Internal Revenue Bulletin 2002-28 (PDF rendition): IRS Revenue Rulings

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

HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2002–41, page 75.
Health reimbursement arrangements (HRAs).This ruling
describes an employer-provided medical care expense reim-
bursement plan called a health reimbursement arrangement
(HRA), in which reimbursements for medical care expenses
made from the plan are excludable from employee gross
income. Among other things, the HRA described retains favor-
able tax treatment because it only reimburses employees or
former employees for medical care expenses of the employee
or former employee and their spouses and dependents; is
solely employer-funded and not paid for directly or indirectly
from salary reduction; and although it allows participants to
carry forward unused amounts for use in later coverage peri-
ods, these amounts may never be used for anything but reim-
bursements for qualified medical care expenses.
Rev. Rul. 2002–44, page 84.
Short sale of stock.This ruling provides guidance on the tim-
ing of recognition of gain or loss on a short sale when stock is
purchased to close the short sale using a regular-way sale.
T.D. 8999, page 78.
Final regulations under section 894 of the Code relate to the
eligibility for treaty benefits of items of income paid by domes-
tic entities that are not fiscally transparent under U.S. laws, but
are fiscally transparent under the laws of the jurisdiction of the
person claiming treaty benefits (domestic reverse hybrid enti-
ties).
T.D. 9000, page 87.
REG–103735–00; REG–110311–98, page 109.
Final, temporary, and proposed regulations under sections
6011, 6111, and 6112 of the Code modify the disclosure, reg-
istration, and list maintenance requirements relating to tax shel-
ters.
REG–107524–00, page 110.
Proposed regulations define whether an organization has a sig-
nificant trade or business of lending money under section
6050P of the Code for purposes of reporting discharges of
indebtedness. A public hearing is scheduled for October 8,
2002.
Notice 2002–45, page 93.
This notice describes the tax treatment of an employer-
provided medical care expense reimbursement plan called a
health reimbursement arrangement (HRA). The notice explains
that to maintain favorable tax treatment, HRAs may only reim-
burse employees or former employees for their medical care
expenses and their spouses’ and dependents’. This notice also
explains that the requirements for flexible spending arrange-
ments (FSAs) stated in section 125 of the Code are generally
not applicable to HRAs. In particular, an HRA may allow a plan
participant to carry forward unused reimbursement amounts to
be used for medical care expense reimbursements in later cov-
erage periods. Also, this notice explains that to retain exemp-
tion from the section 125 FSA requirements, the HRA must be
solely employer-funded and cannot be directly or indirectly paid
for pursuant to salary reduction election.
(Continued on the next page)
Announcements of Declaratory Judgment Proceedings Under Section 7428 begin on page 114.
Finding Lists begin on page ii.
Bulletin No. 2002–28
July 15, 2002

Notice 2002–50, page 98.
Partnership straddle tax shelter.This notice advises tax-
payers and their representatives that the described transac-
tion, which uses a straddle, a tiered partnership, a transitory
partner and the absence of a section 754 election to obtain a
permanent non-economic loss, is subject to challenge by the
Service on several grounds. The notice holds that the
described transaction is now a“listed transaction”and warns
of the potential penalties that may be imposed if taxpayers
claim losses from such a transaction.
EMPLOYEE PLANS
Rev. Rul. 2002–41, page 75.
Health reimbursement arrangements (HRAs).This ruling
describes an employer-provided medical care expense reim-
bursement plan called a health reimbursement arrangement
(HRA), in which reimbursements for medical care expenses
made from the plan are excludable from employee gross
income. Among other things, the HRA described retains favor-
able tax treatment because it only reimburses employees or
former employees for medical care expenses of the employee
or former employee and their spouses and dependents; is
solely employer-funded and not paid for directly or indirectly
from salary reduction; and although it allows participants to
carry forward unused amounts for use in later coverage peri-
ods, these amounts may never be used for anything but reim-
bursements for qualified medical care expenses.
Rev. Rul. 2002–42, page 76.
Merger or conversion; partial termination; notice.This
ruling describes a situation where a merger or conversion of a
money purchase pension plan into a profit-sharing plan is not a
partial termination of the money purchase pension plan and
also describes the type of notice that must be given to affected
plan participants. Rev. Rul. 94–76 amplified.
Notice 2002–45, page 93.
This notice describes the tax treatment of an employer-
provided medical care expense reimbursement plan called a
health reimbursement arrangement (HRA). The notice explains
that to maintain favorable tax treatment, HRAs may only reim-
burse employees or former employees for their medical care
expenses and their spouses’and dependents’. This notice also
explains that the requirements for flexible spending arrange-
ments (FSAs) stated in section 125 of the Code are generally
not applicable to HRAs. In particular, an HRA may allow a plan
participant to carry forward unused reimbursement amounts to
be used for medical care expense reimbursements in later cov-
erage periods. Also, this notice explains that to retain exemp-
tion from the section 125 FSA requirements, the HRA must be
solely employer-funded and cannot be directly or indirectly paid
for pursuant to salary reduction election.
Notice 2002–46, page 96.
Optional forms of benefit; section 645 of EGTRRA;
request for comments.This notice requests comments from
the public on proposed regulations that will be issued concern-
ing elimination of optional forms of benefit from defined benefit
plans.
Notice 2002–47, page 97.
Application of employment taxes to statutory stock
options.This notice provides that until Treasury and the Ser-
vice issue further guidance, in the case of a statutory stock
option, the Service will not assess the Federal Insurance Con-
tributions Act (FICA) tax or Federal Unemployment Tax Act
(FUTA) tax, or apply federal income tax withholding obligations,
upon either the exercise of the option or the disposition of the
stock acquired by an employee pursuant to the exercise of the
option.
EXCISE TAX
Rev. Rul. 2002–43, page 85.
Prohibited transactions; first tier excise tax calculations.
This ruling illustrates the calculation of the first tier prohibited
transactions excise taxes in the instance of the use of money
where there are multiple excise tax rates.
ADMINISTRATIVE
T.D. 9000, page 87.
REG–103735–00; REG–110311–98, page 109.
Final, temporary, and proposed regulations under sections
6011, 6111, and 6112 of the Code modify the disclosure, reg-
istration, and list maintenance requirements relating to tax shel-
ters.
Rev. Proc. 2002–43, page 99.
Agent for the group.This procedure provides instructions
relating to the determination of a substitute agent to act on
behalf of a consolidated group, pursuant to sections 1.1502–
77(d) or 1.1502–77A(d) of the regulations. Procedures are pro-
vided for automatic approval of requests by a terminating com-
mon parent to designate its qualifying successor as substitute
agent.
Rev. Proc. 2002–46, page 105.
Changes in accounting method; non-life insurance com-
panies; automatic consent.This procedure provides certain
non-life insurance companies with a safe harbor method of
accounting for premium acquisition expenses. This document
also provides a procedure for these insurance companies to
obtain automatic consent to change to this safe harbor
method. Rev. Proc. 2002–9 modified and amplified.
July 15, 20022002–28 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are consolidated semiannually into Cumulative Bulle-
tins, 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 Bul-
letin. All published rulings apply retroactively unless otherwise
indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal practices and procedures that affect the rights and duties
of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the rev-
enue ruling. In those based on positions taken in rulings to tax-
payers or technical advice to Service field offices, identifying
details and information of a confidential nature are deleted to
prevent unwarranted invasions of privacy and to comply with
statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.
Part III.—Administrative, Procedural, and
Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the first Bulletin of the succeeding semiannual
period, respectively.
The contents of this 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.
2002–28 I.R.B.July 15, 2002

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 105.—Amounts
Received Under Accident and
Health Plans
(Also §§ 106, 125.)
Health Reimbursement Arrange-
ments (HRAs). This ruling describes an
employer-provided medical care expense
reimbursement plan called a health reim-
bursement arrangement (HRA), in which
reimbursements for medical care
expenses made from the plan are exclud-
able from employee gross income.
Among other things, the HRA described
retains favorable tax treatment because it
only reimburses employees or former
employees for medical care expenses of
the employee or former employee and
their spouses and dependents; is solely
employer-funded and not paid for directly
or indirectly from salary reduction; and
although it allows participants to carry
forward unused amounts for use in later
coverage periods, these amounts may
never be used for anything but reimburse-
ments for qualified medical expenses.
Rev. Rul. 2002–41
ISSUE
Whether employer-provided coverage
and medical care expense reimbursements
made under a reimbursement arrangement
that allows unused amounts to be carried
forward, as described in Situations 1 and
2 below, are excludable from gross
income under §§ 106 and 105 of the
Internal Revenue Code, respectively.
FACTS
Situation 1: An employer sponsors a
major medical plan for all employees that
provides coverage under a policy of acci-
dent and health insurance for certain
medical care expenses described in
§ 213(d)(1)(A) and (B). The major medi-
cal plan has a $2,000 annual deductible
for employee-only coverage and a $4,000
annual deductible for family coverage.
However, certain preventive care benefits
(e.g., annual physicals and well-baby vis-
its) are covered without regard to the
plan’s deductible. The major medical plan
is paid for in part pursuant to salary
reduction elections under the employer’s
cafeteria plan. The election form provides
that salary reduction elections are used
only to pay for the major medical plan.
To participate in the major medical plan,
an employee must make a $1,000 annual
salary reduction election for employee-
only coverage or a $3,500 annual salary
reduction election for family coverage.
In addition to the major medical plan,
the employer also sponsors a health reim-
bursement arrangement (HRA) that reim-
burses the medical care expenses of all
participating employees and their spouses
and dependents up to an annual maximum
reimbursement amount that is fixed on
January 1 of each year. The HRA is avail-
able only to employees who participate in
the major medical plan. The HRA meets
the nondiscrimination requirements of
§ 105(h).
The HRA is paid for by the employer
and employees do not make any salary
reduction election to pay for the HRA.
The HRA operates on a calendar year
basis. Employees have no right to receive
cash or any benefit other than reimburse-
ment for medical care expenses under the
HRA.
The expenses reimbursable under the
HRA are any medical care expenses that
would be covered by the major medical
plan but for the major medical plan’s
deductible, limitation to expenses that are
“usual, customary and reasonable,” or
any other similar dollar limitation
imposed by the major medical plan. Only
expenses that are substantiated are reim-
bursed.
The maximum reimbursement amount
for the first year in which an employee
participates in the HRA is $1,000 for an
employee who has employee-only cover-
age under the major medical plan and
$2,000 for an employee who has family
coverage under the major medical plan.
Unused reimbursement amounts from one
year are carried forward for use in later
years. Therefore, in each year after the
first year, the maximum reimbursement
amount under the HRA equals $1,000 for
an employee who has employee-only
coverage under the major medical plan
and $2,000 for an employee who has
family coverage under the major medical
plan, increased by the unused amount
from the previous year. If an employee
retires or otherwise terminates employ-
ment, any unused reimbursement amount
remaining in the HRA is unavailable
thereafter.
Under the terms of the plans, a quali-
fied beneficiary who chooses to elect
COBRA continuation coverage may only
elect the HRA in conjunction with the
major medical plan. However, a qualified
beneficiary may choose to elect COBRA
continuation coverage for only the major
medical plan. The COBRA applicable
premium for continuation of the major
medical plan is $1,800 for employee-only
coverage and $4,500 for family coverage.
Situation 2: The facts are the same as
Situation 1, except that any portion of the
maximum reimbursement amount under
the HRA that is not applied to reimburse
medical care expenses before an
employee retires or otherwise terminates
employment continues to be available
after retirement or termination for any
medical care expense under § 213(d)(1)
(A), (B), and (D) incurred by the former
employee or the former employee’s
spouse and dependents. However, after
the employee retires or otherwise termi-
nates employment, the maximum reim-
bursement amount is not increased unless
COBRA continuation coverage is elected.
LAW AND ANALYSIS
Section 61(a)(1) and § 1.61–21(a)(3)
of the Income Tax Regulations provide
that, except as otherwise provided in sub-
title A, gross income includes compensa-
tion for services, including fees, commis-
sions, fringe benefits, and similar items.
Section 106 provides that “gross
income of an employee does not include
employer-provided coverage under an
accident or health plan.”
Section 1.106–1 provides that the
gross income of an employee does not
include contributions which the employ-
ee’s employer makes to an accident or
health plan for compensation (through
insurance or otherwise) to the employee
2002–28 I.R.B.75July 15, 2002

for personal injuries or sickness incurred
by the employee or the employee’s
spouse or dependents (as defined in
§152).
Section 105(a) provides that, except as
otherwise provided in§105,“amounts
received by an employee through acci-
dent or health insurance for personal inju-
ries or sickness shall be included in gross
income to the extent such amounts (1) are
attributable to contributions by the
employer which were not includible in
the gross income of the employee, or (2)
are paid by the employer.”
Section 105(e) states that amounts
received under an accident or health plan
for employees are treated as amounts
received through accident or health insur-
ance for purposes of§105 (and§104
relating to compensation for injuries and
sickness). Section 1.105–5(a) provides
that an accident or health plan is an
arrangement for the payment of amounts
to employees in the event of personal
injuries or sickness.
Section 105(b) states that except in the
case of amounts attributable to (and not in
excess of) deductions allowed under
§213 (relating to medical expenses) for
any prior taxable year, gross income does
not include amounts referred to in subsec-
tion (a) if such amounts are paid, directly
or indirectly, to the taxpayer to reimburse
the taxpayer for expenses incurred by the
taxpayer for the medical care (as defined
in§213(d)) of the taxpayer or the taxpay-
er’s spouse or dependents (as defined in
§152).
Section 1.105–2 provides that only
amounts that are paid specifically to reim-
burse the taxpayer for expenses incurred
by the taxpayer for the prescribed medical
care are excludable from gross income.
Thus,§105(b) does not apply to amounts
that the taxpayer would be entitled to
receive irrespective of whether or not the
taxpayer incurs expenses for medical
care.
Section 105(h)(1) provides that, unless
the plan satisfies the nondiscrimination
requirements of§105(h)(2), amounts
paid under a self-insured medical expense
reimbursement plan to a highly compen-
sated individual will not be excludable
from that individual’s gross income under
§105(b) to the extent they constitute
excess reimbursements.
Coverage provided under an accident
and health plan to former employees and
their spouses and dependents are exclud-
able from gross income under§106. See,
Rev. Rul. 82–196, 1982–2 C.B. 53; Rev.
Rul. 85–121, 1985–2 C.B. 57.
Under the facts described above, the
HRA is an employer-provided accident
and health plan used exclusively to reim-
burse expenses incurred for medical care
as defined under§213(d). Under the
HRA, no benefits other than reimburse-
ments for medical care expenses are
available either in the form of cash or
other non-taxable or taxable benefits at
any time.
For purposes of determining whether
any part of the salary reduction for the
major medical plan is attributable to the
HRA, under the facts and circumstances,
the applicable premium for COBRA con-
tinuation coverage may be used as the
actual cost of the major medical plan.
Under the facts described above, the
actual cost of the major medical plan for
one year is $1,800 for employee-only
coverage and $4,500 for family coverage.
The amount of salary reduction election
for employee-only coverage ($1,000) is
less than $1,800 and the amount of salary
reduction election for family coverage
($3,500) is less than $4,500. Also, the
cafeteria plan election form states that
salary reduction elections are used only to
pay for the major medical plan. Under
these facts and circumstances, the HRA
reimbursement amounts are not attribut-
able to the salary reduction contributions
made to pay for the major medical plan.
In Situation 2, the employer provides
accident and health coverage under the
HRA for former employees. This cover-
age is provided based on the former
employee’s prior employment relation-
ship with the employer. The HRA is used
to reimburse the former employee only
for medical care expenses of the former
employee or the former employee’s
spouse or dependents. Neither the former
employee nor the former employee’s
spouse or dependents receive any other
benefits from the HRA at any time.
HOLDING
Employer-provided coverage and
medical care expense reimbursements
made under the reimbursement arrange-
ment that allows unused amounts to be
carried forward, as described in Situations
1 and 2, are excludable from gross
income under§§106 and 105, respec-
tively.
See Notice 2002–45 published else-
where in this Internal Revenue Bulletin
for further information and guidance con-
cerning HRAs.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Lorianne D. Masano of the
Office of Division Counsel/Associate
Chief Counsel (Tax Exempt and Govern-
ment Entities). For further information
regarding this revenue ruling, contact
Lorianne D. Masano (202) 622–6080 (not
a toll-free call).
Section 401.—Qualified
Pension, Profit-Sharing, and
Stock Bonus Plans
(Also,§§411, 4980F; 26 CFR 1.411(d)–2.)
Rev. Rul. 2002–42
Merger or conversion; partial termi-
nation; notice. This ruling describes a
situation where a merger or conversion of
a money purchase pension plan into a
profit-sharing plan is not a partial termi-
nation of the money purchase pension
plan and also describes the type of notice
that must be given to affected plan par-
ticipants.
ISSUES
1. Whether, in the absence of other
facts indicating a partial termination, the
merger or conversion of a money pur-
chase pension plan into a profit-sharing
plan results in a partial termination of the
money purchase pension plan under
§411(d)(3) of the Internal Revenue Code
(the Code).
2. Whether the notice required by
§4980F of the Code and section 204(h)
of the Employee Retirement Income
Security Act of 1974, as amended
(ERISA) must be provided to affected
individuals in a money purchase pension
plan that is merged or converted into a
profit-sharing plan.
July 15, 2002762002–28 I.R.B.

FACTS
Situation 1. Employer J maintains a
money purchase pension plan qualifying
under§401(a) of the Code. The plan pro-
vides that upon a termination or partial
termination of the plan, all affected par-
ticipants will vest 100% in their account
balances. Employer J converts the money
purchase pension plan into a profit-
sharing plan that covers the same employ-
ees as the money purchase pension plan
and contains the same vesting schedule. It
also provides that assets and liabilities in
the profit-sharing plan that originated in
the money purchase pension plan retain
their money purchase pension plan
attributes, in accordance with Rev. Rul.
94–76, 1994–2 C.B. 46.
Situation 2. Employer L maintains a
money purchase pension plan qualifying
under§401(a). This plan provides that
upon a termination or partial termination
of the plan all affected participants will
vest 100% in their account balances.
Employer L also maintains a profit-
sharing plan qualifying under§401(a). L
amends the money purchase pension plan
to cease future employer contributions
and to merge it into the profit-sharing
plan in a transaction that satisfies the
requirements of§414(l). Following the
merger, the profit-sharing plan covers the
same employees and contains the same
vesting schedule as the money purchase
pension plan. Simultaneously, L amends
the profit-sharing plan to provide that
assets and liabilities transferred from the
money purchase pension plan to the
profit-sharing plan retain their money
purchase pension plan attributes, in accor-
dance with Rev. Rul. 94–76.
LAW AND ANALYSIS
Section 411(d)(3)
Section 411(d)(3) requires that a plan
provide that upon its termination or par-
tial termination the rights of all affected
parties accrued to the date of such termi-
nation or partial termination, to the extent
funded as of such date, or the amounts
credited to the employees’accounts, are
nonforfeitable.
Section 1.411(d)–2(b)(1) of the
Income Tax Regulations provides that
whether or not a partial termination of a
defined contribution or defined benefit
plan has occurred is dependent on the
facts and circumstances in a particular
case. Such facts and circumstances
include: the exclusion, by reason of a
plan amendment or severance by the
employer, of a group of employees who
have previously been covered by the plan;
and plan amendments which adversely
affect the rights of employees to vest in
benefits under the plan. Section 1.411(d)–
2(b)(2) contains a special rule providing
that if a defined benefit plan ceases or
decreases future benefit accruals under
the plan, a partial termination shall be
deemed to occur if, as a result of such
cessation or decrease, a potential rever-
sion to the employer maintaining the plan
(determined as of the date such cessation
or decrease is adopted) is created or
increased.
Section 1.401(a)–2(b) provides that a
plan may provide that upon the plan’s ter-
mination assets held in a§415 suspense
account may revert to the employer.
Section 1.415–6(b)(6) describes how
amounts in a§415 suspense account
must be allocated to participants before
any amount in the§415 suspense account
may revert to the employer on plan termi-
nation.
Rev. Rul. 85–6, 1985–1 C.B. 133, pro-
vides that a defined benefit plan that has
surplus resulting from actuarial error may
allow that surplus to revert to the
employer upon termination of the plan.
Rev. Rul. 80–155, 1980–1 C.B. 84,
provides that a profit-sharing, stock
bonus, or money purchase pension plan
(i.e., a defined contribution plan) will not
satisfy plan qualification requirements
unless all funds are allocated to partici-
pants’accounts under the plan in accor-
dance with a definite formula (although
certain exceptions are allowed, such as
the use of a suspense account in accor-
dance with the requirements of§415 of
the Code).
Rev. Rul. 94–76 provides that, under
§414(l), the transfer of assets and liabili-
ties from a money purchase pension plan
to a profit-sharing plan is considered a
spinoff of those assets and liabilities from
the money purchase pension plan and a
merger of those assets and liabilities with
the assets and liabilities of the profit-
sharing plan. The merger does not divest
the assets and liabilities of the money
purchase pension plan of their attributes
as money purchase pension plan assets
and liabilities. The holding in Rev. Rul.
94–76 is applicable when an employer
converts a money purchase pension plan
into a profit-sharing plan.
Thespecialruleprovidedin
§1.411(d)–2(b)(2) for determining
whether a partial termination has
occurred is limited to defined benefit
plans. The listed facts and circumstances
in§1.411(d)–2(b)(1) do not include the
creation of a potential reversion as a fac-
tor to be considered in determining
whether there has been a partial termina-
tion of a defined contribution plan.
Unlike a defined benefit plan, in a
defined contribution plan all assets must
be allocated to participants’accounts with
the exception of amounts held in a§415
suspense account. Therefore, on the ter-
mination of a defined contribution plan,
the only amounts that may revert to the
employer are amounts in a§415 sus-
pense account and then only to the extent
amounts in the§415 suspense account
are not required to be allocated as pro-
vided under§1.415–6(b)(6). In a defined
contribution plan, the cessation or reduc-
tion of benefit accruals does not create or
increase the potential for reversion.
Accordingly, the creation or increase of a
potential reversion is not a relevant fact
or circumstance in determining whether
there has been a partial termination in a
defined contribution plan as a result of
the cessation or reduction of benefit
accruals.
In Situations 1 and 2, all of the
employees who are covered by the con-
verted or merged money purchase plan
remain covered under the continuing
profit-sharing plan, the money purchase
plan assets and liabilities retain their char-
acterization under the profit-sharing plan,
and the employees vest in the continuing
profit-sharing plan under the same vest-
ing schedule that existed under the money
purchase plan. Under these facts and cir-
cumstances, no partial termination has
occurred.
2002–28 I.R.B.77July 15, 2002

Section 4980F of the Code and§204(h)
of ERISA
ERISA§204(h), as amended by
§659(b) of the Economic Growth and
Tax Relief Reconciliation Act of 2001,
Public Law 107–16 (EGTRRA), provides
that a defined benefit pension plan or an
individual account plan subject to the
funding standards of§412 of the Code
not be amended to provide a significant
reduction in the rate of future benefit
accrual unless the plan administrator pro-
vides a notice describing the reduction to
each affected individual whose benefit is
adversely affected by the reduction and to
each employee organization representing
these individuals.
Section 4980F, as added by§659(a) of
EGTRRA, provides for an excise tax if a
defined benefit pension plan or an indi-
vidual account plan subject to the funding
standards of§412 is amended to provide
a significant reduction in the rate of
future benefit accrual and the plan admin-
istrator does not provide a notice describ-
ing the reduction to each affected indi-
vidual whose benefit is adversely affected
by the reduction and to each employee
organization representing these individu-
als.
If a money purchase plan is converted
or merged into a profit-sharing plan, there
is necessarily a significant reduction in
the rate of future benefit accrual under the
money purchase plan requiring notice
under§4980F of the Code and§204(h)
of ERISA. Allocations under the profit-
sharing plan are not benefit accruals
under the money purchase plan for pur-
poses of determining if there is a reduc-
tion in the rate of future benefit accrual
for purposes of§4980F of the Code and
§204(h) of ERISA. A profit-sharing plan
is neither subject to§4980F of the Code
or§204(h) of ERISA. Consequently, a
notice is required to be given to affected
individuals under§4980F of the Code
and§204(h) of ERISA.
HOLDINGS
Issue 1. In the absence of other facts,
the merger or conversion of a money pur-
chase pension plan into a profit-sharing
plan does not result in a partial termina-
tion of the money purchase pension plan
under§411(d)(3) of the Code. Under
either the facts in Situation 1 or 2 there is
no partial termination.
Issue 2. The notice required by
§4980F of the Code and§204(h) of
ERISA must be provided to affected indi-
viduals in a money purchase pension plan
that is merged or converted into a profit-
sharing plan. Under the facts in either
Situation 1 or 2, the notice must be given
to affected individuals.
EFFECT ON OTHER REVENUE
RULINGS
Rev. Rul. 94–76 is amplified.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Andrew Zuckerman of the
Employee Plans, Tax Exempt and Gov-
ernment Entities Division. For further
information regarding this revenue ruling,
please contact the Employee Plans’tax-
payer assistance telephone service at
1–877–829–5500 (a toll-free number),
between the hours of 8:00 a.m. and 6:30
p.m. Eastern time, Monday through Fri-
day. Mr. Zuckerman may be reached at
1–202–283–9655 (not a toll-free number).
Section 411.—Minimum
Vesting Standards
26 CFR 1.411(d)–2: Termination or partial termina-
tion; discontinuance of contributions.
Whether, in the absence of other facts, the
merger or conversion of a money purchase pension
plan into a profit-sharing plan creates or increases a
potential for reversion that results in a partial termi-
nation of the money purchase pension plan. See
Rev. Rul. 2002–42, page 76.
Section 894.—Income
Affected by Treaty
26 CFR 1.894–1: Income affected by treaty.
T.D. 8999
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Treaty Guidance Regarding
Payments With Respect to
Domestic Reverse Hybrid
Entities
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations under section 894 relat-
ing to the eligibility for treaty benefits of
items of income paid by domestic entities
that are not fiscally transparent under
U.S. law but are fiscally transparent under
the laws of the jurisdiction of the person
claiming treaty benefits (domestic reverse
hybrid entities). The regulations affect the
determination of tax treaty benefits with
respect to U.S. source income of foreign
persons.
DATES:Effective Date: These regula-
tions are effective June 12, 2002.
Applicability Date: These regulations
are applicable to items of income paid by
a domestic reverse hybrid entity on or
after June 12, 2002, with respect to
amounts received by the domestic reverse
hybrid entity on or after June 12, 2002.
FOR FURTHER INFORMATION CON-
TACT: Elizabeth U. Karzon at (202) 622–
3880 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On February 27, 2001, the IRS and
Treasury published a notice of proposed
rulemaking (REG–107101–00, 2001–1
C.B 1083) in theFederal Register(66
FR 12445) under section 894 relating to
whether payments made by domestic
reverse hybrid entities to their interest
holders are eligible for benefits under
income tax treaties. A limited number of
comments responding to the notice of
proposed rulemaking were received. After
consideration of these comments, the pro-
posed regulations are adopted as final
regulations as revised by this Treasury
decision.
July 15, 2002782002–28 I.R.B.

