Internal Revenue Bulletin 2003-27 (PDF rendition): IRS Notices

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

HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2003–71, page 1.
Federal rates; adjusted federal rates; adjusted federal long-
term rate and the long-term exempt rate.For purposes of
sections 382, 1274, 1288, and other sections of the Code,
tables set forth the rates for July 2003.
REG–122917–02, page 15.
Proposed regulations under sections 421, 422, 424, and 6039
of the Code provide guidance to taxpayers concerning statu-
tory stock options. A public hearing is scheduled for Septem-
ber 2, 2003. EE-86-88 (LR–279–81, 1984–1 C.B. 715) with-
drawn.
Notice 2003–38, page 9.
The Service announces a compliance initiative for nonresident
aliens and foreign corporations that have not filed U.S. federal
income tax returns, and that may consequently be denied de-
ductions and credits pursuant to section 874(a) or 882(c)(2) of
the Code.
Notice 2003–40, page 10.
The Service clarifies the answers to six questions concerning tax-
exempt qualified New York Liberty Bonds issued under section
1400L(d) of the Code.
EMPLOYEE PLANS
Rev. Rul. 2003–70, page 3.
Small employer plan exception to the COBRA continua-
tion coverage requirements in mergers and acquisitions.
Guidance is provided on when a group health plan maintained by
an employer that grows to have more than 20 employees through
a stock or asset acquisition is required to begin complying with
the COBRA continuation coverage requirements.
ESTATE TAX
Notice 2003–39, page 10.
This notice requests suggestions from the public regarding the
creation of sample forms for charitable lead trusts.
GIFT TAX
Notice 2003–39, page 10.
This notice requests suggestions from the public regarding the
creation of sample forms for charitable lead trusts.
(Continued on the next page)
Bulletin No. 2003–27
July 7, 2003
Finding Lists begin on page ii.
Index for January through June begins on page vii.

EXCISE TAX
Rev. Rul. 2003–70, page 3.
Small employer plan exception to the COBRA continua-
tion coverage requirements in mergers and acquisitions.
Guidance is provided on when a group health plan maintained by
an employer that grows to have more than 20 employees through
a stock or asset acquisition is required to begin complying with
the COBRA continuation coverage requirements.
ADMINISTRATIVE
T.D. 9061, page 5.
REG–107618–02, page 13.
Final, temporary, and proposed regulations under section 6081
of the Code provide an automatic extension of time to file cer-
tain information returns and exempt organization returns. The tem-
porary regulations remove the requirement for a signature and
an explanation to obtain an automatic extension of time to file
these returns.
Rev. Proc. 2003–45, page 11.
LIFO; methods of accounting; automatic consent.For cer-
tain accounting method changes within the inventory price in-
dex computation (IPIC) method of accounting for last-in, first-
out (LIFO) inventories, the 5-year prior change scope limitation
in section 4.02(6) of Rev. Proc. 2002–9, 2002–1 C.B. 327, is
waived. Rev. Proc. 2002–9 modified.
July 7, 20032003–27 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping them
understand and meet their tax responsibilities and by applying
the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of the
Commissioner of Internal Revenue for announcing official rul-
ings and procedures of the Internal Revenue Service and for pub-
lishing Treasury Decisions, Executive Orders, Tax Conventions,
legislation, court decisions, and other items of general inter-
est. It is published weekly and may be obtained from the Super-
intendent of Documents on a subscription basis. Bulletin con-
tents are consolidated semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, modify,
or amend any of those previously published in the Bulletin. All pub-
lished rulings apply retroactively unless otherwise indicated. Pro-
cedures relating solely to matters of internal management are
not published; however, statements of internal practices and pro-
cedures that affect the rights and duties of taxpayers are pub-
lished.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpay-
ers or technical advice to Service field offices, identifying de-
tails and information of a confidential nature are deleted to pre-
vent unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be re-
lied on, used, or cited as precedents by Service personnel in the
disposition of other cases. In applying published rulings and pro-
cedures, the effect of subsequent legislation, regulations, court
decisions, rulings, and procedures must be considered, and Ser-
vice personnel and others concerned are cautioned against reach-
ing the same conclusions in other cases unless the facts and cir-
cumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these sub-
jects are contained in the other Parts and Subparts. Also in-
cluded in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by the
Department of the Treasury’s Office of the Assistant Secretary
(Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the first Bulletin of the succeeding semiannual pe-
riod, respectively.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
2003–27 I.R.B.July 7, 2003

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for the
month of July 2003. See Rev. Rul. 2003–71, page
1.
Section 103.—Interest on
State and Local Bonds
The Service clarifies the answers to six
questions concerning tax-exempt qualified New
York Liberty Bonds issued under section 1400L(d).
See Notice 2003–40, page 10.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term
rates are set forth for the month of July 2003. See
Rev. Rul. 2003–71, page 1.
Section 382.—Limitation on
Net Operating Loss
Carryforwards and Certain
Built-In Losses Following
Ownership Change
The adjusted applicable federal long-term rate
is set forth for the month of July 2003. See Rev.
Rul. 2003–71, page 1.
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for the
month of July 2003. See Rev. Rul. 2003–71, page
1.
Section 446.—General Rule
for Methods of Accounting
26 CFR 1.446-1: General rule for methods of
accounting.
For certain accounting method changes within
the inventory price index computation (IPIC)
method of accounting for last-in, first-out (LIFO)
inventories,the5-yearpriorchangescope
limitation in section 4.02(6) of Rev. Proc. 2002–9,
2002–1 C.B. 327, is waived. See Rev. Proc.
2003–45, page 11.
Section 467.—Certain
Payments for the Use of
Property or Services
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for the
month of July 2003. See Rev. Rul. 2003–71, page
1.
Section 468.—Special Rules
for Mining and Solid Waste
Reclamation and Closing
Costs
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for the
month of July 2003. See Rev. Rul. 2003–71, page
1.
Section 482.—Allocation of
Income and Deductions
Among Taxpayers
Federal short-term, mid-term, and long-term
rates are set forth for the month of July 2003. See
Rev. Rul. 2003–71, page 1.
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for the
month of July 2003. See Rev. Rul. 2003–71, page
1.
Section 642.—Special Rules
for Credits and Deductions
Federal short-term, mid-term, and long-term
rates are set forth for the month of July 2003. See
Rev. Rul. 2003–71, page 1.
Section 807.—Rules for
Certain Reserves
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for the
month of July 2003. See Rev. Rul. 2003–71, page
1.
Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for the
month of July 2003. See Rev. Rul. 2003–71, page
1.
Section 1274.—Determina-
tion of Issue Price in the Case
of Certain Debt Instruments
Issued for Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate and the
long-term exempt rate.For purposes of
sections 382, 1274, 1288, and other sec-
tions of the Code, tables set forth the rates
for July 2003.
Rev. Rul. 2003–71
This revenue ruling provides various pre-
scribed rates for federal income tax pur-
poses for July 2003 (the current month).
Table 1 contains the short-term, mid-term,
and long-term applicable federal rates
(AFR) for the current month for purposes
of section 1274(d) of the Internal Rev-
enue Code. Table 2 contains the short-
term, mid-term, and long-term adjusted ap-
plicable federal rates (adjusted AFR) for the
current month for purposes of section
1288(b). Table 3 sets forth the adjusted fed-
eral long-term rate and the long-term tax-
exempt rate described in section 382(f).
Table 4 contains the appropriate percent-
ages for determining the low-income hous-
ing credit described in section 42(b)(2) for
buildings placed in service during the cur-
rent month. Table 5 contains the federal rate
for determining the present value of annu-
ity, an interest for life or for a term of years,
or a remainder or a reversionary interest for
purposes of section 7520. Finally, Table 6
contains the blended annual rate for 2003
for purposes of section 7872.
2003–27 I.R.B.1July 7, 2003

REV. RUL. 2003–71 TABLE 1
Applicable Federal Rates (AFR) for July 2003
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-Term
AFR1.23%1.23%1.23%1.23%
110% AFR1.35%1.35%1.35%1.35%
120% AFR1.49%1.48%1.48%1.48%
130% AFR1.61%1.60%1.60%1.59%
Mid-Term
AFR2.55%2.53%2.52%2.52%
110% AFR2.80%2.78%2.77%2.76%
120% AFR3.06%3.04%3.03%3.02%
130% AFR3.32%3.29%3.28%3.27%
150% AFR3.84%3.80%3.78%3.77%
175% AFR4.48%4.43%4.41%4.39%
Long-Term
AFR4.17%4.13%4.11%4.09%
110% AFR4.59%4.54%4.51%4.50%
120% AFR5.02%4.96%4.93%4.91%
130% AFR5.44%5.37%5.33%5.31%
REV. RUL. 2003–71 TABLE 2
Adjusted AFR for July 2003
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
adjusted AFR
1.09%1.09%1.09%1.09%
Mid-term
adjusted AFR
2.29%2.28%2.27%2.27%
Long-term
adjusted AFR
4.05%4.01%3.99%3.98%
July 7, 200322003–27 I.R.B.

REV. RUL. 2003–71 TABLE 3
Rates Under Section 382 for July 2003
Adjusted federal long-term rate for the current month4.05%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted
federal long-term rates for the current month and the prior two months.)4.45%
REV. RUL. 2003–71 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for July 2003
Appropriate percentage for the 70% present value low-income housing credit7.78%
Appropriate percentage for the 30% present value low-income housing credit3.33%
REV. RUL. 2003–71 TABLE 5
Rate Under Section 7520 for July 2003
Applicable federal rate for determining the present value of an annuity, an interest
for life or a term of years, or a remainder or reversionary interest3.0%
REV. RUL. 2003–71 TABLE 6
Blended Annual Rate for 2003
Section 7872(e)(2) blended annual rate for 20031.52%
Section 1288.—Treatment of
Original Issue Discounts on
Tax-Exempt Obligations
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for the
month of July 2003. See Rev. Rul. 2003–71, page
1.
Section 1400L.—Tax Benefits
for New York Liberty Zone
The Service clarifies the answers to six
questions concerning tax-exempt qualified New
York Liberty Bonds issued under section 1400L(d).
See Notice 2003–40, page 10.
Section 4980B.—Failure to
Satisfy Continuation Coverage
Requirements of Group Health
Plans
26 CFR 54.4980B–2: Plans that must comply.
(Also section 7805; § 54.4980B–9.)
Small employer plan exception to the
COBRA continuation coverage require-
ments in mergers and acquisitions.Guid-
ance is provided on when a group health
plan maintained by an employer that grows
to have more than 20 employees through
a stock or asset acquisition is required to
begin complying with the COBRA con-
tinuation coverage requirements.
Rev. Rul. 2003–70
ISSUES
1. If, as a result of a transfer of stock,
two previously separate employers are
treated as a single employer for purposes
of the COBRA continuation coverage re-
quirements, how is the number of employ-
ees who were employed by the combined
entity during the preceding calendar year
determined for purposes of applying to the
combined entity the exception from the
2003–27 I.R.B.3July 7, 2003

COBRA continuation coverage require-
ments for group health plans maintained by
employers that normally employed fewer
than 20 employees during the preceding cal-
endar year (the small employer plan ex-
ception)?
2. If one employer acquires substantial
assets (such as a plant or division or sub-
stantially all the assets of a trade or busi-
ness) of another employer, when are the
employees associated with the acquired as-
sets taken into account for purposes of ap-
plying the small employer plan exception
to the acquiring employer?
FACTS
Situation 1. CompanyPmaintains a
group health plan.Pnormally employed
fewer than 20 employees during the pre-
vious calendar year. Under section 414(t)
of the Internal Revenue Code, no other en-
tity is treated as a single employer withP.
During the current calendar year, stock in
CorporationOis transferred so that after
the transferPandOare considered to be
part of a single employer. The combined
number of employees normally employed
byPandOduring the previous calendar
year was at least 20.
Situation 2. CompanyRmaintains a
group health plan.Rnormally employed
fewer than 20 employees during the pre-
vious calendar year. No other entity is con-
sidered to be part of a single employer with
R. During the current calendar year,Rac-
quires substantially all the assets of a busi-
ness and continues the business opera-
tions associated with those assets without
interruption or substantial change. The com-
bined number of employees normally em-
ployed byRand the acquired business dur-
ing the previous calendar year was at least
20.
LAW AND ANALYSIS
Section 4980B of the Code requires cer-
tain group health plans to make continua-
tion coverage available to certain individu-
als who would otherwise lose their coverage
under the plan as a result of certain occur-
rences (the“COBRA continuation cover-
age requirements”). Section 4980B im-
poses an excise tax if a plan subject to the
COBRA continuation coverage require-
ments fails to comply with those require-
ments. Section 414(t) provides that all em-
ployees who are treated as employed by a
single employer under section 414(b), (c),
or (m) are treated as employed by a single
employer for purposes of section 4980B and
that the provisions of section 414(o) ap-
ply with respect to the requirements of sec-
tion 4980B.
Section 4980B(d) of the Code and
Q&A–4of§54.4980B–2 of the Miscella-
neous Excise Tax Regulations provide that
small-employer plans are excepted from
COBRA. Q&A–5(a) of§54.4980B–2pro-
vides that, except in the case of a multi-
employer plan, a small-employer plan is a
plan maintained by an employer that nor-
mally employed fewer than 20 employ-
ees during the preceding calendar year. Un-
der Q&A–5(b) of§54.4980B–2, an
employer is considered to have normally
employed fewer than 20 employees dur-
ing a particular calendar year if, and only
if, it had fewer than 20 employees on at
least 50 percent of its typical business days
during that year. Under Q&A–4(c) of
§54.4980B–2, a small-employer plan oth-
erwise excepted from COBRA is nonethe-
less subject to COBRA with respect to
qualified beneficiaries who experience a
qualifying event during a period when the
plan is not a small-employer plan.
Q&A–1of§54.4980B–9 defines stock
sale for purposes of§54.4980B–9asa
transfer of stock in a corporation that causes
the corporation to become a different em-
ployer or a member of a different employer.
Under Q&A–2of§54.4980B–2, an em-
ployer is defined to include any person who
is a member of a group described in sec-
tion 414(b), (c), (m), or (o) that includes a
person for whom services are performed.
Q&A–1of§54.4980B–9 defines asset
sale for purposes of§54.4980B–9asa
transfer of substantial assets, such as a plant
or division or substantially all the assets of
atradeorbusiness.Q&A–2of
§54.4980B–2 provides that the term em-
ployer includes a successor to a person for
whom services are performed and cross-
references the rules in Q&A–8(c) of
§54.4980B–9 for determining when a pur-
chaser of assets is a successor employer to
the employer selling the assets. Under
Q&A–8(c) of§54.4980B–9, a buyer of
substantial assets is not considered a suc-
cessor employer to the seller of the assets
unless the buyer continues the business op-
erations associated with the purchased as-
sets without interruption or substantial
change and the seller ceases to provide any
group health plan to any employee in con-
nection with the sale.
InSituation 1, as a result of the stock
transfer,PandOare treated as a single em-
ployer for purposes of section 4980B. Ac-
cordingly, in applying the small employer
plan exception of section 4980B(d) to a
group health plan maintained by the com-
bined entity following the stock transfer,
employees of bothPandOduring the pre-
vious calendar year must be taken into ac-
count. SincePandOcombined normally
employed at least 20 employees during the
previous calendar year, a group health plan
maintained by the combined entity be-
comes subject to COBRA as of the date of
the stock transfer.
InSituation 2, CompanyRacquires sub-
stantially all the assets of a business and
continues the business operations associ-
ated with those assets without interrup-
tion or substantial change.Ralone nor-
mally employed fewer than 20 employees
during the previous calendar year, but to-
getherRand the acquired business nor-
mally employed at least 20 employees dur-
ing the previous calendar year. However, the
acquisition of assets byRdoes not cause
Rto be considered a single employer with
any part of the seller of the assets. Thus,
the group health plan maintained byRcon-
tinues to be excepted from COBRA until,
with the normal application of the rules for
determining whether a plan is a small-
employer plan, the January 1 following a
year in whichRnormally employed at least
20 employees. If, however, under the rules
of Q&A–8(c) in§54.4980B–9,Ris a suc-
cessor employer to the seller of the as-
sets, then the group health plan ofRwill
have the obligation to make COBRA con-
tinuation coverage available to any M&A
qualified beneficiaries of the seller in ac-
cordance with the rules of Q&A–4(c) in
§54.4980B–2, even thoughRis other-
wise excepted from COBRA.
HOLDING
InSituation 1, a group health plan main-
tained by the combined entity ceases to be
excepted from COBRA as a small-employer
plan as of the date of the stock transfer. In
Situation 2, a group health plan maintained
by the acquiring company continues to be
excepted from COBRA as a small-employer
plan for at least the remainder of the year
of the asset acquisition.
July 7, 200342003–27 I.R.B.

EFFECTIVE DATE
For purposes of the excise tax of sec-
tion 4980B of the Code, this ruling is ef-
fective for stock sales and asset sales that
take effect on or after July 7, 2003.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Russ Weinheimer of the Office of Di-
vision Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities). For
further information regarding this revenue
ruling, contact Mr. Weinheimer at (202)
622–6080 (not a toll-free number).
Section 6081.—Extension of
Time for Filing Returns
26 CFR 1.6081–8T: Automatic extension of time to
file certain information returns (temporary).
T.D. 9061
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1, 31, and 602
Automatic Extension of Time
to File Certain Information
Returns and Exempt
Organization Returns
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary regulations.
SUMMARY: This document contains tem-
porary regulations providing an automatic
extension of time to file certain informa-
tion returns and exempt organization re-
turns. The temporary regulations remove the
requirement for a signature and an expla-
nation to obtain an automatic extension of
time to file these returns. The temporary
regulations affect taxpayers who are re-
quired to file certain information returns
and/or exempt organization returns and need
an extension of time to file. The text of the
temporary regulations also serves as a por-
tion of the text of the proposed regula-
tions set forth in the notice of proposed rule-
making (REG–107618–02) on page 13 of
this issue of the Bulletin.
DATES:Effective Date: These regulations
are effective on June 11, 2003.
Applicability Date: For dates of appli-
cability for these regulations, see§§1.6081–
8T, 1.6081–9T, and 31.6081(a)–1T(d).
FOR FURTHER INFORMATION CON-
TACT: Charles A. Hall, (202) 622–4940
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These temporary regulations are being
issued without prior notice and public pro-
cedure pursuant to the Administrative Pro-
cedure Act (5 U.S.C. 553). For this rea-
son, the collection of information contained
in these regulations has been reviewed and,
pending receipt and evaluation of public
comments, approved by the Office of Man-
agement and Budget under OMB control
number 1545–1840. Responses to this col-
lection of information are required by the
IRS for taxpayers to obtain a benefit (an au-
tomatic extension of time to file certain in-
formation or exempt organization returns).
An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-
less the collection of information displays
a valid control number.
For further information concerning this
collection of information, and where to sub-
mit comments on the collection of infor-
mation and the accuracy of the estimated
burden, and suggestions for reducing this
burden, please refer to the preamble to the
cross-referencing notice of proposed rule-
making published in this issue of the Bul-
letin.
Books and records relating to a collec-
tion of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required by
26 U.S.C. 6103.
Background
This document contains amendments to
26 CFR parts 1, 31, and 602 under sec-
tion 6081 of the Internal Revenue Code.
Section 6081(a) provides that the Secre-
tary may grant a reasonable extension of
time for filing any return, declaration, state-
ment, or other document required by Title
26 or by regulations. Except in the case of
taxpayers who are abroad, no such exten-
sion shall be for more than 6 months. The
regulations under section 6081 provide spe-
cific rules taxpayers must follow to re-
quest an extension of time to file federal tax
returns.
Under the generally applicable rule, a
taxpayer must submit an application for the
extension on or before the due date of the
return. The application must be in writ-
ing, must be properly signed by the tax-
payer or his duly authorized agent, and must
clearly set forth the particular tax return for
which the extension of the time for filing
is desired and a full recital of the reasons
for requesting the extension. These rules ap-
ply to all returns other than those for which
the regulations provide special rules. In ad-
dition, the Employment Tax Regulations
provide rules for employers to obtain an ex-
tension of time to file the Social Security
Administration copy of Forms W–2 and
W–3. Under those rules, the request must
contain a concise statement of the rea-
sons for requesting the extension.
Explanation of Provisions
Information Returns
Filers and transmitters of information re-
turns on Form 1099 (series), 1098 (se-
ries), 5498 (series), W–2 (series), W–2G,
1042–S, and 8027 can obtain an exten-
sion of time to file these information re-
turns by submitting a signed paper Form
8809,“Request for Extension of Time to
File Information Returns.”The extensions
are most often for a period of 30 days. Fil-
ers and transmitters may thereafter request
an additional 30-day extension. The exten-
sions apply only to the filing with the gov-
ernment. The filer or transmitter is still re-
quired to provide statements to the recipients
by the date specified in the Code or the
regulations.
Currently, in compliance with the regu-
lations, Form 8809 requires a signature and
asks for an explanation of the reasons for
the request for an extension. In current prac-
tice, however, the explanation is not a de-
termining factor for the initial extension. If
the filer supplies the name, address, Em-
ployer Identification Number, tax year, and
type of form(s), the initial extension is rou-
tinely granted. An extension beyond the ini-
tial 30-day period will not be granted, how-
ever, unless the filer provides a detailed
explanation.
2003–27 I.R.B.5July 7, 2003

These temporary regulations allow fil-
ers and transmitters to request an auto-
matic 30-day extension of time to file with-
out having to sign Form 8809 and provide
an explanation. An explanation and a sig-
nature are required if filers and transmit-
ters need additional time to file after re-
ceiving the automatic 30-day extension.
These regulations also permit employers to
obtain an extension of time to file the So-
cial Security Administration copy of Forms
W–2 and W–3 without providing a state-
ment of the reasons for requesting the ex-
tension.
The new rules will allow the IRS to de-
velop an effective online version of the ex-
tension request. Filers and transmitters will
benefit from the simplified extension pro-
cedure that will provide immediate ap-
proval. The IRS will benefit from the ef-
ficiencies inherent in such a system and will
move closer to achieving electronic filing
goals.
Filers and transmitters are eligible for
only one automatic extension of time to file.
Filers and transmitters filing Forms W–2on
anexpeditedbasisundersection
31.6071(a)–1(a)(3)(ii) may receive an au-
tomatic extension of time to file Forms W–2
under Rev. Proc. 96–57, 1996–2 C.B. 389.
These filers and transmitters are not eli-
gible to obtain the 30-day automatic ex-
tension under§1.6081–8T(b). If these fil-
ers and transmitters need additional time,
they may request an extension under the
generally applicable procedures for obtain-
ing additional extensions of time to file
Form W–2.
Exempt Organization Returns
These temporary regulations also al-
low an exempt organization required to file
a return on Form 990 (series), 1041–A,
4720, 5227, 6069, or 8870 an automatic
three-month extension of time to file if (a)
an application is submitted on Form 8868,
“Application for Extension of Time To File
an Exempt Organization Return,”(b) the
application is filed on or before the date the
return is due, (c) the application shows the
full amount properly estimated as tax, and
(d) the application is accompanied by full
remittance of the amount properly esti-
mated as tax that is unpaid as of the date
prescribed for the filing of the return.
A signature and an explanation of the
reasons for requesting the extension are not
required for an exempt organization to re-
ceive the automatic three-month exten-
sion of time to file. If an exempt organi-
zation needs additional time to file a return
after receiving the automatic three-month
extension, the exempt organization may file
a signed Form 8868 that explains in de-
tail why the additional time is needed. The
IRS may grant an additional three months
for the exempt organization to file.
Deadwood Provisions
Theseregulationsalsoremove
§1.6081–1T and§§31.6011(a)–5(b)(1) and
31.6081(a)–1(a)(2). Section 1.6081–1T is
removed because it relates only to returns
for tax years ending before February 1,
1985. Sections 31.6011(a)–5(b)(1) and
31.6081(a)–1(a)(2) are removed because
they relate to information returns that are
no longer required.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not
apply to the regulations. For the applica-
bility of the Regulatory Flexibility Act (5
U.S.C. chapter 6), refer to the Special
Analyses section of the preamble to the
cross-reference notice of proposed rule-
making published in this issue of the Bul-
letin. Pursuant to section 7805(f) of the In-
ternal Revenue Code, these temporary
regulations will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on their
impact on small businesses.
Drafting Information
The principal author of the regulations
is Charles A. Hall of the Office of Asso-
ciate Chief Counsel, Procedure and Ad-
ministration (Administrative Provisions and
Judicial Practice Division).
*****
Amendments to the Regulations
Accordingly, 26 CFR parts 1, 31, and
602 are amended as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read in part as follows:
Authority: 26 U.S.C. 7805***
Section 1.6081–8T also issued under 26
U.S.C. 6081.
Section 1.6081–9T also issued under 26
U.S.C. 6081.***
§1.6081–1T [Removed]
Par. 2. Section 1.6081–1T is removed.
Par. 3. Section 1.6081–8T is added to
read as follows:
§1.6081–8T Automatic extension of time
to file certain information returns
(temporary).
(a)In general. A person required to file
an information return (the filer) on Form
W–2 series, W–2G, 1042–S, 1098 series,
1099 series, 5498 series, or 8027 will be al-
lowed an automatic 30-day extension of
time to file the return after the date pre-
scribed for filing the return if the filer or
the person transmitting the return for the
filer (the transmitter) files an application in
accordance with paragraph (b) of this sec-
tion.
(b)Requirements. To satisfy this para-
graph (b), an application must—
(1) Be submitted on Form 8809,“Re-
quest for Extension of Time To File Infor-
mation Returns,”or in any other manner
as may be prescribed by the Commissioner;
and
(2) Be filed with the Internal Revenue
Service office designated in the applica-
tion’s instructions on or before the date pre-
scribed for filing the information return.
(c)Penalties. See sections 6652, 6693,
6721, 6722, and 6723 for failure to file an
information return.
(d)Additional 30-day extension of time
to file—(1)In general. This paragraph (d)
provides procedures for obtaining an ad-
ditional extension of time for filing an in-
formation return on a form listed in para-
graph (a) of this section. No extension of
time will be granted under this paragraph
(d) unless the filer or transmitter has first
obtained an automatic extension.
(2)Procedures. In the case of an infor-
mation return on a form listed in para-
graph (a) of this section, one additional 30-
day extension of time to file the return may
be allowed if the filer or transmitter sub-
mits a request for the additional exten-
sion before the expiration of the automatic
30-day extension. The request must—
(i) Be submitted on Form 8809 or in any
other manner as may be prescribed by the
Commissioner;
July 7, 200362003–27 I.R.B.

(ii) Explain in detail why the additional
time is needed;
(iii) Be signed by the filer or transmit-
ter; and
(iv) Otherwise satisfy the requirements
of§1.6081–1.
(e)No effect on time to provide state-
ment to recipients. An extension under this
section of time to file an information re-
turn does not extend the due date for pro-
viding a statement to the person with re-
spect to whom the information is required
to be reported.
(f)Effective date. This section applies to
requests for extension of time to file in-
formation returns due after June 11, 2003.
The applicability of this section expires on
June 10, 2006.
Par. 4. Section 1.6081–9T is added to
read as follows:
§1.6081–9T Automatic extension of time
to file exempt organization returns
(temporary).
(a)In general. An exempt organiza-
tion required to file a return on Form 990
(series), 1041–A, 4720, 5227, 6069, or 8870
will be allowed an automatic three-month
extension of time to file the return after the
date prescribed for filing if the exempt or-
ganization files an application in accor-
dance with paragraph (b) of this section. For
guidance on extensions of time for an ex-
empt organization to file Form 1120–POL,
U.S. Income Tax Return for Certain Po-
litical Organizations, see§1.6081–3.
(b)Requirements. To satisfy this para-
graph (b), an application for an automatic
extension under this section must—
(1) Be submitted on Form 8868,“Ap-
plication for Extension of Time To File an
Exempt Organization Return,”or in any
other manner as may be prescribed by the
Commissioner;
(2) Be filed with the Internal Revenue
Service office designated in the applica-
tion’s instructions on or before the date pre-
scribed for filing the information return;
(3) Show the full amount properly es-
timated as tentative tax for the exempt or-
ganization for the taxable year; and
(4) Be accompanied by the full remit-
tance of the amount properly estimated as
tentative tax which is unpaid as of the date
prescribed for the filing of the return.
(c)Termination of automatic extension.
The Commissioner may terminate an au-
tomatic extension at any time by mailing
to the exempt organization a notice of ter-
mination. The notice must be mailed at least
10 days prior to the termination date des-
ignated in such notice. The notice of ter-
mination must be mailed to the address
shown on the application for extension or
to the exempt organization’s last known ad-
dress. For further guidance regarding the
definition of last known address, see
§301.6212–2 of this chapter.
(d)Penalties. See sections 6651 and
6652(c) for failure to file an exempt orga-
nization return or failure to pay the amount
shown as tax on the return.
(e)Coordination with§1.6081–1.Noex-
tension of time will be granted under
§1.6081–1 for filing an exempt organiza-
tion return listed in paragraph (a) of this
section until an automatic extension has
been allowed pursuant to this section.
(f)Effective date. This section applies to
requests for extensions of time to file an ex-
empt organization return due after June 11,
2003. The applicability of this section ex-
pires on June 10, 2006.
PA RT 3 1—EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT SOURCE
Par. 5. The authority citation for part 31
continues to read as follows:
Authority: 26 U.S.C. 7805***
Section 31.6081(a)–1T also issued un-
der 26 U.S.C. 6081.***
Par. 6. Section 31.6011(a)–5 is amended
by revising paragraph (b) to read as follows:
§31.6011(a)–5 Monthly returns.
*****
(b)Information returns on Form W–3
and Social Security Administration cop-
ies of Form W–2.See§31.6051–2 for re-
quirements with respect to information re-
turns on Form W–3 and Social Security
Administration copies of Form W–2.
*****
§31.6051–1 [Amended]
Par. 7. Section 31.6051–1(d)(2)(i)(c)is
amended by removing the language
“§31.6081(a)–1(a)(3)”andadding
“§31.6081(a)–1(a)(2)”in its place.
§31.6051–2 [Amended]
Par. 8. Section 31.6051–2(c) is amended
by removing the language“31.6081(a)–
1(a)(3)”and adding“31.6081(a)–1(a)(2)”
in its place.
Par. 9. Section 31.6081(a)–1 is amended
by:
1. Removing paragraph (a)(2).
2. Redesignating paragraph (a)(3) as
paragraph (a)(2).
3. Revising newly designated paragraph
(a)(2)(i).
The revision reads as follows:
§31.6081(a)–1 Extensions of time for
filing returns and other documents.
(a)***
(2)***(i) [Reserved]. For guidance
on extensions of time to file the Social Se-
curity Administration copy of Forms W–2
and W–3 due after June 11, 2003, see
§31.6081(a)–1T.
*****
Par. 10. Section 31.6081(a)–1T is added
to read as follows:
§31.6081(a)–1T Extensions of time for
filing returns and other documents
(temporary).
(a)(1) [Reserved]. For further guidance,
see§31.6081(a)–1(a)(1).
(2)Information returns of employers on
Forms W–2 and W–3—(i)In general. The
Commissioner may grant an extension of
time in which to file the Social Security Ad-
ministration copy of Forms W–2 and the ac-
companying transmittal form which con-
stitutes an information return under
paragraph§31.6051–2(a). For further guid-
ance regarding extensions of time to file the
Social Security Administration copy of
Forms W–2 and W–3, see§1.6081–8T of
this chapter.
(a)(2)(ii) through (c) [Reserved]. For fur-
ther guidance, see§31.6081(a)–1(a)(2)(ii)
through (c).
(d)Effective date. This section applies
to requests for extensions of time to file the
Social Security Administration copy of
Forms W–2 and W–3 due after June 11,
2003. The applicability of this section ex-
pires on June 10, 2006.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 11. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 12. In§602.101, paragraph (b) is
amended by adding the following entries in
numerical order to the table to read as
follows:
2003–27 I.R.B.7July 7, 2003

