T.D. 9052, 68 Fed. Reg. 17277

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Ct. D. 2077, page 868.Research and development expenses; accounting. The Su-preme Court holds that section 1.861–8(e)(3) is a proper exer-cise of the Secretary of the Treasury’s rulemaking authority.Boeing Co., et al. v. United States.

Rev. Rul. 2003–45, page 876.Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes ofsections 382, 1274, 1288, and other sections of the Code,tables set forth the rates for May 2003.

Rev. Rul. 2003–47, page 866.Length of service award plan. This ruling provides an ex-ample to eligible employers of a type of length-of-service awardprogram (LOSAP) that would qualify as a valid LOSAP plan de-scribed in section 457(e)(11)(A)(ii) of the Code.

Rev. Rul. 2003–48, page 863.Demutualization. This ruling provides guidance as to the taxconsequences when, as described in the specific facts pre-sented, a mutual savings bank converts to a stock savings bankand a holding company structure is created.

Notice 2003–20, page 894.This notice describes the withholding and reporting require-ments applicable to eligible deferred compensation plans de-scribed in section 457(b) of the Code for periods after December31, 2001. Notice 2000–38 modified.

EMPLOYEE PLANS


T.D. 9052, page 879.Final regulations provide guidance on the notification require-ments under section 4980F of the Code and section 204(h) ofthe Employee Retirement Income Security Act of 1974 (ERISA).


EXEMPT ORGANIZATIONS

Announcement 2003–28, page 899.A list is provided of organizations now classified as private foun-dations.

(Continued on the next page)

Bulletin No. 2003–19May 12, 2003

Finding Lists begin on page ii.

EMPLOYMENT TAX

Rev. Rul. 2003–46, page 878.Federal Insurance Contributions Act (FICA); Medicare. Thisruling provides that for the continuing employment exception tothe Medicare portion of the Federal Insurance Contributions Acttax to apply to service performed by an employee of a state, po-litical subdivision, or instrumentality thereof, such employee mustbe a member of a retirement system pursuant to section3121(b)(7)(F) of the Code. Rev. Ruls. 86–88 and 88–36 supple-mented.



ADMINISTRATIVE


Notice 2003–27, page 898.Credit for sales of fuel produced from a nonconventionalsource, inflation adjustment factor, and reference price.This notice publishes the nonconventional source fuel credit, in-flation adjustment factor, and reference price under section 29of the Code for calendar year 2002. This data is used to deter-mine the credit allowable on sales of fuel produced from a non-conventional source.

May 12, 2003 2003–19 I.R.B.

The IRS MissionProvide America’s taxpayers top quality service by helping themunderstand and meet their tax responsibilities and by applyingthe tax law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument of theCommissioner of Internal Revenue for announcing official rul-ings and procedures of the Internal Revenue Service and for pub-lishing Treasury Decisions, Executive Orders, Tax Conventions,legislation, court decisions, and other items of general inter-est. It is published weekly and may be obtained from the Super-intendent of Documents on a subscription basis. Bulletin contentsare consolidated semiannually into Cumulative Bulletins, whichare 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 ofthe tax laws, including all rulings that supersede, revoke, modify,or amend any of those previously published in the Bulletin. All pub-lished rulings apply retroactively unless otherwise indicated. Pro-cedures relating solely to matters of internal management arenot published; however, statements of internal practices and pro-cedures that affect the rights and duties of taxpayers are pub-lished.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpay-ers or technical advice to Service field offices, identifying de-tails and information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not be re-lied on, used, or cited as precedents by Service personnel in thedisposition of other cases. In applying published rulings and pro-cedures, the effect of subsequent legislation, regulations, court

decisions, rulings, and procedures must be considered, and Ser-vice personnel and others concerned are cautioned against reach-ing the same conclusions in other cases unless the facts andcircumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A, TaxConventions and Other Related Items, and Subpart B, Legisla-tion and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to these sub-jects are contained in the other Parts and Subparts. Also in-cluded in this part are Bank Secrecy Act Administrative Rulings.Bank Secrecy Act Administrative Rulings are issued by the De-partment of the Treasury’s Office of the Assistant Secretary (En-forcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The first Bulletin for each month includes a cumulative index forthe matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the first Bulletin of the succeeding semiannual pe-riod, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2003–19 I.R.B. May 12, 2003

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 42.—Low-IncomeHousing Credit

The adjusted applicable federal short-term,mid-term, and long-term rates are set forth for themonth of May 2003. See Rev. Rul. 2003–45, page876.

Section 280G.—GoldenParachute Payments

Federal short-term, mid-term, and long-termrates are set forth for the month of May 2003. SeeRev. Rul. 2003–45, page 876.

Section 368.—DefinitionsRelating to CorporateReorganizations

26 CFR 1.368–1: Purpose and scope of exceptionof reorganization exchanges.

Demutualization. This ruling providesguidance as to the tax consequences when,as described in the specific facts presented,a mutual savings bank converts to a stocksavings bank and a holding company struc-ture is created.

Rev. Rul. 2003–48

ISSUE

What are the tax consequences when, asdescribed in the facts below, a mutual sav-ings bank converts to a stock savings bank?

FACTS

State Y Mutual Bank is a State Y mu-tual savings bank engaged in banking andbanking related activities. State Y MutualBank is regulated by State Y, and State YMutual Bank’s deposits are insured by theFDIC. A membership interest in State YMutual Bank arises from the ownership ofa bank deposit account in State Y MutualBank and is inextricably tied to the bankdeposit account from the time of deposit.A membership interest in State Y MutualBank entitles the member to vote for theboard of directors and to receive assets andother consideration in the event of the liq-uidation, dissolution, or winding up of StateY Mutual Bank. The rights inherent in each

membership interest are created by opera-tion of State Y law solely as a result of themember’s ownership of a bank deposit ac-count in State Y Mutual Bank and cannotbe transferred separately from that bank de-posit account. Further, if a bank deposit ac-count is surrendered by the member, themembership interest ceases to exist, hav-ing no continuing value.

Mutual Holding Company is a State Ymutual bank holding company. A member-ship interest in Mutual Holding Companyarises from the ownership of a bank de-posit account in a bank that is a direct orindirect, wholly owned subsidiary of Mu-tual Holding Company. Such a member-ship interest is inextricably tied to the bankdeposit account from the time of deposit.A membership interest in Mutual Hold-ing Company entitles the member to votefor the board of directors of Mutual Hold-ing Company and to receive assets or otherconsideration in the event of the liquida-tion, dissolution, or winding up of Mu-tual Holding Company. The rights inherentin each membership interest are created byoperation of State Y law solely as a re-sult of the member’s bank deposit accountand cannot be transferred separately fromthat bank deposit account. Further, if a bankdeposit account is surrendered by the mem-ber, the membership interest ceases to ex-ist, having no continuing value.

Stock Holding Company is a State Ystock company the articles of incorpora-tion and by-laws of which authorize the is-suance of capital stock. Stock HoldingCompany has one class of voting stock out-standing.

Transitory is a transitory State Y stocksavings bank.

Each transaction described below is un-dertaken for a valid business purpose.

Situation 1. Pursuant to State Y law andpursuant to an integrated business plan toconvert State Y Mutual Bank from a StateY-chartered mutual savings bank to a StateY-chartered stock savings bank and cre-ate a holding company structure, the fol-lowing events occur. State Y Mutual Bankincorporates Mutual Holding Company forthe sole purpose of engaging in the fol-lowing transactions. Mutual Holding Com-pany initially is organized in stock form.Although Mutual Holding Company is tem-porarily organized as a stock corporation

solely due to regulatory requirements, theparties intend at the time Mutual HoldingCompany is organized that Mutual Hold-ing Company will operate and function inmutual form. In turn, Mutual Holding Com-pany incorporates two wholly owned sub-sidiaries, Stock Holding Company andTransitory. Thereafter, the following eventsoccur substantially contemporaneously: StateY Mutual Bank exchanges its State Y mu-tual bank charter for a State Y stock sav-ings bank charter (which permits the bankto issue equity interests in the form of stock)and changes its name to Stock Bank; Mu-tual Holding Company cancels its outstand-ing stock and exchanges its charter for aState Y mutual holding company charter;and Transitory merges with and into StockBank with Stock Bank surviving as awholly owned subsidiary of Mutual Hold-ing Company and State Y Mutual Bank’smembers receiving Mutual Holding Com-pany membership interests in place of theirformer State Y Mutual Bank membershipinterests. Mutual Holding Company thentransfers all of its Stock Bank stock to StockHolding Company in exchange for votingstock of Stock Holding Company. Pursu-ant to the same plan, Stock Holding Com-pany issues more than 20 percent but lessthan 50 percent of its common stock to thepublic in a qualified underwriting transac-tion as defined in § 1.351–1(a)(3) (the“Stock Offering”).

Under State Y law, Stock Bank’s cor-porate existence as a stock savings bank isa continuation of State Y Mutual Bank’scorporate existence as a mutual savingsbank.

Situation 2. The facts are the same as inSituation 1, except that Stock Holding Com-pany issues no more than 20 percent of itscommon stock in the Stock Offering.

LAW

Section 351(a) provides that no gain orloss will be recognized if property is trans-ferred to a corporation by one or more per-sons solely in exchange for stock in suchcorporation and immediately after the ex-change such person or persons are in con-trol (as defined in § 368(c)) of thecorporation.

Section 1.351–1(a)(3) of the Income TaxRegulations provides that, for purposes of§ 351, if a person acquires stock of a cor-poration from an underwriter in exchange

2003–19 I.R.B. 863 May 12, 2003

for cash in a qualified underwriting trans-action, the person who acquires stock fromthe underwriter is treated as transferringcash directly to the corporation in exchangefor stock of the corporation and the under-writer is disregarded. A qualified under-writing transaction is a transaction in whicha corporation issues stock for cash in an un-derwriting in which either the underwriteris an agent of the corporation or the un-derwriter’s ownership of the stock is tran-sitory.

Section 354(a) provides that, in gen-eral, no gain or loss shall be recognized ifstock or securities in a corporation a partyto a reorganization are, in pursuance of theplan of reorganization, exchanged solely forstock or securities in such corporation orin another corporation a party to the reor-ganization.

Section 368(a)(1)(A) states that the term“reorganization” means a statutory mergeror consolidation. Section 368(a)(2)(E) pro-vides that a transaction otherwise qualify-ing under § 368(a)(1)(A) will not bedisqualified by reason of the fact that stockof a corporation (the “controlling corpora-tion”) that before the merger was in con-trol of the merged corporation is used in thetransaction, if (1) after the transaction, thecorporation surviving the merger holds sub-stantially all of its properties and of theproperties of the merged corporation (otherthan stock of the controlling corporation dis-tributed in the transaction), and (2) in thetransaction, former shareholders of the sur-viving corporation exchanged, for anamount of voting stock of the controllingcorporation, an amount of stock in the sur-viving corporation that constitutes con-trol of such corporation (the control-for-voting-stock requirement).

Section 368(a)(1)(B) provides that theterm reorganization means the acquisitionby one corporation, in exchange solely forall or a part of its voting stock (or in ex-change solely for all or a part of the vot-ing stock of a corporation which is incontrol of the acquiring corporation), ofstock of another corporation if, immedi-ately after the acquisition, the acquiring cor-poration has control of such othercorporation (whether or not such acquir-ing corporation had control immediately be-fore the acquisition).

For purposes of §§ 368(a)(1)(B) and368(a)(2)(E), control is defined in § 368(c).Section 368(c) defines the term “control”

to mean the ownership of stock possess-ing at least 80 percent of the total com-bined voting power of all classes of stockentitled to vote and at least 80 percent ofthe total number of shares of all otherclasses of stock of the corporation.

Section 368(a)(1)(E) provides that theterm reorganization includes a recapital-ization. In Helvering v. Southwest Con-sol. Corp., 315 U.S. 194, 202 (1942), theSupreme Court defined a recapitalization asa “reshuffling of a capital structure withinthe framework of an existing corporation.”

Section 368(a)(1)(F) provides that theterm reorganization means a mere changein identity, form, or place of organizationof one corporation, however effected.

Section 368(a)(2)(C) states, in relevantpart, that a transaction otherwise qualify-ing under § 368(a)(1)(A) or 368(a)(1)(B)will not be disqualified by reason of the factthat part or all of the assets or stock whichwere acquired in the transaction are trans-ferred to a corporation controlled by the cor-poration acquiring such assets or stock.

Section 1.368–2(k)(1) of the Income TaxRegulations restates the general rule of§ 368(a)(2)(C) but permits the assets orstock acquired in certain types of reorga-nizations, including reorganizations under§ 368(a)(1)(A) or (B), to be successivelytransferred to one or more corporations con-trolled (as defined in § 368(c)) in each trans-fer by the transferor corporation withoutdisqualifying the reorganization. Addition-ally, § 1.368–2(k)(2) provides that a trans-action qualifying under §§ 368(a)(1)(A) and368(a)(2)(E) is not disqualified by reasonof the fact that part or all of the stock ofthe surviving corporation is transferred orsuccessively transferred to one or more cor-porations controlled in each transfer by thetransferor corporation.

Generally, to qualify as a reorganiza-tion under § 368(a)(1), a transaction mustsatisfy the continuity of business enter-prise (COBE) requirement. Section 1.368–1(d)(1) provides that COBE requires theissuing corporation (generally the acquir-ing corporation) in a potential reorganiza-tion to either continue the targetcorporation’s historic business or use a sig-nificant portion of the target’s historic busi-ness assets in a business. Pursuant to§ 1.368–1(d)(4)(i), the issuing corpora-tion is treated as holding all of the busi-nesses and assets of all members of itsqualified group. Section 1.368–1(d)(4)(ii)

defines a qualified group as one or morechains of corporations connected throughstock ownership with the issuing corpora-tion, but only if the issuing corporationowns directly stock meeting the require-ments of § 368(c) in at least one other cor-poration, and stock meeting therequirements of § 368(c) in each of the cor-porations (except the issuing corporation)is owned directly by one of the other cor-porations. Continuity of business enter-prise is not required for a recapitalizationto qualify as a reorganization under§ 368(a)(1)(E). See Rev. Rul. 82–34, 1982–1C.B. 59.

Generally, to qualify as a reorganiza-tion under § 368(a)(1), a transaction mustsatisfy the continuity of interest require-ment. Section 1.368–1(e)(1)(i) provides thatcontinuity of interest requires that in sub-stance a substantial part of the value of theproprietary interests in the target corpora-tion be preserved in the reorganization. Allfacts and circumstances must be consid-ered in determining whether, in substance,a proprietary interest in the target corpo-ration is preserved. Continuity of interestis not a requirement for reorganizations un-der § 368(a)(1)(E). See Rev. Rul. 77–415,1977–2 C.B. 311.

In Paulsen v. Commissioner, 469 U.S.131 (1985), a state-chartered stock sav-ings and loan association merged into afederally-chartered non-stock mutual sav-ings and loan association. The stockhold-ers exchanged all of their stock in the state-chartered stock savings and loan associationfor passbook savings accounts and certifi-cates of deposit in the federally-charterednon-stock mutual savings and loan asso-ciation. The Supreme Court determined thatthe passbooks and certificates of deposit inthe federally-chartered non-stock mutualsavings and loan association had a pre-dominantly cash-equivalent component andan insubstantial equity component. Be-cause the passbooks and certificates of de-posit essentially represented cash with aninsubstantial equity component, the Courtheld that the transaction did not satisfy thecontinuity of interest requirement and, there-fore, did not qualify as a tax-free reorga-nization.

In Rev. Rul. 69–3, 1969–1 C.B. 103, X,a mutual savings and loan association,merged into Y, another mutual savings andloan association. In the merger, Y issued toeach share account holder of X a share ac-

May 12, 2003 864 2003–19 I.R.B.

count equal to the dollar amount evidencedby such holder’s passbook. Because theshare account holders of X received pro-prietary interests in Y that were equiva-lent to their equity interests in X before theexchange, the exchange was solely anequity-for-equity exchange that satisfied thecontinuity of interest requirement. Accord-ingly, the Service ruled that the transac-tion qualified as a tax-free reorganizationunder § 368(a)(1)(A).

ANALYSIS

Situation 1. Because Stock Bank is acontinuation of State Y Mutual Bank un-der State Y law, the conversion from StateY Mutual Bank to Stock Bank qualifies asa reorganization under § 368(a)(1)(E) aswell as a reorganization under§ 368(a)(1)(F). Because Stock Bank is acontinuation of State Y Mutual Bank, taxattributes of State Y Mutual Bank (such asa bad debt reserve maintained under § 585and a suspended reserve described in§ 593(g)(2)(A)(ii)) continue as tax attributesof Stock Bank. Finally, neither the subse-quent transfer of Stock Bank stock to StockHolding Company nor the Stock Offeringprevents the conversion from qualifying asa reorganization under § 368(a)(1)(E) aswell as a reorganization under§ 368(a)(1)(F). See § 1.368–1(e)(1); Rev.Rul. 96–29, 1996–1 C.B. 50; Rev. Rul. 77–415, 1977–2 C.B. 311.

Because the status of Mutual HoldingCompany as a stock holding company istransitory, the conversion of Mutual Hold-ing Company from a stock holding com-pany to a mutual holding company isdisregarded.

Because the former owners of the bankare in control (within the meaning of§ 368(c)) of Mutual Holding Company, theirtransfer of their equity interests in the bankto Mutual Holding Company, in exchangefor membership interests in Mutual Hold-ing Company, qualifies as a transfer de-scribed in § 351. Furthermore, thattransaction qualifies as a transfer describedin § 351, even though Mutual HoldingCompany transfers all of its Stock Bankstock to Stock Holding Company. See Rev.Rul. 77–449, 1977–2 C.B. 110; Rev. Rul.83–34, 1983–1 C.B. 79. However, the sametransaction (in which Transitory merges intoStock Bank) does not qualify as a reorga-nization either under §§ 368(a)(1)(A) and368(a)(2)(E) or under § 368(a)(1)(B) be-

cause at the end of the planned series oftransactions Stock Holding Company is nota controlled corporation.

Finally, Mutual Holding Company’s con-tribution of the stock of Stock Bank toStock Holding Company in exchange forStock Holding Company’s voting stock con-stitutes a transfer described in § 351. Thesubsequent Stock Offering by Stock Hold-ing Company does not prevent the trans-action from qualifying as a transferdescribed in § 351 because the persons towhom the stock is issued pursuant to theStock Offering, together with Mutual Hold-ing Company, are transferors to Stock Hold-ing Company under § 351. See § 1.351–1(a)(3).

Situation 2. For the reasons described inthe analysis of Situation 1, the conver-sion from State Y Mutual Bank to StockBank qualifies as a reorganization under§ 368(a)(1)(E) as well as a reorganizationunder § 368(a)(1)(F). Because Stock Bankis a continuation of State Y Mutual Bank,tax attributes of State Y Mutual Bank (suchas a bad debt reserve maintained under§ 585 and a suspended reserve describedin § 593(g)(2)(A)(ii)) continue as tax at-tributes of Stock Bank.

Because the status of Mutual HoldingCompany as a stock holding company istransitory, the conversion of Mutual Hold-ing Company from a stock holding com-pany to a mutual holding company isdisregarded.

For the reasons described in Situation 1,the exchange by the former bank ownersof their equity interests in the bank formembership interests in Mutual HoldingCompany qualifies as a transfer describedin § 351.

In addition, each of the membership in-terests in State Y Mutual Bank and Mu-tual Holding Company constitutes aproprietary interest in the entities that istreated as voting stock for federal incometax purposes. See Rev. Rul. 69–3, 1969–1C.B. 103. Because Mutual Holding Com-pany acquires, in exchange solely for mem-bership interests in Mutual HoldingCompany, the actual stock of Stock Bank,and, immediately after that acquisition Mu-tual Holding Company controls Stock Bank,that acquisition qualifies as a reorganiza-tion under § 368(a)(1)(B), provided that thecontinuity of business enterprise and con-tinuity of interest requirements are satis-fied. Because Stock Bank continues to

provide the same services as State Y Mu-tual Bank after the transactions describedherein, the continuity of business enter-prise requirement is satisfied. See § 1.368–1(d)(1). In addition, the acquisition satisfiesthe continuity of interest requirement be-cause, in the overall transaction, the StateY Mutual Bank members receive MutualHolding Company membership interests inplace of their former Mutual Bank mem-bership interests. See Rev. Rul. 69–3; cf.Paulsen v. Commissioner, 469 U.S. 131(1985). Thus, the acquisition qualifies as areorganization within the meaning of§ 368(a)(1)(B). Moreover, neither the sub-sequent transfer by Mutual Holding Com-pany of Stock Bank stock to Stock HoldingCompany nor the Stock Offering preventsthe acquisition from qualifying as a reor-ganization under § 368(a)(1)(B). See§ 368(a)(2)(C); § 1.368–1(d)(4)(i); § 1.368–2(k).

For purposes of § 354, the former StateY Mutual Bank’s members’ exchange oftheir ownership interests for Mutual Hold-ing Company’s membership interests is pur-suant to that reorganization.