Explanation of Provisions
I.General
These final section 894 regulations
clarify the availability of treaty benefits
on payments made by a domestic reverse
hybrid entity (DRH) to its interest hold-
ers. A DRH is a U.S. entity that the
United States treats as non-fiscally trans-
parent (e.g., as a corporation), but the
interest holder’s country treats as fiscally
transparent (e.g., as a partnership or
branch). These regulations are the final
piece of guidance associated with section
894 regulations finalized on July 3, 2000
(T.D. 8889, 2000–2 C.B. 124 [65 FR
40993]) (the“2000 regulations”), that
generally address the availability of treaty
benefits on items of U.S. source income
paid to hybrid entities (i.e., entities
treated as fiscally transparent by one
jurisdiction but non-fiscally transparent
by another).
The preamble to the 2000 regulations
noted that the IRS and Treasury had
learned that non-U.S. multinationals were
establishing DRH structures in the United
States to manipulate the U.S. tax treaty
network to obtain tax-advantaged financ-
ing. The IRS and Treasury notified the
public in that preamble that they intended
to issue regulations to address this situa-
tion.
Proposed regulations were issued on
February 27, 2001. The proposed regula-
tions provided guidance with respect to
two distinct issues involving domestic
reverse hybrid entities. First, to resolve a
technical question raised by commenta-
tors regarding the application of the 2000
regulations, the proposed regulations
clarified that a payment by a domestic
reverse hybrid entity to a foreign interest
holder may be eligible for treaty benefits.
No comments were received on this por-
tion of the proposed regulations, and the
rule in the proposed regulations is accord-
ingly adopted without change in these
final regulations.
The proposed regulations also
addressed certain structures involving
domestic reverse hybrid entities that Trea-
sury and the IRS believed represented the
use of such entities to obtain inappropri-
ate treaty benefits. The comments
received in response to this portion of the
proposed regulations generally confirmed
the need for regulations to address the use
of DRH structures by non-U.S. compa-
nies. One commentator wrote in its com-
ment that“regulations addressing the
DRH structure are appropriate.”The
commentator noted that DRH structures
are“relatively uncommon”with the
exception of their use by highly sophisti-
cated non-U.S. multinational groups to
procure acquisition financing at a tax-
advantaged rate vis-a-vis their U.S. com-
petitors.
Several commentators expressed con-
cern that the approach taken in the pro-
posed DRH regulations might erode the
simplicity achieved by the section 7701
entity classification rules, known as the
Check-the-Box (CTB) regulations. The
IRS and Treasury have carefully consid-
ered this comment, but continue to
believe that the approach in these final
regulations is appropriate. The regulations
only apply to a DRH structure established
by a group of taxpayers related to each
other by 80% common ownership. This
high ownership requirement minimizes
the possibility that a taxpayer might inad-
vertently establish such a structure. In
addition, the comments confirm that DRH
structures remain“relatively uncommon.”
Thus, any loss of the simplification ben-
efits of the CTB regulations also will be
relatively uncommon.
One commentator suggested that,
rather than adopt the approach in the
regulations, the IRS and Treasury should
pursue an approach under section 1503(d)
to directly address structures similar to,
and potentially including, the DRH that
rely on hybrid entity structures to deduct
the same interest expense in two jurisdic-
tions (commonly called a“double dip”of
interest deductions) to achieve tax-
advantaged financing. The commentator
expressed the view that the real concern
of the IRS and Treasury should be this
double dip on deductions, rather than the
tax treaty manipulation present in DRH
structures.
Treasury and the IRS agree that a
re-examination of the rules of section
1503(d) and the policies underlying those
rules may be appropriate. Such a
re-examination will require substantial
and careful analysis with respect to the
interaction of U.S. and foreign law in a
variety of contexts and is therefore
beyond the scope of these regulations,
which, as noted above, focus on the use
of DRH structures to obtain inappropriate
treaty benefits.
In this regard, the commentator mis-
construes the concern of the IRS and
Treasury with respect to the issues associ-
ated with the use of DRH structures.
Treasury and the IRS are concerned that
DRH structures are being established by
related parties to manipulate differences
in U.S. and foreign entity classification
rules to reduce, through inappropriate use
of an income tax treaty, the amount of tax
imposed on items of income paid by
domestic corporations to related foreign
companies. The overall effect of these
transactions, if respected, would be (1) a
deduction under U.S. law for the“out-
bound”payment of an item of income,
(2) the reduction or elimination of U.S.
withholding tax on that item of income
under an applicable treaty, and (3) the
imposition of little or no tax by the treaty
partner on the item of income. This result
is inconsistent with the expectation of the
United States and its treaty partners that
treaties should be used to reduce or elimi-
nate double taxation of income. The leg-
islative history of section 894(c) supports
this analysis. Congress specifically
expressed its concern about the use of
income tax treaties to manipulate the
inconsistencies between U.S. and foreign
tax laws to obtain similar benefits. See
H.R. Conf. Rep. No 220, 105th Cong., 1st
Sess. 573 (1997); Joint Committee on
Taxation, 105th Cong., 1st Sess., General
Explanation of Tax Legislation Enacted in
1997 (JCS–23–97), at 249 (December 17,
1997). The approach adopted by these
regulations also is consistent with the
U.S. view that contracting states to an
income tax treaty may adopt provisions in
their domestic laws to prevent inappropri-
ate use of the treaty. See,e.g., the Trea-
sury Department Technical Explanation to
Article 22 ( Limitation on Benefits) of the
1996 United States Model Income Tax
Convention. See also Commentaries to
Article 1 of the 2000 OECD Model Tax
Convention on Income and Capital;
S. Rep. No. 445, 100th Cong. 2d Sess.
322–23 (1988).
Another commentator questioned
Treasury’s authority for issuing the regu-
lations, arguing that the recharacterization
of an interest payment as a dividend pay-
ment may contravene the definition of
interest contained in various U.S. treaties.
2002–28 I.R.B.79July 15, 2002

The IRS and Treasury have concluded
that the regulations are consistent with
U.S. law, including U.S. treaties. These
final regulations are issued under the
authority of sections 894(a), 894(c), 7805
and 7701(l). Further, as noted above, con-
tracting states to an income tax treaty
may adopt provisions in their domestic
laws to counter inappropriate uses of the
treaty.Id.
II.Comments and Changes to§1.894–
1(d)(2)(ii)(B)(1): Payment Made to
Related Foreign Interest Holder
Section 1.894–1(d)(2)(ii)(B)(1)ofthe
proposed regulations provided a special
rule that was generally targeted at pay-
ments made by a domestic reverse hybrid
entity to a foreign parent of the domestic
reverse hybrid entity. This rule would
apply if: (1) a domestic subsidiary made a
payment to a domestic reverse hybrid
entity, the payment was considered to be
a dividend either under the laws of the
United States or under the laws of the
jurisdiction of the foreign parent of the
domestic reverse hybrid entity, and the
domestic reverse hybrid entity was
treated as a fiscally transparent, or“pass-
through,”entity under the foreign parent’s
laws; and (2) the domestic reverse hybrid
entity made a deductible payment to the
foreign parent that otherwise would
qualify for a treaty-based reduction in
U.S. withholding tax. Under these cir-
cumstances, the proposed regulations pro-
vided that the payment by the domestic
reverse hybrid entity would be treated as
a dividend for all purposes of the Internal
Revenue Code and the applicable income
tax treaty, but only to the extent of the
foreign parent’s proportionate share of the
prior dividend payments made to the
domestic reverse hybrid entity by the
domestic subsidiary.
Commentators recommended the
inclusion of a tax avoidance purpose test
in the final regulations. As part of this
approach, commentators suggested con-
sideration of several factors, including the
ability of the domestic reverse hybrid
entity to satisfy the debt independent of
dividends or payments from the domestic
entity, and the amount of time between
the time the related foreign interest
holder, the domestic reverse hybrid entity,
and the domestic entity became related
persons and the incurrence of the inter-
company debt. This recommendation was
not adopted. These regulations are
intended to provide objective rules
regarding eligibility for treaty benefits on
certain items of U.S. source income paid
by domestic reverse hybrid entities.
Commentators requested clarification
that paragraph (d)(2)(ii)(B) does not
apply to payments made by a domestic
reverse hybrid entity that would not be
subject to withholding tax without regard
to a treaty. Commentators are correct in
reading the regulations to provide that
paragraph (d)(2)(ii)(B) will not apply if
the payment made by the domestic
reverse hybrid entity is exempt from
withholding tax under the Internal Rev-
enue Code. Commentators also requested
clarification that the regulations apply
only to payments received by the domes-
tic reverse hybrid entity while it is related
to both the domestic entity and the related
foreign interest holder, and to payments
made by the domestic reverse hybrid
entity while it is related to the related for-
eign interest holder. The text of these
regulations also confirms this result.
Accordingly, no changes to the regula-
tions were considered necessary on either
of these points.
As a general matter, commentators
questioned whether paragraph (d)(2)(ii)
(B)(1) of the regulations applies to a situ-
ation in which the dividend withholding
rate under the applicable income tax
treaty is lower than the withholding rate
for interest under the treaty. The regula-
tions do not make the recharacterization
of the deductible payment dependent on
the withholding rates in the applicable
income tax treaty. Therefore, if the
requirements of the regulations are met,
the regulations will apply regardless of
whether the dividend withholding rate is
higher than the withholding rate for inter-
est or other deductible payments in the
applicable income tax treaty. An example
to this effect has been added to the final
regulations.
III.Comments and Changes to§1.894–
1(d)(2)(ii)(B)(3): Definition of Related
Paragraph (d)(2)(ii)(B)(3) of the pro-
posed regulations defined the termrelated
for purposes of determining whether a
domestic entity made a dividend payment
to a related domestic reverse hybrid
entity, and for purposes of determining
whether a domestic reverse hybrid entity
made a payment to a related foreign inter-
est holder. The ownership requirements
set forth in section 267(b) or 707(b)(1),
the constructive ownership rules of sec-
tions 318, and attribution rules of section
267(c) were used solely to determine
whether an entity was“related”for pur-
poses of paragraph (d)(2)(ii)(B); and not
to determine if the entity was an interest
holder.
Commentators consequently have
questioned whether corporations that do
not own any stock directly in the domes-
tic reverse hybrid entity, but are related to
the domestic reverse hybrid entity within
the meaning of paragraph (d)(2)(ii)(B)(3),
can be interest holders, and, therefore,
related foreign interest holders for pur-
poses of paragraph (d)(2)(ii)(B). For
example, commentators questioned
whether the regulations apply if a domes-
tic reverse hybrid entity, which has
received a dividend payment from a
related domestic entity, makes an interest
payment to a foreign sister corporation of
the domestic reverse hybrid entity which
is not itself a shareholder in the domestic
reverse hybrid entity. Commentators
believe that the application of the regula-
tions to a foreign sister corporation
should depend on whether that corpora-
tion is part of a“consolidated group”
under the laws of the jurisdiction of the
foreign parent.
The IRS and Treasury generally agree
with this position. Paragraph (d)(2)(ii)
(B)(ii) of the final regulations provides
that a payment to a person, wherever
organized, the income and losses of
which are available, under the laws of the
jurisdiction of the related foreign interest
holder, to offset the income and losses of
a related foreign interest holder, will be
treated as a payment to a related foreign
interest holder, and the regulations will
apply. Examples have been added to the
final regulations illustrating these prin-
ciples.
Paragraph (d)(2)(ii)(B)(3) of the pro-
posed regulations also contained a special
rule that would treat certain accommoda-
tion parties as related foreign interest
holders. Pursuant to the rule in the pro-
posed regulations, if a person entered into
a transaction with a domestic reverse
hybrid entity, its related interest holder, or
July 15, 2002802002–28 I.R.B.

other related entity, and the effect of the
transaction was to avoid the principles of
these regulations, then that person would
be treated as related to the domestic
reverse hybrid entity for purposes of this
section. Commentators expressed concern
that this language could encompass legiti-
mate dealings with unrelated third parties.
For example, an unrelated foreign bank
that makes a loan to a domestic reverse
hybrid entity and receives interest pay-
ments under the loan could be treated as
related to the domestic reverse hybrid
entity under paragraph (d)(2)(ii)(B)(3). In
recognition of the fact that the special
rule in paragraph (d)(2)(ii)(B)(3) was
potentially overbroad and created uncer-
tainty as to its application, the rule was
deleted.
IV.Comments and Changes to§1.894–
1(d)(2)(ii)(C): Commissioner’s
discretion.
Paragraph (d)(2)(ii)(C) of the proposed
regulations provided the Commissioner
with the authority to recharacterize, for
all purposes of the Internal Revenue
Code, all or part of any transaction (or
series of transactions) between related
parties if the effect of the transaction was
to avoid the principles of paragraph
(d)(2)(ii)(B). Commentators also ques-
tioned the scope of this provision and
requested the inclusion of examples of
situations in which the Commissioner
would not exercise his discretion and situ-
ations in which the Commissioner may
exercise his discretion. Commentators
were concerned that this provision would
allow the Commissioner to apply the
regulations to legitimate, non-abusive
transactions involving domestic reverse
hybrid entities.
In response to these comments, and in
recognition of the potentially overbroad
reach of the proposed provision, para-
graph (d)(2)(ii)(C) has been modified in
the final regulations to narrow its scope
and clarify the circumstances under
which the provision will apply. Thus,
under paragraph (d)(2)(ii)(C)(1)ofthe
final regulations (which applies to trans-
actions involving related parties), the
Commissioner has authority to recharac-
terize a transaction only if the following
conditions are met: (1) A deductible pay-
ment is made to a person who is related,
as that term is defined in paragraph
(d)(2)(ii)(B)(3), to the domestic reverse
hybrid entity (but is not otherwise
describedinparagraph(d)(2)(ii)(B)
(1)(ii)); and (2) that payment is made in
connection with one or more transactions
the effect of which is to avoid the appli-
cation of paragraph (d)(2)(ii)(B). If para-
graph (d)(2)(ii)(C)(1) applies, the Com-
missioner is authorized to treat the
deductible payment as if it were received
directly by the related foreign interest
holder in the domestic reverse hybrid
entity.
In addition, paragraph (d)(2)(ii)(C)(2)
of the final regulations (which applies to
transactions involving an unrelated
“middleman”) provides that the Commis-
sioner may treat a deductible payment
made by a domestic reverse hybrid entity
to an unrelated person as being made
directly to a related foreign interest holder
if: (1) the unrelated person (or other per-
son (whether related or not) which
receives a payment in a series of transac-
tions that includes a transaction involving
such unrelated person) makes a payment
to the related foreign interest holder (or
other person described in paragraph
(d)(2)(ii)(B)(1)(ii)); (2) the payment to
the unrelated person and the payment to
the related foreign interest holder are
made in connection with a series of trans-
actions which constitute a financing
arrangement, as defined in§1.881–
3(a)(2)(i); and (3) the transactions have
the effect of avoiding the application of
paragraph (d)(2)(ii)(B) of this section. An
example has been added to illustrate the
principles contained in this revised para-
graph (d)(2)(ii)(C)(2).
To the extent the Commissioner
recharacterizes a deductible payment as a
distribution within the meaning of section
301(a) under this paragraph (d)(2)(ii)(C),
the payment will be treated as such for all
purposes of the Internal Revenue Code
and the applicable income tax treaty.
Special Analysis
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 assess-
ment 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 these regula-
tions and, because these regulations do
not impose a collection of information
requirement on small entities, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Therefore, a Regulatory
Flexibility Analysis is not required. Pur-
suant to section 7805(f) of the Internal
Revenue Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business.
Drafting Information
The principal author of these regula-
tions is Karen A. Rennie-Quarrie of the
Office of the Associate Chief Counsel
(International). However, other personnel
from the IRS and Treasury Department
participated in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority for part 1
continues to read in part as follows:
Authority: 26 U.S.C. 7805***
Par.2.In§1.894–1, paragraphs
(d)(2)(ii) and (d)(2)(iii) are added and
paragraph (d)(6) is revised to read as fol-
lows:
§1.894–1 Income affected by treaty.
*****
(d)***
(2)***
(ii)Payments by domestic reverse
hybrid entities—(A)General rule. Except
as otherwise provided in paragraph
(d)(2)(ii)(B) of this section, an item of
income paid by a domestic reverse hybrid
entity to an interest holder in such entity
shall have the character of such item of
income under U.S. law and shall be con-
sidered to be derived by the interest
holder, provided the interest holder is not
fiscally transparent in its jurisdiction, as
defined in paragraph (d)(3)(iii) of this
section, with respect to the item of
income. In determining whether the inter-
est holder is fiscally transparent with
2002–28 I.R.B.81July 15, 2002

respect to the item of income under this
paragraph (d)(2)(ii)(A), the determination
under paragraph (d)(3)(ii) of this section
shall be made based on the treatment that
would have resulted had the item of
income been paid by an entity that is not
fiscally transparent under the laws of the
interest holder’s jurisdiction with respect
to any item of income.
(B)Payment made to related foreign
interest holder—(1)General rule.If—
(i) A domestic entity makes a payment
to a related domestic reverse hybrid entity
that is treated as a dividend under either
the laws of the United States or the laws
of the jurisdiction of a related foreign
interest holder in the domestic reverse
hybrid entity, and under the laws of the
jurisdiction of the related foreign interest
holder in the domestic reverse hybrid
entity, the related foreign interest holder
is treated as deriving its proportionate
share of the payment under the principles
of paragraph (d)(1) of this section; and
(ii) The domestic reverse hybrid entity
makes a payment of a type that is deduct-
ible for U.S. tax purposes to the related
foreign interest holder or to a person,
wherever organized, the income and
losses of which are available, under the
laws of the jurisdiction of the related for-
eign interest holder, to offset the income
and losses of the related foreign interest
holder, and for which a reduction in U.S.
withholding tax would be allowed under
an applicable income tax treaty; then
(iii) To the extent the amount of the
payment described in paragraph (d)(2)(ii)
(B)(1)(ii) of this section does not exceed
the sum of the portion of the payment
describedinparagraph(d)(2)(ii)
(B)(1)(i) of this section treated as derived
by the related foreign interest holder and
the portion of any other prior payments
described in paragraph (d)(2)(ii)(B)(1)(i)
of this section treated as derived by the
related foreign interest holder, the amount
of the payment described in (d)(2)(ii)
(B)(1)(ii) of this section will be treated
for all purposes of the Internal Revenue
Code and any applicable income tax
treaty as a distribution within the meaning
of section 301(a) of the Internal Revenue
Code, and the tax to be withheld from the
payment described in paragraph (d)(2)(ii)
(B)(1)(ii) of this section (assuming the
payment is a dividend under section
301(c)(1) of the Internal Revenue Code)
shall be determined based on the appro-
priate rate of withholding that would be
applicable to dividends paid from the
domestic reverse hybrid entity to the
related foreign interest holder in accor-
dance with the principles of paragraph
(d)(2)(ii)(A) of this section.
(2)Determining amount to be rechar-
acterized under paragraph (d)(2)(ii)(B)
(1)(iii). For purposes of determining the
amount to be recharacterized under para-
graph (d)(2)(ii)(B)(1)(iii) of this section,
the portion of the payment described in
paragraph (d)(2)(ii)(B)(1)(i) of this sec-
tion treated as derived by the related for-
eign interest holder shall be increased by
the portion of the payment derived by any
other person described in paragraph
(d)(2)(ii)(B)(1)(ii), and shall be reduced
by the amount of any prior section 301(c)
distributions made by the domestic
reverse hybrid entity to the related foreign
interest holder or any other person
described in paragraph (d)(2)(ii)(B)(1)(ii)
and by the amount of any payments from
the domestic reverse hybrid entity previ-
ously recharacterized under paragraph
(d)(2)(ii)(B)(1)(iii) of this section.
(3)Tiered entities. The principles of
this paragraph (d)(2)(ii)(B) also shall
apply to payments referred to in this para-
graph (d)(2)(ii)(B) made among related
entities when there is more than one
domestic reverse hybrid entity or other
fiscally transparent entity involved.
(4)Definition of related. For purposes
of this section, a person shall be treated as
related to a domestic reverse hybrid entity
if it is related by reason of the ownership
requirements of section 267(b) or
707(b)(1), except that the language“at
least 80 percent”applies instead of“more
than 50 percent,”where applicable. For
purposes of determining whether a person
is related by reason of the ownership
requirements of section 267(b) or
707(b)(1), the constructive ownership
rules of section 318 shall apply, and the
attribution rules of section 267(c) also
shall apply to the extent they attribute
ownership to persons to whom section
318 does not attribute ownership.
(C)Payments to persons not described
in paragraph (d)(2)(ii)(B)(1)(ii)—(1)
Related persons. The Commissioner may
treat a payment by a domestic reverse
hybrid entity to a related person (who is
neither the related foreign interest holder
nor otherwise described in paragraph
(d)(2)(ii)(B)(1)(ii) of this section), in
whole or in part, as being made to a
related foreign interest holder for pur-
poses of applying paragraph (d)(2)(ii)(B)
of this section, if—
(i) The payment to the related person
is of a type that is deductible by the
domestic reverse hybrid entity; and
(ii) The payment is made in connec-
tion with one or more transactions the
effect of which is to avoid the application
of paragraph (d)(2)(ii)(B) of this section.
(2)Unrelated persons. The Commis-
sioner may treat a payment by a domestic
reverse hybrid entity to an unrelated per-
son, in whole or in part, as being made to
a related foreign interest holder for pur-
poses of applying paragraph (d)(2)(ii)(B)
of this section, if—
(i) The payment to the unrelated per-
son is of a type that is deductible by the
domestic reverse hybrid entity;
(ii) The unrelated person (or other per-
son (whether related or not) which
receives a payment in a series of transac-
tions that includes a transaction involving
such unrelated person) makes a payment
to the related foreign interest holder (or
other person described in paragraph
(d)(2)(ii)(B)(1)(ii));
(iii) The foregoing payments are made
in connection with a series of transactions
which constitute a financing arrangement,
as defined in§1.881–3(a)(2)(i); and
(iv) The transactions have the effect of
avoiding the application of paragraph
(d)(2)(ii)(B) of this section.
(iii)Examples. The rules of this para-
graph (d)(2) are illustrated by the follow-
ing examples:
Example 1.Dividend paid by unrelated entity to
domestic reverse hybrid entity. (i)Facts. Entity A is
a domestic reverse hybrid entity, as defined in para-
graph (d)(2)(i) of this section, with respect to the
U.S. source dividends it receives from B, a domes-
tic corporation to which A is not related within the
meaning of paragraph (d)(2)(ii)(B)(4) of this sec-
tion. A’s 85-percent shareholder, FC, is a corpora-
tion organized under the laws of Country X, which
has an income tax treaty in effect with the United
States. A’s remaining 15-percent shareholder is an
unrelated domestic corporation. Under Country X
law, FC is not fiscally transparent with respect to the
dividend, as defined in paragraph (d)(3)(ii) of this
section. In year 1, A receives $100 of dividend
income from B. Under Country X law, FC is treated
as deriving $85 of the $100 dividend payment
received by A. The applicable rate of tax on divi-
dends under the U.S.-Country X income tax treaty is
5 percent with respect to a 10-percent or more cor-
porate shareholder.
July 15, 2002822002–28 I.R.B.

(ii)Analysis. Under paragraph (d)(2)(i) of this
section, the U.S.-Country X income tax treaty does
not apply to the dividend income received by A
because the payment is made by B, a domestic cor-
poration, to A, another domestic corporation. A
remains fully taxable under the U.S. tax laws as a
domestic corporation with regard to that item of
income. Further, pursuant to paragraph (d)(2)(i) of
this section, notwithstanding the fact that A is
treated as fiscally transparent with respect to the
dividend income under the laws of Country X, FC
may not claim a reduced rate of taxation on its share
of the U.S. source dividend income received by A.
Example 2.Interest paid by domestic reverse
hybrid entity to related foreign interest holder where
dividend is paid by unrelated entity. (i)Facts. The
facts are the same as inExample 1. Both the United
States and Country X characterize the payment by B
in year 1 as a dividend. In addition, in year 2, A
makes a payment of $25 to FC that is characterized
under the Internal Revenue Code as interest on a
loan from FC to A. Under the U.S.-Country X
income tax treaty, the rate of tax on interest is zero.
Under Country X laws, had the interest been paid by
an entity that is not fiscally transparent under Coun-
try X’s laws with respect to any item of income, FC
would not be fiscally transparent as defined in para-
graph (d)(2)(ii) of this section with respect to the
interest.
(ii)Analysis. The analysis is the same as in
Example 1with respect to the $100 payment from B
to A. With respect to the $25 payment from A to FC,
paragraph (d)(2)(ii)(B) of this section will not apply
because, although FC is a related foreign interest
holder in A, A is not related to B, the payor of the
dividend income it received. Under paragraph
(d)(2)(ii)(A) of this section, the $25 of interest paid
by A to FC in year 2 is characterized under U.S. law
as interest. Accordingly, in year 2, A is entitled to an
interest deduction with respect to the $25 interest
payment from A to FC, and FC is entitled to the
reduced rate of withholding applicable to interest
under the U.S.-Country X income tax treaty, assum-
ing all other requirements for claiming treaty ben-
efits are met.
Example 3.Interest paid by domestic reverse
hybrid entity to related foreign interest holder where
dividend is paid by a related entity. (i)Facts. The
facts are the same as inExample 2, except the $100
dividend income received by A in year 1 is from A’s
wholly-owned subsidiary, S.
(ii)Analysis. The analysis is the same as in
Example 1with respect to the $100 dividend pay-
ment from S to A. However, the $25 interest pay-
ment in year 2 by A to FC will be treated as a divi-
dend for all purposes of the Internal Revenue Code
and the U.S.-Country X income tax treaty because
$25 does not exceed FC’s share of the $100 divi-
dend payment made by S to A ($85). Since FC is not
fiscally transparent with respect to the payment as
determined under paragraph (d)(2)(ii)(A) of this sec-
tion, FC is entitled to the reduced rate applicable to
dividends under the U.S.-Country X income tax
treaty with respect to the $25 payment. Because the
$25 payment in year 2 is recharacterized as a divi-
dend for all purposes of the Internal Revenue Code
and the U.S.-Country X income tax treaty, A is not
entitled to an interest deduction with respect to that
payment and FC is not entitled to claim the reduced
rate of withholding applicable to interest.
Example 4.Definition of related foreign interest
holder. (i)Facts. The facts are the same as in
Example 3, except that A has two 50-percent share-
holders, FC1 and FC2. In year 2, A makes an inter-
est payment of $25 to both FC1 and FC2. FC1 is a
corporation organized under the laws of Country X,
which has an income tax treaty in effect with the
United States. FC2 is a corporation organized under
the laws of Country Y, which also has an income tax
treaty in effect with the United States. FP owns 100-
percent of both FC1 and FC2, and is organized
under the laws of Country X. Under Country X law,
FC1 is not fiscally transparent with respect to the
dividend, as defined in paragraph (d)(3)(ii) of this
section. Under Country X law, FC1 is treated as
deriving $50 of the $100 dividend payment received
by A because A is fiscally transparent under the laws
of Country X, as determined under paragraph
(d)(3)(iii) of this section. The applicable rate of tax
on dividends under the U.S.-Country X income tax
treaty is 5-percent with respect to a 10-percent or
more corporate shareholder. Under Country Y law,
FC2 is not treated as deriving any of the $100 divi-
dend payment received by A because, under the
laws of Country Y, A is not a fiscally transparent
entity.
(ii)Analysis. The analysis is the same as in
Example 1with respect to the $100 dividend pay-
ment from S to A. With respect to the $25 payment
in year 2 by A to FC1, the payment will be treated
as a dividend for all purposes of the Internal Rev-
enue Code and the U.S.-Country X income tax
treaty because FC1 is a related foreign interest
holderasdeterminedunderparagraph
(d)(2)(ii)(B)(4) of this section, and because $25 does
not exceed FC1’s share of the dividend payment
made by S to A ($50). FC1 is a related foreign
interest holder because FC1 is treated as owning the
stock of A owned by FC2 under section 267(b)(3).
Since FC1 is not fiscally transparent with respect to
the payment as determined under paragraph
(d)(2)(ii)(A) of this section, FC1 is entitled to the
5-percent reduced rate applicable to dividends under
the U.S.-Country X income tax treaty with respect
to the $25 payment. Because the $25 payment in
year 2 is recharacterized as a dividend for all pur-
poses of the Internal Revenue Code and the U.S.-
Country X income tax treaty, A is not entitled to an
interest deduction with respect to that payment.
Even though FC2 is also a related foreign interest
holder, the $25 interest payment by A to FC2 in year
2 is not recharacterized because A is not fiscally
transparent under the laws of Country Y, and FC2 is
not treated as deriving any of the $100 dividend
payment received by A. Thus, the U.S.-Country Y
income tax treaty is not implicated.
Example 5.Higher treaty withholding rate on
dividends. (i)Facts. The facts are the same as in
Example 3, except that under the U.S.-Country X
income tax treaty, the rate of tax on interest is
10-percent and the rate of tax on dividends is
5-percent.
(ii)Analysis. The analysis is the same as in
Example 1with respect to the $100 dividend pay-
ment from S to A. The analysis is the same as in
Example 3with respect to the $25 interest payment
in year 2 from A to FC.
Example 6.Foreign sister corporation the
income and losses of which may offset the income
and losses of related foreign interest holder. (i)
Facts. The facts are the same asExample 3, except
that in year 2, A makes the interest payment of $25
to FS, a subsidiary of FC also organized in Country
X. Under the laws of Country X, FS is not fiscally
transparent with respect to the interest payment, and
the income and losses of FS may be used to offset
the income and losses of FC.
(ii)Analysis. The analysis is the same as in
Example 1with respect to the $100 dividend pay-
ment from S to A. With respect to the $25 interest
payment from A to FS in year 2, FS is a person
described in paragraph (d)(2)(ii)(B)(1)(ii) of this
section because the income and losses of FS may be
used under the laws of Country X to offset the
income and losses of FC, the related foreign interest
holder that derived its proportionate share of the
payment from S to A. Therefore, paragraph
(d)(2)(ii)(B) of this section applies, and the $25
interest payment in year 2 by A to FS is treated as a
dividend for all purposes of the Internal Revenue
Code and the U.S.-Country X income tax treaty
because the $25 payment does not exceed FC’s
share of the $100 dividend payment made by S to A
($85). Since FS is not fiscally transparent with
respect to the payment as determined under para-
graph (d)(2)(ii)(A) of this section, FS is entitled to
obtain the rate applicable to dividends under the
U.S.-Country X income tax treaty with respect to
the $25 payment. Because the $25 payment in year
2 is recharacterized as a dividend for all purposes of
the Internal Revenue Code and the U.S.-Country X
income tax treaty, A is not entitled to an interest
deduction with respect to the payment and FS is not
entitled to claim the reduced rate of withholding
applicable to interest under the U.S.-Country X
income tax treaty.
Example 7.Interest paid by domestic reverse
hybrid entity to unrelated foreign bank. (i)Facts.
The facts are the same as inExample 3, except that
in year 2, A makes the interest payment of $25 to
FB, a Country Y unrelated foreign bank, on a loan
from FB to A.
(ii)Analysis. The analysis is the same as in
Example 1with respect to the $100 dividend pay-
ment from S to A. With respect to the payment from
A to FB, paragraph (d)(2)(ii)(B) of this section will
not apply because, although A is related to S, the
payor of the dividend income it received, A is not
related to FB under paragraph (d)(2)(ii)(B)(4) of this
section. Under paragraph (d)(2)(ii)(A) of this sec-
tion, the $25 interest payment made from A to FB in
year 2 is characterized as interest under the Internal
Revenue Code.
Example 8.Interest paid by domestic reverse
hybrid to an unrelated entity pursuant to a financing
arrangement. (i)Facts. The facts are the same as in
Example 7, except that in year 3, FB makes an inter-
est payment of $25 to FC on a deposit made by FC
with FB.
(ii)Analysis. The analysis is the same as in
Example 1with respect to the $100 dividend pay-
ment from S to A. With respect to the $25 payment
from A to FB in year 2, because the payment is
made in connection with a transaction that consiti-
tutes a financing arrangement within the meaning of
paragraph (d)(2)(ii)(C)(2) of this section, the pay-
ment may be treated by the Commissioner as being
made directly to FC. If the Commissioner disregards
2002–28 I.R.B.83July 15, 2002

