Internal Revenue Bulletin 2004-10 (PDF rendition): IRS Revenue Procedures

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

Bulletin No. 200
4-10
March 8, 2004
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2004–8, page 544.
Cost-share payments.The Forest Land Enhancement Pro-
gram (FLEP) is a small watershed program administered by
the Secretary of Agriculture that is substantially similar to the
type of programs described in section 126(a)(1) through (8)
of the Code within the meaning of section 126(a)(9). All or a
portion of cost-share payments received under the FLEP is eli-
gible for exclusion from gross income to the extent permitted
by section 126. Rental payments and incentive payments are
not cost-share payments and are not excludable from gross in-
come.
Rev. Rul.
2004–24, page 550.
REITs; pa
rking facilities.This ruling identifies circumstances
in which a
real estate investment trust’s (REIT’s) income from
providi
ng parking facilities at its rental real properties qualifies
as rents
from real property under section 856(d) of the Code.
Rev. Proc. 2004–17, page 562.
This procedure provides guidance to individuals who fail to
meet the eligibility requirements of section 911(d)(1) of the
Code because adverse conditions in a foreign country preclude
the individual from meeting those requirements. A current list
of countries and the dates those countries are subject to the
section 911(d)(4) waiver is provided. Rev. Proc. 2003–26
supplemented.
EMPLOYEE PLANS
Rev. Rul. 2004–20, page 546.
Section 412(i) plans; deductibility; listed transactions.
This ruling gives an example where a qualified pension plan
cannot be a section 412(i) plan if the plan holds life insurance
contracts and annuity contracts for the benefit of a participant
that provide for benefits at normal retirement age in excess of
the participant’s benefits at normal retirement age under the
terms of the plan. The ruling also addresses when certain em-
ployer contributions to purchase life insurance coverage for a
participant in a defined benefit plan are deductible and whether
those transactions are “listed transactions.” Rev. Rul. 55–748
modified and superseded.
Rev. Rul
. 2004–21, page 544.
Nondiscr
imination; section 412(i) plan.This ruling pro-
vides an
example where a plan that is funded, in whole or in
part, wi
th life insurance contracts may not satisfy the require-
ments of
Code section 401(a)(4) prohibiting discrimination in
favor of
highly compensated employees.
Rev. Rul. 2004–22, page 553.
COBRA and Medicare entitlement.The COBRA continua-
tion coverage period can be expanded from 18 to 36 months
if a second qualifying event occurs. Medicare entitlement of
a covered employee is one of the listed events that can be a
second qualifying event. This ruling holds that Medicare entitle-
ment is not a second qualifying event unless (ignoring the first
qualifying event) it would result in a loss of coverage under the
group health plan.
(Continued on the next page)
Fi
nding Lists begin on page ii.

REG–126967–03, page 566.
Proposed regulations under section 402 of the Code provide
rules regarding the amount includible in a participant’s income
when a life insurance contract is distributed from a qualified
plan, and provide rules under sections 79 and 83 imposing sim-
ilar valuation requirements for those other employer-provided
life insurance arrangements. A public hearing is scheduled for
June 9, 2004.
Rev. Proc. 2004–16, page 559.
Fair market value; distributions; qualified retirement
plans.This procedure provides interim guidance on how fair
market value may be determined in the instance of distribu-
tions from a qualified retirement plan.
EMPLOYMENT TAX
REG–156421–03, page 571.
Proposed regulations under sections 3121(b)(10) and
3306(c)(10)(B) of the Code provide guidance on the Federal
Insurance Contributions Act (FICA) and Federal Unemployment
Tax Act (FUTA) exceptions for student services. The proposed
regulations provide guidance on whether an employer is
considered a “school, college, or university,” and whether an
employee is considered a “student” under these provisions. A
public hearing is scheduled for June 16, 2004.
Notice 2004–12, page 556.
This notice contains a proposed revenue procedure that sets
forth generally applicable standards for determining whether
service in the employ of certain public or private nonprofit
schools, colleges, universities, or affiliated organizations de-
scribed in section 509(a)(3) of the Code performed by a stu-
dent qualifies for the exception from Federal Insurance Con-
tributions Act (FICA) tax provided under section 3121(b)(10).
Rev. Proc. 98–16 suspended.
ADMINISTRATIVE
Rev. Proc. 2004–19, page 563.
This procedure provides an elective safe harbor that the owner
of an oil and gas property may use in determining the property’s
recoverable reserves for purposes of computing cost depletion
under section 611 of the Code.
Announcement 2004–11, page 581.
This announcement provides information regarding changes to
the reporting for certain 2002 forms by certain fiscal year
pass-through entities affected by pending technical corrections
to the qualified dividend rules. Partnerships, S corporations,
and estates (including revocable trusts treated as part of an es-
tate) with a fiscal year beginning in 2002 that received qualified
dividends in 2003 must reflect the changes required by this an-
nouncement in their reporting for the tax year. Announcement
2003–56 modified.
Announcement 2004–14, page 582.
This document announces the cancellation of a public hearing
on proposed regulations (REG–110896–98, 2003–51 I.R.B.
1226) under section 664(b) of the Code concerning the char-
acterization of distributions from charitable remainder trusts.
March 8, 20042004-10 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bul-
letin contents are consolidated semiannually into Cumulative
Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.*
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
* Beginning with Internal Revenue Bulletin 2003–43, we are publishing the index at the end of the month, rather than at the beginning.
2004-10 I.R.B.March 8, 2004

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 126.—Certain
Cost-Sharing Payments
26 CFR 16A.126–1: Certain cost sharing payments
— In general (Temporary).
Cost-share payments.The Forest
Land Enhancement Program (FLEP) is a
small watershed program administered by
the Secretary of Agriculture that is sub-
stantially similar to the type of programs
describedinsection126(a)(1)through(8)
of the Code within the meaning of section
126(a)(9). All or a portion of cost-share
payments received under the FLEP is el-
igible for exclusion from gross income
to the extent permitted by section 126.
Rental payments and incentive payments
are not cost-share payments and are not
excludable from gross income.
Rev. Rul. 2004–8
ISSUE
Is the Forest Land Enhancement Pro-
gram (FLEP) substantially similar to the
type of programs described in § 126 (a)(1)
through (8) of the Internal Revenue Code,
so that the FLEP is within the scope of
§ 126(a)(9) and, thereby, cost-share pay-
ments received under the FLEP are eligi-
ble for exclusion from gross income to the
extent permitted by § 126?
FACTS
The FLEP, authorized under the provi-
sions of Title VIII of the Farm Security
and Rural Investment Act of 2002, Pub.
L. No. 107–171, 116 Stat. 134, which
amended the Cooperative Forestry Assis-
tance Act of 1978, Pub. L. No. 95–313, 92
Stat. 365, is a voluntary program for non-
industrial private forest landowners that
provides technical, educational, and cost-
share assistance to encourage the long-
term sustainability of non-industrial pri-
vate forest land and related resources. The
FLEP replaces the Stewardship Incentives
Program (SIP), which was determined in
Rev. Rul. 94–27, 1994–1 C.B. 26, to be
within the scope of § 126(a)(9), and the
Forestry Incentives Program (FIP), which
is listed in § 126(a)(8). The SIP provided
for the cost-sharing of a wide range of
multiple resource management practices.
The FIP provided for cost-sharing of tim-
ber stand improvements, site preparation
for natural regeneration, and tree planting
practices. The FLEP encompasses all of
the cost-share practices authorized under
both the SIP and the FIP.
A landowner who wishes to participate
in the cost-share component of the FLEP
must develop and implement, in cooper-
ation with the state forester, another state
official, or a professional resources man-
ager, a management plan that addresses
site specific activities and practices. The
cost-share practices are limited to the treat-
ment of 1,000 acres per year and must
be implemented for a period of at least
10 years. The maximum cost-share pay-
ment for any practice may be up to 75 per-
cent. The aggregate payment to any one
landowner through 2007 may not exceed
$100,000.
The Secretary of Agriculture has deter-
mined that cost-share payments under the
FLEP are primarily for the purpose of con-
servation.
LAW AND ANALYSIS
Under § 126(a), gross income does
not include the excludable portion of
payments received under certain conser-
vationprogramssetforthin§126(a)(1)
through (8). Under § 126(a)(9), a pro-
gram affecting “small watersheds” that is
administered by the Secretary of Agricul-
ture also is eligible for § 126 treatment
if the Commissioner determines that the
program is substantially similar to the
type of programs described in § 126(a)(1)
through (8). See § 16A.126–1(d)(3) of the
temporary Income Tax Regulations for the
definition of “small watershed.”
Once the Commissioner has deter-
mined that a program is substantially
similar to the types of programs described
in § 126(a)(1) through (8), taxpayers re-
ceiving cost-share payments under that
program must determine what portion
of the cost-share payments is excludable
from gross income under § 126. See
§ 126(b)(1), and § 16A.126–1, relating to
the partial exclusion of certain cost-share
payments, to determine what portion of the
cost-share payments is excludable from
gross income under § 126.
HOLDING
The FLEP is substantially similar
to the type of programs described in
§ 126(a)(1) through (8) within the mean-
ing of § 126(a)(9). All or a portion of
cost-share payments received under the
FLEP is eligible for exclusion from gross
income to the extent permitted by § 126.
See § 126(b)(1) and § 16A.126–1 to deter-
mine what portion, if any, of the cost-share
payments is excludable from gross income
under § 126.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Nicole R. Cimino of the Office
of Associate Chief Counsel (Passthroughs
and Special Industries). For further in-
formation regarding this revenue ruling,
contact Ms. Cimino at (202) 622–3120
(not a toll-free call).
Section 401.—Qualified
Pension, Profit-Sharing,
and Stock Bonus Plans
26 CFR 1.401–1: Qualified pension, profit-sharing,
and stock bonus plans.
Whether the incidental death benefit rules are sat-
isfied. See Rev. Rul. 2004-20, page 546.
26 CFR 1.401(a)(4)–4: Nondiscriminatory availabil-
ity of benefits, rights, and features.
Nondiscriminati
on; section 412(i)
plan.This ruling
provides an example
where a plan that i
s funded, in whole or in
part, with life in
surance contracts may not
satisfy the requ
irements of Code section
401(a)(4) prohi
biting discrimination in
favor of highly c
ompensated employees.
Rev. Rul. 2004–21
ISSUE
Does a plan that is funded, in whole or
in part, with life insurance contracts satisfy
2004-10 I.R.B.544March 8, 2004

the requirements of § 401(a)(4) of the In-
ternal Revenue Code prohibiting discrimi-
nation in favor of highly compensated em-
ployees where: (1) highly compensated
employees are permitted, prior to distri-
bution of retirement benefits, to purchase
life insurance contracts from the plan at
cash surrender value; and (2) any rights
under the plan for nonhighly compensated
employees to purchase life insurance con-
tracts from the plan prior to distribution
of retirement benefits are not of inherently
equal or greater value than the purchase
rights of highly compensated employees?
FACTS
Employer M maintains Plan A, a retire-
ment plan that is intended to be a qual-
ified plan under § 401(a). Plan A pro-
vides an incidental death benefit within the
meaning of § 1.401–1(b)(1)(i) of the In-
come Tax Regulations for each participant,
and holds a life insurance contract on the
life of each participant to fund that inci-
dental death benefit. Before distributions
to a participant under Plan A commence,
each participant is offered the opportunity
to purchase the life insurance contract un-
der which the participant is insured from
Plan A for its cash surrender value. It is
assumed for purposes of this revenue rul-
ing that Prohibited Transaction Exemption
92–6, 57 FR 5189 (February 12, 1992) ap-
plies to the purchase of a life insurance
contract from Plan A and, thus, a partici-
pant’s purchase of a life insurance contract
from Plan A is not a prohibited transaction
under § 4975. Employer M has nonhighly
compensated employees that are not ex-
cludable employees within the meaning of
§ 1.410(b)–6, and the features of the life
insurance contracts covering the lives of
highly compensated employees are differ-
ent than the features of the life insurance
contracts covering the lives of nonhighly
compensated employees. In addition, be-
cause of these differences in the features of
the contracts, the rights that the nonhighly
compensated employees have to purchase
the life insurance contracts under which
they are insured from Plan A are not of
inherently equal or greater value than the
rights that highly compensated employees
have to purchase the life insurance con-
tracts under which they are insured.
LAW AND ANALYSIS
Section 401(a)(4) provides that, under a
qualified retirement plan, contributions or
benefits provided under the plan must not
discriminate in favor of highly compen-
sated employees. Section 410(b) provides
minimum coverage requirements that are
designed to ensure that a qualified plan
provides sufficient benefits to a large
enough proportion of participants who are
nonhighly compensated employees.
Section 1.401(a)(4)–1(b)(3) provides
that a plan satisfies the requirements of
§ 401(a)(4) only if all benefits, rights and
features provided under the plan are made
available under the plan in a nondiscrimi-
natory manner. Under § 1.401(a)(4)–4(a),
benefits, rights and features (i.e., optional
forms of benefit, ancillary benefits, and
other rights or features) are made avail-
able under the plan in a nondiscriminatory
manner only if each benefit, right or
feature satisfies the current availability
requirement of § 1.401(a)(4)–4(b) and
the effective availability requirement of
§ 1.401(a)(4)–4(c). In general, a benefit,
right or feature satisfies the current avail-
ability requirement of § 1.401(a)(4)–4(b)
for a plan year if the group of employ-
ees to whom the benefit, right or feature
is currently available during the plan
year satisfies § 410(b) (without regard
to the average benefit percentage test of
§ 1.410(b)–5).
An other right or feature is any right
or feature applicable to employees un-
der the plan (other than a benefit for-
mula, an optional form of benefit, or
an ancillary benefit) that can be ex-
pected to have meaningful value. Under
§ 1.401(a)(4)–4(e)(3)(i), a distinct other
right or feature exists if a right or feature
is not available on substantially the same
terms as another right or feature. Under
§ 1.401(a)(4)–4(e)(3)(iii)(C), the right to a
particular form of investment, including,
for example, a particular class or type of
employer securities (taking into account,
in determining whether different forms
of investment exist, any differences in
conversion, dividend, voting, liquidation
preference, or other rights conferred under
the security) is a distinct other right or fea-
ture. Similarly, differences in insurance
contracts (e.g., differences in cash value
growth terms or different exchange fea-
tures) that may be purchased from a plan
can create distinct other rights or features
even if the terms under which the contracts
are purchased from the plan are the same.
Under § 1.401(a)(4)–4(d)(4), an op-
tional form of benefit, ancillary benefit,
or other right or feature is permitted to be
aggregated with another optional form of
benefit, ancillary benefit, or other right or
feature if one of the two is, in all cases,
of inherently equal or greater value than
the other, and the optional form of benefit,
ancillary benefit, or other right or feature
that is of inherently equal or greater value
separately satisfies the current availabil-
ity requirement of § 1.401(a)(4)–4(b) and
the effective availability requirement of
§ 1.401(a)(4)–4(c). For this purpose, one
benefit, right, or feature is of inherently
equal or greater value than another benefit,
right, or feature only if, at any time and
under any conditions, it is impossible for
any employee to receive a smaller amount
or a less valuable right under the first ben-
efit, right, or feature than under the second
benefit, right, or feature.
To the extent the purchase from Plan
A of a life insurance contract by a highly
compensated employee is a distribution al-
ternative with respect to benefits described
in § 411(d)(6)(A), such a purchase right is
an optional form of benefit under Plan A.
Even in situations in which this purchase
right is not an optional form of benefit,
this purchase right is an other right or fea-
ture. The purchase rights for the highly
compensated employees are distinct op-
tional forms of benefit or other rights or
features from the purchase rights for non-
highly compensated employees because of
differences in the life insurance contracts
(analogous to a conversion right applica-
ble to a security). This purchase right
for highly compensated employees does
not satisfy the current availability require-
ment of § 1.401(a)(4)–4(b) because the
right to purchase the contracts of a type
available to the highly compensated em-
ployees is not available to any nonhighly
compensated employees, and therefore is
not available to a group that satisfies the
requirements of § 410(b). Moreover, un-
der the facts presented, this purchase right
of highly compensated employees cannot
satisfy the requirements of § 1.401(a)(4)–4
through aggregation with any other op-
tional form of benefit, ancillary benefit, or
other right or feature (such as the purchase
right for nonhighly compensated employ-
March 8, 20045452004-10 I.R.B.

ees) because no other optional form of
benefit, ancillary benefit, or other right
or feature under the plan that would en-
able the aggregated benefits to be avail-
able to a group that satisfies the require-
ments of § 410(b) is of inherently equal or
greater value. Thus, Plan A fails to sat-
isfy the nondiscrimination requirements of
§ 401(a)(4).
HOLDING
A plan that is funded, in whole or in
part, with life insurance contracts does not
satisfy the requirements of § 401(a)(4) pro-
hibiting discrimination in favor of highly
compensated employees where: (1) the
plan permits highly compensated employ-
ees, prior to distribution of retirement ben-
efits, to purchase those life insurance con-
tracts prior to distribution; and (2) any
rights under the plan for nonhighly com-
pensated employees to purchase life insur-
ance contracts from the plan prior to dis-
tribution of retirement benefits are not of
inherently equal or greater value than the
purchase rights of highly compensated em-
ployees.
DRAFTING INFORMATION
The principal authors of this revenue
ruling are Larry Isaacs of Employee Plans,
Tax Exempt and Government Entities Di-
vision, and Linda Marshall of the Office
of the Division Counsel/Associate Chief
Counsel, Tax Exempt and Government En-
tities. For further information regarding
this revenue ruling, contact the Employee
Plans taxpayer assistance telephone ser-
vice between the hours of 8:00 a.m. and
6:30 p.m. Eastern Time, Monday through
Friday, by calling (877) 829–5500 (a toll-
free number). Mr. Isaacs may be reached
at (202) 283–9710, and Ms. Marshall may
be reached at (202) 622–6090 (not toll-free
numbers).
Section 404.—Deduction
for Contributions of an
Employer to an Employees’
Trust or Annuity Plan and
Compensation Under a
Deferred-Payment Plan
(Also, §§ 401, 412, 6011, 6111, 6112; §§ 26
CFR 1.401–1, 1.412(i)–1, 1.6011–4, 301.6111–2,
301.6112–1.)
Section 412(i) plans; deductibility;
listed transactions.This ruling gives an
example where a qualified pension plan
cannot be a section 412(i) plan if the plan
holds life insurance contracts and annuity
contracts for the benefit of a participant
that provide for benefits at normal retire-
ment age in excess of the participant’s
benefits at normal retirement age under
the terms of the plan. The ruling also ad-
dresses when certainemployer contribu-
tions to purchase life insurance coverage
for a participant in a defined benefit plan
are deductible and whether those transac-
tions are “listed transactions.” Rev. Rul.
55–748 modified and superseded.
Rev. Rul. 2004–20
ISSUES
Issue 1: Can a qualified pension plan be
a plan described in § 412(i) of the Inter-
nal Revenue Code if the plan holds life in-
surance contracts and annuity contracts for
the benefit of a participant that provide fo
r
benefits at normal retirement age in excess
of the participant’sbenefits at normal re-
tirement age under the terms of the plan?
Issue 2: If a qualified pension plan holds
life insurance contracts providing for li
fe
insurance on a participant’s life in exce
ss
of the participant’s death benefit under
the
terms of the plan, are contributions for
premiums for such excess life insurance
coverage currently deductible by the em-
ployer?
FACTS
Situation 1
Employer M maintains Plan A, a de-
fined benefit plan that is funded solely by
life insurance contracts and annuities with
level annual premiums for each participant
commencing with the date the individual
becomes a participant in the plan (or, in
the case of an increase in benefits, com-
mencing at the time the increase becomes
effective) and ending with the individual’s
attainment of normal retirement age. Plan
A is intended to be a plan described in
§ 412(i). The amounts that will be accu-
mulated under the insurance contracts and
annuity contracts for the benefit of a partic-
ipant at normal retirement age, assuming
premiums are paid and determined by ap-
plying annuity purchase rates guaranteed
under the contracts, will provide for ben-
efits in excess of the participant’s benefits
at normal retirement age under the terms
of the plan.
Situation 2
Employer N maintains Plan B. With
respect to Participant P, Plan B provides
a death benefit that meets the defini-
tion of an incidentaldeath benefit under
§ 1.401–1(b)(1)(i) of the Income Tax Reg-
ulations. The assets of Plan B include life
insurance contracts on the life of Partic-
ipant P with a face amount in excess of
Participant P’s death benefit under Plan
B. Premiums with respect to Participant P
include an annual premium for the waiver
of the entire premium payment if Partici-
pant P becomes disabled. Upon the death
of a covered employee, the portion of the
proceeds of the life insurance contract that
exceeds the death benefit payable to Par-
ticipant P’s beneficiary under the plan is
applied to the payment of premiums under
the plan with respect to other participants.
LAW AND ANALYSIS
Section 412 sets forth minimum fund-
ing requirements for qualified pension
plans. Section 412(i) describes certain
insurance contract plans that are exempt
under § 412(h)(2) from the minimum
funding requirements of § 412 (section
412(i) plans). Under § 411(b)(1)(F), a
plan that is funded exclusively by the pur-
chase of insurance contracts and satisfies
the requirements of § 412(i)(2) and (3) sat-
isfies the accrual requirements of § 411(b)
if an employee’s accrued benefit as of any
applicable date is not less than the cash
surrender value his life insurance contracts
would have on that applicable date if the
requirements of § 412(i)(4) through (6)
were satisfied.
A section 412(i) plan must be funded
by the purchase of individual or group in-
surance contracts. Section 412(i)(2) re-
2004-10 I.R.B.546March 8, 2004

quires contracts held by a section 412(i)
plan to provide for level annual premium
payments to be paid commencing with the
date the individual became a participant in
the plan (or, in the case of an increase in
benefits, commencing at the time the in-
crease becomes effective) and extending
not later than the retirement age for each
individual participating in the plan. Sec-
tion 412(i)(3) requires benefits provided
under a section 412(i) plan to be equal to
the benefits provided under each contract
at normal retirement age under the plan.
Under § 1.412(i)–1(b)(2)(iii), the ben-
efits for each participant provided under a
section 412(i) plan that holds individual in-
surance contracts must be equal to the ben-
efits provided under the participant’s in-
dividual contracts at the participant’s nor-
mal retirement age under the plan. Fur-
thermore, under § 1.412(i)–1(b)(2)(iv), the
benefits provided by the plan for each in-
dividual participant must be guaranteed by
the life insurance company issuing the in-
dividual contracts to the extent premiums
have been paid.
Section 404(a)(1)(A)(i) provides
that the amount necessary to satisfy
the minimum funding requirement un-
der § 412 is deductible even if it is
greater than the amount determined under
§ 404(a)(1)(A)(ii) or(iii), whichever is
applicable with respect to the plan.
The alternative limit determined under
§ 404(a)(1)(A)(ii) is the amount necessary
to provide the remaining unfunded cost
of all participants’ past and current ser-
vice credits as a level amount, or as a
level percentage of compensation, over the
remaining future service of each partici-
pant. However, if the remaining unfunded
cost with respect to any three individuals
is more than 50 percent of all remaining
unfunded cost, the amount attributable to
those individuals is distributed over a pe-
riod of at least five years.
The alternative limit determined under
§ 404(a)(1)(A)(iii) is the normal cost of the
plan plus, if past service or other supple-
mentary pension or annuity credits are pro-
vided by the plan, the amount necessary
to amortize the unfunded costs attributable
to those credits in equal annual payments
over 10 years.
Under § 1.404(a)–6(a)(2) of the Income
Tax Regulations, the normal cost for any
year is defined as the amount actuarially
determined which would be required as a
contribution by the employer in such year
to maintain the plan if the plan had been
in effect from the beginning of service of
each then included employee and if such
costs for prior years had been paid and all
assumptions as to interest, mortality, time
of payment, etc., had been fulfilled.
Section 1.404(a)–3(b) provides that
in no event shall the limitations under
§ 404(a)(1) for pension or annuity plans
exceed costs based on assumptions and
methods that are reasonable in view of the
funding medium and reasonable expecta-
tions as to the effects of mortality, interest,
and other pertinent factors.
Section 1.404(a)–14 provides rules for
determining the deductible limits under
§ 404(a)(1)(A)(i), (ii), and (iii). The reg-
ulations provide in general that the limit
on deductible amounts contributed for an
employer’s taxable year is based on the
amounts determined for purposes of § 412
for the applicable plan year or years.
Section 404(a)(1)(E) provides that an
amount contributed to a plan that would
otherwise be deductible, but that exceeds
the limitations of § 404(a)(1), is deductible
in future years to the extent of the differ-
ence between the amount contributed and
the maximum amount deductible for each
succeeding year under § 404(a)(1).
Section 4972 generally imposes a
10-percent excise tax on nondeductible
contributions to a qualified plan, including
nondeductible contributions carried over
from preceding years.
Rev. Rul. 94–75, 1994–2 C.B. 59, dis-
cusses the tax consequences of converting
a qualified defined benefit plan that is not
a section 412(i) plan to a section 412(i)
plan, and holds that the deductible limit
under § 404(a)(1)(A)(iii) applies to a sec-
tion 412(i) plan.
Rev. Rul. 55–748, 1955–2 C.B. 234,
discusses the deductibility of contributions
to a qualified plan that are used to pay life
insurance premiums attributable to the life
insurance benefits of retirement income
contracts purchased with respect to em-
ployees by the trust, the proceeds of which,
uponthedeathofanemployee, are payable
to the trustee and are held by the trustee
for application to payment of subsequent
premiums on similar contracts on behalf
of other employees. Rev. Rul. 55–748
holds that the part of the employer’s con-
tribution attributable to the purchase of life
insurance benefits, which, when they be-
come payable, are applicable to the reduc-
tion of subsequent employer contributions
to the plan are not considered as a cost
of the pension plan for the purpose of de-
termining the limitation on deductions un-
der § 404(a)(1)(A), (B), and (C) of the
Code (the predecessor provisions to cur-
rent §§ 404(a)(1)(A)(i), (ii), and (iii)) for
the year in which such contributions are
paid, and cannot be deducted as such. Rev.
Rul. 55–748 further provides that contri-
butions attributable to such insurance ben-
efits, not otherwise determined, may be de-
termined by applying the rates provided in
Rev. Rul. 55–747, 1955–2 C.B. 228, to the
amounts of insurance that would revert to
the trust in the event of death of the insured
employee in the year for which the premi-
ums are paid. In later years, if an employer
for any reason, such as the receipt by the
trustee of life insurance proceeds under
a retirement income contract because of
the death of an employee, which proceeds
were applied to the payment of premiums
on similar contracts for the benefit of other
employees, contributes to the trust a sum
less than the maximum deduction permit-
ted for that year under § 404(a)(1)(A), (B),
or (C), Rev. Rul. 55–748 provides that
the employer may deduct in that year, in
addition to this current contribution, the
contributions made in prior years and not
then deductible because they were attrib-
utable to that part of the retirement income
contracts that would provide life insurance
payable to the trustee, to the extent of the
difference between his current contribu-
tion and his maximum deduction permitted
under § 404(a)(1)(A), (B), or (C).
Rev. Rul. 55–747 provided a table to
be used in computing the premiums to be
included in the income of an employee on
account of current life insurance protection
provided for the employee under a life or
endowment insurance contract held by an
employees’ trust qualified under § 401(a).
Rev. Rul. 66–110, 1966–1 C.B. 12,
provided that the current published pre-
mium rates charged by an insurer for in-
dividual 1-year term life insurance avail-
able to all standard risks may be used for
determining the cost of insurance in con-
nection with individual policies issued by
the same insurer and held by an employ-
ees’ trust qualified under § 401(a). In addi-
tion, Rev. Rul. 66–110 extended the table
of premiums set forth in Rev. Rul. 55–747
to cover additional ages.
March 8, 20045472004-10 I.R.B.