In addition, the merger of Transitory intoStock Bank qualifies as a reorganization un-der §§ 368(a)(1)(A) and 368(a)(2)(E) be-cause the owners of the bank exchanged,for membership interests in Mutual Hold-ing Company, an amount of stock in thebank that constitutes control of Stock Bank.Neither the subsequent transfer by Mu-tual Holding Company of the Stock Bankstock to Stock Holding Company nor theStock Offering (of no more than 20 per-cent of the stock of Stock Holding Com-pany) prevents the merger from soqualifying. See § 1.368–2(k).

Furthermore, for the reasons describedin Situation 1, Mutual Holding Compa-ny’s contribution of the stock of Stock Bankto Stock Holding Company in exchange forStock Holding Company’s voting stock con-stitutes a transfer described in § 351.

The analyses in Situations 1 and 2, ingeneral, would also apply if State Y Mu-tual Bank and Stock Bank were incorpo-rated in different jurisdictions. However, inthat case, the conversion would not qualifyas a reorganization under § 368(a)(1)(E), butwould qualify as a reorganization under§ 368(a)(1)(F). In a reorganization under§ 368(a)(1)(F), Stock Bank takes into ac-count the items of State Y Mutual Bank asprovided in § 381.

2003–19 I.R.B. 865 May 12, 2003

HOLDING

This revenue ruling describes the taxconsequences that occur when, as describedin the facts set forth in this ruling, a mu-tual savings bank converts to a stock sav-ings bank.

DRAFTING INFORMATION

The principal authors of this revenue rul-ing are Jeffrey B. Fienberg and Emidio J.Forlini, Jr., of the Office of Associate ChiefCounsel (Corporate). For further informa-tion regarding this revenue ruling, con-tact either Mr. Fienberg or Mr. Forlini at(202) 622–7930 (not a toll-free call).

Section 382.—Limitation onNet Operating LossCarryforwards and CertainBuilt-In Losses FollowingOwnership Change

The adjusted applicable federal long-term rateis set forth for the month of May 2003. See Rev.Rul. 2003–45, page 876.

Section 412.—MinimumFunding Standards


Section 457.—DeferredCompensation Plans of Stateand Local Governments andTax Exempt Organizations

Length of service award plan. This rul-ing provides an example to eligible em-ployers of a type of length-of-service awardprogram (LOSAP) that would qualify as avalid LOSAP plan described in section457(e)(11)(A)(ii) of the Code.

Rev. Rul. 2003–47ISSUES:

(1) Is the plan described below a lengthof service award plan described in§ 457(e)(11)(A)(ii) of the Internal Rev-enue Code?

(2) When are benefits under the plan in-cludible in gross income?

(3) Are benefits paid under the planwages for purposes of FICA taxes?

FACTS

Pursuant to State S law, the County CFire Department has adopted a written plan(the “Plan”) to implement County C’s vol-unteer fire fighters’ and rescue squad work-ers’ service award program. County C andits fire department intend the Plan to be alength of service award plan described in§ 457(e)(11)(A)(ii). The County C Fire De-partment is an agency or instrumentality ofCounty C which is an eligible employerwithin the meaning of § 457(e)(1) and main-tains the plan. The County C Fire Depart-ment employs both professional andvolunteer fire fighters.

The Plan has been established for thebenefit of long-term bona fide volunteerswho perform fire fighting, prevention, andrescue squad services for the fire depart-ment, including related essential services,such as services performed by dispatch-ers, mechanics, ambulance drivers, and cer-tified instructors. The Plan provides lengthof service awards to participating volun-teers in recognition of their volunteer ser-vices to the fire department.

The Plan provides that benefits are onlyprovided to a volunteer who does not re-ceive compensation from the department forperforming fire fighting and prevention ser-vices, emergency medical and ambulanceservices, and related essential services, otherthan reimbursement for (or reasonable al-lowance for) reasonable expenses incurredin the performance of such services, or rea-sonable benefits (including length of ser-vice awards) and nominal fees for suchservices, customarily paid by the depart-ment in connection with the performanceof such services by volunteers.

Under the Plan, a bookkeeping accountis established for each participating volun-teer and, when a participating volunteer sat-isfies the Plan’s age and servicerequirements for distribution of benefits, thevolunteer automatically receives the bal-ance of the volunteer’s account, payable in60 monthly installments beginning on thetenth day of the first month following themonth in which the requirements are sat-isfied. If a participating volunteer dies priorto satisfying the Plan’s age and service re-quirements, the balance of the volunteer’s

account is paid to the volunteer’s benefi-ciary in a single sum within 60 days afterthe date of the volunteer’s death. If a par-ticipating volunteer dies after payments un-der the Plan have commenced, but beforereceiving all monthly installments under thePlan, the balance of the volunteer’s ac-count is paid to the volunteer’s benefi-ciary for the remainder of the 60 monthlyinstallments.

Under the Plan, County C and its fire de-partment each periodically provide cred-its to the accounts of participatingvolunteers. Each account is also creditedwith deemed earnings in accordance withthe Plan and State S law. The deemed earn-ings are based on an index that does not ex-ceed a rate of return on a predeterminedactual investment or a reasonable rate of re-turn, as defined under § 31.3121(v)(2)–1(d)(2)(i) of the regulations. The Planprovides that the combined amount cred-ited to any account with respect to any par-ticipating volunteer, other than deemedearnings, cannot exceed $3,000 for any yearof service credit.

The Plan provides that all amounts cred-ited to the bookkeeping accounts, and alldeemed earnings attributable to suchamounts, remain solely the property ofCounty C and its fire department, and, un-til paid or made available to a participantor beneficiary, are subject to the claims ofCounty C’s and the fire department’s gen-eral creditors. The Plan also provides thata participating volunteer (or beneficiary) hasonly an unsecured right to an award un-der the Plan. The rights of a participatingvolunteer (or beneficiary) to an award un-der the Plan cannot be assigned and arenontransferable. If a participating volun-teer ceases to provide services to the firedepartment prior to satisfying the Plan’s ageand service requirements for distribution ofbenefits (other than by reason of the vol-unteer’s death or disability), the volun-teer’s rights to an award under the Plan areforfeited and County C and its fire depart-ment cease to have any liability regard-ing the volunteer’s account.

LAW AND ANALYSIS

Section 451(a) and § 1.451–1(a) pro-vide that generally an item of gross in-come is includible in gross income for thetaxable year in which it is actually or con-structively received by a cash basis tax-payer. Section 1.451–2(a) provides that

May 12, 2003 866 2003–19 I.R.B.

income is constructively received in the tax-able year during which it is credited to thetaxpayer’s account, set apart, or other-wise made available so that the taxpayermay draw on it at any time. However, in-come is not constructively received if thetaxpayer’s control of its receipt is subjectto substantial limitations or restrictions.

Rev. Rul. 60–31, 1960–1 C.B. 174, holdsthat a mere promise by the service recipi-ent to pay the service provider, not repre-sented by notes or secured in any way, doesnot constitute receipt of income within themeaning of the cash receipts and disburse-ments method of accounting. See also, Rev.Rul. 69–650, 1969–2 C.B. 106, and Rev.Rul. 69–649, 1969–2 C.B. 106.

Section 457 governs the taxation of de-ferred compensation plans of eligible em-ployers. The term “eligible employer” isdefined in § 457(e)(1) as a state, politicalsubdivision of a state, and any agency orinstrumentality of a state or political sub-division of a state, and any other organi-zation (other than a governmental unit)exempt from tax under subtitle A of theCode. Deferred compensation plans main-tained by eligible employers to which § 457applies are either eligible plans or ineli-gible plans. An “eligible deferred compen-sation plan,” as defined in § 457(b), must,among other things, provide that the maxi-mum amount which may be deferred un-der the plan for a taxable year will notexceed the lesser of the applicable dollaramount ($12,000 in 2003) or 100 percentof the participant’s includible compensa-tion. Section 457(a)(1) provides that com-pensation (and income attributable to suchcompensation) deferred under an eligible de-ferred compensation plan maintained by apolitical subdivision of a State is includ-ible in a participant’s gross income in thetaxable year in which the compensation (andincome attributable to such compensa-tion) is paid to the participant.

Section 457(f)(1)(A) provides that gen-erally if a plan of an eligible employer pro-viding for a deferral of compensation is notan eligible deferred compensation plan,compensation deferred under such plan isincluded in the participant’s gross incomefor the first taxable year in which there isno substantial risk of forfeiture of the rightsto such compensation.

Section 457(e)(11)(A)(ii) provides thata plan paying solely length of serviceawards to bona fide volunteers or their ben-

eficiaries on account of qualified servicesperformed by such volunteers is treated asnot providing for the deferral of compen-sation under § 457. Section 457(e)(11)(C)defines qualified services as fire fighting andprevention services, emergency medical ser-vices, and ambulance services.

Section 457(e)(11)(B) provides specialrules applicable to a length of service awardplan. Section 457(e)(11)(B)(i) defines abona fide volunteer to include only per-sons whose only compensation received forperforming qualified services are reim-bursements for (or reasonable allowancesfor) reasonable expenses incurred in per-forming such services or reasonable ben-efits (including length of service awards)and nominal fees for such services, cus-tomarily paid by eligible employers in con-nection with the performance of suchservices by volunteers.

Section 457(e)(11)(B)(ii) provides thata length of service award plan may not pro-vide for an aggregate amount of length ofservice awards exceeding $3,000 accru-ing with respect to any year of service byany volunteer.

Section 3121(a)(5)(I) provides that anypayment made to, or on behalf of, an em-ployee or his or her beneficiary under a plandescribed in § 457(e)(11)(A)(ii) and main-tained by an eligible employer, as definedin § 457(e)(1), is not treated as “wages” forpurposes of Federal Insurance Contribu-tions Act (FICA) taxes.

The Plan established by County C andits fire department satisfies the require-ments of § 457(e)(11)(A)(ii). The Plan ap-plies only to volunteers who providequalified services, i.e., fire fighting and pre-vention services, emergency medical ser-vices, ambulance services, or other relatedessential services in compliance with§ 457(e)(11)(C). The Plan also satisfies§ 457(e)(11)(B)(i) by limiting eligible vol-unteers to persons who receive reimburse-ments, reasonable expenses, nominal fees,or reasonable benefits customarily paid byeligible employers in connection with theperformance of qualified services by vol-unteers. Finally, the Plan satisfies§ 457(e)(11)(B)(ii) by limiting the aggre-gate amount of awards for any year of ser-vice to $3,000.

Since the Plan qualifies as a length ofservice award plan under § 457(e)(11)(A)(ii), neither § 457(a) nor § 457(f) ap-ply to benefits under the Plan. Instead,

amounts distributable under the Plan are in-cludible in gross income under § 451 andthe regulations thereunder, when paid ormade available without substantial limita-tion or restriction.

In addition, since the Plan qualifies asa length of service award plan under§ 457(e)(11)(A)(ii) maintained by an eli-gible employer (as defined in § 457(e)(1)),§ 3121(a)(5)(I) provides that any paymentmade to, or on behalf of, a volunteer or hisor her beneficiary under the Plan is nottreated as “wages” for purposes of deter-mining if FICA taxes apply to such pay-ment.

HOLDINGS

(1) County C’s Plan is a length of ser-vice award plan described in § 457(e)(11)(A)(ii). The Plan, therefore, is not subjectto § 457(a) or § 457(f).

(2) An award under the Plan is includ-ible in a cash basis recipient’s gross in-come under § 451 and the regulationsthereunder, in the taxable year when paidor made available without substantial limi-tation or restriction.

(3) Awards paid under the Plan are notwages for purposes of FICA taxes.


The principal author of this revenue rul-ing is John Tolleris of the Office of Divi-sion Counsel/Associate Chief Counsel (TaxExempt and Government Entities). For fur-ther information regarding this revenue rul-ing, contact John Tolleris at (202) 622–6060 (not a toll-free call).

Section 467.—CertainPayments for the Use ofProperty or Services


Section 468.—Special Rulesfor Mining and Solid WasteReclamation and ClosingCosts

The adjusted applicable federal short-term,mid-term, and long-term rates are set forth for the

2003–19 I.R.B. 867 May 12, 2003

month of May 2003. See Rev. Rul. 2003–45, page876.

Section 482.—Allocation ofIncome and DeductionsAmong Taxpayers


Section 483.—Interest onCertain Deferred Payments


Section 642.—Special Rulesfor Credits and Deductions


Section 807.—Rules forCertain Reserves


Section 846.—DiscountedUnpaid Losses Defined


Section 861.—Income FromSources Within the UnitedStates

Ct. D. 2077

SUPREME COURT OF THEUNITED STATES

No. 01–1209 (2003)

BOEING CO., ET AL.v.

UNITED STATES

CERTIORARI TO THEUNITED STATES COURT OF

APPEALS FORTHE NINTH CIRCUIT

March 4, 2003*

Syllabus

Under a 1971 statute providing specialtax treatment for export sales made by anAmerican manufacturer through a subsid-iary that qualified as a “domestic interna-tional sales corporation” (DISC), no tax ispayable on the DISC’s retained income un-til it is distributed. See 26 U.S.C. Secs. 991–997. The statute thus provides an incentiveto maximize the DISC’s share — and tominimize the parent’s share — of the par-ties’ aggregate income from export sales.The statute provides three alternative waysfor a parent to divert a limited portion ofits income to the DISC. See Sec. 994(a)(1)–(3). The alternative that The Boeing Com-pany chose limited the DISC’s taxableincome to a little over half of the parties“combined taxable income” (CTI). In 1984,the “foreign sales corporation” (FSC) pro-visions replaced the DISC provisions. Asunder the DISC regime, it is in the par-ent’s interest to maximize the FSC’s shareof the taxable income generated by ex-port sales. Because most of the differencesbetween these regimes are immaterial to thissuit, the Court’s analysis focuses mainly onthe DISC provisions. The Treasury Regu-lation at issue, 26 CFR Sec. 1.861–8(e)(3)(1979), governs the accounting for researchand development (R&D) expenses when ataxpayer elects to take a current deduc-tion, telling the taxpaying parent and itsDISC “what” must be treated as a costwhen calculating CTI, and “how” thosecosts should be (a) allocated among dif-

ferent products and (b) apportioned be-tween the DISC and its parent. With respectto the “what” question, the regulation in-cludes a list of Standard Industrial Classi-fication (SIC) categories (e.g., transportationequipment) and requires that R&D for anyproduct within the same category as the ex-ported product be taken into account. Theregulations use gross receipts from sales asthe basis for both “how” questions. Boe-ing organized its internal operations alongproduct lines (e.g., aircraft model 767) formanagement and accounting purposes, eachof which constituted a separate “program”within the organization; and $3.6 billion ofits R&D expenses were spent on “Com-pany Sponsored Product Development,” i.e.,product-specific research. Boeing’s accoun-tants treated all Company Sponsored costsas directly related to a single program andunrelated to any other program. Becausenearly half of the Company SponsoredR&D at issue was allocated to programsthat had no sales in the year in which theresearch was conducted, that amount wasdeducted by Boeing currently in calculat-ing its taxable income for the years at is-sue, but never affected the calculation of theCTI derived by Boeing and its DISC fromexport sales. The Internal Revenue Ser-vice reallocated Boeing’s Company Spon-sored R&D costs for 1979 to 1987, therebydecreasing the untaxed profits of its ex-port subsidiaries and increasing its tax-able profits on export sales. After payingthe additional taxes, Boeing filed this re-fund suit. In granting Boeing summaryjudgment, the District Court found Sec.1.861–8(e)(3) invalid, reasoning that its cat-egorical treatment of R&D conflicted withcongressional intent that there be a directrelationship between items of gross in-come and expenses related thereto, and witha specific DISC regulation giving the tax-payer the right to group and allocate in-come and costs by product or product line.The Ninth Circuit reversed.

Held: section 1.861–8(e)(3) is a properexercise of the Secretary of the Treasury’srulemaking authority. Pp. 8–19.

(a) The relevant statutory text does notsupport Boeing’s argument that the stat-ute and certain regulations give it an un-qualified right to allocate its CompanySponsored R&D expenses to the specificproducts to which they are factually

* Together with No. 01–1382, United States v. Boeing Sales Corp. et al., also on certiorari to the same court.

May 12, 2003 868 2003–19 I.R.B.

related and to exclude such R&D fromtreatment as a cost of any other product.The method that Boeing chose to deter-mine an export sale’s transfer price al-lowed the DISC “to derive taxable incomeattributable to [an export sale] in an amountwhich does not exceed . . . 50 percent ofthe combined taxable income of [the DISCand the parent] which is attributable to thequalified export receipts on such propertyderived as the result of a sale by the DISCplus 10 percent of the export promotion ex-penses of such DISC attributable to suchreceipts. . . .” 26 U.S.C. Sec. 994(a)(2) (em-phasis added).

The statute does not define “combinedtaxable income” or specifically mentionR&D expenditures. The Secretary’s regu-lation must be treated with deference, seeCottage Savings Assn. v. Commissioner, 499U.S. 554, 560–561, but the statute placessome limits on the Secretary’s interpre-tive authority. First, “does not exceed”places an upper limit on the share of the ex-port profits that can be assigned to a DISCand gives three methods of setting the trans-fer price. Second, “combined taxable in-come” makes it clear that the domesticparent’s taxable income is a part of the CTIequation. Third, “attributable” limits the por-tion of the domestic parent’s taxable in-come that can be treated as a part of theCTI. The Secretary’s classification of allR&D as an indirect cost of all export salesof products in a broadly defined SIC cat-egory is not arbitrary. It provides consis-tent treatment for cost items used incomputing the taxpayer’s domestic tax-able income and CTI, and its allocation ofR&D expenditures to all products in a cat-egory even when specifically intended toimprove only one or a few of those prod-ucts is no more tenuous than the alloca-tion of a chief executive officer’s salary toevery product that a company sells, evenwhen he devotes virtually all of his time to

the development of the Edsel. Reading Sec.994 in light of Sec. 861, the more gen-eral provision dealing with the distinctionbetween domestic and foreign source in-come, does not support Boeing’s contraryview. If the Secretary reasonably deter-mines that Company Sponsored R&D canbe properly apportioned on a categorical ba-sis, the portion of Sec. 861(b) that de-ducts from gross income “a ratable part ofany expenses . . . which cannot definitelybe allocated to some item or class of grossincome” is inapplicable. Pp. 8–13.

(b) Boeing’s arguments based on spe-cific DISC regulations are also unavail-ing. Language in 26 CFR Sec. 1.994–1(c)(6)(iii), part of the rule describing CTIcomputation, does not prohibit a ratable al-location of R&D expenditures that can be“definitely related” to particular export sales.Whether such an expense can be “defi-nitely related” is determined by the rulesset forth in the very rule that Boeing chal-lenges, Sec. 1.861–8. Moreover, the Sec-retary could reasonably determine thatexpenditures on model 767 research con-ducted in years before any 767’s were soldwere not “definitely related” to any sales,but should be treated as an indirect cost ofproducing the gross income derived fromthe sale of all planes in the transportationequipment category. Nor do Secs. 1.994–1(c)(7)(i) and (ii)(a), which control group-ing of transactions for determining thetransfer price of sales of export property,and Sec. 1.994–1(c)(6)(iv), which gov-erns the grouping of receipts when the CTImethod is used, speak to the questionswhether or how research costs should be al-located and apportioned. Pp. 13–17.

(c) What little relevant legislative his-tory there is in this suit weighs in the Gov-ernment’s favor. Pp. 18–19.

258 F.3d 958, affirmed.STEVENS, J., delivered the opinion of

the Court, in which REHNQUIST, C.J., and

O’CONNOR, KENNEDY, SOUTER,GINSBURG, and BREYER, JJ., joined.THOMAS, J., filed a dissenting opinion, inwhich SCALIA, J., joined.


Nos. 01–1209 and 01–1382

THE BOEING COMPANYAND CONSOLIDATED

SUBSIDIARIES PETITIONERS v.UNITED STATES — 01–1209

UNITED STATES PETITIONER v.BOEING SALES CORPORATION

ET AL. — 01–1382

ON WRITS OF CERTIORARI TO THEUNITED STATES COURT OF

APPEALSFOR THE NINTH CIRCUIT

March 4, 2003

JUSTICE STEVENS delivered the opin-ion of the Court.

This suit concerns tax provisions en-acted by Congress in 1971 to provide in-centives for domestic manufacturers toincrease their exports and in 1984 to limitand modify those incentives. The specificquestion presented involves the interpre-tation of a Treasury Regulation (26 CFRSec. 1.861–8(e)(3) (1979)) promulgated in1977 that governs the accounting for re-search and development (R&D) expensesunder both statutory schemes.1 We shall ex-plain the general outlines of the two stat-utes before we focus on that regulation.

The 1971 statute provided special taxtreatment for export sales made by anAmerican manufacturer through a subsid-iary that qualified as a “domestic interna-tional sales corporation” (DISC).2 The DISCitself is not a taxpayer; a portion of its in-come is deemed to have been distributed

1 In 1996, the provisions of 26 CFR Sec. 1.861–8 were amended, renumbered, and republished as 26 CFR Sec. 1.861–17. See 26 CFR Sec. 1.861–17 (2002); see also 60 Fed. Reg. 66503 (1995).