§602.101 OMB Control numbers.
*****
(b)***
CFR part or section where
identified and described
Current OMB
control No.
*****
1.6081–8T ........................................................................................................................................................................... 1545–1840
1.6081–9T ........................................................................................................................................................................... 1545–1840
*****
David A. Mader,
Assistant Deputy Commissioner of
Internal Revenue.
Approved May 21, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on June 10, 2003,
8:45 a.m., and published in the issue of the Federal Regis-
ter for June 11, 2003, 68 F.R. 34797)
Section 7520.—Valuation
Tables
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for the
month of July 2003. See Rev. Rul. 2003–71, page
1.
Section 7872.—Treatment of
Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term,
mid-term, and long-term rates are set forth for the
month of July 2003. See Rev. Rul. 2003–71, page
1.
July 7, 200382003–27 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Compliance Initiative for
Nonresident Aliens and
Foreign Corporations
Notice 2003–38
The Internal Revenue Service (IRS) an-
nounces a compliance initiative for non-
resident aliens and foreign corporations that
have not filed U.S. federal income tax re-
turns and that may consequently be de-
nied deductions and credits pursuant to
Code section 874(a) or 882(c)(2). Taxpay-
ers that have requests for waivers pend-
ing with the IRS under Regs. 1.874–1(b)(2)
or 1.882–4(a)(3)(ii) may also participate in
this compliance initiative.
This compliance initiative is intended to
encourage nonresident aliens and foreign
corporations to file income tax returns that
were not filed in a timely manner in ac-
cordance with the regulations under sec-
tion 874(a) or 882(c)(2). The IRS will waive
the filing deadlines set forth in Regs. 1.874–
1(b)(1) and 1.882–4(a)(3)(i) if a taxpayer
files on or before September 15, 2003, all
required U.S. federal income tax returns for
every year for which a waiver is requested.
In addition, a taxpayer must pay the re-
ported income tax liability with each such
return, must pay statutory interest and pen-
alties as determined by the IRS (except the
fraudulent failure to file penalty, as dis-
cussed below), and must cooperate with the
IRS upon request in determining and sat-
isfying its income tax liability for any tax-
able year for which a waiver is requested.
To qualify for a waiver, a taxpayer must at-
tach a statement to each late income tax re-
turn for which a waiver is requested agree-
ing to cooperate with the IRS upon request
in determining and satisfying the taxpay-
er’s income tax liability for that taxable year.
The requirements of this compliance ini-
tiative may not be satisfied by filing pro-
tective returns.
This compliance initiative is not avail-
able where the taxpayer has previously filed
a U.S. federal income tax return or a pro-
tective return for any taxable year prior to
a taxable year for which a waiver is re-
quested, or where the IRS has contacted the
taxpayer concerning a failure to file U.S.
federal income tax returns, initiated an ex-
amination or investigation of the taxpayer,
or notified the taxpayer that it intends to
commence an examination or investiga-
tion.
SCOPE OF THE WAIVER
Under this compliance initiative, the IRS
will waive the filing deadlines set forth in
Regs. 1.874–1(b)(1) and 1.882–4(a)(3)(i)
with respect to late-filed U.S. federal in-
come tax returns. With respect to U.S. fed-
eral income tax returns filed pursuant to this
compliance initiative, the IRS will also
waive the fraudulent failure to file pen-
alty under section 6651(f), but not the fail-
ure to file penalty under section 6651(a)(1).
The IRS will impose other applicable pen-
alties, as appropriate, with respect to U.S.
federal income tax returns filed pursuant to
this compliance initiative.
If a taxpayer that is eligible under this
notice to participate in this compliance ini-
tiative files all required U.S. federal in-
come tax returns for taxable years ending
in 1996 and all subsequent years for which
the applicable deadline set forth in Regs.
1.874–1(b)(1) or 1.882–4(a)(3)(i) has
passed, and satisfies all other requirements
set forth in this notice, the IRS will not ex-
amine any potential U.S. federal income tax
liability with respect to taxable years end-
ing prior to 1996. However, effect will be
given to a carryover item of deduction or
credit only if all required U.S. federal in-
come tax returns are filed on or before Sep-
tember 15, 2003, for the year in which the
item arose and for all years through the year
in which the item has effect, and the tax-
payer cooperates with the IRS upon re-
quest in verifying the carryover item of de-
duction or credit. Protective returns will not
satisfy the requirements of this or the pre-
ceding paragraph.
SUBMISSION PROCESS
The IRS will waive the timely filing re-
quirement under Regs. 1.874–1(b)(1) and
1.882–4(a)(3)(i) for any taxable year for
which a waiver is requested, provided that
the nonresident alien or foreign corporation:
(1) files a true and accurate return for
such taxable year, not including a protec-
tive return, with the Philadelphia Service
Center on or before September 15, 2003;
(2) pays the reported tax liability with
the filing of the return;
(3) pays statutory interest under sec-
tion 6601 and penalties as determined by
the IRS;
(4) agrees in a statement attached to the
return to cooperate with the IRS upon re-
quest in determining and satisfying the tax-
payer’s liability for income tax, interest and
penalties, for the taxable year for which a
waiver is requested, and does in fact co-
operate in accordance with such agree-
ment, and satisfy any liability determined;
and
(5) attaches to the return a copy of any
power of attorney (Forms 2848) granted by
the taxpayer with respect to such taxable
year.
Income tax returns that were not timely
filed pursuant to Regs. 1.874–1(b)(1) and
1.882–4(a)(3)(i) must be filed with the
Philadelphia Service Center via the United
States Postal Service to P.O. Box 480, Ben-
salem, PA 19020; or by private delivery
service to 11601 Roosevelt Blvd., Phila-
delphia, PA 19154.
Each late return filed under this notice
must be marked at the top, in red,“RE-
TURN FILED UNDER NOTICE 2003–
38.”
MISCELLANEOUS
The provisions of this notice relate to
qualification for and participation in a com-
pliance initiative with respect to late U.S.
federal income tax returns filed on or be-
fore September 15, 2003, for prior tax-
able years by taxpayers subject to section
874(a) or 882(c)(2).
The IRS is committed to assisting all
taxpayers to file their required U.S. fed-
eral income tax returns. Taxpayers that do
not file pursuant to this compliance initia-
tive are not prevented from demonstrat-
ing that they satisfy the reasonable cause
exception under Regs. 1.874–1(b)(2) or
1.882–4(a)(3)(ii).
PAPERWORK REDUCTION ACT
The collection of information contained
in this announcement has been reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the Pa-
perwork Reduction Act (44 U.S.C.§3507)
under control number 1545–1845. An
agency may not conduct or sponsor, and a
person is not required to respond to, a col-
lection of information unless the collec-
2003–27 I.R.B.9July 7, 2003

tion of information displays a valid OMB
control number. The collection of informa-
tion in this announcement is in the sec-
tion titledSUBMISSION PROCESS.
This information is required to deter-
mine whether a taxpayer is entitled to a
waiver under this compliance initiative. The
collection of information is required to ob-
tain the benefit described in this notice. The
likely respondents are individuals, and busi-
nesses or other for-profit organizations.
The estimated total annual reporting bur-
den is 50 hours. The estimated annual bur-
den per respondent is 15 minutes. The num-
ber of respondents is uncertain but is
estimated at 200. The estimated frequency
of responses is one time per respondent.
Books or records relating to a collection of
information must be retained as long as their
contents may become material in the ad-
ministration of any internal revenue law.
Generally, tax returns and tax return infor-
mation are confidential, as required by 26
U.S.C.§6103.
CONTACT INFORMATION
For further information regarding this no-
tice, contact Jim Carfine at (202) 435–
5044 (not a toll-free call).
Charitable Lead Trusts
Notice 2003–39
SECTION 1. PURPOSE
This notice requests suggestions from the
public regarding the creation of sample
forms for charitable lead trusts.
SECTION 2. BACKGROUND
When interests in the same property are
transferred for both charitable and non-
charitable purposes, the charitable inter-
est will qualify for the applicable income,
gift, and estate tax charitable deductions
only if the interest is in a certain prescribed
form. If the charitable interest is a lead in-
terest,§§170, 2522, and 2055 of the In-
ternal Revenue Code generally require that
the charitable interest be in the form of a
guaranteed annuity or unitrust interest.
A charitable lead trust is a trust that pays
annually a specified annuity or unitrust
amount to one or more charitable benefi-
ciaries for a specified term of years or for
the life of a named individual or lives of
certain named individuals. Upon termina-
tion of the annuity or unitrust period, the
remainder interest passes to, or for the ben-
efit of, one or more noncharitable benefi-
ciaries.
The Internal Revenue Service has not
previously issued sample forms for chari-
table lead trusts.
SECTION 3. REQUEST
FOR PUBLIC COMMENT
The Internal Revenue Service intends to
publish sample forms that reflect the statu-
tory and regulatory provisions applicable to
charitable lead trusts. The Service requests
comments regarding the charitable lead trust
sample forms, including comments on the
type of format to be used, the substantive
provisions to be included, and the vari-
ous types of charitable lead trusts for which
samples would be most helpful.
Taxpayers may submit comments in
writing to:
Internal Revenue Service
Attn: CC:PSI:RU (Notice 2003–39)
P.O. Box 7604
Room 5226
Ben Franklin Station
Washington, DC 20044
or have them hand delivered between the
hours of 8:00 a.m. and 5:00 p.m. to:
Courier’s Desk
Internal Revenue Service
Attn: CC:PSI:RU (Notice 2003–39,
Room 5226)
1111Constitution Ave., NW
Washington, DC 20224
Alternatively, taxpayers may submit
comments electronically to the following
address:Notice.Comments@irscounsel
.treas.gov. Please include“Notice 2003–
39”in the subject line. Comments and sug-
gestions should be received by October 1,
2003. All comments and suggestions sub-
mitted will be available for public inspec-
tion and copying.
DRAFTING INFORMATION
The principal author of this notice is
Stephanie N. Bland of the Office of the As-
sociate Chief Counsel (Passthroughs and
Special Industries). For further informa-
tion regarding this notice, contact Stephanie
N. Bland at (202) 622–7830 (not a toll-
free call).
Qualified New York Liberty
Bond Questions and Answers
Notice 2003–40
PURPOSE
This notice provides guidance concern-
ing qualified New York Liberty Bonds
(“Liberty Bonds”).
BACKGROUND
Section 301 of the Job Creation and
Worker Assistance Act of 2002, Pub.L.
No.107–147, created section 1400L of the
Internal Revenue Code of 1986, which pro-
vides various tax benefits for the area of
New York City damaged or affected by the
terrorist attack on September 11, 2001. Sec-
tion 1400L(d) authorizes the issuance of $8
billion of Liberty Bonds, a new type of tax-
exempt private activity bond. On July 8,
2002, the Internal Revenue Service is-
sued Notice 2002–42, 2002–27 I.R.B. 36,
which provides guidance regarding sec-
tion 1400L, including section 1400L(d).
This notice provides additional guidance
with respect to Liberty Bonds.
OVERVIEW OF THE PROVISION
Under section 1400L(d)(1), Liberty
Bonds are treated as exempt facility bonds
within the meaning of section 142. Sec-
tion 1400L(d)(2) provides that a Liberty
Bond is any bond issued as part of an is-
sue if: (a) 95 percent or more of the net pro-
ceeds (as defined in section 150(a)(3)) of
the issue are to be used for qualified project
costs; (b) the bond is issued by the State
of New York or any political subdivision
thereof; (c) the Governor of the State of
New York or the Mayor of The City of
New York designates the bond for pur-
poses of section 1400L(d); and (d) the bond
is issued after March 9, 2002, and before
January 1, 2005. The maximum aggre-
gate face amount of bonds that may be des-
ignated as Liberty Bonds is $8 billion.
Section 1400L(d)(4) defines the term
qualified project costs as the cost of ac-
quisition, construction, reconstruction, and
renovation of: (a) nonresidential real prop-
erty and residential rental property (includ-
ing fixed tenant improvements associated
with the property) located in the New York
Liberty Zone (as defined in section
1400L(h)), and (b) public utility property
(as defined in section 168(i)(10)) located in
July 7, 2003102003–27 I.R.B.

the New York Liberty Zone. Qualified
project costs also include the cost of ac-
quisition, construction, reconstruction, and
renovation of nonresidential real property
(including fixed tenant improvements as-
sociated with the property) located out-
side the New York Liberty Zone but within
The City of New York, New York, if the
property is part of a project that consists of
at least 100,000 square feet of usable of-
fice or other commercial space located in
a single building or multiple adjacent build-
ings. Liberty Bonds may not be used to fi-
nance movable fixtures or equipment.
Section 1400L(d)(5) contains the fol-
lowing modifications to the general rule that
Liberty Bonds are treated as exempt facil-
ity bonds: (1) Liberty Bonds are not sub-
ject to the private activity bond volume cap
under section 146; (2) the 15-percent re-
habilitation requirement in section 147(d)
that applies to the acquisition of certain ex-
isting property is increased to 50-percent for
Liberty Bonds; (3) Liberty Bonds are eli-
gible for the two-year construction excep-
tion to the rebate requirement under sec-
tion 148(f)(4)(C); (4) repayments of
principal on financing provided by Lib-
erty Bonds are subject to certain special
rules; and (5) section 57(a)(5), which treats
interest on specified private activity bonds
as an item of tax preference for purposes
of computing the alternative minimum tax,
does not apply to Liberty Bonds.
QUESTIONS AND ANSWERS
Set forth below are questions and an-
swers with regard to section 1400L(d).
Q–1. What types of costs are qualified
project costs under section 1400L(d)(4)?
A–1. Section 1400L(d)(1) provides that
Liberty Bonds are treated as exempt facil-
ity bonds. Accordingly, qualified project
costs are costs that (a) are chargeable to the
capital account of a facility described in sec-
tion 1400L(d)(4), or (b) would be so charge-
able either with a proper election by a tax-
payer (for example, under section 266) or
but for a proper election by a taxpayer to
deduct the costs. Qualified project costs also
include costs of functionally related and
subordinate property within the meaning of
§1.103–8(a)(3) of the Income Tax Regu-
lations.
Q–2. Does§1.142–4 apply to Liberty
Bonds?
A–2. Yes. Section 1.142–4 applies to ex-
empt facility bonds. Section 1.142–4 con-
tains certain requirements that generally are
designed to ensure that exempt facility
bonds are not issued to finance working
capital expenditures. For example,§1.142–
4(b) provides that, if an expenditure for a
facility is paid before the issue date of the
bonds to provide that facility, the facility
is an exempt facility only if the expendi-
ture meets the requirements of§1.150–2
(relating to reimbursement allocations).
Q–3. How does§1.150–2 apply to Lib-
erty Bonds?
A–3. Section 1.150–2 applies to Lib-
erty Bonds in the same manner as exempt
facility bonds, except that all issuers of Lib-
erty Bonds are treated as having adopted
an official intent (as defined in§1.150–
2(c)) that satisfies the requirements of
§1.150–2(e) with respect to expenditures
paid after September 11, 2001, and be-
fore June 23, 2003. For expenditures paid
on or after June 23, 2003, any official in-
tent must be adopted not later than 60 days
after payment of the expenditures.See
§1.150–2(d)(1).
Q–4. Do Liberty Bonds issued before
January 1, 2005, to currently refund out-
standing Liberty Bonds count against the
$8 billion volume limitation on Liberty
Bonds?
A–4. Liberty Bonds issued before Janu-
ary 1, 2005, to currently refund outstand-
ing Liberty Bonds do not count against the
$8 billion volume limitation to the extent
that the amount of the refunding bonds does
not exceed the outstanding amount of the
bonds being refunded.
Q–5. May Liberty Bonds be issued af-
ter December 31, 2004, to refund outstand-
ing Liberty Bonds?
A–5. Liberty Bonds may be issued af-
ter December 31, 2004, to refund outstand-
ing Liberty Bonds originally issued be-
fore January 1, 2005, to the extent (a) the
amount of the refunding bonds does not ex-
ceed the outstanding amount of the re-
funded bonds, and (b) the refunding is not
an advance refunding.
Q–6. May Liberty Bonds be issued by
entities that are acting on behalf of the State
of New York or any political subdivision
thereof?
A–6. Liberty Bonds may be issued on
behalf of the State of New York or any po-
litical subdivision thereof if the issuance sat-
isfies the requirements for determining
whether a bond issued on behalf of a State
or political subdivision constitutes an ob-
ligation of that State or political subdivi-
sion for purposes of section 103.
FURTHER INFORMATION
For further information regarding this no-
tice, contact Michael P. Brewer at (202)
622–3980 (not a toll-free call).
26 CFR 1.472–8: Dollar value method of pricing
LIFO inventories.
(Also Part I,§§446; 1.446–1.)
Rev. Proc. 2003–45
SECTION 1. PURPOSE
For certain accounting method changes
within the inventory price index computa-
tion (IPIC) method of accounting for last-
in, first-out (LIFO) inventories, this rev-
enue procedure waives the 5-year prior
change scope limitation in section 4.02(6)
of 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
modified by Rev. Proc. 2002–54, 2002–35
I.R.B. 432.
SECTION 2. BACKGROUND
.01 The regulations under§472 of the
Internal Revenue Code provide special,
elective pooling rules for LIFO inventory
items accounted for under the IPIC method.
See§§1.472–8(b)(4) (manufacturers and
processors) and 1.472–8(c)(2) (wholesal-
ers, retailers, jobbers and distributors) of the
Income Tax Regulations. The special IPIC
pooling rules provide two optional 5 per-
cent rules for pooling miscellaneous items.
Any change in pooling required or permit-
ted as a result of one of these 5 percent
rules is a change in method of account-
ing. The taxpayer must secure the con-
sent of the Commissioner pursuant to
§446(e) and§1.446–1(e) before combin-
ing or separating IPIC pools, and must com-
bine or separate IPIC pools in accordance
with the requirements of the applicable
regulations.§§1.472–8(b)(4), 1.472–8(c)(2).
.02 A taxpayer using the IPIC method
of accounting for a trade or business com-
putes the inventory price index (IPI) for a
pool using an appropriate price index for
anappropriatemonth.§1.472–
8(e)(3)(iii)(B)(1). A taxpayer not using the
2003–27 I.R.B.11July 7, 2003

retail method may elect to use a represen-
tative appropriate month (representative
month). The election to use a representa-
tive month is a method of accounting, and
the month elected must be used for the tax-
able year of the election and all subse-
quent taxable years, unless the electing tax-
payer obtains the Commissioner’s consent
under§§446(e) and 1.446–1(e) to change
orrevokeitselection.§1.472–
8(e)(3)(iii)(B)(3).
.03 Rev. Proc. 2002–9 applies to a tax-
payer requesting the Commissioner’s con-
sent to change to a method of accounting
described in the APPENDIX of that rev-
enue procedure. Rev. Proc. 2002–9, sec-
tion 4.01. Changes in method of account-
ing to: (1) combine or separate IPIC pools
as a result of the application ofa5per-
cent pooling rule described in§1.472–
8(b)(4) or 1.472–8(c)(2); and (2) change the
representative month when the change in
representative month is necessitated by a
change in taxable year, are described in sec-
tions 10.07(1)(d) and 10.07(1)(f), respec-
tively, of the APPENDIX of Rev. Proc.
2002–9.
.04 Rev. Proc. 2002–9 is the exclusive
procedure for a taxpayer within its scope
to obtain the consent of the Commissioner
under§§446(e) and 1.446–1(e). Rev. Proc.
2002–9, section 4.01. Section 4.02 of Rev.
Proc. 2002–9 sets forth certain scope limi-
tations for the revenue procedure. The
5-year prior change scope limitation set
forth in section 4.02(6) of Rev. Proc.
2002–9 provides that the automatic con-
sent procedures of that revenue procedure
may not be used if the taxpayer, within the
last 5 taxable years (including the year of
change) has made a change in the same
method of accounting (with or without ob-
taining the Commissioner’s consent) or has
applied to change the same method of ac-
counting without effecting the change.
SECTION 3. CHANGES RELATED TO
5 PERCENT RULES FOR IPIC
POOLING
Every third year, taxpayers using the
IPIC method for LIFO inventories are re-
quired to redetermine whether their IPIC
pooling complies with the applicable 5 per-
cent rules and to make any pooling changes
that are necessary to achieve compliance.
§§1.472–8(b)(4); 1.472–8(c)(2). As a re-
sult, taxpayers using the IPIC pooling
method may be required to change their
pooling as frequently as every three years.
The Service believes that the 5-year prior
change scope limitation in section 4.02(6)
of Rev. Proc. 2002–9 should not apply to
prevent taxpayers from using the auto-
matic consent procedures of Rev. Proc.
2002–9 to obtain the consent of the Com-
missioner to make the periodic pooling
changes required to comply with the 5 per-
cent rules under§§1.472–8(b)(4) and
1.472–8(c)(2). Accordingly, the 5-year prior
change scope limitation in section 4.02(6)
does not apply to a change described in sec-
tion 10.07(1)(d) of the APPENDIX of Rev.
Proc. 2002–9.
SECTION 4. CHANGES OF
REPRESENTATIVE MONTH FOR IPI
CALCULATIONS
A taxpayer generally is required to
change its representative month if the tax-
payer changes its taxable year. A taxpayer
may change its taxable year voluntarily or,
in certain cases, may be required to change
its taxable year under the Code or regula-
tions. The Service believes that the 5-year
prior change scope limitation in section
4.02(6) of Rev. Proc. 2002–9 should not ap-
ply to prevent taxpayers from using the au-
tomatic consent procedures of Rev. Proc.
2002–9 to obtain the consent of the Com-
missioner to change their representative
month as necessitated by a change in tax-
able year. Accordingly, the 5-year prior
change scope limitation in section 4.02(6)
of Rev. Proc. 2002–9 does not apply to a
change described in section 10.07(1)(f) of
the APPENDIX of Rev. Proc. 2002–9ifthe
change in representative month is neces-
sitated by a change in the taxpayer’s tax-
able year.
SECTION 5. EFFECTIVE DATE
.01 Except as otherwise provided in sec-
tion 5.02 of this revenue procedure, this rev-
enue procedure is effective for taxable years
ending on or after December 31, 2002.
.02 If a taxpayer filed an application or
ruling request with the national office un-
der Rev. Proc. 97–27, 1997–1 C.B. 680,
modified and amplified by Rev. Proc. 2002–
19, to make a change in method of ac-
counting described in sections 3 or 4 of this
revenue procedure for a year of change for
which this revenue procedure is effective
(see section 5.01 of this revenue proce-
dure), and the application or ruling re-
quest is pending with the national office on
June 18, 2003, the national office will pro-
cess the application or ruling request un-
der the procedures of Rev. Proc. 97–27, un-
less prior to the later of September 17, 2003,
or the issuance of the letter ruling grant-
ing or denying consent to the change, the
taxpayer notifies the national office that it
wants to make the method change under
Rev. Proc. 2002–9. If the taxpayer timely
notifies the national office that it wants to
make the method change under Rev. Proc.
2002–9, the national office may require the
taxpayer to make any appropriate modifi-
cations to the application or ruling request
to comply with the applicable provisions of
this revenue procedure and Rev. Proc.
2002–9. The national office will notify the
taxpayer if and when such adjustments are
required. In addition, any user fee that was
submitted with the application or ruling re-
quest will be returned to the taxpayer.
SECTION 6. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2002–9 is modified to in-
clude in section 10.07 of the APPENDIX
thereof the scope limitation waivers pro-
vided in this revenue procedure.
DRAFTING INFORMATION
The principal author of this revenue pro-
cedure is Grant Anderson of the Office of
the Associate Chief Counsel (Income Tax
and Accounting). For further information re-
garding this revenue procedure, contact
Mr. Anderson at (202) 622–4930 (not a toll-
free call).
July 7, 2003122003–27 I.R.B.

Part IV. Items of General Interest
Notice of Proposed Rulemak-
ing by Cross-Reference to
Temporary Regulations
Automatic Extension of Time
to File Certain Information
Returns and Exempt
Organization Returns
REG–107618–02
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemak-
ing by cross-reference to temporary regu-
lations.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing temporary regulations
(T.D. 9061) providing an automatic exten-
sion of time to file certain information re-
turns and exempt organization returns. The
text of those regulations also serves as the
text of these proposed regulations.
DATES: Written or electronic comments
and requests for a public hearing must be
received by September 9, 2003.
ADDRESSES: Send submissions to:
CC:PA:RU (REG–107618–02), room 5226,
Internal Revenue Service, POB 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand-delivered be-
tween the hours of 8 a.m. and 4 p.m. to
CC:PA:RU (REG–107618–02), Courier’s
Desk, Internal Revenue Service,1111Con-
stitution Avenue, NW, Washington, DC. Al-
ternatively, taxpayers may submit elec-
tronic comments directly to the IRS Internet
site at:www.irs.gov/regs.
FOR FURTHER INFORMATION CON-
TACT: Concerning submissions, Treena
Garret, (202) 622–7180; concerning the
regulations, Charles A. Hall, (202) 622–
4940 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in this notice of proposed rulemaking has
been submitted to the Office of Manage-
ment and Budget for review in accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)). Comments on the col-
lection of information should be sent to the
Office of Management and Budget, Attn:
Desk Officer for the Department of the
Treasury, Office of Information and Regu-
latory Affairs, Washington, DC 20503, with
copies to theInternal Revenue Service,
Attn: IRS Reports Clearance Officer,
W:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collection of in-
formation should be received by August 11,
2003. Comments are specifically requested
concerning:
Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the functions of the IRS, in-
cluding whether the information will have
practical utility;
The accuracy of the estimated burden as-
sociated with the proposed collection of in-
formation (see below);
How the quality, utility, and clarity of the
information to be collected may be en-
hanced;
How the burden of complying with the
proposed collection of information may be
minimized, including through the applica-
tion of automated collection techniques or
other forms of information technology; and
Estimates of capital or start-up costs and
costs of operation, maintenance, and pur-
chase of services to provide information.
The collection of information in this pro-
posed regulation is in§1.6081–8T and
§1.6081–9T. This collection of informa-
tion is required by the IRS for taxpayers to
obtain a benefit (an automatic 30-day ex-
tension of time to file certain information
returns and an automatic three-month ex-
tension of time to file exempt organiza-
tion returns). The respondents are taxpay-
ers required to file certain information
returns or exempt organization returns.
Estimates of the reporting burden in
§1.6081–8T of these proposed regulations
are reflected in the burden estimates of
Form 8809,Request for Extension of Time
to File Information Returns.
Estimated total annual reporting bur-
den for 2001 for Form 8809: 155,000 hours.
Estimated number of responses for 2001
Form 8809: 50,000.
Estimated average annual burden hours
per response for 2001 Form 8809: 3 hours
and 6 minutes.
Estimates of the reporting burden in
§1.6081–9T of these proposed regulations
are reflected in the burden estimates of
Form 8868,Application for Extension of
Time To File an Exempt Organization Re-
turn.
Estimated total annual reporting bur-
den for 2001 for Form 8868: 1,373,335
hours.
Estimated number of responses for 2001
Form 8868: 248,932.
Estimated average annual burden hours
per response for 2001 Form 8809: 5 hours
and 31 minutes.
An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-
less it displays a valid control number
assigned by the Office of Management and
Budget.
Books or records relating to a collec-
tion of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required by
26 U.S.C. 6103.
Background and Explanation of Provi-
sions
Temporary regulations (T.D. 9061) on
page 5 of this issue of the Bulletin amend
26 CFR parts 1 and 31. The temporary
regulations provide that filers and trans-
mitters of certain information returns may
obtain an automatic 30-day extension of
time to file. The temporary regulations also
provide that exempt organizations may ob-
tain an automatic three-month extension of
time to file an exempt organization re-
turn. The text of those regulations also
serves as the text of these regulations. The
preamble to the temporary regulations ex-
plains the temporary regulations and these
proposed regulations. In addition, these
regulations also propose other minor
changes to conform the regulations under
section 6081 to current law and practice.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Ex-
ecutive Order 12866. Therefore, a regula-
tory assessment is not required. It has also
been determined that section 553(b) of the
2003–27 I.R.B.13July 7, 2003

Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to the regula-
tions. It is hereby certified that the collec-
tion of information in these regulations will
not have a significant economic impact on
a substantial number of small entities. This
certification is based upon the fact that the
collection of information imposed by this
regulation is not significant because the bur-
den in these regulations is more than off-
set by the reduction of the burden in Forms
8809 and 8868. These regulations reduce
the burden in those forms by removing the
signature requirement and the requirement
to provide an explanation of the need for
the extension of time to file. Therefore, a
Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) is not required. Pursuant to section
7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking will be sub-
mitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on their impact on small busi-
ness.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (preferably a
signed original and 8 copies) or electronic
comments that are submitted timely to the
IRS. The IRS and Treasury Department re-
quest comments on the clarity of the pro-
posed rules and how they can be made
easier to understand. All comments will be
available for public inspection and copy-
ing. A public hearing will be scheduled if
requested in writing by any person that
timely submits written or electronic com-
ments. If a public hearing is scheduled, no-
tice of the date, time, and place for the pub-
lic hearing will be published in theFederal
Register.
Drafting Information
The principal author of the regulations
is Charles A. Hall of the Office of the As-
sociate Chief Counsel, Procedure and Ad-
ministration (Administrative Provisions and
Judicial Practice Division).
*****
Proposed Amendments to the Regula-
tions
Accordingly, 26 CFR parts 1, 25, 31, 53,
55, and 156 are proposed to be amended
as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in nu-
merical order to read in part as follows:
Authority: 26 U.S.C. 7805***
Section 1.6081–8 also issued under 26
U.S.C. 6081(a).
Section 1.6081–9 also issued under 26
U.S.C. 6081(a).***
Par. 2. Section 1.6081–1 is amended by
revising paragraph (a) to read as follows:
§1.6081–1 Extension of time for filing
returns.
(a)In general. The Commissioner is au-
thorized to grant a reasonable extension of
time for filing any return, declaration, state-
ment, or other document which relates to
any tax imposed by subtitle A of the Code
and which is required under the provi-
sions of subtitle A or F of the Code or the
regulations thereunder. However, other than
in the case of taxpayers who are abroad,
such extensions of time shall not be granted
for more than 6 months, and the exten-
sion of time for filing the return of a DISC
(as defined in section 992(a)), as speci-
fied in section 6072(b), shall not be granted.
An extension of time for filing an income
tax return shall not operate to extend the
time for the payment of the tax or any in-
stallment thereof unless specified to the con-
trary in the extension. For rules relating to
extensions of time for paying tax, see
§1.6161–1.
*****
Par. 3. Section 1.6081–8 is added to read
as follows:
§1.6081–8 Automatic extension of time
to file certain information returns.
[The text of proposed§1.6081–8isthe
same as the text of§1.6081–8T published
elsewhere in this issue of the Bulletin].
Par. 4. Section 1.6081–9 is added to read
as follows:
§1.6081–9 Automatic extension of time
to file exempt organization returns.
[The text of proposed§1.6081–9isthe
same as the text of§1.6081–9T published
elsewhere in this issue of the Bulletin].
PA RT 2 5—GIFT TAX; GIFTS MADE
AFTER DECEMBER 31, 1954
Par. 5. The authority citation for part 25
continues to read in part as follows:
Authority: 26 U.S.C. 7805***
PA RT 3 1—EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT SOURCE
Par. 6. The authority citation for part 31
continues to read in part as follows:
Authority: 26 U.S.C. 7805***
Par.7.In§31.6081(a)–1, paragraph
(a)(2)(i) is revised to read as follows:
§31.6081(a)–1 Extensions of time for
filing returns and other documents.
(a)***
(2)***(i) [The text of proposed
§31.6081(a)–1(a)(2)(i) is the same as the
text of§31.6081(a)–1T(a)(2)(i) published
elsewhere in this issue of the Bulletin].
*****
PA RT 5 3—FOUNDATION AND
SIMILAR EXCISE TAXES
Par. 8. The authority citation for part 53
continues to read as follows:
Authority: 26 U.S.C. 7805.
PA RT 5 5—EXCISE TAX ON REAL
ESTATE INVESTMENT TRUSTS AND
REGULATED INVESTMENT
COMPANIES
Par. 9. The first sentence of the author-
ity citation for part 55 is revised to read as
follows:
Authority: 26 U.S.C. 6001, 6011, 6071,
6091, and 7805.***
PART 156—EXCISE TAX ON
GREENMAIL
Par. 10. The authority citation for part
156 is revised to read as follows:
Authority: 26 U.S.C. 6001, 6011, 6061,
6071, 6091, 6161, and 7805.
Par. 11. In the list below, for each sec-
tion indicated in the left column, remove
the language in the middle column and add
the language in the right column in its place:
July 7, 2003142003–27 I.R.B.

SectionRemoveAdd
1.6081–2(f), first sentencedistrict director, including the Assistant
Commissioner (International), or the
director of a service center
Commissioner
1.6081–3(d), first sentencedistrict director, including the Director of
International Operations, or the director of
a service center may, in his discretion,
Commissioner may
1.6081–4(c), first sentencedistrict director, including the Assistant
Commissioner (International), or the
director of a service center
Commissioner
1.6081–5(a)(1)1.6031–1(e)(2)1.6031(a)–1(e)(2)
1.6081–6(d), first sentencedistrict director, including the Assistant
Commissioner (International), or the
director of a service center
Commissioner
1.6081–7(d), first sentencedistrict director, including the Assistant
Commissioner (International), or the
director of a service center
Commissioner
25.6081–1, second sentencedistrict director or director of the service
center
Commissioner
31.6081(a)–1(b), first sentencedistrict director or director of a service cen-
ter
Commissioner
53.6081–1(a), first sentenceDistrict directors and directors of service
centers are
The Commissioner is
53.6081–1(b), first sentenceto the district director or director of the ser-
vice center with whom the return is to be
filed
in accordance with the instructions to the ex-
tension request form
55.6081–1, first sentenceDistrict directors and directors of service
centers are
The Commissioner is
156.6081–1(a), first sentenceDistrict directors and directors of service
centers are
The Commissioner is
156.6081–1(b), first sentenceto the district director or director of the ser-
vice center with whom the return is to be
filed
in accordance with the instructions to the ex-
tension request form
Judith B. Tomaso,
Acting Deputy Commissioner
for Services and Enforcement.
(Filed by the Office of the Federal Register on June 10, 2003,
8:45 a.m., and published in the issue of the Federal Regis-
ter for June 11, 2003, 68 F.R. 34875)
Notice of Proposed Rulemak-
ing; Withdrawal of Previous
Rulemaking; and Notice of
Public Hearing
Statutory Options
REG–122917–02
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemak-
ing; withdrawal of previous rulemaking; and
notice of public hearing.
SUMMARY: This document contains pro-
posed regulations relating to statutory op-
tions. These proposed regulations affect cer-
tain taxpayers who participate in the transfer
of stock pursuant to the exercise of incen-
tive stock options and the exercise of op-
tions granted pursuant to an employee stock
purchase plan (statutory options). These pro-
posed regulations provide guidance to as-
sist these taxpayers in complying with the
law in addition to clarifying rules regard-
ing statutory options. This document also
withdraws a previous notice of proposed
rulemaking.
DATES: Written and electronically sub-
mitted comments and requests to speak,
with outlines of topics to be discussed at
the public hearing scheduled for Septem-
ber 2, 2003, must be received by August 12,
2003.
ADDRESSES: Send submissions to
CC:PA:RU (REG–122917–02), room 5226,
Internal Revenue Service, POB 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand delivered Mon-
day through Friday between the hours of
8 a.m. and 5 p.m. to: CC:PA:RU (REG–
122917–02), Courier’s Desk, Internal Rev-
enue Service,1111Constitution Avenue,
NW, Washington, DC or sent electroni-
cally, via the IRS Internet sitewww.irs.gov/
regs. The public hearing will be held in the
IRS Auditorium, Internal Revenue Build-
ing,1111Constitution Avenue, NW, Wash-
ington, DC.
2003–27 I.R.B.15July 7, 2003

FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Erinn
Madden at (202) 622–6030 (not a toll-
free number). To be placed on the atten-
dance list for the hearing, please contact
Guy Traynor at (202) 622–7180.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in this notice of proposed rulemaking has
been submitted to the Office of Manage-
ment and Budget for review in accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)). Comments on the col-
lection of information should be sent to the
Office of Management and Budget, Attn:
Desk Officer for the Department of the
Treasury, Office of Information and Regu-
latory Affairs, Washington, DC 20503, with
copies to theInternal Revenue Service,
Attn: IRS Reports Clearance Officer,
W:CAR:MP:T:T:SP; Washington, DC
20224. Comments on the collection of in-
formation should be received by August 8,
2003. Comments are specifically requested
concerning:
Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the functions of theInternal
Revenue Service, including whether the in-
formation will have practical utility;
The accuracy of the estimated burden as-
sociated with the proposed collection of in-
formation (see below);
How the quality, utility, and clarity of the
information to be collected may be en-
hanced;
How the burden of complying with the
proposed collection of information may be
minimized, including through the applica-
tion of automated collection techniques or
other forms of information technology; and
Estimates of capital or start-up costs and
costs of operation, maintenance, and pur-
chase of service to provide information.
The collection of information in this pro-
posed regulation is in 1.6039–1. Section
6039 of the Code requires all corpora-
tions that transfer stock to any person pur-
suant to the exercise of a statutory option
to furnish that person with a written state-
ment describing the transfer. Addition-
ally, the corporation may be required to fur-
nish the person a second written statement
when the stock originally transferred pur-
suant to the exercise of the statutory op-
tion is subsequently disposed of by the per-
son. The information on the statements
required to be provided by the corpora-
tion will be used by recipients to com-
plete their income tax returns in the year
of the disposition of the statutory option
stock. The likely respondents are for-profit
corporations.
Estimated total annual reporting burden:
16,650 hours.
Estimated average annual burden hours
per respondent; 20 minutes.
Estimated number of respondents:
50,000.
Estimated annual frequency of responses:
annually.
An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information un-
less it displays a valid control number
assigned by the Office of Management and
Budget.
Books or records relating to a collec-
tion of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required by
26 U.S.C. 6103.
Background
This document contains proposed
amendments to 26 CFR part 1 under sec-
tions 421, 422, and, 424 of the Internal Rev-
enue Code (Code). Changes to the appli-
cable tax law concerning section 421 were
made by sections 11801 and 11821 of the
Omnibus Budget Reconciliation Act of
1989, Public Law 101–508 (104 Stat. 1388).
Changes to the applicable tax law concern-
ing section 424 were made by section 1003
of the Technical and Miscellaneous Rev-
enue Act of 1988 (TAMRA), Public Law
100–647 (102 Stat. 3581), sections 11801
and 11821 of the Omnibus Budget Recon-
ciliation Act of 1989 (OBRA 89), Public
Law 101–508 (104 Stat. 1388), which in-
cluded re-designating section 425 as sec-
tion 424 of the Code, and section 1702(h)
of the Small Business Job Protection Act
of 1996, Public Law 104–188 (110 Stat.
1755). Changes concerning section 422
were made by section 251 of the Economic
Recovery Tax Act of 1981 (95 Stat. 172),
which added section 422A to the Code. Re-
lated changes to section 422A were made
by section 102(j) of the Technical Correc-
tions Act of 1982, Public Law 97–448, sec-
tion 321(a) of Tax Reform Act of 1986 (96
Stat. 2365), Public Law 99–514 (100 Stat.
2807), section 1003(d) of TAMRA, and sec-
tions 11801 and 11821 of OBRA 89, which
included re-designating section 422A as sec-
tion 422 of the Code.
Regulations under section 421 govern-
ing the requirements for restricted stock op-
tions and qualified stock options, as well
as options granted under an employee stock
purchase plan, were published in theFed-
eral Registeron December 9, 1957 (T.D.
6276, 1957–2 C.B. 271), November 26,
1960 (T.D. 6500), January 18, 1961 (T.D.
6527, 1961–1 C.B. 153), January 20, 1961
(T.D. 6540, 1961–1 C.B. 161), December
12, 1963 (T.D. 6696, 1963–2 C.B. 23), June
23, 1966 (T.D. 6887, 1966–2 C.B. 129),
July 24, 1978 (T.D. 7554, 1978–2 C.B. 83),
and November 3, 1980 (T.D. 7728, 1980–2
C.B. 236). Temporary regulations under sec-
tion 422A providing guidance and transi-
tional rules related to incentive stock op-
tions were published in theFederal
Registeron December 17, 1981 (T.D. 7799,
1982–1 C.B. 67) and September 18, 1992
(T.D. 8435, 1992–2 C.B. 324). Final regu-
lations under section 422 related to stock-
holder approval were published in theFed-
eral Registeron December 1, 1988 (T.D.
8235, 1989–1 C.B.117) and November 29,
1991 (T.D. 8374, 1999–2 C.B. 320). Regu-
lations under section 425 were published in
theFederal Registeron June 23, 1966
(T.D. 6887, 1966–2 C.B. 129).
Proposed changes to the final regula-
tions under sections 421, 424, and 6039 and
proposed regulations under section 422A
were previously published in theFederal
Registerat 49 FR 4504 (EE–86–88 (LR–
279–81, 1984–1 C.B. 715)) on February 7,
1984 (the 1984 proposed regulations). With
the exception of certain stockholder ap-
proval rules that were published in theFed-
eral Registeron June 23, 1966 (T.D. 6887)
and amended by T.D. 7728 on October 31,
1980, the 1984 proposed regulations pro-
vided a comprehensive set of rules under
section 422 of the Code. The 1984 pro-
posed regulations are withdrawn.
In general, the income tax treatment of
the grant of an option to purchase stock in
connection with the performance of ser-
vices and of the transfer of stock pursu-
ant to the exercise of such option is deter-
mined under section 83 of the Code and the
regulations thereunder. However, section
421 of the Code provides special rules for
July 7, 2003162003–27 I.R.B.