FB, then the analysis is the same as inExample 3
with respect to the $25 interest payment in year 2
from A to FC.
Example 9.Royalty paid by related entity to
domestic reverse hybrid entity. (i)Facts. The facts
are the same as inExample 3, except the $100
income received by A from S in year 1 is a royalty
payment under both the laws of the United States
and the laws of Country X. The royalty rate under
the treaty is 10 percent and the interest rate is 0 per-
cent.
(ii)Analysis. The analysis as to the royalty pay-
ment from S to A is the same as inExample 1with
respect to the $100 dividend payment from S to A.
With respect to the $25 payment from A to FC,
paragraph (d)(2)(ii)(B) of this section will not apply
because the payment from S to A is not treated as a
dividend under the Internal Revenue Code or the
laws of Country X. Under paragraph (d)(2)(ii)(A) of
this section, the $25 of interest paid by A to FC in
year 2 is characterized as interest under the Internal
Revenue Code. Accordingly, in year 2, FC may
obtain the reduced rate of withholding applicable to
interest under the U.S.-Country X income tax treaty,
assuming all other requirements for claiming treaty
benefits are met.
*****
(6)Effective dates. This paragraph (d)
applies to items of income paid on or
after June 30, 2000, except paragraphs
(d)(2)(ii) and (d)(2)(iii) of this section
apply to items of income paid by a
domestic reverse hybrid entity on or after
June 12, 2002, with respect to amounts
received by the domestic reverse hybrid
entity on or after June 12, 2002.
*****
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved June 3, 2002.
Pamela F. Olsen,
Acting Assistant Secretary
of the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on June
11, 2002, 8:45 a.m., and published in the issue of
the Federal Register for June 12, 2002, 67 F.R.
40157)
Section 1233.—Gains and
Losses From Short Sales
26 CFR 1.1233–1: Gains and losses from short
sales.
The revenue ruling provides guidance on the
recognition of gain or loss on a short sale when
stock is purchased to close the short sale using a
regular-way sale. See Rev. Rul. 2002–44, on this
page.
Section 1259.—Constructive
Sales Treatment for
Appreciated Financial
Positions
(Also§1233; 26 CFR 1.1233–1.)
Short sale of stock. This ruling pro-
vides guidance on the timing of recogni-
tion of gain or loss on a short sale when
stock is purchased to close the short sale
using a regular-way sale.
Rev. Rul. 2002–44
ISSUE
If a taxpayer enters into a short sale of
stock and directs its broker to purchase
the stock sold short and close out the
short sale, when is a gain or a loss on the
short sale realized?
FACTS
Situation 1
In January of Year 1, TaxpayerT
directs its broker to borrow 100 shares of
XYZ stock and sell the 100 shares of
XYZ stock in the market (the Short Sale).
XYZ stock is traded on a registered secu-
rities exchange.Tdoes not own any
shares of XYZ stock. On December 31 of
Year 1, when the value of XYZ stock has
increased (and the value ofT’s short posi-
tion has depreciated)Tdirects its broker
to purchase 100 shares of XYZ stock to
close the Short Sale. The purchased XYZ
shares are delivered to the lender of the
XYZ stock on January 4 of Year 2. The
purchase of the XYZ stock on December
31 of Year 1 is a regular-way sale as
described in Rev. Rul. 93–84, 1993–2
C.B. 225, with December 31 of Year 1 as
the trade date and January 4 of Year 2 as
the settlement date.
Situation 2
The facts are the same as inSituation
1except that the XYZ stock has depreci-
ated in value and the Short Sale is closed
out at a gain.
LAW
Section 1.1233–1(a)(1) of the Income
Tax Regulations provides that, for income
tax purposes, a short sale is not deemed to
be consummated until delivery of prop-
erty to close the short sale. Under
§1.1233–1(a)(4), if the short sale is made
through a broker and the broker borrows
property to make a delivery, the short sale
is not deemed to be consummated until
the obligation of the seller created by the
short sale is finally discharged by deliv-
ery of property to the broker to replace
the property borrowed by the broker.
In the context of determining holding
period, Rev. Rul. 66–97, 1966–1 C.B.
190, states that both stocks and bonds
“are considered acquired or sold on the
respective‘trade dates.’”
Analogously, Rev. Rul. 93–84 holds
that the year of disposition for a regular-
way sale of stock traded on an established
securities market is the year that includes
the trade date. In Rev. Rul. 93–84, the
taxpayer placed a regular-way sale order
on stock with his broker on December 31,
1992, but the taxpayer did not deliver the
stock certificates or receive the proceeds
from the sale until January 8, 1993. The
revenue ruling holds that the year of dis-
position and realization is 1992.
Section 1259(a)(1) provides that if
there is a constructive sale of an appreci-
ated financial position, the taxpayer shall
recognize gain as if such position were
sold, assigned, or otherwise terminated at
its fair market value on the date of such
constructive sale. The term“appreciated
financialposition”isdefinedin
§1259(b)(1) to include any position with
respect to stock if there would be gain
were such position sold, assigned, or oth-
erwise terminated at its fair market value.
Theterm“position”isdefinedin
§1259(b)(3) to include a short sale. Pur-
suant to§1259(c)(1)(D), in the case of an
appreciated financial position that is a
short sale, a taxpayer is treated as having
July 15, 2002842002–28 I.R.B.

made a constructive sale of the appreci-
ated financial position if the taxpayer
acquires the same or substantially identi-
cal property.
ANALYSIS
Situation 1
Pursuant to§1.1233–1(a)(1), the Short
Sale is not consummated until the XYZ
stock is delivered to close the Short Sale.
AlthoughTis treated as having acquired
the XYZ stock on the trade date (seeRev.
Rul. 66–97;see alsoRev. Rul. 93–84),
the XYZ stock will not be delivered to
close the Short Sale until January 4 of
Year 2. Therefore,Tdoes not realize the
loss on the Short Sale until January 4 of
Year 2.
Situation 2
As inSituation 1,Tis treated as hav-
ing acquired the XYZ stock on the trade
date, December 31 of Year 1.SeeRev.
Rul. 66–97;see alsoRev. Rul. 93–84. At
that time, unlike inSituation 1, the price
of XYZ stock has decreased. Therefore,
the value ofT’s Short Sale has increased,
andTholds an appreciated financial posi-
tion within the meaning of§1259(b)(1),
that is, the short position. Section
1259(b)(3). Section 1259(c)(1)(D) pro-
vides that if a taxpayer holds an appreci-
ated financial position that is a short sale,
the acquisition of the same or substan-
tially identical stock is a constructive sale
transaction. Therefore,Thas entered into
a constructive sale transaction by acquir-
ing the same or substantially identical
stock as the stock underlying the Short
Sale. Pursuant to§1259(a)(1),Trealizes
gain on the Short Sale on December 31 of
Year 1.
HOLDING
(1) InSituation 1,Trealizes the loss
on the Short Sale on January 4 of Year 2,
the date the Short Sale is closed by deliv-
ery of the stock.
(2) InSituation 2,Thas constructively
sold the Short Sale on December 31 of
Year 1.Trealizes gain in Year 1 as ifT
had sold, assigned, or otherwise termi-
nated the Short Sale at its fair market
value on December 31 of Year 1.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Kate Sleeth of the Office of
Associate Chief Counsel (Financial Insti-
tutions and Products). For further infor-
mation regarding this revenue ruling, con-
tact Ms. Sleeth at (202) 622–3920 (not a
toll-free call).
Section 1502.—Regulations
(Consolidated Returns).
26 CFR 1.1502–77.—Agent for the group.
26 CFR 1.1502–77A.—Common parent agent for
subsidiaries applicable for consolidated return
years beginning before June 28, 2002.
The revenue procedure provides instructions
relating to the determination of a substitute agent to
act on behalf of a consolidated group, pursuant to
section 1.1502–77(d) or section 1.1502–77A(d).
Procedures are provided for automatic approval of
requests by a terminating common parent to desig-
nate its qualifying successor as substitute agent.See
§§1.1502–77(d) and 1.1502–77A(d), and Rev. Proc.
2002–43, page 99.
Section 4975:—Ta x O n
Prohibited Transactions
26 CFR 54.4975–1: General rules relating to excise
tax on prohibited transactions.
Rev. Rul. 2002–43
ISSUE
When a loan from a qualified plan that
is a prohibited transaction spans succes-
sive taxable years, and thus constitutes
multiple prohibited transactions, and dur-
ing those years the first tier prohibited
transaction excise tax rate under§4975
of the Internal Revenue Code changes,
how is the excise tax computed?
FACTS
X, Inc., is a Subchapter C corporation
that sponsors Plan Y, a calendar year
profitsharingplanqualifiedunder
§401(a) of the Internal Revenue Code.
Plan Y’s plan year is the calendar year.
On April 1, 1997, individual B, a dis-
qualified person with respect to Plan Y,
obtained a two-year loan in the amount of
$10,000 from Plan Y’s tax-exempt trust.
The loan was secured solely by B’s
account balance in Plan Y. At the time of
the loan, B’s account balance was
$12,000. According to the terms of the
loan, B was to make substantially equal
payments of principal and interest to Plan
Y’s trust on the first business day of
every calendar quarter. The interest rate
of the loan was 11%, compounded annu-
ally, which was equal to or greater than a
fair market rate of interest for such a loan
at that time. B made no payments on the
loan until December 31, 1999, at which
time B repaid the loan, including princi-
pal and accrued interest. The repayment
constituted a“correction”within the
meaning of§4975(f)(5) of the Code.
None of the Forms 5500 that were filed
for Plan Y for 1997, 1998, or 1999
reflected a loan to B.
LAW AND ANALYSIS
Section 4975(a) of the Internal Rev-
enue Code provides that an excise tax is
imposed as a result of each prohibited
transaction on any disqualified person
who participates in the prohibited transac-
tion (other than a fiduciary acting only as
such). Section 4975(c)(1)(B) of the Code
defines the term“prohibited transaction”
as including any direct or indirect lending
of money or other extension of credit
between a plan and a disqualified person.
Section 4975(d)(1) provides a statu-
tory exemption for a loan made to a dis-
qualified person who is a participant or
beneficiary of the plan if such loan (1) is
available to all such participants or ben-
eficiaries on a reasonably equivalent
basis; (2) is not made available to highly
compensated employees (within the
meaning of§414(q)) in an amount
greater than the amount made available to
other employees; (3) is made in accor-
dance with specific provisions regarding
such loans set forth in the plan; (4) bears
a reasonable rate of interest; and (5) is
adequately secured.
Under section 102(a) of Reorganiza-
tion Plan No. 4 of 1978 (43 F. R. 47713,
October 17, 1978, 1979–1 C.B. 480), the
Secretary of Labor has the authority to
issue regulations interpreting§4975
(d)(1) of the Code and the parallel provi-
sion in section 408(b)(1) of the Employee
Retirement Income Security Act of 1974
(“ERISA”). Under 29 C.F.R. 2550.408b–
1(f)(2) of the Department of Labor’s
2002–28 I.R.B.85July 15, 2002

regulations, a loan secured solely by more
than 50 percent of the present value of a
participant’s vested accrued benefit is not
adequately secured for purposes of deter-
mining whether the loan is exempt from
the prohibited transaction excise tax.
Section 1453(a) of the Small Business
Job Protection Act of 1996 increased the
first tier excise tax rate of§4975(a) of
the Code from 5% to 10% of the amount
involved for each year in the taxable
period for prohibited transactions occur-
ring after August 20, 1996. Section
1074(a) of the Taxpayer Relief Act of
1997 increased the first tier excise tax
rate to 15% of the amount involved for
each year in the taxable period for prohib-
ited transactions occurring after August 5,
1997. Section 4975(f)(2) of the Code
defines the term“taxable period”as the
period beginning with the date on which
the prohibited transaction occurs and end-
ing on the earliest of (1) the date of the
mailing of a statutory notice of defi-
ciency, (2) the date on which the first tier
excise tax is assessed, or (3) the date on
which correction of the prohibited trans-
action is completed. Section 4975(f)(4)
defines the term“amount involved,”with
respect to a prohibited transaction, as the
greater of (1) the amount of money and
the fair market value of the other property
given or (2) the amount of money and the
fair market value of the other property
received in such transaction. For purposes
of the first tier excise tax, the fair market
value is determined as of the date on
which the prohibited transaction occurs.
Section 141.4975–13 of the Temporary
Pension Excise Tax Regulations provides
that until superseded by permanent regu-
lations under paragraphs (4) and (5) of
§4975(f) of the Code,§53.4941(e)–1of
the Foundation Excise Tax Regulations
will be controlling to the extent those
regulations describe terms appearing both
in§4941(e) and§4975(f). The term
“amount involved”appears in both
§4941(e) and§4975(f).
Section 53.4941(e)–1(b)(2)(ii) of the
Foundation Excise Tax Regulations pro-
vides that, where the transaction involves
the use of money, the amount involved is
the greater of the amount paid for such
use or the fair market value of such use
for the period for which the money or
other property is used and the amount
involved is determined for the entire
period that the money is used. In addition,
§53.4941(e)–1(e)(1) provides that, in the
instance of a prohibited transaction that is
a loan, an additional prohibited transac-
tion is deemed to occur on the first day of
each taxable year in the taxable period
after the taxable year in which the loan
occurred.
The interest amount for each year
under the facts described above is com-
puted as follows:
YearPrincipalRateTime
Interest
Amount
1997 (4/1–12/31)$10,000.0011.00%275/365 year$ 828.77
1998$10,828.7711.00%1 year1,191.16
199912,019.9311.00%1 year1,322.19
Under the facts described above, and applying the rule in§53.4941(e)–1(e)(1), there are three prohibited transactions that result
from this loan. The first prohibited transaction occurs on the date of the loan (April 1, 1997), the second prohibited transaction
occurs on January 1,1998 (the first day of the next taxable year) and the third prohibited transaction occurs on January 1, 1999.
The taxable period for each of these prohibited transactions begins on the date that the prohibited transaction occurs (April 1, 1997,
for the first prohibited transaction, January 1, 1998, for the second prohibited transaction, and January 1, 1999, for the third pro-
hibited transaction). The taxable periods for all three prohibited transactions end on the date on which the prohibited transactions
were corrected (December 31, 1999). The amount involved for each prohibited transaction is the interest amount, as computed in
the preceding table, for the first taxable year in the taxable period for that prohibited transaction. Therefore, the first-tier prohibited
transaction excise tax for each prohibited transaction is computed as follows:
Year
1st Prohibited Transaction
Excise Tax
2nd Prohibited Transaction
Excise Tax
3rd Prohibited Transaction
Excise Tax
1997$ 828.77 x .10 = $ 82.88-----------------------------------------------------------------
1998828.77 x .10 =82.88$1,191.16 x .15 = $178.67--------------------------------
1999828.77 x .10 =82.88
1,191.16 x .15 = 178.67$1,322.19 x .15 = $198.33
1st tier tax$248.64$357.34$198.33
Total for All Prohibited Transactions = $804.31.
July 15, 2002862002–28 I.R.B.

HOLDING
When a loan from a qualified plan that
is a prohibited transaction spans succes-
sive taxable years, and thus constitutes
multiple prohibited transactions, and dur-
ing those years the first tier prohibited
transaction excise tax rate changes, the
first tier excise tax liability for each pro-
hibited transaction is the sum of the prod-
ucts resulting from multiplying the
amount involved for each year in the tax-
able period for that prohibited transaction
by the excise tax rate in effect at the
beginning of that taxable period.
Drafting Information
The principal author of this revenue
ruling is Michael Rubin of the Employee
Plans, Tax Exempt and Government Enti-
ties Division. For further information
regarding this revenue ruling, please con-
tact the Employee Plans’taxpayer assis-
tance telephone service at 1–877–829–
5500 (a toll-free number), between the
hours of 8:00 a.m. and 6:30 p.m. Eastern
Time, Monday through Friday. Mr. Rubin
can be reached at 1–202–283–9888 (not a
toll-free number).
Section 4980F.—Failure of
Applicable Plans Reducing
Benefit Accruals to Satisfy
Notice Requirements
Whether the notice required by section 4980F of
the Code and section 204(h) ERISA, as amended,
must be provided to the affected individuals in a
money purchase pension plan that is merged or con-
verted into a profit-sharing plan. See Rev. Rul.
2002–42, page 76.
Section 6011.—General
Requirement of Return,
Statement, or List
26 CFR 1.6011–4T: Requirement of statement dis-
closing participation in certain transactions by tax-
payers (Temporary).
T.D. 9000
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
Modification of Tax Shelter
Rules III
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: These regulations modify
the rules relating to the filing by certain
taxpayers of a statement with their Fed-
eral income tax returns under section
6011(a) and the registration of confiden-
tial corporate tax shelters under section
6111(d). These rules also affect the list
maintenance requirement under section
6112. These regulations affect taxpayers
participating in certain reportable transac-
tions, persons responsible for registering
confidential corporate tax shelters, and
persons responsible for maintaining lists
of investors in potentially abusive tax
shelters. The text of these regulations also
serves as the text of the proposed regula-
tions set forth in the notice of proposed
rulemaking (REG–103735–00; REG–
110311–98) on this subject on page 109
of this issue of the Bulletin.
DATES:Effective Date: These regula-
tions are effective June 14, 2002.
Applicability Date: For dates of appli-
cability,see§1.6011–4T(g)and
§301.6111–2T(h).
FOR FURTHER INFORMATION CON-
TACT: Danielle M. Grimm or Tara P.
Volungis, 202–622–3080 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these regulations have been pre-
viously reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduc-
tion Act of 1995 (44 U.S.C. 3507(d))
under control number 1545–1685.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid OMB control number.
Books and records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
This document amends 26 CFR parts 1
and 301 to provide modified rules relating
to the disclosure of reportable transac-
tions by certain individuals, trusts, part-
nerships, S corporations, and other corpo-
rations on their Federal income tax
returns under section 6011 and the regis-
tration of confidential corporate tax shel-
ters under section 6111.
On February 28, 2000, the IRS issued
temporary and proposed regulations
regarding section 6011 (T.D. 8877,
2000–1C.B.747;REG–103735–00,
2000–1 C.B. 770), section 6111 (T.D.
8876, 2000–1 C.B. 753; REG–110311–
98, 2000–1 C.B. 767), and section 6112
(T.D. 8875, 2000–1 C.B. 761; REG–
103736–00, 2000–1 C.B. 768) (collec-
tively, the February regulations). The
February regulations were published in
theFederal Register(65 FR 11205, 65
FR 11215, 65 FR 11211) on March 2,
2000. On August 11, 2000, the IRS issued
temporary and proposed regulations
regarding sections 6011, 6111, and 6112
(T.D. 8896, 2000–2 C.B. 249; REG–
103735–00, REG–110311–98, REG–
103736–00, 2000–2 C.B. 258) (collec-
tively, the August 2000 regulations). The
August 2000 regulations were published
in theFederal Register(65 FR 49909)
on August 16, 2000, modifying the Feb-
ruary regulations. On August 2, 2001, the
IRS issued temporary and proposed regu-
lations regarding sections 6011, 6111, and
6112 (T.D. 8961, 2001–35 I.R.B. 194;
REG–103735–00, REG–110311–98,
REG–103736–00, 2001–35 I.R.B. 204)
(collectively, the August 2001 regula-
tions). The August 2001 regulations were
published in theFederal Register(66 FR
2002–28 I.R.B.87July 15, 2002

41133) on August 7, 2001, further modi-
fying the February 2000 regulations.
The rules under sections 6011, 6111,
and 6112 are designed to provide the IRS
and Treasury with information needed to
evaluate potentially abusive transactions.
The IRS and Treasury have considered
and evaluated compliance with the disclo-
sure, registration, and list maintenance
requirements under sections 6011, 6111,
and 6112 and have determined that cer-
tain additional changes to the temporary
and proposed regulations are necessary to
improve compliance with the regulations
and to carry out the purposes of sections
6011, 6111, and 6112. The IRS and Trea-
sury continue to evaluate all the com-
ments and recommendations received.
Moreover, the IRS and Treasury intend to
make substantial additional changes to
the rules under sections 6011, 6111, and
6112 in order to establish a more effective
disclosure regime and to improve compli-
ance as announced in Treasury’s Plan to
Combat Abusive Tax Avoidance Transac-
tions (PO–2018), released on March 20,
2002. Seehttp://www.treas.gov/press/
releases/po2018.htm.
Explanation of Provisions
1.Application of§1.6011–4T to
Individuals, Trusts, Partnerships, and S
Corporations
Section 1.6011–4T generally provides
that certain corporate taxpayers must dis-
close their participation in listed and other
reportable transactions that meet the pro-
jected tax effect test by attaching a writ-
ten statement to their Federal income tax
returns. It has been determined that a
number of these transactions are entered
into by noncorporate taxpayers. Accord-
ingly, in order to obtain information
regarding potentially abusive transactions
entered into by noncorporate taxpayers,
therequirementtodiscloseunder
§1.6011–4T is extended to individuals,
trusts, partnerships, and S corporations
that participate, directly or indirectly, in
listed transactions. Thus, if a partnership
or an S corporation participates in a listed
transaction, that partnership or S corpora-
tion must disclose its participation under
§1.6011–4T and the partners and share-
holders of the partnership or S corpora-
tion, respectively, also must disclose their
participation under§1.6011–4T. The IRS
and Treasury plan to extend in future
guidance the requirement to disclose
under§1.6011–4T to other reportable
transactions entered into by individuals,
trusts, partnerships, and S corporations.
2.Indirect Participants
Section 1.6011–4T makes reference to
taxpayers who participate directly or indi-
rectly in reportable transactions. In order
to obtain information about potentially
abusive transactions entered into by tax-
payers, the IRS and Treasury have pro-
vided clarification regarding indirect par-
ticipation in a reportable transaction. A
taxpayer will have indirectly participated
in a reportable transaction if the taxpayer
knows or has reason to know that the tax
benefits claimed from the taxpayer’s
transaction are derived from a reportable
transaction. However, this clarification
does not imply that a taxpayer’s participa-
tion in a transaction did not otherwise
qualify as indirect participation in a
reportable transaction for purposes of
§1.6011–4T, as in effect prior to June 14,
2002.
For example, Notice 95–53 (1995–2
C.B. 334), describes a lease stripping
transaction in which one party (the trans-
feror) assigns the right to receive future
payments under a lease of tangible prop-
erty and receives consideration which the
transferor treats as current income. The
transferor later transfers the property sub-
ject to the lease in a transaction intended
to qualify as a substituted basis transac-
tion, for example, a transaction described
in section 351. In return, the transferor
receives stock (with low value and high
basis) from the transferee corporation.
The transferee corporation claims the
deductions associated with the high basis
property subject to the lease. The transf-
eror and transferee corporation have
directly participated in the listed transac-
tion. If the transferor subsequently trans-
fers the high basis/low value stock to a
taxpayer in another transaction intended
to qualify as a substituted basis transac-
tion and the taxpayer uses the stock to
generate a loss, and if the taxpayer knows
or has reason to know that the tax loss
claimed was derived from the lease strip-
ping transaction, then the taxpayer is indi-
rectly participating in a reportable trans-
action. Accordingly, the taxpayer must
disclose the reportable transaction and the
manner of the taxpayer’s indirect partici-
pation in the reportable transaction under
the provisions of§1.6011–4T.
3.Substantially Similar Transactions
Sections 1.6011–4T and 301.6111–2T
make reference tosubstantially similar
transactions. Some taxpayers and promot-
ers have applied thesubstantially similar
standard in an overly narrow manner to
avoid disclosure. For instance, some tax-
payers and promoters have made subtle
and insignificant changes to a listed trans-
action in order to claim that their transac-
tions are not subject to disclosure. Others
have taken the position that their transac-
tion is not substantially similar to a listed
transaction because they have an opinion
concluding that their transaction is proper.
The IRS and Treasury believe that these
interpretations are improper. Accordingly,
theregulationsaremodifiedin
§1.6011–4T and§301.6111–2T to
clarify that the termsubstantially similar
includes any transaction that is expected
to obtain the same or similar types of tax
benefits and that is either factually similar
or based on the same or similar tax strat-
egy. Further, the termsubstantially simi-
larmust be broadly construed in favor of
disclosure. This modification does not
imply that a transaction was not otherwise
the same as or substantially similar to a
listed transaction prior to this modifica-
tion.
For example, Notice 2000–44, 2000–2
C.B. 255, sets forth a listed transaction
involving offsetting options transferred to
a partnership where the taxpayer claims
basis in the partnership for the cost of the
purchased options but does not reduce
basis under section 752 as a result of the
partnership’s assumption of the taxpay-
er’s obligation with respect to the options.
Transactions using short sales, futures,
derivatives or any other type of offsetting
obligations to inflate basis in a partner-
ship interest would be the same as or sub-
stantially similar to the transaction
described in Notice 2000–44. Moreover,
use of the inflated basis in the partnership
interest to diminish gain that would other-
wise be recognized on the transfer of a
partnership asset would also be the same
as or substantially similar to the transac-
tion described in Notice 2000–44.
July 15, 2002882002–28 I.R.B.