2 To qualify as a DISC, at least 95 percent of a corporation’s gross receipts must arise from qualified export receipts. See 26 U.S.C. Sec. 992(a)(1)(A). In addition, at least 95 percent of the corporation’s assets must beexport related. See Sec. 992(a)(1)(B).

2003–19 I.R.B. 869 May 12, 2003

to its shareholders, and the shareholdersmust pay taxes on that portion, but no taxis payable on the DISC’s retained incomeuntil it is actually distributed. See 26 U.S.C.Secs. 991–997. Typically, “a DISC is awholly owned subsidiary of a U.S. corpo-ration.” 1 Senate Finance Committee, Defi-cit Reduction Act of 1984, 98th Cong., p.630, n. 1 (Comm. Print 1984) (hereinaf-ter Committee Print). The statute thus pro-vides an incentive to maximize the DISC’sshare — and to minimize the parent’s share— of the parties’ aggregate income fromexport sales.

The DISC statute does not, however, al-low the parent simply to assign all of theprofits on its export sales to the DISC.Rather, “to avoid granting undue tax ad-vantages,”3 the statute provides three al-ternative ways in which the parties maydivert a limited portion of taxable incomefrom the parent to the DISC. See 26 U.S.C.Secs. 994(a)(1)–(3). Each of the alterna-tives assumes that the parent has sold theproduct to the DISC at a hypothetical“transfer price” that produced a profit forboth seller and buyer when the product wasresold to the foreign customer. The alter-native used by Boeing in this suit limitedthe DISC’s taxable income to a little overhalf of the parties’ “combined taxable in-come” (CTI).4

Soon after its enactment, the DISC stat-ute became “the subject of an ongoing dis-pute between the United States and certainother signatories of the General Agree-ment on Tariffs and Trade (GATT)” re-garding whether the DISC provisions wereimpermissible subsidies that violated ourtreaty obligations. Committee Print 634. “Toremove the DISC as a contentious issue andto avoid further disputes over retaliation, theUnited States made a commitment to theGATT Council on October 1, 1982, to pro-pose legislation that would address the con-cerns of other GATT members.” Id. at 634–

635. This ultimately resulted in thereplacement of the DISC provisions in 1984with the “foreign sales corporation” (FSC)provisions of the Code. See Deficit Re-duction Act of 1984, Pub. L. 98–369, Secs.801–805, 98 Stat. 985.5

Unlike a DISC, an FSC is a foreign cor-poration, and a portion of its income is tax-able by the United States. See ibid.; see alsoB. Bittker & J. Eustice, Federal IncomeTaxation of Corporations and Sharehold-ers ¶17.14 (5th ed. 1987). Whereas a por-tion of a DISC’s income was tax deferred,a portion of an FSC’s income is exemptedfrom taxation. Compare 26 U.S.C. Secs.991–997 with 26 U.S.C. Secs. 921, 923(1988 ed.). Hence, under the FSC regime,as under the DISC regime, it is in the par-ent’s interest to maximize the FSC’s shareof the taxable income generated by ex-port sales. Because the differences be-tween the DISC and FSC regimes for themost part are immaterial to this suit, theanalysis in this opinion will focus mainlyon the DISC provisions.6

The Internal Revenue Code gives thetaxpayer an election either to capitalize andamortize the costs of R&D over a periodof years or to deduct such expenses cur-rently. See 26 U.S.C. Sec. 174. The regu-lation at issue here, 26 CFR Sec. 1.861–8(e)(3) (1979), deals with R&Dexpenditures for which the taxpayer hastaken a current deduction. It tells the tax-paying parent and its DISC “what” must betreated as a cost when calculating CTI, and“how” those costs should be (a) allocatedamong different products and (b) appor-tioned between the DISC and its parent.7

With respect to the “what” question, theTreasury might have adopted a broad ap-proach defining the relevant R&D as in-cluding all of the parent’s products, or, anarrow approach defining the relevant R&Das all R&D directly related to a particularproduct being exported. Instead, the regu-

lation includes a list of two-digit Stan-dard Industrial Classification (SIC)categories (examples are “chemicals and al-lied products” and “transportation equip-ment”), and it requires that R&D for anyproduct within the same category as the ex-ported product be taken into account.8 Seeibid. The regulation explains that R&D onany product “is an inherently speculative ac-tivity” that sometimes contributes unex-pected benefits on other products, and “thatthe gross income derived from successfulresearch and development must bear thecost of unsuccessful research and devel-opment.” Ibid.

With respect to the two “how” ques-tions, the regulations use gross receipts fromsales as the basis both for allocating thecosts among the products within the broadR&D categories and also for apportion-ing those costs between the parent and theDISC. Thus, if the exported product con-stitutes 20 percent of the parties’ total salesof all products within an R&D category, 20percent of the R&D cost is allocated to thatproduct. And if export sales represent 70percent of the total sales of that product, 70percent of that amount, or 14 percent of theR&D, is apportioned to the DISC.

I

Petitioners (and cross-respondents) areThe Boeing Company and subsidiaries thatinclude a DISC and an FSC. For over 40years, Boeing has been a world leader incommercial aircraft development and a ma-jor exporter of commercial aircraft. Dur-ing the period at issue in this litigation, thedollar volume of its sales amounted to about$64 billion, 67 percent of which wereDISC-eligible export sales. The amount thatBoeing spent on R&D during that periodamounted to approximately $4.6 billion.

During the tax years at issue here, Boe-ing organized its internal operations along

3 S. Rep. No. 92–437, p. 13 (1971) (hereinafter S. Rep.).

4 To be more precise, it allowed the DISC “to derive taxable income attributable to [an export sale] in an amount which does not exceed . . . 50 percent of the combined taxable income of [the DISC and the parent]plus 10 percent of the export promotion expenses of such DISC attributable to such receipts. . . . 26 U.S.C. Sec. 994(a)(2).

A hypothetical example in both the House and Senate Committee Reports illustrated the computation of a transfer price of $816 based on a DISC’s selling price of $1,000 and the parent’s cost of goods sold of $650.The gross margin of $350 was reduced by $180 (including the DISC’s promotion expenses of $90, the parent’s directly related selling and administrative expenses of $60, and the parent’s prorated indirect expenses of$30), to produce a CTI of $170. Half of that amount ($85) plus 10 percent of the DISC’s promotion expenses ($9) gave the DISC its allowable taxable income of $94, leaving only $76 of income immediately taxableto the parent. The $184 aggregate of the two amounts attributed to the DISC (promotion expenses of $90 plus its $94 share of CTI) subtracted from the $1,000 gross receipt produced the “transfer price” of $816. SeeS. Rep. at 108, n. 7; H.R. Rep. No. 92–533, p. 74, n. 7 (1971) (hereinafter H.R. Rep.).

5 In 2000, Congress repealed and replaced the FSC provisions with the “extraterritorial income” exclusion of 26 U.S.C. Sec. 114.

6 Two aspects of the 1984 statute that do have special significance to this suit are discussed in Part IV, infra.

7 Treasury Regulation Sec. 1.861–8 (1979) also specifies how other specific items of expense should be treated. See, e.g., 26 CFR Sec. 1.861–8(e)(2) (1979) (interest fees); Sec. 1.861–8(e)(5) (legal and accounting fees);Sec. 1.861–8(e)(6) (income taxes).

8 The original regulation used two-digit SIC categories. See Sec. 1.861–8(e)(3). The current regulation uses narrower three-digit SIC categories, See 26 CFR Sec. 1.861–17(a)(2)(ii) (2002), but the change is not relevantto this suit.

May 12, 2003 870 2003–19 I.R.B.

product lines (e.g., aircraft models 727, 737,747, 757, 767) for management and ac-counting purposes, each of which consti-tuted a separate “program” within theBoeing organization. For those purposes, itdivided its R&D expenses into two broadcategories: “Blue Sky” and “CompanySponsored Product Development.” Theformer includes the cost of broad-based re-search aimed at generally advancing thestate of aviation technology and develop-ing alternative designs of new commer-cial planes. The latter includes product-specific research pertaining to a specificprogram after the board of directors hasgiven its approval for the production of anew model. With respect to its $1 billionof “Blue Sky” R&D, Boeing’s account-ing was essentially consistent with 26 CFRSec. 1.861–8(e)(3) (1979).9 Its method ofaccounting for $3.6 billion of “CompanySponsored” R&D gave rise to this litiga-tion.

Boeing’s accountants treated all of theCompany Sponsored research costs as di-rectly related to a single program, and astotally unrelated to any other program. Thus,for DISC purposes, the cost of CompanySponsored R&D directly related to the 767model, for example, had no effect on thecalculation of the “combined taxable in-come” produced by export sales of anyother models. Moreover, because immenseCompany Sponsored research costs wereroutinely incurred while a particular modelwas being completed and before any salesof that model occurred, those costs effec-tively “disappeared” in the calculation ofthe CTI even for the model to which theR&D was most directly related.10 Almosthalf of the $3.6 billion of Company Spon-sored R&D at issue in this suit was allo-cated to programs that had no sales in theyear in which the research was conducted.That amount (approximately $1.75 bil-lion) was deducted by Boeing currently inthe calculation of its taxable income for theyears at issue, but never affected the cal-culation of the CTI derived by Boeing andits DISC from export sales.

Pursuant to an audit, the Internal Rev-enue Service reallocated Boeing’s Com-pany Sponsored R&D costs for the years

1979 to 1987, thereby decreasing the un-taxed profits of its export subsidiaries andincreasing the parent’s taxable profits fromexport sales. Boeing paid the additional taxobligation of $419 million and filed this suitseeking a refund. Relying on the decisionof the Eighth Circuit in St. Jude Medical,Inc. v. Commissioner, 34 F.3d 1394 (1994),the District Court entered summary judg-ment in favor of Boeing. It held that 26CFR Sec. 1.861–8(e)(3) (1979) is invalidas applied to DISC and FSC transactionsbecause the regulation’s categorical treat-ment of R&D conflicted with congres-sional intent that there be a “direct”relationship between items of gross in-come and expenses “related thereto,” andwith a specific DISC regulation giving thetaxpayer the right to group and allocate in-come and costs by product or product line.The Court of Appeals for the Ninth Cir-cuit reversed, 258 F.3d 958 (2001), and wegranted certiorari to resolve the conflict be-tween the Circuits, 535 U.S. 1094 (2002).We now affirm.

II

Section 861 of the Internal RevenueCode distinguishes between United Statesand foreign source income for several dif-ferent purposes. See 26 U.S.C. Sec. 861.The regulation at issue in this suit, 26 CFRSec. 1.861–8(e)(3) (1979), was promul-gated pursuant to that general statute. Sepa-rate regulations promulgated under theDISC statute, 26 U.S.C. Secs. 991–997, in-corporate 26 CFR Sec. 1.861–8(e)(3) (1979)by specific reference. See Sec. 1.994–1(c)(6)(iii) (citing and incorporating the costallocation rules of Sec. 1.861–8). Boeingdoes not claim that its method of account-ing for Company Sponsored R&D com-plied with Sec. 1.861–8(e)(3). Rather, itargues that Sec. 1.861–8(e)(3) is so plainlyinconsistent with congressional intent andwith other provisions of the DISC regula-tions that it cannot be validly applied to itscomputation of CTI for DISC purposes.

Boeing argues, in essence, that the stat-ute and certain specific regulations pro-mulgated pursuant to 26 U.S.C. Sec. 994give it an unqualified right to allocate itsCompany Sponsored R&D expenses to the

specific products to which they are “fac-tually related” and to exclude any allo-cated R&D from being treated as a cost ofany other product. The relevant statutorytext does not support its argument.

As we have already mentioned, theDISC statute gives the taxpayer a choice ofthree methods of determining the transferprice for an exported good. Boeing electedto use only the second method described inthe following text:

“Inter-company pricing rules”(a) In general“In the case of a sale of export prop-erty to a DISC by a person described insection 482, the taxable income of suchDISC and such person shall be basedupon a transfer price which would al-low such DISC to derive taxable in-come attributable to such sale (regardlessof the sales price actually charged) in anamount which does not exceed the great-est of —

(1) 4 percent of the qualified exportreceipts on the sale of such property bythe DISC plus 10 percent of the ex-port promotion expenses of such DISCattributable to such receipts,

(2) 50 percent of the combined tax-able income of such DISC and such per-son which is attributable to the qualifiedexport receipts on such property de-rived as the result of a sale by the DISCplus 10 percent of the export promo-tion expenses of such DISC attribut-able to such receipts, or

(3) taxable income based upon the saleprice actually charged (but subject to therules provided in section 482).”(b) Rules for commissions, rentals, andmarginal costingThe Secretary shall prescribe regula-

tions setting forth* * * *

“(2) rules for the allocation of ex-penditures in computing combined tax-able income under subsection (a)(2) inthose cases where a DISC is seeking toestablish or maintain a market for ex-port property.” 26 U.S.C. Secs.994(a)(1)–(3), (b)(2) (emphasis added).The statute does not define the term

“combined taxable income,” nor does it spe-

9 Because all of Boeing’s commercial aircraft were “transportation equipment” within the meaning of the Treasury Regulation, it properly allocated all of its Blue Sky research among all of its programs, and then ap-portioned those costs between the parent and the DISC. However, according to the Government, it erroneously did so on the basis of hours of direct labor rather than sales. See Brief for United States 10.

10 When Boeing charged R&D costs to programs that had no sales in the year the research was conducted, the R&D costs effectively “disappeared” in the sense that they were not accounted for by Boeing in computingits CTI.

2003–19 I.R.B. 871 May 12, 2003

cifically mention expenditures for R&D.Congress did grant the Secretary express au-thority to prescribe regulations for deter-mining the proper allocation of expendituresin computing CTI in certain specific con-texts. See, e.g., Secs. 994(b)(1)–(2). Yet inpromulgating 26 CFR Sec. 1.861–8 (1979),the Secretary of the Treasury exercised hisrulemaking authority under 26 U.S.C. Sec.7805(a), which gives the Secretary gen-eral authority to “prescribe all needful rulesand regulations for the enforcement” of theInternal Revenue Code. See 41 Fed. Reg.49160 (1976) (“The proposed regulationsare to be issued under the authority con-tained in section 7805 of the Internal Rev-enue Code”). Even if we regard thechallenged regulation as interpretive be-cause it was promulgated under Sec.7805(a)’s general rulemaking grant ratherthan pursuant to a specific grant of author-ity, we must still treat the regulation withdeference. See Cottage Savings Assn. v.Commissioner, 499 U.S. 554, 560–561(1991).

The words that we have emphasized inthe statutory text do place some limits onthe Secretary’s interpretive authority. First,the “does not exceed” phrase places an up-per limit on the share of the export prof-its that can be assigned to a DISC and alsogives the taxpayer an unfettered right to se-lect any of the three methods of setting a“transfer price.” Second, the use of the term“combined taxable income” in subsection(a)(2) makes it clear that the taxable in-come of the domestic parent is a part of theequation that should produce the CTI. AsBoeing recognizes, even a charitable con-tribution to the Seattle Symphony that re-duces its domestic earnings from sales of767’s must be treated as a cost that is notdefinitely related to any particular cat-egory of income and thus must be appor-tioned among all categories of income,including income from export sales. SeeBrief for Petitioners 8, n. 7. Third, the word“attributable” places a limit on the por-tion of the domestic parent’s taxable in-come that can be treated as a part of theCTI. It is this word that provides the statu-tory basis for Boeing’s position.

Under Boeing’s reading of the statute,a calculation of the domestic income “at-tributable” to the export sale of a 767 may

include both the direct and indirect costs ofmanufacturing and selling 767’s, but it maynot include the direct costs of selling any-thing else. Moreover, if Boeing’s accoun-tants classify a particular cost as directlyrelated to the 767, that classification is con-clusive. Thus, while the Secretary assertsthat Boeing’s R&D expenses are definitelyrelated to all income in the relevant SIC cat-egory, Boeing claims the right to divide itsR&D in a way that effectively creates threesegments: (1) Blue Sky; (2) CompanySponsored R&D on products that have nosales in the current year; and (3) Com-pany Sponsored R&D on products that arebeing sold currently. Boeing, like the Sec-retary, essentially treats Blue Sky R&D asan indirect cost in computing both its do-mestic taxable income and its CTI. With re-spect to the second segment, Boeing usesthe R&D to reduce its domestic taxableearnings on every product it sells, but elimi-nates it entirely from the calculation of CTIon any product by charging the R&D coststo programs without any sales. The thirdsegment is used for both domestic and CTIpurposes, but with respect to CTI only forthe export sales to which it is “factually re-lated.”

The Secretary’s classification of all R&Das an indirect cost of all export sales ofproducts in a broadly defined SIC cat-egory — in other words, as “attributable”to such sales is surely not arbitrary. It hasthe virtue of providing consistent treat-ment for cost items used in computing thetaxpayer’s domestic taxable income and itsCTI. Moreover, its allocation of R&D ex-penditures to all products in a category evenwhen specifically intended to improve onlyone or a few of those products is no moretenuous than the allocation of a chief ex-ecutive officer’s salary to every product thata company sells even when he devotes vir-tually all of his time to the development ofan Edsel.

On the other hand, even if Boeing’smethod of accounting for R&D is fully jus-tified for management purposes, it cer-tainly produces anomalies for tax purposes.Most obvious is the fact that it enabled Boe-ing to deduct some $1.75 billion of expen-ditures from its domestic taxable earningsunder 26 U.S.C. Sec. 174 and never de-duct a penny of those expenditures from its

“combined taxable earnings” under theDISC statute. See Brief for Petitioners 11.Less obvious, but nevertheless significant,is that Boeing’s method assumed that BlueSky research produces benefits for air-plane models that are producing current in-come and — at the same time — assumedthat Company Sponsored research relatedto a specific product, such as the 727, is notlikely to produce benefits for other air-plane models, such as the 737 or 767.11

In all events, the mere use of the word“attributable” in the text of Sec. 994 surelydoes not qualify the Secretary’s authorityto decide whether a particular tax deduct-ible expenditure made by the parent of aDISC is sufficiently related to its exportsales to qualify as an indirect cost in thecomputation of the parties’ CTI. Boeing ar-gues, however, that the text of Sec. 994should be read in light of Sec. 861, themore general provision dealing with the dis-tinction between domestic and foreignsource income.

Title 26 U.S.C. Sec. 861(b) contains thefollowing two sentences:

“Taxable income from sources withinUnited States”“From the items of gross income speci-fied in subsection (a) as being incomefrom sources within the United Statesthere shall be deducted the expenses,losses, and other deductions properly ap-portioned or allocated thereto and a rat-able part of any expenses, losses, orother deductions which cannot defi-nitely be allocated to some item or classof gross income. The remainder, if any,shall be included in full as taxable in-come from sources within the UnitedStates”. (Emphasis added.)

Focusing on the emphasized words, Boe-ing interprets this section as having cre-ated a background rule dividing all expensesinto two categories: those that can be al-located to specific income and those thatcannot. “Ratable” allocation is permis-sible for the second category, but not for thefirst, according to Boeing. Moreover, inBoeing’s view, any expense in the first cat-egory cannot be ratably apportioned acrossall classes of income.

There are at least two flaws in this ar-gument. First, although the emphasizedwords authorize ratable apportionment of

11 This assumption, of course, runs contrary to the Secretary’s determination that R&D “is an inherently speculative activity” that sometimes contributes unexpected benefits on other products. 26 CFR Sec. 1.861–8(e)(3)(i)(A) (1979).

May 12, 2003 872 2003–19 I.R.B.

costs that cannot definitely be allocated tosome item or class of income, the sen-tence as a whole does not prohibit ratableapportionment of expenses that could be,but perhaps in fairness should not be, treatedas direct costs. Second, the Secretary hasthe authority to prescribe regulations de-termining whether an expense can be prop-erly apportioned to an item of gross incomein the calculation of CTI. See 26 U.S.C.Sec. 7805(a). Thus, as in this suit, if theSecretary reasonably determines that Com-pany Sponsored R&D can be properly ap-portioned on a categorical basis, theitalicized portion of Sec. 861 is simply in-applicable.

In sum, Boeing’s arguments based onstatutory text are plainly insufficient to over-come the deference to which the Secre-tary’s interpretation is entitled.

III

Boeing also advances two argumentsbased on the text of specific DISC regu-lations. The first resembles its argumentbased on the text of Sec. 861 and the sec-ond relies on regulations providing that cer-tain accounting decisions made by thetaxpayer shall be controlling.