Rev. Rul. 67–154, 1967–1 C.B. 11,
amplified Rev. Rul. 66–110 and held
that, where an insurer published one-year
term insurance rates lower than those set
forth in Rev. Rul. 55–747, but those
rates were applicable only under a divi-
dend option whereby term insurance may
be purchased with dividends on existing
policies and were lower than the insurer’s
published rates for initial insurance avail-
able to all standard risks, those rates could
not be used in place of the rates set forth
in Rev. Rul. 55–747 in determining the
cost of insurance under a trust described in
§ 401(a).
Notice 2001–10, 2001–1 C.B. 459, re-
voked Rev. Rul. 55–747, and provided a
new table (Table 2001) to be used in valu-
ing term life insurance coverage provided
to an employee. Under Notice 2001–10,
taxpayers could continue to use the rates
set forth in Rev. Rul. 55–747 for purposes
of determining the value of current life in-
surance protection provided under a quali-
fied retirement plan for taxable years end-
ing on or before December 31, 2001. In ad-
dition, Notice 2001–10 provided generally
that taxpayers could continue to determine
the value of current life insurance protec-
tion by using the insurer’s lower published
rates available to standard risks as pro-
vided in Rev. Rul. 66–110. However,
for periods after December 31, 2003, No-
tice 2001–10 sets forth certain additional
conditions on the use of the insurer’s pub-
lished rates.
Notice 2002–8, 2002–1 C.B. 398, re-
vokes Notice 2001–10. Under Notice
2002–8, Rev. Rul. 55–747 remains re-
voked; however, taxpayers can use the
rates set forth in Rev. Rul. 55–747 for
purposes of determining the value of cur-
rent life insurance protection provided
under a qualified retirement plan for tax-
able years ending on or before December
31, 2001. Notice 2002–8 republishes Ta-
ble 2001 and provides that Table 2001 can
be used to determine the value of current
life insurance protection on a single life
that is provided under a qualified plan
for arrangements entered into before the
effective date of future guidance. In addi-
tion, paragraph 3 of Section III of Notice
2002–8 placed conditions on the use of
the insurer’s lower published rates under
Rev. Rul. 66–110, as amplified by Rev.
Rul. 67–154, for periods after December
31, 2003, with respect to arrangements
entered into after January 28, 2002.
Rev. Rul. 2003–105, 2003–40 I.R.B.
696, obsoleted Rev. Rul. 66–110 for ar-
rangements entered into after September
17, 2003, except as provided in paragraph
3 of Section III of Notice 2002–8. Accord-
ingly, Rev. Rul. 66–110, as amplified by
Rev. Rul. 67–154, remains in effect until
future guidance is issued for life insurance
provided under a qualified retirement plan,
subject to the conditions provided by No-
tice 2002–8 with respect to arrangements
entered into after January 28, 2002.
Section 1.401–1(b)(1)(i) provides that
a pension plan within the meaning of
§ 401(a) is a plan established and main-
tained by an employer primarily to pro-
vide systematically for the payment of
definitely determinable benefits to em-
ployees over a period of years, usually for
life, after retirement. A pension plan may
also provide for the payment of incidental
death benefits through insurance or other-
wise.
Rev. Rul. 74–307, 1974–2 C.B. 126,
holds that preretirement death benefits un-
der a qualified pension plan are considered
incidental death benefits within the mean-
ing of § 1.401–1(b)(1)(i) if less than 50
percent of the employer contribution cred-
ited to each participant’s account is used
to purchase ordinary life insurance policies
on the participant’s life, or if the total death
benefit before normal retirement date does
not exceed the greater of (a) the proceeds
of ordinary life insurance policies provid-
ing a death benefit of 100 times the antic-
ipated monthly normal retirement benefit,
or (b) the sum of (i) the reserve under the
ordinary life insurance policies plus (ii) the
participant’s account in the auxiliary fund.
See also Rev. Rul. 68–453, 1968–2 C.B.
163.
Rev. Rul. 81–162, 1981–1 C.B. 169,
holds that a plan established by an em-
ployer that provides employees only such
benefits as are afforded through the pur-
chase of ordinary life insurance contracts
(other than retirement income contracts),
which are converted to life annuities at
normal retirement age, does not consti-
tute a pension plan within the meaning of
§ 401(a). Rev. Rul. 81–162 provides
that the primary purpose of such a life in-
surance contract is to provide life insur-
ance protection, and the reserve accumu-
lated thereon is a result of premium pay-
ments being made on a level basis. Rev.
Rul. 81–162 reasons that such reserve will
provide a relatively small retirement an-
nuity in comparison with the annuity that
a retirement income contract of the same
face amount will provide. Therefore, Rev.
Rul. 81–162 concludes that a plan provid-
ing only for the purchase of ordinary life
insurance contracts (other than retirement
income contracts) is not primarily for the
payment of benefits to employees over a
period of years after retirement. This anal-
ysis would not apply, however, if the death
benefit payable to the beneficiary under
the plan were limited to an incidental death
benefit, with the remaining benefit payable
to the plan.
InSituation 1, Plan A is not a plan
described in § 412(i) because the partic-
ipant’s benefit under Plan A payable at
normal retirement age is not equal to the
amount provided at normal retirement
age with respect to the contracts held
on behalf of the participant, and thus,
Plan A fails to satisfy the requirements
of § 412(i)(3). Accordingly, Plan A is
subject to the requirements of § 412, with
charges and credits to the funding standard
account determined using the reasonable
funding method selected for the plan un-
der generally applicable rules, and using
reasonable actuarial assumptions. Such
reasonable funding method and such rea-
sonable actuarial assumptions are also
used to determine the deductible amount
of contributions underthe generally appli-
cable rules of § 404(a). In addition, the
exception from the accrual rules that ap-
plies to § 412(i) plans under § 411(b)(1)(F)
does not apply to Plan A.
InSituation 2, the fact that the life in-
surance contracts on the life of Partici-
pant P provide for death benefits in ex-
cess of the death benefits under the plan
would not cause Plan B to fail to satisfy
the requirements to be a plan described in
§ 412(i), if Plan B otherwise met those
requirements. Similarly, the fact that the
life insurance contracts on the life of Par-
ticipant P provide for death benefits that
would fail to satisfy the incidental ben-
efit rule of § 1.401–1(b)(1)(i) if payable
to Participant P’s beneficiary under the
plan does not cause Plan B to fail to sat-
isfy the incidental death benefit rule of
§ 1.401–1(b)(1)(i) because those excess
death benefits under the life insurance con-
tracts are not payable to Participant P’s
2004-10 I.R.B.548March 8, 2004

beneficiary under the plan. However, a
portion of Employer N’s contributions un-
der Plan B is attributable to the purchase
of life insurance coverage held by Plan B
that is in excess of the incidental death ben-
efit payable under Plan B. Under Rev. Rul.
55–748, the portion of Employer N’s con-
tributions that is attributable to such ex-
cess life insurance coverage does not con-
stitute normal cost, and is not deductible as
part of normal cost for the taxable year in
which contributed. Rather, that portion of
Employer N’s contributions is used to pro-
vide a source of funds to pay future premi-
ums (i.e., premiums on other participants)
that will come due after the death of Par-
ticipant P. Accordingly, the nondeductible
portion of Employer N’s contributions un-
der Plan B that is paid for life insurance
protection for Participant P is carried over
pursuant to the rules of § 404(a)(1)(E) to
be treated as contributions under the rules
of § 404(a)(1)(E) in later years and de-
ductible when the employer contributions
are less than the maximum deductible limit
(e.g., in years in which excess death bene-
fits under Plan B are used to satisfy Em-
ployer N’s obligation to pay future premi-
ums on other participants). Similarly, Em-
ployer N’s contributions to pay premiums
for the disability waiver for Participant P
do not constitute normal cost, and are not
deductible as part of normal cost for the
taxable year in which contributed. Rather,
that portion of Employer N’s contributions
is used to provide a source of funds to pay
future premiums that will come due after
Participant P becomes disabled. Accord-
ingly, the nondeductible portion of Em-
ployer N’s contributions under Plan B that
is paid for the disability waiver for Partici-
pant P is carried over pursuant to the rules
of § 404(a)(1)(E) to be treated as contri-
butions under the rules of § 404(a)(1)(E)
in later years and deductible when the em-
ployer contributions are less than the max-
imum deductible limit (e.g.,ifandwhen
Participant P becomes disabled).
In general, the premiums for excess life
insurance coverage that are not currently
part of normal cost under § 404(a)(1)(A)
are determined in a manner consistent
with total premiums under the contract
(i.e., must be spread in a level manner
over the premium payment period). How-
ever, if the premiums for the life insurance
contracts covering a participant are level
annual premiums payable beginning with
the participant’s participation in the plan
and ending at the participant’s normal
retirement age, this excess amount can
be determined by applying the appropri-
ate term cost factors to the excess term
coverage. Nondeductible contributions
are subject to the excise tax of § 4972 as
provided thereunder. In determining the
amount of premiums for excess life insur-
ance coverage, Table2001 is applicable
for taxable years ending after December
31, 2001, and the table set forth in Rev.
Rul. 55–747 is used for earlier periods. In
addition, the current published premium
rates charged by an insurer for individ-
ual 1-year term life insurance available
to all standard risks as described in Rev.
Rul. 66–110, as amplified by Rev. Rul.
67–154, can be used for taxable years end-
ing on or before December 31, 2003. For
arrangements entered into on or before
January 28, 2002, such current published
premium rates can continue to be used for
periods ending after December 31, 2003.
However, for arrangements entered into
after January 28, 2002, such current pub-
lished premium rates can continue to be
used for periods ending after December
31, 2003, only if the additional require-
ments of Notice 2002–8 are satisfied.
HOLDING
A qualified pension plan cannot be a
section 412(i) plan if the plan holds life in-
surance contracts and annuity contracts for
the benefit of a participant that provide for
benefits at normal retirement age in excess
of the participant’sbenefits at normal re-
tirement age under the terms of the plan.
Employer contributions under a quali-
fied defined benefit plan that are used to
purchase life insurance coverage for a par-
ticipant in excess of the participant’s death
benefit provided under the plan are not
fully deductible when contributed, but are
carried over to be treated as contributions
in future years and deductible in future
years when other contributions to the plan
that are taken into account for the taxable
year are less than the maximum amount
deductible for the year pursuant to the lim-
its of § 404.
LISTED TRANSACTIONS
Transactions that are the same as,
or substantially similar to, the trans-
action described in Situation 2 of
this revenue ruling are identified as
“listed transactions” for purposes of
§ 1.6011–4(b)(2) of the Income Tax
Regulations and § 301.6111–2(b)(2) and
§ 301.6112–1(b)(2) of the Procedure and
Administration Regulations effective Feb-
ruary 13, 2004, the date this revenue ruling
was released to the public, provided that
the employer has deducted amounts used
to pay premiums on a life insurance con-
tract for a participant with a death benefit
under the contract that exceeds the par-
ticipant’s death benefit under the plan by
more than $100,000.
It should be noted that, independent
of any classification as “listed transac-
tions” for purposes of §§ 1.6011–4(b)(2),
301.6111–2(b)(2), and 301.6112–1(b)(2)
of the regulations, arrangements that are
the same as, or substantially similar to, the
arrangements described in this notice may
already be subject to the disclosure re-
quirements of § 6011 of the Code, the tax
shelter registration requirements of § 6111,
or the list maintenance requirements
of § 6112 (§§ 1.6011–4, 301.6111–1T,
301.6111–2, and 301.6112–1).
Persons who are required to satisfy the
registration requirement of § 6111 of the
Code with respect to the arrangements de-
scribed in this notice and who fail to do
so may be subject to the penalty under
§ 6707(a). Persons who are required to sat-
isfy the list-keeping requirement of § 6112
with respect to the arrangements 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
these arrangements or substantially similar
arrangements, including the accuracy-re-
lated penalty under § 6662.
EFFECT ON OTHER RULINGS
Rev. Rul. 55–748 is modified and su-
perseded.
DRAFTING INFORMATION
The principal authors of this revenue
ruling are Larry Isaacs of the Employee
Plans, Tax Exempt and Government En-
tities Division, and Linda Marshall of
the Office of the Division Counsel/As-
sociate Chief Counsel, Tax Exempt and
Government Entities. For further in-
formation regarding this revenue proce-
dure, please contact the Employee Plans’
taxpayer assistance telephone service at
March 8, 20045492004-10 I.R.B.

1–877–829–5500 (a toll-free number) be-
tween the hours of 8:00 a.m. and 6:30
p.m. Eastern Time, Monday through Fri-
day. Mr. Isaacs may be reached at (202)
283–9888, and Ms. Marshall may be
reached at (202) 622–6090 (not toll-free
numbers).
Section 412.—Minimum
Funding Standards
26 CFR 1.412(i)–1: Certain insurance contract
plans.
Whether a plan is a section 412(i) plan. See Rev.
Rul. 2004-20, page 546.
How for purposes of § 402 of the Code the fair
market value of a life insurance contract may be de-
termined when it is distributed from a qualified plan.
See Rev. Proc. 2004-16, page 559.
Section 611.—Allowance of
Deduction for Depletion
26 CFR 1.611–2: Rules applicable to mines, oil and
gas wells, and other natural deposits.
If a taxpayer owns an oil and gas producing prop-
erty, may the taxpayer elect to treat 105 percent of
the property’s proved reserves as the property’s to-
tal recoverable units for purposes of computing cost
depletion under section 611 of the Internal Revenue
Code. See Rev. Proc. 2004-19, page 563.
Section 856.—Definition of
Real Estate Investment Trust
26 CFR 1.856–4: Rents from real property.
REITs; parking facilities.This rul-
ing identifies circumstances in which a
real estate investment trust’s (REIT’s) in-
come from providing parking facilities at
its rental real properties qualifies as rents
from real property under section 856(d) of
the Code.
Rev. Rul. 2004–24
ISSUE
If a real estate investment trust (REIT)
provides parking facilities at its rental real
properties, under what circumstances do
amounts received by the REIT for provid-
ing the parking facilities qualify as rents
from real property under § 856(d) of the
Internal Revenue Code?
FACTS
Situation 1
CorporationRhas elected to be a REIT
as defined in § 856.Rowns commer-
cial real propertiessuch as office build-
ings, shopping centers, and residential
apartment complexes. Each property in-
cludes one or more buildings containing
space thatRrents out for office, retail, or
multi-family residential use. Each prop-
erty also includes parking facilities for the
use of the tenants of the buildings and their
guests, customers, and subtenants. Each
parking facility is located in or adjacent to
a building occupied by tenants ofRand
is appropriate in size for the number of
tenants and their guests, customers, and
subtenants who are expected to use the
facility.
The parking facilities do not have park-
ing attendants.Rmaintains, repairs, and
lights the parking facilities. As needed
to manage the REIT itself,Ralso per-
forms fiduciary functions, such as dealing
with taxes and insurance, as permitted by
§ 1.856–4(b)(5)(ii) of the Income Tax Reg-
ulations. No other activities are performed
in connection with the parking facilities.
Situation 2
ThefactsarethesameasinSituation 1
except as follows. At some ofR’s parking
facilities, parking spaces are reserved for
use by particular tenants.Rassigns and
marks the reserved spaces in connection
with leasing space in the buildings to the
tenants. Any recurring functions unique to
the reserved spaces (such as enforcement)
are provided by an independent contrac-
tor as defined in § 856(d)(3) from whom
Rdoes not derive or receive any income
within the meaning of §§ 856(d)(7)(C)(i)
and 1.856–4(b)(5)(i).
Situation 3
ThefactsarethesameasinSituations
1and2except as follows.
Although each parking facility is ap-
propriate in size for the expected num-
ber of tenants and their guests, customers,
and subtenants, some of the parking fa-
cilities are available for use not only by
those parties, but also by the general pub-
lic. In addition, the parking facilities have
parking attendants.Rperforms the same
activities it performs inSituations 1and
2, but corporationSmanages and oper-
ates the parking facilities under a manage-
ment contract withR.Sis an indepen-
dent contractor as defined in § 856(d)(3).
AlthoughStypically remits toRparking
fees from those using the parking facilities,
Sreceives arm’s-length compensation un-
der the terms of its management contract
withR,andRdoes not derive or receive
any income fromSwithin the meaning of
§§ 856(d)(7)(C)(i) and 1.856–4(b)(5)(i).S
employs all of the individuals who manage
and operate the parking facilities, includ-
ing the parking attendants.Sis directly re-
sponsible for providing all salary, wages,
benefits, administration, and supervision
of its employees.
In addition to collecting parking fees
from those using the parking facilities, the
parking attendants may park cars in order
to achieve the maximum capacity of the
parking facility or for reasons of safety or
security. No separate fee is charged for
an attendant to park a car. Occasionally,
when necessary, an attendant may provide
minor, incidental, emergency service at a
parking facility, such as charging a battery
or changing a flat tire. No other services
are provided at the parking facilities.
LAW
ToqualifyasaREIT,anentitymust
derive at least 95 percent of its gross in-
come from sources listed in § 856(c)(2)
and at least 75 percent of its gross income
from sources listed in § 856(c)(3). “Rents
from real property” are among the sources
listed in both of those sections. Section
856(d)(1) defines rents from real prop-
erty to include (subject to the exclusions
in § 856(d)(2)) the amounts described
in § 856(d)(1)(A), (B), and (C). Section
856(d)(1)(B) refers to “charges for ser-
vices customarily furnished or rendered in
connection with the rental of real property,
whether or not such charges are separately
stated.” Section 856(d)(2)(C) excludes
“impermissible tenant service income”
from the definition of rents from real
property. Thus, to qualify as rents from
real property, charges for services must be
for services customarily furnished or ren-
dered in connection with the rental of real
property and must not be impermissible
tenant service income.
2004-10 I.R.B.550March 8, 2004

Section 1.856–4(b)(1) provides the fol-
lowing guidance on determining whether
services are customarily furnished or ren-
deredinconnectionwiththerentalofreal
property:
... Services furnished to the tenants of
a particular building will be considered
as customary if, in the geographic mar-
ket in which the building is located, ten-
ants in buildings which are of a similar
class (such as luxury apartment build-
ings) are customarily provided with the
service. ... To qualify as a service cus-
tomarily furnished, the service must be
furnishedorrenderedtothetenantsof
the real estate investment trust or, pri-
marily for the convenience or benefit of
the tenant, to the guests, customers, or
subtenants of the tenant. ...
Thus, to qualify as a service described
in § 856(d)(1)(B), a service furnished
at a REIT’s property must be custom-
arily provided to tenants of properties
of a similar class in that particular geo-
graphic market (the geographic market
test). Section 1.856–4(b)(1) also mentions
the furnishing of parking facilities as an
example of a service that is customarily
furnished to the tenants of a particular
class of buildings in many geographic
markets. Reflecting the statutory require-
ment of “connection with the rental of
real property,” § 1.856–4(b)(1) also pro-
vides that to qualify as a service described
in § 856(d)(1)(B), the service must be
furnished to the REIT’s tenants or their
guests, customers, or subtenants.
Section 1.856–4(b)(5)(ii) discusses the
fiduciary functions of a REIT’s trustees or
directors, as follows:
The trustees or directors of the real es-
tate investment trust are not required to
delegate or contract out their fiduciary
duty to manage the trust itself, as dis-
tinguished from rendering or furnishing
services to the tenants of its property
or managing or operating the property.
Thus, the trustees or directors may do
all those things necessary, in their fidu-
ciary capacities, to manage and conduct
the affairs of the trust itself. For ex-
ample, the trustees or directors may es-
tablish rental terms, choose tenants, en-
ter into and renew leases, and deal with
taxes, interest, and insurance, relating
to the trust’s property. The trustees
or directors may also make capital ex-
penditures with respect to the trust’s
property (as defined in section 263) and
may make decisions as to repairs of
the trust’s property (of the type which
would be deductible under section 162),
the cost of which may be borne by the
trust.
Thus, § 1.856–4(b)(5)(ii) permits the
trustees or directors of a REIT to perform
activities needed to manage the REIT
itself, as distinguished from rendering ser-
vices to tenants of the REIT’s property or
managing or operating the REIT’s prop-
erty.
As noted above, § 856(d)(2)(C) ex-
cludes impermissible tenant service in-
come from the definition of rents from real
property. Pursuant to § 856(d)(7)(A), im-
permissible tenant service income means,
with respect to any real property, any
amount received or accrued directly or in-
directly by a REIT for furnishing services
to the tenants of the property or manag-
ing or operating the property. Section
856(d)(7)(C)(i), however, provides that
services rendered or management or oper-
ation provided is not treated as furnished
by the REIT for this purpose if furnished
through an independent contractor (as de-
fined in § 856(d)(3)) from whom the REIT
does not derive or receive any income.
Thus, amounts received by a REIT for
services furnished to its tenants, or for
property management or operation, do not
constitute impermissible tenant service
income if the services or management or
operation is furnished through an indepen-
dent contractor (as defined in § 856(d)(3))
from whom the REIT does not derive or
receive any income.
Moreover, pursuant to § 856(d)(7)
(C)(ii), an amount is not treated as im-
permissible tenant service income if the
amount would be excluded from unrelated
business taxable income under § 512(b)(3)
if received by an organization described
in § 511(a)(2) (referred to, for purposes of
this revenue ruling, as an exempt organi-
zation). Thus, services provided directly
by a REIT do not give rise to impermis-
sible tenant service income if the charges
for those services would be excluded from
unrelated business taxable income if re-
ceived by an exempt organization.
Section 512(b)(3)(A)(i) excludes rents
from real property from unrelated business
taxable income. Section 1.512(b)–1(c)(5)
provides, however, that payments for the
use of space where services are also ren-
dered to the occupant are not rents from
real property. That section mentions space
in parking lots as an example of space
where services are also rendered to the
occupant. Thus, payments for the use
of parking space are not excluded from
unrelated business taxable income under
§ 512(b)(3) if received by an exempt or-
ganization.
The conference report underlying the
1986 revision of § 856(d) (the 1986 con-
ference report) provides the following
guidance on services performed directly
by REITs:
The conferees wish to make certain
clarifications regarding those services
that a REIT may provide under the
conference agreement without using
an independent contractor, which ser-
vices would not cause the rents derived
from the property in connection with
which the services were rendered to
fail to qualify as rents from real prop-
erty (within the meaning of section
856(d)). The conferees intend, for
example, that a REIT may provide cus-
tomary services in connection with the
operation of parking facilities for the
convenience of tenants of an office or
apartment building, or shopping cen-
ter, provided that the parking facilities
are made available on an unreserved
basis without charge to the tenants and
their guests or customers. On the other
hand, the conferees intend that income
derived from the rental of parking
spaces on a reserved basis to tenants, or
income derived from the rental of park-
ing spaces to the general public, would
not be considered to be rents from real
property unless all services are per-
formed by an independent contractor.
Nevertheless, the conferees intend that
the income from the rental of parking
facilities properly would be considered
to be rents from real property (and not
merely income from services) in such
circumstances if services are performed
by an independent contractor.
2 H.R. Conf. Rep. No. 841, 99
th
Cong., 2d
Sess. II–220 (1986), 1986–3 (Vol. 4) C.B.
220. Thus, the 1986 conference report in-
dicates that, in some circumstances, REITs
may directly perform activities in connec-
tion with parking facilities without causing
charges for providing the parking facilities
to fail to qualify as rents from real property
under § 856(d).
March 8, 20045512004-10 I.R.B.

The difference between this congres-
sional intent and the treatment of ex-
empt organizations under § 512(b)(3)
reflects differences between §§ 856(d) and
512(b)(3), as well asdifferences between
the regulations interpreting those sections.
The definition of rents from real property
in § 856(d), which applies to REITs, dif-
fers significantly in scope and structure
from the definition of rents from real prop-
erty under § 512(b)(3), which applies to
exempt organizations. For example, un-
like § 512(b)(3), § 856(d)(7)(C)(i) treats
services provided by an independent con-
tractor as not provided by the REIT. The
definition of rents from real property under
§ 512(b)(3) does not have a comparable
provision.
ANALYSIS
Situation 1
InSituation 1,Rprovides unattended
parking facilities at its rental real prop-
erties.Rmaintains, repairs, and lights
the unattended parking facilities and per-
forms fiduciary functions permitted by
§ 1.856–4(b)(5)(ii). These activities are
customarily performed at parking facil-
ities located at rental real properties in
all geographic markets. No other activi-
ties are performed in connection withR’s
unattended parking facilities. Therefore,
the furnishing ofR’s unattended parking
facilities will be treated as meeting the
geographic market test of § 1.856–4(b)(1).
R’s unattended parking facilities are
part ofR’s rental real properties and are
provided for the use ofR’s tenants and
their guests, customers, and subtenants.
Each parking facility is located in or adja-
cent to a building occupied by tenants of
Rand is appropriate in size for the number
of tenants and their guests, customers, and
subtenants who are expected to use the
facility. Therefore, the furnishing ofR’s
unattended parking facilities meets the re-
quirement of § 1.856–4(b)(1) that services
be furnished to the REIT’s tenants or their
guests, customers, or subtenants. Because
it meets both that requirement and the
geographic market test, the furnishing of
R’s unattended parking facilities is a ser-
vice customarily furnished or rendered in
connection with the rental of real property
under § 856(d)(1)(B).
The 1986 conference report indicates
that the activities performed byRat its
unattended parking facilities described in
Situation 1should not cause charges for
providing those parking facilities to fail to
qualify as rents from real property under
§ 856(d). Therefore, although inSituation
1payments for the use of parking space
are not excluded from unrelated business
taxable income under § 512(b)(3) if re-
ceived by an exempt organization, the fur-
nishing ofR’s unattended parking facili-
ties will be treated as not giving rise to
impermissible tenant service income un-
der § 856(d)(2)(C) and (d)(7). Accord-
ingly, because the furnishing ofR’s unat-
tended parking facilities qualifies as a ser-
vice described in § 856(d)(1)(B) and does
not give rise to impermissible tenant ser-
vice income, amounts received byRfor
furnishing these parking facilities qualify
as rents from real property under § 856(d).
Situation 2
InSituation 2, the facts are the same
as inSituation 1except that at some of
R’s unattended parking facilities, parking
is available to tenants on a reserved ba-
sis. The furnishing of these parking fa-
cilities qualifies as a service described in
§ 856(d)(1)(B) for the reasons discussed
above with respect toSituation 1.
The 1986 conference report indicates
that income from reserved parking should
qualify as rents from real property only
if services are performed by an indepen-
dent contractor. InSituation 2, any recur-
ring functions unique to the reserved park-
ing spaces (such as enforcement) are per-
formed by an independent contractor.R
assigns and marks the reserved spaces in
connection with leasing space to its tenants
and provides maintenance, repair, light-
ing, and fiduciary functions permitted by
§ 1.856–4(b)(5)(ii). These basic activities
performed byRare not services to ten-
ants that the conferees intended to prevent
REITs from performing directly at parking
facilities. Section 1.856–4(b)(5)(ii) per-
mits the trustees or directors of a REIT to
perform activities needed to manage the
REIT itself, as distinguished from render-
ing services to tenants of the REIT’s prop-
erty or managing or operating the prop-
erty. Therefore, although inSituation 2
payments for the use of parking space are
not excluded from unrelated business tax-
able income under § 512(b)(3) if received
by an exempt organization, the furnishing
ofR’s unattended, reserved parking facil-
ities will be treated as not giving rise to
impermissible tenant service income under
§ 856(d)(2)(C) and (d)(7). Accordingly,
because the furnishing ofR’s unattended,
reserved parking facilities qualifies as a
service described in § 856(d)(1)(B) and
does not give rise to impermissible tenant
service income, amounts received byRfor
furnishing these parking facilities qualify
as rents from real property under § 856(d).
Situation 3
InSituation 3,Rprovides attended
parking facilities at its rental real prop-
erties.Rperforms the same activities it
performs inSituations 1and2,andSman-
ages and operates the attended parking
facilities. Attendants at these facilities
generally collect parking fees. Attendants
may also park cars in order to achieve the
maximum capacity of the parking facility
or for reasons of safety or security, and no
separate fee is charged for an attendant to
park a car. Occasionally, when necessary,
an attendant may provide minor, inciden-
tal, emergency service at a parking facility.
These services typically are provided at
attended parking facilities at rental real
properties in all geographic markets. No
other services are provided atR’s attended
parking facilities. Therefore, the furnish-
ing ofR’s attended parking facilities will
be treated as meeting the geographic mar-
ket test of § 1.856–4(b)(1).
Some ofR’s attended parking facili-
ties are available for use not only byR’s
tenants and their guests, customers, and
subtenants, but also by the general pub-
lic. However, the 1986 conference re-
port indicates that tenant parking facilities
also available to the general public should
not be precluded from qualifying under
§ 856(d)(1)(B).R’s attended parking fa-
cilities are part ofR’s rental real proper-
ties, and each parking facility is located in
or adjacent to a building occupied by ten-
ants ofRand is appropriate in size for the
number of tenants and their guests, cus-
tomers, and subtenants who are expected
to use the facility. Because of this prox-
imity to the tenants and appropriate size,
the attended parking facilities that also are
available to the general public can rea-
sonably be expected to be used predomi-
2004-10 I.R.B.552March 8, 2004