As another example, Notice 2001–16,
2001–1 C.B. 730, sets forth a listed trans-
action involving a seller (X) who desires
to sell stock of a corporation (T), an inter-
mediary corporation (M), and a buyer (Y)
who desires to purchase the assets (and
not the stock) of T. M agrees to facilitate
the sale to prevent the recognition of the
gain that T would otherwise report.
Notice 2001–16 describes M as a member
of a consolidated group that has a loss
within the group or as a party not subject
to tax. Transactions utilizing different
intermediaries to prevent the recognition
of gain would be the same as or substan-
tially similar to the transaction described
in Notice 2001–16. An example is a
transaction in which M is a corporation
that does not file a consolidated return but
which buys T stock, liquidates T, sells
assets of T to Y, and offsets the gain rec-
ognized on the sale of those assets with
currently generated losses.
4.Projected Tax Effect Test for Listed
Transactions
Section 1.6011–4T provides that a
reportable transaction is a transaction that
meets the projected tax effect test and is
either a listed transaction or a transaction
that has at least two of five specified
characteristics. Under§1.6011–4T, the
projected tax effect test for listed transac-
tions is met if the taxpayer reasonably
estimates that the transaction will reduce
the taxpayer’s Federal income tax liability
by more than $1 million in any single tax-
able year or by a total of more than $2
million for any combination of taxable
years in which the transaction is expected
to have the effect of reducing the taxpay-
er’s Federal income tax liability. The IRS
and Treasury have determined that the
projected tax effect test for listed transac-
tions results in inadequate disclosure.
Accordingly, the projected tax effect test
will no longer apply to listed transactions.
Thus, any individual, trust, partnership, S
corporation, or other corporation that par-
ticipates in a listed transaction must
reportitundertheprovisionsof
§1.6011–4T.
5.Time of Providing Disclosure
In general, the disclosure statement for
a reportable transaction must be attached
to the taxpayer’s Federal income tax
return for each taxable year for which the
taxpayer’s Federal income tax liability is
affected by the taxpayer’s participation in
the transaction. In the case of a taxpayer
that is a partnership or an S corporation,
the disclosure statement for a listed trans-
action must be attached to the taxpayer’s
Federal income tax return for each tax-
able year ending with or within the tax-
able year of any partner or shareholder
whose income tax liability is affected or
is reasonably expected to be affected by
the partnership’s or the S corporation’s
participation in the transaction. In addi-
tion, at the same time that the disclosure
statement is first attached to the taxpay-
er’s Federal income tax return, the tax-
payer must file a copy of that disclosure
statement with the Office of Tax Shelter
Analysis.
If a transaction becomes a reportable
transaction (e.g., the transaction subse-
quently becomes one identified in pub-
lished guidance as a listed transaction
described in§1.6011–4T(b)(2), or there
is a change in facts affecting the expected
Federal income tax effect of the transac-
tion) on or after the date the taxpayer has
filed the return for the first taxable year
for which the transaction affected the tax-
payer’s or a partner’s or a shareholder’s
Federal income tax liability, the disclo-
sure statement must be filed as an attach-
ment to the taxpayer’s Federal income tax
return next filed after the date the transac-
tion becomes a reportable transaction
(whether or not the transaction affects the
taxpayer’s or any partner’s or sharehold-
er’s Federal income tax liability for that
year) and at that time a copy of that dis-
closure statement must be filed with the
Office of Tax Shelter Analysis. Notwith-
standing the effective date of these regu-
lations, for purposes of§1.6011–4T,asin
effect prior to June 14, 2002, a corporate
taxpayer was required to disclose a trans-
action that later became reportable on the
corporation’s next filed Federal income
tax return even if the transaction did not
affect the corporation’s Federal income
tax liability for that year.
Regardless of whether the taxpayer
plans to disclose the transaction under
other published guidance, for example,
Rev. Proc. 94–69, 1994–2 C.B. 804, the
taxpayer also must disclose the transac-
tion in the time and manner provided for
under the provisions of this regulation.
Notwithstanding the effective date of
these regulations, a corporate taxpayer
was required to disclose a transaction in
the time and manner provided for in
§1.6011–4T in effect prior to June 14,
2002, regardless of whether the taxpayer
planned to disclose the transaction under
other published guidance.
Effective Dates
The regulations are applicable June 14,
2002.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these 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 time required to prepare
or retain the disclosure is minimal and
will not have a significant impact on
those small entities that are required to
provide disclosure. Therefore, a Regula-
tory Flexibility Analysis under the Regu-
latory Flexibility Act (5 U.S.C. chapter 6)
is not required. Pursuant to section
7805(f) of the Internal Revenue Code,
these regulations will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business.
Drafting Information
The principal authors of these regula-
tions are Danielle M. Grimm and Tara P.
Volungis, Office of the Associate Chief
Counsel (Passthroughs and Special Indus-
tries). However, other personnel from the
IRS and Treasury Department partici-
pated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 301
are amended as follows:
2002–28 I.R.B.89July 15, 2002

PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805***
Par. 2. Section 1.6011–4T is amended
as follows:
1. The heading of§1.6011–4T is
amended by removing the language“cor-
porate”.
2. The heading of paragraph (a) is
revised.
3. Paragraph (a) is amended by adding
“(1)In general.”after the heading.
4. Newly designated paragraph (a)(1)
is amended by adding the language“cor-
porate”before“taxpayer”in the first sen-
tence, and by removing the second sen-
tence and adding three new sentences in
its place.
5. Paragraphs (a)(2) and (a)(3) are
added.
6. Paragraph (b)(1) is amended by
revising the first sentence.
7. Paragraphs (b)(1)(i) and (b)(1)(ii)
are added.
8. Paragraph (b)(4)(i) is amended by
removing the first sentence.
9. Paragraph (b)(5)Example 3is
amended by revising the seventh sen-
tence.
10. Paragraphs(c)(1)(iii) and (c)(1)(v)
are revised.
11. Paragraph (c)(2)Exampleis
amendedbyaddingthelanguage
“Example.”after“of this section:”in the
first sentence and by adding“as in effect
at that time.”to the end of the third sen-
tence.
12. Paragraph (d)(1) is revised.
13. Paragraph (e) is amended by
removing the language“corporation’s”in
the first sentence and adding“taxpayer’s”
in its place.
14. Paragraph (g) is revised.
The revisions and additions read as
follows:
§1.6011–4T Requirement of statement
disclosing participation in certain
transactions by taxpayers (Temporary).
(a)Disclosure requirement—(1)In
general.***Every individual, trust,
partnership, and S corporation that has
participated, directly or indirectly, in a
reportable transaction within the meaning
of paragraph (b)(2) of this section must
attach to its return for the taxable year
described in paragraph (d) of this section
a disclosure statement in the form pre-
scribed by paragraph (c) of this section.
For this purpose, a taxpayer will have
indirectly participated in a reportable
transaction if the taxpayer’s Federal
income tax liability is affected (or in the
case of a partnership or an S corporation,
if a partner’s or shareholder’s Federal
income tax liability is reasonably
expected to be affected) by the transac-
tion even if the taxpayer is not a direct
party to the transaction (e.g., the taxpayer
participates as a partner in a partnership,
as a shareholder in an S corporation, or
through a controlled entity). Moreover, a
taxpayer will have indirectly participated
in a reportable transaction if the taxpayer
knows or has reason to know that the tax
benefits claimed from the taxpayer’s
transaction are derived from a reportable
transaction.***
(2)Example of indirect participation.
Notice 95–53, 1995–2 C.B. 334, (see
§601.601(d)(2) of this chapter), describes
a lease stripping transaction in which one
party (the transferor) assigns the right to
receive future payments under a lease of
tangible property and receives consider-
ation which the transferor treats as current
income. The transferor later transfers the
property subject to the lease in a transac-
tion intended to qualify as a substituted
basis transaction, for example, a transac-
tion described in section 351. In return,
the transferor receives stock (with low
value and high basis) from the transferee
corporation. The transferee corporation
claims the deductions associated with the
high basis property subject to the lease.
The transferor and transferee corporation
have directly participated in the listed
transaction. If the transferor subsequently
transfers the high basis/low value stock to
a taxpayer in another transaction intended
to qualify as a substituted basis transac-
tion and the taxpayer uses the stock to
generate a loss, and if the taxpayer knows
or has reason to know that the tax loss
claimed was derived from the lease strip-
ping transaction, then the taxpayer is indi-
rectly participating in a reportable trans-
action. Accordingly, the taxpayer must
disclose the reportable transaction and the
manner of the taxpayer’s indirect partici-
pation in the reportable transaction under
the rules of this section.
(3)Definition of taxpayer. For pur-
poses of paragraphs (b)(3) and (4) of this
section, the termtaxpayermeans a corpo-
ration required to file a return under sec-
tion 11, 594, 801, or 831. For all other
purposes of this section, the termtax-
payeralso includes an individual, trust,
partnership, or S corporation.
(b)Definition of reportable trans-
action—(1)In general. A reportable
transaction is either a transaction that is
described in paragraph (b)(2) of this sec-
tion, or is a transaction that is described
in paragraph (b)(3) of this section and
that meets the projected tax effect test in
paragraph (b)(4) of this Section.***
(i)Definition of substantially similar.
For purposes of this section, the termsub-
stantially similarincludes any transaction
that is expected to obtain the same or
similar types of tax benefits and that is
either factually similar or based on the
same or similar tax strategy. Receipt of an
opinion concluding that the tax benefits
from the taxpayer’s transaction are allow-
able is not relevant to the determination
of whether the taxpayer’s transaction is
the same as or substantially similar to a
listed transaction. Further, the termsub-
stantially similarmust be broadly con-
strued in favor of disclosure.
(ii)Examples. The following examples
illustrate situations where a transaction is
the same as or substantially similar to a
listed transaction:
Example 1. Notice 2000–44, 2000–2 C.B. 255,
(see§601.601(d)(2) of this chapter), sets forth a
listed transaction involving offsetting options trans-
ferred to a partnership where the taxpayer claims
basis in the partnership for the cost of the purchased
options but does not reduce basis under section 752
as a result of the partnership’s assumption of the
taxpayer’s obligation with respect to the options.
Transactions using short sales, futures, derivatives
or any other type of offsetting obligations to inflate
basis in a partnership interest would be the same as
or substantially similar to the transaction described
in Notice 2000–44. Moreover, use of the inflated
basis in the partnership interest to diminish gain that
would otherwise be recognized on the transfer of a
partnership asset would also be the same as or sub-
stantially similar to the transaction described in
Notice 2000–44.
Example 2. Notice 2001–16, 2001–1 C.B. 730,
(see§601.601(d)(2) of this chapter), sets forth a
listed transaction involving a seller (X) who desires
to sell stock of a corporation (T), an intermediary
corporation (M), and a buyer (Y) who desires to
purchase the assets (and not the stock) of T. M
agrees to facilitate the sale to prevent the recogni-
tion of the gain that T would otherwise report.
Notice 2001–16 describes M as a member of a con-
solidated group that has a loss within the group or
July 15, 2002902002–28 I.R.B.

as a party not subject to tax. Transactions utilizing
different intermediaries to prevent the recognition of
gain would be the same as or substantially similar to
the transaction described in Notice 2001–16. An
example is a transaction in which M is a corporation
that does not file a consolidated return but which
buys T stock, liquidates T, sells assets of T to Y, and
offsets the gain recognized on the sale of those
assets with currently generated losses.
*****
(5)***
Example 3.***However, E does reasonably
determine that the terms of the leases are consistent
with customary commercial form in the leasing
industry, and that there is a generally accepted
understanding that the combination of Federal
income tax consequences it is claiming with respect
to the leases are allowable under the Internal Rev-
enue Code for substantially similar transactions.
***
*****
(c)***(1)***
(iii) A brief description of the principal
elements of the transaction that give rise
to the expected tax benefits, including the
manner of the taxpayer’s direct or indirect
participation in the transaction.
*****
(v) An identification of each taxable
year (including prior taxable years) for
which the transaction is expected to have
the effect of reducing the Federal income
tax liability of the taxpayer, or of any
partner or shareholder of the taxpayer,
and an estimate of the amount by which
the transaction is expected to reduce the
Federal income tax liability of the tax-
payer, or of any partner or shareholder of
the taxpayer, for each such taxable year.
*****
(d)Time of providing disclosure—(1)
In general. The disclosure statement for a
reportable transaction must be attached to
the taxpayer’s Federal income tax return
for each taxable year for which the tax-
payer’s Federal income tax liability is
affected by the taxpayer’s participation in
the transaction. In the case of a taxpayer
that is a partnership or an S corporation,
the disclosure statement for a listed trans-
action must be attached to the taxpayer’s
Federal income tax return for each tax-
able year ending with or within the tax-
able year of any partner or shareholder
whose income tax liability is affected or
is reasonably expected to be affected by
the partnership’s or the S corporation’s
participation in the transaction. In addi-
tion, at the same time that any disclosure
statement is first attached to the taxpay-
er’s Federal income tax return, the tax-
payer must file a copy of that disclosure
statement with the Office of Tax Shelter
Analysis (OTSA) at: Internal Revenue
Service LM:PFTG:OTSA, Large & Mid-
Size Business Division,1111Constitution
Ave., NW, Washington, DC 20224.
Regardless of whether the taxpayer plans
to disclose the transaction under other
published guidance, for example, Rev.
Proc. 94–69, 1994–2 C.B. 804, (see
§601.601(d)(2) of this chapter), the tax-
payer also must disclose the transaction in
the time and manner provided for under
the provisions of this section. If a transac-
tion becomes a reportable transaction
(e.g., the transaction subsequently
becomes one identified in published guid-
ance as a listed transaction described in
(b)(2) of this section, or there is a change
in facts affecting the expected Federal
income tax effect of the transaction) on or
after the date the taxpayer has filed the
return for the first taxable year for which
the transaction affected the taxpayer’sor
a partner’s or a shareholder’s Federal
income tax liability, the disclosure state-
ment must be filed as an attachment to
the taxpayer’s Federal income tax return
next filed after the date the transaction
becomes a reportable transaction
(whether or not the transaction affects the
taxpayer’s or any partner’s or sharehold-
er’s Federal income tax liability for that
year). If a disclosure statement is required
as an attachment to a Federal income tax
return that is filed after June 14, 2002, but
on or before 180 days after June 14,
2002, the taxpayer must either attach the
disclosure statement to the return, or file
the disclosure statement as an amendment
to the return no later than 180 days after
June 14, 2002.
*****
(g)Effective date. This section applies
to Federal income tax returns filed after
February 28, 2000. However, paragraphs
(a)(1), (a)(2), (a)(3), (b)(1), (b)(4)(i),
(b)(5)Example 3, (c)(1)(iii), (c)(1)(v),
(c)(2)Example, (d)(1), and (e) of this sec-
tion apply to any transaction entered into
on or after January 1, 2001, unless such
transaction is reported on a tax return of
the taxpayer that is filed on or before
June 14, 2002. Taxpayers may rely on the
rules in paragraphs (a)(1), (a)(2), (a)(3),
(b)(1), (b)(4)(i), (b)(5)Example 3,
(c)(1)(iii),(c)(1)(v),(c)(2)Example,
(d)(1), and (e) of this section for Federal
income tax returns filed after February
28, 2000. Otherwise, the rules that apply
with respect to transactions entered into
before January 1, 2001, and with respect
to any transaction entered into on or after
January 1, 2001, and reported on a tax
return of the taxpayer that is filed on or
before June 14, 2002, are contained in
§1.6011–4T in effect prior to June 14,
2002, (see 26 CFR part 1 revised as of
April 1, 2002).
Par.3.In§1.6031(a)–1, para-
graph(a)(1) is amended by adding a sen-
tence to the end of the paragraph to read
as follows:
§1.6031(a)–1 Return of partnership
income.
(a)***
(1)***Fortherules requiring the
disclosure of certain transactions, see
§1.6011–4T.
*****
Par.4.In§1.6037–1, paragraph (c) is
amended by adding a sentence to the end
of the paragraph to read as follows:
§1.6037–1 Return of electing small
business corporation.
*****
(c)***Fortherules requiring the
disclosure of certain transactions, see
§1.6011–4T.
*****
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 5. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U.S.C. 7805***
Par. 6. Section 301.6111–2T is
amended as follows:
1. Paragraph (a)(3) is amended by add-
ing four sentences to the end of the para-
graph.
2. The paragraph heading for (h) is
revised and the entire text after the sec-
ond sentence is removed and four new
sentences are added in their place.
The revision and additions read as fol-
lows:
2002–28 I.R.B.91July 15, 2002

§301.6111–2T Confidential corporate
tax shelters (Temporary).
(a)***
(3)***Forpurposes of this section,
the termsubstantially similarincludes
any transaction that is expected to obtain
the same or similar types of tax benefits
and that is either factually similar or
based on the same or similar tax strategy.
Receipt of an opinion concluding that the
tax benefits from the taxpayer’s transac-
tion are allowable is not relevant to the
determination of whether the taxpayer’s
transaction is the same as or substantially
similar to a listed transaction. Further, the
termsubstantially similarmust be
broadly construed in favor of disclosure.
For examples, see§1.6011–4T(b)(1)(ii)
of this chapter.
*****
(h)Effective dates.***However,
paragraph (a)(3) of this section applies to
confidential corporate tax shelters in
which any interests are offered for sale
after June 14, 2002. The rule in paragraph
(a)(3) of this section may be relied upon
for confidential corporate tax shelters in
which any interests are offered for sale
after February 28, 2000. Otherwise, the
rules that apply to confidential corporate
tax shelters in which any interests are
offered for sale after February 28, 2000,
and on or before June 14, 2002, are con-
tained in this§301.6111–2T in effect
prior to June 14, 2002. (See 26 CFR part
301 revised as of April 1, 2002).
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved June 11, 2002.
Pamela F. Olson,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on June
14, 2002, 11:32 a.m., and published in the issue of
the Federal Register for June 18, 2002, 67 F.R.
41324)
July 15, 2002922002–28 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Health Reimbursement
Arrangements
Notice 2002–45
PURPOSE
This notice provides basic information
about a type of employer-provided health
reimbursement arrangement (HRA)
described below. Published elsewhere in
this bulletin is a revenue ruling providing
guidance involving an HRA.
This notice is divided into eight parts.
Part I of the notice describes HRAs and
their general tax treatment. Part II of the
notice outlines the benefits that may be
offered under an HRA. Part III details
who may be covered under an HRA. Part
IV deals with the interaction between
HRAs and cafeteria plans. Part V covers
ordering rules for reimbursement from
HRAs and§125 health flexible spending
arrangements. Part VI relates to the appli-
cability of§105(h) non-discrimination
rules to HRAs. Part VII explains how to
provide COBRA continuation coverage
under HRAs. Part VIII addresses certain
other matters.
I. Tax Treatment of HRAs Generally
An HRA is an arrangement that: (1) is
paid for solely by the employer and not
provided pursuant to salary reduction
election or otherwise under a§125 caf-
eteria plan; (2) reimburses the employee
for medical care expenses (as defined by
§213(d) of the Internal Revenue Code)
incurred by the employee and the
employee’s spouse and dependents (as
defined in§152); and (3) provides reim-
bursements up to a maximum dollar
amount for a coverage period and any
unused portion of the maximum dollar
amount at the end of a coverage period is
carried forward to increase the maximum
reimbursement amount in subsequent
coverage periods. To the extent that an
HRA is an employer-provided accident or
health plan, coverage and reimbursements
of medical care expenses of an employee
and the employee’s spouse and depen-
dents are generally excludable from the
employee’s gross income under§§106
and 105. Assuming that the maximum
amount of reimbursement which is rea-
sonably available to a participant under
an HRA is not substantially in excess of
the value of coverage under the HRA, an
HRA is a flexible spending arrangement
(FSA) as defined in§106(c)(2).
II. Benefits under an HRA
To qualify for the exclusions under
§§106 and 105, an HRA may only pro-
vide benefits that reimburse expenses for
medical care as defined in§213(d). Each
medical care expense submitted for reim-
bursement must be substantiated. An
HRA may not reimburse a medical care
expense that is attributable to a deduction
allowed under§213 for any prior taxable
year. Additionally, an HRA may neither
reimburse a medical care expense that is
incurred before the date the HRA is in
existence nor reimburse a medical care
expense that is incurred before the date an
employee first becomes enrolled under
the HRA. Reimbursements for insurance
covering medical care expenses as
defined in§213(d)(1)(D) are allowable
reimbursements under an HRA, including
amounts paid for premiums for accident
or health coverage for current employees,
retirees, and COBRA qualified beneficia-
ries. However, see Part IV for a discus-
sion relating to cases in which an
employer provides an HRA in conjunc-
tion with another accident or health plan.
If an HRA is an FSA, reimbursable medi-
cal care expenses may not include
expenses for qualified long-term care ser-
vices as defined in§7702B(c). See
§§106(c) and 213(d)(1)(C).
An HRA does not qualify for the
exclusion under§105(b) if any person
has the right to receive cash or any other
taxable or non-taxable benefit under the
arrangement other than the reimburse-
ment of medical care expenses. If any
person has such a right under an arrange-
ment currently or for any future year, all
distributions to all persons made from the
arrangement in the current tax year are
included in gross income, even amounts
paid to reimburse medical care expenses.
For example, if an arrangement pays a
death benefit without regard to medical
care expenses, no amounts paid under the
arrangement to any person are reimburse-
ments for medical care expenses excluded
under§105(b). See§1.105–2ofthe
Income Tax Regulations. Arrangements
formally outside the HRA that provide for
the adjustment of an employee’s compen-
sation or an employee’s receipt of any
other benefit will be considered in deter-
mining whether the arrangement is an
HRA and whether the benefits are eligible
for the exclusions under§§106 and
105(b). If, for example, in the year an
employee retires, the employee receives a
bonus and the amount of the bonus is
related to that employee’s maximum
reimbursement amount remaining in an
HRA at the time of retirement, no
amounts paid under the arrangement are
reimbursements for medical care
expenses for purposes of§105(b). Simi-
larly, if an employer provides severance
pay only to employees who have reim-
bursement amounts remaining in a pur-
ported HRA at the time of termination of
employment, no amounts paid under the
arrangement are reimbursements for
medical care expenses for purposes of
§105(b).
III. Coverage under an HRA
Medical care expense reimbursements
under an HRA are excludable under
§105(b) to the extent the reimbursements
are provided to the following individuals:
current and former employees (including
retired employees), their spouses and
dependents (as defined in§152 as modi-
fied by the last sentence of§105(b)), and
the spouses and dependents of deceased
employees. The term“employee”does
not include a self-employed individual as
defined in§401(c). See§105(g).
An HRA may continue to reimburse
former employees or retired employees
for medical care expenses after termina-
tion of employment or retirement (even if
the employee does not elect COBRA con-
tinuation coverage). For example, an
HRA may have a provision that reim-
burses a former employee for medical
care expenses only up to an amount equal
to the unused reimbursement amount
remaining at retirement or other termina-
tion of employment. The plan may also
provide that the maximum reimbursement
2002–28 I.R.B.93July 15, 2002

amount available after retirement or other
termination of employment is reduced for
any administrative costs of continuing
such coverage. Additionally, an HRA may
or may not provide for an increase in the
amount available for reimbursement of
medical care expenses after the employee
retires or otherwise terminates employ-
ment (even if the employee does not elect
COBRA continuation coverage).
IV. HRAs and Cafeteria Plans
Employer contributions to an HRA
may not be attributable to salary reduc-
tion or otherwise provided under a§125
cafeteria plan. An accident or health plan
funded pursuant to salary reduction is not
an HRA and is subject to the rules under
§125. However, an HRA is not consid-
ered to be paid for pursuant to salary
reduction merely because it is provided in
conjunction with a cafeteria plan. Addi-
tionally, if an employer offers employees
a choice between employer-provided non-
taxable benefits (e.g., coverage under an
HRA and coverage under a health main-
tenance organization (HMO)), with no
cash or other taxable benefits available to
employees, the choice is not an election
to which§125 applies.
If an employer provides an HRA only
in conjunction with another accident or
health plan and that other plan is provided
pursuant to a salary reduction election
under a cafeteria plan, then all the facts
and circumstances are considered in
determining whether the salary reduction
is attributable to the HRA. Assuming that
the terms of the salary reduction election
indicate that the salary reduction is used
only to pay for the specified accident or
health plan offered in conjunction with
the HRA and not to pay for the HRA
itself, the mere fact that an employee may
participate in the HRA only if the
employee participates in a specified acci-
dent or health plan funded pursuant to a
salary reduction election does not neces-
sarily result in the salary reduction being
attributed to the HRA. In such situations,
if the salary reduction election for a cov-
erage period to fund the specified acci-
dent or health plan offered in conjunction
with the HRA exceeds the actual cost of
the specified accident or health plan cov-
erage for such coverage period, the salary
reduction is attributable to the HRA. For
purposes of this rule,“salary reduction”
includes a choice to forgo receipt of any
benefits that would be taxable but for the
fact they are offered under a§125 cafete-
ria plan.
For any coverage period, for purposes
solely of determining whether a salary
reduction election exceeds the cost of
coverage, the actual cost of the specified
accident or health plan coverage for the
coverage period may be determined pur-
suant to the rules for determining the
COBRAapplicablepremiumunder
§4980B(f)(4). For example, assume that
an employer offers an HRA and an
employee who participates in the HRA
must also participate in the corresponding
employee-only or family coverage
offered in a high-deductible accident and
health plan. If the COBRA applicable
premium for the high-deductible accident
and health coverage would be $1,800 for
the employee-only coverage and $4,500
for family coverage if such coverage were
offered separately from the HRA, then
the annual maximum allowable salary
reduction election in this case is $1,800
for employee-only coverage and $4,500
for family coverage in order for the salary
reduction to be treated as not attributable
to the HRA.
An arrangement is not treated as an
HRA if the arrangement interacts with a
cafeteria plan in such a way as to permit
employees to use salary reduction indi-
rectly to fund the HRA. Therefore, where
an employee who participates in a reim-
bursement arrangement has a choice
among two or more specified accident or
health plans to be used in conjunction
with the reimbursement arrangement (or a
choice among various maximum reim-
bursement amounts credited for a cover-
age period) and there is a correlation
between the maximum reimbursement
amount available under the HRA for the
coverage period (disregarding amounts
carried forward from previous coverage
periods) and the amount of salary reduc-
tion election for the specified accident
and health plan, then the salary reduction
is attributed to the reimbursement
arrangement even if the amount of salary
reduction election is equal to or less than
the actual cost of the other accident or
health coverage.
For example, assume an employer
offers a reimbursement arrangement plus
other specified accident or health plan
coverage with the actual cost for family
coverage for the specified accident or
health plan being $4,500 and the
employee having a choice to salary
reduce $2,500 or $3,500 to fund this cov-
erage. An employee who elects family
coverage and $2,500 salary reduction
receives a $1,000 maximum reimburse-
ment amount under the reimbursement
arrangement for the coverage period and
an employee who elects family coverage
and $3,500 salary reduction receives a
$2,000 maximum reimbursement amount
under the reimbursement arrangement for
the coverage period. In this case, although
the maximum allowable salary reduction
is not exceeded, a portion of the salary
reduction is attributed to the reimburse-
ment arrangement because the increase in
salary reduction election is related to a
larger maximum reimbursement amount
in the reimbursement arrangement for the
coverage period. This arrangement is not
an HRA and is subject to§125.
Similarly, assume an employer pro-
vides a reimbursement arrangement in
conjunction with another accident or
health plan. Employees participating in
the reimbursement arrangement are reim-
bursed up to $1,000 each year for sub-
stantiated§213(d) medical care expenses
and unused amounts remaining at the end
of the year are carried forward for reim-
bursements in later years. The employee-
share of the annual premium for the other
accident or health plan is $1,500.
Employees have a choice either to use
amounts in the reimbursement arrange-
ment to pay for the premium for the other
accident or health plan or to pay that pre-
mium pursuant to a salary reduction elec-
tion. Under this plan, the reimbursement
arrangement does not reimburse any por-
tion of the premium paid by salary reduc-
tion. Because an employee may use the
reimbursement arrangement to pay a por-
tion of the premium in lieu of electing to
salary reduce, the reimbursement arrange-
ment is indirectly funded pursuant to sal-
ary reduction. This arrangement does not
meet the definition of an HRA because it
is funded by salary reduction and it is
subject to the rules under§125.
Further, if the amount credited to a
reimbursement arrangement is directly or
indirectly based on the amount forfeited
under a§125 FSA, the arrangement will
be treated as funded by salary reduction.
July 15, 2002942002–28 I.R.B.