The regulations included in 26 CFR Sec.1.994–1 (1979) set forth intercompany pric-ing rules for DISCs. They generally de-scribe the three methods of determining atransfer price, noting that the taxpayer maychoose the most favorable method, and maygroup transactions to use one method forsome export sales and another method forothers. See ibid. With respect to the CTImethod used by Boeing, there is a rule, Sec.1.994–1(c)(6), that describes the compu-tation of CTI. The rule broadly defines theCTI of a DISC and its related supplier froma sale of export property as the excess ofgross receipts over their total costs “whichrelate to such gross receipts.”12 Subdivi-sion (iii) of that rule, on which Boeing re-lies, provides:

“Costs (other than cost of goods sold)which shall be treated as relating to grossreceipts from sales of export property are(a) the expenses, losses, and other de-ductions definitely related, and there-fore allocated and apportioned, thereto,and (b) a ratable part of any other ex-penses, losses, or other deductions whichare not definitely related to a class ofgross income, determined in a mannerconsistent with the rules set forth in Sec.1.861–8.” Sec. 1.994–1(c)(6)(iii) (em-phasis added).Boeing interprets the emphasized words

as prohibiting a ratable allocation of R&Dexpenditures that can be “definitely re-lated” to particular export sales. The ob-vious response to this argument is providedby the final words in the paragraph.Whether such an expense can be “defi-nitely related” is determined by the rulesset forth in the very regulation that Boe-ing challenges, Sec. 1.861–8. Moreover, itseems quite clear that the Secretary couldreasonably determine that expenditures on767 research conducted in years before any767’s were sold were not “definitely re-lated” to any sales, but should be treatedas an indirect cost of producing the grossincome derived from the sale of all planesin the transportation equipment category.

Boeing also argues that the regulationsexpressly allow it to allocate and appor-tion R&D expenses to groups of exportsales that are based on industry usage ratherthan SIC categories. The regulations pro-viding the strongest support for this argu-ment are Secs. 1.994–1(c)(7)(i) and (ii)(a),which control the grouping of transac-tions for the purpose of determining thetransfer price of sales of export property,and Sec. 1.994–1(c)(6)(iv), which gov-erns the grouping of receipts when the CTImethod of transfer pricing is used.13 Trea-sury Regulation Sec. 1.994–1(c)(7) reads,in part, as follows:

“Grouping transactions. (i) Generally, thedeterminations under this section are tobe made on a transaction-by-transactionbasis. However, at the annual choice ofthe taxpayer some or all of these deter-minations may be made on the basis ofgroups consisting of products or prod-uct lines.”“(ii) A determination by a taxpayer as toa product or a product line will be ac-cepted by a district director if such de-termination conforms to any one of thefollowing standards: (a) A recognized in-dustry or trade usage, or (b) the 2-digitmajor groups . . . of the Standard In-dustrial Classification. . . .”As we understand the statutory and regu-

latory scheme, it gives controlling effect tothree important choices by the taxpayer.First, the taxpayer may elect to deduct R&Dexpenses on an annual basis instead of capi-talizing and amortizing those costs. See 26U.S.C. Sec. 174(a)(1). Second, when en-gaging in export transactions with a DISC,the taxpayer may choose any one of thethree methods of determining the transferprice. See Sec. 994(a). Third, the taxpayermay decide how best to group those trans-actions for purposes of applying the trans-fer pricing methods. See 26 CFR Sec.1.994–1(c)(7) (1979). Conceivably the tax-payer could account for each sale sepa-rately, by product lines, or by grouping allof its export sales together. These regula-tions confirm the finality of the third typeof choice (i.e., which groups of sales willbe evaluated under one of the three alter-native transfer pricing methods), but do notspeak to the questions answered by theregulation at issue in this suit — namely,whether or how a particular research costshould be allocated and apportioned.

Nor does Sec. 1.994–1(c)(6)(iv) sup-port Boeing’s argument. It provides that a“taxpayer’s choice in accordance with sub-paragraph (7) of this paragraph as to thegrouping of transactions shall be control-

12 Treasury Regulation Sec. 1.994–1(c)(6), 26 CFR Sec. 1.994–1(c)(6) (1979), provides in part:

“Combined taxable income.” For purposes of this section, the combined taxable income of a DISC and its related supplier from a sale of export property is the excess of the gross receipts (as defined in section 993(f))of the DISC from such sale over the total costs of the DISC and related supplier which relate to such gross receipts. Gross receipts from a sale do not include interest with respect to the sale. Combined taxable incomeunder this paragraph shall be determined after taking into account under paragraph (e)(2) of this section all adjustments required by section 482 with respect to transactions to which such section is applicable. In de-termining the gross receipts of the DISC and the total costs of the DISC and related supplier which relate to such gross receipts, the following rules shall be applied:

“(i) Subject to subdivisions (ii) through (v) of this subparagraph, the taxpayer’s method of accounting used in computing taxable income will be accepted for purposes of determining amounts and the taxable year forwhich items of income and expense (including depreciation) are taken into account. See Sec. 1.991–1(b)(2) with respect to the method of accounting which may be used by a DISC.”

13 In support of its argument that Secs. 1.994–1(c) and 1.861–8(e)(3) conflict, Boeing also points to various proposed regulations, including example 1 of proposed regulation Sec. 1.861–8(g). See Brief for Petitioners22–26. Unlike Boeing and the dissent, See post at 2–3, we find these proposed regulations to be of little consequence given that they were nothing more than mere proposals. In 1972 — when regulations governingDISCs were first proposed — the Secretary made clear that the proposed regulations were suggestions only and that whatever final regulations were ultimately adopted would govern. See Technical Memorandum ac-companying Notice of Proposed Rulemaking, 1972 T. M. Lexis 14, pp. *8–*9 (June 29, 1972) (providing that in determining deductible expenses, “the rules of section 861(b) and Sec. 1.861–8 are to be applied in what-ever form they ultimately take in a new notice to be prepared”).

2003–19 I.R.B. 873 May 12, 2003

ling, and costs deductible in a taxable yearshall be allocated and apportioned to theitems or classes of gross income of suchtaxable year resulting from such group-ing.” The regulation makes clear that if thetaxpayer selects the CTI method of trans-fer pricing (as Boeing did), then the tax-payer may choose to group export receiptsaccording to product lines, two-digit SICcodes, or on a transaction-by-transaction ba-sis. Ibid. The regulation also establishes thatthere shall be an allocation and apportion-ment of all relevant costs deducted in thetaxable year. Ibid. Notably, however, theregulation simply does not speak to howcosts should be allocated among differentitems or classes of gross income and ap-portioned between the DISC and its par-ent once the taxpayer (pursuant to Sec.1.994–1(c)(6)) groups its gross receipts.Treasury Regulation Sec. 1.861–8(e)(3) fillsthis gap by providing that R&D expendi-tures that are related to all income reason-ably connected with the taxpayer’s relevanttwo-digit SIC category or categories are “al-locable to all items of gross income as aclass . . . related to such product category(or categories).” 26 CFR Sec. 1.861–8(e)(3)(1979) (emphasis added).

IV

Boeing also relies heavily on legisla-tive history, particularly on statements inReports prepared by the tax-writing com-mittees of the House and the Senate on theDISC statute. Those Reports are virtuallyidentical in terms of their discussion of theDISC provisions. See H.R. Rep. at 58–95; S. Rep. at 90–129. Neither says any-thing about R&D costs. They both containstatements supporting the proposition thatin determining how to calculate income thatqualifies for a tax benefit, the expenses tobe deducted from gross income are thoseexpenses that are “directly related” to theincome. See H.R. Rep., at 74, S. Rep., at107. Those statements are not, however, in-consistent with the proposition that par-ticular R&D expenses may be factuallyrelated to more than one item of income,or with the proposition that the Secretaryhas broad authority to promulgate regula-

tions determining which expenses are di-rectly or indirectly related to particular itemsof income.

If anything, what little relevant legisla-tive history there is in this suit weighs infavor of the Government’s position in twoimportant respects. First, whereas the DISCtransfer price could be set at a level that at-tributed over half of the CTI to the DISC,when Congress enacted the FSC provi-sions in 1984, it lowered the maximum al-lowable share of CTI attributable to an FSCto 23 percent. Compare 26 U.S.C. Sec.994(a)(2) with 26 U.S.C. Sec. 925(a)(2)(1988 ed.). This dramatizes the point thateven though the purpose of the DISC andFSC statutes was to provide American firmswith a tax incentive to increase their ex-ports, Congress did not intend to grant “un-due tax advantages” to firms. S. Rep., at 13.Rather, the statutory formulas were de-signed to place ceilings on the amount ofthose special tax benefits. See CommitteePrint 636 (“[T]he income of the foreignsales corporation must be determined ac-cording to transfer prices specified in thebill: either actual prices for sales betweenunrelated, independent parties or, if the salesare between related parties, formula priceswhich are intended to comply with GATT’srequirement of arm’s-length prices”).

Second, the 1977 R&D regulation at is-sue in this suit had been in effect for sevenyears when Congress enacted the FSC pro-visions. Yet Congress did not legislativelyoverride 26 CFR Sec. 1.861–8(e)(3) (1979)in enacting the FSC provisions. In fact, al-though a moratorium was placed on the ap-plication of Sec. 1.861–8(e)(3) for purposesof the sourcing of income in 1981,14 a 1984conference agreement specified that themoratorium would “not apply for other pur-poses, such as the computation of com-bined taxable income of a DISC (or FSC)and its related supplier.” H.R. Conf. Rep.No. 98–861, p. 1263 (1984). The fact thatCongress did not legislatively override 26CFR Sec. 1.861–8(e)(3) (1979) in enact-ing the FSC provisions in 1984 serves aspersuasive evidence that Congress regardedthat regulation as a correct implementa-tion of its intent. See Lorillard v. Pons, 434U.S. 575, 580–581 (1978).

The judgment of the Court of Appealsis affirmed.

It is so ordered.


Nos. 01–1209 and 01–1382

THE BOEING COMPANY ANDCONSOLIDATED

SUBSIDIARIES PETITIONERS v.UNITED STATES — 01–1209

UNITED STATES PETITIONER v.BOEING SALES CORPORATION

ET AL. — 01–1382

ON WRITS OF CERTIORARITO THE UNITED STATES

COURT OF APPEALSFOR THE NINTH CIRCUIT

JUSTICE THOMAS, with whom JUS-TICE SCALIA joins, dissenting.

Before placing its hand in the taxpay-er’s pocket, the Government must place itsfinger on the law authorizing its action.United Dominion Industries, Inc. v.United States, 532 U.S. 822, 839 (2001)(THOMAS, J., concurring) (citingLeavell v. Blades, 237 Mo. 695, 700–701,141 S.W. 893, 894 (1911)). Despite theGovernment’s failure to do so here, theCourt holds in its favor; I respectfully dis-sent.

To read the majority opinion, one wouldthink that the Court has before it a per-fectly clear statutory and regulatory schemeand that the position of petitioners/cross-respondents (hereinafter Boeing) is ut-terly without support. Nothing could befurther from the facts of this suit. Indeed,the Internal Revenue Service (IRS) itself ini-tially read the statutory and regulatory pro-visions at issue here to permit preciselywhat Boeing asserts it is allowed to do.1

When regulations governing DISCs werefirst proposed in 1972, the IRS receivedpublic comments recommending that theregulations be amplified to include rules andexamples on how expenses should betreated for purposes of determining the com-bined taxable income of the DISC and a re-lated supplier. The IRS, however, declinedto incorporate the recommendations in the

14 In 1981, Congress imposed a temporary moratorium on the application of the cost allocation rules of 26 CFR Sec. 1.861–8(e)(3) (1979) solely for the geographic sourcing of income. See Economic Recovery Tax Actof 1981, Pub. L. 97–34, Sec. 223, 95 Stat. 249. As a result, research expenditures made for research conducted in the United States were allocated against United States source gross income only — not between UnitedStates source income and foreign source income. See H.R. Conf. Rep. No. 98–861, p. 1262 (1984).

1 Because, as the Court notes, ante at 4, differences in the rules governing domestic international sales corporations (DISCs) and foreign sales corporations do not affect the outcome of this suit, I too focus only on therelevant DISC provisions.

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final regulations, explaining that proposedregulation Sec. 1.861–8, which had beenpublished in 1973, provided ample guid-ance on the subject. Technical Memoran-dum accompanying T.D. 7364, 1974, T. M.Lexis 30, pp. *20–21 (Oct. 29, 1974).

Proposed regulation Sec. 1.861–8(e)(3),in turn, explained that where “research anddevelopment . . . is intended or is reason-ably expected to result in the improve-ment of specific properties or processes,deductions in connection with such re-search and development shall be consid-ered definitely related and thereforeallocable to the class of gross income towhich the properties or processes give riseor are reasonably expected to give rise.” 38Fed. Reg. 15843 (1973). The regulationswent on to note that in “other cases, as inthe case of most basic research, research anddevelopment shall generally be consid-ered definitely related and therefore allo-cable to all gross income of the currenttaxable year which is likely to benefit fromthe research and development.”

Ibid. Example 1 in Sec. 1.8618(g) il-lustrated this principle by considering theresearch and development (R&D) expen-ditures of a corporation manufacturing four-,six-, and eight-cylinder gasoline engines.The corporation conducted both general andengine-specific research. The example madeclear that, while general R&D expenseswere “definitely related” to gross incomeresulting from sales of all three types of en-gines, R&D expenses in connection with aspecific type of engine were to be allo-cated only to gross income arising fromsales of that type of engine. Id., at 15846(“X’s deductions for its research and de-velopment expenses in connection with the4 cylinder engine are definitely related tothe gross income to which the 4 cylinderengine gives rise, i.e., gross income fromthe sales of 4 cylinder engines . . . ”).

Indeed, the IRS’ 1974 position on theproper allocation of R&D expenses in-curred in connection with separate lines ofproducts is the only one that makes senseunder the relevant DISC regulations. See,e.g., 26 CFR Secs. 1.994–1(c)(6), (7)(1979). As the Court explains, ante, at 2,26 U.S.C. Sec. 994 was designed to pro-

vide special tax treatment for Americancompanies engaged in export activities. Tothat end, Sec. 994 permits a DISC and itsrelated supplier to compute their relevanttransfer price (and, relatedly, their incometax liability) based on one of three meth-ods. See Sec. 994 (providing that the trans-fer price for sales between a DISC and arelated supplier can be computed based on(1) the gross income method, (2) the com-bined taxable income method, and (3) theusual transfer-pricing rules set forth in Sec.482).

The Treasury Department has promul-gated regulations explaining how the statu-tory framework must be applied. Section1.994–1(c)(7) of those regulations explainsthat, as a general rule, a determination ofthe transfer price under Sec. 994 is to bemade on a transaction-by-transaction ba-sis. Section 1.994–1(c)(7), however, pro-vides that, instead of following thetransaction-by-transaction rule, taxpayersmay make Sec. 994 transfer price deter-minations based on groups consisting ofproducts or product lines. Sec. 1.994–1(c)(7)(i). Specifically, the regulation statesthat

“A determination by a taxpayer as to aproduct or a product line will be ac-cepted by a district director if such de-termination conforms to any one of thefollowing standards: (a) A recognized in-dustry or trade usage, or (b) the 2-digitmajor groups (or any inferior classifi-cations or combinations thereof, withina major group) of the Standard Indus-trial Classification [SIC] as prepared bythe [Office of Management and Bud-get].” Sec. 1.994–1(c)(7)(ii).

Section 1.994–1(c)(6)(iv), in turn, pro-vides that, in connection with the compu-tation of combined taxable income, “[t]hetaxpayer’s choice in accordance with [Sec.1.994–1(c)(7)] as to the grouping of trans-actions shall be controlling, and costs de-ductible in a taxable year shall be allocatedand apportioned to the items or classes ofgross income of such taxable year result-ing from such grouping.” (Emphasis added.)Thus, in tandem, Secs. 1.994–1(c)(6)(iv) and1.994–1(c)(7) give a taxpayer the choice ofallocating and apportioning costs to items

or classes of gross income resulting from(1) case-by-case transactions, (2) prod-ucts or product lines grouped together basedon industry or trade usage, and (3) prod-ucts or product lines grouped together basedon 2-digit SIC codes or lesser included sub-groups.

Although under Sec. 1.991–1(c)(7) tax-payers are given three choices with re-spect to the proper grouping of exportincome (and the related allocation of ex-penses), and although Sec. 1.994–1(c)(6)(iv)provides that the taxpayer’s selection un-der Sec. 1.991–1(c)(7) shall be “control-ling,” Sec. 1.861–8(e)(3) takes away thevery choices Sec. 1.991–1 provides. Un-der Sec. 1.861–8(e)(3), the taxpayer is toldthat R&D expenses may be allocated solelyto items or classes of gross income result-ing from products that are within the same2-digit SIC group — which happens to beonly one of the three options given underSec. 1.991–1(c)(7). In my view, the rule setforth in Sec. 1.861–8(e)(3) entirely evis-cerates the options given in Sec. 1.991–1.Thus, despite the Court’s efforts to showthat the two regulations complement, ratherthan contradict, each other, ante, at 15–17, the conflict is irreconcilable.2 On thesefacts, a taxpayer should be permitted tocompute its tax liability under Sec. 1.991–1,rather than under Sec. 1.861–8(e)(3), basedon the principle that a specific rule gov-erns a general one.3 See Morales v. TransWorld Airlines, Inc., 504 U.S. 374, 384(1992); Crawford Fitting Co. v. J. T.Gibbons, Inc., 482 U.S. 437, 445 (1987);see also St. Jude Medical, Inc. v. Commis-sioner, 34 F.3d 1394 (CA8 1994).

The Court disapproves of Boeing’smethod of allocating R&D because, as theCourt sees it, Boeing’s approach results inthe “disappear[ance]” of relevant costs, ante,at 6, in “the sense that [R&D costs] werenot accounted for by Boeing in comput-ing its [combined taxable income],” ante,at 7, n. 10. The Court is troubled by the factthat this computation method has enabledBoeing “to deduct some $1.75 billion of ex-penditures from its domestic taxable earn-ings under 26 U.S.C. Sec. 174 and neverdeduct a penny of those expenditures fromits ‘combined taxable earnings’ under the

2 A taxpayer wishing to (1) group its sales based on an accepted industry practice, for example based on different models, and (2) allocate its R&D expenses with respect to a specific model to the items or classes ofgross income resulting from that model is not, on the Government’s view, permitted to do so. Rather, the taxpayer must first allocate R&D expenses incurred in connection with the relevant model to items or classes ofgross income resulting from all models falling within the same 2-digit SIC group and only after doing so can the taxpayer deduct a portion of that model’s R&D expenses from the income earned by sales of that model.

3 With respect to a DISC, Sec. 1.991–1 provides the more specific rules because it applies only to DISCs, while Sec. 1.861–8(e)(3) sets forth more general rules because it applies to all taxpayers that have foreign sourceincome.

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DISC statute.” Ante, at 11–12. But the “dis-appearance” of Boeing’s R&D expenses isthe direct result of Congress’ decision to en-courage such expenditures by making themimmediately deductible under 26 U.S.C.Sec. 174(a)(1). Moreover, the approachadopted in the regulations, and approved bythe Court, does not remedy the allegedproblem of disappearing R&D expenses. Acompany that decides to enter the exportmarket with a product unrelated to its ex-isting business remains free to deduct in thecurrent tax period all R&D expenses in-curred in connection with the new prod-uct, even though those expenses would notbe used to offset DISC income resultingfrom the sale of existing products.4 Fi-nally, neither the Court nor the Govern-ment provide a satisfactory explanation forwhy Sec. 861 can be read to permit the“disappearance” of most expenses, see, e.g.,26 CFR Sec. 1.861–8(d)(1) (1979) (“Eachdeduction which bears a definite relation-ship to a class of gross income shall be al-located to that class . . . even though, forthe taxable year, no gross income in suchclass is received or accrued. . . . In appor-tioning deductions, it may be that, for thetaxable year, there is no gross income in thestatutory grouping (or residual grouping),or that deductions exceed the amount ofgross income in the statutory grouping(or residual grouping)”); see also 1 J.Isenbergh, International Taxation: U.S. Taxa-tion of Foreign Persons and Foreign In-come ¶21.10 (3d ed. 2003) (“[I]f an expenseincurred in one year is properly allocableto income arising in another, the expensewill be allocated to the class to which theincome belongs and may therefore pro-duce a loss in that class for the year”), butto disallow the “disappearance” of R&D ex-penses.