nantly byR’s tenants and their guests, cus-
tomers, and subtenants. For these reasons,
the furnishing ofR’s attended parking fa-
cilities will be treated as meeting the re-
quirement of § 1.856–4(b)(1) that services
be furnished to the REIT’s tenants or their
guests, customers, or subtenants. Because
it meets both that requirement and the ge-
ographic market test, the furnishing ofR’s
attended parking facilities is a service cus-
tomarily furnished or rendered in connec-
tion with the rental of real property under
§ 856(d)(1)(B).
The 1986 conference report indicates
that income from parking that is reserved
or available to the general public should
qualify as rents from real property only
if services are performed by an indepen-
dent contractor. The only activities thatR
performs in connection with its attended
parking facilities are maintenance, repair,
lighting, fiduciary functions, and assign-
ing and marking reserved spaces. As
noted above, these basic activities are not
services to tenants that the conferees in-
tended to prevent REITs from performing
directly at parking facilities. All of the
other activities involved in furnishingR’s
attended parking facilities are performed
byS, an independent contractor as defined
in § 856(d)(3). AlthoughStypically col-
lects parking fees and remits the fees toR,
Sreceives arm’s-length compensation un-
der the terms of its management contract
withR,andRdoes not derive or receive
any income fromSwithin the meaning of
§§ 856(d)(7)(C)(i) and 1.856–4(b)(5)(i).S
employs all of the individuals who manage
and operate the attended parking facilities
and is directly responsible for providing
all their salary, wages, benefits, admin-
istration, and supervision. Therefore,
although inSituation 3payments for the
use of parking space are not excluded from
unrelated business taxable income under
§ 512(b)(3) if received by an exempt or-
ganization, the furnishing ofR’s attended
parking facilities will be treated as not
giving rise to impermissible tenant service
income under § 856(d)(2)(C) and (d)(7).
Accordingly, because the furnishing of
R’s attended parking facilities qualifies as
a service described in § 856(d)(1)(B) and
does not give rise to impermissible tenant
service income, amounts received byRfor
furnishing these parking facilities qualify
as rents from real property under § 856(d).
HOLDING
Amounts received byRfor furnishing
unattended parking facilities, under the cir-
cumstances described inSituations 1and
2, and for furnishing attended parking fa-
cilities, under the circumstances described
inSituation 3, qualify as rents from real
property under § 856(d).
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Jonathan D. Silver of the Office of
Associate Chief Counsel (Financial Insti-
tutions and Products). For further infor-
mation regarding this revenue ruling, con-
tact Mr. Silver at (202) 622–3920 (not a
toll-free call).
Section 3121.—Definitions
26 CFR 31.3121(b)(10)–2: Services performed by
certain students in the employ of a school, college,
or university, or of a nonprofit organization auxiliary
to a school, college, or university.
A notice describes a safe harbor that certain insti-
tutions of higher education can use in applying the
exception from Federal Insurance Contributions Act
taxes for services performed by a student under sec-
tion 3121(b)(10) of the Code. See Notice 2004-12,
page 556.
Section 4980B.—Failure
to Satisfy Continuation
Coverage Requirements of
Group Health Plans
26 CFR 54.4980B–7: Duration of COBRA continua-
tion coverage.
(Also 26 CFR 54.4980B–4)
COBRA and Medicare entitlement.
The COBRA continuation coverage period
can be expanded from 18 to 36 months if
a second qualifying event occurs. Medi-
care entitlement of a covered employee is
one of the listed events that can be a sec-
ond qualifying event. This ruling holds
that Medicare entitlement is not a second
qualifying event unless (ignoring the first
qualifying event) it would result in a loss
of coverage under the group health plan.
Rev. Rul. 2004–22
ISSUE
For purposes of the COBRA contin-
uation coverage requirements of section
4980B of the Internal Revenue Code, is
the Medicare entitlement of a covered
employee a second qualifying event for a
qualified beneficiary if the Medicare enti-
tlement would not have resulted in a loss
of coverage for the qualified beneficiary
under the group health plan that is provid-
ing the COBRA continuation coverage?
FACTS
EmployeeEandE’s spouse are covered
under a group health plan subject to the
COBRA continuation coverage require-
ments of section 4980B of the Internal
Revenue Code.Eis not entitled to Medi-
care benefits.Eterminates employment
(but not by reason of gross misconduct).
EandE’s spouse lose coverage under
the plan as a result ofE’s termination of
employment. The plan offers them the
right to elect COBRA continuation cov-
erageforaperiodofupto18months.
E’s spouse elects and pays for COBRA
continuation coverage timely. Before the
18-month period has expired,Ebecomes
entitled to Medicare benefits by reason of
the attainment of age 65.E’s spouse is
still receiving COBRA continuation cov-
erage under the plan at the timeEbecomes
entitled to Medicare benefits.E’s spouse
notifies the plan ofE’s becoming entitled
to Medicare benefits within 60 days after
Ebecame so entitled. Employees and
their spouses receiving coverage under the
plan by virtue of an employee’s current
employment status are not treated differ-
ently under the plan on account of their
being age 65 or older, nor on account of
March 8, 20045532004-10 I.R.B.

their being entitled to Medicare benefits
by reason of the attainment of age 65.
1
LAW AND ANALYSIS
Section 4980B of the Code requires
certain group health plans to make con-
tinuation coverage available to certain
individuals who would otherwise lose
their coverage under the plan as a result
of certain occurrences (the COBRA con-
tinuation coverage requirements). Section
4980B imposes an excise tax if a plan sub-
ject to the COBRA continuation coverage
requirements fails to comply with them.
Under section 4980B, the obligation of
a plan to make COBRA continuation cov-
erage available arises in connection with a
qualifying event. The individuals to whom
COBRA continuation coverage must be
made available are qualified beneficiaries.
Under Q&A–1 of § 54.4980B–3 of the
Miscellaneous Excise Tax Regulations, a
qualified beneficiary is any individual who
is covered under a group health plan on
the day before a qualifying event by virtue
of being on that day a covered employee
or the spouse or a dependent child of a
covered employee. However, a covered
employee can be a qualified beneficiary
only in connection with a qualifying event
that is a termination (or reduction of hours)
of the covered employee’s employment or
that is the bankruptcy of the employer. Un-
der Q&A–2 of § 54.4980B–3, a covered
employee is generally any individual who
is or was provided coverage under a group
health plan by virtue of the performance
of services for the employer maintaining
the plan or by virtue of membership in the
employee organization maintaining the
plan. Under Q&A–1(f) of § 54.4980B–3,
an individual ceases to be a qualified ben-
eficiary if the individual does not elect
COBRA continuation coverage by the
end of the election period; an individual
also ceases to be a qualified beneficiary
when the plan no longer has an obligation
to make COBRA continuation coverage
available to the individual under the rules
prescribing how long COBRA continua-
tion coverage must be made available.
Section 4980B(f)(3) of the Code lists
six categories of events and defines them
as qualifying events if, but for the COBRA
continuation coverage required to be pro-
vided, they would result in a loss of cov-
erage of a qualified beneficiary. The
categories of qualifying events include
the termination (other than by reason of
gross misconduct), or reduction of hours,
of a covered employee’s employment and
the covered employee’s becoming entitled
to Medicare benefits under title XVIII of
the Social Security Act. Q&A–1(c) of
§ 54.4980B–4 defines what is a loss of
coverage for purposes of determining if a
listed event is a qualifying event, requiring
that the listed event cause the covered em-
ployee or the covered employee’s spouse
or dependent child to cease to be covered
under the same terms and conditions as
in effect immediately before the event.
Q&A–1(c) of § 54.4980B–4 clarifies that
a loss of coverage need not occur imme-
diately after the event so long as it occurs
before the end of the maximum coverage
period.
Q&A–4 of § 54.4980B–7 describes the
end of the maximum coverage period. In
the case of a qualifying event that is a ter-
mination (or reduction of hours) of em-
ployment, the maximum coverage period
generally ends 18 months after the quali-
fying event (29 months if a disability ex-
tension applies). In the case of a qualify-
ing event that is a covered employee’s be-
coming entitled to Medicare benefits, the
maximum coverage period generally ends
36 months after the date of the qualifying
event. (Nothing in the statute or regula-
tions prohibits a group health plan from
providing coverage that continues beyond
the end of the maximum coverage period.)
Q&A–6(b) of § 54.4980B–7 describes
the circumstances under which a second
qualifying event canexpand the maximum
coverage period of an earlier qualifying
event. If a qualifying event that is a ter-
mination (or reduction of hours) of em-
ployment is followed within the 18-month
maximum coverage period (or within the
29-month maximum coverage period in a
case in which a disability extension ap-
plies) by a qualifying event that gives rise
to a 36-month maximum coverage period,
then the 18-month (or 29-month) period
is expanded to 36 months (measured from
the date of the first qualifying event). The
expanded period applies only for those in-
dividuals who were qualified beneficia-
ries in connection with the first qualifying
event and who are still qualified beneficia-
ries at the time of the second qualifying
event.
The expanded maximum coverage
period of Q&A–6 of § 54.4980B–7 ap-
plies only when the 36-month qualifying
event follows the qualifying event that is
a termination (or reduction of hours) of
employment. (However, Q&A–4(d) of
§ 54.4980B–7 provides a special rule for
the measurement of the maximum cov-
erage period in a case where the covered
employee’s becoming entitled to Medi-
care benefits precedes the termination (or
reduction of hours) of employment; this
special rule applies regardless of whether
the Medicare entitlement is a qualifying
event.) Because a covered employee is not
a qualified beneficiary with respect to any
36-month qualifying event, the expanded
period that applies in connection with a
second qualifying event will not apply
to a covered employee but only to the
spouse or a dependent child of a covered
employee.
Based on the statute and regulations,
for a spouse or dependent child of a cov-
ered employee to be entitled to the ex-
panded maximum coverage period when
1
The Medicare Secondary Payer (MSP) provisions of the Social Security Act that apply with respect to individuals entitled to Medicare based on the attainment of age 65 — generally referred
to as the “working aged” MSP provisions (section 1862(b)(1)(A), 42 U.S.C. 1395y(b)(1)(A)) — include two restrictions on most group health plans thatare subject to the COBRA continuation
coverage requirements. (The working aged MSP provisions and the COBRA continuation coverage requirements both include an exception for plans maintained by an employer with fewer
than 20 employees. However, they differ in how the 20 employees are counted, creating the possibility that a plan exempt under one law will be subject tothe other law.)
First, the working aged MSP provisions prohibit a group health plan from taking into account that an individual (or the individual’s spouse) who is covered under the plan by virtue of
the individual’s current employment status with an employer is entitled to Medicare benefits by reason of the attainment of age 65. Second, the working aged MSP provisions also require a
group health plan to provide that any individual age 65 or older (and the spouse age 65 or older of any individual) who has current employment status withan employer is entitled to the same
benefits under the plan under thesame conditions as any individual (or spouse) under age 65.
The MSP provisions also prohibit a large group health plan (a plan of an employer that employs at least 100 employees) from taking into account that an individual or a member of an indi-
vidual’s family who is covered under the plan by virtue of the individual’s current employment status with an employer is entitled to Medicare based ondisability. (42 U.S.C. 1395y(b)(1)(B).)
In addition, the MSP provisions generally prohibit a plan from taking intoaccount that an individual is eligible for or entitled to Medicare benefitsbased on end stage renal disease during a
coordination period of 30 months. (42 U.S.C. 1395y(b)(1)(C).)
2004-10 I.R.B.554March 8, 2004

a second qualifying event occurs, the fol-
lowing three conditions must be satisfied:
2
(1) The spouse or dependent child must
be a qualified beneficiary in connection
with a termination (or reduction of hours)
of employment;
(2) The spouse or dependent child must
still be a qualified beneficiary at the time
that the 36-month event occurs; and
(3) The 36-month event must be a qual-
ifying event.
For a 36-month event to be a qualify-
ing event, it must — but for the required
COBRA continuation coverage — result
in a loss of coverage for the qualified ben-
eficiary under the plan within the maxi-
mum coverage period. In the context of
determining if a 36-month event is a sec-
ond qualifying event, it is necessary to ig-
nore the COBRA continuation coverage
provided in connection with the qualifying
event that is the termination (or reduction
of hours) of the covered employee’s em-
ployment. The inquiry is whether, in the
absence of the first qualifying event, the
36-month event would result in a loss of
coverage for the qualified beneficiary un-
der the plan within the maximum coverage
period. This determination is made by ap-
plying the terms of the plan to the qualified
beneficiary as if the covered employee had
not experienced the termination (or reduc-
tion of hours) of employment and deter-
mining if the occurrence of the 36-month
event in this hypothetical scenario would
resultinalossofcoverageforthequali-
fied beneficiary under the plan within 36
months after, generally
3
, the covered em-
ployee’s actual termination (or reduction
of hours) of employment.
In the facts described, the first two con-
ditions forE’s Medicare entitlement to be
a second qualifying event forE’s spouse
are satisfied:E’s spouse is a qualified
beneficiary in connection withE’s ter-
mination of employment, andE’s spouse
is still a qualified beneficiary at the time
thatEbecomes entitled to Medicare bene-
fits.
4
Thus, whetherE’s spouse is entitled
to a period of 36 months of COBRA con-
tinuation coverage (measured from the
date ofE’s termination of employment)
depends on whetherE’s Medicare enti-
tlement is a qualifying event. The group
health plan described complies with the
working aged Medicare Secondary Payer
provisions of the Social Security Act by
not treating a current employee or the em-
ployee’s spouse differently because either
of them has attained age 65 or is entitled to
Medicare benefits by reason of the attain-
ment of age 65. Thus, applying the terms
of the plan toE’s spouse as ifE’s spouse
were receiving coverage under the plan
in absence ofE’s termination of employ-
ment,E’s becoming entitled to Medicare
benefits in the hypothetical scenario ofE’s
not having experienced a termination of
employment would not result in a loss of
coverage forE’s spouse within 36 months
after the actual termination of employ-
ment. Consequently,E’s spouse is not
entitled to an expansion of the maximum
coverage period by reason ofE’s Medicare
entitlement, and the plan is not required
to make COBRA continuation coverage
available toE’s spouse beyond the end of
the 18-month maximum coverage period.
HOLDING
The Medicare entitlement of a covered
employee is not a second qualifying event
for a qualified beneficiary unless the Medi-
care entitlement would have resulted (if
COBRA continuation coverage, including
COBRA continuation coverage due to the
first qualifying event,is disregarded) in a
loss of coverage for the qualified benefi-
ciary under the group health plan that is
providing the COBRA continuation cover-
age.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Russ Weinheimer of the Office of
Division Counsel/Associate Chief Coun-
sel(TaxExemptandGovernmentEnti-
ties). For further information about this
revenue ruling, contact Mr. Weinheimer at
(202) 622–6080 (not a toll-free call).
Section 6011.—General
Requirement of Return,
Statement, or List
26 CFR 1.6011–4: Requirement of statement disclos-
ing participation in certain transactions by taxpay-
ers.
Whether certain transactions involving a pension
plan that holds life insurance contracts and annuity
contracts for the benefit of a participant which pro-
vide for benefits at normal retirement age in excess
of the participant’s benefits at normal retirement age
under the terms of the plan are “listed transactions.”
See Rev. Rul. 2004-20, page 546.
Section 6111.—Registra-
tion of Tax Shelters
26 CFR 301.6111–2: Confidential corporate tax
shelters.
Whether transactions involving a pension plan that
holds life insurance contracts and annuity contracts
for the benefit of a participant which provide for ben-
efits at normal retirement age in excess of the par-
ticipant’s benefits at normal retirement age under the
terms of the plan are transactions that must be regis-
tered. See Rev. Rul. 2004-20, page 546.
Section 6112.—Organizers
and Sellers of Potentially
Abusive Tax Shelters Must
Keep Lists of Investors
26 CFR 301.6112–1: Requirement to prepare, main-
tain, and furnish lists with respect to potentially abu-
sive tax shelters.
Whether a list must be maintained with respect to
transactions involving a pension plan that holds life
insurance contracts and annuity contracts for the ben-
efit of a participant whichprovide for benefits at nor-
mal retirement age in excess of the participant’s ben-
efits at normal retirement age under the terms of the
plan. See Rev. Rul. 2004-20, page 546.
2
This revenue ruling does not address any COBRA notice requirement that a qualified beneficiary may have to satisfy in order to be entitled to the expanded maximum coverage period in
connection with a second qualifying event.
3
Q&A–4(b) of § 54.4980B–7 of the regulations allows a plan to elect to measure the maximum coverage period from the date of a later loss of coverage ratherthan from the date of the
qualifying event.
4
E’s spouse also provided notice to the plan ofE’s Medicare entitlement within 60 days afterEbecame so entitled. This is relevant in determining whetherE’s spouse has satisfied any
COBRA notice requirement that may apply forE’s spouse to be entitled to the expanded maximum coverage period in connection with the occurrence of a second qualifying event.
March 8, 20045552004-10 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Proposed Revenue Procedure
Regarding Services That
Qualify for the Student FICA
Exception
Notice 2004–12
I. Overview and Purpose
This notice contains a proposed rev-
enue procedure providing a safe harbor
that certain institutions of higher educa-
tion, and certain affiliated organizations
can use in applying the exception for ser-
vices performed by a student provided
under § 3121(b)(10) of the Internal Rev-
enue Code (student FICA exception). A
previous version of this safe harbor was
issued in Rev. Proc. 98–16, 1998–1
C.B. 403. However, the Service has
recently proposed amendments to the Em-
ployment Tax Regulations interpreting
§ 3121(b)(10) in order to clarify specific
issues that have arisen with taxpayers
and in litigation (see proposed regulations
§ 31.3121(b)(10)–2(c), (d), and (e) pub-
lished in the Federal Register on February
25, 2004 (REG–156421–03, 2004–10
I.R.B. 571 [69 F.R. 8604]). In order to
provide guidance that is consistent with
the proposed regulations in all respects,
the Service is suspending Rev. Proc.
98–16 and proposing to replace it with
the revenue procedure contained in this
notice.
The proposed revenue procedure up-
dates the safe harbor of Rev. Proc. 98–16
in several respects that align it with the
proposed regulations. First, the proposed
revenue procedure adds a primary func-
tion requirement to the definition of an
institution of higher education. Section
3121(b)(10) applies only to services per-
formed in the employ of a school, college,
or university, or an affiliated § 509(a)(3)
organization. Under the proposed regula-
tions and the new safe harbor, an organ-
ization can be a school, college, or uni-
versity only if its primary function is to
conduct educationalactivities. Thus, in
order to take advantage of the safe har-
bor in the revenue procedure, an institu-
tion must satisfy not only the Department
of Education’s regulations at 34 C.F.R.
§ 600.4 and satisfy the accreditation re-
quirements of 34 C.F.R. § 600.2, as was re-
quired in Rev. Proc. 98–16, but also must
have education and instruction as its pri-
mary function. The primary function re-
quirement may makethe exception under
§ 3121(b)(10) unavailable to certain insti-
tutions of higher education that are embed-
ded within a larger organization like a hos-
pital or museum.
Second, the proposed revenue proce-
dure does not permit an institution to ap-
ply the student FICA exception to services
performed by an employee who regularly
works 40 or more hours per week. Un-
der the existing regulations, services fall
within the student FICA exception only
if they are performed incident to and for
the purpose of pursuing a course of study.
The proposed regulations clarify that an
individual who regularly works forty or
more hours per week has the status of a
career employee, and, accordingly, is not
performing services incident to and for the
purpose of pursuing a course of study. The
proposed revenue procedure follows the
proposed regulations. The student FICA
exception generally, and the safe harbor
provided by the proposed revenue proce-
dure specifically, are still available for ser-
vices performed by an employee who on
occasion works 40 or more hours per week
and otherwise meets the requirements of
thesafeharbor.
Third, the proposed revenue procedure
provides that an individual has career em-
ployee status if the individual is a “pro-
fessional employee.” The proposed regula-
tions provide that a professional employee
for purposes of the student FICA excep-
tion is an employee whose primary duty
consists of the performance of services re-
quiring knowledge of an advanced type in
a field of science or learning, whose work
requires the consistent exercise of discre-
tion and judgment in its performance, and
whose work is predominantly intellectual
and varied in character. The proposed rev-
enue procedure follows the proposed reg-
ulations.
Fourth, the proposed revenue procedure
expands the terms of employment that re-
sult in status as a career employee. Rev.
Proc. 98–16 provided that an individual
was to be considered a career employee if
the employee was eligible to participate in
one of several types of retirement plans,
eligible for reduced tuition (with certain
exceptions), or otherwise classified by the
institution of higher education as a career
employee. The proposed regulations adopt
the same criteria for identifying individ-
uals who have the status of a career em-
ployee and adds to the list eligibility for a
number of other benefits. The proposed
revenue procedure follows the proposed
regulations, adding the additional criteria
that cause an individual to have career em-
ployee status and fall outside the scope of
the safe harbor. Employees considered as
having the status of a career employeeper
secannot have the status of a student for
purposes of the student FICA exception.
Fifth, and finally, the proposed revenue
procedure provides that an employee has
career employee status if the individual is
required to be licensed under state or lo-
cal law in order to perform the services the
individual provides to the school, college,
or university. The proposed revenue pro-
cedure follows the proposed regulation.
II. Request for Comments
Comments are requested on the pro-
posed revenue procedure. Comments
maybesubmittedonorbeforeMay
25, 2004, to Internal Revenue Service,
PO Box 7604, Washington, DC 20044,
Attn: CC:PA:LPD:PR (Notice 2004–12),
Room 5203. Submissions may also be
hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to the Courier’s Desk at 1111 Consti-
tution Avenue, NW, Washington, DC
20224, Attn: CC:PA:LPD:PR (Notice
2004–12), Room 5203. Submissions
may also be sent electronically via the
internet to the following email address:
Notice.comments@irscounsel.treas.gov.
Include the notice number (Notice
2004–12) in the subject line.
III. Effect on Other Documents
Rev. Proc. 98–16 is suspended effec-
tive February 25, 2004.
IV. Effective Date
The Service intends to issue a final rev-
enue procedure at the same time that the
2004-10 I.R.B.556March 8, 2004

proposed regulations under § 3121(b)(10)
are finalized. Until a final version of the
proposed revenue procedure is issued, tax-
payers may rely on the proposed revenue
procedure with respect to services per-
formed on or after February 25, 2004 (the
date prop. Reg. § 31.3121(b)(10)–2(c)–(f)
(69 F.R. 8604) was published in the Fed-
eral Register).
V. Proposed Revenue Procedure
SECTION 1. PURPOSE
This revenue procedure sets forth gen-
erally applicable standards for determining
whether service in the employ of certain
public or private nonprofit schools, col-
leges, universities, or affiliated organiza-
tions described in § 509(a)(3) of the Inter-
nal Revenue Code (the Code) performed
by a student qualifies for the exception
from Federal Insurance Contributions Act
(FICA) tax provided under § 3121(b)(10)
of the Code (Student FICA exception).
These standards are intended to provide
objective and administrable guidelines for
determining employment tax liability.
SECTION 2. SCOPE
.01 Institutions of higher education typ-
ically distinguish between career employ-
ees and student employees. Sections 5 and
6 of this revenue procedure contain gener-
ally applicable standards for determining
whether or not services performed by em-
ployees of certain institutions of higher ed-
ucation are eligible for the Student FICA
exception.
.02 The standards contained in this
revenue procedure do not apply to em-
ployees who are postdoctoral students,
postdoctoral fellows, medical residents,
or medical interns because the services
performed by these employees cannot be
assumed to be incident to and for the pur-
pose of pursuing a course of study. The
employment activities of these individuals
overlaps with the activities comprising the
course of study, and thus it is not appropri-
ate to apply the standards of this revenue
procedure to these individuals.
.03 The standards contained in this rev-
enue procedure may not constitute the ex-
clusive method for determining whether
the Student FICA exception applies. If
the standard for qualifying for the exclu-
sion described in section 6 of this rev-
enue procedure (providing generally that
an employee enrolled at least half-time
at an institution of higher education has
the status of student) is not met, whether
or not service in the employ of a school,
college, university, or affiliated organiza-
tion described in § 509(a)(3) of the Code
will qualify for the Student FICA excep-
tion will depend on consideration of all the
facts and circumstances.
SECTION 3. BACKGROUND
.01 Sections 3101 and 3111 of the Code
impose social security and Medicare taxes
(FICA taxes) on employees and employ-
ers, respectively, equal to a percentage of
the wages received by an individual with
respect to employment.
.02 Section 3121(a) of the Code de-
fines “wages” for purposes of FICA taxes
as all remuneration for employment, with
certain exceptions. Section 3121(b) of
the Code defines “employment” as ser-
vicesperformedbyanemployeeforan
employer, with certain exceptions.
.03 Section 3121(b)(10) of the Code
excepts from the definition of employ-
ment services performed in the employ of
a school, college, or university (whether
or not that organization is exempt from
income tax), or an affiliated organization
described in § 509(a)(3) of the Code, if
the services are performed by a student
who is enrolled and regularly attending
classes at that school, college, or univer-
sity. Remuneration for services excluded
from the definition of employment under
§ 3121(b)(10) of the Code is not subject to
FICA taxes.
.04 Section 31.3121(b)(10)–2 of the
Employment Tax Regulations provides
that whether an employee has the status of
a student is determined on the basis of the
employee’s relationship with the school,
college, or university for which the ser-
vices are being performed. An employee
who performs services in the employ of a
school, college, or university as an inci-
dent to and for the purpose of pursuing a
course of study at the school, college, or
university has the status of a student in the
performance of those services. Services
that are not incident to and for the pur-
pose of pursuing a course of study do not
qualify for the exception. If the employee
performs services as an incident to and for
the purpose of pursuing a course of study
and, therefore, has the status of a student,
the amount of remuneration for services
performed by the employee, the type of
services performed by the employee, and
the place where the services are performed
are immaterial for purposes of the Student
FICA exception.
.05 Section 218 of the Social Security
Act (the Act), 42 U.S.C. section 418, al-
lows states to provide Social Security cov-
erage for services performed by students
for the public school the student is attend-
ing under agreements established with the
Social Security Administration. If a state
has exercised its option under § 218 of the
Act to provide for coverage of student ser-
vices, § 3121(b)(10) of the Code provides
that those services will not qualify for the
Student FICA exception.
SECTION 4. CERTAIN INSTITUTIONS
OF HIGHER EDUCATION
.01 The standards contained in this
revenue procedure apply to “institu-
tions of higher education” meeting the
requirements of § 31.3121(b)(10)–2(c)
of the proposed Employment Tax Reg-
ulations. For purposes of this revenue
procedure, the term “institution of higher
education” includes any public or pri-
vate nonprofit school, college, or univer-
sity within the meaning of prop. Reg.
§ 31.3121(b)(10)–2(c), or affiliated or-
ganization described in § 509(a)(3) of
the Code, that meets the requirements set
forth in Department of Education regu-
lations at 34 C.F.R. § 600.4, as amended
from time to time, and that is accredited or
preaccredited by a nationally recognized
accrediting agency as defined in the De-
partment of Education regulations at 34
C.F.R. § 600.2.
.02 Services for other institutions may
also be eligible for the Student FICA
exception. Thus, forexample, services
performed by a student for a secondary
school may be eligible for the Student
FICA exception. Whether or not services
for other institutions, such as secondary
schools, qualify for the Student FICA ex-
ception is determined based on the facts
and circumstances of each case.
March 8, 20045572004-10 I.R.B.