determining the income tax treatment of the
transfer of shares of stock pursuant to the
exercise of an option if the requirements of
section 422(a) or 423(a), as applicable, are
met. Section 422 applies to incentive stock
options, and section 423 applies to op-
tions granted under an employee stock pur-
chase plan (collectively, statutory options).
Under section 421, if a share of stock is
transferred to an individual pursuant to the
exercise of a statutory option, there is no
income at the time of exercise of the op-
tion with respect to such transfer, and no
deduction under section 162 is allowed to
the employer corporation with respect to
such transfer. However, pursuant to sec-
tion 56(b)(3), section 421 does not apply
with respect to the exercise of an incen-
tive stock option for purposes of the indi-
vidual alternative minimum tax.
Section 422(a) of the Code provides that
section 421 applies to the transfer of stock
to an individual pursuant to the exercise of
an incentive stock option if (i) no dispo-
sition of the share is made within 2 years
from the date of grant of the option or
within 1 year from the date of transfer of
the share, and (ii) at all times during the pe-
riod beginning on the date of grant and end-
ing on the day 3 months before the exer-
cise of the option, the individual is an
employee of either the corporation grant-
ing the option or a parent or subsidiary of
such corporation, or a corporation (or a par-
ent or subsidiary of such corporation) is-
suing or assuming a stock option in a trans-
action to which section 424(a) applies.
Section 422(b) provides several require-
ments that must be met for an option to
qualify as an incentive stock option. Sec-
tion 422(c) provides special rules appli-
cable to incentive stock options, and sec-
tion 422(d) provides a $100,000 limitation
with respect to incentive stock options.
Section 424 of the Code provides spe-
cial rules applicable to statutory options, in-
cluding rules concerning the modification
of statutory options and the substitution or
assumption of an option by reason of a cor-
porate merger, consolidation, acquisition of
property or stock, separation, reorganiza-
tion, or liquidation. Section 424 also con-
tains definitions of certain terms, includ-
ingdisposition,parent corporation, and
subsidiary corporation. Finally, section 424
provides special rules related to attribu-
tion of stock ownership and the effect of
stockholder approval on the date of grant
of a statutory option.
Explanation of Provisions
Overview
These proposed regulations would pro-
vide a set of comprehensive rules govern-
ing incentive stock options. These pro-
posed regulations incorporate many of the
rules contained in the 1984 proposed regu-
lations, although these proposed regula-
tions are re-numbered and re-organized.
These proposed regulations would also
make changes to the final regulations un-
der sections 421 and 424 to provide addi-
tional guidance, as discussed below, in cer-
tain areas, to reflect the new organizational
structure of the statutory option rules (in-
cluding the re-designation of§1.425–1as
§1.424–1), and to remove obsolete rules and
cross-references.
Section 421: General Rules
The proposed regulations under sec-
tion 421 would remove obsolete provi-
sions and update the cross-references to re-
flect amendments to the applicable statutes
and re-organization of the regulations. These
proposed regulations also incorporate many
provisions of the 1984 proposed regula-
tions. There are two sections of these pro-
posed regulations under section 421:
§1.421–1, which would provide rules con-
cerning the meaning and use of terms, and
§1.421–2, which would provide general
rules regarding the application of section
421.
The terms defined in§1.421–1 of these
proposed regulations are the same as those
previously defined in§1.421–7, but these
proposed regulations make changes to the
definitions of certain terms. For example,
§1.421–1(a) of these proposed regulations
expands the definition ofoptionto include
warrants.
These proposed regulations would pro-
vide that an option must be evidenced in
paper or in an electronic form. Under ei-
ther form, however, the option must be en-
forceable under applicable law. Similarly,
these proposed regulations provide that the
plan pursuant to which incentive stock op-
tions are granted must be in paper or elec-
tronic form, provided that the paper or elec-
tronic form establishes an enforceable plan.
In addition, as with any taxpayer record,
the form used for the option or plan,
whether paper or electronic, must be one
that provides adequate substantiation of the
applicability of section 421. Thus, for ex-
ample, the form must be one that provides
adequate substantiation of the applicable re-
quirements, such as the date on which the
option is granted, the number of shares sub-
ject to the option, and the option price. In
addition, the taxpayer must retain records
relating to the option that are sufficient to
comply with section 6001 and the regula-
tions thereunder. If these records are kept
electronically, the records must meet the re-
quirements of Rev. Proc. 97–22, 1997–1
C.B. 652, or subsequent guidance, and if
the records are kept in an ADP system, the
records must meet the requirements of Rev.
Proc. 98–25, 1998–11 I.R.B. 7, or subse-
quent guidance.
The definition ofstatutory optionin
§1.421–1(b) of these proposed regulations
is revised to provide that a statutory op-
tion may include an option transferred to
a trust if, under section 671 and appli-
cable state law, the individual to whom the
option was granted remains the beneficial
owner. In contrast, these proposed regula-
tions provide that a transfer of a statutory
option incident to divorce will result in the
option failing to qualify as a statutory op-
tion as of the date of transfer.
Section 1.421–1(i) of these proposed
regulations definescorporationto have the
same meaning prescribed by section
7701(a)(3) and§301.7701–2(b). Thus, for
example, acorporationincludes an S Cor-
poration, a foreign corporation, and a lim-
ited liability corporation that is treated as
a corporation for all federal tax purposes.
In addition, section 1.421–1(d) of these pro-
posed regulations provides thatstockin-
cludes ownership interests other than capi-
tal stock. Thus, under these proposed
regulations, it would be permissible for any
entity that is classified as a corporation for
federal tax purposes pursuant to the pro-
visions of§301.7701–2(b) to grant statu-
tory stock options with respect to owner-
ship interests in that entity.
Section 1.421–2 of these proposed regu-
lations incorporates both the provisions of
§1.421–8 and many of the related provi-
sions of the 1984 proposed regulations.
These proposed regulations also provide fur-
ther revisions, including specifying that the
deduction in connection with a disqualify-
ing disposition is allowed only if other-
2003–27 I.R.B.17July 7, 2003

wise allowable under sections 83(h) and 162
and if the reporting requirements under
§1.83–6(a) are met.
Section 422: Incentive Stock Options
The proposed regulations under sec-
tion 422 would provide a new set of com-
prehensive rules, with the exception of the
rules regarding stockholder approval de-
scribed in§1.422–5 of the final regula-
tions (re-numbered as§1.422–3 by these
proposed regulations). There are four sec-
tions under these proposed regulations:
§1.422–1, general rules;§1.422–2, defini-
tion of incentive stock option;§1.422–4, the
$100,000 limitation; and§1.422–5, per-
missible provisions.
1. Special rules regarding disqualifying
dispositions
The 1984 proposed regulations provided
rules concerning the consequences of dis-
qualifying dispositions. The general dis-
qualifying disposition rules for incentive
stock options are provided in§§1.421–
2(b)(1) and 1.422–1(b)(1) of these pro-
posed regulations. In addition,§1.422–
1(b)(2) of these proposed regulations
clarifies the operation of the special rules
applicable to a disqualifying disposition of
an incentive stock option under section
422(c)(2) (section 422A(c)(2), prior to
amendment by OBRA 89).
The general rules concerning disquali-
fying dispositions are described in§1.421–
2(b) of these proposed regulations. Under
these rules, if there is a disqualifying dis-
position of a share of stock, the special tax
treatment provided by section 421 and
§1.421–2(a) does not apply to the trans-
fer of the share. Instead, the exercise of the
option is treated as the exercise of a non-
statutory option under§1.83–7. Thus, in the
taxable year in which the disqualifying dis-
position occurs, the individual must rec-
ognize compensation income equal to the
fair market value of the stock on the date
the stock is transferred less the exercise
price (determined without reduction for any
brokerage fees or other costs paid in con-
nection with the disposition). A deduc-
tion attributable to the transfer of the share
of stock pursuant to the exercise of the op-
tion is allowable for the taxable year in
which such disqualifying disposition oc-
curs, to the employer corporation, its par-
ent or subsidiary corporation, or a corpo-
ration substituting or assuming an option in
a transaction to which§1.424–1(a) ap-
plies, if otherwise allowable under sec-
tions 83(h) and 162 and if the require-
ments of§1.83–6(a) are met.
Section 422(c)(2), however, provides a
special rule that is applicable if an indi-
vidual makes a disqualifying disposition of
stock acquired through the exercise of an
incentive stock option and if the disposi-
tion is a sale or exchange with respect to
which a loss (if sustained) would be rec-
ognized by the individual. Under this spe-
cial rule, the amount includible in gross in-
come on the disqualifying disposition, and
the amount deductible, as compensation at-
tributable to the exercise of the option, shall
not exceed the excess (if any) of the amount
realized on such sale or exchange over the
adjusted basis of the share. Under section
422(c)(2), this special rule is not appli-
cable if the disposition is a sale or ex-
change with respect to which a loss (if sus-
tained) would not be recognized by the
individual. Section 1.422A–1(b)(2) of the
1984 proposed regulations described these
special rules concerning the disqualifying
disposition of an incentive stock option and
this description is incorporated into§1.422–
1(b)(2) of these proposed regulations.
For example, if the disposition is a sale
described in section 1091 (relating to a loss
from wash sales of stock or securities), a
gift, or a sale described in section 267(a)(1)
(relating to sales between related parties),
any loss sustained would not be recog-
nized. Because a loss in any of these trans-
actions would not be recognized, under
§1.422–1(b)(2)(ii) of these proposed regu-
lations, the special rule provided in§1.422–
1(b)(2)(i) of these proposed regulations does
not apply. Instead, the general rules for dis-
qualifying dispositions described in§1.421–
2(b) of these proposed regulations apply.
For example, assume E, an employee of
Corporation X, is granted an incentive stock
option to acquire X stock. The option price
on the date of grant is $100 (the fair mar-
ket value of X stock on the date of grant).
E exercises the option and is transferred X
stock when the fair market value of the
stock is $200. E later sells the stock for
$150 to M before the applicable holding pe-
riods expire. Because the sale is a disquali-
fying disposition that meets the require-
ments of§1.422–1(b)(2)(i) of these
proposed regulations, in the taxable year of
the disqualifying disposition, E is only re-
quired to include $50 (the excess of the
amount realized on the sale, $150, over the
adjusted basis of the share, $100) in gross
income as compensation attributable to the
exercise of the option. For its taxable year
in which the disqualifying disposition oc-
curs, X is allowed a compensation deduc-
tion of $50 attributable to E’s exercise of
the option, if otherwise allowable under sec-
tions 83(h) and 162 and if the require-
ments of§1.83–6(a) are met.
In this example, however, if 10 days af-
ter the sale to M, E purchases substan-
tially identical stock, under section 1091,
a loss would not be recognized on the sale
to M. Thus, under§1.422–1(b)(2)(ii) of
these proposed regulations, the special rule
in§1.422–1(b)(2)(i) does not apply. In-
stead of including $50 in gross income in
the taxable year of the disqualifying dis-
position, E must include $100 (the differ-
ence between the fair market value of X
stock on the date of transfer, $200, and the
exercise price, $100) in gross income as
compensation attributable to the exercise of
the option. In the taxable year in which the
disqualifying disposition occurs, X is al-
lowed a compensation deduction of $100
attributable to E’s exercise of the option if
otherwise allowable under sections 83(h)
and 162 and if the requirements of§1.83–
6(a) are met.
Since the 1984 proposed regulations
were issued, there have been no changes in
section 422(c)(2) (other than the redesig-
nation of section 422A(c)(2) as 422(c)(2)
by OBRA 89), and these proposed regula-
tions do not make any substantive changes
to the 1984 proposed regulations.
2. Stockholder approval of incentive
stock option plan
Among other requirements, to qualify as
an incentive stock option, the option must
be granted pursuant to a plan which is ap-
proved by the stockholders of the grant-
ing corporation within 12 months before or
after the date the plan is adopted. See sec-
tion 422(b). These proposed regulations
would provide the same basic requirements
for stockholder approval as those included
in the 1984 proposed regulations.
These proposed regulations, however,
would provide additional guidance con-
cerning the circumstances in which stock-
holder approval is required. As under the
1984 proposed regulations, stockholder ap-
proval is required if there is a change in the
aggregate number of shares or in the em-
July 7, 2003182003–27 I.R.B.

ployees (or class or classes of employ-
ees) eligible to be granted options under the
plan. In addition, while the standard for de-
termining when stockholder approval is re-
quired is the same as under the 1984 pro-
posedregulations,theseproposed
regulations clarify these requirements and
provide a more complete list of situations
that require new stockholder approval of the
plan by specifically including a change in
the shares with respect to which options are
issued or a change in the granting corpo-
ration. Thus, for example, assume that S,
a subsidiary of P, adopts an incentive stock
option plan under which incentive stock op-
tions for S stock will be granted to S em-
ployees, and the plan is approved by the
stockholders of S (in this case, P) within
the applicable 24-month period. If S later
amends the plan to provide for the grant of
incentive stock options to acquire P stock
(rather than S stock), S must obtain ap-
proval from the stockholders of S within 12
months before or after the date of the
amendment to the plan because the amend-
ment of the plan to allow the grant of op-
tions for P stock is considered the adop-
tion of a new plan.
These proposed regulations also would
provide additional guidance regarding the
application of the stockholder approval re-
quirements in the context of the substitu-
tion or assumption of an option by rea-
son of a corporate transaction. For a
discussion of these rules, see the“Substi-
tution, assumption, and modification of op-
tions”portion of the preamble.
3. $100,000 limitation
Section 422(d)(1) provides that to the ex-
tent that the aggregate fair market value of
stock with respect to which incentive stock
options (determined without regard to sec-
tion 422(d)) are exercisable for the first time
by any individual during the calendar year
(under all of plans of the employer corpo-
ration and any related corporation) ex-
ceeds $100,000, such options are not treated
as incentive stock options. Under section
422(d)(2), options are taken into account in
the order in which they are granted. Sec-
tion 422(d)(3) provides that the fair mar-
ket value of stock is determined at the time
the option is granted.
The 1984 proposed regulations provided
no rules concerning the operation of the
$100,000 limitation because these provi-
sions were enacted in 1986. However, No-
tice 87–49, 1987–2 C.B. 355, provides gen-
eral guidance about the operation of the
$100,000 limitation, including examples il-
lustrating the application of this limita-
tion.
Section 1.422–4 of these proposed regu-
lations provides guidance on the opera-
tion of the $100,000 limitation that incor-
porates and expands on the guidance
provided in Notice 87–49. Section 1.422–
4(a)(1) of these proposed regulations pro-
vides that an option that otherwise quali-
fies as an incentive stock option nevertheless
fails to be an incentive stock option to the
extent the $100,000 limitation is exceeded.
To determine whether the $100,000 limi-
tation has been exceeded, the rules pro-
vided in§1.422–4(b) of these proposed
regulations would apply. Under these pro-
posed regulations, an option that does not
qualify as an incentive stock option when
granted (including an option which con-
tains terms providing that it will not be
treated as an incentive stock option) is dis-
regarded. Additionally, the fair market value
of stock is determined on the date of grant
of the option. Except as described in the fol-
lowing paragraph, options are taken into ac-
count in the order in which they are granted.
An option is considered to be first ex-
ercisable during a calendar year if the op-
tion will first become exercisable at any
time during the year, assuming that any con-
dition on the optionee’s ability to exer-
cise the option related to the performance
of services is satisfied. If an optionee is able
to exercise the option in a year only if an
acceleration provision is satisfied, then the
option is exercisable in that year only if the
acceleration provision is triggered prior to
the end of that year. After an acceleration
provision is triggered, for purposes of ap-
plying the $100,000 limitation, the op-
tions subject to such provision and all other
options first exercisable during a calen-
dar year are then taken into account in the
order in which granted. However, because
an acceleration provision is not taken into
account prior to its triggering, an incen-
tive stock option that becomes exercis-
able for the first time during a calendar year
by operation of such a provision does not
affect the application of the $100,000 limi-
tation with respect to an option (or por-
tion thereof) exercised prior to such accel-
eration. An acceleration provision includes,
for example, a provision that accelerates the
exercisability of an option on a change in
ownership or control or a provision that
conditions exercisability on the attainment
of a performance goal. See§1.422–4(d),Ex-
ample 4of these proposed regulations.
For example, assume that in 2006, E, an
employee of Y Corporation, is granted Op-
tion 1 for stock of Y with a fair market
value on the date of grant of $75,000. Op-
tion 1 is first exercisable in 2008, except
that the option provides that it will be-
come immediately exercisable in the event
of a change in control. In 2007, E is granted
Option 2 for stock of Y with a fair mar-
ket value on the date of grant of $50,000.
Option 2 is immediately exercisable, and E
exercises Option 2. A change in control of
Y occurs in 2007, after E has exercised Op-
tion 2, and Option 1 becomes immedi-
ately exercisable. Notwithstanding the fact
that Option 1 was granted prior to Option
2, because the acceleration clause is not
taken into account until it is triggered and
because E exercised Option 2 prior to the
change in control, Option 2 is an incen-
tive stock option in its entirety. Option 1
is bifurcated into an incentive stock op-
tion to acquire stock with a fair market
value of $50,000 on the date of grant and
a nonstatutory option to acquire stock with
a fair market value of $25,000 on the date
of grant.
If the change in control instead occurred
prior to E’s exercise of Option 2, then Op-
tion 1, which was granted first, is treated
as an incentive stock option in its entirety,
and Option 2 is bifurcated into an incen-
tive stock option to acquire stock with a fair
market value of $25,000 on the date of
grant and a nonstatutory option to acquire
stock with a fair market value of $25,000
on the date of grant.
These proposed regulations also would
provide that an option is disregarded for
purposes of the $100,000 limitation if, prior
to the calendar year during which it would
have otherwise become exercisable for the
first time, the option is modified and there-
after ceases to be an incentive stock op-
tion, is transferred in violation of the non-
transferability requirements, or is canceled.
In all other situations, a modified, trans-
ferred, or canceled option (or portion
thereof) is treated as outstanding until the
end of the calendar year during which it
would otherwise have become exercis-
able for the first time.
Finally, under these proposed regula-
tions, a disqualifying disposition has no ef-
2003–27 I.R.B.19July 7, 2003

fect on the determination of whether an op-
tion exceeds the $100,000 limitation. Thus,
for example, assume Corporation X grants
E, an employee of X, Option 1 to acquire
X stock with a fair market value on the date
of grant of $75,000. Option 1 is exercis-
able on January 1, 2005. On January 5,
2005, E exercises the option and sells the
stock in a disqualifying disposition. On
January 15, 2005, X grants E Option 2 to
acquire X stock with a fair market value on
the date of grant of $50,000. Option 2 is
immediately exercisable. Under§1.422–
4(b)(6) of the proposed regulations, the dis-
qualifying disposition of Option 1 has no
effect on the application of the $100,000
limitation. Thus, Option 2 is bifurcated into
an incentive stock option to acquire stock
with a fair market value of $25,000 on the
date of grant and a nonstatutory option to
acquire stock with a fair market value of
$25,000 on the date of grant.
4. Permissible provisions
These proposed regulations also pro-
vide guidance on additional provisions that
may be included in an incentive stock op-
tion. Because these provisions are not part
of the requirements for an incentive stock
option, they are addressed separately in
§1.422–5 of these proposed regulations
(many of these rules were previously in
§1.422A–2(i) of the 1984 proposed regu-
lations). Section 1.422–5 of these pro-
posed regulations addresses provisions per-
mitting cashless exercise, providing the right
to receive additional compensation, and pro-
viding alternative rights. In each case, these
proposed regulations essentially retain the
rules described in the 1984 proposed regu-
lations.
Section 424: Definitions and Special
Rules
These proposed regulations re-designate
the regulations under section 425 as regu-
lations under section 424 and update the
regulations. For example, these proposed
regulations amend the definition ofdispo-
sitionto exclude a transfer of a share of
stock acquired pursuant to the exercise of
a statutory option if the transfer is de-
scribed in section 1041(a) (concerning trans-
fers between spouses or former spouses in-
cident to divorce).
Substitution, Assumption, and
Modification of Options
Section 424(h)(1) provides that if the
terms of an option are modified, extended,
or renewed, such modification, renewal, or
extension is treated as the grant of a new
option. Under section 424(h)(3), the term
modification(with certain exceptions) means
any change in the terms of an option which
gives the optionee additional benefits un-
der the option. One exception to this defi-
nition is that a change in the terms of an
option attributable to a substitution or an
assumption that meets the requirements of
section 424(a) is not a modification of an
option.
These proposed regulations would pro-
vide that aneligible corporation(as de-
fined in§1.424–1(a)(2) of these proposed
regulations) may by reason of acorpo-
rate transaction(as defined in§1.424–
1(a)(3) of these proposed regulations) sub-
stitute a new statutory option (new option)
for an outstanding statutory option (old op-
tion) or assume an old option without the
substitution or assumption being consid-
ered a modification of the old option un-
der section 424(h).
Aneligible corporationis defined as a
corporation that is the employer of an op-
tionee or a related corporation of such cor-
poration. The determination of whether a
corporation is the employer of the optionee
or a related corporation of such corpora-
tion is based upon the circumstances ex-
isting immediately after the corporate trans-
action.
Under the proposed regulations, acor-
porate transactionis (i) a corporate merger,
consolidation, acquisition of property or
stock, separation, reorganization, or liqui-
dation; (ii) a distribution (excluding ordi-
nary dividends), or change in the terms or
number of outstanding shares of such cor-
poration, such as a stock split or stock divi-
dend (a change in capital structure); (iii) a
change in the name of a corporation whose
stock is purchasable under the old option;
and (iv) such other corporate events as may
be prescribed by the Commissioner in pub-
lished guidance.
The definitions ofeligible corporation
andcorporate transactionwould be ex-
panded under these proposed regulations.
Specifically, these proposed regulations per-
mit corporations with outstanding options
to substitute or assume an option under
§1.424–1(a) if there is a corporate trans-
action. Additionally, the definition ofcor-
porate transactionincludes events, such as
a stock dividend or stock split, that were
previously addressed in§1.425–1(e) of the
final regulations, and is otherwise expanded
so that events or transactions with similar
consequences are treated the same. Be-
cause of these changes, the rules in§1.425–
1(e)(5)(ii) of the current regulations would
be removed.
These proposed regulations also would
eliminate the requirement contained in
§1.425–1(a)(1)(ii) of the final regulations
that the corporate transaction result in a sig-
nificant number of employees being trans-
ferred to a new employer or discharged or
in the creation or severance of a parent-
subsidiary relationship. However,§1.424–
1(a)(4) of these proposed regulations would
continue to impose, and provide additional
guidance concerning, the requirement that
the substitution or assumption be“by rea-
son of”the corporate transaction.
Under these proposed regulations, a
change in an option or issuance of a new
option is considered to be by reason of a
corporate transaction unless the relevant
facts and circumstances demonstrate that
such change or issuance is made for rea-
sons unrelated to such corporate transac-
tion. For example, a change in an option or
issuance of a new option is considered to
be made for reasons unrelated to such a cor-
porate transaction if there is an unreason-
able delay between the corporate transac-
tion and such change in the option or
issuance of a new option or if the corpo-
rate transaction serves no substantial cor-
porate business purpose independent of the
change in options. A change in an option
or issuance of a new option is not by rea-
son of a distribution or change in the terms
or number of outstanding shares unless the
option as changed, or the new option, is is-
sued on the stock of the same corpora-
tion, or if such class of stock is elimi-
nated by the change in capital structure, on
other stock of the same corporation. For
purposes of a change in name of the cor-
poration, the issuance of a new option is by
reason of the change in name of the cor-
poration only if the option issued is on stock
of the successor corporation.
These proposed regulations do not oth-
erwise revise the requirements that must be
met for a change in an option to qualify as
July 7, 2003202003–27 I.R.B.

a substitution or an assumption. For ex-
ample, no changes are proposed with re-
spect to the requirements that no addi-
tional benefits be granted to the optionee
in connection with a substitution or as-
sumption or that certain spread and ratio
tests must be met.
These proposed regulations also con-
tinue to impose the requirement contained
in the final regulations that the new or as-
sumed option must otherwise qualify as a
statutory option. See§1.424–1(a)(5)(vi) of
these proposed regulations. Thus, except as
necessary to comply with the specific re-
quirements regarding substitution or as-
sumption, such as the restrictions on ratio
and spread, the option must comply with
the requirements of§1.422–2 of these pro-
posed regulations or 1.423–2, as appli-
cable. Accordingly, for example, the new
option must be granted, or the old option
must be assumed, under a plan approved by
the stockholders of the corporation substi-
tuting or assuming the option.
The proposed regulations do not im-
pose any additional stockholder approval re-
quirement, however, merely because there
is a corporate transaction. In Rev. Rul. 71–
474, 1971–2 C.B. 215, involving quali-
fied stock options,
1
the IRS held that quali-
fied stock options assumed by a corporation
in a merger with the granting corporation
retained their status as qualified stock op-
tions without approval of the assuming cor-
poration’s stockholders. In the ruling, the
IRS indicated that approval of the per-
sons who owned stock of the granting cor-
poration at the time the plan was approved
was sufficient to satisfy the stockholder ap-
proval requirements. Similarly, the 1984
proposed regulations provided that the
stockholders of the granting corporation
must approve the plan within 12 months be-
fore or after its adoption without addi-
tional requirements.
Section 1.422–2(b)(2) of these proposed
regulations would provide that the plan must
be approved during the applicable 24-month
period by the stockholders of the corpora-
tion granting the incentive stock option.
There is no requirement that additional
stockholder approval be obtained because
of post-approval changes in the stockhold-
ers. For example, assume S, a subsidiary of
P, adopts a plan under which incentive stock
options for S stock will be granted to S em-
ployees. Under the proposed regulations, the
stockholders of S must approve the plan
within 12 months before or after the adop-
tion of the plan. If P later completely dis-
poses of its interest in S, outstanding S op-
tions and new grants of S options under the
plan are treated as options granted under a
plan that meets the stockholder approval re-
quirement of§1.422–2(b)(2) of these pro-
posed regulations without regard to whether
S seeks approval of the plan from the stock-
holders of S after the spin-off. Assuming
all other applicable requirements are met,
the outstanding S options and new op-
tions granted by S pursuant to the plan with
respect to S stock will be treated as incen-
tive stock options.
These proposed regulations also would
provide additional guidance with respect to
when a change to an option constitutes a
modification. Under these proposed regu-
lations, as under the 1984 proposed regu-
lations, both a provision under an option
that provides that the optionee may re-
ceive an additional benefit at the future dis-
cretion of the granting corporation and the
exercise of that discretion are considered
modifications of the option. However, un-
der these proposed regulations, it is not a
modification for the granting corporation to
exercise discretion related to the payment
of a bonus at the time of the exercise of the
option, the availability of a loan at exer-
cise, or the right to tender previously-owned
stock for the stock purchasable under the
option. A change to an option adding such
discretion, however, would be a modifica-
tion.
In addition, these proposed regulations
address more clearly changes related to an
option, including changes not only to the
option or the option plan, but also changes
to any other related agreements. In the case
of a change to the stock on which the op-
tion is granted that affects the value of the
stock, there would be a modification un-
less a new option is substituted for the old
option by reason of the change in the terms
of the stock in accordance with the require-
ments of§1.424–1(a) of these proposed
regulations.
Section 6039
These proposed regulations also would
provide guidance on the statements re-
quired under section 6039 of the Code. Un-
der these proposed regulations,§1.6039–1
of the final regulations would be deleted,
and§1.6039–2 would be re-designated as
§1.6039–1. These proposed regulations take
the same approach toward providing no-
tice as that taken in the 1984 proposed regu-
lations.
Section 1.6039–1(f) of these proposed
regulations states that the matter of fur-
nishing statements in electronic form is re-
served. Temporary and proposed regula-
tions have been issued under sections 6041
and 6051 (relating to voluntary electronic
furnishing of payee statements on Form
W–2) and section 6050S (relating to vol-
untary electronic furnishing of statements
to individuals for whom Forms 1098-T,
“Tuition Payments Statement,”and 1098-E,
“Student Loan Interest Statement”are filed).
See 66 FR 10191 and 10247 (Feb. 14,
2001). The preamble to those temporary and
proposed regulations requested comments
regarding, among other things, the extent
to which the proposed method of elec-
tronic filing is appropriate for informa-
tion statements required under other sec-
tions of the Code. In addition, section 401
of the Job Creation and Worker Assistance
Act of 2002 authorized all statements re-
quired by sections 6041 through 6050T of
the Code to be furnished electronically un-
der certain conditions. The issue of elec-
tronic statements in general is under re-
view, and comments are requested.
Proposed Effective Date
The regulations under sections 421, 422,
and 424 are proposed to apply as of the date
that is 180 days after publication of final
regulations in theFederal Registerand ap-
ply to any statutory option that is granted
on or after that date. The regulations un-
der section 6039 are proposed to apply to
transfers on or after the date that is 180 days
after publication of final regulations in the
Federal Registerof stock acquired pur-
suant to a statutory option. The 1984 pro-
posed regulations are withdrawn. Taxpay-
ers may rely on these proposed regulations
for the treatment of any statutory option
granted after June 9, 2003.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
1
Qualified stock options are no longer permitted under section 422, but the stockholder approval provisions applicable to a plan under which qualified stock options were granted were the
same as those that apply to a plan under which incentive stock options are granted.
2003–27 I.R.B.21July 7, 2003

cant regulatory action as defined in Ex-
ecutive Order 12866. Therefore, a regula-
tory assessment is not required. Section
1.6039–1 of these proposed regulations pro-
vides for the collection of information. It
is hereby certified that the collection of in-
formation in these regulations will not have
a significant economic impact on a sub-
stantial number of small entities. This cer-
tification is based on the fact that the pro-
vision of employee statements provided
under these proposed regulations will im-
pose a minimal paperwork burden on most
small entities (see the discussion under the
heading“Paperwork Reduction Act”ear-
lier in this preamble). Therefore, an analy-
sis under the Regulatory Flexibility Act (5
U.S.C. chapter 6) is not required. Pursu-
ant to section 7805(f) of the Code, this no-
tice of proposed rulemaking is being sub-
mitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written or electronic
comments (a signed original and eight (8)
copies) that are submitted timely to the IRS.
All comments will be available for public
inspection and copying.
A public hearing has been scheduled for
September 2, 2003, beginning at 10 a.m. in
the IRS Auditorium of the Internal Rev-
enue Building,1111Constitution Avenue,
NW, Washington, DC. All visitors must
come to the Constitution Avenue entrance
and present photo identification to enter the
building. Because of access restrictions, visi-
tors will not be admitted beyond the im-
mediate entrance area more than 30 min-
utes before the hearing starts. For
information about having your name placed
on the building access list to attend the hear-
ing, see the“FOR FURTHER INFORMA-
TION 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 comments at the hearing must
submit written comments and an outline of
the topics to be discussed and the time to
be devoted to each topic (signed original
and eight (8) copies) by August 12, 2003.
A period of 10 minutes will be allotted to
each person for making comments. An
agenda showing the schedule of speakers
will be prepared after the deadline for re-
ceiving outlines has passed. Copies of the
agenda will be available free of charge at
the hearing.
Drafting Information
The principal author of these regula-
tions is Erinn Madden, Office of the Di-
vision Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
However, other personnel from the IRS and
Treasury Department participated in their
development.
*****
Proposed Amendments to the Regula-
tions
Accordingly, 26 CFR parts 1 and 14a is
proposed to be amended as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805***
§§1.421–1 through 1.421–6 [Removed]
Par. 2. Sections 1.421–1 through 1.421–6
are removed.
Par. 3. Section 1.421–7 is re-designated
as§1.421–1 and is amended as follows:
1. In paragraph (a)(1), first sentence, the
language“sections 421 through 425”is re-
moved and“§§1.421–1 through 1.424–1”
is added in its place.
2. In paragraph (a)(1), first sentence, the
language“includes”is removed, and
“means”is added in its place.
3. In paragraph (a)(1), removing the sec-
ond sentence.
4. Removing the last sentence of para-
graph (a)(1) and adding two sentences in
its place.
5. Revising paragraph (a)(3).
6. Revising paragraphs (b)(1) and (b)(2).
7. In paragraph (b)(3)(i), third sentence,
removing the language“1.425–1”and in-
serting“1.424–1”in its place.
8. In the list below, for each section in-
dicated in the left column, remove the lan-
guage in the middle column and add the
language in the right column:
Newly Designated SectionRemoveAdd
1.421–1(b)(3)(ii),Example 1, first, sec-
ond, third and fourth sentences
S–1X
1.421–1(b)(3)(ii),Example 1, second sen-
tence
19642004
1.421–1(b)(3)(ii),Example 1, third and
fourth sentences
19652005
1.421–1(b)(3)(ii),Example 2, first and sec-
ond sentences
19642004
1.421–1(b)(3)(ii),Example 2, first, third,
and fourth sentences
S–1X
1..421–1(b)(3)(ii),Example 2, third and
fourth sentences
19652005
July 7, 2003222003–27 I.R.B.