Because I believe that Sec. 1.861–8(e)(3)does not apply to a DISC, I need not de-cide here whether Sec. 1.861–8(e)(3) is con-sistent with the text of Sec. 861(b) and maybe properly applied in other contexts. I am

puzzled, however, by the Court’s asser-tion that the Secretary is free to deter-mine that certain expenses “can be properlyapportioned on a categorical basis,” ante,at 13, and the implication that the Secre-tary has authority to require “ratable ap-portionment of expenses that could be, butperhaps in fairness should not be, treatedas direct costs.” Ibid. By its terms, Sec.861(b) appears to contemplate two types ofexpenses: (1) those that can definitely beallocated to some item or class of gross in-come and (2) those that cannot. 26 U.S.C.Sec. 861(b) (providing for the deduction of“the expenses, losses, and other deduc-tions properly apportioned or allocatedthereto and a ratable part of any expenses,losses, or other deductions which cannotdefinitely be allocated to some item or classof gross income” (emphasis added)). More-over, on its face, the statute does not ap-pear to permit expenses to be “deemed”related to an item or class of gross in-come, even though in actual fact they arenot so related. Yet, Sec. 1.861–8(e)(3) re-lies on the notion of “deemed relation-ships.” The regulation states that themethods of allocation and apportionment es-tablished there “recognize that research anddevelopment is an inherently speculative ac-tivity, that findings may contribute unex-pected benefits, and that the gross incomederived from successful research and de-velopment must bear the cost of unsuc-cessful research and development. 26 CFRSec. 1.861–8(e)(3)(i)(A) (1979). The regu-lation then proceeds to require the alloca-tion of R&D expenses based on 2-digit SICgroups. But neither the regulation nor theCourt attempt to reconcile the statutory textwith the regulation’s determination to al-locate certain R&D expenses to items orclasses of gross income that admittedly didnot benefit from that research.

* * * *In short, I conclude that Boeing prop-

erly computed its tax liability for the yearsat issue here. I would therefore reverse the

judgment of the Court of Appeals. Be-cause the Court concludes otherwise, I re-spectfully dissent.

Section 1274.—Determination of Issue Pricein the Case of Certain DebtInstruments Issued forProperty

(Also Sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates;adjusted federal long-term rate and thelong-term exempt rate. For purposes ofsections 382, 1274, 1288, and other sec-tions of the Code, tables set forth the ratesfor May 2003.

Rev. Rul. 2003–45

This revenue ruling provides various pre-scribed rates for federal income tax pur-poses for May 2003 (the current month).Table 1 contains the short-term, mid-term,and long-term applicable federal rates(AFR) for the current month for purposesof section 1274(d) of the Internal Rev-enue Code. Table 2 contains the short-term, mid-term, and long-term adjustedapplicable federal rates (adjusted AFR) forthe current month for purposes of section1288(b). Table 3 sets forth the adjusted fed-eral long-term rate and the long-term tax-exempt rate described in section 382(f).Table 4 contains the appropriate percent-ages for determining the low-income hous-ing credit described in section 42(b)(2) forbuildings placed in service during the cur-rent month. Finally, Table 5 contains thefederal rate for determining the presentvalue of annuity, an interest for life or fora term of years, or a remainder or a rever-sionary interest for purposes of section7520.

4 Boeing illustrates this point with the following example: Suppose a company that produces and exports athletic clothing (SIC Code 23) decides to invest the proceeds of its clothing sales in research to develop a lineof athletic equipment (SIC Code 39). The company has current DISC sales of $1 million from the athletic clothing, no current sales of athletic equipment, and $500,000 in athletic equipment R&D expenses. Under theregulations, the $500,000 of equipment-related R&D will be allocated to the athletic equipment SIC Code, which has no income. It will not be allocated to the athletic clothing SIC Code to reduce the income eligiblefor the DISC benefit related to the clothing. Thus, in the words of the Court, the expense will simply “disappear.” Brief for Petitioners 37, n. 17.

May 12, 2003 876 2003–19 I.R.B.

REV. RUL. 2003–45 TABLE 1

Applicable Federal Rates (AFR) for May 2003

Period for Compounding

Annual Semiannual Quarterly MonthlyShort-Term

AFR 1.53% 1.52% 1.52% 1.52%110% AFR 1.68% 1.67% 1.67% 1.66%120% AFR 1.83% 1.82% 1.82% 1.81%130% AFR 1.99% 1.98% 1.98% 1.97%

Mid-TermAFR 3.17% 3.15% 3.14% 3.13%

110% AFR 3.50% 3.47% 3.46% 3.45%120% AFR 3.82% 3.78% 3.76% 3.75%130% AFR 4.14% 4.10% 4.08% 4.07%150% AFR 4.79% 4.73% 4.70% 4.68%175% AFR 5.59% 5.51% 5.47% 5.45%

Long-TermAFR 4.79% 4.73% 4.70% 4.68%

110% AFR 5.27% 5.20% 5.17% 5.14%120% AFR 5.76% 5.68% 5.64% 5.61%130% AFR 6.24% 6.15% 6.10% 6.07%


Adjusted AFR for May 2003

Period for Compounding

Annual Semiannual Quarterly MonthlyShort-termadjusted AFR 1.34% 1.34% 1.34% 1.34%

Mid-termadjusted AFR 2.72% 2.70% 2.69% 2.68%

Long-termadjusted AFR 4.45% 4.40% 4.38% 4.36%


Rates Under Section 382 for May 2003

Adjusted federal long-term rate for the current month 4.45%

Long-term tax-exempt rate for ownership changes during the current month (the highestof the adjusted federal long-term rates for the current month and the prior two months.)

4.58%

2003–19 I.R.B. 877 May 12, 2003


Appropriate Percentages Under Section 42(b)(2) for May 2003

Appropriate percentage for the 70% present value low-income housing credit 7.92%

Appropriate percentage for the 30% present value low-income housing credit 3.40%


Rate Under Section 7520 for May 2003

Applicable federal rate for determining the present value of an annuity, an interest for life or a termof years, or a remainder or reversionary interest

3.8%

Section 1288.—Treatment ofOriginal Issue Discounts onTax-Exempt Obligations


Section 3121.—Definitions

Federal Insurance Contributions Act(FICA); Medicare. This ruling providesthat for the continuing employment excep-tion to the Medicare portion of the Fed-eral Insurance Contributions Act tax toapply to service performed by an employeeof a state, political subdivision, or instru-mentality thereof, such employee must bea member of a retirement system pursu-ant to Internal Revenue Code section3121(b)(7)(F). Rev. Ruls. 86–88 and 88–36supplemented.

Rev. Rul. 2003–46The Federal Insurance Contributions Act

(FICA) tax consists of an old age, survi-vors, and disability insurance (“OASDI”)portion and a hospital insurance (“Medi-care”) portion. This revenue ruling pro-vides guidance concerning the applicabilityof the Medicare portion of FICA tax un-der Internal Revenue Code § 3121(u)(2) toemployees of state and local governments.Specifically, this revenue ruling considersthe interaction between §§ 3121(u)(2)(C)and 3121(b)(7)(F) in the context of the con-tinuing employment exception. Section3121(u)(2) generally extends the Medi-

care portion of FICA tax to wages for ser-vice performed by employees of states,political subdivisions, and wholly owned in-strumentalities thereof hired after March 31,1986. Section 3121(b)(7)(F), enacted by sec-tion 11332(b) of the Omnibus Budget Rec-onciliation Act of 1990 (OBRA ’90), Pub.L. 101–508, 104 Stat. 1388, expands thedefinition of employment for FICA tax pur-poses to include service performed after July1, 1991, by state or local government em-ployees who are not members of a retire-ment system.

This revenue ruling supplements Rev.Rul. 86–88, 1986–2 C.B. 172, and Rev. Rul.88–36, 1988–1 C.B. 343, both of whichprovide guidelines concerning the applica-tion of § 3121(u)(2) in a question and an-swer format. This revenue ruling alsoprovides guidelines in a question and an-swer format. In this revenue ruling, theterms “state,” “political subdivision,” “stateemployer,” “political subdivision employer,”and “continuing employment exception”have the same meanings as in Rev. Rul. 86–88.

SERVICE ELIGIBLE FOR THECONTINUING EMPLOYMENTEXCEPTION

Q1. Is the continuing employment ex-ception to the Medicare portion of FICA taxavailable for service performed by an em-ployee for a state employer or political sub-division employer who is not a member ofa retirement system within the meaning of§ 3121(b)(7)(F)?

A1. No. Under § 3121(u)(2)(C)(i), thecontinuing employment exception appliesonly to service that is otherwise excluded

from employment under § 3121(b)(7). Sec-tion 3121(b)(7) excepts from employmentservice in the employ of a state employeror political subdivision employer for FICAtax purposes. However, § 3121(b)(7)(F) ex-pands the definition of employment forFICA tax purposes to include service by anemployee who is not a member of a re-tirement system. See § 31.3121(b)(7)–2 ofthe Employment Tax Regulations. TheHouse-Senate Conference Report to OBRA’90 provides that “[t]he conference agree-ment extends Medicare coverage to, and ap-plies the HI [(Medicare)] tax with respectto wages of, those employees (otherwise notalready subject to the HI tax) who becomesubject to OASDI by reason of this provi-sion.” H.R. Rep. No. 101–964, at 1105(1990). Consequently, wages paid for ser-vice performed by an employee who is nota member of a retirement system for thestate employer or political subdivision em-ployer are subject to the OASDI and Medi-care portions of FICA tax regardless ofwhen the employee became employed.

Q2. Is the continuing employment ex-ception available for service performed byan employee for a state employer or po-litical subdivision employer who is sub-ject to the Medicare portion of FICA taxsolely because the employee is not a mem-ber of a retirement system (i.e., the em-ployee meets all the requirements of§ 3121(u)(2)(C), and the employee’s ser-vice is not covered by a voluntary agree-ment with the Secretary of Health andHuman Services pursuant to § 218 of theSocial Security Act, 42 U.S.C. § 418), butwho becomes a member of a retirement sys-tem after July 1, 1991?

May 12, 2003 878 2003–19 I.R.B.

A2. Yes. If an employee’s wages aresubject to FICA tax solely because the em-ployee is not a member of a retirement sys-tem within the meaning of § 3121(b)(7)(F),and the employee subsequently becomes amember of a retirement system, then theemployee’s wages will cease to be sub-ject to the OASDI and Medicare portionsof FICA tax.

EFFECT ON OTHER REVENUERULINGS:

This revenue ruling supplements Rev.Rul. 86–88, 1986–2 C.B. 172, and Rev. Rul.88–36, 1988–1 C.B. 343.


The principal author of this revenue rul-ing is Patricia P. Holdsworth of the Of-fice of the Division Counsel/Associate ChiefCounsel (Tax Exempt and Government En-tities). For further information regarding thisrevenue ruling, contact Ms. Holdsworth at(202) 622–6040 (not a toll-free call).

Section 4980F.—Failure ofApplicable Plans ReducingBenefit Accruals to SatisfyNotice Requirements

26 CFR 54.4980F–1: Notice requirements forcertain pension plan amendments significantlyreducing the rate of future benefit accrual.

T.D. 9052

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1, 54, and 602

Notice of SignificantReduction in the Rate ofFuture Benefit Accrual

AGENCY: Internal Revenue Service (IRS),Treasury.

ACTION: Final regulations.

SUMMARY:This document contains fi-nal regulations providing guidance on thenotification requirements under section4980F of the Internal Revenue Code (Code)and section 204(h) of the Employee Re-tirement Income Security Act of 1974

(ERISA). Under these final regulations, aplan administrator must give notice of aplan amendment to certain plan partici-pants and beneficiaries when the planamendment provides for a significant re-duction in the rate of future benefit ac-crual or the elimination or significantreduction in an early retirement benefit orretirement-type subsidy. These final regu-lations affect retirement plan sponsors andadministrators, participants in and benefi-ciaries of retirement plans, and employeeorganizations representing retirement planparticipants.

DATES: Effective date: These regulationsare effective on April 9, 2003.

Applicability date: For dates of appli-cability of these regulations, see§54.4980F–1, Q&A–18, of these regula-tions.

FOR FURTHER INFORMATION CON-TACT: Pamela R. Kinard at (202) 622–6060 or Diane S. Bloom at (202) 283–9888 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information containedin these final regulations has been reviewedand approved by the Office of Manage-ment and Budget in accordance with the Pa-perwork Reduction Act (44 U.S.C. 3507)under control number 1545–1780. Re-sponses to this collection of information arerequired to obtain a benefit for a taxpayerwho wants to amend a plan with an amend-ment that significantly reduces the rate offuture benefit accrual or eliminates or sig-nificantly reduces an early retirement ben-efit or retirement-type subsidy.

An agency may not conduct or spon-sor, and a person is not required to re-spond to, a collection of information unlessthe collection of information displays a validcontrol number assigned by the Office ofManagement and Budget.

The estimated annual burden per re-spondent varies from 1 hour to 80 hours,depending on individual circumstances, withan estimated average of 10 hours.

Comments concerning the accuracy ofthis burden estimate and suggestions for re-ducing this burden should be sent to the In-ternal Revenue Service, Attn: IRS ReportsClearance Officer, W:CAR:MP:T:T:SP,Washington, DC 20224, and to the Of-

fice of Management and Budget, Attn:Desk Officer for the Department of theTreasury, Office of Information and Regu-latory Affairs, Washington, DC 20503.

Books or records relating to this collec-tion of information must be retained as longas their contents may become material inthe administration of any internal revenuelaw. Generally, tax returns and tax returninformation are confidential, as required by26 U.S.C. 6103.

Background

This document contains amendments to26 CFR parts 1, 54, and 602 under sec-tion 4980F of the Code and section 204(h)of ERISA. Prior to 2001, section 204(h) ofERISA had no analogous section in theCode, but pursuant to section 101(a) of theReorganization Plan No. 4 of 1978, 29U.S.C. 1001nt, the Secretary of the Trea-sury has authority to issue regulations un-der parts 2 and 3 of subtitle B of title I ofERISA, including section 204(h) of ERISA.Under section 104 of the ReorganizationPlan No. 4, the Secretary of Labor retainsenforcement authority with respect to parts2 and 3 of subtitle B of title 1 of ERISA,but, in exercising that authority, is boundby the regulations issued by the Secretaryof Treasury. On December 15, 1995, tem-porary regulations (T.D. 8631, 1996–1 C.B.54 [60 FR 64320]), under section 411(d)(6)of the Code were published in the Fed-eral Register, providing guidance on sec-tion 204(h) of ERISA. A notice of proposedrulemaking (EE–34–95, 1996–1 C.B. 761[60 FR 64401]), cross-referencing the tem-porary regulations was published in theFederal Register on the same day. On De-cember 14, 1998, final regulations (T.D.8795, 1999–1 C.B. 459 [63 FR 68678]) ad-dressing the notice requirements under sec-tion 204(h) of ERISA were published in theFederal Register and were codified in§1.411(d)–6. The final regulations in thisTreasury decision remove Treasury regu-lation §1.411(d)–6.

Section 659 of the Economic Growthand Tax Relief Reconciliation Act of 2001,Public Law 107–16 (115 Stat. 38)(EGTRRA) added section 4980F of theCode. Section 4980F imposes an excise taxwhen a plan administrator fails to pro-vide timely notice of plan amendments thatprovide for a significant reduction in the rateof future benefit accrual. A reduction of anearly retirement benefit or a retirement-type subsidy is also treated, for purposes of

2003–19 I.R.B. 879 May 12, 2003

section 4980F of the Code, as a reductionin the rate of future benefit accrual. Sec-tion 659(b) of EGTRRA also amended sec-tion 204(h) of ERISA to treat theelimination of an early retirement benefitor a retirement-type subsidy as a reduc-tion in the rate of future benefit accrual. TheJob Creation and Worker Assistance Act of2002, Public Law 107–147 (116 Stat. 21)included certain technical corrections to sec-tion 659 of EGTRRA.

On April 23, 2002, proposed regula-tions (REG–136193–01, 2002–1 C.B. 995[67 FR 19713]) under section 4980F of theCode and section 204(h) of ERISA werepublished in the Federal Register. On Au-gust 15, 2002, the IRS held a public hear-ing on the proposed regulations. Writtencomments responding to the notice of pro-posed rulemaking were also received. Af-ter consideration of all the comments, theproposed regulations are adopted, asamended by this Treasury decision, and theregulations under §1.411(d)–6 are removed.The revisions are discussed below.

The regulations retain the overall struc-ture of the proposed regulations and, likethe proposed regulations, include a num-ber of examples illustrating applicable rules.Some of the examples show the informa-tion required to be furnished in a section204(h) notice, both as to amendments thatresult in a simple reduction in the future rateof benefit accrual and as to those that re-sult in more complex reductions. The mostcomplex are examples in which a definedbenefit plan is amended to change prospec-tively the plan’s benefit accrual formulafrom a traditional formula to a formula thatbases future benefits on an account bal-ance — commonly called a conversion toa cash balance pension plan — with the re-sult that, for purposes of the notice require-ments of section 4980F and section 204(h),the future rate of benefit accrual may be re-duced for some participants and increasedfor others, including a separate but simi-larly complex effect on future early retire-ment benefits.

None of the examples illustrates rules inany other regulation or positions of Trea-sury or the IRS regarding provisions of theInternal Revenue Code other than the no-tice requirements of section 4980F and sec-tion 204(h). Thus, the examples do notindicate any possible outcome regardingproposed regulations that were published inthe Federal Register (67 FR 76123) on De-

cember 11, 2002, relating to sections411(b)(1)(H) and 411(b)(2) of the Inter-nal Revenue Code, which require that ac-cruals or allocations under certain retirementplans not cease or be reduced because ofthe attainment of any age. Specifically, Trea-sury and the IRS are still considering com-ments received in connection with thoseproposed regulations, including commentsrelating to cash balance pension plans, andwill only address the application of sec-tion 411(b)(1)(H) to cash balance plans aspart of the process to issue regulations un-der sections 411(b)(1)(H).

Explanation of Revisions and Sum-mary of Comments

A. Overview

Section 4980F of the Code and sec-tion 204(h) of ERISA require notice of anamendment to an applicable pension planthat either provides for a significant reduc-tion in the rate of future benefit accrual oreliminates or significantly reduces an earlyretirement benefit or retirement-type sub-sidy. An applicable pension plan is a de-fined benefit plan and any individualaccount plan that is subject to the fund-ing requirements of section 412 of the Code.The notice is required to be provided to par-ticipants and alternate payees for whom theamendment is reasonably expected to re-duce significantly the rate of future ben-efit accrual and to employee organizationsrepresenting those participants. The stat-ute generally requires the plan administra-tor to provide the notice within a reasonabletime before the effective date of the planamendment.

A plan amendment that is subject to thenotice requirements of section 4980F of theCode and section 204(h) of ERISA (sec-tion 204(h) amendment) may be subject toadditional reporting and disclosure require-ments under title I of ERISA, such as therequirement to provide a summary of ma-terial modifications (SMM) describing theamendment. Notice under section 4980F ofthe Code and section 204(h) of ERISA (sec-tion 204(h) notice) must be provided in ac-cordance with the provisions of theseregulations even though sections 102(a) and104(b) of ERISA also may require that anSMM describing the plan amendment befurnished to participants covered under theplan and beneficiaries receiving benefits un-der the plan. The Department of Labor hasadvised the IRS that a plan administrator

who provides a section 204(h) notice to ap-plicable individuals in accordance with thisfinal rule will be treated as having fur-nished those individuals with an SMM re-garding the section 204(h) amendment. TheDepartment of Labor has also advised theIRS that furnishing the notice to the lastknown address of an individual would besufficient for this purpose where the planutilizes a method of delivery described in29 CFR 2520.104b–1 and the fiduciaries ofthe plan have taken reasonable steps to keepplan records up-to-date and to locate lostor missing participants. Finally, the De-partment of Labor noted that the plan ad-ministrator is required to satisfy any otherrequirements regarding the furnishing ofSMMs or updated summary plan descrip-tions, including, for example, satisfactionof the requirement to furnish an SMM toany other participants covered under theplan, and to beneficiaries receiving ben-efits under the plan, who are entitled to anSMM regarding the amendment.

B. Conversion of a Money PurchasePension Plan into an Individual AccountPlan That is Not Subject to Section 412

Rev. Rul. 2002–42, 2002–28 I.R.B. 76,provides that a conversion of a money pur-chase pension plan into a profit-sharing planis considered a significant reduction in therate of future benefit accrual under themoney purchase pension plan, thus requir-ing notice under section 4980F of the Codeand section 204(h) of ERISA. As stated inthe revenue ruling, allocations under theprofit-sharing plan are not benefit accru-als under the money purchase pension planfor purposes of determining whether thereis a reduction in the rate of future benefitaccrual. Accordingly, the final regulationsclarify that a plan amendment to convert amoney purchase pension plan into a profit-sharing or any other individual account planthat is not subject to section 412 of theCode (including a merger, consolidation, ortransfer) is deemed to be a plan amend-ment that provides for a significant reduc-tion in the rate of future benefit accrual forpurposes of section 4980F of the Code andsection 204(h) of ERISA.

C. Rate of Future Benefit AccrualDetermined Annually

A commentator questioned the provi-sions of the proposed regulations underwhich the determination of whether there

May 12, 2003 880 2003–19 I.R.B.

is a reduction in the rate of future benefitaccrual would be based on whether theamendment is reasonably expected to re-duce “the benefits accruing for a year.” Thecommentator objected on the grounds thatthis could require section 204(h) notice foran amendment that increases benefits in oneyear and then reduces them in the next,even though the aggregate benefit over thetwo years might not be reduced or mighteven be increased in the aggregate. The fi-nal regulations retain this rule, but clarifyin an example that where a reduction oc-curs at the same time as an immediate in-crease in accrued benefits such that theparticipant’s aggregate benefit can never beless than what it would have been had theamendment not been adopted, the reduc-tion is not significant.