SECTION 5. STUDENT FICA
EXCEPTION NOT AVAILABLE
FOR EMPLOYEES WITH CAREER
EMPLOYEE STATUS
.01 Services performed by individuals
with career employee status are not eli-
gible for the Student FICA exception un-
der the standard in section 6 of this rev-
enue procedure because their services are
not incident to and for the purpose of pur-
suing a course of study. See prop. Reg.
§ 31.3121(b)(10)–2(d)(3)(ii).
.02 Career employee status. Services
of an employee with career employee sta-
tus are not incident to and for the purpose
of pursuing a course of study. An em-
ployee may be considered to have career
employee status based on the employee’s
hours worked, whether the employee is a
“professional employee,” the employee’s
terms of employment, or whether the
employee is licensed under state or lo-
cal law to work in the field in which
the employee performs services. These
standards are set forth in prop. Reg.
§ 31.3121(b)(10)–2(d)(3)(ii). An em-
ployee has career employee status if the
employee is described in paragraph (1),
(2), (3), or (4) of this section.
(1) Hours worked. An employee has the
status of a career employee if the employee
regularly performs services 40 hours or
more per week.
(2) Professional employee. An em-
ployee has the status of a career employee
if the employee is a professional em-
ployee. A professional employee is an
employee—
(a) Whose primary duty consists of the
performance of work requiring knowledge
of an advanced type in a field of science
or learning customarilyacquiredbyapro-
longed course of specialized intellectual
instruction and study, as distinguished
from a general academic education, from
an apprenticeship, and from training in the
performance of routine mental, manual, or
physical processes.
(b) Whose work requires the consistent
exercise of discretion and judgment in its
performance; and
(c) Whose work is predominantly intel-
lectual and varied in character (as opposed
to routine mental, manual, mechanical, or
physical work) and is of such character that
the output produced or the result accom-
plished cannot be standardized in relation
to a given period of time.
(3) Terms of employment. An em-
ployee’s terms of employment may in-
dicate that the employee has career em-
ployee status. An employee with career
employee status includes any employee
who is—
(a) Eligible to receive vacation, sick
leave, or paid holiday benefits;
(b) Eligible to participate in any retire-
ment plan described in § 401(a) of the
Code that is established or maintained by
the employer; or would be eligible to par-
ticipate if age and service requirements
were met;
(c) Eligible to participate in an arrange-
ment described in § 403(b) of the Code, or
would be eligible to participate if age and
service requirements were met;
(d) Eligible to participate in a plan de-
scribed under § 457(a), or would be eligi-
ble to participate if age and service require-
ments were met;
(e) Eligible for reduced tuition (other
than qualified tuition reduction under
§ 117(d)(5) of the Code provided to a
teaching or research assistant who is a
graduate student) because of the individ-
ual’s employment relationship with the
institution;
(f) Eligible to receive employee bene-
fits described under § 79 (life insurance),
127 (qualified educational assistance), 129
(dependent care assistance programs), or
137 (adoption assistance); or
(g) Classified by the employer as a ca-
reer employee.
(4)Licensure. An employee is a career
employee if the employee is required to be
licensed under state or local law to work in
the field in which the employee performs
services.
.03 If an individual performs services in
multiple job positions, the individual will
be deemed to have career employee status
with respect to all of the positions if the
individual has careeremployee status in
any one or more of the job positions.
SECTION 6. STANDARDS
APPLICABLE TO UNDERGRADUATE
AND GRADUATE STUDENTS
.01 An individual who is a half-time un-
dergraduate student or a half-time graduate
or professional student and who does not
have the status of a career employee will
qualify for the Student FICA exception un-
der this revenue procedure with respect to
services performed at or for an institution
of higher education described in section 4
of this revenue procedure in which they are
enrolled or at affiliated organizations de-
scribedin§509(a)(3)oftheCode. Ser-
vices performed by a student for any other
employer are not covered by the standards
of this revenue procedure.
.02 An individual is deemed to be a
half-time undergraduate or half-time grad-
uate or professional student if the indi-
vidual does not have the status of a ca-
reer employee status and is an undergrad-
uate or graduate student who is in the last
semester, trimester, or quarter of a course
of study requiring at least two semesters,
trimesters, or quarters to complete and is
enrolled in the number of credit or unit
hours needed to complete the requirements
for obtaining a degree, certificate, or other
recognized educational credential offered
by that institution of higher education even
if enrolled in less than half the number re-
quired of full-time students.
.03 The determination of student status
should be made at the end of the drop-add
period and may be adjusted thereafter at
the institution of higher education’s op-
tion. The determination of student status
for payroll periods ending before the end
of the drop-add period may be based on the
number of semester, trimester, or quarter
hours being taken at the end of the regis-
tration period for that semester, trimester,
or quarter.
.04 If an individual is described in sec-
tion 6.01 or 6.02 of this revenue proce-
dure, services performed by the individual
are eligible for the Student FICA exception
with respect to all services performed dur-
ing all payroll periods of a month or less
that fall wholly or partially within the aca-
demic term.
.05 The Student FICA exception does
not apply to services performed by an
individual who is not enrolled in classes
during school breaks of more than five
weeks (including summer breaks of more
than five weeks), other than services de-
scribed in section 6.04. See Rev. Rul.
72–142, 1972–1 C.B. 317, and Rev. Rul.
74–109, 1974–1 C.B. 288. However, the
Student FICA exception applies to em-
ployment which continues during normal
school breaks of 5 weeks or less during
which the individual is not eligible for
2004-10 I.R.B.558March 8, 2004

the Student FICA exception pursuant to
section 6.01 of this revenue procedure
provided that the individual qualifies for
the Student FICA exception pursuant to
section 6.01 of this revenue procedure on
the last day of classes or examinations
preceding the break and is eligible to en-
roll in classes for the first academic period
following the break.
.06 If the standards of this revenue pro-
cedure are met (and section 8 does not ap-
ply), the amount of remuneration for ser-
vices performed by the employee, the type
of services performed by the employee,
and the place where the services are per-
formed are immaterial. If the services per-
formed by a student otherwise described in
section 6.01 or 6.02 are covered under an
agreement pursuant to section 218 of the
Act, the Student FICA exception does not
apply.
.07 For provisions relating to domes-
tic service performed by a student in
a local college club, or local chapter
of a college fraternity or sorority, see
§ 31.3121(b)(2)–1.
SECTION 7. DEFINITIONS
For purposes of the standard contained
in section 6 of this revenue procedure,
the following definitions must be used.
For purposes of the following definitions,
the term “institution of higher education”
means an institution of higher education
as defined in section 4 of this revenue
procedure.
.01 Undergraduate student. The term
“undergraduate student” has the meaning
attributed to that term in the Department of
Education regulations at 34 C.F.R. section
674.2.
.02 Half-time undergraduate student.
The term “half-time undergraduate stu-
dent” has the meaning attributed to that
term in the Department of Education reg-
ulations at 34 C.F.R. section 674.2.
.03 Graduate or professional student.
The term “graduate or professional stu-
dent” means a student who—
(1) is enrolled at an institution of higher
education for the purpose of obtaining a
degree, certificate, orother recognized ed-
ucational credential above the baccalaure-
ate level or is enrolled in a program leading
to a professional degree;
(2) has completed the equivalent of at
least three years of full-time study at an
institution of higher education, either prior
to entrance into the program or as part of
the program itself; and
(3) is not a postdoctoral student, post-
doctoral fellow, medical resident, or med-
ical intern.
.04 Half-time graduate or professional
student. The term “half-time graduate or
professional student” means an enrolled
graduate or professional student, as de-
fined in section 7.03 of this revenue pro-
cedure, who is carrying at least a half-
time academic workload at an institution
of higher education as determined by that
institution according to its own standards
and practices.
SECTION 8. ANTI-ABUSE RULE
The standards in this revenue procedure
must be applied in a reasonable manner,
consistent with the purpose of excluding
from employment only services that are
performed as an incident to and for the pur-
pose of pursuing a course of study at an
institution of higher education as defined
in section 4 of this revenue procedure. If
the standards are inappropriately applied
in a manner that conflicts with this under-
lying purpose so as to manipulate or mis-
characterize the nature of the relationship
between an employee and an institution of
higher education, resulting in the improper
avoidance of payment of FICA taxes, then
whether the Student FICA exception ap-
plies will be determined on the basis of
all the facts and circumstances, rather than
on the basis of the specific standards set
forth in section 6 of this revenue proce-
dure. For example, the standards would
be inappropriately applied through the ma-
nipulation of the relationship between em-
ployees and the institution of higher edu-
cation if a university claimed that the Stu-
dent FICA exception applied to research
laboratory workers, who had been career
employees, but were converted to non-ca-
reer status and required to enroll in a cer-
tificate program granting six credit hours
per semester for work experience in the
laboratory. As another example, if an in-
dividual who was not a student worked
for a university on a full-time basis for
many years, in a job generally performed
by non-students (but nonetheless failed to
meet the literal definition of career em-
ployee), and then enrolled at the univer-
sity for six credit hours of course work
per semester while continuing the full-time
work in the same job, it may not be appro-
priate to apply the standards of this rev-
enue procedure to conclude that the in-
dividual’s work has become incident to
and for the purpose of pursuing a course
of study solely because the individual en-
rolled for this course work. In both of these
examples, whether the work is performed
incident to and for the purpose of pursuing
a course of study must be determined on
the basis of all the relevant facts and cir-
cumstances.
SECTION 9. EFFECTIVE DATE
This revenue procedure is effective
for services performed on or after Feb-
ruary 25, 2004 (the date prop. Reg.
§ 31.3121(b)(10)–2(c)–(f) (69 FR 8604)
was published in the Federal Register).
The principal author of this notice
is Stephen D. Suetterlein of the Office
of Associate Chief Counsel (Tax Ex-
empt & Government Entities). However,
other personnel from the Service and
Treasury Department participated in the
development of this notice. For further
information regarding this notice, contact
Mr. Suetterlein at (202) 622–6040 (not a
toll-free call).
26 CFR 601.201: Rulings and determination letters.
(Also, Part I, § 402; § 1.402(a)–1.)
Rev. Proc. 2004–16
SECTION 1. PURPOSE
This revenue procedure is issued in
connection with the issuance of proposed
regulations under § 402(a) of the Internal
Revenue Code regarding the valuation
of life insurance contracts upon distri-
bution from a qualified retirement plan
and proposed regulations under §§ 79
and 83 regarding the valuation of life
insurance contracts under those sections
(REG–126967–03, 2004–10 I.R.B. 566).
The preamble to the proposed regulations
states that it is not appropriate in some
cases to use either the net surrender value
of a distributed life insurance contract
(i.e., the contract’s cash value after re-
duction for any surrender charges) or the
contract’s reserves as the contract’s fair
March 8, 20045592004-10 I.R.B.

market value upon distribution of an in-
surance contract from a qualified plan but
the preamble provides limited guidance as
to what value may be used instead. Simi-
larly, the proposed regulations under §§ 79
and 83 clarify that the amount includible
in income under those sections is based
upon the fair market value of the insur-
ance contract rather than its cash value but
these proposed regulations do not provide
any guidance as what constitutes fair mar-
ket value. The regulations are generally
proposed to apply beginning on the date
the proposed regulations are filed in the
Federal Register. The preamble to the
proposed regulations also requests public
comments regarding appropriate methods
for valuing life insurance contracts when
distributed from qualified retirement plans
and for purposes of §§ 79 and 83. Until
further guidance is issued, this revenue
procedure provides interim rules under
which the cash value (without reduction
for surrender charges) of a life insurance
contract may be treated as the contract’s
fair market value when the contract is dis-
tributed from a qualified plan under § 402
and for purposes of §§ 79 and 83.
SECTION 2. BACKGROUND
.01 Section 402(a) provides generally
that any amount actually distributed to any
distributee by any employees’ trust de-
scribed in § 401(a) which is exempt from
tax under § 501(a) shall be taxable to the
distributee, in the taxable year of the dis-
tributee in which distributed, under § 72.
.02 Section 1.402(a)–1(a)(1)(iii) of the
current regulations provides, in general,
that a distribution of property by a § 401(a)
plan shall be taken into account by the dis-
tributee at its “fair market value.” Section
1.402(a)–1(a)(2) of the current regulations
provides, in general, that upon distribu-
tion of an annuity or life insurance con-
tract, the “entire cash value” must be in-
cluded in the distributee’s income. The
current regulations do not define “fair mar-
ket value” or “entire cash value” and ques-
tions have arisen regarding the interaction
between these two provisions.
.03 The proposed regulations would
clarify that the requirement that a distri-
bution of property must be included in
the distributee’s income at fair market
value is controlling in those situations
where the existing regulations provide
for the inclusion of the entire cash value.
Thus, the proposed regulations provide
that, in those cases where a qualified
plan distributes a life insurance contract,
retirement income contract, endowment
contract, or other contract providing life
insurance protection, the fair market value
of such a contract is generally included
in the distributee’s income rather than
the entire cash value of the contract. For
this purpose, the policy cash value and all
other rights under the contract (including
any supplemental agreements thereto and
whether or not guaranteed) are included
in determining the fair market value of
such a contract. The proposed regulations
provide a similar rule for purposes of the
valuation of such contracts under §§ 79
and 83.
.04 In Rev. Rul. 59–195, 1959–1 C.B.
18, the Service ruled that in situations sim-
ilar to those where an employer purchases
and pays the premiums on an insurance
policy on the life of one of its employ-
ees and subsequently sells such policy, on
which further premiums must be paid, the
value of such policy, for computing tax-
able gain in the year of purchase, should be
determined under the method of valuation
prescribed in § 25.2512–6 of the Gift Tax
Regulations. Under this method, the value
of such a policy is not its cash surrender
value but the interpolated terminal reserve
at the date of sale plus the proportionate
part of any premium paid by the employer
prior to the date of the sale which is appli-
cable to a period subsequent to the date of
the sale. Section 25.2512–6 also provides
that if “because of the unusual nature of
the contract such approximation is not rea-
sonably close to the full value, this method
may not be used.” Thus, this method may
not be used to determine the fair market
value of an insurance policy where the re-
serve does not reflect the value of all of the
relevant features of the policy.
.05 In Q&A–10 of Notice 89–25,
1989–1 C.B. 662, the IRS addressed the
question of what amount is includible in
income under § 402(a) when a participant
receives a distribution from a qualified
plan that includes a life insurance policy
with a value substantially higher than the
cash surrender value stated in the policy.
The notice noted the practice of using
cash surrender value as fair market value
for these purposes and concluded that
this practice is not appropriate where the
total policy reserves, including life in-
surance reserves (if any) computed under
§ 807(d), together with any reserves for
advance premiums, dividend accumula-
tions, etc., represent a much more accurate
approximation of the policy’s fair market
value.
.06 Since Notice 89–25 was issued, life
insurance contracts have been marketed
that are structured in a manner which re-
sultsinatemporaryperiodduringwhich
neither a contract’s reserves nor its cash
surrender value represent the fair market
value of the contract. For example, some
life insurance contracts may provide for
large surrender charges and other charges
that are not expected to be paid because
they are expected to be eliminated or re-
versed in the future (under the contract
or under another contract for which the
first contract is exchanged), but this future
elimination or reversal is not always re-
flected in the calculation of the contract’s
reserve. If such a contract is distributed
prior to the elimination or reversal of those
charges, both the cash surrender value and
the reserve under the contract could sig-
nificantly understate the fair market value
of the contract. Thus, the preamble to the
proposed regulations states that, in some
cases, it would not be appropriate to use
either the net surrender value (i.e.the con-
tract’s cash value after reduction for any
surrender charges) or, because of the un-
usual nature of the contract, the contract’s
reserves to determine the fair market value
of the contract. Accordingly, Q&A–10 of
Notice 89–25 should not be interpreted to
provide that a contract’s reserves (includ-
ing life insurance reserves (if any) com-
puted under § 807(d), together with any re-
serves for advance premiums, dividend ac-
cumulations, etc.) are always an accurate
representation of the contract’s fair market
value.
.07 As stated in the preamble to the pro-
posed regulations, the amount of any dis-
tribution determined under § 402 also ap-
plies for purposes of determining the qual-
ified status of any plan. For example, the
fair market value of a distributed life insur-
ance contract, determined in accordance
with the proposed regulations and this rev-
enue procedure, must be considered in de-
termining whether the insured participant
has received benefits in excess of the lim-
its imposed by § 415.
2004-10 I.R.B.560March 8, 2004

.08 Section 79 generally requires that
the cost of group-term life insurance cov-
erage on the life of an employee that is in
excess of $50,000 of coverage be included
in the income of the employee. Pursuant
to § 1.79–1(b) of the Income Tax Reg-
ulations, under specified circumstances
group-term life insurance may be com-
bined with other benefits, referred to as
permanent benefits.
.09 Permanent benefits provided to an
employee are subject to taxation under
rules described in § 1.79–1(d). Under
those rules, the cost of the permanent ben-
efits, reduced by the amount paid for those
benefits by the employee, is included in
the employee’s income. The cost of the
benefits can be no less than an amount de-
termined under a formula provided in the
regulations. The formula is based in part
on the increase in the employee’s deemed
death benefit during the year. One of the
factors used for determining the deemed
death benefit is “the net level premium
reserve at the end of that policy year for
all benefits provided to the employee by
the policy or, if greater, the cash value of
the policy at the end of that policy year.”
.10 The proposed regulations would
amend § 1.79–1(d) to delete the term cash
value from the formula for determining
the cost of permanent benefits and sub-
stitute the term fair market value. The
purpose of the change is to clarify that,
unless specifically excepted from the def-
inition of permanent benefits, the value
of all features of a life insurance policy
providing an economic benefit to an em-
ployee (including, for example, the value
of a springing cash value feature) must be
included in the employee’s income.
.11 Section 83(a) provides that when
property is transferred to any person in
connection with the performance of ser-
vices, the service provider must include in
gross income (as compensation income)
the excess of the fair market value of the
property, determined without regard to
lapse restrictions (such as life insurance
contract surrender charges), and deter-
mined at the first time that the transferee’s
rights in the property are either transfer-
able or not subject to a substantial risk
of forfeiture (i.e., when those rights be-
come “substantially vested”), over the
amount (if any) paid for the property. Sec-
tion 1.83–3(e) provides that in the case
of a transfer of a life insurance contract,
retirement income contract, endowment
contract, or other contract providing life
insurance protection, only the cash sur-
render value of the contract is considered
to be property. The proposed regulations
generally would amend § 1.83–3(e) to
provide that in the case of a transfer of
an insurance contract, retirement income
contract, endowment contract, or other
contract providing life insurance protec-
tion, the policy cash value and all other
rights under the contract (including any
supplemental agreements, whether or not
guaranteed), other than current insurance
protection, are treated as property for
purposes of this section. However, in
the case of the transfer of a life insur-
ance contract, retirement income contract,
endowment contract, or other contract
providing life insurance protection, which
was part of a split-dollar arrangement (as
defined in § 1.61–22(j)) entered into on
or before September 17, 2003, and which
is not materially modified (as defined in
§ 1.61–22(j)(2)) after September 17, 2003,
only the cash surrender value of the con-
tract is considered to be property.
SECTION 3. INTERIM GUIDANCE
FOR DETERMINING FAIR MARKET
VALUE
.01 The Service and the Treasury recog-
nize that many taxpayers could have diffi-
culty determining the fair market value of
an insurance contract after the issuance of
the proposed regulations under §§ 79 and
83 and the clarification in the preamble to
the proposed regulations under § 402 that
Notice 89–25 should not be interpreted to
provide that a contract’s reserves (includ-
ing life insurance reserves (if any) com-
puted under § 807(d), together with any re-
serves for advance premiums, dividend ac-
cumulations, etc.) are always an accurate
representation of the contract’s fair mar-
ket value. Accordingly, in connection with
the proposed regulations, this revenue pro-
cedure provides interim rules under which
the cash value (without reduction for sur-
render charges) of a life insurance contract
distributed from a qualified plan may be
treated as the fair market value of that con-
tract. These interim rules also apply for
purposes of determining the value of insur-
ance contracts under §§ 79 and 83.
.02 Cash value (without reduction for
surrender charges) may be treated as the
fair market value of a contract as of a de-
termination date provided such cash value
is at least as large as the aggregate of: (1)
the premiums paid from the date of issue
through the date of determination, plus
(2) any amounts credited (or otherwise
made available) to the policyholder with
respect to those premiums, including inter-
est, dividends, and similar income items
(whether under the contract or otherwise),
minus (3) reasonable mortality charges
and reasonable charges (other than mortal-
ity charges), but only if those charges are
actually charged on or before the date of
determination and are expected to be paid.
.03 In those cases where the contract is
a variable contract (as defined in § 817(d))
cash value (without reduction for surren-
der charges) may be treated as the fair mar-
ket value of the contract provided such
cash value is at least as large as the ag-
gregate of: (1) the premiums paid from
the date of issue through the date of de-
termination, plus (2) all adjustments made
with respect to those premiums during that
period (whether under the contract or oth-
erwise) that reflect investment return and
the current market value of segregated as-
set accounts, minus (3) reasonable mortal-
ity charges and reasonable charges (other
than mortality charges), but only if those
charges are actually charged on or before
the date of determination and are expected
to be paid.
.04 The date of determination in the
case of a distribution of a contract from a
qualified plan is the date of that distribu-
tion. The date of determination in the case
of the provision of permanent benefits sub-
ject to § 79 is the date those benefits are
provided. The date of determination in the
case of a transfer of an insurance contract
subjectto§83isthedateonwhichfair
market value must be determined under the
rules of § 83.
SECTION 4. EFFECTIVE DATE
This revenue procedure is effective on
February 13, 2004.
DRAFTING INFORMATION
The principal authors of this rev-
enue procedure are Robert Walsh and
Larry Isaacs of the Employee Plans, Tax
Exempt and Government Entities Divi-
sion. For further information regarding
March 8, 20045612004-10 I.R.B.

this revenue procedure as it pertains to
§ 402, please contact the Employee Plans’
taxpayer assistance telephone service at
1–877–829–5500 (a toll-free number) be-
tween the hours of 8:00 a.m. and 6:30
p.m. Eastern Time, Monday through Fri-
day. For further information regarding this
revenue procedure as it pertains to § 79,
please contact Betty Clary of the Office of
Division Counsel/Associate Chief Coun-
sel (Tax Exempt and Government Entities)
at (202) 622–6080 (not a toll-free number).
For further information regarding this rev-
enue procedure as it pertains to § 83, please
contact Robert Misner of the Office of Di-
vision Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities) at
(202) 622–6030 (not a toll-free number).
Mr. Walsh and Mr. Isaacs may be reached
at (202) 283–9888 (not a toll-free num-
ber).
26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also, Part I, § 911, 1.911–1.)
Rev. Proc. 2004–17
SECTION 1. PURPOSE
.01 This revenue procedure provides
information to any individual who failed
to meet the eligibility requirements of
§ 911(d)(1) of the Internal Revenue Code
because adverse conditions in a foreign
country precluded the individual from
meeting those requirements for taxable
year 2003.
.02 The Internal Revenue Service has
previously listed countries for which the
eligibility requirements of § 911(d)(1) of
the Code are waived under § 911(d)(4) be-
cause of adverse conditions in those coun-
tries on and after the date stated. See Rev.
Proc. 2003–26, 2003–1 C.B. 666, Rev.
Proc. 2002–20, 2002–1 C.B. 732, and Rev.
Proc. 2001–27, 2001–1 C.B. 1155. This
revenue procedure lists countries added to
the list in 2003, for which the eligibility re-
quirements of § 911(d)(1) are waived. Rev.
Proc. 2003–26, Rev. Proc. 2002–20, and
Rev. Proc. 2001–27 remain in full force
and effect.
SECTION 2. BACKGROUND
.01 Section 911(a) of the Code allows
a “qualified individual,” as defined in
§ 911(d)(1), to exclude foreign earned
income and housing cost amounts from
gross income. Section 911(c)(3) of the
Code allows a qualified individual to
deduct housing cost amounts from gross
income.
.02 Section 911(d)(1) of the Code de-
fines the term “qualified individual” as an
individual whose tax home is in a foreign
country and who is (A) a citizen of the
United States and establishes to the satis-
faction of the Secretary of the Treasury that
the individual has been abona fideresident
of a foreign country or countries for an un-
interrupted period that includes an entire
taxable year, or (B) a citizen or resident of
the United States who, during any period
of 12 consecutive months, is present in a
foreign country or countries during at least
330 full days.
.03 Section 911(d)(4) of the Code pro-
vides an exception to the eligibility re-
quirements of § 911(d)(1). An individ-
ual will be treated as a qualified individ-
ual with respect to a period in which the
individual was abona fideresident of, or
was present in, a foreign country if the in-
dividual left the country during a period
for which the Secretary of the Treasury, af-
ter consultation with the Secretary of State,
determines that individuals were required
to leave because of war, civil unrest, or
similar adverse conditions that precluded
the normal conduct of business. An in-
dividual must establish that but for those
conditions the individual could reasonably
have been expected to meet the eligibility
requirements.
.04 For 2003, the Secretary of the Trea-
sury in consultation with the Secretary of
State has determined that war, civil un-
rest, or similar adverse conditions that pre-
cluded the normal conduct of business ex-
isted in the following countries beginning
on the specified date:
Date of Departure
CountryOn or after
Burund
i
July 13
, 2003
IsraelMarch 16, 2003
KuwaitMarch 16, 2003
Liber
ia
June 6
, 2003
Saudi ArabiaMay 13, 2003
SyriaMarch 16, 2003
.05 Accordingly, for purposes of § 911
of the Code, an individual who left one
of the foregoing countries on or after the
specified departure date shall be treated as
a qualified individual with respect to the
period during which that individual was
present in, or was abona fideresident of,
such foreign country, if the individual es-
tablishes a reasonable expectation of meet-
ing the requirements of § 911(d) but for
those conditions.
.06 To qualify for relief under
§ 911(d)(4) of the Code, an individual
must have established residency, or have
been physically present, in the foreign
country on or prior to the date that the
Secretary of the Treasury determines that
individuals were required to leave the for-
eign country. Individuals who establish
residency, or are first physically present, in
the foreign country after the date that the
Secretary prescribes shall not be treated as
qualified individuals under § 911(d)(4) of
the Code. For example, individuals who
are first physically present in Kuwait after
March 16, 2003, are not eligible to qualify
for the exception provided in § 911(d)(4)
of the Code for taxable year 2003.
2004-10 I.R.B.562March 8, 2004