9. Revising the last sentence of para-
graph (b)(3)(ii),Example 1.
10. Removing the last sentence of para-
graph (b)(3)(ii),Example 2and adding two
sentences in its place.
11. Removing the first sentence of para-
graph (c)(1) and adding two new sentences
in its place.
12. In paragraph (c)(2), second sen-
tence, the language“425”is removed and
“424”is added in its place.
13. In paragraph (c)(3), second and last
sentences, the language“1964”is removed
and“2004”is added in its place.
14. In paragraph (c)(3), second sen-
tence, the language“1965”is removed and
“2005”is added in its place.
15. Revising paragraphs (d) and (e).
16. In paragraph (f), in the first sen-
tence, the language“sections 421 through
425”is removed and“this section and
§§1.421–2 through 1.424–1”is added in its
place.
17. Revising the last sentence of para-
graph (f).
18. In paragraph (g), first sentence, the
language“sections 421 through 425”is re-
moved and“this section and§§1.421–2
through 1.424–1”is added in its place.
19. Adding a new third sentence to para-
graph (g).
20. Revising the first, second, and third
sentences of paragraph (h)(1).
21. Revising paragraph (h)(2).
22. In paragraph (h)(3), first sentence,
the language“425”is removed and“424”
is added in its place.
23. In paragraph (h)(3), last sentence, the
language“or assuming”is removed and
“the option or substituting or assuming the
option”is added in its place.
24. In the list below, for each section in-
dicated in the left column, remove the lan-
guage in the middle column and add the
language in the right column:
Newly Designated SectionRemoveAdd
1.421–1(h)(4),Example 1, first sen-
tence
19642004
1.421–1(h)(4),Example 1, second and
last sentences
19652005
1.421–1(h)(4),Example 2, first sen-
tence
425424
1.421–1(h)(4),Example 2, first sen-
tence
issuingsubstituting
1.424–1(h)(4),Example 2, last sen-
tence
19652005
1.421–1(h)(4),Example 2, last sen-
tence
for A is then employed by a corpora-
tion which issued an option under
section 425(a).
to the transfer of the M stock because,
at all times during the period beginning
with the date of grant of the X option and
ending with the date of exercise of the
M option, A was an employee of the cor-
poration granting the option or substi-
tuting or assuming the option under
§1.424–1(a).
1.421–1(h)(4),Example 3, second sen-
tence
19642004
1.421–1(h)(4),Example 3, third, fourth,
and fifth sentences
19652005
1.421–1(h)(4),Example 4, first sen-
tence
425(a)424(a)
1.421–1(h)(4),Example 5, first sen-
tence
qualified stockstatutory
1.421–1(h)(4),Example 6, first sen-
tence
an employment contract with M which
provides that upon the termination of
any military duty E may be required to
serve, E will be entitled to reemploy-
ment with M or a parent or subsidiary
of M.
a right to reemployment with M or a re-
lated corporation on the termination of
any military duty E may be required to
serve.
1.421–1(h)(4),Example 6, third sen-
tence
of Mof M or a related corporation
1.421–1(h)(4),Example 6, last sen-
tence
can applyapplies
2003–27 I.R.B.23July 7, 2003

Newly Designated SectionRemoveAdd
1.421–1(h)(4),Example 7, first and last
sentences
a qualified stockan incentive
1.421–1(h)(4),Example 7, first sen-
tence
parent or subsidiaryrelated corporation
1.421–1(h)(4),Example 7, last sen-
tence
its parent and subsidiary corporationrelated corporations
1.421–1(h)(4),Example 7, last sen-
tence
terminateddeemed terminated
25. Revising paragraph (i).
26. Adding paragraph (j).
The additions and revisions read as
follows:
§1.421–1 Meaning and use of certain
terms.
(a)***(1)***While no particular
form of words is necessary, the option must
express, among other things, an offer to sell
at the option price, the maximum number
of shares purchasable under the option, and
the period of time during which the offer
remains open. The termoptionincludes a
warrant that meets the requirements of this
paragraph (a)(1).
*****
(3) An option must be in writing (in pa-
per or electronic form), provided that such
writing is adequate to establish an option
right or privilege that is enforceable un-
der applicable law.
(b)Statutory options. (1) The termstatu-
tory option, for purposes of this section and
§§1.421–2 through 1.424–1, means anin-
centive stock option, as defined in§1.422–
2(a), or an option granted under anem-
ployee stock purchase plan, as defined in
§1.423–2.
(2) An option qualifies as a statutory op-
tion only if the option is not transferable
(other than by will or by the laws of de-
scent and distribution) by the individual to
whom the option was granted, and is ex-
ercisable, during the lifetime of such indi-
vidual, only by such individual. See
§§1.422–2(a)(2)(v) and 1.423–2(j). Accord-
ingly, an option which is transferable or
transferred by the individual to whom the
option is granted during such individual’s
lifetime, or is exercisable during such in-
dividual’s lifetime by another person, is not
a statutory option. However, if the option
or the plan under which the option was
granted contains a provision permitting the
individual to designate the person who may
exercise the option after such individual’s
death, neither such provision, nor a desig-
nation pursuant to such provision, disquali-
fies the option as a statutory option. A
pledge of the stock purchasable under an
option as security for a loan that is used to
pay the option price does not cause the op-
tion to violate the nontransferability re-
quirements of this paragraph (b). Also, the
transfer of an option to a trust does not dis-
qualify the option as a statutory option if,
under section 671 and applicable state law,
the individual is considered the sole ben-
eficial owner of the option while it is held
in the trust. If an option is transferred in-
cident to divorce (within the meaning of
section 1041) or pursuant to a qualified do-
mestic relations order (within the mean-
ing of section 414(p)), the option does not
qualify as a statutory option as of the day
of such transfer. For the treatment of non-
statutory options, see§1.83–7.
(3)(ii)*****
Example 1.***Because X was a sub-
sidiary of P on the date of the grant of the
statutory option, the option does not fail to
be a statutory option even though X ceases
to be a subsidiary of P.
Example 2.***Because X was not a
subsidiary of P on the date of the grant of
the option, the option is not a statutory op-
tion even though S later becomes a sub-
sidiary of P. See§§1.422–2(a)(2) and 1.423–
2(b).
(c)Time and date of granting option. (1)
For purposes of this section and§§1.421–2
through 1.424–1, the language“the date of
the granting of the option”and“the time
such option is granted,”and similar phrases
refer to the date or time when the grant-
ing corporation completes the corporate ac-
tion constituting an offer of stock for sale
to an individual under the terms and con-
ditions of a statutory option. A corporate ac-
tion constituting an offer of stock for sale
is not considered complete until the date on
which the maximum number of shares that
can be purchased under the option and the
minimum option price are fixed or deter-
minable.***
*****
(d)Stock and voting stock. (1) For pur-
poses of this section and§§1.421–2 through
1.424–1, the termstockmeans capital stock
of any class, including voting or nonvot-
ing common or preferred stock. Except as
otherwise provided, the term includes both
treasury stock and stock of original issue.
Special classes of stock authorized to be is-
sued to and held by employees are within
the scope of the termstockas used in such
sections, provided such stock otherwise pos-
sesses the rights and characteristics of capi-
tal stock.
(2) For purposes of determining what
constitutes voting stock in ascertaining
whether a plan has been approved by stock-
holders under§1.422–2(b) or 1.423–2(c) or
whether the limitations pertaining to vot-
ing power contained in§§1.422–2(f) and
1.423–2(d) have been met, stock which does
not have voting rights until the happen-
ing of an event, such as the default in the
payment of dividends on preferred stock,
is not voting stock until the happening of
the specified event. Generally, stock which
does not possess a general voting power,
and may vote only on particular questions,
is not voting stock. However, if such stock
is entitled to vote on whether a stock op-
tion plan may be adopted, it is voting stock.
(3) In general, for purposes of this sec-
tion and§§1.421–2 through 1.424–1, own-
ership interests other than capital stock are
considered stock.
(e)Option price. (1) For purposes of this
section and§§1.421–2 through 1.424–1, the
termoption price,price paid under the op-
tion,orexercise pricemeans the consid-
eration in cash or property which, pursu-
ant to the terms of the option, is the price
July 7, 2003242003–27 I.R.B.

at which the stock subject to the option is
purchased. The termoption pricedoes not
include any amounts paid as interest un-
der a deferred payment arrangement or
treated as interest.
(2) Any reasonable valuation method
may be used to determine whether, at the
time the option is granted, the option price
satisfies the pricing requirements of sec-
tions 422(b)(4), 422(c)(5), 422(c)(7), and
423(b)(6) with respect to the stock sub-
ject to the option. Such methods include,
for example, the valuation method described
in§20.2031–2 of this chapter (Estate Tax
Regulations).
(f)Exercise.***Anagreement or un-
dertaking by the employee to make pay-
ments under a stock purchase plan does not
constitute the exercise of an option to the
extent the payments made remain subject
to withdrawal by or refund to the employee.
(g)Transfer.***Atransfer does not
fail to occur merely because, under the
terms of the arrangement, the individual
may not dispose of the share for a speci-
fied period of time or the share is subject
to a right of first refusal at the share’s fair
market value at the time of sale.
(h)Employment relationship. (1) An op-
tion is a statutory option only if, at the time
the option is granted, the optionee is an em-
ployee of the corporation granting the op-
tion, or a related corporation of such cor-
poration. If the option has been assumed or
a new option has been substituted in its
place under§1.424–1(a), the optionee must,
at the time of such substitution or assump-
tion, be an employee of the corporation so
substituting or assuming the option, or a re-
lated corporation of such corporation. The
determination of whether the optionee is an
employee at the time the option is granted
(or at the time of the substitution or as-
sumption under§1.424–1(a)) is made in ac-
cordance with section 3401(c) and the regu-
lations thereunder.***
(2) In addition,§1.421–2(a) is appli-
cable to the transfer of a share pursuant to
the exercise of the statutory option only if
the optionee is, at all times during the pe-
riod beginning with the date of the grant-
ing of such option and ending on the day
3 months before the date of such exer-
cise, an employee of either the corpora-
tion granting such option, a related corpo-
ration of such corporation, or a corporation
(or a related corporation of such corpora-
tion) substituting or assuming a stock op-
tion in a transaction to which§1.424–1(a)
applies. For purposes of the preceding sen-
tence, the employment relationship is treated
as continuing intact while the individual is
on military leave, sick leave, or otherbona
fideleave of absence (such as temporary
employment by the Government) if the pe-
riod of such leave does not exceed 90 days,
or if longer, so long as the individual’s right
to reemployment with the corporation grant-
ing the option (or a related corporation of
such corporation) or a corporation (or a re-
lated corporation of such corporation) sub-
stituting or assuming a stock option in a
transaction to which§1.424–1(a) applies,
is guaranteed either by statute or by con-
tract. If the period of leave exceeds 90 days
and the individual’s right to reemploy-
ment is not guaranteed either by statute or
by contract, the employment relationship is
deemed to terminate on the 91st day of such
leave. Thus, if the option is not exercised
before such deemed termination of em-
ployment,§1.421–2(a) applies to the trans-
fer of a share pursuant to an exercise of the
option only if the exercise occurs within 3
months from the date the employment re-
lationship is deemed terminated.
*****
(i)Additional definitions. (1)Corpora-
tion. For purposes of this section and
§§1.421–2 through 1.424–1, the termcor-
porationhas the meaning prescribed by sec-
tion 7701(a)(3) and§301.7701–2(b) of this
chapter. For example, acorporationfor pur-
poses of the preceding sentence includes an
S corporation (as defined in section 1361),
a foreign corporation (as defined in sec-
tion 7701(a)(5)), and a limited liability com-
pany that is treated as a corporation for all
federal tax purposes.
(2)Parent corporation and subsidiary
corporation. For the definition of the terms
parent corporation(andparent) andsub-
sidiary corporation(andsubsidiary), for
purposes of this section and§§1.421–2
through 1.424–1, see§1.424–1(f)(i) and (ii),
respectively.Related corporationas used
in this section and in§§1.421–2 through
1.424–1 means either a parent corpora-
tion or subsidiary corporation.
(j)Effective date. This section applies to
any statutory option granted on or after the
date that is 180 days after publication of fi-
nal regulations in theFederal Register.
Taxpayers can rely on these regulations for
the treatment of any statutory option granted
on or after June 9, 2003.
Par. 4. Section 1.421–8 is re-designated
as 1.421–2 and is amended by:
1. Revising paragraphs (a)(1), (b), and
(c)(1).
2. In the list below, for each section in-
dicated in the left column, remove the lan-
guage in the middle column and add the
language in the right column:
Newly Designated SectionRemoveAdd
1.421–2(c)(2), second sentence, or 424(c)(1)
1.421–2(c)(2), third sentenceor 424(c)(1)
1.421–2(c)(3)(i), first, second, and third
sentences
422(c)(1), 423(c), or 424(c)(1)423(c)
1.421–2(c)(3)(ii),Example, first sen-
tence
19642004
1.421–2(c)(3)(ii),Example, third, fifth,
and sixth sentences
19662006
2003–27 I.R.B.25July 7, 2003

3. In paragraph (c)(2), first sentence, add
the phrase“for purposes of section 423(c)”
at the end of the first sentence.
4. Removing paragraph (c)(4)(i) and re-
designating paragraphs (c)(4)(ii) through
(c)(4)(iv) as paragraphs (c)(4)(i) through
(c)(4)(iii), respectively.
5. In newly designated paragraph
(c)(4)(i)(a), first sentence, removing the
phrase“In the case of an employee dying
after December 31, 1956”and adding“In
the case of the death of an optionee”in its
place.
6. RemovingExample (1)in newly des-
ignated paragraph (c)(4)(iii) and redesig-
natingExamples (2)through (5)asEx-
amples (1) through (4), respectively.
7. In the list below, for each section in-
dicated in the left column, remove the lan-
guage in the middle column and add the
language in the right column:
Newly Designated SectionRemoveAdd
1.421–2(c)(4)(i)(a), last sentence422(c)(1), 423(c), or 424(c)(1)423(c)
1.421–2(c)(4)(i)(b), first, second, and last
sentences
422(c)(1), 423(c), or 424(c)(1)423(c)
1.421–2(c)(4)(i)(c), first sentence422(c)(1), 423(c), or 424(c)(1)423(c)
1.421–2(c)(4)(iii),Example 1, first sen-
tence
19642005
1.421–2(c)(4)(iii),Example 1, eighth
sentence
subdivision (ii)(b) of this subparagraphparagraph (c)(4)(i)(b) of this section
1.421–2(c)(4)(iii),Example 1, third and
fifth sentences
19662006
1.421–2(c)(4)(iii),Example 1, ninth sen-
tence
subdivision (ii)(c) of this subparagraphparagraph (c)(4)(i)(c) of this section
1.421–2(c)(4)(iii),Example 2, second
and fifth sentences
subdivision (ii)(a) of this subparagraphparagraph (c)(4)(i)(a) of this section
1.421–2(c)(4)(iii),Example 2, fifth sen-
tence
subdivision (ii)(b) of this subparagraphparagraph (c)(4)(i)(b) of this section
1.421–2(c)(4)(iii),Example 2, first sen-
tence
example (2)Example 1
1.421–2(c)(4)(iii),Example 3, first sen-
tence
example (2)Example 1
1.421–2(c)(4)(iii),Example 3, second
and fourth sentences
subdivision (ii)(a) of this subparagraphparagraph (c)(4)(i)(a) of this section
1.421–2(c)(4)(iii),Example 3, fourth
sentence
subdivision (ii)(c) of this subparagraphparagraph (c)(4)(i)(c) of this section
1.421–2(c)(4)(iii),Example 4, first sen-
tence
example (2)Example 1
1.421–2(c)(4)(iii),Example 4, first sen-
tence
19662006
1.421–2(c)(4)(iii),Example 4, first and
second sentences
19672007
1.421–2(c)(iii),Example 4, third, fifth,
and sixth sentences
subdivision (ii)(a) of this subparagraphparagraph (c)(4)(i)(a) of this section
1.421–2(c)(4)(iii),Example 4, fifth and
sixth sentences
subdivision (ii)(b) of this subparagraphparagraph (c)(4)(i)(b) of this section
1.421–2(c)(4)(iii),Example 4, sixth sen-
tence
subdivision (ii)(c) of this subparagraphparagraph (c)(4)(i)(c) of this section
8. Revising paragraph (d).
9. Adding paragraph (f).
The revisions read as follows:
§1.421–2 General rules.
(a)Effect of qualifying transfer. (1) If a
share of stock is transferred to an indi-
vidual pursuant to the individual’s exer-
cise of a statutory option, and if the re-
quirements of§1.422–1(a) (relating to in-
centive stock options) or§1.423–1(a)
(relating to employee stock purchase plans)
whichever is applicable, are met, then—
(i) No income results at the time of the
transfer of such share to the individual upon
the exercise of the option with respect to-
such share (in addition, no income results
upon grant of the option, see§1.83–7);
(ii) No deduction under section 162 or
the regulations thereunder (relating to trade
or business expenses) is allowable at any
time with respect to the share so trans-
ferred; and
July 7, 2003262003–27 I.R.B.

(iii) No amount other than the price paid
under the option is considered as received
by the employer corporation, a related cor-
poration of such corporation, or a corpo-
ration substituting or assuming a stock op-
tion in a transaction to which§1.424–1(a)
(relating to corporate reorganizations, liq-
uidations, etc.) applies, for the share so
transferred.
*****
(b)Effect of disqualifying disposition.
(1)(i) The disposition (as defined in§1.424–
1(c)) of a share of stock acquired by the ex-
ercise of a statutory option before the ex-
piration of the applicable holding periods
as determined under§1.422–1(a) or 1.423–
1(a) is a disqualifying disposition and makes
paragraph (a) of this section inapplicable to
the transfer of such share. See§1.83–7 for
the treatment of nonstatutory options. The
income attributable to such transfer (deter-
mined without reduction for any broker-
age fees or other costs paid in connection
with the disposition) is treated by the in-
dividual as compensation income received
in the taxable year in which such disquali-
fying disposition occurs. Similarly, if oth-
erwise allowable under sections 83(h) and
162, a deduction attributable to such trans-
fer is allowable for the taxable year in
which such disqualifying disposition oc-
curs to the employer corporation, or a re-
lated corporation of such corporation, or a
corporation substituting or assuming an op-
tion in a transaction to which§1.424–1(a)
applies. Additionally, an amount is allowed
as a deduction only if the requirements of
§1.83–6(a) are satisfied. No amount is
treated as income, and no amount is al-
lowed as a deduction, for any taxable year
other than the taxable year in which the dis-
qualifying disposition occurs. If the amount
realized on the disposition exceeds (or is
less than) the sum of the amount paid for
the share and the amount of compensa-
tion income recognized as a result of such
disposition, the extent to which the differ-
ence is treated as gain (or loss) is deter-
mined under the rules of section 302 or
1001, as applicable.
(ii) The following examples illustrate the
principles of this paragraph (b):
Example 1. On June 1, 2006, X Corporation grants
an incentive stock option to A, an employee of X, en-
titling A to purchase 100 shares of X stock at $10 per
share. On August 1, 2006, A exercises the option when
the fair market value of X stock is $20 per share, and
100 shares of X stock are transferred to A on that date.
On December 15, 2007, A sells the stock. Because A
disposed of the stock before June 2, 2008, A did not
satisfy the holding period requirements of§1.422–
1(a). Under paragraph (b)(1)(i) of this section, A made
a disqualifying disposition of the stock. Thus, para-
graph (a) of this section is inapplicable to the trans-
fer of the shares, and A must include the compensa-
tion income attributable to the transfer of the shares
in gross income. The amount of compensation in-
come A must include in income under§1.83–7inthe
year of the disqualifying disposition is $1,000 (($20,
the fair market value of X stock on transfer less $10,
the exercise price per share) times 100 shares)). If oth-
erwise allowable under sections 83(h) and 162 and if
the requirements of§1.83–6(a) are met, X is al-
lowed a deduction of $1,000 for its taxable year in
which the disqualifying disposition occurs.
Example 2. Y Corporation grants an incentive stock
option for 100 shares of its stock to E, an employee
of Y. The option has an exercise price of $10 per share.
E exercises the option and is transferred the shares
when the fair market value of a share of Y stock is
$30. Before the applicable holding periods expire, Y
redeems the shares for $70 per share. Because the
holding period requirements of§1.422–1(a) are not
met, the redemption of the shares is a disqualifying
disposition of the shares. Under paragraph (b)(1)(i) of
this section, A made a disqualifying disposition of the
stock. Thus, paragraph (a) of this section is inappli-
cable to the transfer of the shares, and E must in-
clude the compensation income attributable to the
transfer of the shares in gross income. Under§1.83–7,
the amount of compensation income attributable to E’s
purchase of the share that E must include in gross in-
come in the year of the disqualifying disposition is
$2,000 ($3,000, the fair market value of Y stock on
transfer, less $1,000, the exercise price paid by E). The
character of the additional gain that is includible in
E’s income as a result of the redemption is deter-
mined under the rules of section 302. If otherwise al-
lowable under sections 83(h) and 162 and if the re-
quirements of§1.83–6(a) are met, Y is allowed a
deduction for the taxable year in which the disquali-
fying disposition occurs for the compensation in-
come of $2,000. Y is not allowed a deduction for the
additional gain includible in E’s income as a result of
the redemption.
(2) If an optionee transfers stock ac-
quired through the optionee’s exercise of a
statutory option prior to the expiration of
the applicable holding periods, paragraph
(a) of this section continues to apply to the
transfer of the stock pursuant to the exer-
cise of the option if such transfer is not a
disposition of the stock as defined in
§1.424–1(c) (for example, a transfer from
a decedent to the decedent’s estate or a
transfer by bequest or inheritance). Simi-
larly, a subsequent transfer by the execu-
tor, administrator, heir, or legatee is not a
disqualifying disposition by the decedent.
If a statutory option is exercised by the es-
tate of the optionee or by a person who ac-
quired the option by bequest or inheri-
tance or by reason of the death of such op-
tionee, see paragraph (c) of this section. If
a statutory option is exercised by the in-
dividual to whom the option was granted
and the individual dies before the expira-
tion of the holding periods, see paragraph
(d) of this section.
(3) For special rules relating to the dis-
qualifying disposition of a share of stock
acquired by exercise of an incentive stock
option, see§§1.422–5(b)(2) and 1.424–
1(c)(3).
(c)Exercise by estate. (1) If a statu-
tory option is exercised by the estate of the
individual to whom the option was granted
(or by any person who acquired such op-
tion by bequest or inheritance or by rea-
son of the death of such individual), para-
graph (a) of this section applies to the
transfer of stock pursuant to such exer-
cise in the same manner as if the option had
been exercised by the deceased optionee.
Consequently, neither the estate nor such
person is required to include any amount
in gross income as a result of a transfer of
stock pursuant to the exercise of the op-
tion. Paragraph (a) of this section applies
even if the executor, administrator, or such
person disposes of the stock so acquired be-
fore the expiration of the applicable hold-
ing periods as determined under§1.422–
1(a) or 1.423–1(a). This special rule does
not affect the applicability of section 423(c),
relating to the estate’s or other qualifying
person’s recognition of compensation in-
come, or section 1222, relating to what con-
stitutes a short-term and long-term capi-
tal gain or loss. Paragraph (a) of this section
also applies even if the executor, admin-
istrator, or such person does not exercise the
option within three months after the death
of the individual or is not employed as de-
scribed in§1.421–1(h), either when the op-
tion is exercised or at any time. However,
paragraph (a) of this section does not ap-
ply to a transfer of shares pursuant to an
exercise of the option by the estate or by
such person unless the individual met the
employment requirements described in
§1.421–1(h) either at the time of the indi-
vidual’s death or within three months be-
fore such time (or, if applicable, within the
period described in§1.422–1(a)(3)). Ad-
ditionally, paragraph (a) of this section does
not apply if the option is exercised by a per-
son other than the executor or administra-
tor, or other than a person who acquired the
option by bequest or inheritance or by rea-
son of the death of such deceased indi-
vidual. For example, if the option is sold
by the estate, paragraph (a) of this sec-
2003–27 I.R.B.27July 7, 2003

tion does not apply to the transfer of stock
pursuant to an exercise of the option by the
buyer, but if the option is distributed by the
administrator to an heir as part of the es-
tate, paragraph (a) of this section applies to
the transfer of stock pursuant to an exer-
cise of the option by such heir.
*****
(d)Option exercised by the individual to
whom the option was granted if the indi-
vidual dies before expiration of the appli-
cable holding periods. If a statutory op-
tion is exercised by the individual to whom
the option was granted and such individual
dies before the expiration of the appli-
cable holding periods as determined un-
der§1.422–1(a) or 1.423–1(a), paragraph
(a) of this section does not become inap-
plicable if the executor or administrator of
the estate of such individual, or any per-
son who acquired such stock by bequest or
inheritance or by reason of the death of such
individual, disposes of such stock before the
expiration of such applicable holding pe-
riods. This rule does not affect the appli-
cability of section 423(c), relating to the in-
dividual’s recognition of compensation
income, or section 1222, relating to what
constitutes a short-term and long-term capi-
tal gain or loss.
*****
(f)Effective date. This section applies to
any statutory option granted on or after the
date that is 180 days after publication of fi-
nal regulations in theFederal Register.
Taxpayers can rely on these regulations for
the treatment of any statutory option granted
on or after June 9, 2003.
Par. 5. Section 1.422–1 is added to read
as follows:
§1.422–1 Incentive stock options;
general rules.
(a)Applicability of section 421(a). (1)(i)
Section 1.421–2(a) applies to the transfer
of a share of stock to an individual pursu-
ant to the individual’s exercise of an in-
centive stock option if the following con-
ditions are satisfied—
(A) The individual makes no disposi-
tion of such share before the later of the ex-
piration of the 2-year period from the date
of grant of the option pursuant to which
such share was transferred, or the expira-
tion of the 1-year period from the date of
transfer of such share to the individual; and
(B) At all times during the period be-
ginning on the date of grant of the option
and ending on the day 3 months before the
date of exercise, the individual was an em-
ployee of either the corporation granting the
option, a related corporation of such cor-
poration, or a corporation (or a related cor-
poration of such corporation) substituting
or assuming a stock option in a transac-
tion to which§1.424–1(a) applies.
(ii) For rules relating to the disposi-
tion of shares of stock acquired pursuant to
the exercise of a statutory option, see
§1.424–1(c). For rules relating to the req-
uisite employment relationship, see§1.421–
1(h).
(2)(i) The holding period requirement of
section 422(a)(1), described in paragraph
(a)(1)(i)(A) of this section, does not ap-
ply to the transfers of shares by an insol-
vent individual described in this paragraph
(a)(2). If an insolvent individual holds a
share of stock acquired pursuant to the in-
dividual’s exercise of an incentive stock op-
tion, and if such share is transferred to a
trustee, receiver, or other similar fiduciary
in any proceeding under the Bankruptcy Act
or any other similar insolvency proceed-
ing, neither such transfer, nor any other
transfer of such share for the benefit of the
individual’s creditors in such proceeding is
a disposition of such share for purposes of
this paragraph (a). For purposes of this para-
graph (a)(2), an individual is insolvent only
if the individual’s liabilities exceed the in-
dividual’s assets or the individual is un-
able to satisfy the individual’s liabilities as
they become due. See section 422(c)(3).
(ii) A transfer by the trustee or other fi-
duciary that is not treated as a disposition
for purposes of this paragraph (a) may be
a sale or exchange for purposes of recog-
nizing capital gain or loss with respect to
the share transferred. For example, if the
trustee transfers the share to a creditor in
an insolvency proceeding, capital gain or
loss must be recognized by the insolvent in-
dividual to the extent of the difference be-
tween the amount realized from such trans-
fer and the adjusted basis of such share.
(iii) If any transfer by the trustee or other
fiduciary (other than a transfer back to the
insolvent individual) is not for the exclu-
sive benefit of the creditors in an insol-
vency proceeding, then whether such trans-
fer is a disposition of the share by the
individual for purposes of this paragraph (a)
is determined under§1.424–1(c). Simi-
larly, if the trustee or other fiduciary trans-
fers the share back to the insolvent indi-
vidual, any subsequent transfer of the share
by such individual which is not made in re-
spect of the insolvency proceeding may be
a disposition of the share for purposes of
this paragraph (a).
(3) If the employee exercising an op-
tion ceased employment because of per-
manent and total disability, within the mean-
ing of section 22(e)(3), 1 year is used
instead of 3 months in the employment pe-
riod requirement of paragraph (a)(1)(i)(B)
of this section.
(b)Failure to satisfy holding period
requirements—(1)General rule. For gen-
eral rules concerning a disqualifying dis-
position of a share of stock acquired pur-
suant to the exercise of an incentive stock
option, see§1.421–2(b)(1).
(2)(i)Special rule. If an individual makes
a disqualifying disposition of a share of
stock acquired by the exercise of an in-
centive stock option, and if such disposi-
tion is a sale or exchange with respect to
which a loss (if sustained) would be rec-
ognized to the individual, then, under this
paragraph (b)(2)(i), the amount includible
in the gross income of such individual, and
deductible from the income of the em-
ployer corporation (or a related corpora-
tion of such corporation, or of a corpora-
tion substituting or assuming the option in
a transaction to which§1.424–1(a) ap-
plies) as compensation attributable to the
exercise of such option, shall not exceed the
excess (if any) of the amount realized on
such sale or exchange over the adjusted ba-
sis of such share. Subject to the special rule
provided by this paragraph (b)(2)(i), the
amount of compensation attributable to the
exercise of the option is determined un-
der§1.83–7; see§1.421–2(b)(1)(i).
(ii)Limitation to special rule. The spe-
cial rule described in paragraph (b)(2)(i) of
this section does not apply if the disposi-
tion is a sale or exchange with respect to
which a loss (if sustained) would not be rec-
ognized to the individual. Thus, for ex-
ample, if a disqualifying disposition is a sale
described in section 1091 (relating to loss
from wash sales of stock or securities), a
gift (or any other transaction which is not
at arm’s length), or a sale described in sec-
tion 267(a)(1) (relating to sales between re-
lated persons), the special rule described in
paragraph (b)(2)(i) of this section does not
July 7, 2003282003–27 I.R.B.

apply because a loss sustained in any such
transaction would not be recognized.
(3)Examples. The following examples
illustrate the principles of this paragraph (b):
Example 1. On June 1, 2006, X Corporation grants
an incentive stock option to A, an employee of X Cor-
poration, entitling A to purchase one share of X Cor-
poration stock. On August 1, 2006, A exercises the op-
tion and the share of X Corporation stock is transferred
to A on that date. The option price is $100 (the fair
market value of a share of X Corporation stock on June
1, 2006) and the fair market value of a share of X Cor-
poration stock on August 1, 2006 (the date of trans-
fer), is $200. The share transferred to A is transfer-
able and not subject to a substantial risk of forfeiture.
A makes a disqualifying disposition by selling the share
on June 1, 2007, for $250. Under§1.83–7(a) (relat-
ing to options to which section 421 does not apply),
the amount of compensation attributable to A’s ex-
ercise is $100 (the difference between the fair mar-
ket value of the share at the date of transfer, $200, and
the amount paid for the share, $100). Because the
amount realized ($250) is greater than the value of the
share at transfer ($200), paragraph (b)(2)(i) of this sec-
tion does not apply and thus does not affect the amount
includible as compensation in A’s gross income and
deductible by X. A must include in gross income for
the taxable year in which the sale occurred $100 as
compensation and $50 as capital gain ($250, the
amount realized from the sale, less A’s basis of $200
(the $100 paid for the share plus the $100 increase
in basis resulting from the inclusion of that amount
in A’s gross income as compensation attributable to
the exercise of the option)). For its taxable year in
which the disqualifying disposition occurs, if other-
wise allowable under sections 83(h) and 162 and if
the requirements of§1.83–6(a) are met, X Corpora-
tion is allowed a deduction of $100 for compensa-
tion attributable to A’s exercise of the incentive stock
option.
Example 2. Assume the same facts as inExample
1, except that the share of X Corporation stock trans-
ferred to A is subject to a substantial risk of forfei-
ture and not transferable for a period of six months
after such transfer. Assume further that the fair mar-
ket value of X Corporation stock is $225 on Febru-
ary 1, 2005, the date on which the six-month restric-
tion lapses. Under section 83(a) and§1.83–7(a), the
amount of compensation attributable to A’s exercise
of the option and disqualifying disposition of the share
is $125 (the difference between the fair market value
of the share on the date that the restriction lapsed,
$225, and the amount paid for the share, $100). A must
include $125 of compensation income and $25 of capi-
tal gain in gross income for the taxable year in which
the disposition occurs ($250, the amount realized from
the sale, less A’s basis of $225 (the $100 paid for the
share plus the $125 increase in basis resulting from
the inclusion of that amount of compensation in A’s
gross income)). For its taxable year in which the dis-
qualifying disposition occurs, if otherwise allow-
able under sections 83(h) and 162 and if the require-
ments of§1.83–6(a) are met, X Corporation is allowed
a deduction of $125 for the compensation attribut-
able to A’s exercise of the option.
Example 3. (i) Assume the same facts as inEx-
ample 1, except that A sells the share for $150 to M.
(ii) If the sale to M is a disposition that meets the
requirements of paragraph (b)(2)(i) of this section, in-
stead of $100 which otherwise would have been in-
cludible as compensation under§1.83–7, under para-
graph (b)(2)(i) of this section, A must include only $50
(the excess of the amount realized on such sale, $150,
over the adjusted basis of the share, $100) in gross
income as compensation attributable to the exercise
of the incentive stock option. Because A’s basis for
the share is $150 (the $100 which A paid for the share,
plus the $50 increase in basis resulting from the in-
clusion of that amount in A’s gross income as com-
pensation attributable to the exercise of the option),
A realizes no capital gain or loss as a result of the sale.
For its taxable year in which the disqualifying dis-
position occurs, if otherwise allowable under sec-
tions 83(h) and 162 and if the requirements of§1.83–
6(a) are met, X Corporation is allowed a deduction
of $50 for the compensation attributable to A’s ex-
ercise of the option.
(iii) Assume the same facts as in paragraph (i) of
thisExample 3, except that 10 days after the sale to
M, A purchases substantially identical stock. Be-
cause under section 1091(a) a loss (if it were sus-
tained on the sale) would not be recognized on the sale,
under paragraph (b)(2)(ii) of this section, the spe-
cial rule described in paragraph (b)(2)(i) of this sec-
tion does not apply. Under§1.83–7, A must include
$100 (the difference between the fair market value of
the share on the date of transfer, $200, and the amount
paid for the share, $100) in gross income as com-
pensation attributable to the exercise of the option for
the taxable year in which the disqualifying disposi-
tion occurred. A recognizes no capital gain or loss on
the transaction. For its taxable year in which the dis-
qualifying disposition occurs, if otherwise allow-
able under sections 83(h) and 162 and if the require-
ments of§1.83–6(a) are met, X Corporation is allowed
a $100 deduction for compensation attributable to A’s
exercise of the option.
(iv) Assume the same facts as in paragraph (ii) of
thisExample 3, except that A sells the share for $50.
Under paragraph (b)(2)(i) of this section, A is not re-
quired to include any amount in gross income as com-
pensation attributable to the exercise of the option. A
is allowed a capital loss of $50 (the difference be-
tween the amount realized on the sale, $50, and the
adjusted basis of the share, $100). X Corporation is
not allowed any deduction attributable to A’s exer-
cise of the option and disqualifying disposition of the
share.
(c)Failure to satisfy employment re-
quirement. Section 1.421–2(a) does not ap-
ply to the transfer of a share of stock pur-
suant to the exercise of an incentive stock
option if the employment requirement, as
determined under paragraph (a)(1)(i)(B) of
this section, is not met at the time of the
exercise of such option. Consequently, the
effects of such a transfer are determined un-
der the rules of§1.83–7. For rules relat-
ing to the employment relationship, see
§1.421–1(h).
Par. 6. Section 1.422–2 is added to read
as follows:
§1.422–2 Incentive stock options defined.
(a)Incentive stock option defined—(1)
In general. The termincentive stock op-
tionmeans an option that meets the re-
quirements of paragraph (a)(2) of this sec-
tion on the date of grant. An incentive stock
option is also subject to the $100,000 limi-
tation described in§1.422–4. An incen-
tive stock option may contain a number of
permissible provisions that do not affect the
status of the option as an incentive stock
option. See§1.422–5 for rules relating to
permissible provisions of an incentive stock
option.
(2)Option requirements. To qualify as
an incentive stock option under this sec-
tion, an option must be granted to an in-
dividual in connection with the individu-
al’s employment by the corporation granting
such option (or by a related corporation),
and granted only for stock of any of such
corporations. In addition, the option must
meet all of the following requirements—
(i) It must be granted pursuant to a plan
that meets the requirements described in
paragraph (b) of this section;
(ii) It must be granted within 10 years
from the date of the adoption of the plan
or the date such plan is approved by the
stockholders, whichever is earlier (see para-
graph (c) of this section);
(iii) It must not be exercisable after the
expiration of 10 years from the date of grant
(see paragraph (d) of this section);
(iv) It must provide that the option price
per share is not less than the fair market
value of the share on the date of grant (see
paragraph (e) of this section);
(v) By its terms, it must not be trans-
ferrable by the individual to whom the op-
tion is granted other than by will or the laws
of descent and distribution, and must be ex-
ercisable, during such individual’s life-
time, only by such individual (see§§1.421–
1(b)(2) and 1.421–2(c)); and
(vi) Except as provided in paragraph (f)
of this section, it must be granted to an in-
dividual who, at the time the option is
granted, does not own stock possessing
more than 10 percent of the total com-
bined voting power of all classes of stock
of the corporation employing such indi-
vidual or of any related corporation of such
corporation.
(3)Amendment of option terms. Ex-
cept as otherwise provided in§1.424–1, the
amendment of the terms of an incentive
stock option may cause it to cease to be an
option described in this section. If the terms
of an option that has lost its status as an in-
centive stock option are subsequently
2003–27 I.R.B.29July 7, 2003

changed with the intent to re-qualify the op-
tion as an incentive stock option, such
change results in the grant of a new op-
tion on the date of the change. See§1.424–
1(e).
(4)Terms provide option not an incen-
tive stock option. If the terms of an op-
tion, when granted, provide that it will not
be treated as an incentive stock option, such
option is not treated as an incentive stock
option.
(b)Option plan—(1)In general. An in-
centive stock option must be granted pur-
suant to a plan that meets the requirements
of this paragraph (b). The authority to grant
other stock options or other stock-based
awards pursuant to the plan, where the ex-
ercise of such other options or awards does
not affect the exercise of incentive stock op-
tions granted pursuant to the plan, does not
disqualify such incentive stock options. The
plan must be in writing or electronic form,
provided that such writing or electronic
form is adequate to establish the terms of
the plan. See§1.422–5 for rules relating to
permissible provisions of an incentive stock
option.
(2)Stockholder approval. (i) The plan
required by this paragraph (b) must be ap-
proved by the stockholders of the corpo-
ration granting the incentive stock option
within 12 months before or after the date
such plan is adopted. Ordinarily, a plan is
adopted when it is approved by the grant-
ing corporation’s board of directors, and the
date of the board’s action is the reference
point for determining whether stockholder
approval occurs within the applicable 24-
month period. However, if the board’s ac-
tion is subject to a condition (such as stock-
holder approval) or the happening of a
particular event, the plan is adopted on the
date the condition is met or the event oc-
curs, unless the board’s resolution fixes the
date of approval as the date of the board’s
action.
(ii) For purposes of paragraph (b)(2)(i)
of this section, the stockholder approval
must comply with the rules described in
§1.422–3.
(iii) The provisions relating to the maxi-
mum aggregate number of shares to be is-
sued under the plan (described in para-
graph (b)(3) of this section) and the
employees (or class or classes of employ-
ees) eligible to receive options under the
plan (described in paragraph (b)(4) of this
section) are the only provisions of a stock
option plan that must be approved by stock-
holders for purposes of section 422(b)(1).
Any increase in the maximum aggregate
number of shares that may be issued un-
der the plan (other than an increase merely
reflecting a change in the number of out-
standing shares, such as a stock dividend
or stock split), or change in the designa-
tion of the employees (or class or classes
of employees) eligible to receive options un-
der the plan is considered the adoption of
a new plan requiring stockholder approval
within the prescribed 24-month period. In
addition, a change in the granting corpo-
ration or the stock available for purchase
or award under the plan is considered the
adoption of a new plan requiring new stock-
holder approval within the prescribed 24-
month period. Any other changes in the
terms of an incentive stock option plan are
not considered the adoption of a new plan
and, thus, do not require stockholder ap-
proval.
(3)Maximum aggregate number of
shares. (i) The plan required by this para-
graph (b) must designate the maximum ag-
gregate number of shares that may be is-
sued under the plan through incentive stock
options, nonstatutory options, and all other
stock-based awards to be granted thereun-
der. If nonstatutory options or other stock-
based awards may be granted, the plan may
separately designate terms for each type of
option and other stock-based award and des-
ignate the maximum number of shares that
may be issued under such option or other
stock-based award. Unless otherwise speci-
fied, all terms of the plan apply to all op-
tions and other stock-based awards that may
be granted under the plan.
(ii) A plan that merely provides that the
number of shares that may be issued un-
der options and other stock-based awards
granted under such plan may not exceed a
stated percentage of the shares outstand-
ing at the time of each offering or grant un-
der such plan does not satisfy the require-
ment that the plan state the maximum
aggregate number of shares that may be is-
sued under the plan. However, the maxi-
mum aggregate number of shares that may
be issued under the plan may be stated in
terms of a percentage of the authorized, is-
sued or outstanding shares at the date of the
adoption of the plan. The plan may specify
that the maximum aggregate number of
shares available for grants under the plan
may increase annually by a specified per-
centage of the authorized, issued or out-
standing shares at the date of the adop-
tion of the plan. A plan which provides that
the maximum aggregate number of shares
that may be issued under the plan may
change based on any other specified cir-
cumstances satisfies the requirements of this
paragraph (b)(3) only if the stockholders ap-
prove an immediately determinable maxi-
mum aggregate number of shares that may
be issued under the plan in any event.
(iii) It is permissible for the plan to pro-
vide that shares purchasable under the plan
may be supplied to the plan through ac-
quisitions of stock on the open market, that
shares purchased under the plan and for-
feited back to the plan are available for re-
issuance under the plan, or that shares sur-
rendered in payment of the exercise price
of an option are available for re-issuance
under the plan.
(iv) If there is more than one plan un-
der which incentive stock options may be
granted and stockholders of the granting
corporation merely approve a maximum ag-
gregate number of shares that are avail-
able for issuance under such plans, the
stockholder approval requirements described
in paragraph (b)(2) of this section are not
satisfied. A separate maximum aggregate
number of shares must be approved for each
plan.
(4)Designation of employees. The plan
described in this paragraph (b), as adopted
and approved, must indicate the employ-
ees (or class or classes of employees) eli-
gible to receive the options or other stock-
based awards to be granted under the plan.
This requirement is satisfied by a general
designation of the classes of employees eli-
gible to receive options or other stock-
based awards under the plan. Designa-
tions such as“key employees of the grantor
corporation”;“all salaried employees of the
grantor corporation and its subsidiaries, in-
cluding subsidiaries which become such af-
ter adoption of the plan;”or“all employ-
ees of the corporation”meet this
requirement. This requirement is consid-
ered satisfied even though the board of di-
rectors, another group, or an individual is
given the authority to select the particular
employees who are to receive options or
other stock-based awards from a described
class and to determine the number of shares
to be optioned or granted to each such em-
ployee. If individuals other than employ-
ees may be granted options or other stock-
July 7, 2003302003–27 I.R.B.