D. Reduction in the Rate of FutureBenefit Accrual for Individual AccountPlans

A commentator suggested that the regu-lations be revised to clarify that only con-tributions or forfeitures that are allocatedto a participant’s account be considered indetermining whether a plan amendment toan individual account plan reduces the rateof future benefit accrual. The commenta-tor recommended this revision to clarify thatan amendment reducing a contribution for-mula is not considered insignificant solelybecause expected future investment re-turns might offset a portion of the reduc-tion in the contribution formula. Aclarification that reflects this suggestion hasbeen adopted in the final regulations.

E. Determination of ApplicableIndividuals

A commentator suggested that the regu-lations be revised to clarify the date as ofwhich applicable individuals should be iden-tified. The commentator argued that the lackof a clear determination date would makeit difficult, from an administrative stand-point, for plans to identify applicable in-dividuals due to turnover amongparticipants. The final regulations pro-vide that whether a plan participant or analternate payee is an applicable individualis determined on a typical business day thatis reasonably proximate to the time the sec-tion 204(h) notice is provided (or at the lat-est date for providing section 204(h) notice,if earlier), based on all relevant facts andcircumstances. An example to this effect hasbeen added to the final regulations.

F. Definition of Early RetirementBenefits and Retirement-Type Subsidies

A commentator stated that Treasury andIRS should issue regulations defining theterms early retirement benefits andretirement-type subsidies. The commenta-tor noted that there are numerous refer-ences to the terms early retirement benefitor retirement-type subsidy in both the Code(section 4980F(f)(3) and section411(d)(6)(B)(i)), ERISA (sections204(g)(2)(A) and 204(h)(9)) and the regu-lations (§1.411(d)–4 and Proposed§54.4980F–1), but the terms are not de-fined. The commentator expressed con-cern that adverse consequences might resultfrom an egregious failure to identify a sig-nificant reduction in early retirement ben-efit or a retirement-type subsidy andguidance has not been issued to clarify themeaning of those terms. The definitions ofearly retirement benefits and retirement-type subsidies affect more than determin-ing whether an amendment requires asection 204(h) notice and, therefore, are be-yond the scope of these final regulations.Treasury and IRS anticipate issuing pro-posed regulations under section 411(d)(6),including general guidance concerning earlyretirement benefits and retirement-type sub-sidies. Comments regarding the antici-pated proposed regulations were requested,including comments on the guidance thatshould be provided regarding early retire-ment benefits and retirement-type subsi-dies, in Notice 2002–46, 2002–28 I.R.B. 96,and Notice 2003–10, 2003–5 I.R.B. 369.

G. Timing of Notice

A number of comments addressed whatconstitutes a reasonable period for provid-ing a section 204(h) notice. The proposedregulations included a generally appli-cable 45-day advance notice rule with ex-ceptions for amendments in connection withcertain business transactions and smallplans. Some comments recommended thatnotice generally be required to be pro-vided more than 45 days in advance of theeffective date of the section 204(h) amend-ment and others recommended that no-tice generally be allowed to be provided lessthan 45 days in advance of the effectivedate of the section 204(h) amendment. Theapproach in the proposed regulations wasdesigned to strike a balance between pro-viding participants with sufficient time to

understand and consider the information inthe notice and allowing employers to ef-fect changes in their plans for business rea-sons within a reasonable time, and has beenretained in the final regulations.

A commentator requested clarificationthat section 204(h) notice may be pro-vided before the adoption date of theamendment. The commentator noted thatneither section 4980F of the Code nor sec-tion 204(h) of ERISA prevents a plan ad-ministrator from providing section 204(h)notice before the adoption date of theamendment. The regulations have not beenrevised to reflect this suggestion because thestatute is already sufficiently clear that sec-tion 204(h) notice may be provided be-fore the adoption of the amendment.

H. Certification of Accuracy by SeniorOfficer

A commentator suggested that the regu-lations be revised to require that a seniorofficer of the plan sponsor or the plan ad-ministrator certify to employees of the plansponsor and the IRS that the disclosures inthe section 204(h) notice accurately de-scribe the effects of the amendment and thatthe notice is presented in a manner that isunderstandable to the average applicable in-dividual. The commentator also suggestedthat the senior officer should certify that thesection 204(h) notice provided to appli-cable individuals does not contain any falseor misleading information. The commen-tator argued that this certification would notbe burdensome to plan sponsors if they haveexercised due diligence concerning the con-tent of the section 204(h) notice. Becauseof concerns about the usefulness of such arule as well as whether there is statutory au-thority for such a rule, this suggestion hasnot been adopted.

I. Determination and Effects ofEgregious Failures

A commentator suggested that the regu-lations revise the definition of an egre-gious violation to distinguish betweenintentional and negligent acts of failure. Thecommentator stated that it is possible thata trustee or plan sponsor may make a de-cision not to provide section 204(h) no-tice that the trustee or plan sponsor thoughtwas prudent at the time but later deter-mined was a mistake. The commentator ar-gued that these types of decisions, whichmay be negligent but not intentional, should

2003–19 I.R.B. 881 May 12, 2003

not be considered egregious failures. Thecommentator suggested that the final regu-lations be revised to provide that an egre-gious failure is an action resulting from adeliberate choice by the plan sponsor, inwhich the plan sponsor knew or reason-ably should have known that a section204(h) notice would be required. The com-mentator also suggested that the final regu-lations be revised to provide that onlyapplicable individuals who were adverselyaffected by the egregious failure be en-titled to the greater of the old or new ben-efit formulas.

Section 204(h)(6)(B) of ERISA gener-ally defines an egregious failure as a fail-ure within the control of the plan sponsorthat is either an intentional failure or a fail-ure to provide most of the individuals withmost of the information they are entitled toreceive. Further, section 204(h)(6)(A) ofERISA provides that, in the case of anyegregious failure to meet any requirementof section 204(h) with respect to any planamendment, the provisions are applied sothat all applicable individuals are entitledto the greater of the benefits to which theywould have been entitled without regard tothe amendment, or the benefits under theplan with regard to the amendment. Ac-cordingly, these suggestions were notadopted in the final regulations because theywould conflict with the plain language ofsection 204(h) of ERISA.

J. Content of Section 204(h) Notice

Section 4980F of the Code and sec-tion 204(h) of ERISA require that section204(h) notice be written in a manner cal-culated to be understood by the averageplan participant and that it provide suffi-cient information to allow applicable indi-viduals to understand the effect of theamendment. Q&A–11 of these final regu-lations sets forth the content requirementsfor section 204(h) notice. The final regu-lations retain the basic structure of Q&A–11in the proposed regulations, but include anumber of clarifications, including clari-fying that the content must permit the ap-plicable individual to determine theapproximate magnitude of the reduction ap-plicable to that individual. The regula-tions provide that this requirement isdeemed to be satisfied if the notice in-cludes illustrative examples satisfying cer-tain conditions. At the request of acommentator, the final regulations clarifythat individualized benefit statements may

be used in lieu of illustrative examples ifthe statements include the same informa-tion as illustrative examples, such as show-ing the approximate range of the reductionsfor the individual if the reductions vary overtime and identification of the assumptionsused in the projections.

K. Benefit Changes Made by CollectiveBargaining Agreements

A commentator suggested that the fi-nal regulations be revised to distinguish be-tween a reduction in the rate of futurebenefit accrual by collective bargainingagreements and a reduction in the rate offuture benefit accrual by plan amendments.Multiemployer plans often incorporate theprovisions of related collective bargain-ing agreements by reference. The commen-tator argued that when the rate of futurebenefit accrual is being reduced by a changeto a collective bargaining agreement, sec-tion 204(h) notice is not required becausethere is no plan amendment relating to thereduction. The commentator suggested thatthe final regulations include an exampleclarifying that in situations where there isan automatic benefit change that is linkedto a collective bargaining agreement, sec-tion 204(h) notice is not required, or at aminimum that some relief be provided toallow the amendment to go into effectquickly. The IRS and Treasury believe thatwhen a benefit formula in a plan docu-ment incorporates provisions of the col-lective bargaining agreement by reference,those provisions are part of the plan. Ac-cordingly, the final regulations provide arule in Q&A–7(a)(2) that if all or a part ofa plan’s rate of future benefit accrual, or anearly retirement benefit or retirement-typesubsidy provided under the plan, dependson provisions in another document that arereferenced in the plan document, a changein the provisions of the other document isan amendment of the plan. An example il-lustrating this rule has been added to the fi-nal regulations.

The IRS and Treasury recognize thatmultiemployer plans may need additionaltime to comply with the requirements ofQ&A–7(a)(2) of these final regulations,therefore the effective date of this rule hasbeen delayed until January 1, 2004. In ad-dition, because of the special characteris-tics of multiemployer plans (e.g.,participating employers are often small busi-nesses with fewer than 100 employees), the

final regulations provide that, for a multi-employer plan, section 204(h) notice mustbe provided at least 15 days before the ef-fective date of any section 204(h) amend-ment.

Effective Date

Except with respect to Q&A–7(a)(2),these regulations are applicable to amend-ments with an effective date that is on orafter September 1, 2003.

The provisions of Q&A–7(a)(2) of theseregulations are applicable to amendmentswith an effective date that is on or afterJanuary 1, 2004.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It has also been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. chapter 5) does notapply to these regulations.

It is hereby certified that the collec-tion of information in these final regula-tions will not have a significant economicimpact on a substantial number of small en-tities. This certification is based upon thefact that small entities generally do not havevery complex benefit structures in theirplans, or many different classes of partici-pants who will be differently affected by anamendment reducing the rate of future ben-efit accrual. Small entities also have feweremployees, and thus they are required toprovide section 204(h) notice to fewer in-dividuals. Accordingly, the time required forthem to prepare and provide section 204(h)notice will usually be modest. Further-more, because most small entities will onlybe affected when they amend the retire-ment plans they sponsor to reduce or elimi-nate benefits, and most small entities willnot so amend their retirement plans fre-quently, it is generally expected that mostsmall entities would be required to pro-vide section 204(h) notice only once overthe course of several years. Therefore, aRegulatory Flexibility Analysis under theRegulatory Flexibility Act (5 U.S.C. chap-ter 6) is not required.

Pursuant to section 7805(f) of the Code,the notice of proposed rulemaking preced-ing these final regulations was submitted tothe Chief Counsel for Advocacy of the

May 12, 2003 882 2003–19 I.R.B.

Small Business Administration for com-ment on its impact on small business.

Drafting Information

The principal author of these regula-tions is Pamela R. Kinard, Office of Divi-sion Counsel/Associate Chief Counsel (TaxExempt and Government Entities), Inter-nal Revenue Service. However, personnelfrom other offices of the Internal Rev-enue Service and Treasury Department par-ticipated in their development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR parts 1, 54, and602 are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read in part as follows:Authority: 26 U.S.C. 7805 ***

§1.411(d)–6 [Removed]

Par. 2. Section 1.411(d)–6 is removed.

PART 54—PENSION EXCISE TAXES

Par. 3. The authority citation for part 54is amended by adding the following cita-tion in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *Section 54.4980F–1 also issued under 26

U.S.C. 4980F.* * *Par. 4. Section 54.4980F–1 is added to

read as follows:

§54.4980F–1 Notice requirements forcertain pension plan amendmentssignificantly reducing the rate of futurebenefit accrual.

The following questions and answersconcern the notification requirements im-posed by 4980F of the Internal RevenueCode and section 204(h) of ERISA relat-ing to a plan amendment of an applicablepension plan that significantly reduces therate of future benefit accrual or that elimi-nates or significantly reduces an early re-tirement benefit or retirement-type subsidy.

List of Questions

Q–1. What are the notice requirementsof section 4980F(e) of the Internal Rev-enue Code and section 204(h) of ERISA?

Q–2. What are the differences betweensection 4980F and section 204(h)?

Q–3. What is an “applicable pensionplan” to which section 4980F and section204(h) apply?

Q–4. What is “section 204(h) notice” andwhat is a “section 204(h) amendment”?

Q–5. For which amendments is sec-tion 204(h) notice required?

Q–6. What is an amendment that re-duces the rate of future benefit accrual orreduces an early retirement benefit orretirement-type subsidy for purposes of de-termining whether section 204(h) notice isrequired?

Q–7. What plan provisions are taken intoaccount in determining whether an amend-ment is a section 204(h) amendment?

Q–8. What is the basic principle used indetermining whether a reduction in the rateof future benefit accrual or a reduction inan early retirement benefit or retirement-type subsidy is significant for purposes ofsection 4980F and section 204(h)?

Q–9. When must section 204(h) noticebe provided?

Q–10. To whom must section 204(h) no-tice be provided?

Q–11. What information is required tobe provided in a section 204(h) notice?

Q–12. What special rules apply if par-ticipants can choose between the old andnew benefit formulas?

Q–13. How may section 204(h) noticebe provided?

Q–14. What are the consequences if aplan administrator fails to provide section204(h) notice?

Q–15. What are some of the rules thatapply with respect to the excise tax undersection 4980F?

Q–16. How do section 4980F and sec-tion 204(h) apply when a business is sold?

Q–17. How are amendments to cease ac-cruals and terminate a plan treated undersection 4980F and section 204(h)?

Q–18. What are the effective dates ofsection 4980F, section 204(h), as amendedby EGTRRA, and these regulations?

Questions and Answers

Q–1. What are the notice requirementsof section 4980F(e) of the Internal Rev-enue Code and section 204(h) of ERISA?

A–1. (a) Requirements of Internal Rev-enue Code section 4980F(e) and ERISA sec-tion 204(h). Section 4980F of the InternalRevenue Code (section 4980F) and sec-

tion 204(h) of the Employee Retirement In-come Security Act of 1974, as amended(ERISA), 29 U.S.C. 1054(h) (section204(h)) each generally requires notice of anamendment to an applicable pension planthat either provides for a significant reduc-tion in the rate of future benefit accrual orthat eliminates or significantly reduces anearly retirement benefit or retirement-typesubsidy. The notice is required to be pro-vided to plan participants and alternate pay-ees who are applicable individuals (asdefined in Q&A–10 of this section) and tocertain employee organizations. The planadministrator must generally provide the no-tice before the effective date of the planamendment. Q&A–9 of this section setsforth the time frames for providing no-tice, Q&A–11 of this section sets forth thecontent requirements for the notice, andQ&A–12 of this section contains specialrules for cases in which participants canchoose between the old and new benefit for-mulas.

(b) Other notice requirements. Other pro-visions of law may require that certain par-ties be notified of a plan amendment. See,for example, sections 102 and 104 ofERISA, and the regulations thereunder, forrequirements relating to summary plan de-scriptions and summaries of material modi-fications.

Q–2. What are the differences betweensection 4980F and section 204(h)?

A–2. The notice requirements of sec-tion 4980F generally are parallel to the no-tice requirements of section 204(h), asamended by the Economic Growth and TaxRelief Reconciliation Act of 2001, PublicLaw 107–16 (115 Stat. 38) (2001)(EGTRRA). However, the consequences ofthe failure to satisfy the requirements of thetwo provisions differ: section 4980F im-poses an excise tax on a failure to satisfythe notice requirements, while section204(h)(6), as amended by EGTRRA, con-tains a special rule with respect to an egre-gious failure to satisfy the noticerequirements. See Q&A–14 and Q&A–15of this section. Except to the extent spe-cifically indicated, these regulations ap-ply both to section 4980F and to section204(h).

Q–3. What is an “applicable pensionplan” to which section 4980F and section204(h) apply?

A–3. (a) In general. Section 4980F andsection 204(h) apply to an applicable pen-

2003–19 I.R.B. 883 May 12, 2003

sion plan. For purposes of section 4980F,an applicable pension plan means a de-fined benefit plan qualifying under sec-tion 401(a) or 403(a) of the InternalRevenue Code, or an individual accountplan that is subject to the funding stan-dards of section 412 of the Internal Rev-enue Code. For purposes of section 204(h),an applicable pension plan means a de-fined benefit plan that is subject to part 2of subtitle B of title I of ERISA, or an in-dividual account plan that is subject to suchpart 2 and to the funding standards of sec-tion 412 of the Internal Revenue Code. Ac-cordingly, individual account plans that arenot subject to the funding standards of sec-tion 412 of the Internal Revenue Code, suchas profit-sharing and stock bonus plans andcontracts under section 403(b) of the In-ternal Revenue Code, are not applicablepension plans to which section 4980F orsection 204(h) apply. Similarly, a definedbenefit plan that neither qualifies under sec-tion 401(a) or 403(a) of the Internal Rev-enue Code nor is subject to part 2 of subtitleB of title I of ERISA is not an applicablepension plan. Further, neither a govern-mental plan (within the meaning of sec-tion 414(d) of the Internal Revenue Code),nor a church plan (within the meaning ofsection 414(e) of the Internal RevenueCode) with respect to which no election hasbeen made under section 410(d) of the In-ternal Revenue Code is an applicable pen-sion plan.

(b) Section 204(h) notice not required forsmall plans covering no employees. Sec-tion 204(h) notice is not required for a planunder which no employees are partici-pants covered under the plan, as describedin §2510.3–3(b) of the Department of La-bor regulations, and which has fewer than100 participants.

Q–4. What is “section 204(h) notice” andwhat is a “section 204(h) amendment”?

A–4. (a) Section 204(h) notice is no-tice that complies with section 4980F(e) ofthe Internal Revenue Code, section204(h)(1) of ERISA, and this section.

(b) A section 204(h) amendment is anamendment for which section 204(h) no-tice is required under this section.

Q–5. For which amendments is sec-tion 204(h) notice required?

A–5. (a) Significant reduction in the rateof future benefit accrual. Section 204(h) no-tice is required for an amendment to an ap-

plicable pension plan that provides for asignificant reduction in the rate of futurebenefit accrual.

(b) Early retirement benefits andretirement-type subsidies. Section 204(h) no-tice is also required for an amendment toan applicable pension plan that provides forthe significant reduction of an early retire-ment benefit or retirement-type subsidy. Forpurposes of this section, early retirementbenefit and retirement-type subsidy meanearly retirement benefits and retirement-type subsidies within the meaning of sec-tion 411(d)(6)(B)(i).

(c) Elimination or cessation of ben-efits. For purposes of this section, the termsreduce or reduction include eliminate orcease or elimination or cessation.

(d) Delegation of authority to Commis-sioner. The Commissioner may provide inrevenue rulings, notices, or other guid-ance published in the Internal Revenue Bul-letin (see §601.601(d)(2) of this chapter) thatsection 204(h) notice need not be providedfor plan amendments otherwise describedin paragraph (a) or (b) of this Q&A–5 thatthe Commissioner determines to be nec-essary or appropriate, as a result of changesin the law, to maintain compliance with therequirements of the Internal Revenue Code(including requirements for tax qualifica-tion), ERISA, or other applicable federallaw.

Q–6. What is an amendment that re-duces the rate of future benefit accrual orreduces an early retirement benefit orretirement-type subsidy for purposes of de-termining whether section 204(h) notice isrequired?

A–6. (a) In general. For purposes of de-termining whether section 204(h) notice isrequired, an amendment reduces the rate offuture benefit accrual or reduces an earlyretirement benefit or retirement-type sub-sidy only as provided in paragraph (b) or(c) of this Q&A–6.

(b) Reduction in rate of future benefitaccrual—(1) Defined benefit plans. For pur-poses of section 4980F and section 204(h),an amendment to a defined benefit plan re-duces the rate of future benefit accrual onlyif it is reasonably expected that the amend-ment will reduce the amount of the fu-ture annual benefit commencing at normalretirement age (or at actual retirement age,if later) for benefits accruing for a year. Forthis purpose, the annual benefit commenc-ing at normal retirement age is the ben-

efit payable in the form in which the termsof the plan express the accrued benefit (or,in the case of a plan in which the accruedbenefit is not expressed in the form of anannual benefit commencing at normal re-tirement age, the benefit payable in the formof a single life annuity commencing at nor-mal retirement age that is the actuarialequivalent of the accrued benefit expressedunder the terms of the plan, as determinedin accordance with section 411(c)(3) of theInternal Revenue Code).

(2) Individual account plans. For pur-poses of section 4980F and section 204(h),an amendment to an individual account planreduces the rate of future benefit accrualonly if it is reasonably expected that theamendment will reduce the amount of con-tributions or forfeitures allocated for any fu-ture year. Changes in the investments orinvestment options under an individual ac-count plan are not taken into account forthis purpose.

(3) Determination of rate of future ben-efit accrual. The rate of future benefit ac-crual for purposes of this paragraph (b) isdetermined without regard to optional formsof benefit within the meaning of§1.411(d)–4, Q&A–1(b) of this chapter(other than the annual benefit described inparagraph (b)(1) of this Q&A–6). The rateof future benefit accrual is also determinedwithout regard to ancillary benefits andother rights or features as defined in§1.401(a)(4)–4(e) of this chapter.

(c) Reduction of early retirement ben-efits or retirement-type subsidies. For pur-poses of section 4980F and section 204(h),an amendment reduces an early retirementbenefit or retirement-type subsidy only ifit is reasonably expected that the amend-ment will eliminate or reduce an early re-tirement benefit or retirement-type subsidy.