.07 In order to assist those individuals
who are filing prior year or amended tax
returns, the Internal Revenue Service is re-
publishing the countries listed for tax years
2000, 2001, and 2002 for which the eli-
gibility requirements of § 911(d)(1) of the
Code are waived under § 911(d)(4):
Tax Year 2000—
Date of Departure
CountryOn or after
EritreaMay 19, 2000
Tax Year 2001
—
Date of Departure
CountryOn or after
MacedoniaJuly 27, 2001
Tax Year 2002—
Date of Departure
CountryOn or after
Central Af
rican Republic
October 31
, 2002
Côte d’IvoireOctober 18, 2002
IndonesiaOctober 13, 2002
Madagasc
ar
April 13,
2002
PakistanMarch 22, 2002
VenezuelaDecember 20, 2002
SECTION 3. INQUIRIES
A taxpayer who needs assistance on
how to claim this exclusion, or on how to
file an amended return, should contact a lo-
cal IRS Office or, for a taxpayer residing
or traveling outside the United States, the
nearest overseas IRS office.
SECTION 4. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2003–26, 2003–1 C.B. 666,
is supplemented.
DRAFTING INFORMATION
The principal author of this revenue
procedureisKateY.HwaoftheOfficeof
Associate Chief Counsel (International).
For further information regarding this rev-
enue procedure, contact Ms. Hwa at (202)
622–3840 (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, §§ 611; 1.611–2.)
Rev. Proc. 2004–19
SECTION 1. PURPOSE
This revenue procedure provides an
elective safe harbor that the owner of an
oil and gas property may use in determin-
ing the property’s recoverable reserves
for purposes of computing cost depletion
under § 611 of the Internal Revenue Code.
SECTION 2. BACKGROUND
.01In General. Section 611(a) and the
regulations thereunder allow as a deduc-
tion in computing taxable income a reason-
able allowance for depletion in the case of
oil and gas wells according to the peculiar
conditions in each case.
.02Computation of Cost Depletion.
Under § 1.611–2(a) of the Income Tax
Regulations, a taxpayer claiming the de-
duction for cost depletion computes the
amount allowed with respect to each oil
and gas property by reference to both the
total number of recoverable units that the
property is estimated to contain and the
number of units sold from the property
during the taxable year.
.03Depletion Accounts. A taxpayer is
required under § 1.611–2(b) to keep ac-
counts for the depletion of each property
and to adjust those accounts annually for
units sold and for depletion claimed.
.04Reserve Estimates.Section
1.611–2(c)(1) contains the rules for es-
timating the total recoverable units of
mineral products reasonably known, or
on good evidence believed, to exist with
respect to each property. The estimate or
determination must be made according
to the method current in the industry and
March 8, 20045632004-10 I.R.B.

in light of the most accurate and reliable
information obtainable. Under the regu-
lations, the estimate of total recoverable
units includes all reserves that are proved
and, under appropriate circumstances,
probable or prospective reserves in addi-
tion to the reserves that are proved.
.05Revisions of Reserve Estimates.
(1) Under § 1.611–2(c)(2), if the num-
ber of recoverable units of mineral in the
deposit has been previously estimated, and
if there has been no known change in the
facts upon which the prior estimate was
based, the number of recoverable units of
mineral in the deposit as of the taxable
year will be the number remaining from
the prior estimate. However, § 611 pro-
vides that, in any case in which it is as-
certained as a result of operations and de-
velopment work that the recoverable units
are greater or less than the prior estimate,
then the estimate will be revised and the re-
vised estimate will be used for subsequent
periods. Under § 1.611–2(c)(2), a revision
is made only when operations or develop-
ment work indicates that the remaining re-
coverable units as of the taxable year are
materially greater or less than the number
remaining from the prior estimate. The
revised estimate is used until a change in
facts requires another revision.
(2) InMartin Marietta Corporation v.
United States, 7 Cl. Ct. 586 (1985),
the United States Claims Court interpreted
§ 611(a) and § 1.611–2(c)(2) as intended
to remedy mistakes of geological fact: sit-
uations where the actual size of the min-
eral deposit in place, as originally esti-
mated, is later determined on the basis
of more exploratory studies, for example,
to be greater or less than earlier informa-
tion indicated. The court distinguished
situations where revisions are made un-
der the statute and regulations from those
in which the mineral property has experi-
enced a mere diminution in value or even
a retreat into worthlessness.
.06Differences between Tax and Finan-
cial Accounting for Reserves. Generally,
accounting for reserves for purposes of the
depletion allowance differs from account-
ing for reserves for financial purposes in
two important respects. First, while the
regulations require the inclusion of prob-
able or prospective reserves in addition
to proved reserves for purposes of the
depletion allowance, the United States Se-
curities and Exchange Commission (SEC)
generally requires the reporting of only
proved reserves for financial purposes.
Second, the revision of a reserve estimate
for purposes of the depletion allowance is
permitted under fewer circumstances than
is the revision of a reserve estimate for
financial reporting purposes. While the
SEC may require or permit the revision of
a reserve estimate in the case of changes
in the price of the mineral or the cost of
its extraction, such circumstances are not
sufficient basis for revision of a reserve
estimate for purposes of the depletion al-
lowance.
.07Probable or Prospective Reserves.
The appropriate quantity of probable or
prospective reserves to be included in
an oil and gas property’s total recover-
able units for purposes of computing cost
depletion has been a source of contro-
versy between taxpayers and the Service.
When present, the issue has been resolved
through the examinations which are costly
for both parties in the dispute. This rev-
enue procedure provides a safe harbor
which is intended to remove this source
of controversy from the examinations of
taxpayers who elect it.
SECTION 3. SCOPE
.01In General. A taxpayer’s estimate
of an oil and gas property’s probable or
prospective reserves determined under the
safe harbor provided in this revenue proce-
dure may be used only for purposes of the
depletion allowance. This revenue proce-
dure has no application to the determina-
tion of the fair market value of any oil and
gas property or for any other purpose not
specifically authorized herein.
.02Effect of Other Statutory and Reg-
ulatory Rules. Except with respect to
estimated total recoverable units (within
the meaning of § 1.611–2(c)(1)) and re-
vised estimates (within the meaning of
§ 1.611–2(c)(2)), this revenue procedure
has no effect on the rules provided in § 611
and the regulations thereunder.
SECTION 4. TOTAL RECOVERABLE
UNITS SAFE HARBOR
.01 If a taxpayer makes an election in
accordance with section 5 of this revenue
procedure, then, for purposes of comput-
ing cost depletion:
(1) The total recoverable units under
§ 1.611–2(c)(1) that each of the taxpayer’s
domestic oil and gas producing properties
is estimated to contain as of a specific date
will be treated as being equal to 105 per-
cent of the property’s “proved reserves”
(both developed and undeveloped) as de-
fined in 17 C.F.R. § 210.4–10(a) of Regu-
lation S-X, as of that date;
(2) The total recoverable units under
§ 1.611–2(c)(2) that each of the taxpayer’s
domestic oil and gas producing properties
is estimated, on a revised basis, to con-
tain as of a taxable year will be deemed to
be equal to 105 percent of the property’s
“proved reserves” (both developed and un-
developed) as defined in Regulation S-X,
as of that taxable year.
.02 Nothing in this revenue procedure
precludes the examination and adjustment,
if appropriate, of the estimate of proved re-
serves, as defined in Regulation S-X, in or-
der to ensure that this revenue procedure is
properly administered. Except as provided
in section 5.02 of this revenue procedure, a
taxpayer’s estimate of a property’s remain-
ing recoverable units may be revised only
under the circumstances permitted under
§ 1.611–2(c)(2).
SECTION 5. METHOD OF ELECTION
AND REVOCATION
.01In General.
(1)Election. To elect the safe harbor
provided in this revenue procedure for tax-
able years ending on or after March 8,
2004, a taxpayer must attach a statement
to its timely filed (including extensions)
original federal income tax return for the
first taxable year for which the safe har-
bor is elected. The statement must indicate
that the taxpayer is electing the safe har-
bor provided by Rev. Proc. 2004–19, and
include the taxpayer’s name, address, tax-
payer identification number, and contact
name and telephone number. A copy of the
statement must be sent to the Industry Di-
rector, Large and Mid-Size Business, Nat-
ural Resources, 1919 Smith Street, HOU
1000, Houston, Texas 77002. Once a tax-
payer files a first return electing the safe
harbor for a taxable year, the taxpayer may
not revoke the election for the taxable year.
The election is effective for the taxable
year of election and all subsequent taxable
years until revoked and applies to all of the
2004-10 I.R.B.564March 8, 2004

taxpayer’s domestic oil and gas producing
properties.
(2)Revocation. Torevokeasafehar-
bor election, a taxpayer must attach a state-
ment to its timely filed (including exten-
sions) original federal income tax return
for the first taxable year for which the
safe harbor is revoked. The statement
must indicate that the taxpayer is revok-
ing the safe harbor provided by Rev. Proc.
2004–19, and include the taxpayer’s name,
address, taxpayer identification number,
and contact name and telephone number.
A copy of the statement must be sent to
the Industry Director, Large and Mid-Size
Business, Natural Resources, 1919 Smith
Street, HOU 1000, Houston, Texas 77002.
If a taxpayer revokes its election, the tax-
payer may not re-elect the safe harbor for
the next five taxable years following the
taxable year of revocation.
.02Election of Safe Harbor for Taxable
Year Beginning Before January 1, 2005.
If the first taxable year for which a tax-
payer elects the safe harbor provided in
this revenue procedure begins before Jan-
uary 1, 2005, the taxpayer may, for the tax-
able year of election, revise the estimate
of remaining recoverable units for any of
the taxpayer’s domestic oil and gas pro-
ducing properties whether or not there has
been a change in geological fact indicat-
ing that the remaining recoverable units as
of the taxable year for any given property
is materially greater or less than the num-
ber remaining from the prior estimate. The
taxpayer must use the economic and oper-
ating conditions (such as prices and costs)
applicable to the taxable year of election
in determining the estimate of total recov-
erable units.
.03Election of Safe Harbor for Tax-
able Year Beginning After December 31,
2004. If the first taxable year for which
a taxpayer elects the safe harbor pro-
vided in this revenue procedure begins
after December 31, 2004, the taxpayer
must determine, for each domestic oil and
gas producing property, the last taxable
year preceding the taxable year of elec-
tion as of which the taxpayer revised an
oil and gas property’s total recoverable
units (the year of last revision) pursuant to
§ 1.611–2(c)(2). The taxpayer determines
the property’s remaining recoverable units
for the year of last revision using the safe
harbor rules set forth in section 4 of this
revenue procedure. The taxpayer then ap-
plies the rules set forth in § 1.611–2(b) for
all subsequent taxable years to determine
the property’s remaining recoverable units
for the taxable year of election. Similar
procedures apply if the taxpayer’s estimate
of the property’s remaining recoverable
units is based on the taxpayer’s original
estimate of its total recoverable units under
§ 1.611–2(c)(1). The taxpayer may not,
for the taxable year of election, revise the
estimate of remaining recoverable units
for any of the taxpayer’s domestic oil and
gas producing properties unless there has
been a change in geological fact indicating
that the remaining recoverable units as of
the taxable year for any given property is
materially greater or less than the number
remaining from the prior estimate.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective for
taxable years ending on or after March 8,
2004.
SECTION 7. 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 number
1545–1861.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
The collection of information in this
revenue procedure is in section 5. The
information in section 5 is required to be
submitted to the applicable service center
in order to elect (or revoke) the safe har-
bor. This information will be used to deter-
mine whether a taxpayer estimated the to-
tal recoverable units for each of its domes-
tic oil and gas producing properties under
the safe harbor. The likely respondents are
businesses or other for-profit institutions.
The estimated total annual reporting
burden is 50 hours.
The estimated annual burden per re-
spondent varies from .25 hours to .75
hours, depending on individual circum-
stances, with an estimated average burden
of .5 hours to complete the statement. The
estimated number of respondents is 100.
The estimated annual frequency of re-
sponses is on occasion.
Books or records relating to a collection
of information must be retained as long as
their contents may become material in the
administration of any internal revenue law.
Generally, tax returns and tax return in-
formation are confidential under 26 U.S.C.
§ 6103.
SECTION 8. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Jolene J. Shiraishi of the
Office of the Associate Chief Counsel
(Passthroughs and Special Industries). For
further information regarding this revenue
procedure, contact Ms. Shiraishi at (202)
622–3120 (not a toll-free call).
March 8, 20045652004-10 I.R.B.

Part IV. Items of General Interest
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Value of Life Insurance
Contracts When Distributed
From a Qualified Retirement
Plan
REG–126967–03
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains pro-
posed amendments to the regulations un-
der section 402(a) of the Internal Revenue
Code regarding the amount includible in
a distributee’s income when life insurance
contracts are distributed by a qualified re-
tirement plan and the treatment of property
sold by a qualified retirement plan to a plan
participant or beneficiary for less than fair
market value. This document also contains
proposed amendments to the regulations
under sections 79 and 83 conforming the
language in those regulations to the lan-
guage in the proposed amendments to the
section 402(a) regulations. These regula-
tions will affect administrators of, partici-
pants in, and beneficiaries of qualified em-
ployer plans. These regulations also pro-
vide guidance to employers who provide
group-term life insurance to their employ-
ees that is includible in the gross income
of the employees and to employers who
transfer life insurance contracts to persons
in connection with the performance of ser-
vices. This document also provides notice
of a public hearing on these proposed reg-
ulations.
DATES: Written or electronic comments
must be received by May 13, 2004. Re-
quests to speak and outlines of topics to be
discussed at the public hearing scheduled
forJune9,2004,at10a.m.,mustbere-
ceived by May 19, 2004.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–126967–03), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand-delivered Monday through Friday
betweenthehoursof8a.m. and4p.m.
to: CC:PA:LPD:PR (REG–126967–03),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington D.C. Alternatively, taxpayers may
submit comments electronically directly to
the IRS Internet site atwww.irs.gov/regs.
ThepublichearingwillbeheldintheAu-
ditorium, Internal Revenue Building, 1111
Constitution Avenue, NW, Washington,
D.C.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
amendments to the section 79 regula-
tions, Betty Clary at (202) 622–6080;
concerning the proposed amendments to
the section 83 regulations, Robert Misner
at (202) 622–6030; concerning the pro-
posed amendments to the 402 regula-
tions, Linda Marshall at (202) 622–6090;
concerning submissions and the hearing
and/or to be placed on the building access
list to attend the hearing, Robin Jones at
(202) 622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regu-
lations (26 CFR Part 1) under section
402(a) of the Internal Revenue Code
(Code) relating to the amount includi-
ble in a distributee’s income when a life
insurance contract, retirement income
contract, endowment contract, or other
contract providing life insurance protec-
tion is distributed by a retirement plan
qualified under section 401(a) of the Code
and to the sale of property by a retirement
plan to a plan participant or beneficiary
for less than the fair market value of the
property. This document also contains
proposed amendments to the regulations
under sections 79 and 83 relating, respec-
tively, to employer-provided group-term
life insurance and life insurance contracts
transferred in connection with the perfor-
mance of services.
Section 402(a) provides generally that
any amount actually distributed to any dis-
tributee by any employees’ trust described
in section 401(a) which is exempt from tax
under section 501(a) shall be taxable to the
distributee, in the taxable year of the dis-
tributee in which distributed, under section
72.
Section 1.402(a)–1(a)(1)(iii) of the cur-
rent regulations provides, in general, that a
distribution of property by a section 401(a)
plan shall be taken into account by the dis-
tributee at its “fair market value.” Section
1.402(a)–1(a)(2) of the regulations pro-
vides, in general, that upon the distribution
of an annuity or life insurance contract, the
“entire cash value” of the contract must
be included in the distributee’s income.
The current regulations do not define “fair
market value” or “entire cash value” and
questions have arisen regarding the inter-
action between these two provisions and
whether “entire cash value” includes a
reduction for surrender charges.
Prohibited Transaction Exemption
(PTE) 77–8 (1977–2 C.B. 425), subse-
quently amended and redesignated as
Prohibited Transaction Exemption 92–6,
was jointly issued in 1977 by the Depart-
ment of Labor and the Internal Revenue
Service. PTE 77–8 permits an employee
benefit plan to sell individual life insur-
ance contracts and annuities to (1) a plan
participant insured under such policies,
(2) a relative of such insured participant
who is the beneficiary under the contract,
(3) an employer any of whose employees
are covered by the plan, or (4) another
employee benefit plan, for the cash sur-
render value of the contracts, provided the
conditions set forth in the exemption are
met.
The preamble to PTE 77–8 (citing Rev.
Rul. 59–195; 1959–1 C.B. 18) notes that,
for Federal income tax purposes, the value
of an insurance policy is not the same as,
and may exceed, its cash surrender value,
and that a purchase of an insurance pol-
icy at its cash surrender value may there-
fore be a purchase of property for less than
its fair market value. The regulations un-
der section 402 do not address the conse-
quences of a sale of property by a section
401(a) plan to a plan participant or benefi-
ciary for less than the fair market value of
2004-10 I.R.B.566March 8, 2004

that property. In this regard, the preamble
to PTE 77–8 states that the Federal income
tax consequences of such a bargain pur-
chase must be determined in accordance
with generally applicable Federal income
tax rules but that any income realized by
a participant or relative of such partici-
pant upon such a purchase under the con-
ditions of PTE 77–8 will not be deemed
a distribution from the plan to such par-
ticipant for purposes of subchapter D of
chapter 1 of the Internal Revenue Code
(i.e., sections 401 to 424 of the Code) re-
lating to qualified pension, profit-sharing,
and stock bonus plans.
Section 79 of the Code generally re-
quires that the cost of group-term life in-
surance coverage provided by an employer
onthelifeofanemployeethatisinex-
cess of $50,000 of coverage be included in
the income of the employee. Pursuant to
§1.79–1(b) of the regulations, under spec-
ified circumstances, group-term life insur-
ance may be combined with other benefits,
referred to as permanent benefits. A per-
manent benefit is defined in §1.79–0 of the
regulations as an economic value extend-
ing beyond one policy year (for example,
a paid-up or cash surrender value) that is
provided under a life insurance policy. The
regulations further provide that certain fea-
tures are not permanent benefits, including
(a) a right to convert (or continue) life in-
surance after group life insurance coverage
terminates, (b) any other feature that pro-
vides no economic benefit (other than cur-
rent insurance protection) to the employee,
and (c) a feature under which term life in-
surance is provided at a level premium for
a period of five years or less.
Permanent benefits provided to an em-
ployee are subject to taxation under rules
described in §1.79–1(d) of the regulations.
Under those rules, the cost of the perma-
nent benefits, reduced by the amount paid
for those benefits by the employee, is in-
cluded in the employee’s income. The reg-
ulations provide the cost of the permanent
benefits can be no less than an amount de-
termined under a formula set forth in the
regulations. One of the factors used in this
formula is “the net level premium reserve
at the end of that policy year for all bene-
fits provided to the employee by the policy
or, if greater, the cash value of the policy
at the end of that policy year.”
Section 83(a) provides that when prop-
erty is transferred to any person in connec-
tion with the performance of services, the
service provider must include in gross in-
come (as compensation income) the excess
of the fair market value of the property,
determined without regard to lapse restric-
tions, and determined at the first time that
the transferee’s rights in the property are
either transferable or not subject to a sub-
stantial risk of forfeiture, over the amount
(if any) paid for the property. Section
1.83–3(e) of the regulations generally pro-
vides that in the case of “a transfer of a life
insurance contract, retirement income con-
tract, endowment contract, or other con-
tract providing life insurance protection,
only the cash surrender value of the con-
tract is considered to be property.”
In T.D. 9092, 2003–46 I.R.B. 1055
[68 FR 54336], published in theFed-
eral Registeron September 17, 2003,
relating to split-dollar life insurance ar-
rangements, §1.83–3(e) was amended to
add the following sentence: “Notwith-
standing the previous sentence, in the case
of a transfer of a life insurance contract,
retirement income contract, endowment
contract, or other contract providing life
insurance protection, or any undivided
interest therein, that is part of a split-dollar
life insurance arrangement (as defined in
§1.61–22(b)(1) or (2)) that is entered into,
or materially modified (within the mean-
ing of §1.61–22(j)(2)), after September
17, 2003, the policy cash value and all
other rights under such contract (including
any supplemental agreements thereto and
whether or not guaranteed), other than cur-
rent life insurance protection, are treated
as property for purposes of this section.”
Explanation of Provisions
A.Overview
These proposed amendments to the
regulations under section 402(a) clarify
that the requirement that a distribution
of property must be included in the dis-
tributee’s income at fair market value is
controlling in those situations where the
existing regulations provide for the inclu-
sion of the entire cash value. Thus, these
proposed regulations provide that, in those
cases where a qualifiedplan distributes
a life insurance contract, retirement in-
come contract, endowment contract, or
other contract providing life insurance
protection, the fair market value of such a
contract (i.e., the value of all rights under
the contract, including any supplemental
agreements thereto and whether or not
guaranteed) is generally included in the
distributee’s income and not merely the
entire cash value of the contracts.
These proposed regulations also pro-
vide that if a qualified plan transfers prop-
erty to a plan participant or beneficiary for
consideration that is less than the fair mar-
ket value of the property, the transfer will
be treated as a distribution by the plan to
the participant or beneficiary to the ex-
tent the fair market value of the distributed
property exceeds the amount received in
exchange. Thus, in contrast to the state-
ment to the contrary in the preamble to
PTE 77–8, any bargain element in the sale
would be treated as a distribution under
section 402(a). It is also intended that any
bargain element would be treated as a dis-
tribution for other purposes of the Code,
including the limitations on in-service dis-
tributions from certain qualified retirement
plans and the limitations of section 415.
These proposed regulations also amend
the current regulations under sections 79
and 83 to clarify that fair market value is
also controlling with respect to life insur-
ance contracts under those sections and,
thus, that all of the rights under the con-
tract (including any supplemental agree-
ments thereto and whether or not guaran-
teed) must be considered in determining
that fair market value. With respect to sec-
tion 79, these proposed regulations would
amend §1.79–1(d) to remove the termcash
valuefrom the formula for determining
the cost of permanent benefits and substi-
tute the termfair market value. With re-
spect to section 83, these proposed regu-
lations would amend §1.83–3(e) generally
to apply the definition of property for new
split-dollar life insurance arrangements to
all situations involving the transfer of life
insurance contracts. Section 83(a) requires
that the excess of the fair market value of
the property over the amount paid for the
property be includedin income. The cur-
rent definition of property outside the con-
text of a split-dollar life insurance arrange-
ment may lead taxpayers to believe that
it is appropriate upon receiving a transfer
of a life insurance contract to include only
its cash surrender value on the day of the
transfer when, due to supplemental agree-
ments, the fair market value of the trans-
ferred property is much greater. The pur-
March 8, 20045672004-10 I.R.B.

pose of the changes to these regulations
is to clarify that, unless specifically ex-
cepted from the definition of permanent
benefits or fair market value, the value of
all features of a life insurance policy pro-
viding an economic benefit to a service
provider (including, for example, the value
of a springing cash value feature) must be
included in determining the employee’s in-
come.
The proposed regulations will not af-
fect the relief granted by the provisions of
Section IV, paragraph 4 of Notice 2002–8,
2002–1 C.B. 398, to the parties to any
insurance contract that is part of a pre-
January 28, 2002, split-dollar life insur-
ance arrangement. Also, consistent with
theeffectivedateofthefinalsplit-dol-
lar life insurance regulations, §1.61–22,
these proposed regulations will not apply
to the transfer of a life insurance contract
which is part of a split-dollar life insur-
ance arrangement entered into on or be-
fore September 17, 2003, and not mate-
rially modified after that date. However,
taxpayers are reminded that, in determin-
ing the fair market value of property trans-
ferred under section 83, lapse restrictions
(such as life insurance contract surrender
charges) are ignored.
B.Determination of Fair Market Value
As noted above, §1.402(a)–1(a)(1)(iii)
does not define fair market value. In Rev.
Rul. 59–195, the Service ruled that, in sit-
uations similar to those in which an em-
ployer purchases and pays the premiums
on an insurance policy on the life of one of
its employees and subsequently sells such
policy, on which further premiums must
be paid, the value of such policy for com-
puting taxable gain in the year of purchase
should be determined under the method of
valuation prescribed in §25.2512–6 of the
Gift Tax Regulations. Under this method,
the value of such a policy is not its cash
surrender value but the interpolated termi-
nal reserve at the date of sale plus the pro-
portionate part of any premium paid by the
employer prior to the date of the sale which
is applicable to a period subsequent to the
date of the sale. Section 25.2512–6 of the
Gift Tax Regulations also provides that if
“because of the unusual nature of the con-
tract such approximation is not reasonably
close to the full value, this method may not
be used.” Thus, this method may not be
used to determine the fair market value of
an insurance policy where the reserve does
not reflect the value of all of the relevant
features of the policy.
In Q&A–10 of Notice 89–25, 1989–1
C.B. 662, the IRS addressed the question
of what amount is includible in income un-
der section 402(a) when a participant re-
ceives a distribution from a qualified plan
that includes a life insurance policy with
a value substantially higher than the cash
surrender value stated in the policy. The
notice noted the practice of using cash sur-
render value as fair market value for these
purposes and concluded that this practice
is not appropriate where the total policy
reserves, including life insurance reserves
(if any) computed under section 807(d), to-
gether with any reserves for advance pre-
miums, dividend accumulations, etc., rep-
resent a much more accurate approxima-
tion of the policy’s fair market value.
Since Notice 89–25 was issued, life in-
surance contracts have been marketed that
are structured in a manner which results in
a temporary period during which neither
a contract’s reserves nor its cash surren-
der value represent the fair market value of
the contract. For example, some life insur-
ance contracts may provide for large sur-
render charges and other charges that are
not expected to be paid because they are
expected to be eliminated or reversed in
the future (under the contract or under an-
other contract for which the first contract is
exchanged), but this future elimination or
reversal is not always reflected in the cal-
culation of the contract’s reserve. If such
a contract is distributed prior to the elim-
ination or reversal of those charges, both
the cash surrender value and the reserve
under the contract could significantly un-
derstate the fair market value of the con-
tract. Thus, in some cases, it would not be
appropriate to use either the net surrender
value (i.e., the contract’s cash value after
reduction for any surrender charges) or, be-
cause of the unusual nature of the contract,
the contract’s reserves to determine the fair
market value of the contract. Accordingly,
Q&A–10 of Notice 89–25 should not be
interpreted to provide that a contract’s re-
serves (including life insurance reserves (if
any) computed under section 807(d), to-
gether with any reserves for advance pre-
miums, dividend accumulations, etc.) are
always an accurate representation of the
contract’s fair market value.
For example, it would not be appropri-
ate to use a contract’s reserve or the net
surrender value of the contract as fair mar-
ket value at the time of distribution if un-
der that contract those amounts are sig-
nificantly less than the aggregate of: (1)
the premiums paid from the date of issue
through the date of distribution, plus (2)
any amounts credited (or otherwise made
available) to the policyholder with respect
to those premiums (including interest, div-
idends, and similar income items), or, in
the case of variable contracts, all adjust-
ments made with respect to the premiums
paid during that period that reflect invest-
ment return and the current market value of
segregated asset accounts, minus (3) rea-
sonable mortality charges and reasonable
charges (other than mortality charges) ac-
tually charged from the date of issue to
the date of distribution and expected to be
paid.
The following example provides an il-
lustration of a contract where it would not
be appropriate to use a contract’s reserve
or its net surrender value as its fair market
value:
A participates in a plan intended to
satisfy the requirements of section 401(a).
In Year 1, the plan acquires a life in-
surance contract on A’s life that is not a
variable contract and with a face amount
of $1,400,000. In that year and for the
next four years, the plan pays premiums
of $100,000 per year on the contract.
The contract provides for a surrender
charge that is fixed for the first five years
of the contract and decreases ratably to
zero at the end of ten years. The con-
tract also imposes reasonable mortality
and other charges as defined by section
7702(c)(3)(B)(i) and (ii) of the Code.
The contract provides a stated cash sur-
render value for each of the first ten years
(the first five years are guaranteed), as set
forth in the table below. The reserves un-
der the contract, including life insurance
reserves and reserves for advance premi-
ums, dividend accumulations, etc. (calcu-
lated using the rules in section 807(d) of
the Code) at the end of the fifth year are
$150,000.
2004-10 I.R.B.568March 8, 2004