based awards under the plan, the plan must
separately designate the employees or
classes of employees eligible to receive in-
centive stock options.
(5)Conflicting option terms. An op-
tion on stock available for purchase or grant
under the plan is treated as having been
granted pursuant to a plan even if the terms
of the option conflict with the terms of the
plan, unless such option is granted to an
employee who is ineligible to receive op-
tions under the plan, options have been
granted on stock in excess of the aggre-
gate number of shares which may be is-
sued under the plan, or the option pro-
vides otherwise.
(6) The following examples illustrate the
principles of this paragraph (b):
Example 1.Stockholder approval. (i) S Corpora-
tion is a subsidiary of P Corporation, a publicly traded
corporation. On January 1, 2006, S adopts a plan un-
der which incentive stock options for S stock are
granted to S employees.
(ii) To meet the requirements of paragraph (b)(2)
of this section, the plan must be approved by the stock-
holders of S (in this case, P) within 12 months be-
fore or after January 1, 2004.
(iii) Assume the same facts as in paragraph (i) of
thisExample 1. Assume further that the plan was ap-
proved by the stockholders of S (in this case, P) on
March 1, 2006. On January 1, 2008, S changes the
plan to provide that incentive stock options for P stock
will be granted to S employees under the plan. Be-
cause there is a change in the stock available for grant
under the plan, the change is considered the adop-
tion of a new plan that must be approved by the stock-
holders within 12 months before or after January 1,
2008.
Example 2. Stockholder approval. (i) Assume the
same facts as in paragraph (i) ofExample 1, except
that on March 15, 2007, P completely disposes of its
interest in S. Thereafter, S continues to grant op-
tions for S stock to S employees under the plan.
(ii) The new S options are granted under a plan
that meets the stockholder approval requirements of
paragraph (b)(2) of this section without regard to
whether S seeks approval of the plan from the stock-
holders of S after P disposes of its interest in S.
(iii) Assume the same facts as in paragraph (i) of
thisExample 2, except that under the plan as adopted
on January 1, 2006, only options for P stock are
granted to S employees. Assume further that after P
disposes of its interest in S, S changes the plan to pro-
vide for the grant of options for S stock to S em-
ployees. Because there is a change in the stock avail-
able for purchase or grant under the plan, under
paragraph (b)(2)(iii) of this section, the stockhold-
ers of S must approve the plan within 12 months be-
fore or after the change to the plan to meet the stock-
holder approval requirements of paragraph (b) of this
section.
Example 3.Maximum aggregate number of shares.
X Corporation maintains a plan under which statu-
tory options and nonstatutory options may be granted.
The plan designates the number of shares that may be
used for incentive stock options. Because the maxi-
mum aggregate number of shares that will be used for
both statutory and nonstatutory options is not desig-
nated in the plan, the requirements of paragraph (b)(3)
of this section are not satisfied.
Example 4.Maximum aggregate number of shares.
Y Corporation adopts an incentive stock option plan
on November 1, 2006. On that date there are two mil-
lion outstanding shares of Y Corporation stock. The
plan provides that the maximum aggregate number of
shares that may be issued under the plan may not ex-
ceed 15% of the outstanding number of shares of Y
Corporation on November 1, 2006. Because the maxi-
mum aggregate number of shares under the plan is des-
ignated in the plan, the requirements of paragraph
(b)(3) of this section are met.
Example 5.Maximum aggregate number of shares.
(i) B Corporation adopts an incentive stock option plan
on March 15, 2005. The plan provides that the maxi-
mum aggregate number of shares available under the
plan is 50,000, increased on each anniversary date of
the adoption of the plan by 5 percent of the then-
outstanding shares.
(ii) Because the maximum aggregate number of
shares is not designated under the plan, the require-
ments of paragraph (b)(3) of this section are not met.
(iii) Assume the same facts as in paragraph (i) of
thisExample 5, except that the plan provides that the
maximum aggregate number of shares available un-
der the plan is the lesser of (a) 50,000 shares in-
creased each anniversary date of the adoption of the
plan by 5 percent of the then-outstanding shares or (b)
200,000 shares. Because the maximum aggregate num-
ber of shares under the plan is designated as the lesser
of one of two numbers, one of which provides an im-
mediately determinable maximum aggregate num-
ber of shares that may be issued under the plan in any
event, the requirements of paragraph (b)(3) of this sec-
tion are met.
(c)Duration of option grants under the
plan. An incentive stock option must be
granted within 10 years from the date that
the plan under which it is granted is adopted
or the date such plan is approved by the
stockholders, whichever is earlier. To grant
incentive stock options after the expira-
tion of the 10-year period, a new plan must
be adopted and approved.
(d)Period for exercising options. An in-
centive stock option, by its terms, must not
be exercisable after the expiration of 10
years from the date such option is granted,
or 5 years from the date such option is
granted to an employee described in para-
graph (f) of this section. An option that does
not contain such a provision when granted
is not an incentive stock option.
(e)Option price. (1) Except as pro-
vided by paragraph (e)(2) of this section,
the option price of an incentive stock op-
tion must not be less than the fair market
value of the stock subject to the option at
the time the option is granted. The option
price may be determined in any reason-
able manner, including the valuation meth-
ods permitted under§20.2031–2ofthis
chapter (Estate Tax Regulations), so long
as the minimum price possible under the
terms of the option is not less than the fair
market value of the stock on the date of
grant. For general rules relating to the op-
tion price, see§1.421–1(e). For rules re-
lating to the determination of when an op-
tion is granted, see§1.421–1(c).
(2)(i) If a share of stock is transferred
to an individual pursuant to the exercise of
an option which fails to qualify as an in-
centive stock option merely because there
was a failure of an attempt, made in good
faith, to meet the option price require-
ments of paragraph (e)(1) of this section,
the requirements of such paragraph are con-
sidered to have been met. Whether there
was a good-faith attempt to set the option
price at not less than the fair market value
of the stock subject to the option at the time
the option was granted depends on the rel-
evant facts and circumstances.
(ii) For publicly held stock that is ac-
tively traded on an established market at the
time the option is granted, determining the
fair market value of such stock by the ap-
propriate method described in§20.2031–2
of this chapter (Estate Tax Regulations) es-
tablishes that a good-faith attempt to meet
the option price requirements of this para-
graph (e) was made.
(iii) For non-publicly traded stock, if it
is demonstrated, for example, that the fair
market value of the stock at the date of
grant was based upon an average of the fair
market values as of such date set forth in
the opinions of completely independent and
well-qualified experts, such a demonstra-
tion generally establishes that there was a
good-faith attempt to meet the option price
requirements of this paragraph (e). If the
stock is non-publicly traded, the option-
ee’s status as a majority or minority stock-
holder may be taken into consideration.
(iv) Regardless of whether the stock of-
fered under an option is publicly traded, a
good-faith attempt to meet the option price
requirements of this paragraph (e) is not
demonstrated unless the fair market value
of the stock on the date of grant is deter-
mined with regard tononlapse restric-
tions(as defined in§1.83–3(h)) and with-
out regard tolapse restrictions(as defined
in§1.83–3(i)).
(v) Amounts treated as interest and
amounts paid as interest under a deferred
payment arrangement are not includible as
part of the option price. See§1.421–1(e)(1).
An attempt to set the option price at not less
2003–27 I.R.B.31July 7, 2003

than fair market value is not regarded as
made in good faith where an adjustment of
the option price to reflect amounts treated
as interest results in the option price be-
ing lower than the fair market value on
which the option price was based.
(3) Notwithstanding that the option price
requirements of paragraphs (e)(1) and (2)
of this section are satisfied by an option
granted to an employee whose stock own-
ership exceeds the limitation provided by
paragraph (f) of this section, such option is
not an incentive stock option when granted
unless it also complies with paragraph (f)
of this section. If the option, when granted,
does not comply with the requirements de-
scribed in paragraph (f) of this section, such
option can never become an incentive stock
option, even if the employee’s stock own-
ership does not exceed the limitation of
paragraph (f) of this section when such op-
tion is exercised.
(f)Options granted to certain stock-
holders. (1) If, immediately before an op-
tion is granted, an individual owns (or is
treated as owning) stock possessing more
than 10 percent of the total combined vot-
ing power of all classes of stock of the cor-
poration employing the optionee or of any
related corporation of such corporation, then
an option granted to such individual can-
not qualify as an incentive stock option un-
less the option price is at least 110 per-
cent of the stock’s fair market value on the
date of grant and such option by its terms
is not exercisable after the expiration of 5
years from the date of grant. For purposes
of determining the minimum option price
for purposes of this paragraph (f), the rules
described in paragraph (e)(2) of this sec-
tion, relating to the good-faith determina-
tion of the option price, do not apply.
(2) For purposes of determining the stock
ownership of the optionee, the stock attri-
bution rules of§1.424–1(d) apply. Stock that
the optionee may purchase under outstand-
ing options is not treated as stock owned
by the individual. The determination of the
percentage of the total combined voting
power of all classes of stock of the em-
ployer corporation (or of its related corpo-
rations) that is owned by the optionee is
made with respect to each such corpora-
tion in the related group by comparing the
voting power of the shares owned (or
treated as owned) by the optionee to the ag-
gregate voting power of all shares of each
such corporation actually issued and out-
standing immediately before the grant of the
option to the optionee. The aggregate vot-
ing power of all shares actually issued and
outstanding immediately before the grant of
the option does not include the voting
power of treasury shares or shares autho-
rized for issue under outstanding options
held by the individual or any other per-
son.
(3)Examples. The rules of this para-
graph (f) are illustrated by the following
examples:
Example 1. (i) E, an employee of M Corpora-
tion, owns 15,000 shares of M Corporation com-
mon stock, which is the only class of stock outstand-
ing. M has 100,000 shares of its common stock
outstanding. On January 1, 2005, when the fair mar-
ket value of M stock is $100, E is granted an option
with an option price of $100 and an exercise period
of 10 years from the date of grant.
(ii) Because E owns stock possessing more than
10 percent of the total combined voting power of all
classes of M Corporation stock, M cannot grant an in-
centive stock option to E unless the option is granted
at an option price of at least 110 percent of the fair
market value of the stock subject to the option and
the option, by its terms, expires no later than 5 years
from its date of grant. The option granted to E fails
to meet the option-price and term requirements de-
scribed in paragraph (f)(1) of this section and, thus,
the option is not an incentive stock option.
(iii) Assume the same facts as in paragraph (i) of
thisExample 1, except that E’s father and brother each
owned 7,500 shares of M Corporation stock, and E
owned no M stock in E’s own name. Because un-
der the attribution rules of§1.424–1(d), E is treated
as owning stock held by E’s parents and siblings, M
cannot grant an incentive stock option to E unless the
option price is at least 110 percent of the fair mar-
ket value of the stock subject to the option, and the
option, by its terms, expires no later than 5 years from
the date of grant.
Example 2. Assume the same facts as in para-
graph (i) of thisExample 1. Assume further that M
is a subsidiary of P Corporation. Regardless of whether
E owns any P stock and the number of P shares out-
standing, if P Corporation grants an option to E which
purports to be an incentive stock option, but which
fails to meet the 110-percent-option-price and 5-year-
term requirements, the option is not an incentive stock
option because E owns more than 10 percent of the
total combined voting power of all classes of stock
of a related corporation of P Corporation (i.e., M Cor-
poration). An individual who owns (or is treated as
owning) stock in excess of the ownership specified
in paragraph (f)(1) of this section, in any corpora-
tion in a group of corporations consisting of the em-
ployer corporation and its related corporations, can-
not be granted an incentive stock option by any
corporation in the group unless such option meets the
110-percent-option-price and 5-year-term require-
ments of paragraph (f)(1) of this section.
Example 3. (i) F is an employee of R Corpora-
tion. R has only one class of stock, of which 100,000
shares are issued and outstanding. F owns no stock
in R Corporation or any related corporation of R Cor-
poration. On January 1, 2005, R grants a 10-year in-
centive stock option to F to purchase 50,000 shares
of R stock at $3 per share, the fair market value of
R stock on the date of grant of the option. On April
1, 2005, F exercises half of the January option and
receives 25,000 shares of R stock that previously were
not outstanding. On July 1, 2005, R grants a second
50,000 share option to F which purports to be an in-
centive stock option. The terms of the July option are
identical to the terms of the January option, except that
the option price is $3.25 per share, which is the fair
market value of R stock on the date of grant of the
July option.
(ii) Because F did not own more than 10% of the
total combined voting power of all classes of stock
of R Corporation or any related corporation on the date
of the grant of the January option and the pricing re-
quirements of paragraph (e) of this section are satis-
fied on the date of grant of such option, the unexer-
cised portion of the January option remains an
incentive stock option regardless of the changes in F’s
percentage of stock ownership in R after the date of
grant. However, the July option is not an incentive
stock option because, on the date that it was granted,
F owned 20 percent (25,000 shares owned by F di-
vided by 125,000 shares of R stock issued and out-
standing) of the total combined voting power of all
classes of R Corporation stock and, thus the pricing
requirements of paragraph (f)(1) of this section were
not met.
(iii) Assume the same facts as in paragraph (i) of
thisExample 3except that the partial exercise of the
January incentive stock option on April 1, 2003, is for
only 10,000 shares. Under these circumstances, the July
option is an incentive stock option, because, on the
date of grant of the July option, F does not own more
than 10 percent of the total combined voting power
(10,000 shares owned by F divided by 110,000 shares
of R issued and outstanding) of all classes of R Cor-
poration stock.
§1.422–4 [Removed]
Par. 7. Section 1.422–4 is removed.
§1.422–5 [Redesignated]
Par. 8. Section 1.422–5 is re-designated
as§1.422–3.
Par. 9. New§1.422–4 is added to read
as follows:
§1.422–4 $100,000 limitation for
incentive stock options.
(a)$100,000 per year limitation—(1)
General rule. An option that otherwise
qualifies as an incentive stock option nev-
ertheless fails to be an incentive stock op-
tion to the extent that the $100,000 limi-
tation described in paragraph (a)(2) of this
section is exceeded.
(2)$100,000 per year limitation. To the
extent that the aggregate fair market value
of stock with respect to which an incen-
tive stock option (determined without re-
gard to this section) is exercisable for the
first time by any individual during any cal-
endar year (under all plans of the employer
July 7, 2003322003–27 I.R.B.

corporation and related corporations) ex-
ceeds $100,000, such option is treated as
a nonstatutory option. See§1.83–7 for rules
applicable to nonstatutory options.
(b)Application. To determine whether
the limitation described in paragraph (a)(2)
of this section has been exceeded, the fol-
lowing rules apply.
(1) An option that does not meet the re-
quirements of§1.422–2 when granted (in-
cluding an option which, when granted,
contains terms providing that it will not be
treated as incentive stock option) is disre-
garded. See§1.422–2(a)(4).
(2) The fair market value of stock is de-
termined as of the date of grant of the op-
tion for such stock.
(3) Except as otherwise provided in para-
graph (b)(4) of this section, options are
taken into account in the order in which
they are granted.
(4) For purposes of this section, an op-
tion is considered to be first exercisable dur-
ing a calendar year if the option will be-
come exercisable at any time during the
year assuming that any condition on the op-
tionee’s ability to exercise the option re-
lated to the performance of services is sat-
isfied. If the optionee’s ability to exercise
the option in the year is subject to an ac-
celeration provision, then the option is con-
sidered first exercisable in the calendar year
in which the acceleration provision is trig-
gered. After an acceleration provision is trig-
gered, the options subject to such provi-
sion are then taken into account in
accordance with paragraph (b)(3) of this
section for purposes of applying the limi-
tation described in paragraph (a)(2) of this
section to all options first exercisable dur-
ing a calendar year. However, because an
acceleration provision is not taken into ac-
count prior to its triggering, an incentive
stock option that becomes exercisable for
the first time during a calendar year by op-
eration of such a provision does not af-
fect the application of the $100,000 limi-
tation with respect to any option (or portion
thereof) exercised prior to such accelera-
tion. For purposes of this paragraph (b)(4),
an acceleration provision includes, for ex-
ample, a provision that accelerates the ex-
ercisability of an option on a change in
ownership or control or a provision that
conditions exercisability on the attainment
of a performance goal. See paragraph (d),
Example 4of this section.
(5)(i) An option (or portion thereof) is
disregarded if, prior to the calendar year
during which it would otherwise have be-
come exercisable for the first time, the op-
tion (or portion thereof) is modified and
thereafter ceases to be an incentive stock
option described in§1.422–2, is canceled,
or is transferred in violation of§1.421–
1(b)(2).
(ii) If an option (or portion thereof) is
modified, canceled, or transferred at any
other time, such option (or portion thereof)
is treated as outstanding according to its
original terms until the end of the calen-
dar year during which it would otherwise
have become exercisable for the first time.
(6) A disqualifying disposition has no ef-
fect on the determination of whether an op-
tion exceeds the $100,000 limitation.
(c)Bifurcation of options. The applica-
tion of the rules described in paragraph (b)
of this section may result in an option be-
ing treated, in part, as an incentive stock op-
tion and, in part, as a nonstatutory op-
tion. In such a case, a corporation can issue
a separate certificate for incentive option
stock and designate such stock as incen-
tive stock option stock in the corporation’s
transfer records. In the absence of such a
designation, apro rataportion of each share
of stock purchased under the option is
treated as incentive stock option stock and
nonstatutory option stock. See§1.83–7 for
the treatment of nonstatutory options.
(d)Examples. The following examples
illustrate the principles of this section. In
each of the following examples E is an em-
ployee of X Corporation. The examples are
as follows:
Example 1.General rule. Effective January 1,
2004, X Corporation adopts a plan under which in-
centive stock options may be granted to its employ-
ees. On January 1, 2004, and each succeeding Janu-
ary 1 through January 1, 2013, E is granted
immediately exercisable options for X Corporation
stock with a fair market value of $100,000 deter-
mined on the date of grant. The options qualify as in-
centive stock options (determined without regard to
this section). On January 1, 2014, E exercises all of
the options. Because the $100,000 limitation has not
been exceeded during any calendar year, all of the op-
tions are treated as incentive stock options.
Example 2.Order of grant. X Corporation is a par-
ent corporation of Y Corporation, which is a parent
corporation of Z Corporation. Each corporation has
adopted its own separate plan, under which an em-
ployee of any member of the corporate group may be
granted options for stock of any member of the group.
On January 1, 2004, X Corporation grants E an in-
centive stock option (determined without regard to this
section) for stock of Y Corporation with a fair mar-
ket value of $100,000 on the date of grant. On De-
cember 31, 2004, Y Corporation grants E an incen-
tive stock option (determined without regard to this
section) for stock of Z Corporation with a fair mar-
ket value of $75,000 as of the date of grant. Both of
the options are immediately exercisable. For pur-
poses of this section, options are taken into account
in the order in which granted using the fair market
value of stock as of the date the option is granted. Dur-
ing calendar year 2004, the aggregate fair market value
of stock with respect to which E’s options are exer-
cisable for the first time exceeds $100,000. There-
fore, the option for Y Corporation stock is treated as
an incentive stock option, and the option for Z Cor-
poration stock is treated as a nonstatutory option.
Example 3.Acceleration provision. (i) In 2004, X
Corporation grants E three incentive stock options (de-
termined without regard to this section) to acquire stock
with an aggregate fair market value of $150,000 on
the date of grant. The dates of grant, the fair market
value of the stock (as of the applicable date of grant)
with respect to which the options are exercisable, and
the years in which the options are first exercisable
(without regard to acceleration provisions) are as
follows:
Date of GrantFair Market
Value of Stock
First
Exercisable
Option 1April 1, 2004$60,0002004
Option 2May 1, 2004$50,0002006
Option 3June 1, 2004$40,0002004
(ii) In July of 2004, a change in control of X Cor-
poration occurs, and, under the terms of its option plan,
all outstanding options become immediately exercis-
able. Under the rules of this section, Option 1 is treated
as an incentive stock option in its entirety; Option 2
exceeds the $100,000 aggregate fair market value limi-
tation for calendar year 2004 by $10,000 (Option 1’s
$60,000 + Option 2’s $50,000 = $110,000) and is,
therefore, bifurcated into an incentive stock option for
2003–27 I.R.B.33July 7, 2003

stock with a fair market value of $40,000 as of the
date of grant and a nonstatutory option for stock with
a fair market value of $10,000 as of the date of grant.
Option 3 is treated as a nonstatutory option in its en-
tirety.
Example 4.Exercise of option and acceleration
provision. (i) In 2004, X Corporation grants E three
incentive stock options (determined without regard to
this section) to acquire stock with an aggregate fair
market value of $120,000 on the date of grant. The
dates of grant, the fair market value of the stock (as
of the applicable date of grant) with respect to which
the options are exercisable, and the years in which the
options are first exercisable (without regard to accel-
eration provisions) are as follows:
Date of GrantFair Market
Value of Stock
First
Exercisable
Option 1April 1, 2004$60,0002005
Option 2May 1, 2004$40,0002006
Option 3June 1, 2004$20,0002005
(ii) On June 1, 2005, E exercises Option 3. At the
time of exercise of Option 3, the fair market value of
X stock (at the time of grant) with respect to which
options held by E are first exercisable in 2005 does
not exceed $100,000. On September 1, 2005, a change
of control of X Corporation occurs, and, under the
terms of its option plan, Option 2 becomes immedi-
ately exercisable. Under the rules of this section, be-
cause E’s exercise of Option 3 occurs before the
change of control and the effects of an acceleration
provision are not taken into account until it is trig-
gered, Option 3 is treated as an incentive stock op-
tion in its entirety. Option 1 is treated as an incen-
tive stock option in its entirety. Option 2 is bifurcated
into an incentive stock option for stock with a fair mar-
ket value of $20,000 on the date of grant and a non-
statutory option for stock with a fair market value of
$20,000 on the date of grant because it exceeds the
$100,000 limitation for 2003 by $20,000 (Option 1
for $60,000 + Option 3 for $20,000 + Option 2 for
$40,000 = $120,000).
(iii) Assume the same facts as in paragraph (ii) of
thisExample 4, except that the change of control oc-
curs on May 1, 2005. Because options are taken into
account in the order in which they are granted, Op-
tion 1 and Option 2 are treated as incentive stock op-
tions in their entirety. Because the exercise of Op-
tion 3 (on June 1, 2005) takes place after the
acceleration provision is triggered, Option 3 is treated
as a nonstatutory option in its entirety.
Example 5.Cancellation of option. (i) In 2004, X
Corporation grants E three incentive stock options (de-
termined without regard to this section) to acquire stock
with an aggregate fair market value of $140,000 as
of the date of grant. The dates of grant, the fair mar-
ket value of the stock (as of the applicable date of
grant) with respect to which the options are exercis-
able, and the years in which the options are first ex-
ercisable (without regard to acceleration provisions)
are as follows:
Date of GrantFair Market
Value of Stock
First
Exercisable
Option 1April 1, 2004$60,0002005
Option 2May 1, 2004$40,0002005
Option 3June 1, 2004$40,0002005
(ii) On December 31, 2004, Option 2 is can-
celed. Because Option 2 is canceled before the cal-
endar year during which it would have become ex-
ercisable for the first time, it is disregarded. As a result,
Option 1 and Option 3 are treated as incentive stock
options in their entirety.
(iii) Assume the same facts as in paragraph (ii) of
thisExample 5, except that Option 2 is canceled on
January 1, 2005. Because Option 2 is not canceled
prior to the calendar year during which it would have
become exercisable for the first time (2005), it is
treated as an outstanding option for purposes of de-
termining whether the $100,000 requirement for 2005
has been exceeded. Because options are taken into ac-
count in the order in which granted, Option 1 is treated
as an incentive stock option in its entirety. Because
Option 3 exceeds the $100,000 limitation by $40,000
(Option 1 for $60,000 + Option 2 for $40,000 + Op-
tion 3 for $40,000 = $140,000), it is treated as a non-
statutory option in its entirety.
(iv) Assume the same facts as in paragraph (i) of
thisExample 5, except that on January 1, 2005, E ex-
ercises Option 2 and immediately sells the stock in
a disqualifying disposition. A disqualifying disposi-
tion has no effect on the determination of whether the
underlying option is considered outstanding during the
calendar year during which it is first exercisable. Be-
cause options are taken into account in the order in
which granted, Option 1 is treated as an incentive stock
option in its entirety. Because Option 3 exceeds the
$100,000 limitation by $40,000 (Option 1 for $60,000
+ Option 2 for $40,000 + Option 3 for $40,000 =
$140,000), it is treated as a nonstatutory option in its
entirety.
Example 6.Designation of stock. On January 1,
2004, X grants E an immediately exercisable incen-
tive stock option (determined without regard to this
section) to acquire X stock with a fair market value
of $150,000 on that date. Under the rules of this sec-
tion, the option is bifurcated and treated as an incen-
tive stock option for X stock with a fair market value
of $100,000 and a nonstatutory option for X stock with
a fair market value of $50,000. In these circum-
stances, X may designate the stock that is treated as
stock acquired pursuant to the exercise of an incen-
tive stock option by issuing a separate certificate (or
certificates) for $100,000 of stock and identifying such
certificates as Incentive Stock Option Stock in its trans-
fer records. In the absence of such a designation, two-
thirds ($100,000 / $150,000) of each share of stock
is treated as acquired pursuant to the exercise of an
incentive stock option and one-third ($50,000 /
$150,000) as stock acquired pursuant to the exer-
cise of a nonstatutory option.
Par. 10. Section 1.422–5 is added to read
as follows:
§1.422–5 Permissible provisions.
(a)General rule. An option that other-
wise qualifies as an incentive stock op-
tion does not fail to be an incentive stock
option merely because such option con-
tains one or more of the provisions de-
scribed in paragraphs (b), (c), and (d) of this
section.
(b)Cashless exercise. (1) An option does
not fail to be an incentive stock option
merely because the optionee may exer-
cise the option with previously acquired
stock of the corporation that granted the op-
tion or stock of the corporation whose stock
is being offered for purchase under the op-
tion. For special rules relating to the use of
statutory option stock to pay the option price
of an incentive stock option, see§1.424–
1(c)(3).
July 7, 2003342003–27 I.R.B.

(2) All shares acquired through the ex-
ercise of an incentive stock option are in-
dividually subject to the holding period re-
quirements described in§1.422–1(a) and the
disqualifying disposition rules of§1.422–
1(b), regardless of whether the option is ex-
ercised with previously acquired stock of
the corporation that granted the option or
stock of the corporation whose stock is be-
ing offered for purchase under the option.
If an incentive stock option is exercised with
such shares, and the exercise results in the
basis allocation described in paragraph
(b)(3) of this section, the optionee’s dis-
qualifying disposition of any of the stock
acquired through such exercise is treated as
a disqualifying disposition of the shares with
the lowest basis.
(3) If the exercise of an incentive stock
option with previously acquired shares is
comprised in part of an exchange to which
section 1036 (and so much of section 1031
as relates to section 1036) applies, then:
(i) The optionee’s basis in the incen-
tive stock option shares received in the sec-
tion 1036 exchange is the same as the op-
tionee’s basis in the shares surrendered in
the exchange, increased, if applicable, by
any amount included in gross income as
compensation pursuant to sections 421
through 424 or section 83. Except for pur-
poses of§1.422–1(a), the holding period of
the shares is determined under section 1223.
For purposes of§1.422–1 and sections
421(b) and 83 and the regulations there-
under, the amount paid for the shares pur-
chased under the option is the fair market
value of the shares surrendered on the date
of the exchange.
(ii) The optionee’s basis in the incen-
tive stock option shares not received pur-
suant to the section 1036 exchange is zero.
For all purposes, the holding period of such
shares begins as of the date that such shares
are transferred to the optionee. For pur-
poses of§1.422–1(b) and sections 421(b)
and 83 and the regulations thereunder, the
amount paid for the shares is considered to
be zero.
(c)Additional compensation. An op-
tion does not fail to be an incentive stock
option merely because the optionee has the
right to receive additional compensation, in
cash or property, when the option is exer-
cised, provided such additional compensa-
tion is includible in income under section
61 or section 83. The amount of such ad-
ditional compensation may be determined
in any manner, including by reference to the
fair market value of the stock at the time
of exercise or to the option price.
(d)Option subject to a condition. (1) An
option does not fail to be an incentive stock
option merely because the option is sub-
ject to a condition, or grants a right, that
is not inconsistent with the requirements of
§§1.422–2 and 1.422–4.
(2) An option that includes an alterna-
tive right is not an incentive stock option
if the requirements of§1.422–2 are effec-
tively avoided by the exercise of the alter-
native right. For example, an alternative
right extending the option term beyond ten
years, setting an option price below fair
market value, or permitting transferabil-
ity prevents an option from qualifying as
an incentive stock option. If either of two
options can be exercised, but not both, each
such option is a disqualifying alternative
right with respect to the other, even though
one or both options would individually sat-
isfy the requirements of§§1.422–2,
1.422–4, and this section.
(3) An alternative right to receive a tax-
able payment of cash and/or property in ex-
change for the cancellation or surrender of
the option does not disqualify the option as
an incentive stock option if the right is ex-
ercisable only when the then fair market
value of the stock exceeds the exercise price
of the option and the option is otherwise ex-
ercisable, the right is transferable only when
the option is otherwise transferable, and the
exercise of the right has the same eco-
nomic and tax consequences as the exer-
cise of the option followed by an imme-
diate sale of the stock. For this purpose, the
exercise of the alternative right does not
have the same economic and tax conse-
quences if the payment exceeds the differ-
ence between the then fair market value of
the stock and the exercise price of the op-
tion.
(e)Examples. The principles of this sec-
tion are illustrated by the following
examples:
Example 1. On June 1, 2004, X Corporation grants
an incentive stock option to A, an employee of X Cor-
poration, entitling A to purchase 100 shares of X Cor-
poration common stock at $10 per share. The op-
tion provides that A may exercise the option with
previously acquired shares of X Corporation com-
mon stock. X Corporation has only one class of com-
mon stock outstanding. Under the rules of section 83,
the shares transferable to A through the exercise of the
option are transferable and not subject to a substan-
tial risk of forfeiture. On June 1, 2005, when the fair
market value of an X Corporation share is $25, A uses
40 shares of X Corporation common stock, which A
had purchased on the open market on June 1, 2002,
for $5 per share, to pay the full option price. After ex-
ercising the option, A owns 100 shares of incentive
stock option stock. Under section 1036 (and so much
of section 1031 as relates to section 1036), 40 of the
shares have a $200 aggregate carryover basis (the $5
purchase price x 40 shares) and a three-year hold-
ing period for purposes of determining capital gain,
and 60 of the shares have a zero basis and a hold-
ing period beginning on June 1, 2005, for purposes
of determining capital gain. All 100 shares have a hold-
ing period beginning on June 1, 2005, for purposes
of determining whether the holding period require-
ments of§1.422–1(a) are met.
Example 2. Assume the same facts as inExample
1. Assume further that, on September 1, 2005, A sells
75 of the shares that A acquired through exercise of
the incentive stock option for $30 per share. Be-
cause the holding period requirements were not sat-
isfied, A made a disqualifying disposition of the 75
shares on September 1, 2005. Under the rules of para-
graph (b)(3) of this section, A has sold all 60 of the
non-section-1036 shares and 15 of the 40 section-
1036 shares. Therefore, under paragraph (b)(3) of this
section and section 83(a), the amount of compensa-
tion attributable to A’s exercise of the option and sub-
sequent disqualifying disposition of 75 shares is $1,500
(the difference between the fair market value of the
stock on the date of transfer, $1,875 (75 shares at $25
per share), and the amount paid for the stock, $375
(60 shares at $0 per share plus 15 shares at $25 per
share)). In addition, A must recognize a capital gain
of $675. Accordingly, A must include in gross in-
come for the taxable year in which the sale occurs
$1,500 as compensation and $675 as capital gain. For
its taxable year in which the disqualifying disposi-
tion occurs, if otherwise allowable under section 162
and if the requirements of§1.83–6(a) are met, X Cor-
poration is allowed a deduction of $1,500 for the com-
pensation paid to A.
Example 3. Assume the same facts as inExample
2, except that, instead of selling the 75 shares of in-
centive stock option stock on September 1, 2005, A
uses those shares to exercise a second incentive stock
option. The second option was granted to A by X Cor-
poration on January 1, 2005, entitling A to purchase
100 shares of X Corporation common stock at $22.50
per share. As inExample 2, A has made a disquali-
fying disposition of the 75 shares of stock pursuant
to§1.424–1(c). Under paragraph (b)(1) of this sec-
tion, A has disposed of all 60 of the non-section-
1036 shares and 15 of the 40 section-1036 shares.
Therefore, pursuant to paragraph (b)(3) of this sec-
tion and section 83(a), the amount of compensation
attributable to A’s exercise of the first option and sub-
sequent disqualifying disposition of 75 shares is $1,500
(the difference between the fair market value of the
stock on the date of transfer, $1,875 (75 shares at $25
per share), and the amount paid for the stock, $375
(60 shares at $0 per share plus 15 shares at $25 per
share)). UnlikeExample 2, A does not recognize any
capital gain as a result of exercising the second op-
tion because, for all purposes other than the determi-
nation of whether the exercise is a disposition pur-
suant to section 424(c), the exercise is considered an
exchange to which section 1036 applies. Accord-
ingly, A must include in gross income for the tax-
able year in which the disqualifying disposition oc-
curs $1,500 as compensation. For its taxable year in
which the disqualifying disposition occurs, if other-
2003–27 I.R.B.35July 7, 2003