For purposes of making this determina-
tion, facts and circumstances taken into
consideration include the manner in
which salary reduction is implemented
for other accident or health plans offered
by the employer.
Because an HRA is paid for solely by
the employer and not pursuant to salary
reduction, the following restrictions on
health FSAs under§125 are not appli-
cable to HRAs: (1) the prohibition against
a benefit that defers compensation by per-
mitting employees to carry over unused
elective contributions or plan benefits
from one plan year to another plan year;
(2) the requirement that the maximum
amount of reimbursement must be avail-
able at all times during the coverage
period; (3) the mandatory twelve-month
period of coverage; and (4) except as oth-
erwise provided in this notice, the limita-
tion that medical expenses reimbursed
must be incurred during the period of
coverage. As a result, the maximum reim-
bursement amount for a coverage period
(not including amounts carried forward
from previous coverage periods) need not
be available at all times during the cover-
age period. Also, an HRA may specify a
coverage period for a reimbursement
amount that is less than a year. Although
claims incurred during one coverage
period may be reimbursed in a later cov-
erage period, an unreimbursed claim may
be reimbursed in a later coverage period
only if the individual was covered under
the HRA when the claim was incurred.
Additionally, the maximum reimburse-
ment amount credited under the HRA in
the future (not including amounts carried
forward from previous coverage periods)
may be increased or decreased. However,
see§1.105–11(c)(3)(ii) regarding opera-
tional discrimination in favor of highly
compensated individuals (as defined in
§105(h)). Thus, if an increase in maxi-
mum reimbursement amounts in an HRA
favors one or more highly compensated
individuals, the HRA may violate these
non-discrimination rules.
V. Ordering Rules for HRAs and§125
Health FSAs
A medical care expense may not be
reimbursed from a§125 health FSA if
the expense has been reimbursed or is
reimbursable under any other accident or
health plan. If coverage is provided under
both an HRA and a§125 health FSA for
the same medical care expenses, amounts
available under an HRA must be
exhausted before reimbursements may be
made from the FSA. However, a§125
health FSA will not violate this rule if
coverage is provided under both an HRA
and a§125 health FSA and the FSA
reimburses a medical care expense which
is not reimbursable by the HRA. In no
case may an employee be reimbursed for
the same medical care expense by both an
HRA and a§125 health FSA.
Consistent with these rules, before a
§125 health FSA plan year begins, the
plan document for the HRA may specify
that coverage under the HRA is available
only after expenses exceeding the dollar
amount of the§125 FSA have been paid.
For example, if an employer sponsors a
§125 health FSA and an HRA, both of
which provide coverage for the same
medical care expenses, and the HRA plan
document includes a provision that the
HRA is not available for reimbursements
of medical care expenses that are covered
by the§125 health FSA until after
expenses exceeding the dollar amount of
the§125 FSA have been paid, then those
medical care expenses may be reimbursed
first from the§125 health FSA and then
from the HRA when the amount available
under the§125 FSA is exhausted.
VI. Nondiscrimination Rules Applicable
to HRAs
Section 105(h) sets forth nondiscrimi-
nation rules for self-insured medical
expense reimbursement plans. To the
extent an HRA is a self-insured medical
expense reimbursement plan, the nondis-
crimination rules under§105(h) apply to
the HRA. See§1.105–11.
VII. COBRA Continuation Coverage
An HRA is a group health plan gener-
ally subject to the COBRA continuation
coverage requirements. If an individual
elects COBRA continuation coverage, an
HRA complies with these COBRA
requirements by providing for the con-
tinuation of the maximum reimbursement
amount for an individual at the time of
the COBRA qualifying event and by
increasing that maximum amount at the
same time and by the same increment that
it is increased for similarly situated non-
COBRA beneficiaries (and by decreasing
it for claims reimbursed). Premiums are
determined under the existing rules in
§4980B. An HRA complies with the
COBRA requirements for calculating the
applicable premium under§4980B if the
applicable premium is the same for quali-
fied beneficiaries with different total
reimbursement amounts available from
the HRA (and otherwise also satisfies the
requirements of§4980B). For example,
if the annual additional reimbursement
amount credited under an HRA is $1,000
and the maximum reimbursement amount
remaining for two similarly situated
qualified beneficiaries at the time of their
qualifying events is $500 and $5,000, the
applicable premium is the same for each
individual.
The plan rules of an HRA may provide
for continued reimbursements after a
COBRA qualifying event regardless of
whether a qualified beneficiary elects
continuation coverage. For example, an
HRA might allow reimbursements up to
the unused maximum reimbursement
amount following termination of employ-
ment. In such a situation, an HRA subject
to COBRA must still comply with the
COBRA continuation coverage require-
ments. If a qualified beneficiary elects
COBRA continuation coverage in addi-
tion to the continued reimbursement
amount already available, an HRA com-
plies with the COBRA requirements by
increasing the maximum reimbursement
amount at the same time and by the same
increment that it is increased for similarly
situated non-COBRA beneficiaries (and
by decreasing it for claims reimbursed).
VIII. Other Matters
Accident or health plans that meet the
definition of an HRA are subject to a
variety of statutory rules and provisions,
many of which are not addressed in this
notice. Among the statutory provisions
not addressed in this notice are:
•Thedeductionlimitationsunder
§§419 and 419A (for employer con-
tributions to welfare benefit funds)
and under§404 (for amounts paid or
accrued under plans providing for
deferred benefits that are not provided
through a welfare benefit fund).
•The application of the nondiscrimina-
tion requirements under the Health
2002–28 I.R.B.95July 15, 2002

Insurance Portability and Account-
ability Act of 1996 (HIPAA), includ-
ing the extent to which underwritten
individual health insurance policies
purchased and reimbursed by an HRA
are treated as health insurance cover-
age offered under a group health plan.
•Other requirements under HIPAA,
including the requirement that a
group health plan provide certificates
of creditable coverage.
•The requirements for welfare benefit
plans under the Employee Retirement
Income Security Act of 1974
(ERISA).
The proposed regulations relating to
health FSAs under§125 state that certain
requirements apply whether or not the
health FSA is part of a cafeteria plan.
Future guidance will modify the proposed
regulation under§125 to clarify that
while those rules continue to apply to
health FSAs provided pursuant to salary
reduction election under a§125 cafeteria
plan, they do not apply to HRAs.
COMMENTS REQUESTED
Comments are requested about the
rules set forth in this notice. Send com-
ments to : CC:DOM:CORP:R (Notice
2002–45), Room 5226, Internal Revenue
Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Comments may
be hand-delivered between the hours of 8
a.m. and 5 p.m. to: CC:DOM:CORP:R
(Notice 2002–45), Courier’s Desk, Inter-
nal Revenue Service,1111Constitution
Avenue, NW, Washington, D.C. Alterna-
tively, taxpayers may submit comments
electronicallyat:Notice.Comments@
irscounsel.treas.gov(a Service comments
e-mail address).
DRAFTING INFORMATION
The principal author of this notice is
Lorianne D. Masano of the Office of
Division Counsel/Associate Chief Coun-
sel (Tax Exempt and Government Enti-
ties). For further information regarding
this notice, contact Lorianne D. Masano
at (202) 622–6080 (not a toll-free call).
Request for Comments
Containing Suggestions for
Future Proposed Regulations
Concerning Permitted
Elimination of Optional Forms
of Benefit From Defined
Benefit Plans
Notice 2002–46
The Internal Revenue Service and the
Treasury Department request comments
on regulations that are expected to be pro-
posed under§411(d)(6) of the Internal
Revenue Code concerning the elimination
of optional forms of benefit from defined
benefit plans, including the types of situ-
ations in which the retention of particular
optional forms of benefit under a defined
benefit plan results in significant burdens
and complexities for sponsors of retire-
ment plans and for participants and the
conditions under which these optional
forms of benefit are ofde minimisvalue
to participants.
BACKGROUND
Section 411(d)(6) generally provides
that a plan is treated as not satisfying the
requirements of§411 if the accrued ben-
efit of a participant is decreased by a plan
amendment.
1
Under§411(d)(6)(B), a
plan amendment that eliminates or
reduces an early retirement benefit, a
retirement-type subsidy, or an optional
form of benefit is treated as reducing
accrued benefits to the extent that the
amendment applies to benefits accrued as
of the later of the adoption date or the
effective date of the amendment. How-
ever,§411(d)(6)(B) permits the Secretary
of Treasury to issue regulations that per-
mit the elimination of optional forms of
benefit. Pursuant to this authority, regula-
tory exceptions to the application of
§411(d)(6) to optional forms of benefit
have been developed in the past to
address certain specific practical prob-
lems and to permit elimination of most
optional forms of benefit in many defined
contribution plans. See A–2 and A–10 of
§1.411(d)–4 of the Income Tax Regula-
tions.
Prior to the enactment of the Eco-
nomic Growth and Tax Relief Reconcilia-
tion Act of 2001 (EGTRRA), 115 Stat. 38
(2001), the authority to permit elimina-
tion of an optional form of benefit did not
apply if the optional form constituted an
early retirement benefit or retirement-type
subsidy. EGTRRA amended§411(d)
(6)(B) to provide for the Secretary of
Treasury to issue regulations under which
§411(d)(6)(B) would not apply to any
plan amendment which reduces or elimi-
nates benefits or subsidies that create sig-
nificant burdens or complexities for the
plan and plan participants, unless such
amendment adversely affects the rights of
any participant in a more thande minimis
manner. Under section 645(b)(3) of
EGTRRA, these regulations are to be
issued by December 31, 2003 and are to
apply to plan years beginning after
December 31, 2003 or an earlier date.
COMMENTS REQUESTED
The Service and Treasury intend to
issueproposedregulationsunder
§411(d)(6) of the Code with respect to
optional forms of benefit under defined
benefit plans. Consequently, comments
are requested on which optional forms of
benefit (including early retirement ben-
efits and retirement-type subsidies)
should be permitted to be eliminated and
the circumstances under which they
should be permitted to be eliminated,
consistent with§411(d)(6)(B) as
amended by EGTRRA. In particular,
comments are requested on when particu-
lar optional forms of benefit (whether or
not subsidized) result in significant bur-
dens and complexities for sponsors of
1
Section 204(g)(2) of the Employee Retirement Income Security Act of 1974 (ERISA), Public Law 93–406, (88 Stat. 829), provides a parallel rule to§411(d)(6)(B) of the Internal Rev-
enue Code that applies under Title I of ERISA, and authorizes the Secretary of the Treasury to provide exceptions to this parallel ERISA requirement. Thus, Treasury regulations issued
under§411(d)(6)(B) of the Internal Revenue Code apply as well for purposes of§204(g)(2) of ERISA.
July 15, 2002962002–28 I.R.B.

retirement plans and for participants and
when these optional forms of benefit are
ofde minimisvalue to a participant.
Comments are also requested on which
optional forms of benefit should remain
protected. Finally, comments are
requested on any other issues relating to
the treatment of optional forms of benefit
under defined benefit plans under§411
(d)(6) on which guidance is needed.
The authority to provide exceptions to
the restrictions of§411(d)(6) does not
apply to other requirements of the Inter-
nal Revenue Code. Thus, for example, the
upcoming regulations will not permit a
defined benefit plan to be amended to
eliminate a distribution form required by
§§401(a)(11) and 417 and will not affect
the requirements of§401(a)(31) (relating
to direct rollovers).
Comments should be submitted by
September 30, 2002, in writing, and
should reference Notice 2002–46.
Comments may be submitted to CC:
ITA:RU (Notice 2002–46), room 5226,
Internal Revenue Service, POB 7604 Ben
Franklin Station, Washington, DC 20044.
Comments may be hand delivered
between the hours of 8 a.m. and 5 p.m.,
Monday through Friday to: CC:ITA:RU
(Notice 2002–46), Courier’s Desk, Inter-
nal Revenue Service,1111Constitution
Avenue NW, Washington, D.C. Alterna-
tively, comments may be submitted via
theInternetatNotice.Comments@
irscounsel.treas.gov.All comments will
be available for public inspection and
copying.
DRAFTING INFORMATION
The principal authors of this notice are
Linda Marshall of the Office of the Asso-
ciate Chief Counsel (Tax Exempt and
Government Entities) and Andrew Zuck-
erman of the Employee Plans, Tax
Exempt and Government Entities Divi-
sion. For further information regarding
this notice, contact the Employee Plans
taxpayer assistance telephone service
between the hours of 8:00 a.m. and 6:30
p.m. Eastern Time, Monday through Fri-
day by calling 1–877–829–5500 (a toll-
free number). Ms. Marshall can be
reached at (202) 622–6090 and Mr. Zuck-
erman can be reached at (202) 283–9655
(not toll-free numbers).
Application of Employment
Taxes to Statutory Stock
Options
Notice 2002–47
I. Purpose and Overview
This notice provides that until Trea-
sury and the Service issue further guid-
ance, in the case of a statutory stock
option,i.e., an incentive stock option
(ISO) described in section 422(b) of the
Internal Revenue Code (Code) or an
option granted under an employee stock
purchase plan (ESPP) described in sec-
tion 423(b), the Service will not assess
the Federal Insurance Contributions Act
(FICA) tax or Federal Unemployment
Tax Act (FUTA) tax, or apply federal
income tax withholding obligations, upon
either the exercise of the option or the
disposition of the stock acquired by an
employee pursuant to the exercise of the
option. This notice further announces that
Treasury and the Service anticipate that
any final guidance that would apply
employment taxes to statutory stock
options will not apply to any exercise of
a statutory stock option that occurs before
the January 1 of the year that follows the
second anniversary of the publication of
the final guidance. This notice does not
relieve individual taxpayers of the obliga-
tion to include compensation in income
upon a disposition of stock acquired pur-
suant to the exercise of a statutory stock
option and does not relieve employers of
any of their reporting obligations.
II. Background
A. Notice 2001–14
On January 18, 2001, the Internal Rev-
enue Service (Service) issued Notice
2001–14, 2001–1 C.B. 516, addressing
the application of employment taxes to
statutory stock options. Notice 2001–14
provides that, in the case of a statutory
stock option exercised before January 1,
2003, the Service will not assess FICA or
FUTA taxes upon the exercise of the
option, and will not treat the disposition
of stock acquired by an employee pursu-
ant to the exercise of the option as subject
to federal income tax withholding. The
notice further provides that information
reporting requirements continue to be
applicable. The notice also announced the
intention to issue administrative guidance
clarifying the application of employment
taxes to statutory stock options.
B. Proposed Regulations and Related
Guidance
On November 13, 2001, the Service
and the Treasury Department issued pro-
posed regulations addressing the applica-
tion of employment taxes to statutory
stock options (66 Fed. Reg. 57023 (Nov.
14, 2001)). The proposed regulations pro-
vide that FICA and FUTA taxes apply
when an individual exercises a statutory
stock option and that federal income tax
withholding does not apply when an indi-
vidual exercises a statutory stock option.
As proposed, the regulations would have
been effective for exercises of statutory
stock options occurring on or after Janu-
ary 1, 2003.
On November 13, 2001, the Service
also issued two related notices containing
proposed guidance: Notice 2001–72,
2001–49 I.R.B. 548, and Notice 2001–73,
2001–49 I.R.B. 549. In Notice 2001–72,
the Service provides proposed rules
regarding an employer’s federal income
tax withholding and reporting obligations
upon the disposition of stock acquired by
an individual pursuant to the exercise of a
statutory stock option. The rules would
exempt the employer from any federal
income tax withholding in such cases.
However, under the proposed rules, an
employer generally would still be
required to make reasonable efforts to
report any income on an employee’sor
former employee’s Form W–2.
In Notice 2001–73, the Service pro-
vides proposed rules of administrative
convenience intended to lessen the
administrative burdens related to the
application of FICA and FUTA taxes at
the time of exercise of a statutory stock
option. The rules would allow employers
to deem the wages paid due to the exer-
cise of a statutory stock option as being
paid at any subsequent date or dates dur-
ing the calendar year of the date of exer-
cise. In addition, under the proposed
rules, an employer would be allowed to
spread the deemed wage payments over a
2002–28 I.R.B.97July 15, 2002

period of dates. Notice 2001–73 also pro-
poses other rules of administrative conve-
nience that are intended to assist employ-
ers and employees in meeting their
employment tax obligations.
III. Comments Received
The Service requested comments as to
the proposed regulations and the pro-
posed rules in the accompanying notices.
Comments were submitted on a wide
variety of issues raised by the application
of employment taxes to statutory stock
options, including whether imposition of
the FICA and FUTA taxes upon an exer-
cise of a statutory stock option was the
correct interpretation of the law, and the
extent of the administrative burdens upon
employers and employees in administer-
ing the payments of the taxes. Recogniz-
ing the complexity of the issues raised by
the proposed guidance and comments,
Treasury and the Service have determined
that an extension of the moratorium is
needed to provide adequate time to con-
sider those issues.
IV. Interim Guidance
The Service and Treasury will con-
tinue to consider all of the comments
received on the proposed regulations.
However, until that review is completed
and further guidance is issued, the Ser-
vice (1) will not assess FICA or FUTA
taxes upon the exercise of a statutory
stock option or the disposition of stock
acquired by an employee pursuant to the
exercise of a statutory stock option, and
(2) will not treat the exercise of a statu-
tory stock option, or the disposition of
stock acquired by an employee pursuant
to the exercise of a statutory stock option,
as subject to federal income tax withhold-
ing.
This Part IV does not relieve indi-
vidual taxpayers of the obligation to
include any compensation in income
upon a disposition of stock acquired pur-
suant to the exercise of a statutory stock
option and does not relieve employers of
any of their reporting obligations.
Regardingthereportingobligations,
§1.6041–2(a)(1) of the Income Tax
Regulations requires that, under certain
circumstances, a payment made by an
employer to an employee be reported on
Form W–2 even if the payment is not
subject to income tax withholding. Spe-
cifically,§1.6041–2(a)(1) generally
requires reporting of a payment on the
Form W–2 if the total amount of the pay-
ment, and any other payment of remu-
neration (including wages, if any) made
to the employee (or former employee)
that are required to be reported on Form
W–2, aggregate at least $600 in a calen-
dar year. Therefore, a disqualifying dispo-
sition of stock acquired pursuant to the
exercise of a statutory stock option which
results in ordinary income generally will
result in a reporting obligation on the
Form W–2.
V. Effect on Other Documents
In recognition of the need of employ-
ers and statutory stock option plan admin-
istrators for adequate time to implement
any guidance that may be forthcoming,
the Service and Treasury anticipate that
any final guidance that would apply
employment taxes to statutory stock
options will not apply to exercises of
statutory stock options that occur before
the January 1 of the year that follows the
second anniversary of the publication of
the final guidance.
VI. Drafting Information
The principal author of this notice is
Stephen Tackney of the Office of Divi-
sion Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
For further information regarding this
notice, contact Stephen Tackney at (202)
622–6040 (not a toll-free call).
Partnership Straddle Tax
Shelter
Notice 2002–50
The Internal Revenue Service and the
Treasury Department have become aware
of a type of transaction, described below,
that is being used by taxpayers for the
purpose of generating deductions. This
notice alerts taxpayers and their represen-
tatives that the tax benefits purportedly
generated by these transactions are not
allowable for federal income tax pur-
poses. This notice also alerts taxpayers,
their representatives, and promoters of
these transactions of certain responsibili-
ties that may arise from participating in
these transactions.
FACTS
This transaction involves partnerships
manipulated through a series of steps car-
ried out in the following order. No§754
election is in effect at any relevant time.
Step 1: Corporation acquires a majority
interest in an upper tier partnership (UTP)
at fair market value.Step 2: UTP acquires
a majority interest in a lower tier partner-
ship (LTP) at fair market value.Step 3:
LTP enters into straddles on foreign cur-
rencies and may acquire other assets.Step
4: LTP terminates the gain leg of a for-
eign currency straddle. LTP allocates a
pro ratashare of the gain to UTP, which
in turn allocates apro ratashare of the
gain to Corporation. This gain increases
the basis of each partnership interest.Step
5: Corporation sells its interest in UTP to
Taxpayer at fair market value. This results
in a loss to Corporation sufficient to off-
set the gain that was allocated to Corpo-
ration.Step 6: Taxpayer purchases UTP’s
interest in LTP at fair market value. UTP
realizes a loss on this sale, but the loss is
disallowed under§707(b)(1)(A) because
Taxpayer owns more than 50% of UTP.
Step 7: LTP engages in a transaction that
is intended to increase Taxpayer’s basis in
the LTP interest. For example, LTP may
incur a liability that Taxpayer guarantees.
LTP then terminates the loss leg of the
foreign currency straddle and allocates a
pro ratashare of the loss to Taxpayer.
Step 8: Taxpayer sells the interest in LTP
at its fair market value and realizes gain
(for example, from the relief of liability).
Taxpayer then claims that this gain is off-
set under§267(d) by the amount of the
loss that was disallowed to UTP under
§707(b)(1)(A).
ANALYSIS
The transaction described in this notice
has been designed to use a straddle, a
tiered partnership structure, a transitory
partner, and the absence of a§754 elec-
tion to allow Taxpayer to claim a perma-
nent non-economic loss. The Service
intends to challenge the purported tax
benefits from this transaction on a num-
ber of grounds. First, the Service expects
that the partnership anti-abuse rule con-
tained in§1.701–2(b) of the Income Tax
July 15, 2002982002–28 I.R.B.