Q–7. What plan provisions are taken intoaccount in determining whether an amend-ment is a section 204(h) amendment?

A–7. (a) Plan provisions taken intoaccount—(1) In general. All plan provi-sions that may affect the rate of future ben-efit accrual, early retirement benefits, orretirement-type subsidies of participants oralternate payees must be taken into ac-count in determining whether an amend-ment is a section 204(h) amendment. Forexample, plan provisions that may affect therate of future benefit accrual include the dol-lar amount or percentage of compensa-tion on which benefit accruals are based;

May 12, 2003 884 2003–19 I.R.B.

the definition of service or compensationtaken into account in determining an em-ployee’s benefit accrual; the method of de-termining average compensation forcalculating benefit accruals; the defini-tion of normal retirement age in a definedbenefit plan; the exclusion of current par-ticipants from future participation; ben-efit offset provisions; minimum benefitprovisions; the formula for determining theamount of contributions and forfeitures al-located to participants’ accounts in an in-dividual account plan; in the case of a planusing permitted disparity under section401(l) of the Internal Revenue Code, theamount of disparity between the excess ben-efit percentage or excess contribution per-centage and the base benefit percentage orbase contribution percentage (all as de-fined in section 401(l) of the Internal Rev-enue Code); and the actuarial assumptionsused to determine contributions under a tar-get benefit plan (as defined in §1.401(a)(4)–8(b)(3)(i) of this chapter). Plan provisionsthat may affect early retirement benefits orretirement-type subsidies include the rightto receive payment of benefits after sev-erance from employment and before nor-mal retirement age and actuarial factors usedin determining optional forms for distribu-tion of retirement benefits.

(2) Provisions incorporated by refer-ence in plan. If all or a part of a plan’s rateof future benefit accrual, or an early re-tirement benefit or retirement-type sub-sidy provided under the plan, depends onprovisions in another document that are ref-erenced in the plan document, a change inthe provisions of the other document is anamendment of the plan.

(b) Plan provisions not taken into ac-count. Plan provisions that do not affect therate of future benefit accrual of partici-pants or alternate payees are not taken intoaccount in determining whether there hasbeen a reduction in the rate of future ben-efit accrual. Further, any benefit that is nota section 411(d)(6) protected benefit as de-scribed in §1.411(d)–4, Q&A–1(d) of thischapter, or that is a section 411(d)(6) pro-tected benefit that may be eliminated or re-duced as permitted under §1.411(d)–4,Q&A–2(a) or (b) of this chapter, is nottaken into account in determining whetheran amendment is a section 204(h) amend-ment. Thus, for example, provisions relat-ing to vesting schedules or the right to make

after-tax contributions or elective defer-rals are not taken into account.

(c) Examples. The following examplesillustrate the rules in this Q&A–7:

Example 1. (i) Facts. A defined benefit plan pro-vides a normal retirement benefit equal to 50% of high-est 5-year average pay multiplied by a fraction (notin excess of one), the numerator of which equals thenumber of years of participation in the plan and thedenominator of which is 20. A plan amendment isadopted that changes the numerator or denominatorof that fraction.

(ii) Conclusion. The plan amendment must betaken into account in determining whether there hasbeen a reduction in the rate of future benefit ac-crual.

Example 2. (i) Facts. Plan C is a multiemployerdefined benefit plan subject to several collective bar-gaining agreements. The specific benefit formula un-der Plan C that applies to an employee depends onthe hourly rate of contribution of the employee’s em-ployer, which is set forth in the provisions of the col-lective bargaining agreements that are referenced inthe Plan C document. Collective Bargaining Agree-ment A between Employer B and the union repre-senting employees of Employer B is renegotiated toprovide that the hourly contribution rate for an em-ployee of B who is subject to the Collective Bargain-ing Agreement A will decrease. That decrease willresult in a decrease in the rate of future benefit ac-crual for employees of B.

(ii) Conclusion. Under paragraph (a)(2) of thisQ&A–7, the change to Collective Bargaining Agree-ment A is a plan amendment that is a section 204(h)amendment if the reduction in the rate of future ben-efit accrual is significant.

Q–8. What is the basic principle used indetermining whether a reduction in the rateof future benefit accrual or a reduction inan early retirement benefit or retirement-type subsidy is significant for purposes ofsection 4980F and section 204(h)?

A–8. (a) General rule. Whether anamendment reducing the rate of future ben-efit accrual or reducing an early retire-ment benefit or retirement-type subsidyprovides for a reduction that is signifi-cant for purposes of section 4980F and sec-tion 204(h) is determined based onreasonable expectations taking into ac-count the relevant facts and circumstancesat the time the amendment is adopted.

(b) Application for determining signifi-cant reduction in the rate of future ben-efit accrual. For a defined benefit plan, thedetermination of whether an amendmentprovides for a significant reduction in therate of future benefit accrual is made bycomparing the amount of the annual ben-efit commencing at normal retirement age(or at actual retirement age, if later), as de-termined under Q&A–6(b)(1) of this sec-tion, under the terms of the plan as amendedwith the amount of the annual benefit com-

mencing at normal retirement age (or at ac-tual retirement age, if later), as determinedunder Q&A–6(b)(1) of this section, underthe terms of the plan prior to amendment.For an individual account plan, the deter-mination of whether an amendment pro-vides for a significant reduction in the rateof future benefit accrual is made in accor-dance with Q&A–6(b)(2) of this section bycomparing the amounts to be allocated inthe future to participants’ accounts underthe terms of the plan as amended with theamounts to be allocated in the future to par-ticipants’ accounts under the terms of theplan prior to amendment. An amendmentto convert a money purchase pension planto a profit-sharing or other individual ac-count plan that is not subject to section 412of the Internal Revenue Code is, in all cases,deemed to be an amendment that providesfor a significant reduction in the rate of fu-ture benefit accrual.

(c) Application to certain amendmentsreducing early retirement benefits orretirement-type subsidies. Because sec-tion 204(h) notice is required only for re-ductions that are significant, section 204(h)notice is not required for an amendment thatreduces an early retirement benefit orretirement-type subsidy if the amendmentis permitted under the third sentence of sec-tion 411(d)(6)(B) of the Internal RevenueCode and regulations thereunder (relatingto the elimination or reduction of benefitsor subsidies which create significant bur-dens or complexities for the plan and planparticipants unless the amendment adverselyaffects the rights of any participant in amore than de minimis manner).

(d) Example. The following example il-lustrates the rules in this Q&A–8:

Example. (i) Facts. Pension Plan A is a definedbenefit plan that provides a rate of benefit accrual of1% of highest-five years’ pay multiplied by years ofservice, payable annually for life commencing at nor-mal retirement age (or at actual retirement age, if later).Plan A is amended, effective January 1, 2008, to pro-vide that any participant who separates from serviceafter December 31, 2007, and before January 1, 2013,will have the same number of years of service he orshe would have had if his or her service continued toDecember 31, 2012.

(ii) Conclusion. While the amendment will re-sult in a reduction in the annual rate of future ben-efit accrual from 2009 through 2012 (because underthe amendment, benefits based upon an additional fiveyears of service accrue on January 1, 2008, and noadditional service is credited after January 1, 2008,until January 1, 2013), the amendment does not re-sult in a reduction that is significant because theamount of the annual benefit commencing at nor-mal retirement age (or at actual retirement age, if later)

2003–19 I.R.B. 885 May 12, 2003

under the terms of the plan as amended is not underany conditions less than the amount of the annual ben-efit commencing at normal retirement age (or at ac-tual retirement age, if later) to which any participantwould have been entitled under the terms of the planhad the amendment not been made.

Q–9. When must section 204(h) noticebe provided?

A–9. (a) 45-day general rule. Except asdescribed in paragraphs (b), (c), and (d) ofthis Q&A–9, section 204(h) notice must beprovided at least 45 days before the effec-tive date of any section 204(h) amend-ment. See paragraph (e) of this Q&A–9 forspecial rules for amendments permitting par-ticipant choice.

(b) 15-day rule for small plans. Ex-cept for amendments described in para-graph (d)(2) of this Q&A–9, section 204(h)notice must be provided at least 15 days be-fore the effective date of any section 204(h)amendment in the case of a small plan. Forpurposes of this section, a small plan is aplan that the plan administrator reason-ably expects to have, on the effective dateof the section 204(h) amendment, fewerthan 100 participants who have an accruedbenefit under the plan.

(c) 15-day rule for multiemployer plans.Except for amendments described in para-graph (d)(2) of this Q&A–9, section 204(h)notice must be provided at least 15 days be-fore the effective date of any section 204(h)amendment in the case of a multiemployerplan. For purposes of this section, a mul-tiemployer plan means a multiemployer planas defined in section 414(f) of the Inter-nal Revenue Code.

(d) Special timing rule for businesstransactions—(1) 15-day rule for section204(h) amendment in connection with anacquisition or disposition. Except foramendments described in paragraph (d)(2)of this Q&A–9, if a section 204(h) amend-ment is adopted in connection with an ac-quisition or disposition, section 204(h)notice must be provided at least 15 days be-fore the effective date of the section 204(h)amendment.

(2) Later notice permitted for a sec-tion 204(h) amendment significantly reduc-ing early retirement benefit or retirement-type subsidies in connection with certainplan transfers, mergers, or consolidations.If a section 204(h) amendment is adoptedwith respect to liabilities that are trans-ferred to another plan in connection witha transfer, merger, or consolidation of as-sets or liabilities as described in section

414(l) of the Internal Revenue Code and§1.414(l)–1 of this chapter, the amend-ment is adopted in connection with an ac-quisition or disposition, and the amendmentsignificantly reduces an early retirementbenefit or retirement-type subsidy, but doesnot significantly reduce the rate of futurebenefit accrual, then section 204(h) no-tice must be provided no later than 30 daysafter the effective date of the section 204(h)amendment.

(3) Definition of acquisition or dispo-sition. For purposes of this paragraph (d),see §1.410(b)–2(f) of this chapter for thedefinition of acquisition or disposition.

(e) Timing rule for amendments permit-ting participant choice. In general, sec-tion 204(h) notice of a section 204(h)amendment that provides applicable indi-viduals with a choice between the old andthe new benefit formulas (as described inQ&A–12 of this section) must be providedin accordance with the time period appli-cable under paragraphs (a) through (d) ofthis Q&A–9. See Q&A–12 of this sec-tion for additional guidance regarding sec-tion 204(h) notice in connection withparticipant choice.

Q–10. To whom must section 204(h) no-tice be provided?

A–10. (a) In general. Section 204(h) no-tice must be provided to each applicable in-dividual and to each employee organizationrepresenting participants who are appli-cable individuals. A special rule is pro-vided in paragraph (d) of this Q&A–10.

(b) Applicable individual. Applicable in-dividual means each participant in the plan,and any alternate payee, whose rate of fu-ture benefit accrual under the plan is rea-sonably expected to be significantlyreduced, or for whom an early retirementbenefit or retirement-type subsidy under theplan may reasonably be expected to be sig-nificantly reduced, by the section 204(h)amendment. The determination is made withrespect to individuals who are reasonablyexpected to be participants or alternate pay-ees in the plan at the effective date of thesection 204(h) amendment.

(c) Alternate payee. Alternate payeemeans a beneficiary who is an alternatepayee (within the meaning of section414(p)(8) of the Internal Revenue Code) un-der an applicable qualified domestic rela-tions order (within the meaning of section414(p)(1)(A) of the Internal Revenue Code).

(d) Designees. Section 204(h) notice maybe provided to a person designated in writ-ing by an applicable individual or by an em-ployee organization representing participantswho are applicable individuals, instead ofbeing provided to that applicable indi-vidual or employee organization. Any des-ignation of a representative made throughan electronic method that satisfies stan-dards similar to those of Q&A–13(c)(1) ofthis section satisfies the requirement that adesignation be in writing.

(e) Facts and circumstances test.Whether a participant or alternate payee isan applicable individual is determined ona typical business day that is reasonablyproximate to the time the section 204(h) no-tice is provided (or at the latest date for pro-viding section 204(h) notice, if earlier),based on all relevant facts and circum-stances.

(f) Examples. The following examplesillustrate the rules in this Q&A–10:

Example 1. (i) Facts. A defined benefit plan re-quires an individual to complete 1 year of service tobecome a participant who can accrue benefits, and par-ticipants cease to accrue benefits under the plan at sev-erance from employment with the employer. There areno alternate payees and employees are not repre-sented by an employee organization. On November18, 2004, the plan is amended effective as of Janu-ary 1, 2005, to reduce significantly the rate of fu-ture benefit accrual. Section 204(h) notice is providedon November 1, 2004.

(ii) Conclusion. Section 204(h) notice is only re-quired to be provided to individuals who, based onthe facts and circumstances on November 1, 2004, arereasonably expected to have completed at least 1 yearof service and to be employed by the employer onJanuary 1, 2005.

Example 2. (i) Facts. The facts are the same asin Example 1, except that the sole effect of the planamendment is to alter the pre-amendment plan pro-visions under which benefits payable to an employeewho retires after 20 or more years of service are un-reduced for commencement before normal retire-ment age. The amendment requires 30 or more yearsof service in order for benefits commencing before nor-mal retirement age to be unreduced, but the amend-ment only applies for future benefit accruals.

(ii) Conclusion. Section 204(h) notice is only re-quired to be provided to individuals who, on Janu-ary 1, 2005, have completed at least 1 year of servicebut less than 30 years of service, are employed by theemployer, have not attained normal retirement age, andwill have completed 20 or more years of service be-fore normal retirement age if their employment con-tinues to normal retirement age.

Example 3. (i) Facts. A plan is amended to re-duce significantly the rate of future benefit accrual forall current employees who are participants. Based onthe facts and circumstances, it is reasonable to ex-pect that the amendment will not reduce the rate offuture benefit accrual of former employees who arecurrently receiving benefits or of former employeeswho are entitled to deferred vested benefits.

May 12, 2003 886 2003–19 I.R.B.

(ii) Conclusion. The plan administrator is not re-quired to provide section 204(h) notice to any formeremployees.

Example 4. (i) Facts. The facts are the same as

in Example 3, except that the plan covers two groupsof alternate payees. The alternate payees in the firstgroup are entitled to a certain percentage or portionof the former spouse’s accrued benefit and, for thispurpose, the accrued benefit is determined at the timethe former spouse begins receiving retirement ben-efits under the plan. The alternate payees in the sec-ond group are entitled to a certain percentage or portionof the former spouse’s accrued benefit and, for thispurpose, the accrued benefit was determined at the timethe qualified domestic relations order was issued bythe court.

(ii) Conclusion. It is reasonable to expect that thebenefits to be received by the second group of alter-nate payees will not be affected by any reduction ina former spouse’s rate of future benefit accrual. Ac-cordingly, the plan administrator is not required to pro-vide section 204(h) notice to the alternate payees inthe second group.

Example 5. (i) Facts. A plan covers hourly em-ployees and salaried employees. The plan provides thesame rate of benefit accrual for both groups. The em-ployer amends the plan to reduce significantly the rateof future benefit accrual of the salaried employees only.At that time, it is reasonable to expect that only a smallpercentage of hourly employees will become sala-ried in the future.

(ii) Conclusion. The plan administrator is not re-quired to provide section 204(h) notice to the par-ticipants who are currently hourly employees.

Example 6. (i) Facts. A plan covers employees inDivision M and employees in Division N. The planprovides the same rate of benefit accrual for bothgroups. The employer amends the plan to reduce sig-nificantly the rate of future benefit accrual of em-ployees in Division M. At that time, it is reasonableto expect that in the future only a small percentageof employees in Division N will be transferred to Di-vision M.

(ii) Conclusion. The plan administrator is not re-quired to provide section 204(h) notice to the par-ticipants who are employees in Division N.

Example 7. (i) Facts. The facts are the same factsas in Example 6, except that at the time the amend-ment is adopted, it is expected that thereafter Divi-sion N will be merged into Division M in connectionwith a corporate reorganization (and the employeesin Division N will become subject to the plan’samended benefit formula applicable to the employ-ees in Division M).

(ii) Conclusion. In this case, the plan administra-tor must provide section 204(h) notice to the partici-pants who are employees in Division M and to theparticipants who are employees in Division N.

Example 8. (i) Facts. A plan is amended to re-duce significantly the rate of future benefit accrual forall current employees who are participants. The planamendment will be effective on January 1, 2004. Theplan will provide the notice to applicable individu-als on October 31, 2003. In determining which cur-rent employees are applicable individuals, the planadministrator determines that October 1, 2003, is atypical business day that is reasonably proximate tothe time the section 204(h) notice is provided.

(ii) Conclusion. In this case, October 1, 2003, isa typical business day that satisfies the requirementsof Q&A–10(e) of this section.

Q–11. What information is required tobe provided in a section 204(h) notice?

A–11. (a) Explanation of noticerequirements—(1) In general. Section204(h) notice must include sufficient in-formation to allow applicable individuals tounderstand the effect of the plan amend-ment. In order to satisfy this rule, a plan ad-ministrator providing section 204(h) noticemust satisfy each of the following require-ments of this paragraph (a).

(2) Information in section 204(h) no-tice. The information in a section 204(h) no-tice must be written in a manner calculatedto be understood by the average plan par-ticipant and to apprise the applicable indi-vidual of the significance of the notice.

(3) Required narrative description ofamendment—(i) Reduction in rate of fu-ture benefit accrual. In the case of anamendment reducing the rate of future ben-efit accrual, the notice must include a de-scription of the benefit or allocation formulaprior to the amendment, a description of thebenefit or allocation formula under the planas amended, and the effective date of theamendment.

(ii) Reduction in early retirement ben-efit or retirement-type subsidy. In the caseof an amendment that reduces an early re-tirement benefit or retirement-type sub-sidy (other than as a result of an amendmentreducing the rate of future benefit accrual),the notice must describe how the early re-tirement benefit or retirement-type sub-sidy is calculated from the accrued benefitbefore the amendment, how the early re-tirement benefit or retirement-type sub-sidy is calculated from the accrued benefitafter the amendment, and the effective dateof the amendment. For example, if, for aplan with a normal retirement age of 65, thechange is from an unreduced normal re-tirement benefit at age 55 to an unreducednormal retirement benefit at age 60 for ben-efits accrued in the future, with an actu-arial reduction to apply for benefits accruedin the future to the extent that the early re-tirement benefit begins before age 60, thenotice must state the change and specify thefactors that apply in calculating the actu-arial reduction (for example, a 5% per yearreduction applies for early retirement be-fore age 60).

(4) Sufficient information to determinethe approximate magnitude of reduction—

(i) General rule. (A) Section 204(h) no-tice must include sufficient information foreach applicable individual to determine theapproximate magnitude of the expected re-duction for that individual. Thus, in any casein which it is not reasonable to expect thatthe approximate magnitude of the reduc-tion for each applicable individual will bereasonably apparent from the description ofthe amendment provided in accordance withparagraph (a)(3) of this Q&A–11, furtherinformation is required. The further infor-mation may be provided by furnishing ad-ditional narrative information or in otherinformation that satisfies this paragraph ofthis section.

(B) To the extent any expected reduc-tion is not uniformly applicable to all par-ticipants, the notice must either identify thegeneral classes of participants to whom thereduction is expected to apply, or by someother method include sufficient informa-tion to allow each applicable individual re-ceiving the notice to determine whichreductions are expected to apply to that in-dividual.

(ii) Illustrative examples—(A) Require-ment generally. The requirement to in-clude sufficient information for eachapplicable individual to determine the ap-proximate magnitude of the expected re-duction for that individual under (a)(4)(i)(A)of this Q&A–11 is deemed satisfied if thenotice includes one or more illustrative ex-amples showing the approximate magni-tude of the reduction in the examples, asprovided in this paragraph (a)(4)(ii). Illus-trative examples are in any event requiredto be provided for any change from a tra-ditional defined benefit formula to a cashbalance formula or a change that results ina period of time during which there are noaccruals (or minimal accruals) with re-gard to normal retirement benefits or anearly retirement subsidy (a wear-away pe-riod).

(B) Examples must bound the range ofreductions. Where an amendment results inreductions that vary (either among partici-pants, as would occur for an amendmentconverting a traditional defined benefit for-mula to a cash balance formula, or overtime as to any individual participant, aswould occur for an amendment that re-sults in a wear-away period), the illustra-tive example(s) provided in accordance withthis paragraph (a)(4)(ii) must show the ap-proximate range of the reductions. How-

2003–19 I.R.B. 887 May 12, 2003

ever, any reductions that are likely to occurin only a de minimis number of cases arenot required to be taken into account in de-termining the range of the reductions if anarrative statement is included to that ef-fect and examples are provided that showthe approximate range of the reductions inother cases. Amendments for which themaximum reduction occurs under identi-fiable circumstances, with proportionatelysmaller reductions in other cases, may beillustrated by one example illustrating themaximum reduction, with a statement thatsmaller reductions also occur. Further, as-suming that the reduction varies from smallto large depending on service or other fac-tors, two illustrative examples may be pro-vided showing the smallest likely reductionand the largest likely reduction.