wise allowable under sections 83(h) and 162 and if
the requirements of§1.83–6(a) are met, X Corpora-
tion is allowed a deduction of $1,500 for the com-
pensation paid to A. After exercising the second op-
tion, A owns a total of 125 shares of incentive stock
option stock. Under section 1036 (and so much of sec-
tion 1031 as relates to section 1036), the 100“new”
shares of incentive stock option stock have the fol-
lowing bases and holding periods: 15 shares have a
$75 carryover basis and a three-year-and-three-month
holding period for purposes of determining capital gain,
60 shares have a $1,500 basis resulting from the in-
clusion of that amount in income as compensation and
a three-month holding period for purposes of deter-
mining capital gain, and 25 shares have a zero basis
and a holding period beginning on September 1, 2005,
for purposes of determining capital gain. All 100 shares
have a holding period beginning on September 1, 2005,
for purposes of determining whether the holding pe-
riod requirements of§1.422–1(a) are met.
Example 4. Assume the same facts as inExample
2, except that, instead of selling the 75 shares of in-
centive stock option stock on September 1, 2005, A
uses those shares to exercise a nonstatutory option. The
nonstatutory option was granted to A by X Corpora-
tion on January 1, 2005, entitling A to purchase 100
shares of X Corporation common stock at $22.50 per
share. UnlikeExample 3, A has not made a disquali-
fying disposition of the 75 shares of stock. After ex-
ercising the nonstatutory option, A owns a total of 100
shares of incentive stock option stock and 25 shares
of nonstatutory stock option stock. Under section 1036
(and so much of section 1031 as relates to section
1036), the 75 new shares of incentive stock option
stock have the same basis and holding period as the
75 old shares used to exercise the nonstatutory op-
tion. The additional 25 shares of stock received upon
exercise of the nonstatutory option are taxed under the
rules of section 83(a). Accordingly, A must include in
gross income for the taxable year in which the trans-
fer of such shares occurs $750 (25 shares at $30 per
share) as compensation. A’s basis in such shares is the
same as the amount included in gross income. For its
taxable year in which the transfer occurs, X Corpo-
ration is allowed a deduction of $750 for the com-
pensation paid to A to the extent allowable under sec-
tions 83(h) and 162 and if the requirements of§1.83–
6(a) are satisfied.
Example 5. Assume the same facts inExample 1,
except that the shares transferred pursuant to the ex-
ercise of the incentive stock option are subject to a
substantial risk of forfeiture and not transferable (sub-
stantially nonvested) for a period of six months af-
ter such transfer. Assume further that the shares that
A uses to exercise the incentive stock option are simi-
larly restricted. Such shares were transferred to A on
January 1, 2005, through A’s exercise of a nonstatu-
tory stock option which was granted to A on Janu-
ary 1, 2004. A paid $5 per share for the stock when
its fair market value was $22.50 per share. A did not
file a section 83(b) election to include the $700 spread
(the difference between the option price and the fair
market value of the stock on date of exercise of the
nonstatutory option) in gross income as compensa-
tion. After exercising the incentive stock option with
the 40 substantially-nonvested shares, A owns 100
shares of substantially-nonvested incentive stock op-
tion stock. Section 1036 (and so much of section 1031
as relates to section 1036) applies to the 40 shares ex-
changed in exercise of the incentive stock option. How-
ever, pursuant to section 83(g), the stock received in
such exchange, because it is incentive stock option
stock, is not subject to restrictions and conditions sub-
stantially similar to those to which the stock given in
such exchange was subject. For purposes of section
83(a) and§1.83–1(b)(1), therefore, A has disposed of
the 40 shares of substantially-nonvested stock on June
1, 2005, and must include in gross income as com-
pensation $800 (the difference between the amount re-
alized upon such disposition, $1,000, and the amount
paid for the stock, $200). Accordingly, 40 shares of
the incentive stock option stock have a $1,000 basis
(the $200 original basis plus the $800 included in in-
come as compensation) and 60 shares of the incen-
tive stock option stock have a zero basis. For its tax-
able year in which the disposition of the substantially-
nonvested stock occurs, X Corporation is allowed a
deduction of $800 for the compensation paid to A, pro-
vided that the requirements of§1.83–6 are satisfied.
(f)Effective date. This section applies to
any statutory option granted on or after the
date that is 180 days after publication of fi-
nal regulations in theFederal Register.
Taxpayers can rely on these regulations for
the treatment of any statutory option granted
on or after June 9, 2003.
§1.423–1 [Amended]
Par. 11. Section 1.423–1 is amended as
follows:
1. In paragraph (a)(2), the language
“425(a)”is removed and“424(a)”is added
in its place.
2. In paragraph (b), first sentence, the
language“§1.421–7”is removed and
“§1.421–1”is added in its place.
3. In paragraph (b), second sentence, the
language“§1.421–8”is removed and
§1.421–2”is added in its place.
4. In paragraph (b), last sentence, the lan-
guage“425(c)”is removed and“424(c)”is
added in its place.
5. In paragraph (b), last sentence, the lan-
guage“§1.425–1”is removed and
“§1.424–1”is added in its place.
§1.423–2 [Amended]
Par. 12. Section 1.423–2 is amended by:
1. In paragraph (b), last sentence, the lan-
guage“§1.421–7”is removed and
“§1.421–1”is added in its place.
2. In paragraph (d)(1), second sentence,
the language“425(d)”is removed and
“424(d)”is added in its place.
3. In paragraph (d)(3),Example 3, fourth
sentence, the language“425(d)”is removed
and“424(d)”is added in its place.
4. In paragraph (e)(2), the language
“§1.421–7”is removed and“§1.421–1”is
added in its place.
5. In paragraph (g)(1), the first sen-
tence of the concluding text, the language
“§1.421–7”is removed and“§1.421–1”is
added in its place.
6. In paragraph (g)(1), the third sen-
tence of the concluding text, the language
“§1.421–7”is removed and“§1.421–1”is
added in its place.
7. In paragraph (j), second sentence, the
language“§1.421–7”is removed and
“§1.421–1”is added in its place.
8. In paragraph (j), last sentence, the lan-
guage“425”is removed and“424”is added
in its place.
9. In paragraph (k)(2), second sentence,
the language“§1.421–8”is removed and
“§1.421–2”is added in its place.
§1.425–1 [Redesignated]
Par. 13. Section 1.425–1 is redesignated
as§1.424–1 and is amended by:
1. Revising paragraphs (a)(1) through
(a)(6).
2. Redesignating paragraph (a)(7) as
paragraph (a)(9).
3. Adding paragraph (a)(7).
4. Revising paragraph (a)(8).
5. Adding paragraph (a)(10).
6. In paragraph (b)(1), first, second, and
last sentences, the language“425”is re-
moved wherever it appears, and“424”is
added in their places.
7. In paragraph (c)(1), first sentence, the
language“425”is removed and“424”is
added in its place.
8. In paragraph (c)(1), first sentence, the
language“disposition”is removed and“dis-
position of stock”is added in its place.
9. Adding paragraph (c)(1)(iv).
10. Redesignating paragraph (c)(3) as
(c)(4).
11. Adding new paragraph (c)(3).
12. Adding newly designated paragraph
(c)(4),Examples 7through9.
13. In the list below, for each section in-
dicated in the left column, remove the lan-
guage in the middle column and add the
language in the right column:
July 7, 2003362003–27 I.R.B.

Newly Designated SectionRemoveAdd
1.424–1(c)(4),Example 1, first sen-
tence
19642004
1.424–1(c)(4),Example 1, first sen-
tence
qualified stock optionstatutory option
1.424–1(c)(4),Example 1, second and
fourth sentences
19652005
1.424–1(c)(4),Example 1, third sen-
tence
19682006
1.424–1(c)(4),Example 2, first sen-
tence
19682006
1.424–1(c)(4),Example 2, last sentencelong-term
1.424–1(c)(4),Example 3, first sen-
tence
19682006
1.424–1(c)(4),Example 4, first sen-
tence
1968, two years and 11 months after the
transfer of shares to him
2006
1.424–1(c)(4),Example 4, last sentencethree years from the datetwoyears from the date the options were
granted and within one year of the date
that
1.424–1(c)(4),Example 5, first sen-
tence
19652005
1.424–1(c)(4),Example 5, first sen-
tence
qualified stock optionstatutory option
1.424–1(c)(4),Example 6, first sen-
tence
19652005
1.424–1(c)(4),Example 6, third sen-
tence
three years2 years
1.424–1(c)(4),Example 6, last sentenceincomecompensation income
1.424–1(c)(4),Example 6, third sen-
tence
a qualified stock optionthe option
1.424–1(c)(4),Example 6, last sentenceparagraph (b)(2) of§1.421–8§1.421–2(b)(2)
14. Revising paragraph (d).
15. Revising paragraphs (e)(1) and (e)(2).
16. In paragraph (e)(3), first sentence, re-
move the phrase“Except as otherwise pro-
vided in subparagraph (4)”and add“If sec-
tion 423(c) applies to an option then,“.
17. In paragraph (e)(3), first sentence, re-
move the language“, and 424(b)(1).”
18. Removing paragraph (e)(4).
19. Redesignating paragraph (e)(5) as
paragraph (e)(4).
20. Revising newly designated para-
graph (e)(4).
21. Redesignating paragraph (e)(6) as
paragraph (e)(5) and removing the sec-
ond and third sentences.
22. Adding a new paragraph (e)(6).
23. In the list below, for each section in-
dicated in the left column, remove the lan-
guage in the middle column and add the
language in the right column:
SectionRemoveAdd
1.424–1(e)(7)Example 1, first sentence19642004
1.424–1(e)(7)Example 1, first sentence19662006
1.424–1(e)(7)Example 1, third, fourth,
fifth, sixth and last sentences
19652005
1.424–1(e)(7)Example 1, fifth sen-
tence
425(h)424(h)
1.424–1(e)(7)Example 1, last sentenceThe exercise of suchBecause the requirements of§1.424–
1(e)(3) and§1.423–2(g) have not been
met, the exercise of such
1.424–1(e)(7)Example 2, first, sec-
ond, and fifth sentences
19642004
2003–27 I.R.B.37July 7, 2003

SectionRemoveAdd
1.424–1(e)(7)Example 2, first, third,
fourth, and fifth sentences, wherever it
appears
19652005
1.424–1(e)(7)Example 2, first and third
sentences
19662006
1.424–1(e)(7)Example 2, fifth sen-
tence
425(h)424(h)
1.424–1(e)(7)Example 2, last sentenceThe exercise of suchBecause the requirements of§1.424–
1(e)(3) and§1.423–2(g) have not been
met, the exercise of such
1.424–1(e)(7)Example 3, first, sec-
ond, and last sentences
19652005
24. In paragraph (e)(7), removeEx-
ample 4.
25. Adding paragraphs (f) and (g).
The additions and revisions are as
follows:
§1.424–1 Definitions and special rules
applicable to statutory options.
(a)Substitutions and assumptions of
options—(1)In general. (i) This paragraph
(a) provides rules under which aneligible
corporation(as defined in paragraph (a)(2)
of this section) may, by reason of acor-
porate transaction(as defined in para-
graph (a)(3) of this section), substitute a new
statutory option (new option) for an out-
standing statutory option (old option) or as-
sume an old option without such substitu-
tion or assumption being considered a
modification of the old option. For the defi-
nition ofmodification, see paragraph (e) of
this section.
(ii) For purposes of§§1.421–1 through
1.424–1, the phrase“substituting or assum-
ing a stock option in a transaction to which
section 424 applies,”“substituting or as-
suming a stock option in a transaction to
which§1.424–1(a) applies,”and similar
phrases means a substitution of a new op-
tion for an old option or an assumption of
an old option that meets the requirements
of this paragraph (a). For a substitution or
assumption to qualify under this paragraph
(a), the substitution or assumption must
meet all of the requirements described in
paragraphs (a)(4) and (a)(5) of this sec-
tion.
(2)Eligible corporation. For purposes
of this paragraph (a), the termeligible cor-
porationmeans a corporation that is the em-
ployer of the optionee or a related corpo-
ration of such corporation. For purposes of
this paragraph (a), the determination of
whether a corporation is the employer of
the optionee or a related corporation of such
corporation is based upon all of the rel-
evant facts and circumstances existing im-
mediately after the corporate transaction.
(3)Corporate transaction. For purposes
of this paragraph (a), the termcorporate
transactionincludes—
(i) A corporate merger, consolidation, ac-
quisition of property or stock, separation,
reorganization, or liquidation;
(ii) A distribution (excluding ordinary
dividends) or change in the terms or num-
ber of outstanding shares of such corpora-
tion (e.g., a stock split or stock dividend);
(iii) A change in the name of the cor-
poration whose stock is purchasable un-
der the old option; and
(iv) Such other corporate events pre-
scribed by the Commissioner in published
guidance.
(4)By reason of. (i) For a change in an
option or issuance of a new option to
qualify as a substitution or assumption un-
der this paragraph (a), the change must be
made by aneligible corporation(as de-
fined in paragraph (a)(2) of this section) and
occur by reason of acorporate transac-
tion(as defined in paragraph (a)(3) of this
section).
(ii) Generally, a change in an option or
issuance of a new option is considered to
be by reason of a corporate transaction, un-
less the relevant facts and circumstances
demonstrate that such change or issuance
is made for reasons unrelated to such cor-
porate transaction. For example, a change
in an option or issuance of a new option
will be considered to be made for rea-
sons unrelated to a corporate transaction if
there is an unreasonable delay between the
corporate transaction and such change in the
option or issuance of a new option, or if the
corporate transaction serves no substan-
tial corporate business purpose indepen-
dent of the change in options. Similarly, a
change in the number or price of shares pur-
chasable under an option merely to re-
flect market fluctuations in the price of the
stock purchasable under an option is not by
reason of a corporate transaction.
(iii) A change in an option or issuance
of a new option is by reason of a distribu-
tion or change in the terms or number of
the outstanding shares of a corporation (as
described in paragraph (a)(3)(ii) of this sec-
tion) only if the option as changed or the
new option issued is an option on the same
stock as under the old option (or if such
class of stock is eliminated in the change
in capital structure, on other stock of the
same corporation).
(iv) A change in an option or issuance
of a new option is by reason of a change
in the name of a corporation (as defined in
paragraph (a)(3)(iii) of this section) only if
the option as changed or the new option is-
sued is an option on stock of the succes-
sor corporation.
(5)Other requirements. For a change in
an option or issuance of a new option to
qualify as a substitution or assumption un-
der this paragraph (a), all of the require-
ments described in this paragraph (a)(5)
must be met.
(i) In the case of an issuance of a new
option (or a portion thereof) in exchange
for an old option (or portion thereof), the
optionee’s rights under the old option (or
portion thereof) must be canceled, and the
optionee must lose all rights under the old
option (or portion thereof). There cannot be
a substitution of a new option for an old op-
July 7, 2003382003–27 I.R.B.

tion within the meaning of this paragraph
(a) if the optionee may exercise both the old
option and the new option. It is not nec-
essary to have a complete substitution of
a new option for the old option. However,
any portion of such option which is not sub-
stituted or assumed in a transaction to which
this paragraph (a) applies is an outstand-
ing option to purchase stock or, to the ex-
tent paragraph (e) of this section applies,
a modified option.
(ii) The excess of the aggregate fair mar-
ket value of the shares subject to the new
or assumed option immediately after the
change in the option or issuance of a new
option over the aggregate option price of
such shares must not exceed the excess of
the aggregate fair market value of all shares
subject to the old option (or portion thereof)
immediately before the change in the op-
tion or issuance of a new option over the
aggregate option price of such shares.
(iii) On a share by share comparison, the
ratio of the option price to the fair mar-
ket value of the shares subject to the op-
tion immediately after the change in the op-
tion or issuance of a new option must not
be more favorable to the optionee than the
ratio of the option price to the fair mar-
ket value of the stock subject to the old op-
tion (or portion thereof) immediately be-
fore the change in the option or issuance
of a new option. The number of shares sub-
ject to the new or assumed option may be
adjusted to compensate for any change in
the aggregate spread between the aggre-
gate option price and the aggregate fair mar-
ket value of the shares subject to the op-
tion immediately after the change in the
option or issuance of the new option as
compared to the aggregate spread between
the option price and the aggregate fair mar-
ket value of the shares subject to the op-
tion immediately before the change in the
option or issuance of the new option.
(iv) The new or assumed option must
contain all terms of the old option, ex-
cept to the extent such terms are rendered
inoperative by reason of the corporate trans-
action.
(v) The new option or assumed option
must not give the optionee additional ben-
efits that the optionee did not have under
the old option.
(vi) The new or assumed option must
otherwise comply with the requirements of
§1.422–2or§1.423–2. Thus, for example,
the old option must be assumed or the new
option must be issued under a plan ap-
proved by the stockholders of the corpo-
ration changing the option or issuing the
new option as described in§1.422–2(b)(2)
or§1.423–2(c), as applicable.
(6)Obligation to substitute or assume
not necessary. For a change in the option
or issuance of a new option to meet the re-
quirements of this paragraph (a), it is not
necessary to show that the corporation
changing an option or issuing a new op-
tion is under any obligation to do so. In fact,
this paragraph (a) may apply even when the
option that is being replaced or assumed ex-
pressly provides that it will terminate upon
the occurrence of certain corporate trans-
actions. However, this paragraph (a) can-
not be applied to revive a statutory op-
tion which, for reasons not related to the
corporate transaction, expires before it can
properly be replaced or assumed under this
paragraph (a).
(7)Issuance of stock without meeting the
requirements of this paragraph (a).A
change in the terms of an option result-
ing in a modification of such option oc-
curs if an optionee’s new employer (or a re-
lated corporation of the new employer)
issues its stock (or stock of a related cor-
poration) upon exercise of such option with-
out satisfying all of the requirements de-
scribed in paragraphs (a)(4) and (5) of this
section.
(8)Date of grant. For purposes of ap-
plying the rules of this paragraph (a), a sub-
stitution or assumption is considered to oc-
cur on the date that the optionee would, but
for this paragraph (a), be considered to have
been granted the option that the eligible cor-
poration is substituting or assuming. A sub-
stitution or an assumption that occurs by
reason of a corporate transaction may oc-
cur before or after the corporate transac-
tion.
*****
(10)Examples. The principles of this
paragraph (a) are illustrated by the follow-
ing examples:
Example 1.Eligible corporation. X Corporation
acquires a new subsidiary, Y Corporation, and trans-
fers some of its employees to Y. Y Corporation wishes
to grant to its new employees and to the employees
of X Corporation new options for Y shares in ex-
change for old options for X shares that were previ-
ously granted by X Corporation. Because Y Corpo-
ration is an employer with respect to its own
employees and a related corporation of X Corpora-
tion, Y Corporation is an eligible corporation under
paragraph (a)(2) of this section with respect to both
the employees of X and Y Corporations.
Example 2.Corporate transaction. (i) On Janu-
ary 1, 2004, Z Corporation grants E, an employee of
Z, an option to acquire 100 shares of Z stock. At the
time of grant, the fair market value of Z stock is $200
per share. E’s option price is $200 per share. On July
1, 2005, when the fair market value of Z stock is $400,
Z declares a stock dividend that causes the fair mar-
ket value of Z stock to decrease to $200 per share.
On the same day, Z grants to E a new option to ac-
quire 200 shares of Z stock in exchange for E’s old
option. The new option has an exercise price of $100
per share.
(ii) A stock dividend is a corporate transaction un-
der paragraph (a)(3)(ii) of this section. Generally, the
issuance of a new option is considered to be by rea-
son of a corporate transaction. None of the facts in
thisExample 2indicate that the new option is not is-
sued by reason of the stock dividend. In addition, the
new option is issued on the same stock as the old op-
tion. Thus, the substitution occurs by reason of the cor-
porate transaction. Assuming the other requirements
of this section are met, the issuance of the new op-
tion is a substitution that meets the requirements of
this paragraph (a) and is not a modification of the op-
tion.
(iii) Assume the same facts as in paragraph (i) of
thisExample 2. Assume further that on December 1,
2005, Z declares an ordinary cash dividend. On the
same day, Z grants E a new option to acquire Z stock
in substitution for E’s old option. Under paragraph
(a)(3)(ii) of this section, an ordinary cash dividend is
not a corporate transaction. Thus, the exchange of the
new option for the old option does not meet the re-
quirements of this paragraph (a) and is a modifica-
tion of the option.
Example 3.Corporate transaction. On March 15,
2004, A Corporation grants E, an employee of A, an
option to acquire 100 shares of A stock at $50 per
share, the fair market value of A stock on the date of
grant. On May 2, 2005, A Corporation transfers sev-
eral employees, including E, to B Corporation, a re-
lated corporation. B Corporation arranges to pur-
chase some assets from A on the same day as E’s
transfer to B. Such purchase is without a substantial
business purpose independent of making the ex-
change of E’s old options for the new options ap-
pear to be by reason of a corporate transaction. The
following day, B Corporation grants to E, one of its
new employees, an option to acquire shares of B stock
in exchange for the old option held by E to acquire
A stock. Under paragraph (a)(3)(i) of this section, the
purchase of assets is a corporate transaction. Gener-
ally, the substitution of an option is considered to oc-
cur by reason of a corporate transaction. However, in
this case, the relevant facts and circumstances dem-
onstrate that the issuance of the new option in ex-
change for the old option occurred by reason of the
change in E’s employer rather than a corporate trans-
action and that the sale of assets is without a sub-
stantial corporate business purpose independent of the
change in the options. Thus, the exchange of the new
option for the old option is not by reason of a cor-
porate transaction that meets the requirements of this
paragraph (a) and is a modification of the old op-
tion.
Example 4.Additional benefit.OnJune1,2004,
P Corporation acquires 100 percent of the shares of
S Corporation and issues a new option to purchase P
shares in exchange for an old option to purchase S
shares that is held by E, an employee of S. On the date
2003–27 I.R.B.39July 7, 2003

of the exchange, E’s old option is exercisable for 3
more years, and, after the exchange, E’s new option
is exercisable for 5 years. Because the new option is
exercisable for an additional period of time beyond
the time allowed under the old option, the effect of
the exchange of the new option for the old option is
to give E an additional benefit that E did not enjoy
under the old option. Thus, the requirements of para-
graph (a)(5) of this section are not met, and this para-
graph (a) does not apply to the exchange of the new
option for the old option. Therefore, the exchange is
a modification of the old options.
Example 5.Spread and ratio tests.Eisanem-
ployee of S Corporation. E holds an old option that
was granted to E by S to purchase 60 shares of S at
$12 per share. On June 1, 2005, S Corporation is
merged into P Corporation, and on such date P is-
sues a new option to purchase P shares in exchange
for E’s old option to purchase S shares. Immedi-
ately before the exchange, the fair market value of an
S share is $32; immediately after the exchange, the
fair market value of a P share is $24. The new op-
tion entitles E to buy P shares at $9 per share. Be-
cause, on a share-by-share comparison, the ratio of the
new option price ($9 per share) to the fair market value
of a P share immediately after the exchange ($24 per
share) is not more favorable to E than the ratio of the
old option price ($12 per share) to the fair market value
of an S share immediately before the exchange ($32
per share) (9/24 = 12/32), the requirements of para-
graph (a)(5)(iii) of this section are met. The number
of shares subject to E’s option to purchase P stock is
set at 80. Because the excess of the aggregate fair mar-
ket value over the aggregate option price of the shares
subject to E’s new option to purchase P stock, $1,200
(80 x $24 minus 80 x $9), is not greater than the ex-
cess of the aggregate fair market value over the ag-
gregate option price of the shares subject to E’s old
option to purchase S stock, $1,200 (60 x $32 minus
60 x $12), the requirements of paragraph (a)(5)(ii) of
this section are met.
Example 6.Ratio test and partial substitution.As-
sume the same facts as inExample 5, except that the
fair market value of an S share immediately before
the exchange of the new option for the old option is
$8, that the option price is $10 per share, and that the
fair market value of a P share immediately after the
exchange is $12. P sets the new option price at $15
per share. Because, on a share-by-share compari-
son, the ratio of the new option price ($15 per share)
to the fair market value of a P share immediately af-
ter the exchange ($12) is not more favorable to E than
the ratio of the old option price ($10 per share) to the
fair market value of an S share immediately before
the substitution ($8 per share) (15/12 = 10/8), the re-
quirements of paragraph (a)(5)(iii) of this section are
met. Assume further that the number of shares sub-
ject to E’s P option is set at 20, as compared to 60
shares under E’s old option to buy S stock. Immedi-
ately after the exchange, 2 shares of P are worth $24,
which is what 3 shares of S were worth immedi-
ately before the exchange (2 x $12=3x$8).Thus,
to achieve a complete substitution of a new option for
E’s old option, E would need to receive a new op-
tion to purchase 40 shares of P (i.e., 2 shares of P for
each 3 shares of S that E could have purchased un-
der the old option (2/3 = 40/60)). Because E’s new
option is for only 20 shares of P, P has replaced only
1
⁄2of E’s old option, and the other
1
⁄2is still outstand-
ing.
Example 7.Partial substitution. X Corporation
forms a new corporation, Y Corporation, by a trans-
fer of certain assets and, in a spin-off, distributes the
shares of Y Corporation to the stockholders of X Cor-
poration. E, an employee of X Corporation, is there-
after an employee of Y. Y wishes to substitute a new
option to purchase some of its stock for E’s old op-
tion to purchase 100 shares of X. E’s old option to
purchase shares of X, at $50 a share, was granted when
the fair market value of an X share was $50, and an
X share was worth $100 just before the distribution
of the Y shares to X’s stockholders. Immediately af-
ter the spin-off, which is also the time of the substi-
tution, each share of X and each share of Y is worth
$50. Based on these facts, a new option to purchase
200 shares of Y at an option price of $25 per share
could be granted to E in complete substitution of E’s
old option. It would also be permissible to grant E a
new option to purchase 100 shares of Y, at an op-
tion price of $25 per share, in substitution for E’s right
to purchase 50 of the shares under the old option.
Example 8.Stockholder approval requirements. (i)
X Corporation, a publicly traded corporation, adopts
an incentive stock option plan that meets the require-
ments of §1.422–2. Under the plan, options to ac-
quire X stock are granted to X employees. X Corpo-
ration is acquired by Y Corporation and becomes a
subsidiary corporation of Y Corporation. Y Corpora-
tion maintains an incentive stock option plan that meets
the requirements of §1.422–2. Under the plan, op-
tions for Y stock may be granted to employees of Y
or its related corporations. After the acquisition, X em-
ployees remain employees of X. In connection with
the acquisition, Y Corporation substitutes new op-
tions for Y stock for old options for X stock that were
previously granted to the employees of X. As a re-
sult of this substitution, on exercise of the new op-
tions, X employees receive Y Corporation stock.
(ii) Because Y Corporation has a plan that meets
the requirements of §1.422–2 in existence on the date
it acquires X, the new options for Y stock are granted
under a plan approved by the stockholders of Y. The
stockholders of Y do not need to approve the X plan.
If the other requirements of paragraphs (a)(4) and (5)
of this section are met, the issuance of new options
for Y stock in exchange for the old options for X stock
meets the requirements of this paragraph (a) and is not
a modification of the old options.
(iii) Assume the same facts as in paragraph (i) of
thisExample 8, except that Y Corporation does not
maintain an incentive stock option plan on the date
of the acquisition of X. The Y options will only be
incentive stock options if they are granted under a plan
that meets the requirements of §1.422–2(b). There-
fore, Y must adopt a plan that provides for the grant
of incentive stock options, and the plan must be ap-
proved by the stockholders of Y in accordance with
§1.422–2(b). If the stockholders of Y approve the in-
centive stock option plan within 12 months before or
after the date of the adoption of a plan by Y and the
other requirements of §1.422–2 and the requirements
of this paragraph (a) are met, the issuance of the new
options for Y stock in exchange for the old options
for X stock meets the requirements of this para-
graph (a) and is not treated as a modification of the
old options for X stock. The result is the same if Y
Corporation assumes the old options instead of issu-
ing new options.
(iv) Assume the same facts as in paragraph (i) of
thisExample 8, except that there is no exchange of
options. Instead, as part of the acquisition, X amends
its plan to allow future grants under the plan to be
grants to acquire Y stock. Because the amendment of
the plan to allow options on a different stock is con-
sidered the adoption of the new plan, the stockhold-
ers of X must approve the plan within 12 months be-
fore or after the date of the amendment of the plan.
If the stockholders of X timely approve the plan, the
future grants to acquire Y stock will be incentive stock
options (assuming the other requirements of §1.422–2
have been met).
Example 9.Modification. X Corporation merges
into Y Corporation. Y Corporation retains employ-
ees of X who hold old options to acquire X Corpo-
ration stock. When the former employees of X exer-
cise the old options, Y Corporation issues Y stock to
the former employees of X. Under paragraph (a)(7)
of this section, because Y issues its stock on exer-
cise of the old options for X stock, there is a change
in the terms of the old options for X stock. Thus, the
issuance of Y stock on exercise of the old options is
a modification of the old options.
*****
(c)***(1)***
(iv) A transfer between spouses or in-
cident to divorce (described in section
1041(a)). The special tax treatment of
§1.421–2(a) with respect to the transferred
stock applies to the transferee. However, see
§1.421–1(b)(2) for the treatment of the
transfer of a statutory option incident to di-
vorce.
*****
(3) If an optionee exercises an incen-
tive stock option with statutory option stock
and the applicable holding period require-
ments (under §1.422–1(a) or §1.423–1(a))
with respect to such statutory option stock
are not met before such transfer, then sec-
tions 354, 355, 356, or 1036 (or so much
of 1031 as relates to 1036) do not apply to
determine whether there is a disposition of
those shares. Therefore, there is a dispo-
sition of the statutory option stock, and the
special tax treatment of § 1.421–2(a) does
not apply to such stock.
(4)***
Example 7. On January 1, 2004, X Corporation
grants to E, an employee of X Corporation, an in-
centive stock option to purchase 100 shares of X Cor-
poration stock at $100 per share (the fair market value
of an X Corporation share on that date). On Janu-
ary 1, 2005, when the fair market value of a share of
X Corporation stock is $200, E exercises half of the
option, pays X Corporation $5,000 in cash, and is
transferred 50 shares of X Corporation stock with an
aggregate fair market value of $10,000. E makes no
disposition of the shares before January 2, 2006. Un-
der §1.421–2(a), no income is recognized by E on the
transfer of shares pursuant to the exercise of the in-
centive stock option, and X Corporation is not en-
titled to any deduction at any time with respect to its
transfer of the shares to E. E’s basis in the shares is
$5,000.
July 7, 2003402003–27 I.R.B.

Example 8. Assume the same facts as inExample
7, except that on December 1, 2005, one year and 11
months after the grant of the option and 11 months
after the transfer of the 50 shares to E, E uses 25 of
those shares, with a fair market value of $5,000, to
pay for the remaining 50 shares purchasable under the
option. On that day, X Corporation transfers 50 of its
shares, with an aggregate fair market value of $10,000,
to E. Because E disposed of the 25 shares before the
expiration of the applicable holding periods,§1.421–
2(a) does not apply to the January 1, 2005, transfer
of the 25 shares used by E to exercise the remain-
der of the option. As a result of the disqualifying dis-
position of the 25 shares, E recognizes compensa-
tion income under the rules of§1.421–2(b).
Example 9. On January 1, 2005, X Corporation
grants an incentive stock option to E, an employee of
X Corporation. The exercise price of the option is $10
per share. On June 1, 2005, when the fair market value
of an X Corporation share is $20, E exercises the op-
tion and purchases 5 shares with an aggregate fair mar-
ket value of $100. On January 1, 2006, when the fair
market value of an X Corporation share is $50, X Cor-
poration is acquired by Y Corporation in a section
368(a)(1)(A) reorganization. As part of the acquisi-
tion, all X Corporation shares are converted into Y Cor-
poration shares. After the conversion, if an optionee
holds a fractional share of X Corporation stock, Y Cor-
poration will purchase the fractional share for cash
equal to its fair market value. After applying the con-
version formula to the shares held by E, E has 10 Y
Corporation shares and one-half of a share of X Cor-
poration stock. Y Corporation purchases E’s one-
half share for $25, the fair market value of one-half
of an X Corporation share on the conversion date. Be-
cause E sells the one-half share prior to expiration of
the holding periods described in§1.422–1(a), the sale
is a disqualifying disposition of the one-half share.
Thus, in 2006, E must recognize compensation in-
come of $5 (one-half of the fair market value of an
X Corporation share on the date of exercise of the op-
tion, or $10, less one-half of the exercise price per
share, or $5). For purposes of computing any addi-
tional gain, E’s basis in the one-half share increases
to $10 (reflecting the $5 included in income as com-
pensation). E recognizes an additional gain of $15 ($25,
the fair market value of the one-half share, less $10,
the basis in such share). The extent to which the ad-
ditional $15 of gain is treated as a redemption of X
Corporation stock is determined under section 302.
(d)Attribution of stock ownership. To de-
termine the amount of stock owned by an
individual for purposes of applying the per-
centage limitations relating to certain stock-
holders described in§§1.422–2(f) and
1.423–2(d), shares of the employer corpo-
ration or of a related corporation that are
owned (directly or indirectly) by or for the
individual’s brothers and sisters (whether
by the whole or half blood), spouse, an-
cestors, and lineal descendants, are con-
sidered to be owned by the individual. Also,
for such purposes, if a domestic or for-
eign corporation, partnership, estate, or trust
owns (directly or indirectly) shares of the
employer corporation or of a related cor-
poration, the shares are considered to be
owned proportionately by or for the stock-
holders, partners, or beneficiaries of the cor-
poration, partnership, estate, or trust. The
extent to which stock held by the optionee
as a trustee of a voting trust is considered
owned by the optionee is determined un-
der all of the facts and circumstances.
(e)Modification, extension, or renewal
of option. (1) This paragraph (e) provides
rules for determining whether a share of
stock transferred to an individual upon the
individual’s exercise of an option after the
terms of the option have been changed is
transferred pursuant to the exercise of a
statutory option.
(2) Any modification, extension, or re-
newal of the terms of an option to pur-
chase shares is considered the granting of
a new option. The new option may or may
not be a statutory option. To determine the
date of grant of the new option for pur-
poses of section 422 or 423, see§1.421–
1(c).
*****
(4)(i) For purposes of§§1.421–1 through
1.424–1 the termmodificationmeans any
change in the terms of the option (or change
in the terms of the plan pursuant to which
the option was granted or in the terms of
any other agreement governing the arrange-
ment) that gives the optionee additional ben-
efits under the option regardless of whether
the optionee in fact benefits from the change
in terms. In contrast, for example, a change
in the terms of the option shortening the pe-
riod during which the option is exercis-
able is not a modification. However, a
change providing an extension of the pe-
riod during which an option may be exer-
cised (such as after termination of employ-
ment) or a change providing an alternative
to the exercise of the option (such as a stock
appreciation right) is a modification re-
gardless of whether the optionee in fact ben-
efits from such extension or alternative right.
Similarly, a change providing an additional
benefit upon exercise of the option (such
as the payment of a cash bonus) or a change
providing more favorable terms for pay-
ment for the stock purchased under the op-
tion (such as the right to tender previously
acquired stock) is a modification.
(ii) If an option is not immediately ex-
ercisable in full, a change in the terms of
the option to accelerate the time at which
the option (or any portion thereof) may be
exercised is not a modification for pur-
poses of this section. Additionally, no modi-
fication occurs if a provision accelerating
the time when an option may first be ex-
ercised is removed prior to the year in
which it would otherwise be triggered. For
example, if an acceleration provision is
timely removed to avoid exceeding the
$100,000 limitation described in§1.422–4,
a modification of the option does not oc-
cur.
(iii) A change to an option which pro-
vides, either by its terms or in substance,
that the optionee may receive an addi-
tional benefit under the option at the fu-
ture discretion of the grantor, is a modifi-
cation at the time that the option is changed
to provide such discretion. In addition, the
exercise of discretion to provide an addi-
tional benefit is a modification of the op-
tion. However, it is not a modification for
the grantor to exercise discretion reserved
under an option with respect to the pay-
ment of a cash bonus at the time of exer-
cise, the availability of a loan at exercise,
or the right to tender previously acquired
stock for the stock purchasable under the
option. An option is not modified merely-
because an optionee is offered a change in
the terms of an option if the change to the
option is not made.
(iv) A change in the terms of the stock
purchasable under the option that affects the
value of the stock is a modification of such
option, except to the extent that a new op-
tion is substituted for such option by rea-
son of the change in the terms of the stock
in accordance with paragraph (a) of this sec-
tion.
(v) If an option is amended solely to in-
crease the number of shares subject to the
option, the increase is not considered a
modification of the option but is treated as
the grant of a new option for the addi-
tional shares.
(vi) Any change in the terms of an op-
tion made in an attempt to qualify the op-
tion as a statutory option grants additional
benefits to the optionee and is, therefore,
a modification.
(vii) An extension of an option refers to
the granting by the corporation to the op-
tionee of an additional period of time within
which to exercise the option beyond the
time originally prescribed. A renewal of an
option is the granting by the corporation of
the same rights or privileges contained in
the original option on the same terms and
conditions. The rules of this paragraph ap-
2003–27 I.R.B.41July 7, 2003