Regulations will generally disallow the
deduction claimed by the Taxpayer upon
the termination of the loss leg of the
straddle.See§1.701–2(d) (Ex. 8) (disal-
lowing duplication of a built-in loss
deduction attributable to the absence of a
§754 election). Second, the Service may
challenge the allowance of the loss
deduction based on other statutory provi-
sions, including§988, and judicial doc-
trines, including the step transaction doc-
trine and the doctrines of economic
substance, business purpose, and sub-
stance over form. Third, the Service may
assert that, where a loss is disallowed on
the sale of a partnership interest under
§267(a)(1) or§707(b)(1),§267(d) must
be applied under an aggregate approach
rather than an entity approach. See
§1.701–2(e) (requiring aggregate treat-
ment of partnerships for certain pur-
poses). Because the gain realized by Tax-
payer on the sale of its interest in LTP
does not correspond to any increase in the
value of the assets within LTP, the disal-
lowed loss realized on the sale of LTP by
UTP cannot be used to offset the gain
under an aggregate approach.
Transactions that are the same as, or
substantially similar to, the transaction
described in this notice are identified as
“listed transactions”for purposes of
§1.6011–4T(b)(2) of the temporary
Income Tax Regulations and§301.6111–
2T(b)(2) of the temporary Procedure and
Administration Regulations.See also
§301.6112–1T, A–4. For purposes of
§1.6011–4T(b)(2) and§301.6111–
2T(b)(2), a transaction will be considered
the same as, or substantially similar to,
the transaction described in this notice
even if, at the time relevant for making
such determination, the taxpayer in such
transaction has not engaged in a step hav-
ing the effect of Step 8.
Persons who are required to satisfy the
registration requirement of§6111 with
respect to the transaction described in this
notice and who fail to do so may be sub-
ject to the penalty under§6707(a). Per-
sons who are required to satisfy the list-
keeping requirement of§6112 with
respect to the transaction and who fail to
do so may be subject to the penalty under
§6708(a). In addition, the Service may
impose penalties on participants in this
transaction or substantially similar trans-
actions or, as applicable, on persons who
participate in the promotion or reporting
of this transaction or substantially similar
transactions, including the accuracy-
related penalty under§6662, the return
preparer penalty under§6694, the pro-
moter penalty under§6700, and the aid-
ing and abetting penalty under§6701.
The principal author of this notice is
Heather Faught of the Office of Associate
Chief Counsel (Passthroughs and Special
Industries). For further information
regarding this notice, contact Ms. Faught
at (202) 622–3060 (not a toll-free call).
26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also Part I,§§1502; 1.1502–77, 1.1502–77A.)
Rev. Proc. 2002–43
Determination of Substitute
Agent for a Consolidated
Group When the Common
Parent Ceases to Exist
Table of Contents
SECTION 1. PURPOSE
SECTION 2. GENERAL BACK-
GROUND
SECTION 3. SPECIFIC BACK-
GROUND INFORMATION REGARD-
ING DIFFERENT MEANS OF DETER-
MINING A SUBSTITUTE AGENT
SECTION 4. SCOPE
SECTION 5. WHERE TO FILE
SECTION 6. DESIGNATION BY A
TERMINATING COMMON PARENT
OF ITS QUALIFYING SUCCESSOR AS
SUBSTITUTE AGENT
SECTION 7. DESIGNATION BY A
TERMINATING COMMON PARENT
OF A CORPORATION OTHER THAN
ITS QUALIFYING SUCCESSOR AS
SUBSTITUTE AGENT
SECTION 8. DESIGNATION BY
REMAINING MEMBERS OF THE
GROUP UNDER§1.1502–77A(d)
SECTION 9. NOTIFICATION BY
DEFAULT SUBSTITUTE AGENT
UNDER§1.1502–77(d)(2)
SECTION 10. MEMBER’S REQUEST
FOR THE IRS TO DESIGNATE A SUB-
STITUTE AGENT UNDER§1.1502–
77(d)(3)(i)
SECTION 11. REQUEST THAT IRS
REPLACE A PREVIOUSLY DESIG-
NATED SUBSTITUTE AGENT
SECTION 12. EFFECTIVE DATE
SECTION 13. PAPERWORK REDUC-
TION ACT
SECTION 14. INQUIRIES
SECTION 1. PURPOSE
This revenue procedure provides
instructions for all communications relat-
ing to the determination of a substitute
agent to act on behalf of a consolidated
group pursuant to§1.1502–77(d) or
§1.1502–77A(d) of the Income Tax
Regulations. This revenue procedure is
the exclusive procedure under§§1.1502–
77(d) and 1.1502–77A(d) for submitting
the communications identified in section
3 of this revenue procedure. This revenue
procedure also provides for the automatic
approval of requests by a terminating
common parent to designate its qualifying
successor as substitute agent.
SECTION 2. GENERAL
BACKGROUND
In general, the corporation that is the
common parent of a consolidated group
for a taxable year is the sole agent for the
group with regard to the group’s income
tax liability for that taxable year. The
original common parent generally
remains the agent for the group for that
taxable year, even if another corporation
is the common parent of the group in a
later year or the group later terminates.
However, the original common parent
cannot act as sole agent if its own exist-
ence terminates. In that case, the group
may require a substitute agent to function
with respect to prior open taxable years
for which the original common parent
was the group’s agent. Sections 1.1502–
77(d) and 1.1502–77A(d) provide rules
regarding a substitute agent to replace a
terminating or terminated common par-
ent. This revenue procedure sets forth the
procedures under those rules. These pro-
cedures also apply when a substitute
2002–28 I.R.B.99July 15, 2002

agent’s existence terminates. In this rev-
enue procedure, references to a terminat-
ing or terminated common parent include
a substitute agent going out of existence.
SECTION 3. SPECIFIC
BACKGROUND INFORMATION
REGARDING DIFFERENT MEANS
OF DETERMINING A SUBSTITUTE
AGENT
.01 Sections 1.1502–77(d)(1) and
1.1502–77A(d) provide for several differ-
ent means of determining a substitute
agent to act on behalf of a consolidated
group. Each method is described below.
Some can apply only to consolidated
return years beginning on or after June
28, 2002, some can apply only to years
beginning before June 28, 2002, and
some can apply to any or all open years.
If the terminating common parent is agent
for any open years beginning before June
28, 2002, the Internal Revenue Service
(IRS) recommends that the terminating
common parent designate a substitute
agent, because that is the only single pro-
cedure applicable to all open years. Des-
ignation by the terminating common par-
ent affords the group the greatest choice
as to the selection of its substitute agent
and ensures the least interruption of com-
munication with the IRS.
.02 A terminating common parent may
designateasubstituteagent.See
§§1.1502–77(d)(1) and 1.1502–77A(d).
Designation by a terminating common
parent is available for any and all taxable
years for which the terminating common
parent is agent for the group. This rev-
enue procedure provides different proce-
dures depending on whether the terminat-
ing common parent designates its
qualifying successor (see section 6 of this
revenue procedure) or another corpora-
tion (see section 7 of this revenue proce-
dure).
(1) If the terminating common parent
designates its qualifying successor in
accordance with the procedures of this
revenue procedure, that designation is
automatically approved without further
communication from the IRS, and will be
effective on the later of the termination of
the common parent or the filing of the
designation with the IRS. See section
6.02 of this revenue procedure for the
definition of a qualifying successor. Des-
ignation by the terminating common par-
ent of its qualifying successor as substi-
tute agent is generally available for any
consolidated return year.
(2) The terminating common parent
may also designate certain corporations
other than its qualifying successor as sub-
stitute agent (see section 7 of this revenue
procedure). Such a designation is subject
to approval by the IRS. Designation of a
corporation other than the terminating
common parent’s qualifying successor as
substitute agent is generally available for
any consolidated return year.
.03 If the terminating common parent
does not designate a substitute agent, the
remaining members may designate a sub-
stitute agent, but only for consolidated
return years beginning before June 28,
2002. See§1.1502–77A(d). The designa-
tion must be filed in the manner specified
in section 8 of this revenue procedure,
and is not effective until the IRS approves
the designation.
.04 If the terminating common parent
does not designate a substitute agent, its
qualifying successor, if any, may notify
the IRS that it is the substitute agent by
default, but only for consolidated return
years beginning on or after June 28, 2002.
See§1.1502–77(d)(2). IRS approval is
not required, but the IRS is not required
to send communications to, or act on
communications from, the successor until
it provides notification to the IRS of its
status as a default substitute agent under
section 9 of this revenue procedure.
.05 If the terminating common parent
does not designate a substitute agent and
has no qualifying successor, one or more
members of the group may request the
IRS to designate a substitute agent, but
only for consolidated return years begin-
ning on or after June 28, 2002. See
§1.1502–77(d)(3)(i). The request is made
pursuant to section 10 of this revenue
procedure. If the group does not request
designation of a substitute agent in this
situation, the IRS may nevertheless (if it
has reason to believe there is no default
substitute agent) designate any group
member or successor of a member as the
substitute agent for the group.
.06 If the IRS designated a substitute
agent for consolidated return years begin-
ning on or after June 28, 2002, one or
more members of the group may request
that the IRS replace the previously desig-
nated substitute with another member (or
successor of a member), in accordance
with the procedures of section 11 of this
revenue procedure.
SECTION 4. SCOPE
.01In general. This revenue procedure
applies to any designation of a substitute
agent under§§1.1502–77(d)(1) or
1.1502–77A(d), notification of the exist-
ence of a default substitute agent under
§1.1502–77(d)(2), request under§1.
1502–77(d)(3)(i) for the designation of a
substituteagent,andrequestunder
§1.1502–77(d)(3)(ii) for replacement of a
previously designated substitute agent.
.02References to IRS. References in
this revenue procedure to the IRS include
any official to whom the Commissioner’s
authority under§§1.1502–77(d) or
1.1502–77A(d) has been duly delegated.
SECTION 5. WHERE TO FILE
Except as provided in section 11 of
this revenue procedure, all documents
described in this revenue procedure are
filed at the following address:
Ogden Submission Processing
Center
P.O. Box 9941
Mail Stop 4912
Ogden, UT 84409
SECTION 6. DESIGNATION BY A
TERMINATING COMMON PARENT
OF ITS QUALIFYING SUCCESSOR
AS SUBSTITUTE AGENT
.01In general. A terminating common
parent may designate a substitute agent.
See§§1.1502–77(d)(1), 1.1502–
77(h)(1)(ii), and 1.1502–77A(d). Desig-
nation by a terminating common parent is
available for any and all taxable years for
which the terminating common parent is
agent for the group. If the terminating
common parent designates its qualifying
successor in accordance with the proce-
dures of this section 6, that designation is
automatically approved without further
communication from the IRS, and no
written approval will be provided. Such
designation will be effective on the later
of the termination of the common parent
or the filing of the designation with the
IRS. Designation by a terminating com-
mon parent of its qualifying successor as
July 15, 20021002002–28 I.R.B.

substitute agent with respect to consoli-
dated return years beginning before June
28, 2002, requires the terminating com-
mon parent to elect to apply§1.1502–
77(d)(1) pursuant to§1.1502–77(h)(1)(ii)
in accordance with subsection .04(5) of
this section 6. A designation by a com-
mon parent, before its existence termi-
nates, of its qualifying successor as sub-
stitute agent for the group must be filed in
accordance with the requirements set
forth in this section 6.
.02Qualifying Successor. For pur-
poses of this revenue procedure, a“quali-
fying successor”must be (i) the sole
entity that is primarily liable under appli-
cable law (without regard to§§1.1502–
1(f)(4) or 1.1502–6(a)) for the common
parent’s Federal income tax liability and
(ii) a domestic corporation for Federal
income tax purposes. Qualifying succes-
sors usually result from the merger of a
terminating common parent into another
domestic corporation.
.03When to file. (1)In general. A ter-
minating common parent’s designation of
its qualifying successor as substitute
agent must be executed by the common
parent before its existence terminates and,
except as provided in paragraph (2) of
this subsection .03, filed promptly.
(2)Special rule. If the qualifying suc-
cessor does not come into existence
before the common parent’s existence ter-
minates, the common parent must still
execute the designation before its exist-
ence terminates, and the qualifying suc-
cessor must promptly complete the desig-
nation after it comes into existence by
executing the statement required in sub-
section .04(9) of this section 6 and filing
the designation.
.04Contents. The terminating common
parent’s designation of its qualifying suc-
cessor as substitute agent must be in writ-
ing and contain the following informa-
tion:
(1) The heading“REV. PROC. 2002–
43: COMMON PARENT’S DESIGNA-
TION OF ITS QUALIFYING SUCCES-
SOR AS SUBSTITUTE AGENT”must
be typed or legibly printed at the top of
the designation;
(2) Name, address, and employer iden-
tification number of the common parent
making the designation;
(3) Name, address, and employer iden-
tification number of the common parent’s
qualifying successor and the consolidated
return year(s) for which the designation
applies (or a statement that it applies to
all consolidated return years ending on or
before the date of termination of the com-
mon parent);
(4) The name and employer identifica-
tion number of the common parent under
which the return(s) for which the designa-
tion applies was (were) filed, if different
from the common parent named in para-
graph (2) of this subsection .04;
(5) If the designation applies to any
consolidated return year(s) beginning
before June 28, 2002, a statement that the
commonparentelectspursuantto
§1.1502–77(h)(1)(ii) to apply§1.1502–
77(d)(1) with respect to such year(s);
(6) The Internal Revenue Service Cen-
ter where the consolidated return(s) was
(were) or will be filed, as the case may
be, for the year(s) for which the designa-
tion applies;
(7) The expected date of termination
of the common parent;
(8) The name, address, and phone
number of any Examination Team Man-
ager, Appeals Officer or Counsel Attorney
who currently has jurisdiction of consoli-
dated return year(s) for which the desig-
nation applies; and
(9) A statement on behalf of the quali-
fying successor in which it:
(a) Agrees to serve as the group’s sub-
stitute agent pursuant to the common par-
ent’s designation; and
(b) If it was not a member of the group
during the consolidated return year(s) for
which it is designated, acknowledges that
it is or will be primarily liable as a suc-
cessor of the common parent of the group
for the consolidated tax liability for such
consolidated return year(s).
.05Signature requirements. (1) The
terminating common parent’s designation
of its qualifying successor as substitute
agent must contain the following declara-
tion, signed by a duly authorized officer
of the common parent:Under penalties
of perjury, I declare that I am autho-
rized to make this designation on
behalf of the common parent and that,
to the best of my knowledge, the infor-
mation provided is true, correct, and
complete.
(2) The statement required under sub-
section .04(9) of this section 6 must con-
tain the following declaration, signed by a
duly authorized officer of the terminating
common parent’s qualifying successor:
Under penalties of perjury, I declare
that I am authorized to sign this state-
ment on behalf of the qualifying succes-
sor and that, to the best of my knowl-
edge, the information provided is true,
correct, and complete.
SECTION 7. DESIGNATION BY A
TERMINATING COMMON PARENT
OF A CORPORATION OTHER THAN
ITS QUALIFYING SUCCESSOR AS
SUBSTITUTE AGENT
.01In general. A terminating common
parent may designate a substitute agent.
See§§1.1502–77(d)(1), 1.1502–
77(h)(1)(ii), and 1.1502–77A(d). Desig-
nation by a terminating common parent is
available for any and all taxable years for
which the terminating common parent is
agent for the group. If the terminating
common parent designates a corporation
other than its qualifying successor as sub-
stitute agent, that designation is subject to
approval by the IRS and is not effective
unless and until it is approved. The desig-
nation must be made in accordance with
the procedures of this section 7. The ter-
minating common parent may designate:
(1) Any corporation that was a mem-
ber of the group during any part of the
consolidated return year for which the
designation applies and has not subse-
quently been disregarded as an entity
separate from its owner or reclassified as
a partnership for Federal tax purposes; or
(2) Any successor of such a corpora-
tion, if such successor is a domestic cor-
poration and is not disregarded as an
entity separate from its owner or classi-
fied as a partnership for Federal tax pur-
poses, including a corporation that will
become a successor at the time that the
common parent’s existence terminates.
The designation of a successor of a mem-
ber as substitute agent is available for
consolidated return years beginning
before June 28, 2002, only if the termi-
nating common parent elects to apply
§1.1502–77(d)(1) pursuant to§1.1502–
77(h)(1)(ii) in accordance with subsection
.03(5) of this section 7. (See section 6 of
this revenue procedure regarding the ter-
minating common parent’s designation of
its qualifying successor as substitute
agent.)
2002–28 I.R.B.101July 15, 2002

.02When to file. (1)In general. A ter-
minating common parent’s designation of
a corporation other than its qualifying
successorassubstituteagentunder
§§1.1502–77(d)(1) or 1.1502–77A(d)
must be executed by the common parent
before its existence terminates and,
except as provided in paragraph (2) of
this subsection .02, filed promptly.
(2)Special rule. If the substitute agent
designated by the terminating common
parent under this section 7 does not come
into existence before the common par-
ent’s existence terminates, the common
parent must still execute the designation
before its existence terminates, and the
designated substitute agent must promptly
complete the designation after it comes
into existence by executing the statement
required in subsection .03(10) of this sec-
tion 7 and filing the designation.
.03Contents. The terminating common
parent’s designation of a corporation
other than its qualifying successor as sub-
stitute agent must be in writing and con-
tain the following information:
(1) The heading“REV. PROC. 2002–
43: DESIGNATION OF SUBSTITUTE
AGENT BY COMMON PARENT”must
be typed or legibly printed at the top of
the designation;
(2) Name, address, and employer iden-
tification number of the common parent
making the designation;
(3) Name, address, and employer iden-
tification number of the designated sub-
stitute agent and the consolidated return
year(s) for which the designation applies
(or a statement that it applies to all con-
solidated return years ending on or before
the date of termination of the common
parent);
(4) The name and employer identifica-
tion number of the common parent under
which the return(s) for which the designa-
tion applies was (were) filed, if different
from the common parent named in para-
graph (2) of this subsection .03;
(5) If the common parent elects pursu-
ant to§1.1502–77(h)(1)(ii) to apply
§1.1502–77(d)(1) with respect to con-
solidated return years beginning before
June 28, 2002, a statement making an
election;
(6) The Internal Revenue Service Cen-
ter where the consolidated return(s) was
(were) or will be filed, as the case may
be, for the year(s) for which the designa-
tion applies;
(7) The expected date of termination
of the common parent;
(8) The name and address of the cor-
poration(s) (or other person(s)) that have
(or will have) custody of the books and
records with respect to the consolidated
return year(s) for which the designation
applies, if different from the designated
substitute agent named in paragraph (3)
of this subsection .03, and if so, a descrip-
tion of the arrangements available to the
designated substitute agent for access to
the books and records;
(9) The name, address, and phone
number of the Examination Team Man-
ager, Appeals Officer or Counsel Attor-
ney, if any, who currently has jurisdiction
of the consolidated return year(s) for
which the designation applies; and
(10) A statement on behalf of the sub-
stitute agent in which it:
(a) Agrees to serve as the group’s sub-
stitute agent pursuant to the common par-
ent’s designation; and
(b) If it was not a member of the group
during the consolidated return year(s) for
which it is designated, acknowledges that
it is or will be primarily liable as a suc-
cessor of a member of the group for the
consolidated tax liability for such consoli-
dated return year(s).
.04Signature requirements. (1) The
terminating common parent’s designation
of a corporation other than its qualifying
successor as substitute agent must contain
the following declaration, signed by a
duly authorized officer of the common
parent:Under penalties of perjury, I
declare that I am authorized to make
this designation on behalf of the com-
mon parent and that, to the best of my
knowledge, the information provided is
true, correct, and complete.
(2) The statement required under sub-
section .03(10) of this section 7 must con-
tain the following declaration, signed by a
duly authorized officer of the substitute
agent:Under penalties of perjury, I
declare that I am authorized to sign
this statement on behalf of the desig-
nated substitute agent and that, to the
best of my knowledge, the information
provided is true, correct, and complete.
.05Designations solely for consoli-
dated return years subject to§1.1502–
77A(d). If the designation applies only to
one or more consolidated return years
beginning before June 28, 2002, and the
designated substitute agent was a member
(but not a successor of a member) of the
group for the year(s) for which the desig-
nation applies, the election in paragraph
(5) of subsection .03 and the statement
signed on behalf of the designated substi-
tute agent in paragraph (10) of subsection
.03 are not applicable and are therefore
not required.
.06Approval. (1) The IRS may
approve or disapprove for any reason a
designation of a substitute agent under
this section 7. Approval of such designa-
tion is in the sole discretion of the IRS.
(2) No designation by a terminating
common parent under this section 7
applies unless and until it is approved by
the IRS. Approval of a terminating com-
mon parent’s designation under this sec-
tion 7 will not be effective before the
existence of the common parent making
the designation terminates.
(3) The IRS will approve or disap-
prove any designation under this section 7
in writing to the terminating common par-
ent and the substitute agent. Unless writ-
ten approval is received from the IRS,
taxpayers may not assume that the substi-
tute agent has the authority to act on
behalf of the group.
SECTION 8. DESIGNATION BY
REMAINING MEMBERS OF THE
GROUP UNDER§1.1502–77A(d).
.01.In general. If a terminating com-
mon parent does not designate a substi-
tute agent for any consolidated return
year(s) beginning before June 28, 2002,
the remaining members of the group may
designate a substitute agent pursuant to
§1.1502–77A(d) for such year(s). The
remaining members may designate as
substitute agent any corporation that was
a member of the group for any part of a
consolidated return year for which the
designation applies. The designation must
be filed in accordance with the require-
ments set forth in this section 8.
.02When to file. The designation of a
substitute agent by the remaining mem-
bers of the group under§1.1502–
July 15, 20021022002–28 I.R.B.

77A(d)(1) may be filed at any time after
the common parent’s existence termi-
nates.
.03Contents. The remaining members’
designation of a substitute agent must be
in writing and contain the following
information:
(1) The heading“REV. PROC. 2002–
43: DESIGNATION BY GROUP MEM-
BERS UNDER§1.1502–77A(d)”must
be typed or legibly printed at the top of
the designation;
(2) Name, address, and employer iden-
tification number of the terminated com-
mon parent for which a substitute agent is
being designated;
(3) Name, address, and employer iden-
tification number of the designated sub-
stitute agent and the consolidated return
year(s) for which the designation applies
(or a statement that it applies to all con-
solidated return years ending on or before
the date of termination of the common
parent);
(4) The name and employer identifica-
tion number of the common parent under
which the return(s) for which the designa-
tion applies was (were) filed, if different
from the common parent named in para-
graph (2) of this subsection .03;
(5) The Internal Revenue Service Cen-
ter where the consolidated return(s) was
(were) or will be filed, as the case may
be, for the year(s) for which the designa-
tion applies;
(6) The date of termination of the com-
mon parent;
(7) The name and address of the cor-
poration(s) (or other person(s)) that have
(or will have) custody of the books and
records with respect to the consolidated
return year(s) for which the designation
applies, if different from the designated
substitute agent named in paragraph (3)
of this subsection .03, and if so, a descrip-
tion of the arrangements available to the
designated substitute agent for access to
the books and records;
(8) A representation that the corpora-
tions signing the designation constitute all
of the remaining members of the group;
and
(9) The name, address, and phone
number of the Examination Team Man-
ager, Appeals Officer or Counsel Attor-
ney, if any, who currently has jurisdiction
of the consolidated return year(s) for
which the designation applies.
.04Signature requirements. The desig-
nation must contain the following decla-
ration, signed by a duly authorized officer
of each remaining member of the group
for the consolidated return year(s) for
which the designation applies:Under
penalties of perjury, I declare that I am
authorized to make this designation on
behalf of the named member of the
group and that, to the best of my
knowledge, the information provided is
true, correct, and complete.For pur-
poses of this subsection .04, the designa-
tion may be submitted as a single docu-
ment containing all required signatures or
as multiple documents each signed by a
duly authorized officer of a remaining
member of the group.
.05Approval. (1) The IRS may
approve or disapprove for any reason a
designation of a substitute agent under
this section 8. Approval of such designa-
tion is in the sole discretion of the IRS.
(2) No designation under this section 8
applies unless and until it is approved by
the IRS.
(3) The IRS will approve or disap-
prove any designation under this section 8
in writing to the member designated as
substitute agent in subsection .03(3) of
this section 8. Unless written approval is
received from the IRS, taxpayers may not
assume that the substitute agent has the
authority to act on behalf of the group.
SECTION 9. NOTIFICATION BY
DEFAULT SUBSTITUTE AGENT
UNDER§1.1502–77(d)(2)
.01In general. If a terminating com-
mon parent that does not designate a sub-
stitute agent pursuant to§1.1502–
77(d)(1) has a qualifying successor (as
defined in section 6.02 of this revenue
procedure), such qualifying successor is
thedefaultsubstituteagentunder
§1.1502–77(d)(2) for consolidated return
years beginning on or after June 28, 2002.
Such default substitute agent must pro-
vide notification to the IRS pursuant to
the filing requirements set forth in this
section 9 to insure that it will receive
communications from the IRS to the
group and to insure that the IRS will act
on its communications to the IRS on
behalf of the group.
.02When to file. Notification by the
default substitute agent should be filed
promptly after the existence of the com-
mon parent terminates.
.03Contents. The notification by the
default substitute agent under§1.1502–
77(d)(2) must be in writing and contain
the following information:
(1) The heading“REV. PROC. 2002–
43: NOTIFICATION BY DEFAULT
SUBSTITUTEAGENTUNDER
§1.1502–77(d)(2)”must be typed or leg-
ibly printed at the top of the notification;
(2) Name, address, and employer iden-
tification number of the terminated com-
mon parent;
(3) Name, address, and employer iden-
tification number of the default substitute
agent and the consolidated return year(s)
for which it is the substitute agent;
(4) The name and employer identifica-
tion number of the common parent under
which the return(s) for which the default
substitute agent is the substitute agent
was (were) filed, if different from the
common parent named in paragraph (2)
of this subsection .03;
(5) The Internal Revenue Service Cen-
ter where the consolidated return(s) was
(were) or will be filed, as the case may
be, for the consolidated return year(s) for
which the default substitute agent is the
substitute agent;
(6) The date of termination of the com-
mon parent;
(7) The name, address, and phone
number of the Examination Team Man-
ager, Appeals Officer or Counsel Attor-
ney, if any, who currently has jurisdiction
of the consolidated return year(s) for
which the default substitute agent is the
substitute agent; and
(8) A statement in which the default
substitute agent:
(a) Agrees to serve as the group’s sub-
stitute agent; and
(b) If it was not a member of the group
during the consolidated return year(s) for
which it is the default substitute agent,
acknowledges that it is primarily liable as
a successor of the former common parent
of the group for the consolidated tax
liability for such consolidated return
year(s).
.04Signature requirements. The notifi-
cation by a default substitute agent must
contain the following declaration, signed
by a duly authorized officer of the default
substitute agent:Under penalties of per-
jury, I declare that I am authorized to
2002–28 I.R.B.103July 15, 2002

submit this notification on behalf of the
default substitute agent and that, to the
best of my knowledge, the information
provided is true, correct, and complete.
.05No approval required. IRS
approval is not required for a default sub-
stitute agent, but the IRS is not required
to send communications to, or act on
communications from, a default substitute
agent until it provides notification under
this section 9.
SECTION 10. MEMBER’S REQUEST
FOR THE IRS TO DESIGNATE A
SUBSTITUTE AGENT UNDER
§1.1502–77(d)(3)(i)
.01In general. If a terminating com-
mon parent does not designate a substi-
tute agent and there is no default substi-
tute agent under§1.1502–77(d)(2), one
or more members of the group may
request that the IRS designate a substitute
agent pursuant to§1.1502–77(d)(3)(i) for
consolidated return years beginning on or
after June 28, 2002. Such request may
(but is not required to) propose a member
(or a successor of a member) for the IRS
to designate as substitute agent.
.02When to file. A request by a mem-
ber of the group that the IRS designate a
substitute agent may be filed at any time
after the common parent’s existence ter-
minates and before the IRS designates a
substitute agent.
.03Contents. A request for designation
of a substitute agent must be in writing
and contain the following information:
(1) The heading“REV. PROC. 2002–
43: REQUEST FOR DESIGNATION OF
SUBSTITUTEAGENTUNDER
§1.1502–77(d)(3)”must be typed or leg-
ibly printed at the top of the designation;
(2) Name, address, and employer iden-
tification number of the terminated com-
mon parent;
(3) Name, address, and employer iden-
tification number of the proposed substi-
tute agent, if any, and the consolidated
return year(s) for which the designation is
requested;
(4) The name and employer identifica-
tion number of the common parent under
which the return(s) for which the designa-
tion is requested was (were) filed, if dif-
ferent from the common parent named in
paragraph (2) of this subsection .03;
(5) The Internal Revenue Service Cen-
ter where the consolidated return(s) was
(were) or will be filed, as the case may
be, for the year(s) for which the designa-
tion is requested;
(6) The date the common parent’s
existence terminated and the circum-
stances under which it terminated (e.g.,
dissolution under state law or merger into
a limited liability company);
(7) The name and address of the cor-
poration(s) (or other person(s)) that have
custody of the books and records with
respect to the consolidated return year(s)
for which the designation is requested, if
different from any proposed substitute
agent named in paragraph (3) of this sub-
section .03, and if so, a description of the
arrangements available to the proposed
substitute agent for access to the books
and records; and
(8) The name, address, and phone
number of the Examination Team Man-
ager, Appeals Officer or Counsel Attor-
ney, if any, who currently has jurisdiction
of the consolidated return year(s) for
which the designation is requested.
.04Signature requirement. A request
under this section 10 must contain the fol-
lowing declaration, signed by a duly
authorized officer of at least one of the
requesting members which was a member
of the group for the consolidated return
year(s) for which the designation is
requested:Under penalties of perjury, I
declare that I am authorized to make
this request on behalf of the named
member of the group and that, to the
best of my knowledge, the information
provided is true, correct, and complete.
.05Designation by the IRS. (1) In
response to a request under this section
10, the IRS may, in its sole discretion,
designate as the substitute agent the mem-
ber (or successor of the member) pro-
posed by the request, if any, or another
member (or successor of another mem-
ber).
(2) The IRS will notify in writing the
designated substitute agent.
SECTION 11. REQUEST THAT IRS
REPLACE A PREVIOUSLY
DESIGNATED SUBSTITUTE AGENT
.01In general. If the IRS designates a
substitute agent pursuant to§1.1502–
77(d)(3)(i), one or more members of the
group may request pursuant to§1.1502–
77(d)(3)(ii) that the IRS replace the previ-
ously designated substitute agent with
another member (or successor of another
member). Such request may (but is not
required to) propose a substitute agent to
replace the previously designated substi-
tute agent.
.02When to file. A request by a mem-
ber of the group that the IRS replace a
previously designated substitute agent
may be filed at any time after the IRS
designates the substitute agent that the
request seeks to have replaced.
.03Contents. A request that the IRS
replace a previously designated substitute
agent must be in writing and contain the
following information:
(1) The heading“REV. PROC. 2002–
43: REQUEST FOR IRS TO REPLACE
PREVIOUSLY DESIGNATED SUBSTI-
TUTE AGENT UNDER§1.1502–
77(d)(3)”must be typed or legibly printed
at the top of the designation;
(2) Name, address, and employer iden-
tification number of the previously desig-
nated substitute agent;
(3) Name, address, and employer iden-
tification number of the proposed substi-
tute agent, if any, to replace the previ-
ously designated substitute agent and the
consolidated return year(s) for which the
replacement designation is requested;
(4) The name and employer identifica-
tion number of the common parent under
which the return(s) for which the replace-
ment designation is requested was (were)
filed;
(5) The Internal Revenue Service Cen-
ter where the consolidated return(s) was
(were) or will be filed, as the case may
be, for the year(s) for which the replace-
ment designation is requested;
(6) The date the common parent’s
existence terminated and the circum-
stances under which it terminated (e.g.,
dissolution under state law or merger into
a limited liability company);
(7) The name and address of the cor-
poration(s) (or other person(s)) that have
custody of the books and records with
respect to the consolidated return years
for which the replacement designation is
requested, if different from the proposed
replacement substitute agent named in
paragraph (3) of this subsection .03, and
if so, a description of the arrangements
available to the proposed replacement
substitute agent for access to the books
and records;
July 15, 20021042002–28 I.R.B.