YearPremiumNet Surrender Value
Cash Value
Determined without
Reduction for
Surrender Charges
1
$100,000
2
$100,000
3
$100,000
4
$100,000
5
$100,000$100,000$450,000
6
$195,000$475,000
7
$290,000$500,000
8
$385,000$525,000
9
$480,000$550,000
10
$575,000$575,000
At the end of Year 5, A retired and received
a distribution of the insurance contract that
was purchased on his life.
These regulations clarify that the con-
tract is included in A’s income at its fair
market value rather than the $100,000 cash
surrender value. Furthermore, A could not
treat the $150,000 reserve as of the end of
the fifth year as the fair market value, be-
cause this amount is less than the amount
a willing buyer would pay a willing seller
for such a contract, with neither party be-
ing under a compulsion to buy and sell and
both having reasonable knowledge of the
relevant facts.
Proposed Effective Dates
The amendments to §1.402(a)–1(a)(2)
of the regulations are proposed to be ap-
plicable to any distribution of a transfer-
able retirement income, endowment, or
other life insurance contract occurring on
or after February 13, 2004. The amend-
ment to §1.79–1 is proposed to be appli-
cable to permanent benefits provided on
or after February 13, 2004. The amend-
ment to §1.83–3(e) is proposed to be ap-
plicable to any transfer occurring on or af-
ter February 13, 2004. The amendments
to §1.402(a)–1(a)(1)(iii) of the regulations
are proposed to be applicable to any trans-
fer of property by a plan to a plan partici-
pant or beneficiary for less than fair mar-
ket value where the transfer occurs on or
after the date of publication in theFederal
Registerof the final regulations adopting
these amendments. Taxpayers may rely
upon these proposed regulations for guid-
ance pending the issuance of final regula-
tions.
Interim Guidance for Determining Fair
Market Value
The IRS and the Treasury recognize
that taxpayers could have difficulty deter-
mining the fair market value of a life in-
surance contract after the clarification in
this preamble that Notice 89–25 should not
be interpreted to provide that a contract’s
reserves (including life insurance reserves
(if any) computed under section 807(d), to-
gether with any reserves for advance pre-
miums, dividend accumulations, etc.) are
always an accurate representation of the
contract’s fair marketvalue. Accordingly,
in connection with this guidance, the IRS
has issued Rev. Proc 2004–16, 2004–10
I.R.B. 559), which provides interim rules
under which the cash value (without reduc-
tion for surrender charges) of a life insur-
ance contract distributed from a qualified
plan may be treated as the fair market value
of that contract. The interim rules in Rev.
Proc. 2004–16, permit the use of values
that should be readilyavailable from in-
surance companies, because the cash value
(without reduction for surrender charges)
is an amount that, in the case of a flex-
ible insurance contract (including a vari-
able contract), is generally reported in poli-
cyholder annual statements, and in the case
of traditional insurancecontracts, is fixed
at issue and provided in the insurance con-
tract.
Under those interim rules, a plan may
treat the cash value (without reduction for
surrender charges) as the fair market value
of a contract at the time of distribution pro-
vided such cash value is at least as large
as the aggregate of: (1) the premiums
paid from the date of issue through the
date of distribution, plus (2) any amounts
credited (or otherwise made available)
to the policyholder with respect to those
premiums, including interest, dividends,
and similar income items (whether under
the contract or otherwise), minus (3) rea-
sonable mortality charges and reasonable
charges (other than mortality charges), but
only if those charges are actually charged
on or before the date of distribution and
are expected to be paid.
In those cases where the contract is a
variable contract (as defined in section
807(d)) a plan may treat the cash value
(without reduction for surrender charges)
as the fair market value of the contract
at the time of distribution provided such
cash value is at least as large as the ag-
gregate of: (1) the premiums paid from
thedateofissuethroughthedateofdis-
tribution, plus (2) all adjustments made
with respect to those premiums during
that period (whether under the contract or
otherwise) that reflect investment return
and the current market value of segre-
gated asset accounts, minus (3) reasonable
mortality charges and reasonable charges
(other than mortality charges), but only
if those charges are actually charged on
or before the date of distribution and are
expected to be paid.
Applying those interim rules to the ex-
ample above, A could treat the cash value
(without reduction for surrender charges)
of $450,000 as the fair market value of
the contract as of the end of the fifth year,
because, in this example, that amount ex-
ceeds the aggregate of the five $100,000
premiums ($500,000), plus the amounts
credited to A with respect to those premi-
ums, minus the reasonable mortality and
other charges actually imposed and ex-
pected to be paid.
March 8, 20045692004-10 I.R.B.

Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It has also been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations,
and, because the regulations do not im-
pose a collection of information on small
entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursuant
to section 7805(f) of the Code, this notice
of proposed rulemaking will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written (a signed
original and eight (8) copies) or electronic
comments that are submitted timely to the
IRS. The IRS and Treasury Department
specifically request comments on the clar-
ity of the proposed regulations and how
they may be made easier to understand.
In addition, the Treasury Department and
the IRS specifically request comments re-
garding the interim rules set forth in Rev.
Proc. 2004–16 and proposals for appro-
priate permanent methods for valuing life
insurance contracts when distributed from
qualified retirement plans and for valuing
such contracts for purposes of sections 79
and 83, including appropriate discounts
which take into account the probability
that contracts will be surrendered during
the period during which surrender charges
apply. The IRS and the Treasury are also
reviewing other types of contracts, such
as annuities, which have cash surrender
value but where that cash surrender value
may not reflect the fair market value of the
contracts. Accordingly, the IRS and the
Treasury also request comments regard-
ing the valuation of these other contracts.
All comments will be available for public
inspection and copying.
A public hearing has been scheduled
for Wednesday, June 9, 2004, at 10 a.m.
in the auditorium, Internal Revenue Build-
ing, 1111 Constitution Avenue, NW, Wash-
ington, DC. Due to building security pro-
cedures, visitors must use the main build-
ing entrance on Constitution Avenue. In
addition, all visitors must present photo
identification to enter the building. Be-
cause of access restrictions, visitors will
not be admitted beyond the immediate en-
trance area more than 30 minutes before
the hearing starts. For more information
about having your name placed on the list
to attend the hearing, see the “FOR FUR-
THER INFORMATION CONTACT” sec-
tion of this preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written (signed original and eight
(8) copies) or electronic comments and an
outline of the topics to be discussed and
the time to be devoted to each topic by
Wednesday, May 19, 2004. A period of
10 minutes will be allotted to each person
for making comments. An agenda show-
ing the scheduling of the speakers will be
prepared after the deadline for receiving
outlines has passed. Copies of the agenda
will be available free of charge at the hear-
ing.
Drafting Information
The principal authors of these regu-
lations are Robert M. Walsh, Employee
Plans, Tax Exempt and Government En-
tities Division, and Linda Marshall, Of-
fice of Division Counsel/Associate Chief
Counsel (Tax Exempt and Government
Entities). However, other personnel from
the IRS and Treasury participated in the
development of these regulations.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.79–1, paragraph
(d)(3) is revised to read as follows:
§1.79–1 Group-term life
insurance—general rules.
*****
(d) * * *
(3)Formula for determining deemed
death benefit. The deemed death benefit
(DDB) at the end of any policy year for
any particular employee is equal to:
R/Y
where—
R is the net level premium reserve at
the end of that policy year for all benefits
provided to the employee by the policy
or, if greater, the fair market value of the
policy at the end of that policy year; and
Y is the net single premium for insur-
ance (the premium for one dollar of paid-
up, whole life insurance) at the employee’s
age at the end of that policy year.
*****
Par. 3. In §1.83–3, paragraph (e), the
last two sentences are revised to read as
follows:
§1.83–3 Meaning and use of certain
terms.
*****
(e)***Inthecaseofatransferofalife
insurance contract, retirement income con-
tract, endowment contract, or other con-
tract providing life insurance protection,
or any undivided interest therein, the pol-
icy cash value and all other rights under
such contract (including any supplemen-
tal agreements thereto and whether or not
guaranteed), other than current life insur-
ance protection, are treated as property for
purposes of this section. However, in the
case of the transfer of a life insurance con-
tract, retirement income contract, endow-
ment contract, or other contract providing
life insurance protection, which was part
of a split-dollar arrangement (as defined
in §1.61–22(b)) entered into (as defined in
§1.61–22(j)) on or before September 17,
2003, and which is not materially mod-
ified (as defined in §1.61–22(j)(2)) after
September 17, 2003, only the cash surren-
der value of the contract is considered to
be property.
*****
Par. 4. Section 1.402(a)–1 is amended
by:
1. Revising paragraph (a)(1)(iii).
2. Revising the last two sentences of
paragraph (a)(2).
The revisions read as follows:
2004-10 I.R.B.570March 8, 2004

§1.402(a)–1 Taxability of beneficiary
under a trust which meets the requirements
of section 401(a).
(a)***(1)***
(iii) Except as provided in paragraph
(b) of this section, a distribution of prop-
erty by a trust described in section 401(a)
and exempt under section 501(a) shall be
taken into account by the distributee at its
fair market value. In the case of a dis-
tribution of a life insurance contract, re-
tirement income contract, endowment con-
tract, or other contract providing life in-
surance protection, or any interest therein,
the policy cash value and all other rights
under such contract (including any supple-
mental agreements thereto and whether or
not guaranteed) are included in determin-
ing the fair market value of the contract. In
addition, where a trust described in section
401(a) and exempt under section 501(a)
transfers property to a plan participant or
beneficiary in exchange for consideration
and where the fair market value of the
property transferred exceeds the amount
received by the trust, then the excess of
the fair market value of the property trans-
ferred by the trust over the amount re-
ceived by the trust is treated as a distribu-
tion by the trust to the distributee.
*****
(2)***If,however,thecontractdis-
tributed by such exempt trust is a life insur-
ance contract, retirement income contract,
endowment contract, or other contract pro-
viding life insurance protection, the fair
market value of such contract at the time
of distribution must be included in the dis-
tributee’s income in accordance with the
provisions of section 402(a), except to the
extent that, within 60 days after the distri-
bution of such contract, all or any portion
of such value is irrevocably converted into
a contract under which no part of any pro-
ceeds payable on death at any time would
be excludable under section 101(a) (relat-
ing to life insurance proceeds). If the con-
tract distributed by such trust is a transfer-
able annuity contract, alife insurance con-
tract, a retirement income contract, endow-
ment contract, or other contract provid-
ing life insurance protection (whether or
not transferable), then notwithstanding the
preceding sentence, the fair market value
of the contract is includible in the distribu-
tee’s gross income, unless within such 60
days such contract is also made nontrans-
ferable.
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on February 13,
2004, 8:45 a.m., and published in the issue of the Federal
Register for February 17, 2004, 69 F.R. 7384)
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Student FICA Exception
REG–156421–03
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains pro-
posed regulations that provide guidance
regarding the meaning of “school, college,
or university” and “student” for purposes
of the student FICA exception under sec-
tions 3121(b)(10) and 3306(c)(10)(B) of
the Internal Revenue Code (Code). In
addition, this document contains proposed
regulations that provide guidance on the
meaning of “school, college, or univer-
sity” for purposes of the FICA exception
under section 3121(b)(2) for domestic
service performed in a local college club,
or local chapter of a college fraternity or
sorority by a student. This document also
provides a notice of public hearing on
these proposed regulations.
DATES: Written and electronic comments
must be received by May 25, 2004. Out-
lines of topics to be discussed at the public
hearing scheduled for June 16, 2004, must
be received by May 25, 2004.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–156421–03), room
5703, Internal Revenue Service, POB
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand delivered Monday through Friday
betweenthehoursof8a.m. and4p.m.
to: CC:PA:LPD:PR (REG–156421–03),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC. Alternatively, taxpayers may
submit comments electronically, via the
IRS Internet site at:www.irs.gov/regs.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, John Richards of the Office of
Associate Chief Counsel (Tax Exempt and
Government Entities), (202) 622–6040;
concerning submissions of comments,
the hearing and/or to be placed on the
building access list to attend the hear-
ing, Treena Garret, (202) 622–7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to 26 CFR part 31 under sec-
tions 3121(b)(10) and 3306(c)(10)(B) of
the Internal Revenue Code. These sections
except from “employment” for Federal In-
surance Contributions Act (FICA) tax
purposes and Federal Unemployment Tax
Act (FUTA) purposes, respectively, ser-
vice performed in the employ of a school,
college, or university if such service is
performed by a student who is enrolled
and regularly attending classes at such
school, college, or university. In addition,
this document contains proposed amend-
ments to 26 CFR part 31 under section
3121(b)(2). This section excepts from
employment for FICA purposes domestic
service performed in a local college club,
or local chapter of a college fraternity or
sorority, by a student who is enrolled and
is regularly attending cases at a school,
college, or university.
Explanation of Provisions
A. Current Law
Section 3121(b)(10) of the Code (the
student FICA exception) excepts from the
definition of employment for FICA pur-
poses services performed in the employ
of a school, college, or university (SCU)
(whether or not that organization is ex-
empt from income tax), or an affiliated or-
ganization that satisfies section 509(a)(3)
of the Code in relation to the SCU (“re-
lated section 509(a)(3) organization”), if
the service is performed by a student who
March 8, 20045712004-10 I.R.B.

is enrolled and regularly attending classes
at that SCU. Section 3306(c)(10)(B) con-
tains a similar student exception. Thus, the
student FICA exception applies to services
only if both the “SCU status” and “student
status” requirements are met. This regu-
lation deals with both the SCU status and
student status requirements.
To satisfy the SCU status requirement,
the employer for whom the employee
performs services (the common law em-
ployer) must be either a SCU or a related
section 509(a)(3) organization. If a stu-
dent is not employed by a SCU or a related
section 509(a)(3) organization, then the
student FICA exception is not available.
Seee.g., Rev. Rul. 69–519, 1969–2 C.B.
185 (holding that students attending an ap-
prenticeship school established pursuant
to an agreement between a union and a
contractors’ association were employees
of the participating contractors to whom
the students were assigned.) Section
31.3121(b)(10)–2(d) of the Employment
Tax Regulations provides that the term
“SCU” for purposes of the student FICA
exception is to be construed in its “com-
monly or generally accepted sense.”
To satisfy the student status require-
ment, the employee must meet three
requirements.First, under section
3121(b)(10), the employee must be a
student enrolled and regularly attending
classes at the SCU employing the student.
Second, the employee must be pursuing
a course of study at the SCU employing
the student. Third, the employee must be
“[a]n employee who performs services in
the employ of a [SCU] as an incident to
and for the purpose of pursuing a course
of study at such [SCU] . . . .” Reg.
§31.3121(b)(10)–2(c). The IRS’s position
has been that whether services are inci-
dent to and for the purpose of pursuing a
course of study depends on two factors:
the employee’s course workload and the
nature of the employee’s employment re-
lationship with the employer. Seee.g.,
Rev. Proc. 98–16, 1998–1 C.B. 403; Rev.
Rul. 78–17, 1978–1 C.B. 306.
B. Need for Regulations
Treasury and IRS have determined that
it is necessary to provide additional clar-
ification of the terms “SCU” and “stu-
dent who is enrolled and regularly attend-
ing classes” as they are used in section
3121(b)(10). In recent years the ques-
tion has arisen whether the performance
of certain services that are in the nature
of on the job training are excepted from
employment under the student FICA ex-
ception. This issue was presented with re-
spect to medical residents and interns in
State of Minnesota v. Apfel, 151 F.3d 742
(8
th
Cir. 1998), which concluded that ser-
vices performed by medical residents and
interns are not employment for social secu-
rity purposes. The question also applies to
services performed by employees in other
fields, particularly regulated fields, where
on the job training is often required to gain
licensure. Guidance is needed to address
situations where the performance of ser-
vices and pursuit of the course of study are
not separate and distinct activities, but in-
stead are to some extent intermingled.
Section 3121(a) defines “wages” as
“allremunerationforemployment....”
Under section 3121(b), “employment”
means “any service . . . performed
. . . by an employee for the person em-
ploying him.” The Social Security Act
provides nearly identical definitions of
“wages” and “employment.” 42 U.S.C.
sections 409(a)(1)(I); 410(a). “The very
words ‘any service . . . performed . . .
for his employer,’ with the purpose of
the Social Security Act in mind, import
a breadth of coverage.”Social Security
Board v. Nierotko, 327 U.S. 358, 365
(1946). The courts have generally found
that the terms “wages” and “employment”
as used in both the social security benefits
and FICA tax provisions are to be inter-
preted broadly.State of New Mexico v.
Weinberger, 517 F.2d 989, 993 (10
th
Cir.
1995);Mayberry v. United States,151
F.3d 855, 860 (8
th
Cir. 1998);Moorhead
v. United States, 774 F.2d 936, 941 (9
th
Cir. 1985);Abrahamsen v. United States,
228 F.3d 1360, 1364 (Fed. Cir. 2000).
The broad interpretation of these terms
results from the underlying purpose of the
Social Security Act, namely, “to provide
funds through contributions by employer
and employee for the decent support of el-
derly workmen who have ceased to labor.”
Nierotko, 327 U.S. at 364. See alsoSt.
Luke’s Hospital v. United States,333F.2d
157, 164 (6
th
Cir. 1964) (“[I]n dealing
with the beneficent purposes of the Social
Security Act, this court generally favors
that interpretation of statutory provisions
which calls for coverage rather than ex-
clusion.”).
Wage and employment questions affect
both social security benefits entitlement
and FICA taxes which fund the social
security trust fund. Except in unusual cir-
cumstances, the Social Security Act, and
the Internal Revenue FICA provisions, are
to be read in pari materia.United States
v. Cleveland Indians Baseball Co.,532
U.S. 200, 213 (2001). Thus, whether cer-
tain service is employment affects not just
FICA taxation, but also social security
benefits eligibility and level of benefits.
Moreover, the integrity of the social se-
curity system requires symmetry between
service that is considered employment
for social security benefits purposes and
employment for FICA taxation purposes.
Resolution of this issue has significant
social security benefits and FICA tax im-
plications. The case of medical residents
illustrates the possible effect on individ-
uals and the social security system as a
whole of excepting service in the nature of
on the job training from employment for
social security benefits and FICA tax pur-
poses. The Social Security Administration
(SSA) reported to the General Accounting
Office (GAO) that “[b]ecause many resi-
dents are married and have children and
work as residents for up to 8 years, an
exemption from Social Security coverage
could have a very significant effect on their
potential disability benefits or their fam-
ily’s survivor benefits.” Moreover, SSA
reported that if medical residents were de-
termined to be students for purposes of the
student FICA exception, 270,000 medical
residents would lose some coverage over
the next ten years (2001 through 2010).
1
This regulation addresses two issues:
(1) whether an organization carrying on
educational activities in connection with
the performance of services is a SCU
within the meaning of section 3121(b)(10),
and (2) whether certain employees per-
forming services in the nature of on the job
training have the status of a student who
is enrolled and regularly attending classes
for purposes of section 3121(b)(10).
1
GAO Report B–284947, Health, Education, and Human Services Division,Social Security: Coverage For Medical Residents(August 31, 2000).
2004-10 I.R.B.572March 8, 2004

C. Whether an Organization Carrying On
Educational Activities Is a SCU
Organizations providing on the job
training typically carry on both nonedu-
cational and educational activities. The
issue is whether organizations carrying
on both noneducational and educational
activities are SCUs within the meaning of
section 3121(b)(10). For example, orga-
nizations such as hospitals typically carry
on both educational and noneducational
activities. InUnited States v. Mayo Foun-
dation, 282 F. Supp. 2d 997 (D. Minn.
2003), the United States argued, consis-
tent with the position it has maintained
administratively, that the primary purpose
of an organization determines whether
the organization is a SCU for purposes of
the student FICA exception. The court
rejected this argument, finding it inconsis-
tent with the common sense standard. The
court stated, “If the [IRS] had intended the
term ‘SCU’ in §3121(b)(10) to have the
same scope and meaning as ‘educational
institution’ (found in §170(b)(1)(A)(ii)
. . . ), it could have clearly and explicitly
given the phrase such scope and meaning
by cross-referencing those Code provi-
sions and their implementing regulations.”
Although Treasury and IRS disagree with
the interpretation of the district court, the
Secretary understands and is responding
to the court’s view by more clearly incor-
porating the primary purpose standard in
regulations.
This regulation provides that the char-
acter of an organization as a SCU or not
as a SCU is determined by its primary
function. The primary function standard
is consistent with the language of section
3121(b)(10) and the existing regulations
thereunder, and is consistent with the in-
tended scope of the student FICA excep-
tion as reflected in the legislative history
accompanying the Social Security Amend-
ments of 1939 and 1950.
Section 170(b)(1)(A) of the Code de-
fines various classes of organizations for
charitable deduction purposes. All of the
organizations have some combination of
charitable, educational, religious and/or
cultural purposes. The definitions dis-
tinguish them into categories based on
various criteria. One such class defined
in section 170(b)(1)(A)(ii) is for any “ed-
ucational organization which normally
maintains a regular faculty and curriculum
and normally has a regularly enrolled body
of pupils or students in attendance at the
place where its educational activities are
regularly carried on.”
Section 1.170A–9(b)(1) of the Income
Tax Regulations provides:
An educational organization is de-
scribed in section 170(b)(1)(A)(ii) if
its primary function is the presentation
of formal instruction and it normally
maintains a regular faculty and cur-
riculum and normally has a regularly
enrolled body of pupils or students in
attendance at the place where its edu-
cational activities are regularly carried
on. The term includes institutions such
as primary, secondary, preparatory, or
high schools, and colleges and univer-
sities. It includes Federal, State, and
other public-supported schools which
otherwise come within the definition. It
does not include organizations engaged
in both educational and noneducational
activities unless the latter are merely
incidental to the educational activities.
A recognized university which inciden-
tally operates a museum or sponsors
concerts is an educational organiza-
tion within the meaning of section
170(b)(1)(A)(ii). However, the oper-
ation of a school by a museum does
not necessarily qualify the museum as
an educational organization within the
meaning of this subparagraph.
Thus, in order to qualify as an ed-
ucational organization under section
170(b)(1)(A)(ii), it is not enough that the
organization carries on educational activ-
ities; instead, the organization’s primary
function must be to carry on educational
activities.
The section 170(b)(1)(A)(ii) stan-
dard applies to the organization as a
whole, an approach that is consistent with
§31.3121(b)(10)–2(b) of the regulations,
which provides that one of “[t]he statutory
tests [is] the character of theorganization
in the employ of which the services are
performed as a [SCU] . . . .” Thus, the
character of the organization determines
whether it is a SCU, not merely whether
the organization carries on some educa-
tional activities. Further, section 3121(b)
provides that “the term ‘employment’
means any service . . . performed . . .
by an employee for thepersonemploying
him,” and §31.3121(d)–2 of the regula-
tions provides that “everypersonis an
employer if he employs one or more em-
ployees.” Under section 7701(a)(1), the
term “person” means any individual, trust,
estate, association, or corporation. Thus,
the character of thepersonemploying the
employee—the legal entity recognized for
federal tax purposes—determines whether
the SCU status requirement is met, not
merely the character of a division or func-
tion of the employer.
In addition, the primary function stan-
dard reaches a result consistent with
the “commonly or generally accepted
sense” standard of the existing regula-
tion (§31.3121(b)(10)–2(d)). In common
parlance, the term “hospital” is used to
describe an organization with the pri-
mary function of caring for patients. The
term “museum” is used to describe an
organization with the primary function
of maintaining a collection and display-
ing it to the public in a way that will
educate them about the collection and re-
lated concepts. A hospital or a museum
may conduct educational activities, even
classes or possibly even certificate or de-
gree programs, but the activities which
define them in the public mind are patient
care and maintenance and display of a
collection. An organization bears the label
“school” when its primary function is the
conduct of classes for an identified set
of students leading to the awarding of a
credential demonstrating mastery of some
subject matter.
Finally, defining the term “SCU” to in-
clude institutions whose primary function
is other than to carry on educational ac-
tivities could lead to expansion of the stu-
dent FICA exception beyond what Con-
gress intended. When Congress enacted
the student FICA exception in 1939, and
amended it in 1950, it contemplated that
the exception would be limited in scope.
The House Report to the Social Security
Amendments of 1939 states the following
in describing the purpose of the student
FICA and other exceptions:
In order to eliminate the nuisance of
inconsequential tax payments, the bill
excludes certain services performed
for fraternal benefit societies and other
nonprofit institutions exempt from in-
come tax, and certain other groups.
While the earnings of a substantial
number of persons are excluded by
this recommendation, the total amount
of earnings involved is undoubtedly
March 8, 20045732004-10 I.R.B.