ply as well to successive modifications, ex-
tensions, and renewals.
*****
(6) [Reserved.]
*****
(f)Definitions. The following defini-
tions apply for purposes of§§1.421–1
through 1.424–1:
(1)Parent corporation. The termpar-
ent corporation,orparent, means any cor-
poration (other than the employer corpo-
ration) in an unbroken chain of corporations
ending with the employer corporation if, at
the time of the granting of the option, each
of the corporations other than the employer
corporation owns stock possessing 50 per-
cent or more of the total combined vot-
ing power of all classes of stock in one of
the other corporations in such chain.
(2)Subsidiary corporation. The term
subsidiary corporation,orsubsidiary, means
any corporation (other than the employer
corporation) in an unbroken chain of cor-
porations beginning with the employer cor-
poration if, at the time of the granting of
the option, each of the corporations other
than the last corporation in an unbroken
chain owns stock possessing 50 percent or
more of the total combined voting power
of all classes of stock in one of the other
corporations in such chain.
(g)Effective date. This section applies
to any statutory option granted on or af-
ter the date that is 180 days after publica-
tion of final regulations in theFederal Reg-
ister. Taxpayers can rely on these
regulations for the treatment of any statu-
tory option granted on or after June 9, 2003.
§1.6039–1 [Removed]
Par. 14. Section 1.6039–1 is removed.
§1.6039–2 [Redesignated]
Par. 15. Section 1.6039–2 is redesig-
nated as 1.6039–1 and revised to read as
follows:
§1.6039–1 Statements to persons with
respect to whom information is
furnished.
(a)Requirement of statement with re-
spect to incentive stock options under sec-
tion 6039(a)(1). Every corporation which
transfers stock to any person pursuant to
such person’s exercise of an incentive stock
option described in section 422(b) must fur-
nish to such transferee, for each calendar
year in which such a transfer occurs, a writ-
ten statement with respect to the transfer or
transfers made during such year. This state-
mentmustincludethefollowing
information—
(1) The name, address, and employer
identification number of the corporation
transferring the stock;
(2) The name, address, and identifying
number of the person to whom the share or
shares of stock were transferred;
(3) The name and address of the cor-
poration the stock of which is the subject
of the option (if other than the corpora-
tion transferring the stock);
(4) The date the option was granted;
(5) The date the shares were transferred
to the person exercising the option;
(6) The fair market value of the stock at
the time the option was exercised;
(7) The number of shares of stock trans-
ferred pursuant to the option;
(8) The type of option under which the
transferred shares were acquired; and
(9) The total cost of all the shares.
(b)Requirement of statement with re-
spect to stock purchased under an em-
ployee stock purchase plan under section
6039(a)(2). (1) Every corporation which
records, or has by its agent recorded, a
transfer of the title to stock acquired by the
transferor pursuant to the transferor’s ex-
ercise on or after January 1, 1964, of an op-
tion granted under an employee stock pur-
chase plan which meets the requirements
of section 423(b), and with respect to which
the special rule of section 423(c) applied,
must furnish to such transferor, for each cal-
endar year in which such a recorded trans-
fer of title to such stock occurs, a written
statement with respect to the transfer or
transfers containing the information re-
quired by paragraph (b)(2) of this sec-
tion.
(2) The statement required by paragraph
(b)(1) of this section must contain the fol-
lowing information—
(i) The name and address of the corpo-
ration whose stock is being transferred;
(ii) The name, address and identifying
number of the transferor;
(iii) The date such stock was transferred
to the transferor;
(iv) The number of shares to which title
is being transferred; and
(v) The type of option under which the
transferred shares were acquired.
(3) If the statement required by this para-
graph is made by the authorized transfer
agent of the corporation, it is deemed to
have been made by the corporation. The
termtransfer agent, as used in this sec-
tion means any designee authorized to keep
the stock ownership records of a corpora-
tion and to record a transfer of title of the
stock of such corporation on behalf of such
corporation.
(4) A statement is required by reason of
a transfer described in section 6039(a)(2)
of a share only with respect to the first
transfer of such share by the person who
exercised the option. Thus, for example, if
the owner has record title to a share or
shares of stock transferred to a recognized
broker or financial institution and the stock
is subsequently sold by such broker or in-
stitution (on behalf of the owner), the cor-
poration is only required to furnish a writ-
ten statement to the owner relating to the
transfer of record title to the broker or fi-
nancial institution. Similarly, a written state-
ment is required when a share of stock is
transferred by the optionee to himself and
another person (or persons) as joint ten-
ants, tenants by the entirety or tenants in
common. However, when stock is origi-
nally issued to the optionee and another per-
son (or persons) as joint tenants, or as ten-
ants by the entirety, the written statement
required by this paragraph shall be fur-
nished (at such time and in such manner as
is provided by this section) with respect to
the first transfer of the title to such stock
by the optionee.
(5) Every corporation which transfers
any share of stock pursuant to the exer-
cise of an option described in this para-
graph shall identify such stock in a man-
ner sufficient to enable the accurate
reporting of the transfer of record title to
such shares. Such identification may be ac-
complished by assigning to the certifi-
cates of stock issued pursuant to the exer-
cise of such options a special serial number
or color.
(c)Time for furnishing statements—(1)
In general. Each statement required by this
section to be furnished to any person for a
calendar year must be furnished to such per-
son on or before January 31 of the year fol-
lowing the year for which the statement is
required.
(2)Extension of time. For good cause
shown upon written application of the cor-
poration required to furnish statements un-
July 7, 2003422003–27 I.R.B.

der this section, the Director, Martins-
burg Computing Center, may grant an
extension of time not exceeding 30 days in
which to furnish such statements. The ap-
plication must contain a full recital of the
reasons for requesting an extension to aid
the Director in determining the period of
the extension, if any, which will be granted
and must be sent to the Martinsburg Com-
puting Center (Attn: Extension of Time Co-
ordinator). Such a request in the form of a
letter to the Martinsburg Computing Cen-
ter signed by the applicant (or its agent) will
suffice as an application. The application
must be filed on or before the date pre-
scribed in paragraph (c)(1) of this section
for furnishing the statements required by this
section, and must contain the employer
identification number of the corporation re-
quired to furnish statements under this sec-
tion.
(3)Last day for furnishing statement. For
provisions relating to the time for perfor-
mance of an act when the last day pre-
scribed for performance falls on Satur-
day, Sunday, or a legal holiday, see
§301.7503–1 of this chapter (Regulations
on Procedure and Administration).
(d)Statements furnished by mail. For
purposes of this section, a statement is con-
sidered to be furnished to a person if it is
mailed to such person’s last known ad-
dress.
(e)Penalty. For provisions relating to the
penalty provided for failure to furnish a
statement under this section, see section
6722.
(f)Electronic furnishing of statements
[Reserved]
(g)Effective date. This section applies
as of the date that is 180 days after pub-
lication of final regulations in theFED-
ERAL REGISTERto transfers of stock
acquired pursuant to a statutory option on
or after that date. Taxpayers can rely on
these regulations with respect to the trans-
fer of stock acquired pursuant to a statu-
tory option on or after June 9, 2003.
PART 14a—TEMPORARY INCOME
TAX REGULATIONS RELATING TO
INCENTIVE STOCK OPTIONS
Part 14a [Removed]
Par. 16. Part 14a is removed.
David A. Mader,
Assistant Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on June 6, 2003,
8:45 a.m., and published in the issue of the Federal Regis-
ter for June 9, 2003, 68 F.R. 34344)
2003–27 I.R.B.43July 7, 2003

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as“rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
withmodified, below).
Clarifiedis used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modifiedis used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it
applies to both A and B, the prior ruling
is modified because it corrects a pub-
lished position. (Compare withamplified
andclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revokeddescribes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Supersededdescribes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example,modified
andsupersededdescribes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case,
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current
use and formerly used will appear in
material published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F. R .—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
July 7, 2003i2003–27 I.R.B.

Numerical Finding List
1
Bulletins 2003–1 through 2003–26
Announcements:
2003–1, 2003–2 I.R.B.281
2003–2, 2003–3 I.R.B.301
2003–3, 2003–4 I.R.B.361
2003–4, 2003–5 I.R.B.396
2003–5, 2003–5 I.R.B.397
2003–6, 2003–6 I.R.B.450
2003–7, 2003–6 I.R.B.450
2003–8, 2003–6 I.R.B.451
2003–9, 2003–7 I.R.B.490
2003–10, 2003–7 I.R.B.490
2003–11, 2003–10 I.R.B.585
2003–12, 2003–10 I.R.B.585
2003–13, 2003–11 I.R.B.603
2003–14, 2003–11 I.R.B.603
2003–15, 2003–11 I.R.B.605
2003–16, 2003–12 I.R.B.641
2003–17, 2003–15 I.R.B.722
2003–18, 2003–13 I.R.B.675
2003–19, 2003–15 I.R.B.723
2003–20, 2003–15 I.R.B.750
2003–21, 2003–17 I.R.B.846
2003–22, 2003–17 I.R.B.846
2003–23, 2003–16 I.R.B.808
2003–24, 2003–16 I.R.B.810
2003–25, 2003–17 I.R.B.846
2003–26, 2003–18 I.R.B.862
2003–27, 2003–18 I.R.B.862
2003–28, 2003–19 I.R.B.899
2003–29, 2003–20 I.R.B.928
2003–30, 2003–20 I.R.B.929
2003–31, 2003–20 I.R.B.930
2003–32, 2003–20 I.R.B.933
2003–33, 2003–21 I.R.B.953
2003–34, 2003–21 I.R.B.953
2003–35, 2003–21 I.R.B.956
2003–36, 2003–25 I.R.B.1093
2003–37, 2003–24 I.R.B.1025
2003–38, 2003–24 I.R.B.1029
2003–39, 2003–24 I.R.B.1030
2003–40, 2003–26 I.R.B.1132
2003–41, 2003–25 I.R.B.1098
2003–42, 2003–25 I.R.B.1104
2003–43, 2003–26 I.R.B.1139
2003–44, 2003–26 I.R.B.1144
Court Decisions:
2077, 2003–19 I.R.B.868
Notices:
2003–1, 2003–2 I.R.B.257
2003–2, 2003–2 I.R.B.257
2003–3, 2003–2 I.R.B.258
2003–4, 2003–3 I.R.B.294
2003–5, 2003–3 I.R.B.294
2003–6, 2003–3 I.R.B.298
2003–7, 2003–4 I.R.B.310
2003–8, 2003–4 I.R.B.310
2003–9, 2003–5 I.R.B.369
2003–10, 2003–5 I.R.B.369
Notices—Continued:
2003–11, 2003–6 I.R.B.422
2003–12, 2003–6 I.R.B.422
2003–13, 2003–8 I.R.B.513
2003–14, 2003–8 I.R.B.515
2003–15, 2003–9 I.R.B.540
2003–16, 2003–10 I.R.B.575
2003–17, 2003–12 I.R.B.633
2003–18, 2003–14 I.R.B.699
2003–19, 2003–14 I.R.B.703
2003–20, 2003–19 I.R.B.894
2003–21, 2003–17 I.R.B.817
2003–22, 2003–18 I.R.B.851
2003–23, 2003–17 I.R.B.821
2003–24, 2003–18 I.R.B.853
2003–25, 2003–18 I.R.B.855
2003–26, 2003–18 I.R.B.855
2003–27, 2003–19 I.R.B.898
2003–28, 2003–22 I.R.B.971
2003–29, 2003–20 I.R.B.917
2003–30, 2003–25 I.R.B.1044
2003–31, 2003–21 I.R.B.948
2003–32, 2003–21 I.R.B.949
2003–33, 2003–23 I.R.B.990
2003–34, 2003–23 I.R.B.990
2003–35, 2003–23 I.R.B.992
2003–36, 2003–23 I.R.B.992
2003–37, 2003–26 I.R.B.1121
Proposed Regulations:
REG–209500–86, 2003–2 I.R.B.262
REG–113007–99, 2003–23 I.R.B.1004
REG–104385–01, 2003–12 I.R.B.634
REG–116641–01, 2003–8 I.R.B.518
REG–125638–01, 2003–5 I.R.B.373
REG–126016–01, 2003–7 I.R.B.486
REG–126485–01, 2003–9 I.R.B.542
REG–164754–01, 2003–22 I.R.B.975
REG–103580–02, 2003–9 I.R.B.543
REG–124069–02, 2003–7 I.R.B.488
REG–131478–02, 2003–13 I.R.B.669
REG–138882–02, 2003–8 I.R.B.522
REG–139768–02, 2003–10 I.R.B.583
REG–141097–02, 2003–16 I.R.B.807
REG–141659–02, 2003–20 I.R.B.927
REG–142605–02, 2003–23 I.R.B.1010
REG–151043–02, 2003–3 I.R.B.300
REG–152524–02, 2003–22 I.R.B.979
REG–157302–02, 2003–24 I.R.B.1021
REG–164464–02, 2003–2 I.R.B.262
REG–103809–03, 2003–26 I.R.B.1132
Revenue Procedures:
2003–1, 2003–1 I.R.B.1
2003–2, 2003–1 I.R.B.76
2003–3, 2003–1 I.R.B.113
2003–4, 2003–1 I.R.B.123
2003–5, 2003–1 I.R.B.163
2003–6, 2003–1 I.R.B.191
2003–7, 2003–1 I.R.B.233
2003–8, 2003–1 I.R.B.236
2003–9, 2003–8 I.R.B.516
2003–10, 2003–2 I.R.B.259
2003–11, 2003–4 I.R.B.311
Revenue Procedures—Continued:
2003–12, 2003–4 I.R.B.316
2003–13, 2003–4 I.R.B.317
2003–14, 2003–4 I.R.B.319
2003–15, 2003–4 I.R.B.321
2003–16, 2003–4 I.R.B.359
2003–17, 2003–6 I.R.B.427
2003–18, 2003–6 I.R.B.439
2003–19, 2003–5 I.R.B.371
2003–20, 2003–6 I.R.B.445
2003–21, 2003–6 I.R.B.448
2003–22, 2003–10 I.R.B.577
2003–23, 2003–11 I.R.B.599
2003–24, 2003–11 I.R.B.599
2003–25, 2003–11 I.R.B.601
2003–26, 2003–13 I.R.B.666
2003–27, 2003–13 I.R.B.667
2003–28, 2003–16 I.R.B.759
2003–29, 2003–20 I.R.B.917
2003–30, 2003–17 I.R.B.822
2003–31, 2003–17 I.R.B.838
2003–32, 2003–16 I.R.B.803
2003–33, 2003–16 I.R.B.803
2003–34, 2003–18 I.R.B.856
2003–35, 2003–20 I.R.B.919
2003–36, 2003–18 I.R.B.859
2003–37, 2003–21 I.R.B.950
2003–38, 2003–24 I.R.B.1017
2003–39, 2003–22 I.R.B.971
2003–40, 2003–25 I.R.B.1044
2003–41, 2003–25 I.R.B.1047
2003–42, 2003–23 I.R.B.993
2003–43, 2003–23 I.R.B.998
2003–44, 2003–25 I.R.B.1051
Revenue Rulings:
2003–1, 2003–3 I.R.B.291
2003–2, 2003–2 I.R.B.251
2003–3, 2003–2 I.R.B.252
2003–4, 2003–2 I.R.B.253
2003–5, 2003–2 I.R.B.254
2003–6, 2003–3 I.R.B.286
2003–7, 2003–5 I.R.B.363
2003–8, 2003–3 I.R.B.290
2003–9, 2003–4 I.R.B.303
2003–10, 2003–3 I.R.B.288
2003–11, 2003–3 I.R.B.285
2003–12, 2003–3 I.R.B.283
2003–13, 2003–4 I.R.B.305
2003–14, 2003–4 I.R.B.302
2003–15, 2003–4 I.R.B.302
2003–16, 2003–6 I.R.B.401
2003–17, 2003–6 I.R.B.400
2003–18, 2003–7 I.R.B.467
2003–19, 2003–7 I.R.B.468
2003–20, 2003–7 I.R.B.465
2003–21, 2003–8 I.R.B.509
2003–22, 2003–8 I.R.B.494
2003–23, 2003–8 I.R.B.511
2003–24, 2003–10 I.R.B.557
2003–25, 2003–13 I.R.B.642
2003–26, 2003–10 I.R.B.563
2003–27, 2003–11 I.R.B.597
2003–28, 2003–11 I.R.B.594
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2002–26 through 2002–52 is
in Internal Revenue Bulletin 2003–1, dated January 6, 2003.
2003–27 I.R.B.iiJuly 7, 2003

Revenue Rulings—Continued:
2003–29, 2003–11 I.R.B.587
2003–30, 2003–13 I.R.B.659
2003–31, 2003–13 I.R.B.643
2003–32, 2003–14 I.R.B.689
2003–33, 2003–13 I.R.B.642
2003–34, 2003–17 I.R.B.813
2003–35, 2003–14 I.R.B.687
2003–36, 2003–18 I.R.B.849
2003–37, 2003–15 I.R.B.717
2003–38, 2003–17 I.R.B.811
2003–39, 2003–17 I.R.B.811
2003–40, 2003–17 I.R.B.813
2003–41, 2003–17 I.R.B.814
2003–42, 2003–16 I.R.B.754
2003–43, 2003–21 I.R.B.935
2003–44, 2003–18 I.R.B.848
2003–45, 2003–19 I.R.B.876
2003–46, 2003–19 I.R.B.878
2003–47, 2003–19 I.R.B.866
2003–48, 2003–19 I.R.B.863
2003–49, 2003–20 I.R.B.903
2003–50, 2003–21 I.R.B.944
2003–51, 2003–21 I.R.B.938
2003–52, 2003–22 I.R.B.960
2003–53, 2003–22 I.R.B.969
2003–54, 2003–23 I.R.B.982
2003–55, 2003–22 I.R.B.961
2003–56, 2003–23 I.R.B.985
2003–57, 2003–22 I.R.B.959
2003–58, 2003–22 I.R.B.959
2003–59, 2003–24 I.R.B.1014
2003–60, 2003–23 I.R.B.987
2003–61, 2003–24 I.R.B.1015
2003–62, 2003–25 I.R.B.1034
2003–63, 2003–25 I.R.B.1037
2003–64, 2003–25 I.R.B.1036
2003–65, 2003–25 I.R.B.1035
2003–66, 2003–26 I.R.B.1115
2003–67, 2003–26 I.R.B.1119
2003–68, 2003–26 I.R.B.1108
2003–69, 2003–26 I.R.B.1118
Tax Conventions:
Ann. 2003–21, 2003–17 I.R.B.846
Treasury Decisions:
9024, 2003–5 I.R.B.365
9025, 2003–5 I.R.B.362
9026, 2003–5 I.R.B.366
9027, 2003–6 I.R.B.413
9028, 2003–6 I.R.B.415
9029, 2003–6 I.R.B.403
9030, 2003–8 I.R.B.495
9031, 2003–8 I.R.B.504
9032, 2003–7 I.R.B.471
9033, 2003–7 I.R.B.483
9034, 2003–7 I.R.B.453
9035, 2003–9 I.R.B.528
9036, 2003–9 I.R.B.533
9037, 2003–9 I.R.B.535
9038, 2003–9 I.R.B.524
9039, 2003–10 I.R.B.561
9040, 2003–10 I.R.B.568
9041, 2003–8 I.R.B.510
9042, 2003–10 I.R.B.564
9043, 2003–12 I.R.B.611
9044, 2003–14 I.R.B.690
9045, 2003–12 I.R.B.610
Treasury Decisions—Continued:
9046, 2003–12 I.R.B.614
9047, 2003–14 I.R.B.676
9048, 2003–13 I.R.B.644
9049, 2003–14 I.R.B.685
9050, 2003–14 I.R.B.693
9051, 2003–16 I.R.B.755
9052, 2003–19 I.R.B.879
9053, 2003–20 I.R.B.914
9054, 2003–20 I.R.B.909
9055, 2003–21 I.R.B.945
9056, 2003–21 I.R.B.940
9057, 2003–22 I.R.B.964
9058, 2003–22 I.R.B.962
9059, 2003–26 I.R.B.1109
9060, 2003–26 I.R.B.1116
July 7, 2003iii2003–27 I.R.B.

Finding List of Current Actions
on Previously Published Items
2
Bulletins 2003–1 through 2003–26
Notices:
97–19
Modified by
Rev. Proc. 2003–1, 2003–1 I.R.B.1
97–32
Revoked by
T.D. 9058, 2003–22 I.R.B.962
2000–38
Modified by
Notice 2003–20, 2003–19 I.R.B.894
2001–26
Obsoleted by
T.D. 9032, 2003–7 I.R.B.471
2001–46
Modified by
Notice 2003–6, 2003–3 I.R.B.298
2001–69
Modified and superseded by
Notice 2003–1, 2003–2 I.R.B.257
2002–20
Superseded by
Rev. Proc. 2003–36, 2003–18 I.R.B.859
2002–27
Clarified by
Notice 2003–3, 2003–2 I.R.B.258
2002–40
Modified by
Ann. 2003–18, 2003–13 I.R.B.675
2002–46
Modified by
Notice 2003–10, 2003–5 I.R.B.369
Proposed Regulations:
REG–209500–86
Corrected by
Ann. 2003–6, 2003–6 I.R.B.450
REG–103829–99
Corrected by
Ann. 2003–12, 2003–10 I.R.B.585
REG–126485–01
Withdrawn by
REG–126485–01, 2003–9 I.R.B.542
Corrected by
Ann. 2003–25, 2003–17 I.R.B.846
REG–164754–01
Supplemented by
REG–164754–01, 2003–22 I.R.B.975
REG–131478–02
Corrected by
Ann. 2003–24, 2003–16 I.R.B.810
Proposed Regulations—Continued:
REG–143321–02
Corrected by
Ann. 2003–12, 2003–10 I.R.B.585
REG–164464–02
Corrected by
Ann. 2003–6, 2003–6 I.R.B.450
Revenue Procedures:
58–120
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
66–4
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
67–25
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
70–11
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
71–37
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
73–6
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
76–23
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
83–23
Supplemented by
Rev. Proc. 2003–21, 2003–6 I.R.B.448
84–37
Modified by
Rev. Proc. 2003–1, 2003–1 I.R.B.1
85–21
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
85–33
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
88–16
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
88–39
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
89–33
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
91–42
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
Revenue Procedures—Continued:
92–55
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
93–38
Obsoleted by
Rev. Proc. 2003–15, 2003–4 I.R.B.321
97–31
Modified by
Rev. Proc. 2003–9, 2003–8 I.R.B.516
98–13
Obsoleted by
T.D. 9032, 2003–7 I.R.B.471
98–55
Superseded by
Rev. Proc. 2003–43, 2003–23 I.R.B.998
2002–1
Superseded by
Rev. Proc. 2003–1, 2003–1 I.R.B.1
2002–2
Superseded by
Rev. Proc. 2003–2, 2003–1 I.R.B.76
2002–3
Superseded by
Rev. Proc. 2003–3, 2003–1 I.R.B.113
2002–4
Superseded by
Rev. Proc. 2003–4, 2003–1 I.R.B.123
2002–5
Superseded by
Rev. Proc. 2003–5, 2003–1 I.R.B.163
2002–6
Superseded by
Rev. Proc. 2003–6, 2003–1 I.R.B.191
2002–7
Superseded by
Rev. Proc. 2003–7, 2003–1 I.R.B.233
2002–8
Superseded by
Rev. Proc. 2003–8, 2003–1 I.R.B.236
2002–9
Modified and amplified by
Rev. Proc. 2003–20, 2003–6 I.R.B.445
Rev. Rul. 2003–3, 2003–2 I.R.B.252
Rev. Rul. 2003–54, 2003–23 I.R.B.982
Suspended in part by
Notice 2003–36, 2003–23 I.R.B.992
2002–20
Supplemented by
Rev. Proc. 2003–26, 2003–13 I.R.B.666
2002–22
Modified by
Rev. Proc. 2003–3, 2003–1 I.R.B.113
2002–29
Modified by
Rev. Proc. 2003–10, 2003–2 I.R.B.259
2
A cumulative list of current actions on previously
published items in Internal Revenue Bulletins
2002–26 through 2002–52 is in Internal Revenue
Bulletin 2003–1, dated January 6, 2003.
2003–27 I.R.B.ivJuly 7, 2003

Revenue Procedures—Continued:
2002–37
Modified by
Rev. Proc. 2002–34, 2002–18 I.R.B.856
2002–39
Modified by
Rev. Proc. 2002–34, 2002–18 I.R.B.856
2002–47
Modified and superseded by
Rev. Proc. 2003–44, 2003–25 I.R.B.1051
2002–51
Superseded by
Rev. Proc. 2003–31, 2003–17 I.R.B.838
2002–52
Modified by
Rev. Proc. 2003–1, 2003–1 I.R.B.1
2002–53
Superseded by
Rev. Proc. 2003–30, 2003–17 I.R.B.822
2002–57
Superseded by
Rev. Proc. 2003–28, 2003–16 I.R.B.759
2002–67
Supplemented by
Ann. 2003–3, 2003–4 I.R.B.361
2002–75
Superseded by
Rev. Proc. 2003–3, 2003–1 I.R.B.113
2003–3
Amplified by
Rev. Proc. 2003–14, 2003–4 I.R.B.319
2003–7
Corrected by
Ann. 2003–4, 2003–5 I.R.B396
2003–30
Corrected by
Ann. 2003–41, 2003–25 I.R.B.1098
Revenue Rulings:
53–131
Modified by
Rev. Rul. 2003–12, 2003–3 I.R.B.283
53–225
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
54–86
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
54–93
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
54–125
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
54–431
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
54–571
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
Revenue Rulings—Continued:
54–598
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
55–134
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
55–227
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
55–606
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
56–41
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
57–190
Obsoleted by
Rev. Rul. 2003–18, 2003–7 I.R.B.467
59–328
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
63–248
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
64–36
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
65–129
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
65–190
Revoked by
Rev. Rul. 2003–3, 2003–2 I.R.B.252
65–248
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
66–118
Distinguished by
Rev. Rul. 2003–41, 2003–17 I.R.B.814
66–270
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
66–383
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
67–121
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
67–197
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
68–345
Obsoleted by
Rev. Rul. 2003–54, 2003–23 I.R.B.982
69–372
Revoked by
Rev. Rul. 2003–3, 2003–2 I.R.B.252
Revenue Rulings—Continued:
70–140
Distinguished by
Rev. Rul. 2003–51, 2003–21 I.R.B.938
70–522
Distinguished by
Rev. Rul. 2003–51, 2003–21 I.R.B.938
71–310
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
73–232
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
74–126
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
76–561
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
77–53
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
78–157
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
78–169
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
79–70
Distinguished by
Rev. Rul. 2003–51, 2003–21 I.R.B.938
79–194
Distinguished by
Rev. Rul. 2003–51, 2003–21 I.R.B.938
81–245
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
85–37
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
85–50
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
86–88
Supplemented by
Rev. Rul. 2003–46, 2003–19 I.R.B.878
88–36
Supplemented by
Rev. Rul. 2003–46, 2003–19 I.R.B.878
92–19
Supplemented in part by
Rev. Rul. 2003–24, 2003–10 I.R.B.557
93–70
Obsoleted by
Rev. Rul. 2003–67, 2003–26 I.R.B.1119
2000–49
Modified and superseded by
Rev. Rul. 2003–49, 2003–20 I.R.B.903
July 7, 2003v2003–27 I.R.B.

Revenue Rulings—Continued:
2002–80
Distinguished by
Rev. Rul. 2003–43, 2003–21 I.R.B.935
2003–2
Revoked by
Rev. Rul. 2003–22, 2003–8 I.R.B.494
2003–50
Modified by
Ann. 2003–44, 2003–26 I.R.B.1144
Treasury Decisions:
9002
Corrected by
Ann. 2003–8, 2003–6 I.R.B.451
9021
Corrected by
Ann. 2003–16, 2003–12 I.R.B.641
9022
Supplemented by
Ann. 2003–7, 2003–6 I.R.B.450
Corrected by
Ann. 2003–11, 2003–10 I.R.B.585
9048
Corrected by
Ann. 2003–23, 2003–16 I.R.B.808
2003–27 I.R.B.viJuly 7, 2003

INDEX
Internal Revenue Bulletins
2003–1 through 2003–26
The abbreviation and number in paren-
thesis following the index entry refer to
the specific item; numbers in roman and
italic type following the parenthesis refer
to the Internal Revenue Bulletin in which
the item may be found and the page num-
ber on which it appears.
Key to Abbreviations:
AnnAnnouncement
CDCourt Decision
DODelegation Order
EOExecutive Order
PLPublic Law
PTEProhibited Transaction
Exemption
RPRevenue Procedure
RRRevenue Ruling
SPRStatement of Procedural
Rules
TCTax Convention
TDTreasury Decision
TDOTreasury Department Order
EMPLOYEE PLANS
Address for filing certain elections, state-
ments, returns and other documents
(Notice 19) 14,703
Advance letter rulings and determination
letters, areas which will not be issued
from:
Associate Chief Counsel (Interna-
tional) (RP 7) 1,233; correction
(Ann 4) 5,396
Associates Chief Counsel and Division
Counsel/Associate Chief Counsel
(TE/GE) (RP 3) 1,113
Collective-bargained welfare plans, listed
transactions (Notice 24) 18,853
Contacts with third parties for determina-
tion or collection of taxes (TD 9028)
6,415
Deferred compensation plan, withholding
and reporting requirements of eligible
plans (Notice 20) 19,894
Defined benefit plans, required minimum
distributions (Notice 2) 2,257
Determination letters:
Form 5310 revised (Ann 13) 11,603
EMPLOYEE PLANS—
Cont.
Future of the determination letter pro-
gram (Ann 32) 20,933
Issuing procedures (RP 6) 1,191
Employee Plans Compliance Resolution
System Correction program (RP 44) 25,
1051
Employee stock ownership plans, delayed
effective date, abuse (RR 6) 3,286
Form 5310, Application for Determina-
tion for Terminating Plan, revised (Ann
13) 11,603
Full funding limitations, weighted aver-
age interest rate for:
January 2003 (Notice 7) 4,310
February 2003 (Notice 14) 8,515
March 2003 (Notice 17) 12,633
April 2003 (Notice 23) 17,821
May 2003 (Notice 32) 21,949
June 2003 (Notice 30) 25,1044
Guidance Priority List, recommendations
for 2003–2004 (Notice 26) 18,855
Individual retirement arrangements:
Deemed IRAs (RP 13) 4,317
Required minimum distributions
(Notice 3) 2,258
Returned or recharacterized contribu-
tions, net income calculation for
(TD 9056) 21,940
Length-of-service award program (RR
47) 19,866
Letter rulings:
Determination letters and information
letters issued by Associates Chief
Counsel and Division Counsel/
Associate Chief Counsel (TE/GE)
(RP 1) 1,1
Information letters, etc. (RP 4) 1,123
Limitation on annual compensation, non-
discrimination (RR 11) 3,285
Nondiscrimination:
Cash balance plans (Ann 22) 17,846
Governmental plans (Notice 6) 3,298
Obsolete rulings (RR 67) 26,1119
Practice before the Internal Revenue Ser-
vice (Ann 5) 5,397
Proposed Regulations:
26 CFR 1.401(a)(4)–3,–9, revised;
1.411(b)–2, revised; reductions of
accruals and allocations because of
the attainment of any age; applica-
tion of nondiscrimination cross-
testing rules to cash balance plans
(REG–209500–86, REG–164464–
02) 2,262; correction (Ann 6)
6,450
EMPLOYEE PLANS—
Cont.
26 CFR 1.408(q)–1, added; deemed
IRAs in qualified retirement plans
(REG–157302–02) 24,1021
Qualified retirement plans:
Age discrimination (REG–209500–86,
REG–164464–02) 2,262; correc-
tion (Ann 6) 6,450
Amounts applied to pay health insur-
ance premiums or medical care
expenses, taxability of (RR 62) 25,
1034
Deemed IRAs (REG–157302–02) 24,
1021
Definition of early retirement benefits
and retirement-type subsidies, con-
tingent benefits (Notice 10) 5,369
Distributions, rollover, waiver of
60-day requirement (RP 16) 4,359
Loans to participants or beneficiaries
under section 72(p) (Ann 16) 12,
641
Minimum distributions, delayed
amendment date (RP 10) 2,259
Minimum vesting standards, frozen
plan (RR 65) 25,1035
Rate of future benefit accrual, significant
reduction (TD 9052) 19,879
Regulations:
26 CFR 1.72(p)–1; loans from a quali-
fied employer plan to plan partici-
pants or beneficiaries (TD 9021);
correction (Ann 16) 12,641
26 CFR 1.408–4, amended; 1.408–11,
added; 1.408A–5, revised; earnings
calculation for returned or recharac-
terized IRA contributions (TD 9056)
21,940
26 CFR 1.411(d)–6, removed;
54.4980F–1, added; 602.101,
amended; notice of significant
reduction in the rate of future benefit
accrual (TD 9052) 19,879
26 CFR 301.7602–2, added; third
party contacts (TD 9028) 6,415
Technical advice:
Proposed cash balance regulations,
age discrimination issues (Ann 1)
2,281
To directors and chiefs, appeals
offices, from Associates Chief
Counsel and Division Counsel/
Associate Chief Counsel (TE/GE)
(RP 2) 1,76
To IRS employees (RP 5) 1,163
July 7, 2003vii2003–27 I.R.B.