(8) The name, address, and phone
number of the Examination Team Man-
ager, Appeals Officer or Counsel Attor-
ney, if any, who currently has jurisdiction
of the consolidated return years for which
the replacement designation is requested;
and
(9) The reason(s) for the request to
replace the previously designated substi-
tute agent.
.04Signature requirement. A request
under this section 11 must contain the fol-
lowing declaration, signed by a duly
authorized officer of at least one of the
requesting members which was a member
of the group for the consolidated return
year(s) for which the replacement desig-
nation is requested:Under penalties of
perjury, I declare that I am authorized
to make this request on behalf of the
named member of the group and that,
to the best of my knowledge, the infor-
mation provided is true, correct, and
complete.
.05Where to file. Notwithstanding the
instructions in section 4 of this revenue
procedure, a request under this section 11
must be filed with the office that made
the designation of the substitute agent that
the request seeks to replace.
.06Designation by the IRS. (1) In
response to a request under this section
11, the IRS may, in its sole discretion,
replace the previously designated substi-
tute agent with the member (or successor
of the member) proposed by the request
or another member (or successor of
another member).
(2) If the IRS replaces the previously
designated substitute agent, it will notify
in writing the previously designated sub-
stitute agent and the replacement substi-
tute agent of the change in the substitute
agent.
SECTION 12. EFFECTIVE DATE
This revenue procedure applies to des-
ignations of substitute agents and notifi-
cations of the existence of default substi-
tute agents, and to requests for
designation of a substitute agent or for
replacement of a previously designated
substitute agent made after June 28, 2002.
SECTION 13. PAPERWORK
REDUCTION ACT
The collection of information con-
tained in this revenue procedure has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act (44
U.S.C. 3507) under control numbers
1545–1699 and 1545–1793.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless the collection of information dis-
plays a valid OMB control number.
The collections of information in this
revenue procedure are in sections 6
through 11. These collections of informa-
tion are required (i) for the common par-
ent to notify the IRS of the designation of
a substitute agent for the consolidated
group when the common parent’s exist-
ence is about to terminate and for the des-
ignated corporation to confirm that it
agrees to serve as the group’s substitute
agent and qualifies to be the group’s sub-
stitute agent, (ii) for the common parent’s
successor to notify the IRS that it quali-
fies as a default substitute agent, or (iii)
for a member of a consolidated group to
request that the IRS designate a substitute
agent or replace a previously designated
substitute agent. This information will be
used (i) to determine whether to approve
the designation of the substitute agent, (ii)
to update IRS records with the name of
the substitute agent, or (iii) to designate
or replace a substitute agent. The collec-
tions of information are required to obtain
a benefit in the case of a designation by
the common parent or notification by a
default substitute agent, and voluntary in
the case of requests by members to desig-
nate or replace a substitute agent. The
likely respondents are business or other
for-profit institutions.
The estimated total annual reporting
burden is 400 hours.
The estimated annual burden per
respondent varies from one hour to 3
hours, depending on individual circum-
stances, with an estimated average of two
hours. The estimated number of respon-
dents is 200.
The estimated annual frequency of
responses is on occasion.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
SECTION 14. INQUIRIES
Inquiries regarding this revenue proce-
dure may be addressed to the Commis-
sioner of Internal Revenue, ATTN:
CC:CORP:BO2, P.O. Box 7604, Ben
Franklin Station, Washington, D.C.
20044.
DRAFTING INFORMATION
The principal authors of this revenue
procedure are George R. Johnson and
Gerald B. Fleming of the Office of Asso-
ciate Chief Counsel (Corporate). For fur-
ther information regarding this revenue
procedure, contact Mr. Johnson at (202)
622–7930 or Mr. Fleming at (202) 622–
7770 (not toll-free numbers).
26 CFR 601.204: Changes in accounting periods
and methods of accounting.
(Also Part I,§832; 1.832–4; 1.832–5.)
Rev. Proc. 2002–46
SECTION 1. PURPOSE
This revenue procedure provides cer-
tain insurance companies subject to tax
under§831 of the Internal Revenue Code
with a safe harbor method of accounting
for premium acquisition expenses. This
revenue procedure also provides a proce-
dure for insurance companies to obtain
automatic consent of the Commissioner
to change to this safe harbor method.
SECTION 2. BACKGROUND
.01 Section 832(b)(1) provides that the
gross income of an insurance company
subject to tax under§831 includes the
company’s“underwriting income.”
.02 Section 832(b)(3) defines“under-
writing income”as“premiums earned on
insurance contracts during the taxable
year, less losses incurred and expenses
incurred.”
.03 Section 832(b)(4) provides that to
compute premiums earned, an insurance
company reduces the amount of gross
premiums written on insurance contracts
2002–28 I.R.B.105July 15, 2002

during the taxable year by return premi-
ums and premiums paid for reinsurance.
Subject to the exceptions in§§832(b)(7),
(b)(8), and 833, this amount is increased
by 80 percent of the unearned premiums
on outstanding insurance contracts at the
end of the preceding taxable year, and is
decreased by 80 percent of the unearned
premiums on outstanding insurance con-
tracts at the end of the current year. This
20 percent reduction in the amount of an
insurance company’s deduction for
increases in unearned premiums is
intended to represent the allocable portion
of the company’s expenses incurred in
generatingtheunearnedpremiums.
S. Rep. No. 313, 99th Cong. 2d Sess. 496
(1986),1986–3(Vol. 3)C.B.496;
H. Rep. No. 426, 99th Cong. 1st Sess.
669 (1985), 1986–3 (Vol. 2) C.B. 669.
.04 Sections 1.832–4(a)(3) through
(11) of the Income Tax Regulations,
effective for taxable years beginning after
December 31, 1999, prescribe specific
rules regarding the manner in which an
insurance company determines gross pre-
miums written, return premiums, and
unearned premiums for purposes of the
calculation of premiums earned under
§832(b)(4). These rules apply regardless
of the accounting practices used by the
insurance company to record gross premi-
ums written and unearned premiums on
its annual statement filed for state regula-
tory reporting purposes. Section 1.832–
4(a)(4) defines“gross premiums written”
as“all amounts payable for the effective
period of the insurance contract.”Section
1.832–4(a)(5)(i) generally requires the
insurance company to report gross premi-
ums written“for the earlier of the taxable
year that includes the effective date of the
insurance contract or the year in which
the company receives all or a portion of
the gross premium for the insurance con-
tract.”In some situations, this rule may
result in gross premiums written being
taken into account in the calculation of
premiums earned under§832(b)(4) for a
taxable year earlier than the year in which
those written premiums are reported on
the company’s annual statement.
.05 Section 1.832–4(a)(5) provides
special methods of reporting gross premi-
ums written for certain categories of
insurance contracts with installment pre-
miums, including contracts for which an
advance premium installment is received
prior to the effective date of the underly-
ing contract, cancellable accident and
health insurance contracts, and certain
multi-year insurance contracts with pre-
miums payable at guaranteed rates. To
use one of these special methods of
reporting gross premiums written, the
insurance company must satisfy an
annualpro rataexpense limitation with
regard to the amount of premium acquisi-
tion expenses deducted for the underlying
contract. Section 1.832–4(a)(5)(vii). This
annualpro rataexpense limitation
ensures that the company does not deduct
the premium acquisition expenses for the
insurance contract more rapidly than the
company includes the gross premiums
written for the associated contract in the
calculation of premiums earned under
§832(b)(4).
.06 Section 832(b)(6) provides that
“expenses incurred”means all expenses
shown on the insurance company’s
annual statement. Expenses incurred gen-
erally are calculated as the sum of the
expenses paid during the taxable year,
plus the increase in unpaid expenses dur-
ing the taxable year. To be included in
expenses incurred, an expense listed on
the annual statement also must be an
allowable deduction under§832(c). Sec-
tion 832(c) lists various categories of
allowable deductions, including“all ordi-
nary and necessary expenses incurred, as
provided in§162 (relating to trade or
business expenses).”See§832(c)(1).
.07 The 20 percent reduction in the
deduction for increases in unearned pre-
miums under§832(b)(4) was intended to
correct the mismatching that results from
the deferral of unearned premium income
and the current deduction of premium
acquisition expenses. S. Rep. No. 313, at
496 (1986); H. Rep. No. 426, at 668–69
(1985). Consistent with this intent, the
Internal Revenue Service will allow
insurance companies within the scope of
this revenue procedure to account for pre-
mium acquisition expenses using the safe
harbor method described in section 5.02
of this revenue procedure.
SECTION 3. DEFINITIONS
The following definitions apply solely
for purposes of this revenue procedure.
.01Premium acquisition expenses.A
premium acquisition expense is an
expense that is primarily related to the
production of gross premiums written on
an insurance contract and directly varies
with the amount of gross premiums writ-
ten on the underlying contract. For
example, agent and broker commissions,
premium taxes, and premium-based
assessments generally qualify as premium
acquisition expenses because these
expenses vary with and are primarily
related to the acquisition of gross premi-
ums written on new and renewal insur-
ance contracts. An annual expense allow-
ance payable by a reinsurer to assume all
or a portion of the risk on insurance con-
tracts of another insurance company is
treated as a premium acquisition expense
to the extent that this expense allowance
reflects the reinsurer’s reimbursement of
the premium acquisition expenses
incurred by the direct writing company.
However, expenditures with respect to
salaried personnel and general adminis-
trative costs typically will not qualify as
premium acquisition expenses. Although
a portion of these costs may be associated
with activities relating to the issuance of
insurance contracts, these expenditures do
not vary directly based on the amount of
gross premiums written for the associated
contracts.
.02Pro forma premium acquisition
expenses.Apro formapremium acquisi-
tion expense is any unpaid premium
acquisition expense that is not shown on
the insurance company’s annual statement
for the year in which the insurance com-
pany includes the gross premiums written
to which that expense relates in the calcu-
lationofpremiumsearnedunder
§832(b)(4).
.03Pro forma unearned premium
reserve. Thepro formaunearned pre-
mium reserve is the portion of an insur-
ance company’s year-end unearned pre-
miums (other than amounts to which
special rules in§§832(b)(7)(A) and
832(b)(8) apply) attributable to gross pre-
miums written that are not shown on the
company’s annual statement, but which
the company is required to report in the
calculation of premiums earned under
§832(b)(4) for the taxable year in accor-
dance with the provisions of§1.832–4.
July 15, 20021062002–28 I.R.B.

.04Unearned premium reserve offset
amount. (i) Except as otherwise provided
in paragraph 3.04(ii), an insurance com-
pany determines the unearned premium
offset amount for a taxable year by
multiplying—
(A) The amount, if any, by which the
company’spro formaunearned premium
reserve at the end of the taxable year
exceeds itspro formaunearned premium
reserve at the end of the preceding tax-
able year, by
(B) .20.
(ii) In the case of a financial guaranty
insurer to which the special rules in
§832(b)(7)(B) apply, the unearned pre-
mium reserve offset amount is determined
by multiplying the amount, if any, by
which the company’spro formaunearned
premium reserve for financial guaranty
contracts at the end of the taxable year
exceeds itspro formaunearned premium
reserve for financial guaranty contracts at
the end of the preceding taxable year by
.10.
SECTION 4. SCOPE
.01 Except as otherwise provided in
section 4.02 of this revenue procedure,
this revenue procedure applies to any
insurance company that is subject to tax
under§831(a) and determines its premi-
ums earned for insurance contracts during
the taxable year under§832(b)(4) in
accordancewiththeprovisionsof
§1.832–4.
.02 This revenue procedure does not
apply to an existing Blue Cross or Blue
Shield organization or any other organiza-
tion to which§833 applies.
SECTION 5. SAFE HARBOR
METHOD
.01 Taxpayers within the scope of this
revenue procedure are permitted to
account for premium acquisition expenses
incurred for taxable years beginning after
December 31, 1999, using the safe harbor
method described in section 5.02 of this
revenue procedure.
.02DescriptionofSafeHarbor
Method. (i) Except as provided in section
5.02(ii) of this revenue procedure, an
insurance company is permitted to treat as
premium acquisition expenses incurred
for the taxable year an amount equal to
the sum of—
(A) The amount of premium acquisi-
tion expenses paid during the taxable
year;
(B) The difference between the unpaid
premium acquisition expenses shown on
the company’s annual statement for the
taxable year and the unpaid premium
acquisition expenses shown on the com-
pany’s annual statement for the preceding
taxable year; and
(C) The difference between the
amount of the insurance company’spro
formapremium acquisition expenses at
the end of the taxable year and the com-
pany’spro formapremium acquisition
expenses at the end of the preceding tax-
able year.
(ii)Limitation on current deductibility
of certain pro forma expenses. For pur-
poses of calculating the premium acquisi-
tion expenses incurred for the taxable
year under section 5.02(i) of this revenue
procedure, the amount taken into account
as a net increase inpro formapremium
acquisition expenses during the year
under section 5.02(i)(C) cannot exceed
the insurance company’s unearned pre-
mium reserve offset amount for that year.
If the amount taken into account as a net
increase inpro formapremium acquisi-
tion expenses during the year under sec-
tion 5.02(i)(C) is reduced as a result of
this limitation, the reduction amount is
carried forward and increases the compa-
ny’spro formapremium acquisition
expenses at the end of the succeeding tax-
able year.
SECTION 6. APPLICATION OF SAFE
HARBOR METHOD TO CERTAIN
CONTRACTS WITH INSTALLMENT
PREMIUMS
An insurance company using one of
the special methods of reporting gross
premiums written in§1.832–4(a)(5) for a
category of insurance contracts with
installment premiums may apply the safe
harbor method to determine the amount
of premium acquisition expenses treated
as incurred for the taxable year with
regard to those contracts. The company’s
premium acquisition expenses treated as
incurred for the taxable year with regard
to those contracts, however, cannot
exceed the annualpro rataexpense limi-
tation of§1.832–4(a)(5)(vii). If the insur-
ance company is required to reduce the
amount of premium acquisition expenses
that would otherwise be treated as
incurred for a taxable year in order to
meet the annualpro rataexpense limita-
tion of§1.832–4(a)(5)(vii), the reduction
amount is carried forward and is taken
into account in determining the compa-
ny’s premium acquisition expenses
incurred with regard to those contracts for
the succeeding taxable year.
SECTION 7. CHANGE IN METHOD
OF ACCOUNTING
.01In general. A change to the safe
harbor method provided in section 5.02 of
this revenue procedure is a change in
method of accounting to which the provi-
sions of§§446 and 481 and the regula-
tions thereunder apply. Thus, in order to
change to the safe harbor method, an
insurance company must complete Form
3115,Application for Change In Method
of Accounting, and otherwise comply
with the procedures in this section 7.
.02Automatic change. A taxpayer that
wants to change its method of accounting
for premium acquisition expenses to the
safe harbor method provided by section
5.02 of this revenue procedure must fol-
low the automatic change in method of
accounting provisions of Rev. Proc.
2002–9, 2002–3 I.R.B. 327 (or its succes-
sor), as modified by Rev. Proc. 2002–19,
2002–13 I.R.B. 696, with the following
modifications:
(1) The scope limitations in section
4.02 of Rev. Proc. 2002–9 do not apply.
(2) To assist the Service in processing
changes in method of accounting under
this section of the revenue procedure, and
to ensure proper handling, section
6.02(4)(a) of Rev. Proc. 2002–9 is modi-
fied to require that a Form 3115 filed
under this revenue procedure include the
statement:“Automatic Change Filed
Under Rev. Proc. 2002–46.”This state-
ment should be legibly printed or typed
on the appropriate line of any Form 3115
filed under this revenue procedure.
.03Automatic change for the first tax-
able year beginning after December 31,
1999. A taxpayer that wants to change to
the safe harbor method for its first taxable
year beginning after December 31, 1999,
is not subject to the filing requirements in
section 6.02(3)(a) or the effective date
provision in section 13.01 of Rev. Proc.
2002–28 I.R.B.107July 15, 2002

2002–9, provided that the taxpayer com-
plies with the following filing require-
ments. The taxpayer must complete and
file a Form 3115 in duplicate. The origi-
nal must be filed with the taxpayer’s
amended federal income tax return for its
first taxable year beginning after Decem-
ber 31, 1999. A copy of the Form 3115
must be filed with the national office (see
Rev. Proc. 2002–9 for the address) no
later than when the taxpayer’s amended
return is filed. The amended return must
be filed no later than January 21, 2003. A
taxpayer that wants to change to the safe
harbor method for a taxable year earlier
than its first taxable year ending on or
after December 31, 2001, must take into
account the§481(a) adjustment required
as a result of the change over a four-year
adjustment period. See sections 4.01 and
4.04(1) of Rev. Proc. 2002–19.
.04Pending applications with national
office. If a taxpayer filed an application or
ruling request with the national office to
make a change in method of accounting
for premium acquisition expenses for a
taxable year beginning before January 1,
2002, and the application or ruling
request is pending with the national office
on June 20, 2002, the taxpayer may make
the method change under this revenue
procedure. However, the national office
will process the application or ruling
request in accordance with the authority
under which it was filed, unless prior to
September 20, 2002, the taxpayer notifies
the national office that it wants to make
the method change under this revenue
procedure. If the taxpayer timely notifies
the national office that it wants to make
the method change under this revenue
procedure, the application or ruling
request will be considered closed and any
user fee that was submitted with the
application or ruling request will be
returned to the taxpayer.
SECTION 8. EXAMPLE
The following example illustrates the
manner in which an insurance company
applies the safe harbor method to deter-
mine the amount of premium acquisition
expenses treated as incurred for the tax-
able year.
Example.
(i) IC is an insurance company taxable as
described in section 4 of this revenue procedure that
files its returns on a calendar year basis. IC writes
automobile insurance policies which provide insur-
ance coverage for a one-year period beginning on
January 1st and ending on December 31st. The pre-
miums for the policies are payable on a monthly
installment basis. For annual statement reporting
purposes, IC reports gross premiums written for
these insurance policies based on the calendar year
in which the related coverage commences. For pur-
poses of calculating its premiums earned under
§832(b)(4), IC is required by§1.832–4(a)(5)(i) to
report gross premiums written for the policies for
the earlier of the taxable year that includes the effec-
tive date of the related policies or the year in which
all or a portion of the premiums for the policies are
received. However, pursuant to§1.832–4(a)(5)(iii),
IC has adopted the method of reporting advance pre-
mium installments in gross premiums written for the
taxable year of receipt.
(ii) As of December 31, 2002, IC has collected
$250 of advance premium installments during the
year with respect to insurance policies with effective
dates in 2003. IC determines that the premium
acquisition expenses attributable to these advance
premium installments are $62.50 and that the total
amount of premium acquisition expenses expected
to be incurred over the effective period of the
related insurance policies is $750. On its 2002
annual statement, IC reports total amount of pre-
mium acquisition expenses of $1,250, consisting of
$1,000 of paid expenses plus a $250 increase in
unpaid expenses. The expenses shown on IC’s 2002
annual statement did not include the $62.50 of pre-
mium acquisition expenses attributable to $250 of
advance premium installments that IC collected in
2002 with respect to policies with effective dates in
2003, but did include $50 of premium acquisition
expenses attributable to $200 of advance premium
installments that IC collected in 2001 with respect
to policies with effective dates in 2002. Pursuant to
§1.832–4(a)(5)(iii), IC had already included those
$200 of advance premium installments in gross pre-
miums written and unearned premiums when calcu-
lating the amount of premiums earned under
§832(b)(4) for the 2001 taxable year.
(iii) For the taxable year ending December 31,
2002, IC changes to the safe harbor method of
deducting premium acquisition expenses described
in section 5.02 of this revenue procedure. To deter-
mine the deductible premium acquisition expenses
for the 2002 taxable year, IC adds the amount of
premium acquisition expenses paid during the tax-
able year ($1,000) to the increase in unpaid
expenses as shown on the 2002 annual statement
($250). The increase inpro formapremium acquisi-
tion expenses for the taxable year equals $12.50
($62.50 - $50.00 = $12.50). For the 2002 taxable
year, IC’s unearned premium reserve offset amount
equals $10 (($250 x .20 = $50) - ($200 x .20 =
$40)). Accordingly, IC’s deductible premium acqui-
sition expenses for the 2002 taxable year equal
$1,260 ($1,000 + 250 +10). The $2.50 ofpro forma
premium acquisition expenses which cannot be
deducted in 2002 as a result of the limitation in sec-
tion 5.02(ii) is added to IC’spro formapremium
acquisition expenses at the end of the 2003 taxable
year.
(iv) To determine the amount of premium acqui-
sition expenses deductible under the safe harbor
method, IC also must apply the annualpro rata
expense limitation of§1.832–4(a)(5)(vii) with
respect to those insurance policies for which IC col-
lected advance premium installments during 2002.
For this purpose, IC compares the ratio of the
amount of expenses allowable under the safe harbor
method over the total premium acquisition expenses
for the related insurance policies (($62.50 - 2.50 =
$60)/$750 = .08) with the ratio of the advance pre-
mium installments over the total gross premiums
written for the related insurance policies ($250/
$2,000 = .125). As .08 is less than .125, the amount
of premium acquisition expenses determined under
the safe harbor method satisfies the annualpro rata
expense limitation of§1.832–4(a)(5)(vii).
(v) On its 2002 federal income tax return, IC
follows the general automatic change procedures of
Rev. Proc. 2002–9, as modified by this revenue pro-
cedure, to change to the safe harbor method. This
change in method of accounting results in a negative
§481(a) adjustment of $50, thepro formaacquisi-
tion expenses attributable to the $200 of advance
premium installments received by IC for the 2001
taxable year. Pursuant to section 5.04 of Rev. Proc.
2002–9, as modified by Rev. Proc. 2002–19, IC
takes the $50 negative§481(a) adjustment into
account in one-year in computing its taxable income
for the taxable year ending December 31, 2002.
SECTION 9. EFFECTIVE DATE
This revenue procedure is effective for
changes in method of deducting premium
acquisition expenses for the taxable years
ending after December 31, 1999.
SECTION 10. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2002–9 is modified and
amplified to include this automatic
method change in section 5 of the
APPENDIX.
DRAFTING INFORMATION
The principal authors of this revenue
procedure are Gary Geisler and Melissa
Luxner of the Office of Associate Chief
Counsel (Financial Institutions & Prod-
ucts). For further information regarding
this revenue procedure, contact Ms. Lux-
ner at (202) 622–3970 (not a toll-free
call).
July 15, 20021082002–28 I.R.B.

Part IV. Items of General Interest
Notice of Proposed
Rulemaking by Cross-
Reference to Temporary
Regulations.
Modification of Tax Shelter
Rules III
REG–103735–00;
REG–110311–98
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions.
SUMMARY: These proposed rules pro-
vide the public with additional guidance
needed to comply with the disclosure
rules under section 6011(a) and the regis-
tration requirement under section 6111(d).
These rules also affect the list mainte-
nance requirement under section 6112.
The proposed rules affect taxpayers par-
ticipating in certain reportable transac-
tions, persons responsible for registering
confidential corporate tax shelters, and
organizers of potentially abusive tax shel-
ters. In the rules and regulations portion
of theFederal Register, the IRS is issu-
ing temporary regulations (T.D. 9000 on
page 87 of this Bulletin) modifying the
rules relating to the requirement that cer-
tain taxpayers file a statement with their
Federal income tax returns under section
6011(a), and the registration of confiden-
tial corporate tax shelters under section
6111(d). The text of those temporary
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 16, 2002.
ADDRESSES: Send submissions to:
CC:ITA:RU (REG–103735–00; REG–
110311–98), room 5226, Internal Rev-
enue Service, POB 7604, Ben Franklin
Station, Washington, DC 20044. Submis-
sions may be hand delivered Monday
through Friday between the hours of 8
a.m. and 5 p.m. to: CC:ITA:RU (REG–
103735–00; REG–110311–98), Courier’s
Desk, Internal Revenue Service,1111
Constitution Avenue, NW, Washington,
DC. Alternatively, taxpayers may submit
electronic comments directly to the IRS
Internet site atwww.irs.gov/regs.
FOR FURTHER INFORMATION CON-
TACT: Danielle M. Grimm or Tara P.
Volungis, 202–622–3080 (not a toll-free
number); concerning submissions, Sonya
Cruse, 202–622–7180 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in this notice of proposed rulemak-
ing have been previously reviewed and
approved by the Office of Management
and Budget in accordance with the Paper-
work Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545–
1685.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless 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 mate-
rial 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
The temporary regulations amend 26
CFR part 1 regarding rules relating to the
filing and records requirements for cer-
tain taxpayers under section 6011. The
temporary regulations also amend 26
CFR part 301 regarding the registration of
confidential corporate tax shelters under
section 6111.
The text of the temporary regulations
also serves as the text of these proposed
regulations. The preamble to the tempo-
rary regulations explains the regulations.
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 assess-
ment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these 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 time required to prepare
or retain the disclosure is minimal and
will not have a significant impact on
those small entities that are required to
provide disclosure. Therefore, a Regula-
tory Flexibility Analysis under the Regu-
latory Flexibility Act (5 U.S.C. chapter 6)
is not required. Pursuant to section
7805(f) of the Internal Revenue Code,
these temporary regulations 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 a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(preferably a signed original and eight (8)
copies) or electronically generated com-
ments that are submitted timely to the
IRS. The IRS and Treasury request com-
ments on the clarity of the proposed rules
and how they can be made easier to
understand. All comments will be avail-
able for public inspection and copying. A
public hearing will be scheduled if
requested in writing by any person that
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the public hear-
ing will be published in theFederal Reg-
ister.
Drafting Information
The principal authors of these regula-
tions are Danielle M. Grimm and Tara P.
Volungis, Office of the Associate Chief
Counsel (Passthroughs and Special Indus-
tries). However, other personnel from the
IRS and Treasury Department partici-
pated in their development.
*****
2002–28 I.R.B.109July 15, 2002

Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 301,
which were proposed to be amended at 66
FR 41133 (August 7, 2001), are proposed
to be further amended as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805***
Par. 2. Section 1.6011–4, as proposed
at 66 FR 41169 (August 7, 2001), is
amended as follows:
1. The heading of§1.6011–4is
amended by removing the language“cor-
porate”.
2. The heading of paragraph (a) is
revised.
3. Paragraph (a) is amended by adding
“(1)In general.”after the heading.
4. Newly designated paragraph (a)(1)
is amended by adding the language“cor-
porate”before“taxpayer”in the first sen-
tence, and by removing the second sen-
tence and adding three new sentences in
its place.
5. Paragraphs (a)(2) and (a)(3) are
added.
6. Paragraph (b)(1) is amended by
revising the first sentence.
7. Paragraphs (b)(1)(i) and (b)(1)(ii)
are added.
8. Paragraph (b)(4)(i) is amended by
removing the first sentence.
9. Paragraph (b)(5)Example 3is
amended by revising the seventh sen-
tence.
10. Paragraphs (c)(1)(iii) and (c)(1)(v)
are revised.
11. Paragraph (c)(2)Exampleis
amendedbyaddingthelanguage
“Example.”after“of this section:”in the
first sentence and by adding“as in effect
at that time.”to the end of the third sen-
tence.
12. Paragraph (d)(1) is revised.
13. Paragraph (e) is amended by
removing the language“corporation’s”in
the first sentence and adding“taxpayer’s”
in its place.
14. Paragraph (g) is revised.
The revisions and additions read as
follows:
§1.6011–4 Requirement of statement
disclosing participation in certain
transactions by taxpayers.
[The text of the amendments to this
proposed section is the same as the text of
the amendments to§1.6011–4T pub-
lished elsewhere in this issue of theFed-
eral Register.]
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 3. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U.S.C. 7805***
Par. 4. Section 301.6111–2, as pro-
posed to be added at 66 FR 41169
(August 7, 2001), is amended as follows:
1. Paragraph (a)(3) is amended by add-
ing four sentences to the end of the para-
graph.
2. The heading for paragraph (h) is
revised and the entire text after the sec-
ond sentence is removed and four new
sentences are added in their place.
The revision and additions read as fol-
lows:
§301.6111–2 Confidential corporate tax
shelters.
[The text of the amendments to this
proposed section is the same as the text of
the amendments to§301.6111–2T pub-
lished elsewhere in this issue of theFed-
eral Register.]
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on June
14, 2002, 11:32 a.m., and published in the issue of
the Federal Register for June 18, 2002, 67 F.R.
41362)
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Guidance Under Section
6050P Regarding
Cancellation of Indebtedness
REG–107524–00
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains
proposed regulations relating to the infor-
mation reporting requirement under sec-
tion 6050P of the Internal Revenue Code
(Code) for cancellation of indebtedness.
The proposed regulations reflect the
enactment of section 6050P(c)(2)(D) by
the Ticket to Work and Work Incentives
Improvement Act of 1999. Section
6050P(c)(2)(D) requires organizations a
significant trade or business of which is
the lending of money to report discharges
of indebtedness. The proposed regulations
also conform the existing regulations to
statutory changes made by the Debt Col-
lection Improvement Act of 1996. In
addition, under the proposed regulations,
if an organization that is required to
report under section 6050P (an applicable
entity) forms, or avails itself of, some
other entity for the principal purpose of
holding loans acquired by the applicable
entity, then, for purposes of section
6050P, the entity so formed or availed of
is treated as having a significant trade or
business of lending money. This docu-
ment also provides notice of a public
hearing on these proposed regulations.
DATES: Written or electronic comments
must be received by September 17, 2002.
Requests to speak (with outlines of oral
comments) at a public hearing scheduled
for October 8, 2002, at 10:00 a.m., must
be received by September 17, 2002.
ADDRESSES: Send submissions to:
CC:ITA:RU (REG–107524–00), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand
delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m.
to: CC:ITA:RU (REG–107524–00), Cou-
rier’s Desk, Internal Revenue Service,
1111Constitution Avenue, NW, Washing-
ton, DC. Alternatively, taxpayers may
submit comments electronically directly
to the IRS Internet site at:www.irs.gov/
regs.The public hearing will be held in
Room 4718, Internal Revenue Building,
1111Constitution Avenue, NW, Washing-
ton, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Donna J. Welch at (202) 622–4910;
July 15, 20021102002–28 I.R.B.

concerning submissions and delivery of
comments, and the hearing, Treena Gar-
rett at (202) 622–7190 (not toll-free num-
bers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1) defining an organi-
zation a significant trade or business of
which is the lending of money under sec-
tion6050P(c)(2)(D).Section
6050P(c)(2)(D) was enacted by section
553(a) of the Ticket to Work and Work
Incentives Improvement Act of 1999,
Public Law No. 106–170, 113 Stat. 1860,
1931 (1999) (“the Act”), effective for dis-
charges of indebtedness occurring after
December 31, 1999. Generally, section
6050P(a) requires organizations that are
subject to that section (applicable entities)
to file returns with the Service and to pro-
vide statements to persons whose names
are required to be shown on the returns
(“payees”), setting forth certain informa-
tion regarding discharges of indebtedness
of $600 or more. Section 553(a) of the
Act amended section 6050P of the Code
by expanding the types of entities that are
required to report discharges of indebted-
ness to include any organization“a sig-
nificant trade or business of which is the
lending of money.”Notice 2000–22,
2000–1 C.B. 902, provides that penalties
under sections 6721 and 6722 will not be
imposed on the lending organizations
newly required to report discharges of
indebtedness for failures to report dis-
charges of indebtedness occurring before
January 1, 2001. In addition, Notice
2001–8, 2001–1 C.B. 374, extended that
suspension of penalties for failures to file
information returns for any discharge of
indebtedness that occurs prior to the first
calendar year beginning at least two
months after the date that appropriate
guidance is issued.
This document also contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1) conforming the
existing regulations under section 6050P
to statutory changes made by the Debt
Collection Improvement Act of 1996.
Explanation of Provisions
Under section 6050P(c)(2)(D), any
organization“a significant trade or busi-
ness of which is the lending of money”is
required to report discharges of indebted-
ness. These proposed regulations provide
guidance on when a trade or business is
the lending of money and when that trade
or business is significant. In general, the
proposed regulations provide that the
lending of money is a significant trade or
business if money is lent on a regular and
continuing basis. The regulations provide
three safe harbors under which organiza-
tions will not be considered to have a sig-
nificant trade or business of lending
money. The IRS and the Treasury Depart-
ment believe that these safe harbors sat-
isfy the information reporting objectives
of the statute while minimizing the
administrative burden on taxpayers.
The first safe harbor applies to organi-
zations that were not required to report
under section 6050P in the previous cal-
endar year. Such an organization will be
considered not to have a significant trade
or business of lending money for the cal-
endar year if its gross income from lend-
ing money in the most recent test year
(the most recent taxable year ending
before July 1 of the previous calendar
year) is less than both 15 percent of the
organization’s gross income and $5 mil-
lion.
The second safe harbor applies to
organizations that were required to report
under section 6050P for the previous cal-
endar year. Such an organization will be
considered not to have a significant trade
or business of lending money for the cal-
endar year if, for each of the three most
recent test years, its gross income from
lending money is less than both 10 per-
cent of the organization’s gross income
and $3 million. The IRS and the Treasury
Department believe that a stricter safe
harbor is appropriate for taxpayers that
have been subject to section 6050P in a
prior year and, therefore, presumably
have systems in place to comply with the
information reporting requirements of the
statute.
The third safe harbor applies to certain
newly formed organizations. Except for
an entity that is formed or availed of for
the principal purpose of holding loans
acquired by an applicable entity (as
defined in section 6050P), an organiza-
tion that does not have a test year is con-
sidered not to have a significant trade or
business of lending money even if the
organization lends money on a regular
and continuing basis. This safe harbor
and the use of a“test year”in determin-
ing whether a taxpayer fits within the
other safe harbors provides taxpayers
with some advance notice (i.e., at least
six months) of whether they will need to
establish systems to track and report dis-
charges of indebtedness.
In addition to the safe harbors dis-
cussed above, the proposed regulations
provide a general exception to informa-
tion reporting for entities whose principal
trade or business is the sale of nonfinan-
cial goods or the provision of nonfinan-
cial services. Such entities are not consid-
ered to have a significant trade or
business of lending money with respect to
lending or credit extended in connection
with the purchase by customers of those
goods and services. This is consistent
with the legislative history, which indi-
cates that, in amending section 6050P,
Congress was concerned with credit card
and finance companies. S. Rpt. No. 201,
106th Cong., 1st Sess. 28 (1999). The
IRS and the Treasury Department believe
that Congress did not mean to extend the
reporting requirement to retailers and
other entities who extend credit to cus-
tomers in connection with the purchase of
nonfinancial goods and services. How-
ever, consistent with applying the tests
under section 6050P on an entity-by-
entity basis, this exception is not avail-
able to a separate financing subsidiary of
such a retailer. In addition, if such a
retailer is subject to section 6050P regard-
less of its accounts receivable, it is
required to report discharges of indebted-
ness of accounts receivable as well as
other debt.
The proposed regulations also provide
that,forpurposesofsection
6050P(c)(2)(D), lending money includes
acquiring a loan, and gross income aris-
ing from that loan is gross income from
lending money. Therefore, an organiza-
tion that buys and holds loans is treated
as an organization that lends money. This
is consistent with the temporary regula-
tions under section 6050J (relating to
information returns for acquisitions and
2002–28 I.R.B.111July 15, 2002

abandonments of property that is security
for indebtedness). See§1.6050J–1T,
Q&A–22.
Finally, the proposed regulations
amend§1.6050P–1 to provide a new rule
applicable to all entities subject to section
6050P, not just those newly made subject
to section 6050P by the 1999 amendment.
The current regulations under section
6050P (§1.6050P–1(e)(2)) contain rules
respecting the reporting requirements of
debtors when indebtedness is owned by
more than one creditor. Each creditor that
is an applicable entity is required to
report with respect to any discharge of
indebtedness of $600 or more allocable to
that creditor. For purposes of this rule,
indebtedness owned by a partnership is
treated as owned by the partners, with the
result that reporting may be required of
the partners with respect to a cancellation
of debt held by the partnership. Rules
respecting compliance with this pass-
through reporting requirement by holders
of interests in certain pass-through securi-
tized indebtedness arrangements and
REMICs were reserved.§1.6050P–
1(e)(2)(iii) & (iv). The preamble to those
regulations states that penalties will not
be imposed for nonreporting by holders
of interests in these entities.
Conceivably, an entity that otherwise
would be required to report under section
6050P with respect to its debt (for
example, an entity that regularly and con-
tinuously lends money and does not meet
the safe harbors of these proposed regula-
tions), could transfer debt that it origi-
nates to a special purpose subsidiary or
trust in a single transaction. Through this
structure, the originator could possibly
avoid application of section 6050P by
arguing that the reservation of rules in the
regulations for pass-through securitized
indebtedness arrangements absolves them
of any reporting obligation and that the
transferee entity does not meet the
requirements of regular and continuous
lending activity.
To address the foregoing concern, the
amendment to§1.6050P–1 by the pro-
posed regulations provides that an entity
formed or availed of by an applicable
entity for the principal purpose of holding
loans acquired or originated by the appli-
cable entity is treated as having a signifi-
cant trade or business of lending money.
Accordingly, the transferee entity itself is
treated as an applicable entity for pur-
poses of section 6050P(c)(2)(D). If the
entity formed or availed of by the appli-
cable entity is a REMIC or a pass-through
securitized indebtedness arrangement as
defined in§1.6050P–1(e)(2)(iii)(B), the
REMIC or pass-through securitized
indebtedness arrangement will be treated
as an applicable entity for purposes of
section 6050P(c)(2)(D), despite the reser-
vation in§1.6050P–1(e)(2)(iii) and (iv)
of the application of section 6050P to
holders of interests in REMICs and pass-
through securitized indebtedness arrange-
ments.
Proposed Effective Date
The regulations, as proposed, apply to
any discharge of indebtedness occurring
in any calendar year beginning at least
two months after the date that the final
regulations are published in theFederal
Register. Regardless of when the final
regulations are made effective, the rules
in these proposed regulations may be
relied on for prior taxable periods.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory 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
these regulations, and because the regula-
tion does not impose a collection of infor-
mation on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. The information collection ref-
erenced in this proposed rule (Form
1099–C) has been previously reviewed
and approved by theOffice of Manage-
ment and Budgetunder OMB Control
Number 1545–1424. An agency may not
collect or sponsor the collection of infor-
mation unless it displays a valid OMB
Control Number. Pursuant to section
7805(f) of the Code, this notice of pro-
posed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any electronic or written
comments (a signed original and eight (8)
copies) that are submitted timely to the
IRS. The IRS and Treasury Department
request comments on the clarity of the
proposed rules and how they can be made
easier to understand. All comments will
be available for public inspection and
copying.
A public hearing has been scheduled
for October 8, 2002, beginning at 10 a.m.
in Room 4718 of the Internal Revenue
Building,1111Constitution Avenue, NW,
Washington, DC. Because of access
restrictions, visitors must enter at the
main entrance, located at1111Constitu-
tion Avenue, NW. All visitors must
present photo identification to enter the
building. Because of access restrictions,
visitors will not be admitted beyond the
immediate entrance area more than 30
minutes before the hearing starts. For
information about having your name
placed on the building access list to
attend the hearing, see the“FOR FUR-
THER INFORMATION CONTACT”
portion of this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments must submit elec-
tronic or written comments and an outline
of the topic to be discussed and time to be
devoted to each topic (preferably a signed
original and eight (8) copies) by Septem-
ber 17, 2002. A period of 10 minutes will
be allotted to each person for making
comments. An agenda showing the sched-
uling of the speakers will be prepared
after the deadline for receiving outlines
has passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these proposed
regulations is Sharon L. Hall, Office of
Associate Chief Counsel (Income Tax &
Accounting). However, other personnel
from the IRS and Treasury Department
participated in their development.
*****
July 15, 20021122002–28 I.R.B.

Proposed Amendment to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read as follows:
Authority: 26 U.S.C. 7805***
Section 1.6050P–1 and 1.6050P–2 also
issued under 26 U.S.C. 6050P.***
Par. 2. Section 1.6050P–0 is amended
as follows:
1. The introductory text is amended by
adding the language“and§1.6050P–2”
immediatelyafterthelanguage
“§1.6050P–1”.
2. The heading for§1.6050P–1is
amended by removing the word“finan-
cial”.
3. The entry for§1.6050P–1(e)(2)(v)
is added.
4. The entries for§§1.6050P–1(e)(5)
through (e)(8) are redesignated as entries
for§§1.6050P–1(e)(6) through (e)(9) and
a new entry for§1.6050P–1(e)(5) is
added.
5. The entries for§1.6050P–2 are
added.
The additions read as follows:
§1.6050P–0 Table of Contents.
*****
§1.6050P–1 Information reporting for
discharges of indebtedness for certain
entities.
*****
(e)***
(2)***
(v) No double reporting.
*****
(5) Entity formed or availed of to hold
indebtedness.
*****
§1.6050P–2 Organizations a significant
trade or business of which is the lending
of money.
(a) In general.
(b) Safe harbors.
(1) Organizations not subject to section
6050P in the previous calendar year.
(2) Safe harbor for organizations that
were subject to section 6050P in the pre-
vious calendar year.
(3) No test year.
(c) Seller financing.
(d) Gross income from lending of money.
(e) Acquisition of indebtedness by subse-
quent holder.
(f) Test year.
(g) Predecessor organization.
(h) Examples.
(i) Effective date.
Par. 3. Section 1.6050P–1 is amended
as follows:
1. The heading for§1.6050P–1is
amended by removing the word“finan-
cial”.
2. Paragraphs (a)(1), (b)(2)(i)(F), (c),
(e)(2)(i), (e)(3), (e)(7), (f)(1) introductory
text, (f)(1)(ii) and (f)(2) are amended by
removing the word“financial”.
3. The first sentence of paragraph (c)
is amended by adding“and section
1.6050P–2”immediately after the word
“section”.
4. Paragraph (e)(2)(v) is added.
5. Paragraph (e)(4) is amended by
removing“6050P(c)(1)(A)”each time it
appears and adding“6050P(c)(2)(A)”in
itsplaceandbyremoving
“6050P(c)(1)(C)”andadding
“6050P(c)(2)(C)”in its place.
6. Paragraphs(e)(5) through (e)(8) are
redesignated as (e)(6) through (e)(9) and
a new paragraph (e)(5) is added.
7. Paragraph (e)(7)(i), as redesignated,
is amended by removing“(e)(6)”where it
appears and adding“(e)(7)”and para-
graph (e)(7)(ii), as redesignated, is
amended by removing“(e)(6)(i)”where it
appears and adding“(e)(7)(i)”in its
place.
8. Paragraph (h)(1) is amended by add-
ing“and, except paragraph (e)(5) of this
section, which applies to discharges of
indebtedness occurring in any calendar
year beginning at least two months after
the date that the final regulations are pub-
lished in theFederal Register.”, immedi-
ately after the language“1994”.
The additions read as follows:
§1.6050P–1 Information reporting for
discharges of indebtedness by certain
entities.
*****
(e)***
(2)***
(v)No double reporting. If multiple
creditors are considered to hold interests
in an indebtedness under paragraph (e)(2)
of this section, and an entity is required to
report a discharge of that indebtedness
under paragraph (e)(5) of this section,
then such multiple creditors are not
required to report the discharge of indebt-
edness.
*****
(5)Entity formed or availed of to hold
indebtedness.Notwithstanding§1.
6050P–2(b)(3), if an entity (the transferee
entity) is formed or availed of by an
applicable entity (within the meaning of
section 6050P(c)(1)) for the principal pur-
pose of holding indebtedness acquired
(including originated) by the applicable
entity, then, for purposes of section
6050P(c)(2)(D), the transferee entity has
a significant trade or business of lending
money.
*****
Par. 4. A new§1.6050P–2 is added as
follows:
§1.6050P–2 Organization a significant
trade or business of which is the lending
of money.
(a)In general. For purposes of section
6050P(c)(2)(D), the lending of money is a
significant trade or business of an organi-
zation in a calendar year if the organiza-
tion lends money on a regular and con-
tinuing basis during the calendar year.
(b)Safe harbors—(1)Organizations
not subject to section 6050P in the previ-
ous calendar year. For an organization
that was not required to report under sec-
tion 6050P in the previous calendar year,
the lending of money will not be treated
as a significant trade or business for the
calendar year in which the lending occurs
if gross income from lending money in
the organization’s most recent test year
(as defined in paragraph (f) of this sec-
tion) is both less than $5 million and less
than 15 percent of the organization’s
gross income for that test year.
(2)Organizations that were subject to
section 6050P in the previous calendar
year. For an organization that was
required to report under section 6050P for
the previous calendar year, the lending of
money will not be treated as a significant
trade or business for the calendar year in
which the lending occurs if gross income
2002–28 I.R.B.113July 15, 2002

from lending money in each of the orga-
nization’s three most recent test years is
both less than $3 million and less than 10
percent of the organization’s gross
income for that test year.
(3)No test year. The lending of money
will not be treated as a significant trade or
business for an organization for the calen-
dar year in which the lending occurs if
the organization does not have a test year
for that calendar year.
(c)Seller financing. If the principal
trade or business of an organization is
selling nonfinancial goods or providing
nonfinancial services and if the organiza-
tion extends credit to the purchasers of
those goods or services in order to
finance the purchases, then, for purposes
of section 6050P(c)(2)(D), these exten-
sions of credit are not a significant trade
or business of lending money.
(d)Gross income from lending of
money. For purposes of this section, gross
income from lending of money includes
income from interest, fees, penalties, mer-
chant discount, interchange and gains
arising from the sale of an indebtedness.
(e)Acquisition of indebtedness by sub-
sequent holder. For purposes of this sec-
tion, lending money includes acquiring an
indebtedness, and gross income arising
from such an acquired indebtedness is
treated as gross income from lending
money, without regard to whether the
indebtedness was originated by either an
applicable entity or a related party.
(f)Test year. For any calendar year, a
test yearis a taxable year of the organiza-
tion that ends before July 1 of the previ-
ous calendar year.
(g)Predecessor organization.Ifan
organization acquires substantially all of
the property that was used in a trade or
business of some other organization (the
predecessor) (including when two or
more corporations are parties to a merger
agreement under which the surviving cor-
poration becomes the owner of all the
assets and assumes all the liabilities of the
absorbed corporations(s)) or was used in
a separate unit of the predecessor, then
whether the organization at issue qualifies
for one of the safe harbors in paragraph
(b) of this section is determined by also
taking into account the test years, report-
ing obligations, and gross income of the
predecessor.
(h)Examples. The rules of this section
are illustrated by the following examples.
Example 1. Finance Company A, a calendar year
taxpayer, was formed in Year 1 as a non-bank sub-
sidiary of Manufacturing Company and has no pre-
decessor. A lends money to purchasers of Manufac-
turing Company’s products on a regular and
continuing basis to finance the purchase of those
products. A’s gross income from interest in Year 1 is
$4.7 million. A’s gross income from fees and penal-
ties related to the lending activity in Year 1 is $.5
million. Section 6050P does not require A to report
discharges of indebtedness occurring in Years 1 or 2,
because A has no test year for those years. Notwith-
standing that A lends money in those years on a
regular and continuing basis, under paragraph (b)(3)
of this section, A does not have a significant trade or
business of lending money in those years for pur-
poses of section 6050P(c)(2)(D). However, for Year
3, A’s test year is Year 1. A’s gross income from
lending in Year 1 is not less than $5 million for pur-
poses of the applicable safe harbor of paragraph
(b)(1) of this section. Because A lends money on a
regular and continuing basis and does not meet the
applicable safe harbor, section 6050P requires A to
report discharges of indebtedness occurring in Year
3.
Example 2. The facts are the same as inExample
1, except that A is a division of Manufacturing
Company, rather than a separate subsidiary. Manu-
facturing Company’s principal activity is the manu-
facture and sale of non-financial products, and other
than financing the purchase of those products Manu-
facturing Company does not extend credit or other-
wise lend money. Accordingly, under paragraph (c)
of this section, that financing activity is not a sig-
nificant trade or business of lending money for pur-
poses of section 6050P(c)(2)(D), and section 6050P
does not require Manufacturing Company to report
discharges of indebtedness.
Example 3. Company B, a calendar year tax-
payer, is formed in Year 1. B has no predecessor and
a part of its activities consists of the lending of
money. B packages and sells part of the indebted-
ness it originates and holds the remainder. B is
engaged in these activities on a regular and continu-
ing basis. For Year 1, B’s gross income from sales
of the indebtedness, combined with interest income,
fees, and penalties related to the lending activity is
only $4.8 million, but it is 16% of B’s gross income
in Year 1. Because B lends money on a regular and
continuing basis and does not meet the applicable
safe harbor of paragraph (b)(1) of this section, sec-
tion 6050P requires B to report discharges of indebt-
edness occurring in Year 3. B is not required to
report discharges of indebtedness in years 1 and 2
because B has no test year for years 1 and 2.
Example 4. The facts are the same as inExample
3. In addition, in each of Years 2, 3, and 4, B’s gross
income from sales of the indebtedness combined
with interest income, fees, and penalties related to
the lending activity is less than both $3 million and
10% of B’s gross income. Because B was required
to report under section 6050P for Year 3, the appli-
cable safe harbor for Year 4 is paragraph (b)(2) of
this section, which is satisfied only if B’s gross
income from lending activities for each of the three
most recent test years is less than both $3 million
and 10% of B’s gross income. For Year 4, even
though B has only two test years, B’s gross income
in one of those test years, Year 1, causes B to fail to
meet this safe harbor. Accordingly, B is required to
report discharges of indebtedness under section
6050P in Year 4. For Year 5, B’s three most recent
test years are Years 1, 2, and 3. However, B’s gross
income from lending activities in Year 1 is not less
than $3 million and 10% of B’s gross income.
Accordingly, section 6050P requires B to report dis-
charges of indebtedness in Year 5. For Year 6, B
satisfies the applicable safe harbor requirements of
paragraph (b)(2) for each of the three most recent
test years (Years 2, 3, and 4). Therefore, section
6050P does not require B to report discharges of
indebtedness in Year 6. Because B is not required to
report for Year 6, the applicable safe harbor for Year
7 is the one contained in paragraph (b)(1) of this
section, and thus the only relevant test year is year
5.
(i)Effective date. This section is effec-
tive for discharges of indebtedness occur-
ring in any calendar year beginning at
least two months after the date that the
final regulations are published in theFed-
eral Register.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on June
12, 2002, 8:45 a.m., and published in the issue of
the Federal Register for June 13, 2002, 67 F.R.
40629)
Section 7428(c) Validation of
Certain Contributions Made
During Pendency of
Declaratory Judgment
Proceedings
This announcement serves notice to
potential donors that the organization
listed below has recently filed timely
declaratory judgment suit under section
7428 of the Code, challenging revocation
of it’s status as an eligible donee under
section 170(c)(2).
Protection under section 7428(c) of the
Code begins on the date that the notice of
revocation is published in the Internal
Revenue Bulletin and ends on the date on
which a court first determines that an
organization is not described in section
170(c)(2), as more particularly set forth in
section 7428(c)(1). In the case of indi-
vidual contributors, the maximum amount
of contributions protected during this
period is limited to $1,000.00, with a hus-
band and wife being treated as one con-
tributor. This protection is not extended to
any individual who was responsible, in
whole or in part, for the acts or omissions
July 15, 20021142002–28 I.R.B.

of the organization that were the basis for
the revocation. This protection also
applies (but without limitation as to
amount) to organizations described in
section 170(c)(2) which are exempt from
tax under section 501(a). If the organiza-
tion ultimately prevails in its declaratory
judgment suit, deductibility of contribu-
tions would be subject to the normal limi-
tations set forth under section 170.
T. L. C. Environmental
Encinitas, CA
2002–28 I.R.B.115July 15, 2002

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.—Intemal 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 15, 2002i2002–28 I.R.B.

Numerical Finding List
1
Bulletin 2002–26 and 2002–27
Announcements:
2002–59, 2002–26 I.R.B.28
2002–60, 2002–26 I.R.B.28
2002–61, 2002–27 I.R.B.72
2002–62, 2002–27 I.R.B.72
2002–63, 2002–27 I.R.B.72
2002–64, 2002–27 I.R.B.72
Notices:
2002–42, 2002–27 I.R.B.36
2002–43, 2002–27 I.R.B.38
2002–44, 2002–27 I.R.B.39
Proposed Regulations:
REG–248110–96, 2002–26 I.R.B.19
REG–103823–99, 2002–27 I.R.B.44
REG–103829–99, 2002–27 I.R.B.59
REG–106457–00, 2002–26 I.R.B.23
REG–115285–01, 2002–27 I.R.B.62
REG–126024–01, 2002–27 I.R.B.64
REG–122564–02, 2002–26 I.R.B.25
REG–123305–02, 2002–26 I.R.B.26
Revenue Procedures:
2002–44, 2002–26 I.R.B.10
2002–45, 2002–27 I.R.B.40
Revenue Rulings:
2002–38, 2002–26 I.R.B.4
2002–39, 2002–27 I.R.B.33
2002–40, 2002–27 I.R.B.30
Treasury Decisions:
8997, 2002–26 I.R.B.6
8998, 2002–26 I.R.B.1
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2002–1 through 2002–25 is
in Internal Revenue Bulletin 2002–26, dated July 1, 2002.
2002–28 I.R.B.iiJuly 15, 2002

Finding List of Current Actions
on Previously Published Items
1
Bulletin 2002–26 and 2002–27
Announcements:
98–99
Superseded by
Rev. Proc. 2002–44, 2002–26 I.R.B.10
2000–4
Modified by
Ann. 2002–60, 2002–26 I.R.B.28
2001–9
Superseded by
Rev. Proc. 2002–44, 2002–26 I.R.B.10
Revenue Procedures:
2002–13
Modified by
Rev. Proc. 2002–45, 2002–27 I.R.B.40
1
A cumulative list of current actions on previously published
items in Internal Revenue Bulletins 2002–1 through 2002–25 is
in Internal Revenue Bulletin 2002–26, dated July 1, 2002.
July 15, 2002iii2002–28 I.R.B.