verysmall....Theintentofthis
amendment is to exclude those persons
and those organizations in which the
employment is part-time or intermit-
tent and the total amount of earnings
is only nominal, and the payment of
tax is inconsequential and a nuisance.
The benefit rights built up are also in-
consequential. Many of those affected,
such as students and the secretaries of
lodges, will have other employment
which will enable them to develop in-
surance benefits. This amendment,
therefore, should simplify the admin-
istration for the worker, the employer,
and the Government.
H. R. Rep. No. 728, 76
th
Cong. 1
st
Sess.
(1939), 1939–2 C.B. 538, 543. The Sen-
ate Report uses similar language. S. Rep.
No. 734, 76
th
Cong. 1
st
Sess. 19 (1939),
1939–2 C.B. 565, 570.
The House Report to the Social Secu-
rity Amendments of 1950 continued to de-
scribe the exception as a matter of admin-
istrative convenience not meaningfully af-
fecting social security benefits:
The bill would continue to exclude ser-
vice performed for nominal amounts
in the employ of tax-exempt nonprofit
organizations,
2
service performed by
student nurses and internes [sic],
3
and
service performed by students in the
employ of colleges and universities.
These exclusions simplify administra-
tion without depriving any significant
number of people of needed protection.
H. R. Rep. No. 1300, 81
st
Cong. 1
st
Sess. 12 (1949). The Senate Report con-
tains similar language. S. Rep. No. 1669,
81
st
Cong. 2d Sess. 15 (1950). Defining
“SCU” to include organizations whose pri-
mary purpose is not to carry on educational
activities would create a broad exception
contrary to what Congress intended. Ac-
cordingly, the term “SCU” should not be
interpreted so broadly as to include orga-
nizations whose primary function is other
than to carry on educational activities.
D. Whether Certain Employees Are
Students
This regulation clarifies who is a
student enrolled and regularly attend-
ing classes for purposes of section
3121(b)(10). The existing regulations
at §31.3121(b)(10)–2(c) provide that an
employee will have the status of student
only if the services are performed “as an
incident to and for the purpose of pursuing
a course of study” at the SCU. Thus, to
qualify for the exception, the individual’s
predominant relationship with the SCU
must be as a student, and only secondarily
or incidentally as an employee.
Where an individual’s employment and
educational activities are separate and dis-
tinct, the extent and nature of the respec-
tive activities determine whether the em-
ployment or student aspect of the relation-
ship with the SCU is predominant. See
Rev. Proc. 98–16. In the vast major-
ity of cases the service and the course of
study are separate and distinct activities;
for example, the biology major’s service
in the cafeteria is unrelated to his course of
study. By contrast, some employees’ ser-
vices are arguably part of a course of study;
for example, the services of a medical res-
ident are necessary to receive a certificate
in a medical specialty. The standards in
Rev. Proc. 98–16—whether the employee
has at least a half-time course workload,
and whether the employee is eligible to re-
ceive certain employee benefits—are inad-
equate to determine student status in such
circumstances. Where the services per-
formed by the individual for the SCU are
also earning the individual credit toward
an educational credential, the determina-
tion of whether the employment relation-
ship is the predominant relationship with
the SCU must be based on other factors.
This regulation is intended to provide stan-
dards to determine student status in such
cases.
This regulation is intended to further
Congress’s intent regarding those eligible
for the student FICA exception as reflected
by the legislative history to the Social Se-
curity Amendments of 1939. Consistent
with Congress’s intent, the student FICA
exception covers individuals earning small
amounts who are expected to accumulate
social security benefits through future em-
ployment that will follow the completion
of their education. Thus, in the typical
case, a student will earn a modest amount
while devoting his primary time and atten-
tion to classes and study.
This regulation provides clarification in
three respects. First, it describes what
the individual must be doing to be con-
sidered enrolled and regularly attending
classes. In order to be a class, the ac-
tivity must be more than an activity that
gives the individual an opportunity to ac-
quire new skills and knowledge. It must
involve instructional activities, and be led
by a knowledgeable faculty member fol-
lowing an established curriculum for iden-
tified students. Classes can include much
more than traditional classroom-based in-
struction, but the faculty leadership, the set
curriculum, and the prescribed time frame
are essential.
Second, this regulation provides stan-
dards for determining whether an em-
ployee is pursuing a course of study.
The regulation provides that one or more
courses conducted by a SCU the comple-
tion of which fulfills the requirements to
receive an educational credential granted
by the SCU is a course of study.
Third, this regulation provides stan-
dards for determining whether an em-
ployee’s services are incident to and for
the purpose of pursuing a course of study.
The regulation provides in general that
whether the employee’s services are inci-
dent to and for the purpose of pursuing a
course of study depends on all the facts
and circumstances. This determination is
made by comparing the educational aspect
of the relationship between the employer
and the employee with the service aspect
of the relationship. The regulation pro-
vides that the employee’s course workload
is used to measure the scope of the ed-
ucational aspect of the relationship. A
relevant factor is the employee’s course
workload relative to a full-time course
workload. The regulation further provides
that where an employee has the status of
a career employee, the services performed
by the employee are not incident to and for
the purpose of pursuing a course of study.
This regulation specifies various as-
pects of an individual’s employment
relationship with the SCU which cause
conclusively the individual to have the
status of a “career employee.”
This regulation provides that the crite-
ria used to identify an employee as having
the status of a career employee are (1) the
2
The general exception from employment for services performed for non-profit organizations was repealed in 1983 by Public Law 98–21, section 102(b).
3
The Social Security Amendments of 1965 repealed the student intern exception under §3121(b)(13). See discussioninfra.
2004-10 I.R.B.574March 8, 2004

employee’s hours worked, (2) whether the
employee is a “professional employee,”
(3) the employee’s terms of employment,
and (4) whether the employee is required
tobelicensedinthefieldinwhichtheem-
ployee is performing services. The hours
worked criteria reflects Congressional in-
tent to limit the student FICA exception
to services performed by those individuals
who are predominantly students. Em-
ployees who are working enough hours
to be considered full-time employees (40
hours or more per week) have filled the
conventional measure of available time
with work, and not study. Even if they are
capable of balancing a full-time job with a
heavy course load, they are earning wages
at a level that exceeds Congress’s intended
scope for the student FICA exception. The
IRS’s long-standing position is that hours
worked is a relevant factor in determining
whether an employee has student status.
Rev. Rul. 78–17, 1978–1 C.B. 306 (hold-
ing that whether an employee has student
status is determined by hours worked rel-
ative to credits taken); Rev. Rul. 66–285,
1966–2 C.B. 455 (holding that services of
an employee employed full-time are not
incident to and for the purpose of pursu-
ing a course of study). Rev. Rul. 85–74,
1985–1 C.B. 331, dealing with the student
nurse exception, uses an hours worked
standard. The student nurse exception and
the student FICA exception share the same
legislative history. The IRS’s use of an
hoursworkedstandardwasfoundtobea
reasonable interpretation of the legislative
history inJohnson City Medical Center
v. United States, 999 F.2d 973 (6
th
Cir.
1993).
The regulation provides that a “pro-
fessional employee”has the status of a
career employee, and thus his services
are not incident to a course of study. The
standards defining a professional em-
ployee for purposes of this regulation
closely follow existing Department of La-
bor standards defining certain professional
employees. See 29 U.S.C. 213(a); and 29
CFR 541.3(a)(1), (b), (c), (d). Section
213(a) and the regulations thereunder pro-
vide that certain employees are exempt
from the minimum wage and overtime
laws. This regulation provides that a pro-
fessional employee for purposes of the
student FICA exception is an employee
whose primary duty consists of the perfor-
mance of services requiring knowledge of
an advanced type in a field of science or
learning, whose work requires the consis-
tent exercise of discretion and judgment
in its performance, and whose work is
predominantly intellectual and varied in
character. The services of employees
exhibiting these characteristics are not
incident to a course of study.
This regulation provides that an em-
ployee’s terms of employment may also
cause an employee to have the status of a
career employee. A list of terms is pro-
vided, any one of which causes the em-
ployee to have the status of a career em-
ployee. On the list are terms of employ-
ment that provide foreligibility to receive
certain employee benefits typically associ-
ated with career employment, such as eli-
gibility to participate in certain types of re-
tirement plans or tuition reduction arrange-
ments. The notion of a career employee
standard based on eligibility to receive cer-
tain fringe benefits was recommended by
the higher education community for pur-
poses of guidance that was issued in Rev.
Proc. 98–16, and Treasury and IRS believe
it is an appropriate standard to use for pur-
poses of identifying employees whose ser-
vices are not incident to and for the pur-
pose of pursuing a course of study. Rev.
Proc. 98–16 provides that career employee
status precludes application of the safe har-
bor standard, but leaves the possibility that
the employee could have the status of a
student based on all the facts and circum-
stances. In contrast, this regulation pro-
vides that an employee considered as hav-
ing the status of a career employee based
on eligibility to receive certain employee
benefits does not have the status of a stu-
dent for purposes of the student FICA ex-
ception.
Finally, this regulation provides that
an employee who must be licensed by a
government entity in order to perform a
certain function has the status of a career
employee. An employee who is required
to be licensed to perform the services must
have received sufficient prior instruction
and demonstrated sufficient mastery of
the activity to receive the license. Fur-
thermore, licensed workers typically earn
more than a modest amount for their work
to reflect their expertise. As discussed,
the legislative history indicates that the
student FICA exception is intended to
cover individuals earning a small amount
of wages prior to entry into meaningful
post-education employment. The excep-
tion is not intended to cover an individual
who has developed enough expertise to
beworkinginafieldwhereheorsheis
already licensed and has the capacity to
earn substantial wages.
The IRS requests comments on the cri-
teria used to identify an employee as hav-
ing the status of a career employee. In par-
ticular, the IRS requests comments on the
licensure criterion and whether this crite-
rion should be further refined or clarified.
IRS and Treasury believe that Congress
has shown the specific intent to provide so-
cial security coverage to individuals who
work long hours, serve as highly skilled
professionals, and typically share some or
all of the terms of employment of career
employees, particularly medical residents
and interns. The Social Security Amend-
ments of 1939 added section 1426(b)(13)
to the Code (later redesignated section
3121(b)(13)), which provided an excep-
tion from social security coverage for
“service performed as an intern in the em-
ploy of a hospital by an individual who has
completed a 4 years’ course in a medical
school chartered or approved pursuant to
State law.” The House Report accompa-
nying the legislation provides:
Paragraph 13 excepts service per-
formed as a student nurse in the employ
of a hospital or a nurse’s training school
by an individual who is enrolled and is
regularly attending classes . . . ; and
service performed as an interne [sic](as
distinguished from a resident doctor)
in the employ of a hospital by an indi-
vidual who has completed a four years’
course in a medical school chartered or
approved pursuant to State law.
H. R. Rep. No. 728, 76
th
Cong. 1
st
Sess.
49 (1939), 1939–2 C.B. 538, 550–51 (em-
phasis added); see also S. Rep. No. 734,
76
th
Cong. 1
st
Sess. 58, 1939–2 C.B. 565,
578. Thus, the services of medical interns
were excepted from FICA, but the services
of resident doctors were not.
Twenty-five years later, inSt. Luke’s
Hospital v. United States, 333 F.2d 157
(6
th
Cir. 1964), the Sixth Circuit con-
firmed that section 3121(b)(13) of the
Code applied to medical interns, but that
medical residents were not specifically
excepted from social security coverage.
St. Luke’s claimed a refund of FICA taxes
for the years 1953 through 1958 based on
the student internexception under sec-
March 8, 20045752004-10 I.R.B.

tion 3121(b)(13). The refund claims were
computed based upon the remuneration
paid to medical school graduates in their
second or subsequent year of clinical train-
ing. The court held that the services of
medical residents were not excluded under
the medical intern exception.
In 1965, one year after theSt. Luke’s
decision, Congress amended the Code to
repeal the special exemption for medical
interns. The legislative history underlying
the Social Security Amendments of 1965
(Public Law 89–97) suggests that Con-
gress intended that medical interns be cov-
ered by FICA just as medical residents al-
ready were. The House Report states:
Coverage would also be extended to
services performed by medical and den-
tal interns. The coverage of services as
an intern would give young doctors an
earlier start in building up social secu-
rity protection and would help many of
them to become insured under the pro-
gram at the time when they need the
family survivor and disability protec-
tion it provides. This protection is im-
portant for doctors of medicine who,
like members of other professions, in
the early years of their practice, may not
otherwise have the means to provide ad-
equate survivorship and disability pro-
tection for themselves and their fami-
lies. Interns would be covered on the
same basis as other employees working
for the same employers, beginning on
January 1, 1966.
H. R. Rep. No. 213, 89
th
Cong. 1
st
Sess.
95 (1965).
The Senate Report states:
Section 3121(b)(13) of the Internal
Revenue Code of 1954 excludes from
the term ‘employment,’ and thus from
coverage under the [FICA], services
performedasaninternintheemploy
of a hospital by an individual who has
completed a 4-year course in a medical
school....Section311(b)(5)ofthe
bill amends section 3121(b)(13) so as
to remove this exclusion. The effect of
this amendment is to extend coverage
under the [FICA] to such interns unless
their services are excluded under pro-
visions other than section 3121(b)(13).
Thus, the services of an intern are cov-
ered if he is employed by a hospital
which is not exempt from income tax
as an organization described in section
501(c)(3) of the Code.
S. Rep. No. 404, 89
th
Cong. 1
st
Sess.
237–38 (1965). The last sentence makes
indirect reference to the exclusion from
FICA for services performed for exempt
organizations under section 3121(b)(8)(B)
of the 1954 Code. That exclusion was re-
pealed by the Social Security Amendments
of 1983 (Public Law 98–21). Nothing in
the legislative history indicates that Con-
gress believed interns (or residents, who
were even further along in their medical
careers than interns) were eligible for the
student FICA exception.
In addition to revoking the medical
intern exception, section 311 of the Social
Security Amendments of 1965, entitled,
“Coverage for Doctors of Medicine,”
changed the law in two other ways af-
fecting medical doctors. First, section
1402(c)(5) of the 1954 Code was amended
to eliminate the exception for physician
services from the definition of “trade or
business,” thus subjecting these services
to self-employment tax. Second, section
3121(b)(6)(C)(iv) of the 1954 Code, which
provided an exception from the definition
of employment for “service performed
in the employ of the United States if the
service is performed by any individual as
an employee included under § 5351(2)
of title 5, [U.S.C.], (relating to certain
interns, student nurses, and other student
employees of hospitals of the Federal
Government),” was amended by adding,
“other than as a medical or dental intern or
a medical or dental resident in training.”
These provisions, taken together, indicate
Congress’s intent to create a scheme un-
der which all medical doctors are covered
under the social security system, whether
or not they are still in training, whether or
not they are self-employed, or whether or
not they work for the federal government.
E. Effect on Rev. Proc. 98–16
Several years ago, representatives of
higher education asked the IRS and Trea-
sury for guidance on the application of
the student FICA exception. Colleges and
universities were particularly interested
in guidance relating to students who had
on-campus jobs that were completely sep-
arate and distinct from their course work.
In response, the IRS issued Rev. Proc.
98–16, which sets forth standards for de-
termining whether services performed by
students in the employ of certain insti-
tutions of higher education qualify for
the exception from FICA tax provided
under section 3121(b)(10). The revenue
procedure provided answers to many long-
standing questions.
The revenue procedure addresses dif-
ferent circumstances than those prompt-
ing the need for the clarifications provided
in this proposed regulation. It provides a
safe harbor that applies where the student’s
course work and the student’s employment
are separate activities, and are not inter-
mingled. In clarifying the regulations in-
terpreting section 3121(b)(10), the IRS and
Treasury fully intend to retain the safe har-
bor in the revenue procedure. However,
several discrete aspects of the safe harbor
need to be updated to align with the pro-
posed regulations. Thus, in conjunction
with this notice of proposed rulemaking,
the IRS is suspending Rev. Proc. 98–16
and proposing to replace it with a new rev-
enue procedure that is revised in limited
ways to align with the proposed regula-
tions. See Notice 2004–12, to be published
in I.R.B. 2004–10 (March 8, 2004). Tax-
payers may rely on the proposed revenue
procedure until final regulations and a fi-
nal revenue procedure are issued. Also, the
public is invited to comment on the pro-
posed revenue procedure.
F.RelatedProposedAmendments
Section 3306(c)(10)(B) of the Code ex-
cepts from “employment” for FUTA tax
purposes services performed by a student
who is enrolled and regularly attending
classes at a SCU. This regulation provides
that the standards that apply in determin-
ing whether an employer is a SCU and
whether an employee is a student for pur-
poses of section 3121(b)(10) also apply
for purposes of section 3306(c)(10)(B). In
addition, this regulation provides that the
standards that apply for purposes of deter-
mining whether an employer is a SCU for
purposes of section 3121(b)(10) also ap-
ply for purposes of section 3121(b)(2) (ex-
cluding from employment for FICA pur-
poses domestic services performed for lo-
cal college clubs, fraternities, and sorori-
ties by students who are enrolled and reg-
ularly attending classes).
2004-10 I.R.B.576March 8, 2004

G. Proposed Effective Date
It is proposed that these regulations ap-
ply to services performed on or after Feb-
ruary 25, 2004.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It has also
been determined thatsection 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions. In addition, because no collection
of information is imposed on small enti-
ties, the provisions of the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) do not ap-
ply, and, therefore, a Regulatory Flexibil-
ity Analysis is not required. Pursuant to
section 7805(f) of the Code, this notice
of proposed rulemaking will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on the impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written or electronic
comments that are submitted timely to the
IRS. The IRS and Treasury Department re-
quest comments on all aspects of the pro-
posed regulations and how they can be
made easier to understand. All comments
will be available for public inspection and
copying.
A public hearing is scheduled for June
16, 2004, beginning at 10 a.m. in room
2615 of the Internal Revenue Building,
1111 Constitution Avenue, NW, Wash-
ington, DC. Due to building security
procedures, visitors must enter at the Con-
stitution Avenue entrance. All visitors
must present photo identification to enter
the building. Because of access restric-
tions, visitors will not be admitted beyond
the immediate entrance area more than 30
minutes before the hearing starts. For in-
formation about having your name placed
on the building access list to attend the
hearing, see the “FOR FURTHER IN-
FORMATION CONTACT” section of this
preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit electronic or written comments by
May 25, 2004, and submit an outline of the
topics to be discussed and the time to be
devoted to each topic (signed original and
eight (8) copies). 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 af-
ter the deadline for receiving outlines has
passed. Copies of the agenda will be avail-
able free of charge at the hearing.
Drafting Information
The principal author of these proposed
regulations is John Richards of the Of-
fice of Division Counsel/Associate Chief
Counsel (Tax Exempt and Government
Entities). However, other personnel from
the IRS and Treasury Department partici-
pated in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 31 is pro-
posed to be amended as follows:
PART 31—EMPLOYMENT TAXES
Paragraph 1. The authority citation for
part 31 continues to read in part, as fol-
lows:
Authority26U.S.C.7805***
Par. 2. In §31.3121(b)(2)–1, paragraph
(d) is revised to read as follows:
§31.312
1(b)(2)–1 Domestic service
perform
ed by students for certain college
organiz
ations.
*****
(d)A school, college, or universityis
described in section 3121(b)(2) if its pri-
mary function is the presentation of formal
instruction, it normally maintains a regu-
lar faculty and curriculum, and it normally
has a regularly enrolled body of students
in attendance at the place where its edu-
cational activities are regularly carried on.
See section 170(b)(1)(A)(ii) and the regu-
lations thereunder.
*****
Par. 3. Section 31.3121(b)(10)–2 is
amended by:
1. Adding headings for paragraphs (a),
(b).
2. Revising paragraphs (c) and (d).
3. Redesignating paragraph (e) as (g).
4. Adding paragraphs (e) and (f).
The revisions and additions read as fol-
lows:
§31.3121(b)(10)–2 Services performed
by certain students in the employ of a
school, college, or university, or of a
nonprofit organization auxiliary to a
school, college, or university.
(a)General rule.(1)***
(b)Statutory tests.***
(c)School, College, or University.A
school, college, or universityis described
in section 3121(b)(10) if its primary func-
tion is the presentation of formal instruc-
tion, it normally maintains a regular fac-
ulty and curriculum, and it normally has a
regularly enrolled body of students in at-
tendance at the place where its educational
activities are regularly carried on. See sec-
tion 170(b)(1)(A)(ii) and the regulations
thereunder.
(d)Student Status—general rule.
Whether an employee has the status of
a student performing the services shall be
determined based on the relationship of the
employee with the organization for which
the services are performed. In order to
have the status of a student, the employee
must perform services in the employ of
a school, college, or university described
in paragraph (c) of this section at which
the employee is enrolled and regularly
attending classes in pursuit of a course of
study within the meaning of paragraphs
(d)(1) and (2) of this section. In addition,
the employee’s services must be incident
to and for the purpose of pursuing a course
of study within the meaning of para-
graph (d)(3) of this section at such school,
college, or university. An employee who
performs services in the employ of an affil-
iated organization described in paragraph
(a)(2) of this section must be enrolled and
regularly attending classes at the affiliated
school, college, or university within the
meaning of paragraph (c) of this section
in pursuit of a course of study within the
meaning of paragraphs (d)(1) and (2) of
this section. In addition, the employee’s
services must be incident to and for the
purpose of pursuing a course of study
within the meaning of paragraph (d)(3)
of this section at such school, college, or
university.
March 8, 20045772004-10 I.R.B.

(1)Enrolled and regularly attending
classes. An employee must be enrolled
and regularly attending classes at a school,
college, or university within the meaning
of paragraph (c) of this section at which the
employee is employed to have the status
of a student within the meaning of section
3121(b)(10). An employee is enrolled
within the meaning of section 3121(b)(10)
iftheemployeeisregisteredforacourseor
courses creditable toward an educational
credential described in paragraph (d)(2)
of this section. In addition, the employee
must be regularly attending classes to have
the status of a student. For purposes of
this paragraph (d)(1), a class is an instruc-
tional activity led by a knowledgeable
faculty member for identified students
following an established curriculum. Tra-
ditional classroom activities are not the
sole means of satisfying this requirement.
For example, research activities under the
supervision of a faculty advisor necessary
to complete the requirements for a Ph.D.
degree may constitute classes within the
meaning of section 3121(b)(10). The fre-
quency of events such as these determines
whether the employee may be considered
to be regularly attending classes.
(2)Course of study. An employee must
be pursuing a course of study in order to
have the status of a student. A course of
study is one or more courses the comple-
tion of which fulfills the requirements nec-
essary to receive an educational credential
granted by a school, college, or univer-
sity within the meaning of paragraph (c)
of this section. For purposes of this para-
graph, an educational credential is a de-
gree, certificate, or other recognized ed-
ucational credential granted by an organ-
ization described in paragraph (c) of this
section. In addition, a course of study is
one or more courses at a school, college
or university within the meaning of para-
graph (c) of this section the completion of
which fulfills the requirements necessary
for the employee to sit for an examination
required to receive certification by a rec-
ognized organization in a field.
(3)Incident to and for the purpose of
pursuing a course of study. An employee’s
services must be incident to and for the
purpose of pursuing a course of study in
order for the employee to have the sta-
tus of a student. Whether an employee’s
services are incident to and for the pur-
pose of pursuing a course of study shall
be determined on the basis of the relation-
ship of such employee with the organiza-
tion for which such services are performed.
The educational aspect of the relationship,
as compared to the service aspect of the
relationship, must be predominant in or-
der for the employee’s services to be in-
cident to and for the purpose of pursuing
a course of study. The educational aspect
of the relationship between the employer
and the employee is established by the em-
ployee’s course workload. The service as-
pect of relationship is established by the
facts and circumstances related to the em-
ployee’s employment. In the case of an
employee with the status of a career em-
ployee within the meaning of paragraph
(d)(3)(ii) of this section, the service aspect
of the relationship with the employer is
predominant. Standards applicable in de-
termining whether an employee’s services
are considered to be incident to and for the
purpose of pursuing a course of study are
provided in paragraphs (d)(3)(i) and (ii) of
this section.
(i)Course workload. The educational
aspect of an employee’s relationship with
the employer is evaluated based on the em-
ployee’s course workload. Whether an
employee’s course workload is sufficient
in order for the employee’s employment
to be incident to and for the purpose of
pursuing a course of study generally de-
pends on the particular facts and circum-
stances. A relevant factor in evaluating
an employee’s course workload is the em-
ployee’s course workload relative to a full-
time course workload at the school, college
or university within the meaning of para-
graph (c) of this section at which the em-
ployee is enrolled and regularly attending
classes.
(ii)Career employee status. Services of
an employee with the status of a career em-
ployee are not incident to and for the pur-
pose of pursuing a course of study. An em-
ployee has the statusof a career employee
if the employee is described in paragraph
(d)(3)(ii)(A), (B), (C) or (D) of this section.
(A)Hours worked. An employee has
the status of a career employee if the
employee regularly performs services 40
hours or more per week.
(B)Professional employee.Anem-
ployee has the statusof a career employee
if the employee is a professional employee.
A professional employee is an employee—
(1) Whose primary duty consists of the
performance of work requiring knowledge
of an advanced type in a field of science
or learning customarily acquired by a pro-
longed course of specialized intellectual
instruction and study, as distinguished
from a general academic education, from
an apprenticeship, and from training in the
performance of routine mental, manual, or
physical processes.
(2) Whose work requires the consistent
exercise of discretion and judgment in its
performance; and
(3) Whose work is predominantly intel-
lectual and varied in character (as opposed
to routine mental, manual, mechanical, or
physical work) and is of such character that
the output produced orthe result accom-
plished cannot be standardized in relation
to a given period of time.
(C)Terms of employment.Anem-
ployee with the status of a career employee
includes any employee who is—
(1) Eligible to receive vacation, sick
leave, or paid holiday benefits;
(2) Eligible to participate in any retire-
ment plan described in section 401(a) that
is established or maintained by the em-
ployer, or would be eligible to participate
if age and service requirements were met;
(3) Eligible to participate in an arrange-
ment described in section 403(b), or would
be eligible to participate if age and service
requirements were met;
(4) Eligible to participate in a plan de-
scribed under section 457(a), or would be
eligible to participate if age and service re-
quirements were met;
(5) Eligible for reduced tuition (other
than qualified tuition reduction under sec-
tion 117(d)(5) provided to a teaching or
research assistant who is a graduate stu-
dent) because of the individual’s employ-
ment relationship with the institution;
(6) Eligible to receive employee ben-
efits described under sections 79 (life in-
surance), 127 (qualified educational assis-
tance), 129 (dependent care assistance pro-
grams), or 137 (adoption assistance); or
(7) Classified by the employer as a ca-
reer employee.
(D)Licensure status.Anemployeeis
a career employee if the employee is re-
quired to be licensed under state or local
lawtoworkinthefieldinwhichtheem-
ployee performs services.
2004-10 I.R.B.578March 8, 2004