EMPLOYEE PLANS—
Cont.
Time for performance of acts when last
day falls on Saturday, Sunday, or legal
holiday (RR 41) 17,814
User fees, request for letter rulings (RP 8)
1,236
EMPLOYMENT TAX
Address for filing certain elections, state-
ments, returns and other documents
(Notice 19) 14,703
Contacts with third parties for determina-
tion or collection of taxes (TD 9028)
6,415
Corporations, employee leasing (Notice
22) 18,851
Deferred compensation plan, withholding
and reporting requirements of eligible
plans (Notice 20) 19,894
Disclosure of returns and return informa-
tion by other agencies (TD 9036) 9,
533
Federal Insurance Contributions Act
(FICA), retirement system membership,
continuing employment exception (RR
46) 19,878
Gaming Industry Tipping Agreement Pro-
gram (RP 35) 20,919
Guidance Priority List, recommendations
for 2003–2004 (Notice 26) 18,855
Length-of-service award program (RR
47) 19,866
Levy restrictions during installment
agreements (TD 9027) 6,413
Obsolete rulings (RR 67) 26,1119
Practice before the Internal Revenue Ser-
vice (Ann 5) 5,397
Proposed Regulations:
26 CFR 1.61–22, amended; 1.83–6,
amended; 1.301–1, amended; split-
dollar life insurance arrangements
(REG–164754–01) 22,975
Publications:
1141, General Rules and Specifica-
tions for Substitute Forms W–2 and
W–3, revised (RP 30) 17,822
1223, General Rules and Specifica-
tions for Substitute Forms W–2c and
W–3c, revised (RP 31) 17,838
EMPLOYMENT TAX—
Cont.
Regulations:
26 CFR 31.6011–4, added; 31.6011–
4T, removed; tax shelter regulations
(TD 9046) 12,614
26 CFR 301.6103(p)(2)(B)–1, added;
301.6103(p)(2)(B)–1T, removed;
602.101, amended; disclosure of
returns and return information by
other agencies (TD 9036) 9,533
26 CFR 301.6331–3,–4, added; levy
restrictions during installment agree-
ments (TD 9027) 6,413
26 CFR 301.7602–2, added; third
party contacts (TD 9028) 6,415
Reporting of tip income by gaming indus-
try employees, gaming industry tipping
agreement (RP 35) 20,919
Split-dollar life insurance arrangements
(REG–164754–01) 22,975
Substitute forms:
W–2 and W–3, general rules and
specifications (RP 30) 17,822
W–2c and W–3c, general rules and
specifications (RP 31) 17,838
Tax shelter regulations (TD 9046) 12,
614
Time for performance of acts when last
day falls on Saturday, Sunday, or legal
holiday (RR 41) 17,814
ESTATE TAX
Address for filing certain elections, state-
ments, returns and other documents
(Notice 19) 14,703
Contacts with third parties for determina-
tion or collection of taxes (TD 9028)
6,415
Disclosure of returns and return informa-
tion by other agencies (TD 9036) 9,
533
Guidance Priority List, recommendation
for 2003–2004 (Notice 26) 18,855
Levy restrictions during installment
agreements (TD 9027) 6,413
Life insurance, taxation for Louisiana
decedents (RR 40) 17,813
Obsolete rulings (RR 67) 26,1119
Practice before the Internal Revenue Ser-
vice (Ann 5) 5,397
Qualified family-owned business interest
(QFOBI), distribution in redemption of
stock (RR 61) 24,1015
ESTATE TAX—Cont.
Qualified personal residence trust (QPRT)
(RP 42) 23,993
Regulations:
26 CFR 20.6011–4, added; 20.6011–
4T, removed; tax shelter regulations
(TD 9046) 12,614
26 CFR 301.6103(p)(2)(B)–1, added;
301.6103(p)(2)(B)–1T, removed;
602.101, amended; disclosure of
returns and return information by
other agencies (TD 9036) 9,533
26 CFR 301.6331–3,–4, added; levy
restrictions during installment agree-
ments (TD 9027) 6,413
26 CFR 301.7602–2, added; third
party contacts (TD 9028) 6,415
Tax shelter regulations (TD 9046) 12,
614
Time for performance of acts when last
day falls on Saturday, Sunday, or legal
holiday (RR 41) 17,814
EXCISE TAX
Address for filing certain elections, state-
ments, returns and other documents
(Notice 19) 14,703
Communication services, distance sensi-
tivity (REG–141097–02) 16,807
Contacts with third parties for determina-
tion or collection of taxes (TD 9028)
6,415
Diesel fuel, blended taxable fuel (TD
9051) 16,755
Disclosure of returns and return informa-
tion by other agencies (TD 9036) 9,
533
Factoring discount of a structured settle-
ment factoring transaction, new form to
pay excise tax (Ann 33) 21,953
Forms:
8876, Excise Tax on Structured Settle-
ment Factoring Transactions (Ann
33) 21,953
Guidance Priority List, recommendations
for 2003–2004 (Notice 26) 18,855
Highway vehicle, definition; correction
(Ann 12) 10,585
Insurance premium excise tax, liability
for (TD 9024) 5,365
Levy restrictions during installment
agreements (TD 9027) 6,413
Obsolete rulings (RR 67) 26,1119
Practice before the Internal Revenue Ser-
vice (Ann 5) 5,397
2003–27 I.R.B.viiiJuly 7, 2003

EXCISE TAX—Cont.
Proposed Regulations:
26 CFR 41.4482(a)–1; 48.4041–8;
48.4051–1; 48.4072–1; 48.4081–1;
48.6421–4; 145.4051–1; definition
of highway vehicle (REG–103829–
99); correction (Ann 12) 10,585
26 CFR 49.4252–0, added; communi-
cations services, distance sensitivity
(REG–141097–02) 16,807
26 CFR Part 157, added; excise tax on
structured settlement factoring trans-
actions (REG–139768–02) 10,583
Regulations:
26 CFR 40.6302(c)–3, amended;
48.4041–21, amended; 48.4081–1,
–3, amended; 48.6427–8(d),
amended; 49.4291–1, amended; die-
sel fuel, blended taxable fuel (TD
9051) 16,755
26 CFR 46.4374–1, revised; liability
for insurance premium excise tax
(TD 9024) 5,365
26 CFR 53.6011–4, added; 53.6011–
4T, removed; 54.6011–4, added;
54.6011–4T, removed; 56.6011–4,
added; 56.6011–4T, removed; tax
shelter regulations (TD 9046) 12,
614
26 CFR 301.6103(p)(2)(B)–1, added;
301.6103(p)(2)(B)–1T, removed;
602.101, amended; disclosure of
returns and return information by
other agencies (TD 9036) 9,533
26 CFR 301.6331–3,–4, added; levy
restrictions during installment agree-
ments (TD 9027) 6,413
26 CFR 301.7602–2, added; third
party contacts (TD 9028) 6,415
26 CFR Part 157, added; 602.101,
amended; excise tax on structured
settlement factoring transactions
(TD 9042) 10,564
Scholarship grants by employer-related
private foundations, victim of qualified
disaster (RR 32) 14,689
Structured settlement factoring transac-
tions (TD 9042) 10,564; (REG–
139768–02) 10,583
Tax shelter regulations (TD 9046) 12,
614
Time for performance of acts when last
day falls on Saturday, Sunday, or legal
holiday (RR 41) 17,814
EXEMPT
ORGANIZATIONS
Address for filing certain elections, state-
ments, returns and other documents
(Notice 19) 14,703
Advance letter rulings and determination
letters, areas which will not be issued
from Associates Chief Counsel and
Division Counsel/Associate Chief
Counsel (TE/GE) (RP 3) 1,113
Application of small partnership excep-
tion to exempt organizations and for-
eign corporations (RR 69) 26,1118
Contacts with third parties for determina-
tion or collection of taxes (TD 9028)
6,415
Declaratory judgment under section
7428(c) (Ann 27) 18,862
Disclosure, political organizations (RR
49) 20,903
Dissolution clause requirements for sec-
tion 501(c)(3) entities seeking a section
115(1) letter ruling (RP 12) 4,316
Excess employer social security tax, abil-
ity for a social club described in section
501(c)(7) to claim credit (RR 64) 25,
1036
Form 990, Return of Organization
Exempt From Income Tax, U.S. posses-
sions, relief from filing (RP 21) 6,448
Guidance Priority List, recommendations
for 2003–2004 (Notice 26) 18,855
Insurance, commercial-type insurance
activities of certain exempt organiza-
tions (Notice 31) 21,948
International grant-making and activities
of 501(c)(3) organizations (Ann 29) 20,
928
Letter rulings:
Determination letters and information
letters issued by Associates Chief
Counsel and Division Counsel/
Associate Chief Counsel (TE/GE)
(RP 1) 1,1
Information letters, etc. (RP 4) 1,123
List of organizations classified as private
foundations (Ann 10) 7,490; (Ann 14)
11,603; (Ann 20) 15,750; (Ann 28)
19,899; (Ann 31) 20,930; (Ann 34)
21,953; (Ann 39) 24,1030; (Ann 42)
25,1104
Obsolete rulings (RR 67) 26,1119
Political organizations, disclosure and
reporting requirements (RR 49) 20,
903
EXEMPT
ORGANIZATIONS—
Cont.
Practice before the Internal Revenue Ser-
vice (Ann 5) 5,397
Private foundations, termination, transfer
of assets (RR 13) 4,305
Regulations:
26 CFR 301.7602–2, added; third
party contacts (TD 9028) 6,415
Reporting requirements, political organi-
zations (RR 49) 20,903
Restoration of organization, withdrawal
of Announcement 99–45 (Ann 30) 20,
929
Revocations, exempt organizations (Ann
26) 18,862
Scholarship grants by employer-related
private foundations, victim of qualified
disaster (RR 32) 14,689
Tax shelter regulations (TD 9046) 12,
614
Technical advice to:
Directors and chiefs, appeals offices,
from Associates Chief Counsel and
Division Counsel/Associate Chief
Counsel (TE/GE) (RP 2) 1,76
IRS employees (RP 5) 1,163
Time for performance of acts when last
day falls on Saturday, Sunday, or legal
holiday (RR 41) 17,814
U.S. possessions, relief from filing Form
990 (RP 21) 6,448
User fees, request for letter rulings (RP 8)
1,236
GIFT TAX
Address for filing certain elections, state-
ments, returns and other documents
(Notice 19) 14,703
Contacts with third parties for determina-
tion or collection of taxes (TD 9028) 6,
415
Disclosure of returns and return informa-
tion by other agencies (TD 9036) 9,
533
Guidance Priority List, recommendations
for 2003–2004 (Notice 26) 18,855
Obsolete rulings (RR 67) 26,1119
Practice before the Internal Revenue Ser-
vice (Ann 5) 5,397
July 7, 2003ix2003–27 I.R.B.

GIFT TAX—Cont.
Proposed Regulations:
26 CFR 1.61–22, amended; 1.83–6,
amended; 1.301–1, amended; spilt-
dollar life insurance arrangements
(REG–164754–01) 22,975
Qualified Personal Residence Trust
(QPRT) (RP 42) 23,993
Regulations:
26 CFR 25.6011–4, added; 25.6011–
4T, removed; tax shelter regulations
(TD 9046) 12,614
26 CFR 301.6103(p)(2)(B)–1, added;
301.6103(p)(2)(B)–1T, removed;
602.101, amended; disclosure of
returns and return information by
other agencies (TD 9036) 9,533
26 CFR 301.7602–2, added; third
party contacts (TD 9028) 6,415
Split-dollar life insurance arrangements
(REG–164754–01) 22,975
Tax shelter regulations (TD 9046) 12,
614
Time for performance of acts when last
day falls on Saturday, Sunday, or legal
holiday (RR 41) 17,814
INCOME TAX
Accident and health plans, amounts
received under (RR 43) 21,935
Accounting:
Application of normalization account-
ing rules to balances of excess
deferred income taxes and accumu-
lated deferred investment tax credits
(REG–104385–01) 12,634
Changes in accounting periods (RP 34)
18,856
Research and development expenses
(CD 2077) 19,868
Accrual of income (RR 10) 3,288
Accuracy-related penalty, defenses avail-
able to the imposition (REG–126016–
01) 7,486
Address for filing certain elections, state-
ments, returns and other documents
(Notice 19) 14,703
Advance letter rulings and determination
letters, areas which will not be issued
from:
Associate Chief Counsel (Interna-
tional) (RP 7) 1,233; correction
(Ann 4) 5,396
Associates Chief Counsel and Division
Counsel/Associate Chief Counsel
(TE/GE) (RP 3) 1,113
INCOME TAX—Cont.
Advance Pricing Agreement (APA) pro-
gram for 2002 (Ann 19) 15,723
Arrangements by purported insurance
companies to defer or recharacterize
ordinary income, alert to taxpayers
(Notice 34) 23,990
Backup withholding, taxpayer identifica-
tion numbers (TIN) (TD 9055) 21,945
Basis of redeemed stock when a distribu-
tion in redemption of stock is treated as
a dividend (Ann 9) 7,490
Capital expenditures, rotable spare parts,
depreciable assets (RR 37) 15,717
Capitalization of amounts paid to acquire,
create, or enhance intangible assets
(REG–125638–01) 5,373
Census Bureau, disclosure of tax informa-
tion (TD 9037) 9,535
Charitable contributions; patents (RR 28)
11,594
Combat zone personnel, tax relief (Notice
21) 17,817
Conservation Reserve Program (CRP),
cost-share payments (RR 59) 24,1014
Consolidated income tax return, common
parent as agent for consolidated group,
substitute agent, tentative carryback
adjustments (Ann 8) 6,451
Constructive sales:
Short sales, transition rule (RR 31) 13,
643
Treatment for appreciated financial
positions (RR 1) 3,291
Contacts with third parties for determina-
tion or collection of taxes (TD 9028)
6,415
Contingent liability transaction cases, list
of arbitrators (Ann 3) 4,361
Corporations:
Acquisitions:
Auto dealer expansion (RR 18) 7,
467
Employee leasing (Notice 22) 18,
851
Retail shoe store expansion (RR 38)
17,811
Transfer to controlled corporation,
successive transfers of property
and stock (RR 51) 21,938
Foreign tax credit limitation, dividends
from a noncontrolled section 902
corporation (Notice 5) 3,294
INCOME TAX—Cont.
S corporations:
Employee stock ownership plan
(ESOP):
Basis (RR 27) 11,597
IRA rollovers and S corporation
election (RP 23) 11,599
Spin-offs, stock distributions:
Business purpose requirement (RR
55) 22,961
Farming business (RR 52) 22,960
Statutory mergers and consolidations
(TD 9038) 9,524; (REG–126485–
01) 9,542; correction (Ann 25) 17,
846
Transactions involving deemed sale of
corporate assets under section 338,
new Form 8883 (Ann 2) 3,301
Cost-share payments, Agricultural Man-
agement Assistance Program (AMA)
(RR 15) 4,302
Costa Rican withholding taxes, noncredit-
ability (RR 8) 3,290
Credits:
Adoption credit (Notice 15) 9,540
Earned income credit:
Indian tribal government (Notice
28) 22,971
Prequalification of child eligibility
for (Ann 40) 26,1132
Update (TD 9045) 12,610
Education tax credit (TD 9034) 7,
453
Foreign taxpayers, disallowance of
deductions and credits for failure to
file timely return (TD 9043) 12,
611
Low-income housing credit:
2003 population figures used for
calculation (Notice 16) 10,575
Satisfactory bond,“bond factor”
amounts for the period:
January through March 2003 (RR
2) 2,251; correction (RR 22)
8,494
April through June 2003 (RR 44)
18,848
New markets tax credit (RR 20) 7,
465; extension of deadline (Notice
9) 5,369
Nonconventional source fuel credit,
inflation adjustment factor, reference
price for CY 2002 (Notice 27) 19,
898
2003–27 I.R.B.xJuly 7, 2003

INCOME TAX—Cont.
Renewable electricity production
credit, 2003 inflation adjustment
(Notice 29) 20,917
Damages for willful violations of the sec-
tion 363 automatic stay or the section
524 discharge provisions of the Bank-
ruptcy Code (TD 9050) 14,693
Declaratory judgment under section
7428(c) (Ann 27) 18,862
Deductions, commercial revitalization
expenditures, rehabilitated building (RP
38) 24,1017
Deferred compensation plan, withholding
and reporting requirements of eligible
plans (Notice 20) 19,894
Demutualization, corporate reorganiza-
tion and mergers:
Insurance companies (RR 19) 7,
468
Savings banks (RR 48) 19,863
Depreciation, gasoline pump canopies
(RR 54) 23,982
Disaster relief:
For taxpayers affected by the Septem-
ber 11, 2001, terrorist attack, exten-
sion for estates (Ann 18) 13,675
Payments, businesses (Notice 18) 14,
699
Disciplinary actions involving attorneys,
certified public accountants, enrolled
agents, and enrolled actuaries (Ann 15)
11,605
Disclosure of returns and return informa-
tion:
By other agencies (TD 9036) 9,533
Department of Agriculture (TD 9060)
26,1116; (REG–103809–03) 26,
1132
To designee of the taxpayer (TD 9054)
20,909
Election to treat trust as part of an estate
(TD 9032) 7,471
Electronic filing, furnishing and retaining
of returns filed by tax preparer (TD
9053) 20,914; (REG–141659–02) 20,
927
Electronic tax administration, guidance to
facilitate (TD 9040) 10,568
Entity exempt from income tax under sec-
tion 501(c)(15) (Notice 35) 23,
992
Estimated tax, application of the addition
to the tax for underpayment (RR 23) 8,
511
INCOME TAX—Cont.
Exclusion of gain from the sale or
exchange of a principal residence (TD
9030) 8,495
Executor, relief from joint and several
liability (RR 36) 18,849
Expedited mediation of tax-exempt bond
issues, pilot program (Ann 36) 25,
1093
Family day care, deduction of business
expenses, standard meal rates (RP 22)
10,577
Fast track:
Mediation of Small Business/Self-
Employed Compliance Division
(SB/SE) cases (RP 41) 25,1047
Settlement of Large and Mid-Size
Business Division (LMSB) cases
(RP 40) 25,1044
Federal Agency reporting requirements
under sections 6041A and 6050M (RR
66) 26,1115
Foreign personal holding company
income, commodities hedging and
interest-bearing liabilities (TD 9039)
10,561
Foreign trusts, retirement savings plans
(Notice 25) 18,855
Forms:
1096, 1098, 1099, 5498, W–2G, and
1042S, substitute form specifica-
tions (RP 28) 16,759
8023, extension to file election under
section 338 for certain acquisitions
(RP 33) 16,803
8883, Asset Allocation Statement
Under Section 338, new (Ann 2) 3,
301
Fuel costs, overrecovered (RR 39) 17,
811
Guidance Priority List, recommendations
for 2003–2004 (Notice 26) 18,855
Industry Issue Resolution (IIR) program
(RP 36) 18,859
Information reporting:
On Form 1099–B for securities futures
contracts (Notice 8) 4,310
Payment card transactions, information
reporting and backup withholding
(REG–116641–01) 8,518
Penalties, incorrect taxpayer identifica-
tion number (TIN), backup with-
holding (TD 9055) 21,945
INCOME TAX—Cont.
Requirements:
For qualified tuition and related
expenses under section 6059S,
filing information returns on
magnetic media (TD 9029) 6,
403
Under sections 6041A and 6050M
(RR 66) 26,1115
Taxable stock transactions, corporate
reorganizations, brokers (Ann 11)
10,585
Transition rules for acquisitions of
control and substantial changes in
capital structure (Ann 7) 6,450
Innocent spouse relief, nonrequesting
spouse administrative appeal rights (RP
19) 5,371
Insurance companies:
Corporate reorganization and mergers,
demutualization (RR 19) 7,468
Determination of effectively connected
income of foreign insurance compa-
nies (RR 17) 6,400
Interest rate tables (RR 24) 10,557
Loss payment patterns and discount
factors for the 2002 accident year
(RP 17) 6,427
Recomputed differential earnings rate
for 2000 and the differential earn-
ings rate for 2001 for mutual life
insurance companies (RR 4) 2,253
Salvage discount factors for the 2002
accident year (RP 18) 6,439
Interest:
Fair market value method of appor-
tionment of interest expense, docu-
mentation and information for using
(RP 37) 21,950
Investment:
Federal short-term, mid-term, and
long-term rates for:
January 2003 (RR 5) 2,254
February 2003 (RR 16) 6,401
March 2003 (RR 26) 10,563
April 2003 (RR 35) 14,687
May 2003 (RR 45) 19,876
June 2003 (RR 60) 23,987
Rates:
Farm real property, special use
value (RR 53) 22,969
Underpayments and overpayments,
quarter beginning:
April 1, 2003 (RR 30) 13,659
July 1, 2003 (RR 63) 25,1037
July 7, 2003xi2003–27 I.R.B.

INCOME TAX—Cont.
Inventory:
LIFO, price indexes used by depart-
ment stores for:
November 2002 (RR 9) 4,303
December 2002 (RR 21) 8,509
January 2003 (RR 33) 13,642
February 2003 (RR 42) 16,754
March 2003 (RR 50) 21,944; cor-
rection (Ann 44) 26,1144
April 2003 (RR 68) 26,1108
Valuation of vehicle parts cores (RP
20) 6,445
Late election relief for S corporations (RP
43) 23,998
Leave-based donation programs (Notice
1) 2,257
Length-of-service award program (RR
47) 19,866
Letter rulings, determination letters and
information letters issued by Associates
Chief Counsel and Division Counsel/
Associate Chief Counsel (TE/GE) (RP
1) 1,1
Levy restrictions during installment
agreements (TD 9027) 6,413
Liabilities assumed in certain transactions
(Ann 37) 24,1025
LIFO recapture installment payments
(Notice 4) 3,294
Like-kind exchanges, LKE programs (RP
39) 22,971
Loss transactions, exceptions (RP 24) 11,
599
Low-income taxpayer clinics, income tax
return preparer (TD 9026) 5,366
Medical expense deduction:
Cosmetic procedures (RR 57) 22,959
Medicines, supplies, and equipment
(RR 58) 22,959
Methods of accounting:
Adjustments (REG–142605–02) 23,
1010
Nonaccural experience (NAE) method
(Notice 12) 6,422
Modified guaranteed contracts (TD 9058)
22,962
Mortgage bonds and credit certificates,
median income figures—2003 (RP 29)
20,917
Noncompensatory partnership options
(REG–103580–02) 9,543
INCOME TAX—Cont.
Obsolete rulings (RR 67) 26,1119
Offshore Voluntary Compliance Initiative
(RP 11) 4,311
Partnerships:
Allocation of basis adjustments among
partnership assets (TD 9059) 26,
1109
Application of small partnership
exception to exempt organizations
and foreign corporations (RR 69)
26,1118
Basis adjustments upon the sale of a
corporate partner’s stock (TD 9049)
14,685
Like-kind exchanges, transaction
straddling two taxable years, tax
consequences (RR 56) 23,985
Regulated investment companies (RP
32) 16,803
Section 6038, returns required with
respect to controlled foreign partner-
ships (TD 9033) 7,483; (REG–
124069–02) 7,488
Payment card transactions, optional pro-
cedures for reporting requirements
under sections 6041 and 6041A (Notice
37) 26,1121
Practice before the Internal Revenue Ser-
vice (Ann 5) 5,397
Pre-Filing Agreement Program, annual
report for CY 2002, Large and Mid-
Size Business Division (Ann 43) 26,
1139
Presidentially declared disaster or combat
zone:
Combat zone personnel, tax relief
(Notice 21) 17,817
Gross income, disaster relief payments
(RR 12) 3,283
Major disaster and emergency areas
list (RR 29) 11,587
Private activity bonds:
2003 population figures used for cal-
culation (Notice 16) 10,575
Application of tests under section 141
to refunding issues (REG–113007–
99) 23,1004
Private foundations, organizations now
classified as (Ann 10) 7,490; (Ann 14)
11,603; (Ann 20) 15,750; (Ann 28)
19,899; (Ann 31) 20,930; (Ann 34)
21,953; (Ann 39) 24,1030; (Ann 42)
25,1104
INCOME TAX—Cont.
Proposed Regulations:
26 CFR 1.46–6, amended; 1.168(i)–3
added; application of normalization
accounting rules to balances of
excess deferred income taxes and
accumulated deferred investment tax
credits of public utilities whose gen-
eration assets cease to be public util-
ity property (REG–104385–01) 12,
634
26 CFR 1.61–8, revised; rents and roy-
alties (REG–151043–02) 3,300
26 CFR 1.61–22, amended; 1.83–6,
amended; 1.301–1, amended; split-
dollar life insurance arrangements
(REG–164754–01) 22,975
26 CFR 1.121–3, amended; reduced
maximum exclusion of gain from
sale or exchange of principal resi-
dence (REG–138882–02) 8,522
26 CFR 1.141–0,–1, amended; 1.141–
13, added; 1.141–15, amended;
1.145–0,–2, amended; 1.149(d)–1,
amended; 1.150–1, amended; obli-
gations of states and political subdi-
visions (REG–113007–99) 23,1004
26 CFR 1.167(a)–3, amended;
1.263(a)–4, added; 1.446–5, added;
guidance regarding deduction and
capitalization of expenditures
(REG–125638–01) 5,373
26 CFR 1.263A–7, revised; 1.448–1,
amended; administration simplifica-
tion of section 481(a) adjustment
periods in various regulations
(REG–142605–02) 23,1010
26 CFR 1.302–5, 1.304–3; redemp-
tions taxable as dividends (REG–
150313–01); correction (Ann 9) 7,
490
26 CFR 1.368–2, revised; statutory
mergers and consolidations (REG–
126485–01) 9,542; correction (Ann
25) 17,846
26 CFR 1.704–1,–3, amended;
1.721–2, added; 1.761–3, added;
1.1272–1, amended; 1.1273–2,
amended; 1.1275–4, amended; non-
compensatory partnership options
(REG–103580–02) 9,543
2003–27 I.R.B.xiiJuly 7, 2003

INCOME TAX—Cont.
26 CFR 1.1502–20,–32, amended;
amendment of waiver of loss carry-
overs from separate return limitation
years (REG–152524–02) 22,979
26 CFR 1.1502–21,–32, amended;
1.1502–35, added; guidance under
section 1502, suspension of losses
on certain stock dispositions (REG–
131478–02) 13,669; correction
(Ann 24) 16,810
26 CFR 1.6038–3, amended; returns
required with respect to controlled
foreign partnerships (REG–124069–
02) 7,488
26 CFR 1.6043–4; 1.6045–3; informa-
tion reporting relating to taxable
stock transactions (REG–143321–
02); correction (Ann 12) 10,585
26 CFR 1.6107–2, added; 1.6695–1,
amended; tax return preparers, elec-
tronic filing (REG–141659–02) 20,
927
26 CFR 1.6662–3, amended;
1.6664–0,–4, amended; establishing
defenses to the imposition of the
accuracy-related penalty (REG–
126016–01) 7,486
26 CFR 31.3406(g)–1, (j)–1, amended;
301.6724–1, amended; information
reporting and backup withholding
for payment card transactions
(REG–116641–01) 8,518
26 CFR 301.6103(j)(5)–1, added; dis-
closure of return information to the
Department of Agriculture (REG–
103809–03) 26,1132
Publications:
538, Accounting Periods and Methods,
revised (Ann 17) 15,722
1141, General Rules and Specifica-
tions for Substitute Forms W–2 and
W–3, revised (RP 30) 17,822; cor-
rection (Ann 41) 25,1098
1179, General Rules and Specifica-
tions for Substitute Forms 1096,
1098, 1099, 5498, W–2G, and
1042–S (RP 28) 16,759
1223, General Rules and Specifica-
tions for Substitute Forms W–2c and
W–3c, revised (RP 31) 17,838
Qualified census tracts, issuers of quali-
fied mortgage bonds and mortgage
credit certificates (RP 15) 4,321
INCOME TAX—Cont.
Qualified Payment Card Agent (QPCA),
proposed revenue procedure to request
a determination (Notice 13) 8,513
Qualified retirement plans, amounts
applied to pay health insurance premi-
ums or medical care expenses, taxabil-
ity of (RR 62) 25,1034
Regulations:
26 CFR 1.25A–0 through–5, added;
602.101, revised; education tax
credit (TD 9034) 7,453
26 CFR 1.32–2, amended; earned
income credit for taxable years
beginning after December 31, 1978
(TD 9045) 12,610
26 CFR 1.48–12, amended; 1.48–12T,
removed; 1.152–3, amended; 1.152–
3T, removed; 1.611–3, amended;
1.611–3T, removed; 1.852–9,
amended; 1.852–9T, removed;
301.6011–1, added; 301.6011–1T,
removed; 301.6903–1, amended;
301.6903–1T, removed; 602.101,
amended; guidance necessary to
facilitate electronic tax administra-
tion (TD 9040) 10,568
26 CFR 1.121–1 through–4, amended;
1.121–5, removed; 1.1398–3, added;
exclusion of gain from sale or
exchange of principal residence (TD
9030) 8,495
26 CFR 1.121–3T, added; reduced
maximum exclusion of gain from
sale or exchange of principal resi-
dence (TD 9031) 8,504
26 CFR 1.337(d)–5T, redesignated;
newly designated 1.337(d)–5,
amended; 1.337(d)–6, added;
1.337(d)–6T, removed; 1.337(d)–7,
added; 1.337(d)–7T, removed;
1.514(c)–2, amended; 602.101,
amended; certain transfers of prop-
erty to regulated investment compa-
nies (RICs) and real estate invest-
ment trusts (REITs) (TD 9047) 14,
676
26 CFR 1.368–2, revised; 1.368–2T,
added; statutory mergers and con-
solidations (TD 9038) 9,524
26 CFR 1.446–1, amended; 1.1502–
13, revised; intercompany transac-
tions: conforming amendments to
section 446 (TD 9025) 5,362
INCOME TAX—Cont.
26 CFR 1.641(b)–3, amended;
1.642(c)–1,–6A, revised; 1.645–1,
added; 1.671–4, amended; 1.6012–3,
amended; 1.6072–1, amended;
301.6109–1, amended; 602.101,
amended; election to treat trust as
part of an estate (TD 9032) 7,471
26 CFR 1.705–1,–2, amended; deter-
mination of basis of partner’s inter-
est, special rules (TD 9049) 14,685
26 CFR 1.755–1, amended; 1.755–2T,
removed; 1.1060–1, revised;
602.101, revised; allocation of basis
adjustments among partnership
assets and application of the residual
method to certain partnership trans-
actions (TD 9059) 26,1109
26 CFR 1.807–2, added; 1.811–3,
added; 1.812–9, added; 1.817A–0,
–1, added; guidance under section
817A regarding modified guaranteed
contracts (TD 9058) 22,962
26 CFR 1.874–1, revised; 1.874–1T,
removed; 1.882–4, revised; 1.882–
4T, removed; disallowance of
deductions and credits for failure to
file timely return (TD 9043) 12,
611
26 CFR 1.954–0,–2, amended; guid-
ance regarding the definition of for-
eign personal holding company
income (TD 9039) 10,561
26 CFR 1.1041–1T, amended;
1.1041–2, added; 602.101, amended;
constructive transfers and transfers
of property to a third party on behalf
of a spouse (TD 9035) 9,528
26 CFR 1.1502–20T,–32T, amended;
amendment of waiver of loss carry-
overs from separate return limitation
years (TD 9057) 22,964
26 CFR 1.1502–21, amended; 1.1502–
21T, revised; 1.1502–32, amended;
1.1502–32T, revised; 1.1502–35T,
added; 602.101, amended; guidance
under section 1502; suspension of
losses on certain stock dispositions
(TD 9048) 13,644
26 CFR 1.1502–21T,–32T,–35T, cor-
rected; suspension of losses on cer-
tain stock dispositions (TD 9048)
13,644; correction (Ann 23) 16,
808
26 CFR 1.1502–77T, 602.101; agent
for consolidated group (TD 9002);
correction (Ann 8) 6,451
July 7, 2003xiii2003–27 I.R.B.

INCOME TAX—Cont.
26 CFR 1.6011–4. added; 1.6011–4T,
removed; 301.6111–2, added;
301.6111–2T, removed; 301.6112–1,
added; 301.6112–1T, removed;
602.101, amended; tax shelter regu-
lations (TD 9046) 12,614
26 CFR 1.6038–3, amended; 1.6038–
3T, added; 602.101, amended;
returns required with respect to con-
trolled foreign partnerships (TD
9033) 7,483
26 CFR 1.6043–4T; information
reporting relating to taxable stock
transactions (TD 9022); correction
(Ann 11) 10,585
26 CFR 1.6050S–0, amended;
1.6050S–1, added; 301.6011–2,
amended; 602.101, amended; infor-
mation reporting for qualified tuition
and related expenses; magnetic
media filing requirements for infor-
mation returns (TD 9029) 6,403
26 CFR 1.6107–2T, added; 1.6695–1,
amended; 1.6695–1T, added; tax
return preparers, electronic filing
(TD 9053) 20,914
26 CFR 31.3406(d)–5, amended;
301.6724–1, amended, receipt of
multiple notices with respect to
incorrect taxpayer identification
numbers (TD 9055) 21,945
26 CFR 31.3406(j)–1, amended;
31.3406(j)–1T, added; Taxpayer
Identification Number (TIN) Match-
ing Program (TD 9041) 8,510
26 CFR 301.6103(c)–1, added;
301.6103(c)–1T, removed; 602.101,
revised; disclosure of returns and
return information to designee of
taxpayer (TD 9054) 20,909
26 CFR 301.6103(j)(1)–1, revised;
301.6103(j)(1)–1T, removed; disclo-
sure of return information to the
Bureau of the Census (TD 9037) 9,
535
26 CFR 301.6103(j)(5)–1, removed;
301.6103(j)(5)–1T, added; disclo-
sure of return information to the
Department of Agriculture (TD
9060) 26,1116
26 CFR 301.6103(n)–1, revised;
602.101, amended; amendment to
incorporate Taxpayer Browsing Pro-
tection Act (TD 9044) 14,690
INCOME TAX—Cont.
26 CFR 301.6103(p)(2)(B)–1, added;
301.6103(p)(2)(B)–1T, removed;
602.101, amended; disclosure of
returns and return information by
other agencies (TD 9036) 9,533
26 CFR 301.6331–3,–4, added; levy
restrictions during installment agree-
ments (TD 9027) 6,413
26CFR301.7426–2,added;
301.7430–1,–2,–3,–6, amended;
301.7430–8, added; 301.7433–1,
amended; 301.7433–2, added; civil
cause of action for damages caused
by unlawful tax collection actions,
including actions taken in violation
of section 362 or 524 of the Bank-
ruptcy Code (TD 9050) 14,693
26 CFR 301.7602–2, added; third
party contacts (TD 9028) 6,415
26 CFR 301.7701–15, amended; low-
income taxpayer clinics-definition of
income tax return preparer (TD
9026) 5,366
Rents and royalties, inclusion of advance
rentals in gross income (REG–151043–
02) 3,300
Reportable transactions, book-tax differ-
ences, exceptions (RP 25) 11,601
Restoration of organization, withdrawal
of Announcement 99–45 (Ann 30) 20,
929
Revocations, exempt organizations (Ann
26) 18862
Safe harbor for valuation of certain secu-
rities and commodities subject to fair
market valuation at year end under sec-
tion 475 (Ann 35) 21,956
Sale or exchange of a principal residence,
reduced maximum exclusion of gain
(TD 9031) 8,504;REG–138882–02,
8,522
Scholarship grants by employer-related
private foundations, victim of qualified
disaster (RR 32) 14,689
Section 911(d)(4) waiver, 2002 update
(RP 26) 13,666
Soil and Water Conservation Assistance
Program (SWCA) (RR 14) 4,302
Special estimated tax payments, guidance
for discontinuing the deduction (RR
34) 17,813
Split-dollar life insurance arrangements
(REG–164754–01) 22,975
Standard Industry Fare Level (SIFL) for-
mula (RR 25) 13,642
INCOME TAX—Cont.
State tax refunds, accrual of income
(RR 3) 2,252
Stocks:
Determination and recognition of gain
or loss (RR 7) 5,363
Guidance under section 1502, suspen-
sion of losses on certain stock dispo-
sitions (TD 9048) 13,644; correc-
tion (Ann 23) 16,808; (REG–
131478–02) 13,669; correction
(Ann 24) 16,810
Redemptions by a spouse or former
spouse during marriage or incident
to divorce (TD 9035) 9,528
Substitute forms:
W–2 and W–3, general rules and
specifications (RP 30) 17,822; cor-
rection (Ann 41) 25,1098
W–2c and W–3c, general rules and
specifications (RP 31) 17,838
1096, 1098, 1099, 5498, W–2G, and
1042S, rules and specifications (RP
28) 16,759
Tax conventions, Netherlands, treaty, pen-
sions (Ann 21) 17,846; correction
(Ann 38) 24,1029
Tax shelter registrations, effective date
(Notice 11) 6,422
Tax shelter regulations (TD 9046) 12,
614
Taxable stock transactions, corporate
reorganizations, brokers; correction
(Ann 12) 10,585
Taxicabs, information reporting for small
cash transactions (RP 27) 13,667
Taxpayer Browsing Protection Act, incor-
porated in amendment of 26 CFR
301.6103(n)(1) (TD 9044) 14,690
Taxpayer Indentification Number (TIN)
Matching Program:
Expanded to online matching for all
payors and authorized agents (RP 9)
8,516
Expansion (TD 9041) 8,510
Technical advice to:
Directors and chiefs, appeals offices,
from Associates Chief Counsel and
Divison Counsel/Associate Chief
Counsel (TE/GE) (RP 2) 1,76
IRS employees (RP 5) 1,163
Time for performance of acts when last
day falls on Saturday, Sunday, or legal
holiday (RR 41) 17,814
Timing rules of intercompany transaction
(TD 9025) 5,362
2003–27 I.R.B.xivJuly 7, 2003

INCOME TAX—Cont.
Transfers of property, regulated invest-
ment companies (RICs) and real estate
investment trusts (REITs) (TD 9047)
14,676
Trusts:
Election to treat trust as part of an
estate (Notice 33) 23,990
For minors, Indian Gaming Regulatory
Act (IGRA) (RP 14) 4,319
Uniform capitalization, simplified service
cost and production methods (Notice
36) 23,992
Waiver of loss carryovers from separate
return limitation years, amendment (TD
9057) 22,964; (REG–152524–02) 22,
979
SELF-EMPLOYMENT
TAX
Address for filing certain elections, state-
ments, returns and other documents
(Notice 19) 14,703
Contacts with third parties for determina-
tion or collection of taxes (TD 9028) 6,
415
Guidance Priority List, recommendations
for 2003–2004 (Notice 26) 18,855
Levy restrictions during installment
agreements (TD 9027) 6,413
Obsolete rulings (RR 67) 26,1119
Practice before the Internal Revenue Ser-
vice (Ann 5) 5,397
Regulations:
26 CFR 301.6331–3,–4, added; levy
restrictions during installment agree-
ments (TD 9027) 6,413
26 CFR 301.7602–2, added; third
party contacts (TD 9028) 6,415
Time for performance of acts when last
day falls on Saturday, Sunday, or legal
holiday (RR 41) 17,814
July 7, 2003xv*U.S. Government Printing Office 2003—496–919/600902003–27 I.R.B.

T:T:SP, Washington, DC 20224.