(e)Examples. The following examples
illustrate the principles of paragraphs (c)
and (d) of this section:
Example 1. (i) Employee C is employed by State
University T to provide services as a clerk in T’s ad-
ministrative offices, and is enrolled and regularly at-
tending classes at T in pursuit of a B.S. degree in bi-
ology. C has a course workload which constitutes a
full-time course workloadat T. C performs services
on average 20 hours per week, but from time to time
works 40 hours or more during a week. C receives
onlyhourlywagesandnootherpayorbenefits.Cis
not required under state or local law to be licensed to
perform the services for T.
(ii) In thisexample, C is employed by T, a school,
college, or university within the meaning of para-
graph (c) of this section. C is enrolled and regularly
attending classes at T in pursuit of a course of study.
C’s hours worked do not cause C to have the status of
a career employee, even though C may occasionally
work 40 hours or more during a week. C’s part-time
employment relative to C’s full-time course workload
indicates that C’s services are incident to and for the
purpose of pursuing a course of study. C is not a
professional employee, and C’s terms of employment
and licensure status do not cause C to have the status
of a career employee within the meaning of paragraph
(d)(3)(ii) of this section. Thus, C has the status of a
student. Accordingly, C’s services are excepted from
employment under section 3121(b)(10).
Example 2. (i) Employee D is employed in the ac-
counting department of University U, and is enrolled
and regularly attending classes at U in pursuit of an
M.B.A. degree. D has a course workload which con-
stitutes a half-time course workload at U. D’s work
does not require the consistent exercise of discretion
and judgment, and is not predominantly intellectual
and varied in character. D regularly performs services
full-time (40 hours per week), and is eligible to partic-
ipate in a retirement plan described in section 401(a)
maintained by U.
(ii) In thisexample, D is employed by U, a school,
college, or university within the meaning of para-
graph (c) of this section. In addition, D is enrolled
and regularly attending classes at U in pursuit of a
course of study. However, D has the status of a ca-
reer employee because D regularly works 40 hours
per week, and is eligible to participate in U’s section
401(a) retirement plan. Because D has the status of
a career employee within the meaning of paragraph
(d)(3)(ii) of this section, D’s services are not incident
to and for the purpose of pursuing a course of study.
Accordingly, D’s services are not excepted from em-
ployment under section 3121(b)(10).
Example 3. (i) Employee E is employed by Uni-
versity V to provide patient care services at a teaching
hospital that is an unincorporated division of V. These
services are performed as part of a medical residency
program in a medical specialty sponsored by V. The
residency program in which E participates is accred-
ited by the Accreditation Counsel for Graduate Med-
ical Education. Upon completion of the program, E
will receive a certificate of completion, and be eligi-
ble to sit for an examination required to be certified
by a recognized organization in the medical specialty.
E regularly performs services more than 40 hours per
week. E’s patient care services require knowledge of
an advanced type in the field of medicine, and are pre-
dominantly intellectual and varied in character. Fur-
ther, although E is subject to supervision, E’s services
require the consistent exercise of discretion and judg-
ment regarding the treatment of patients. In addition,
E receives vacation, sick leave, and paid holiday ben-
efits; and salary deferral benefits under an arrange-
ment described in section 403(b). E is a first-year res-
ident, and thus is not eligible to be licensed to practice
medicine under the laws of the state in which E per-
forms services.
(ii) In thisexample,EisemployedbyV,aschool,
college, or university within the meaning of para-
graph (c) of this section. However, because of E’s
hours worked, professional employee status, and em-
ployee benefits, E has the status of a career employee
within the meaning of paragraph (d)(3)(ii) of this sec-
tion. Thus, E’s services are not incident to and for the
purpose of pursuing a course of study. Accordingly,
E’s services are not excepted from employment un-
der section 3121(b)(10).
Example 4. (i) Employee F is employed in the
facilities management department of University W. F
has a B.S. degree in engineering, and is completing
the work experience required to sit for an examina-
tion to become a professional engineer eligible for li-
censure under state or local law. F is not attending
classes at W in pursuit of a course of study leading to
an educational credential. F regularly performs ser-
vices 40 hours or more per week. F receives certain
employee benefits including vacation, sick leave, and
paid holiday benefits. F also receives retirement ben-
efits under an arrangement described in section 457.
(ii) In thisexample, F is employed by W, a school,
college, or university within the meaning of para-
graph (c) of this section. However, F is not enrolled
and regularly attending classes at W in pursuit of a
course of study. F’s work experience is not a course
of study for purposes of paragraph (d)(2) of this sec-
tion. In addition, because of F’s hours worked and
employment benefits, F has the status of a career em-
ployee within the meaning of paragraph (d)(3)(ii) of
this section. Thus, F’s services are not incident to and
for the purpose of pursuing a course of study. Accord-
ingly, F’s services are notexcepted from employment
under section 3121(b)(10).
Example 5. (i) Employee G is employed by Em-
ployer X as an apprentice in a skilled trade. X is a sub-
contractorprovidingservicesinthefieldinwhichG
wishes to specialize. G is pursuing a certificate in the
skilled trade from Community College C. G is per-
forming services for X pursuant to an internship pro-
gram sponsored by C under which its students gain
experience, and receive credit toward a certificate in
the trade.
(ii) In thisexample, G is employed by X. X is
not a school, college or university within the meaning
of paragraph (c) of this section. Thus, the exception
from employment under section 3121(b)(10) is not
available with respect to G’s services for X.
Example 6. (i) Employee H is employed by a cos-
metology school Y at which H is enrolled and reg-
ularly attending classes in pursuit of a certificate of
completion. Y’s primary function is to carry on ed-
ucational activities to prepare its students to work in
the field of cosmetology. Prior to issuing a certifi-
cate, Y requires that its students gain experience in
cosmetology services by performing services for the
general public on Y’s premises. H performs services
less than 40 hours per week. H’s work does not re-
quire knowledge of an advanced type in a field of sci-
ence or learning, nor is it predominantly intellectual
and varied in character. H receives remuneration in
the form of hourly compensation from Y for provid-
ing cosmetology services to clients of Y, and does not
receive any other compensation or benefits. H is not
required to be a licensed cosmetologist in the state in
which H performs services while participating in the
training program.
(ii) In thisexample, H is employed by Y, a school,
college or university within the meaning of paragraph
(c) of this section, and is enrolled and regularly at-
tending classes at Y in pursuit of a course of study.
In addition, because H works less than 40 hours per
week, H is not a professional employee, and H’s
terms of employment, and licensure status do not
indicate that H has the status of a career employee, H
is not a career employee within the meaning of para-
graph (d)(3)(ii) of this section. Thus, H’s services are
incident to and for the purpose of pursuing a course
of study. Accordingly, H’s services are excepted
from employment under section 3121(b)(10).
Example 7. (i) Employee J is a teaching assistant
at University Z. J is enrolled and regularly attending
classes in pursuit of a graduate degree at Z. J has a
course workload which constitutes a full-time course
workload at Z. J performs services less than 40 hours
per week. J’s duties include grading quizzes, provid-
ing class and laboratory instruction pursuant to a les-
son plan developed by the professor, and preparing
laboratory equipment for demonstrations. J receives
no employee benefits. J receives a cash stipend and a
qualified tuition reduction within the meaning of sec-
tion 117(d)(5) for the credits earned for being a teach-
ing assistant. J is not required under state or local law
to be licensed to perform the activities of a teaching
assistant.
(ii) In thisexample, J is employed as a teaching
assistant by Z, a school, college, or university within
the meaning of paragraph (c), and is enrolled and reg-
ularly attending classes at Z in pursuit of a course of
study. J’s full-time course workload relative to J’s
employment workload indicates that J’s services are
incident to and for the purpose of pursuing a course
of study. J is not a professional employee because
J’s work does not require the consistent exercise of
discretion and judgment in its performance. In ad-
dition, J’s terms of employment and licensure status
do not cause J to have the status of a career employee
within the meaning of paragraph (d)(3)(ii) of this sec-
tion. Thus, J has the status of a student. Accordingly,
J services are excepted from employment under sec-
tion 3121(b)(10).
(f)Effective date. Paragraphs (c), (d),
and (e) of this section apply to services
performed on or after February 25, 2004.
*****
Par. 4. In §31.3306(c)(10)–2 is revised
as follows:
1. Paragraph (c) is revised.
2. Paragraph (d) and (e) are added.
The revision and addition read as fol-
lows:
March 8, 20045792004-10 I.R.B.

§31.3306(c)(10)–2 Services of student in
employ of a school, college, or university.
*****
(c)General rule. (1) For purposes of
this section, the tests are the character of
the organization in the employ of which the
services are performed and the status of the
employee as a student enrolled and regu-
larly attending classes at the school, col-
lege, or university described in paragraph
(c)(2) of this section, in the employ of
which he performs the services. The type
of services performed by the employee, the
place where the services are performed,
and the amount of remuneration for ser-
vices performed by the employee are not
material.
(2)School, college, or university.A
school, college, or universityis described
in section 3306(c)(10)(B) if its primary
function is the presentation of formal in-
struction, and it normally maintains a regu-
lar faculty and curriculum, and it normally
has a regularly enrolled body of students
in attendance at the place where its edu-
cational activities are regularly carried on.
See section 170(b)(1)(A)(ii) and the regu-
lations thereunder.
(d)Student Status—general rule.
Whether an employee has the status of
a student within the meaning of section
3306(c)(10)(B) performing the services
shall be determined based on the relation-
ship of the employee with the organization
for which the services are performed. In
order to have the status of a student, the
employee must perform services in the
employ of a school, college, or univer-
sity described in paragraph (c)(2) of this
section at which the employee is enrolled
and regularly attending classes in pursuit
of a course of study within the meaning
of paragraphs (d)(1) and (2) of this sec-
tion. In addition, the employee’s services
must be incident to and for the purpose of
pursuing a course of study at such school,
college, or university within the meaning
of paragraph (d)(3) of this section.
(1)Enrolled and regularly attending
classes. An employee must be enrolled
and regularly attending classes at a school,
college, or university within the mean-
ing of paragraph (c)(2) of this section at
which the employee is employed to have
the status of a student within the meaning
of section 3306(c)(10)(B). An employee
is enrolled within the meaning of sec-
tion 3306(c)(10)(B) if the employee is
registered for a course or courses cred-
itable toward an educational credential
described in paragraph (d)(2) of this sec-
tion. In addition, the employee must be
regularly attending classes to have the
status of a student. For purposes of this
paragraph (d)(1), a class is a didactic ac-
tivity in which a faculty member plays a
leadership role in furthering the objectives
of an established curriculum. Traditional
classroom activities are not the sole means
of satisfying this requirement. The fre-
quency of events such as these determines
whether the employee may be considered
to be regularly attending classes.
(2)Course of study. An employee must
be pursuing a course of study in order
to have the status of a student within the
meaning of section 3306(c)(10)(B). A
course of study is one or more courses the
completion of which fulfills the require-
ments necessary to receive an educational
credential granted by a school, college,
or university within the meaning of para-
graph (c)(2) of this section. For purposes
of this paragraph, an educational cre-
dential is a degree, certificate, or other
recognized educational credential granted
by an organization described in paragraph
(c)(2) of this section. In addition, a course
of study is one or more courses at a school,
college, or university within the meaning
of paragraph (c)(2) of this section the com-
pletion of which fulfills the requirements
necessary for the employee to sit for an ex-
amination required to receive certification
by a recognized organization in a field.
(3)Incident to and for the purpose of
pursuing a course of study. An employee’s
services must be incident to and for the
purpose of pursuing a course of study in
order for the employee to have the sta-
tus of a student within the meaning of
section 3306(c)(10)(B). Whether an em-
ployee’s services are incident to and for
the purpose of pursuing a course of study
shall be determined on the basis of the re-
lationship of such employee with the or-
ganization for which such services are per-
formed. The educational aspect of the re-
lationship, as compared to the service as-
pect of the relationship, must be predomi-
nant in order for the employee’s services to
be incident to and for the purpose of pur-
suing a course of study. The educational
aspect of the relationship between the em-
ployer and the employee is established by
the employee’s course workload. The ser-
vice aspect of relationship is established
by the facts and circumstances related to
the employee’s employment. In the case
of an employee with the status of a ca-
reer employee, the service aspect of the re-
lationship with the employer is predomi-
nant. Standards applicable in determining
whether an employee’s services are con-
sidered to be incident to and for the pur-
pose of pursuing a course of study are pro-
vided in paragraphs (d)(3)(i) and (ii) of this
section.
(i)Course workload. The educational
aspect of an employee’s relationship with
the employer is evaluated based on the
employee’s course workload. Whether an
employee’s course workload is sufficient
for the employee’s employment to be in-
cident to and for the purpose of pursuing a
course of study generally depends on the
particular facts and circumstances. A rel-
evant factor in evaluating the employee’s
course workload is the employee’s course
workload relative to a full-time course
workload at the school, college or univer-
sity within the meaning of paragraph (c)(2)
of this section at which the employee is
enrolled and regularly attending classes.
(ii)Career employee status. Services of
an employee with the status of a career em-
ployee are not incident to and for the pur-
pose of pursuing a course of study. An em-
ployee has the status of a career employee
if the employee is described in paragraph
(d)(3)(ii)(A), (B), (C), or (D) of this sec-
tion.
(A)Hours worked. An employee has
the status of a career employee if the
employee regularly performs services 40
hours or more per week.
(B)Professional employee.Anem-
ployee has the status of a career employee
if the employee is a professional employee.
A professional employee is an employee—
(1) Whose primary duty consists of the
performance of work requiring knowledge
of an advanced type in a field of science
or learning customarily acquired by a pro-
longed course of specialized intellectual
instruction and study, as distinguished
from a general academic education, from
an apprenticeship, and from training in the
performance of routine mental, manual, or
physical processes.
(2) Whose work requires the consistent
exercise of discretion and judgment in its
performance; and
2004-10 I.R.B.580March 8, 2004

(3) Whose work is predominantly intel-
lectual and varied in character (as opposed
to routine mental, manual, mechanical, or
physical work) and is of such character that
the output produced or the result accom-
plished cannot be standardized in relation
to a given period of time.
(C)Terms of employment.Anem-
ployee with the status of a career employee
includes any employee who is—
(1) Eligible to receive vacation, sick
leave, or paid holiday benefits;
(2) Eligible to participate in any retire-
ment plan described in section 401(a) that
is established or maintained by the em-
ployer, or would be eligible to participate
if age and service requirements were met;
(3) Eligible to participate in an arrange-
ment described in section 403(b), or would
be eligible to participate if age and service
requirements were met;
(4) Eligible to participate in a plan de-
scribed under section 457(a), or would be
eligible to participate if age and service re-
quirements were met;
(5) Eligible for reduced tuition (other
than qualified tuition reduction under sec-
tion 117(d)(5) provided to a teaching or
research assistant who is a graduate stu-
dent) because of the individual’s employ-
ment relationship with the institution;
(6) Eligible to receive employee ben-
efits described under sections 79 (life in-
surance), 127 (qualified educational assis-
tance), 129 (dependent care assistance pro-
grams), or 137 (adoption assistance); or
(7) Classified by the employer as a ca-
reer employee.
(D)Licensure status.Anemployeeis
a career employee if the employee is re-
quired to be licensed under state or local
lawtoworkinthefieldinwhichtheem-
ployee performs services.
(e)Effective date. Paragraphs (c) and
(d) of this section apply to services per-
formed on or after February 25, 2004.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on February 24,
2004, 8:45 a.m., and published in the issue of the Federal
Register for February 25, 2004, 69 F.R. 8604)
Changes to Reporting
Requirements for Certain
2002 Forms Because of
Changes in the Tax Rates
and Holding Period Rules for
Qualified Dividends
Announcement 2004–11
BACKGROUND
Under current law, qualified dividends
received after 2002 are taxed to individ-
uals, estates, and trusts at the new lower
capital gain tax rates (5% or 15%). The
new rates do not apply to dividends passed
through from fiscal year partnerships, S
corporations, or estates for their fiscal year
beginning in 2002, even if the dividends
were received in 2003.
Also, to qualify for the lower rates un-
der current law, you must hold a stock
for at least 61 days of a 120-day period.
That period begins 60 days before the day
a stock trades without its dividend (the
“ex-dividend date”), and ends 59 days af-
ter the ex-dividend date. In the case of
dividends attributable to periods of more
than 366 days that were received on pre-
ferred stock, you must hold the stock for at
least 91 days of a 180-day period. That pe-
riod begins 90 days before the ex-dividend
date, and ends 89 days after the ex-divi-
dend date.
TECHNICAL CORRECTION
Section 2 of the Tax Technical Correc-
tions Act of 2003 (H.R. 3654, S. 1984),
which has not yet been enacted, would
amend current law to allow partnerships,
S corporations, and estates (including re-
vocable trusts treated as part of an estate)
with fiscal years beginning in 2002 to pass
through dividends received in 2003 from
domestic corporations and qualified for-
eign corporations as qualified dividends to
their partners, shareholders, and beneficia-
ries (to the extent otherwise permitted by
law). In addition, the legislation would
amend the holding period rules for qual-
ified dividends by changing the 120-day
period to a 121-day period and the 180-day
period to a 181-day period. These periods
would end one day later than under current
law. Both amendments would be treated as
if included in section 302 of the Jobs and
Growth Tax Relief Reconciliation Act of
2003. The Commissioner of Internal Rev-
enue has agreed to allow taxpayers to ap-
ply section 2 of the Tax Technical Correc-
tions Act of 2003 as if the legislation were
presently enacted.
As a result, there are changes in the
reporting requirements for the following
2002 forms (these forms and their instruc-
tions do not reflect this legislation) filed by
entities with 2002–2003 fiscal years:
•Schedules K and K–1 for partnerships
and S corporations and
•Schedule K–1 for estates.
Also, the tax computation (for both the
regular tax and the alternative minimum
tax) for estates with 2002–2003 fiscal
years and qualified dividends received in
2003 is affected by this change.
Note:Dividends received in a tax year
beginning in 2002 and ending in 2003 are
not qualified dividends for individuals with
2002–2003 fiscal years, even if the divi-
dends are received during 2003.
The necessary changes are described in
the following sections.
FISCAL YEAR ESTATES: REPORTING
QUALIFIED DIVIDENDS AND
FIGURING TAX FOR 2002–2003
Estates with 2002–2003 fiscal years and
qualified dividendsreceived in 2003 must
attach to their 2002 Form 1041 a computa-
tion similar to that shown in Part V of the
2003 Schedule D (Form 1041) or the Qual-
ified Dividends Tax Worksheet on page 22
of the 2003 Instructions for Form 1041
and Schedules A, B, D, G, I, J, and K–1.
These estates may use the 2003 Schedule
D (Form 1041) or the Qualified Dividends
Tax Worksheet to figure their 2002 tax. To
do so, these filers must:
•Enter qualified dividends received in
2003 on line 20 of the 2003 Schedule D
(Form 1041) or line 2 of the Qualified
Dividends Tax Worksheet (whichever
applies).
•Modify the computation in Part V of
Schedule D (Form 1041) or the Qual-
ified Dividends Tax Worksheet by us-
ing the 2002 Tax Rate Schedule instead
of the 2003 Tax Rate Schedule.
March 8, 20045812004-10 I.R.B.

•Substitute $1,850 for $1,900 on line 25
of the 2003 Schedule D (Form 1041) or
line 6 of the Qualified Dividends Tax
Worksheet.
Note:This change also affects the com-
putation of the alternative minimum tax.
Estates should attach a computation sim-
ilar to that shown in Part IV, Schedule I, of
the 2003 Form 1041.
Estates must continue to report each
beneficiary’s share of ordinary dividends
for the entire tax year on line 2 of the 2002
Schedule K–1. In addition, the estate must
report each beneficiary’s share of qualified
dividends received in 2003 on line 14 of
the 2002 Schedule K–1.
Estates should advise beneficiaries fil-
ing Form 1040 to report qualified divi-
dends on line 9b of the 2003 Form 1040.
FISCAL YEAR PARTNERSHIPS AND
S CORPORATIONS: REPORTING
QUALIFIED DIVIDENDS FOR
2002–2003
Partnerships and S corporations with
2002–2003 fiscal years must continue to
report ordinary dividends for the entire tax
year on the applicablelines shown below:
•Form 1065 (or 8865) filers: Sched-
ule K, line 4b of the 2002 Form 1065
(or 8865) and each partner’s share on
line 4b of Schedule K–1 (Form 1065
or 8865).
•Form 1065–B filers: Part II, line 2 of
the 2002 Form 1065–B.
•Form 1120S filers: Schedule K, line
4b of the 2002 Form 1120S and each
shareholder’s share on line 4b of
Schedule K–1 (Form 1120S).
In addition, partnerships and S corpora-
tions with 2002–2003 fiscal years must re-
port qualified dividends received in 2003
as an item of information on the applica-
ble lines (or attachment) shown below:
•Form 1065 (or 8865) filers: Sched-
ule K, line 24 of the 2002 Form 1065
(or 8865) and each partner’s share on
line 25 of Schedule K–1 (Form 1065
or 8865).
•Form 1065–B filers: Schedule K, line
16 of the 2002 Form 1065–B and each
partner’s share on an attachment to
Schedule K–1 (Form 1065–B).
•Form 1120S filers: Schedule K, line
21 of the 2002 Form 1120S and each
shareholder’s share on line 23 of
Schedule K–1 (Form 1065 or 8865).
Partnerships and S corporations should
advise partners and shareholders filing
Form 1040 to report qualified dividends
on line 9b of the 2003 Form 1040.
EFFECT ON OTHER DOCUMENTS
Announcement 2003–56, 2003–39
I.R.B. 694, is modified.
Charitable Remainder Trusts;
Application of Ordering Rule;
Hearing Cancellation
Announcement 2004–14
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Cancellation of notice of public
hearing on proposed rulemaking.
SUMMARY: This document provides no-
tice of cancellation of a public hearing on
the ordering of rules of section 664(b) for
characterizing distributions from charita-
ble remainder trusts.
DATES: The public hearing originally
scheduled for March 9, 2004, at 10 a.m.,
is cancelled.
FOR FURTHER INFORMATION
CONTACT: Robin R. Jones of the Pub-
lications and Regulations Branch, Legal
Processing Division at (202) 622–7180
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
A notice of proposed rulemaking and no-
tice of public hearing (REG–110896–98,
2003–51 I.R.B. 1226) that appeared in the
Federal Registeron Thursday, November
20, 2003 (68 FR 65419), announced that
a public hearing was scheduled for March
9, 2004, at 10 a.m., in the auditorium. The
subject of the public hearing is proposed
regulations under section 664 of the Inter-
nal Revenue Code. The public comment
period for these regulations expired on
February 17, 2004.
The notice of proposed rulemaking and
notice of public hearing, instructed those
interested in testifying at the public hear-
ing to submit an outline of the topics to
be addressed. As of Wednesday, February
18, 2004, no one has requested to speak.
Therefore, the public hearing scheduled
for March 9, 2004, is cancelled.
Cynthia E. Grigsby,
Acting Chief, Publications
and Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on February 25,
2004, 8:45 a.m., and published in the issue of the Federal
Register for February 26, 2004, 69 F.R. 8885)
2004-10 I.R.B.582March 8, 2004

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
March 8, 2004i2004-10 I.R.B.

Numerical Finding List
1
Bulletins 2004–1 through 2004–10
Announcements:
2004-1, 2004-1 I.R.B.254
2004-2, 2004-3 I.R.B.322
2004-3, 2004-2 I.R.B.294
2004-4, 2004-4 I.R.B.357
2004-5, 2004-4 I.R.B.362
2004-6, 2004-3 I.R.B.322
2004-7, 2004-4 I.R.B.365
2004-8, 2004-6 I.R.B.441
2004-9, 2004-6 I.R.B.441
2004-10, 2004-7 I.R.B.501
2004-11, 2004-10 I.R.B.581
2004-12, 2004-9 I.R.B.541
2004-13, 2004-9 I.R.B.543
2004-14, 2004-10 I.R.B.582
Notices:
2004-1, 2004-2 I.R.B.268
2004-2, 2004-2 I.R.B.269
2004-3, 2004-5 I.R.B.391
2004-4, 2004-2 I.R.B.273
2004-5, 2004-7 I.R.B.489
2004-6, 2004-3 I.R.B.308
2004-7, 2004-3 I.R.B.310
2004-8, 2004-4 I.R.B.333
2004-9, 2004-4 I.R.B.334
2004-10, 2004-6 I.R.B.433
2004-11, 2004-6 I.R.B.434
2004-12, 2004-10 I.R.B.556
2004-14, 2004-9 I.R.B.526
2004-15, 2004-9 I.R.B.526
2004-16, 2004-9 I.R.B.527
Proposed Regulations:
REG-116664-01, 2004-3 I.R.B.319
REG-122379-02, 2004-5 I.R.B.392
REG-139845-02, 2004-5 I.R.B.397
REG-126459-03, 2004-6 I.R.B.437
REG-126967-03, 2004-10 I.R.B.566
REG-156232-03, 2004-5 I.R.B.399
REG-156421-03, 2004-10 I.R.B.571
REG-167217-03, 2004-9 I.R.B.540
Revenue Procedures:
2004-1, 2004-1 I.R.B.1
2004-2, 2004-1 I.R.B.83
2004-3, 2004-1 I.R.B.114
2004-4, 2004-1 I.R.B.125
2004-5, 2004-1 I.R.B.167
2004-6, 2004-1 I.R.B.197
2004-7, 2004-1 I.R.B.237
2004-8, 2004-1 I.R.B.240
Revenue Procedures— Continued:
2004-9, 2004-2 I.R.B.275
2004-10, 2004-2 I.R.B.288
2004-11, 2004-3 I.R.B.311
2004-12, 2004-9 I.R.B.528
2004-13, 2004-4 I.R.B.335
2004-14, 2004-7 I.R.B.489
2004-15, 2004-7 I.R.B.490
2004-16, 2004-10 I.R.B.559
2004-17, 2004-10 I.R.B.562
2004-18, 2004-9 I.R.B.529
2004-19, 2004-10 I.R.B.563
Revenue Rulings:
2004-1, 2004-4 I.R.B.325
2004-2, 2004-2 I.R.B.265
2004-3, 2004-7 I.R.B.486
2004-4, 2004-6 I.R.B.414
2004-5, 2004-3 I.R.B.295
2004-6, 2004-4 I.R.B.328
2004-7, 2004-4 I.R.B.327
2004-8, 2004-10 I.R.B.544
2004-9, 2004-6 I.R.B.428
2004-10, 2004-7 I.R.B.484
2004-11, 2004-7 I.R.B.480
2004-12, 2004-7 I.R.B.478
2004-13, 2004-7 I.R.B.485
2004-14, 2004-8 I.R.B.511
2004-15, 2004-8 I.R.B.515
2004-16, 2004-8 I.R.B.503
2004-17, 2004-8 I.R.B.516
2004-18, 2004-8 I.R.B.509
2004-19, 2004-8 I.R.B.510
2004-20, 2004-10 I.R.B.546
2004-21, 2004-10 I.R.B.544
2004-22, 2004-10 I.R.B.553
2004-24, 2004-10 I.R.B.550
Tax Conventions:
2004-3, 2004-7 I.R.B.486
Treasury Decisions:
9099, 2004-2 I.R.B.255
9100, 2004-3 I.R.B.297
9101, 2004-5 I.R.B.376
9102, 2004-5 I.R.B.366
9103, 2004-3 I.R.B.306
9104, 2004-6 I.R.B.406
9105, 2004-6 I.R.B.419
9106, 2004-5 I.R.B.384
9107, 2004-7 I.R.B.447
9108, 2004-6 I.R.B.429
9109, 2004-8 I.R.B.519
9110, 2004-8 I.R.B.504
9111, 2004-8 I.R.B.518
9112, 2004-9 I.R.B.523
Treasury Decisions— Continued:
9113, 2004-9 I.R.B.524
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2003–27 through 2003–52 is in Internal Revenue Bulletin
2003–52, dated December 29, 2003.
2004-10 I.R.B.iiMarch 8, 2004

Findings List of Current Actions on
Previously Published Items
1
Bulletins 2004–1 through 2004–10
Announcements:
2003-56
Modified by
Ann. 2004-11, 2004-10 I.R.B.581
Proposed Regulations:
REG-110896-98
Corrected by
Ann. 2004-14, 2004-10 I.R.B.582
REG-115037-00
Corrected by
Ann. 2004-7, 2004-4 I.R.B.365
REG-143321-02
Withdrawn by
REG-156232-03, 2004-5 I.R.B.399
REG-146893-02
Corrected by
Ann. 2004-7, 2004-4 I.R.B.365
REG-163974-02
Corrected by
Ann. 2004-13, 2004-9 I.R.B.543
Revenue Procedures:
87-19
Obsoleted in part by
Rev. Proc. 2004-18, 2004-9 I.R.B.529
93-15
Obsoleted in part by
Rev. Proc. 2004-18, 2004-9 I.R.B.529
94-41
Superseded by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
94-55
Obsoleted in part by
Rev. Proc. 2004-18, 2004-9 I.R.B.529
98-16
Suspended by
Notice 2004-12, 2004-10 I.R.B.556
2000-38
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
2000-50
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
2002-9
Modified and amplified by
Rev. Rul. 2004-18, 2004-8 I.R.B.509
Revenue Procedures— Continued:
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
2002-71
Superseded by
Rev. Proc. 2004-13, 2004-4 I.R.B.335
2003-1
Superseded by
Rev. Proc. 2004-1, 2004-1 I.R.B.1
2003-2
Superseded by
Rev. Proc. 2004-2, 2004-1 I.R.B.83
2003-3
As amplified by Rev. Proc. 2003-14, and as
modified by Rev. Proc. 2003-48 superseded by
Rev. Proc. 2004-3, 2004-1 I.R.B.114
2003-4
Superseded by
Rev. Proc. 2004-4, 2004-1 I.R.B.125
2003-5
Superseded by
Rev. Proc. 2004-5, 2004-1 I.R.B.167
2003-6
Superseded by
Rev. Proc. 2004-6, 2004-1 I.R.B.197
2003-7
Superseded by
Rev. Proc. 2004-7, 2004-1 I.R.B.237
2003-8
Superseded by
Rev. Proc. 2004-8, 2004-1 I.R.B.240
2003-23
Modified and superseded by
Rev. Proc. 2004-14, 2004-7 I.R.B.489
2003-26
Supplemented by
Rev. Proc. 2004-17, 2004-10 I.R.B.562
2004-1
Corrected by
Ann. 2004-8, 2004-6 I.R.B.441
2004-4
Modified by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
2004-5
Modified by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
2004-6
Modified by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
Revenue Rulings:
55-748
Modified and superseded by
Rev. Rul. 2004-20, 2004-10 I.R.B.546
92-19
Supplemented in part by
Rev. Rul. 2004-14, 2004-8 I.R.B.511
94-38
Clarified by
Rev. Rul. 2004-18, 2004-8 I.R.B.509
98-25
Clarified by
Rev. Rul. 2004-18, 2004-8 I.R.B.509
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2003–27 through 2003–52 is in Internal Revenue Bulletin 2003–52, dated December 29,
2003.
March 8, 2004iii2004-10 I.R.B.
*U.S. Government Printing Office: 2004—304–774/60125