(C) Assumptions used in examples. Theexamples provided under this paragraph(a)(4)(ii) are not required to be based on anyparticular form of payment (such as a lifeannuity or a single sum), but may be basedon whatever form appropriately illustratesthe reduction. The examples generally maybe based on any reasonable assumptions (forexample, assumptions relating to the rep-resentative participant’s age, years of ser-vice, and compensation, along with anyinterest rate and mortality table used in theillustrations, as well as salary scale as-sumptions used in the illustrations foramendments that alter the compensationtaken into account under the plan), but thesection 204(h) notice must identify those as-sumptions. However, if a plan’s benefit pro-visions include a factor that varies over time(such as a variable interest rate), the de-termination of whether an amendment isreasonably expected to result in a wear-away period must be based on the value ofthe factor applicable under the plan at a timethat is reasonably close to the date sec-tion 204(h) notice is provided, and anywear-away period that is solely a result ofa future change in the variable factor maybe disregarded. For example, to determinewhether a wear-away occurs as a result ofa section 204(h) amendment that convertsa defined benefit plan to a cash balancepension plan that will credit interest basedon a variable interest factor specified in theplan, the future interest credits must be pro-jected based on the interest rate applicableunder the variable factor at the time sec-tion 204(h) notice is provided.

(D) Individual statements. This para-graph (a)(4)(ii) may be satisfied by pro-viding a statement to each applicableindividual projecting what that individu-al’s future benefits are reasonably expectedto be at various future dates and what thatindividual’s future benefits would have beenunder the terms of the plan as in effect be-fore the section 204(h) amendment, pro-vided that the statement includes the sameinformation required for examples underparagraphs (a)(4)(ii)(A) through (C) of thisQ&A–11, including showing the approxi-mate range of the reductions for the indi-vidual if the reductions vary over time andidentification of the assumptions used in theprojections.

(5) No false or misleading informa-tion. A section 204(h) notice may not in-clude materially false or misleadinginformation (or omit information so as tocause the information provided to be mis-leading).

(6) Additional information when reduc-tion not uniform—(i) In general. If anamendment by its terms affects differentclasses of participants differently (e.g., onenew benefit formula will apply to Divi-sion A and another to Division B), then therequirements of paragraph (a) of thisQ&A–11 apply separately with respect toeach such general class of participants. Inaddition, the notice must include suffi-cient information to enable an applicable in-dividual who is a participant to understandwhich class he or she is a member of.

(ii) Option for different section 204(h)notices. If a section 204(h) amendment af-fects different classes of applicable indi-viduals differently, the plan administratormay provide to differently affected classesof applicable individuals a section 204(h)notice appropriate to those individuals. Suchsection 204(h) notice may omit informa-tion that does not apply to the applicableindividuals to whom it is furnished, butmust identify the class or classes of appli-cable individuals to whom it is provided.

(b) Examples. The following examplesillustrate the requirements of paragraph (a)of this Q&A–11. In each example, it is as-sumed that the actual notice provided iswritten in a manner calculated to be un-derstood by the average plan participant andto apprise the applicable individual of thesignificance of the notice in accordance withparagraph (a)(2) of this Q&A–11. The ex-amples are as follows:

Example 1. (i) Facts. Plan A provides that a par-ticipant is entitled to a normal retirement benefit of2% of the participant’s average pay over the 3 con-secutive years for which the average is the highest(highest average pay) multiplied by years of ser-vice. Plan A is amended to provide that, effective Janu-ary 1, 2004, the normal retirement benefit will be 2%of the participant’s highest average pay multiplied byyears of service before the effective date, plus 1% ofthe participant’s highest average pay multiplied byyears of service after the effective date. The plan ad-ministrator provides notice that states: “Under thePlan’s current benefit formula, a participant’s nor-mal retirement benefit is 2% of the participant’s av-erage pay over the 3 consecutive years for which theaverage is the highest multiplied by the participant’syears of service. This formula is being changed by aplan amendment. Under the Plan as amended, a par-ticipant’s normal retirement benefit will be the sumof 2% of the participant’s average pay over the 3 con-secutive years for which the average is the highest mul-tiplied by years of service before the January 1, 2004,effective date, plus 1% of the participant’s average payover the 3 consecutive years for which the average isthe highest multiplied by the participant’s years of ser-vice after December 31, 2003. This change is effec-tive on January 1, 2004.” The notice does not containany additional information.

(ii) Conclusion. The notice satisfies the require-ments of paragraph (a) of this Q&A–11.

Example 2. (i) Facts. Plan B provides that a par-ticipant is entitled to a normal retirement benefit atage 64 of 2.2% of the participant’s career average paymultiplied by years of service. Plan B is amended tocease all accruals, effective January 1, 2004. The planadministrator provides notice that includes a descrip-tion of the old benefit formula, a statement that, af-ter December 31, 2003, no participant will earn anyfurther accruals, and the effective date of the amend-ment. The notice does not contain any additional in-formation.


Example 3. (i) Facts. Plan C provides that a par-ticipant is entitled to a normal retirement benefit atage 65 of 2% of career average compensation mul-tiplied by years of service. Plan C is amended to pro-vide that the normal retirement benefit will be 1% ofaverage pay over the 3 consecutive years for whichthe average is the highest multiplied by years of ser-vice. The amendment only applies to accruals for yearsof service after the amendment, so that each employ-ee’s accrued benefit is equal to the sum of the ben-efit accrued as of the effective date of the amendmentplus the accrued benefit equal to the new formula ap-plied to years of service beginning on or after the ef-fective date. The plan administrator provides noticethat describes the old and new benefit formulas andalso explains that for an individual whose compen-sation increases over the individual’s career such thatthe individual’s highest 3-year average exceeds the in-dividual’s career average, the reduction will be lessor there may be no reduction. The notice does not con-tain any additional information.


Example 4. (i) Facts. (A) Plan D is a defined ben-efit pension plan under which each participant ac-crues a normal retirement benefit, as a life annuitybeginning at the normal retirement age of 65, equal

May 12, 2003 888 2003–19 I.R.B.

to the participant’s number of years of service mul-tiplied by 1.5 percent multiplied by the participant’saverage pay over the 3 consecutive years for whichthe average is the highest. Plan D provides early re-tirement benefits for former employees beginning ator after age 55 in the form of an early retirement an-nuity that is actuarially equivalent to the normal re-tirement benefit, with the reduction for earlycommencement based on reasonable actuarial as-sumptions that are specified in Plan D. Plan D pro-vides for the suspension of benefits of participants whocontinue in employment beyond normal retirement age,in accordance with section 203(a)(3)(B) of ERISA andregulations thereunder issued by the Department of La-bor. The pension of a participant who retires after age65 is calculated under the same normal retirement ben-efit formula, but is based on the participant’s ser-vice credit and highest 3-year pay at the time of lateretirement with any appropriate actuarial increases.

(B) Plan D is amended, effective July 1, 2005, tochange the formula for all future accruals to a cashbalance formula under which the opening account bal-ance for each participant on July 1, 2005, is zero, hy-pothetical pay credits equal to 5 percent of pay arecredited to the account thereafter, and hypothetical in-terest is credited monthly based on the applicable in-terest rate under section 417(e)(3) of the InternalRevenue Code at the beginning of the quarter. Anyparticipant who terminates employment with vestedbenefits can receive an actuarially equivalent annu-ity (based on the same reasonable actuarial assump-tions that are specified in Plan D) commencing at anytime after termination of employment and before theplan’s normal retirement age of 65. The benefit re-sulting from the hypothetical account balance is in ad-dition to the benefit accrued before July 1, 2005 (takinginto account only service and highest 3-year pay be-fore July 1, 2005), so that it is reasonably expectedthat no wear-away period will result from the amend-ment. The plan administrator expects that, as a gen-eral rule, depending on future pay increases and futureinterest rates, the rate of future benefit accrual afterthe conversion is higher for participants who accruebenefits before approximately age 50 and after ap-proximately age 70, but is lower for participants whoaccrue benefits between approximately age 50 and age70.

(C) The plan administrator of Plan D announcesthe conversion to a cash balance formula on May 16,2005. The announcement is delivered to all partici-pants and includes a written notice that describes theold formula, the new formula, and the effective date.

(D) In addition, the notice states that the Plan Dformula before the conversion provided a normal re-tirement benefit equal to the product of a partici-pant’s number of years of service multiplied by 1.5percent multiplied by the participant’s average pay overthe 3 years for which the average is the highest (high-est 3-year pay). The notice includes an example show-ing the normal retirement benefit that will be accruedafter June 30, 2005, for a participant who is age 49with 10 years of service at the time of the conver-sion. The plan administrator reasonably believes thatsuch a participant is representative of the partici-pants whose rate of future benefit accrual will be re-duced as a result of the amendment. The exampleestimates that, if the participant continues employ-ment to age 65, the participant’s normal retirement ben-efit for service from age 49 to age 65 will be $657per month for life. The example assumes that the par-

ticipant’s pay is $50,000 at age 49. The example statesthat the estimated $657 monthly pension accrues overthe 16-year period from age 49 to age 65 and that,based on assumed future pay increases, this amountannually would be 9.1 percent of the participant’s high-est 3-year pay at age 65, which over the 16 years fromage 49 to age 65 averages 0.57 percent per year mul-tiplied by the participant’s highest 3-year pay. The ex-ample also states that the sum of the monthly annuityaccrued before the conversion in the 10-year periodfrom age 39 to age 49 plus the $657 monthly annu-ity estimated to be accrued over the 16-year periodfrom age 49 to age 65 is $1,235 and that, based onassumed future increases in pay, this would be 17.1percent of the participant’s highest 3-year pay at age65, which over the employee’s career from age 39 toage 65 averages 0.66 percent per year multiplied bythe participant’s highest 3-year pay. The notice alsoincludes two other examples with similar informa-tion, one of which is intended to show the circum-stances in which a small reduction may occur and theother of which shows the largest reduction that the planadministrator thinks is likely to occur. The notice statesthat the estimates are based on the assumption that payincreases annually after June 30, 2005, at a 4 per-cent rate. The notice also specifies that the appli-cable interest rate under section 417(e) for hypotheticalinterest credits after June 30, 2005, is assumed to be6 percent, which is the section 417(e) of the Inter-nal Revenue Code applicable interest rate under theplan for 2005.

(ii) Conclusion. The information in the notice, asdescribed in paragraph (i)(C) and (i)(D) of this Ex-ample 4, satisfies the requirements of paragraph (a)(3)of this Q&A–11 with respect to applicable individu-als who are participants. The requirements of para-graph (a)(4) of this Q&A–11 are satisfied because, asnoted in paragraph (i)(D) of this Example 4, the no-tice describes the old formula and describes the es-timated future accruals under the new formula in termsthat can be readily compared to the old formula, i.e.,the notice states that the estimated $657 monthly pen-sion accrued over the 16-year period from age 49 toage 65 averages 0.57 percent of the participant’s high-est 3-year pay at age 65. The requirement in para-graph (a)(4)(ii) of this Q&A–11 that the examplesinclude sufficient information to be able to deter-mine the approximate magnitude of the reductionwould also be satisfied if the notice instead directlystated the amount of the monthly pension that wouldhave accrued over the 16-year period from age 49 toage 65 under the old formula.

Example 5. (i) Facts. The facts are the same asin Example 4, except that, under the plan as in ef-fect before the amendment, the early retirement pen-sion for a participant who terminates employment afterage 55 with at least 20 years of service is equal to thenormal retirement benefit without reduction from age65 to age 62 and reduced by only 5 percent per yearfor each year before age 62. As a result, early retire-ment benefits for such a participant constitute aretirement-type subsidy. The plan as in effect after theamendment provides an early retirement benefit equalto the sum of the early retirement benefit payable un-der the plan as in effect before the amendment tak-ing into account only service and highest 3-year paybefore July 1, 2005, plus an early retirement annu-ity that is actuarially equivalent to the account bal-ance for service after June 30, 2005. The noticeprovided by the plan administrator describes the old

early retirement annuity, the new early retirement an-nuity, and the effective date. The notice includes anestimate of the early retirement annuity payable to theillustrated participant for service after the conver-sion if the participant were to retire at age 59 (whichthe plan administrator believes is a typical early re-tirement age) and elect to begin receiving an imme-diate early retirement annuity. The example states thatthe normal retirement benefit expected to be pay-able at age 65 as a result of service from age 49 toage 59 is $434 per month for life beginning at age 65and that the early retirement annuity expected to bepayable as a result of service from age 49 to age 59is $270 per month for life beginning at age 59. Theexample states that the monthly early retirement an-nuity of $270 is 38 percent less than the monthly nor-mal retirement benefit of $434, whereas a 15 percentreduction would have applied under the plan as in ef-fect before the amendment. The notice also includessimilar information for examples that show the small-est and largest reduction that the plan administratorthinks is likely to occur in the early retirement ben-efit. The notice also specifies the applicable interestrate, mortality table, and salary scale used in the ex-ample to calculate the early retirement reductions.

(ii) Conclusion. The information in the notice, asdescribed in paragraphs (i)(C) and (D) of Example 4and paragraph (i) of this Example 5, satisfies the re-quirements of paragraph (a)(3) of this Q&A–11 withrespect to applicable individuals who are partici-pants. The requirements of paragraph (a)(4) of thisQ&A–11 are satisfied because, as noted in para-graph (i) of this Example 5, the notice describes theearly retirement subsidy under the old formula and de-scribes the estimated early retirement pension underthe new formula in terms that can be readily com-pared to the old formula, i.e., the notice states that themonthly early retirement pension of $270 is 38 per-cent less than the monthly normal retirement ben-efit of $434, whereas a 15 percent reduction wouldhave applied under the plan as in effect before theamendment. The requirements of paragraph (a)(4)(ii)of this Q&A–11 that the examples include suffi-cient information to be able to determine the approxi-mate magnitude of the reduction would also besatisfied if the notice instead directly stated the amountof the monthly early retirement pension that would bepayable at age 59 under the old formula.

Q–12. What special rules apply if par-ticipants can choose between the old andnew benefit formulas?

A–12. In any case in which an appli-cable individual can choose between thebenefit formula (including any early retire-ment benefit or retirement-type subsidy) ineffect before the section 204(h) amend-ment (old formula) or the benefit formulain effect after the section 204(h) amend-ment (new formula), section 204(h) no-tice has not been provided unless theapplicable individual has been provided theinformation required under Q&A–11 of thissection, and has also been provided suffi-cient information to enable the individualto make an informed choice between the oldand new benefit formulas. The informa-

2003–19 I.R.B. 889 May 12, 2003

tion required under Q&A–11 of this sec-tion must be provided by the date otherwiserequired under Q&A–9 of this section. Theinformation sufficient to enable the indi-vidual to make an informed choice must beprovided within a period that is reason-ably contemporaneous with the date bywhich the individual is required to make hisor her choice and that allows sufficient ad-vance notice to enable the individual to un-derstand and consider the additionalinformation before making that choice.

Q–13. How may section 204(h) noticebe provided?

A–13. (a) Delivering section 204(h) no-tice. A plan administrator (including a per-son acting on behalf of the planadministrator, such as the employer or plantrustee) must provide section 204(h) no-tice through a method that results in ac-tual receipt of the notice or the planadministrator must take appropriate and nec-essary measures reasonably calculated to en-sure that the method for providing section204(h) notice results in actual receipt of thenotice. Section 204(h) notice must be pro-vided either in the form of a paper docu-ment or in an electronic form that satisfiesthe requirements of paragraph (c) of thisQ&A–13. First class mail to the last knownaddress of the party is an acceptable de-livery method. Likewise, hand delivery isacceptable. However, the posting of no-tice is not considered provision of section204(h) notice. Section 204(h) notice maybe enclosed with or combined with othernotice provided by the employer or plan ad-ministrator (for example, a notice of in-tent to terminate under title IV of ERISA).Except as provided in paragraph (c) of thisQ&A–13, a section 204(h) notice is deemedto have been provided on a date if it hasbeen provided by the end of that day. Whennotice is delivered by first class mail, thenotice is considered provided as of the dateof the United States postmark stamped onthe cover in which the document is mailed.

(b) Example. The following example il-lustrates the provisions of paragraph (a) ofthis Q&A–13:

Example. (i) Facts. Plan A is amended to reducesignificantly the rate of future benefit accrual effec-tive January 1, 2005. Under Q&A–9 of this section,section 204(h) notice is required to be provided at least45 days before the effective date of the amendment.The plan administrator causes section 204(h) noticeto be mailed to all affected participants. The mail-ing is postmarked November 16, 2004.

(ii) Conclusion. Because section 204(h) notice isgiven 45 days before the effective date of the planamendment, it satisfies the timing requirement ofQ&A–9 of this section.

(c) New technologies—(1) General rule.A section 204(h) notice may be providedto an applicable individual through an elec-tronic method (other than an oral commu-nication or a recording of an oralcommunication), provided that all of the fol-lowing requirements are satisfied:

(i) Either the notice is actually receivedby the applicable individual or the plan ad-ministrator takes appropriate and neces-sary measures reasonably calculated toensure that the method for providing sec-tion 204(h) notice results in actual receiptof the notice by the applicable individual.

(ii) The plan administrator provides theapplicable individual with a clear and con-spicuous statement, in electronic or non-electronic form, that the applicableindividual has a right to request and ob-tain a paper version of the section 204(h)notice without charge and, if such requestis made, the applicable individual is fur-nished with the paper version withoutcharge.

(iii) The requirements of this sectionmust otherwise be satisfied. Thus, for ex-ample, a section 204(h) notice providedthrough an electronic method must be de-livered on or before the date required un-der Q&A–9 of this section and must satisfythe requirements set forth in Q&A–11 ofthis section, including the content require-ments and the requirements that it be writ-ten in a manner calculated to be understoodby the average plan participant and to ap-prise the applicable individual of the sig-nificance of the notice. Accordingly, whenit is not otherwise reasonably evident, therecipient should be apprised (either in elec-tronic or in non-electronic form), at the timethe notice is furnished electronically, of thesignificance of the notice.

(2) Examples. The following examplesillustrate the requirement in paragraph(c)(1)(i) of this Q&A–13. In these examples,it is assumed that the notice satisfies the re-quirements in paragraphs (c)(1)(ii) and (iii)of this section. The examples are as follows:

Example 1. (i) Facts. On July 1, 2003, M, a planadministrator of Company N’s plan, sends notice in-tended to constitute section 204(h) notice to A, an em-ployee of Company N and a participant in the plan.The notice is sent through e-mail to A’s e-mail ad-dress on Company N’s electronic information sys-tem. Accessing Company N’s electronic informationsystem is not an integral part of A’s duties. M sendsthe e-mail with a request for a computer-generated no-

tification that the message was received and opened.M receives notification indicating that the e-mail wasreceived and opened by A on July 9, 2003.

(ii) Conclusion. With respect to A, although M hasfailed to take appropriate and necessary measures rea-sonably calculated to ensure that the method for pro-viding section 204(h) notice results in actual receiptof the notice, M satisfies the requirement of para-graph (c)(1)(i) of this Q&A–13 on July 9, 2003, whichis when A actually receives the notice.

Example 2. (i) Facts. On August 1, 2003, O, a planadministrator of Company P’s plan, sends a notice in-tended to constitute section 204(h) notice of ERISAto B, who is an employee of Company P and a par-ticipant in Company P’s plan. The notice is sentthrough e-mail to B’s e-mail address on Company P’selectronic information system. B has the ability to ef-fectively access electronic documents from B’s e-mailaddress on Company P’s electronic information sys-tem and accessing the system is an integral part of B’sduties.

(ii) Conclusion. Because access to the system isan integral part of B’s duties, O has taken appropri-ate and necessary measures reasonably calculated toensure that the method for providing section 204(h)notice results in actual receipt of the notice. Thus, re-gardless of whether B actually accesses B’s email onthat date, O satisfies the requirement of paragraph(c)(1)(i) of this Q&A–13 on August 1, 2003, with re-spect to B.

(3) Safe harbor in case of consent. Therequirement of paragraph (c)(1)(i) of thisQ&A–13 is deemed to be satisfied with re-spect to an applicable individual if the sec-tion 204(h) notice is provided electronicallyto an applicable individual, and—

(i) The applicable individual has affir-matively consented electronically, or con-firmed consent electronically, in a mannerthat reasonably demonstrates the appli-cable individual’s ability to access the in-formation in the electronic form in whichthe notice will be provided, to receiving sec-tion 204(h) notice electronically and has notwithdrawn such consent;

(ii) The applicable individual has pro-vided, if applicable, in electronic or non-electronic form, an address for the receiptof electronically furnished documents;

(iii) Prior to consenting, the applicableindividual has been provided, in electronicor non-electronic form, a clear and con-spicuous statement indicating—

(A) That the consent can be withdrawnat any time without charge;

(B) The procedures for withdrawing con-sent and for updating the address or otherinformation needed to contact the appli-cable individual;

(C) Any hardware and software require-ments for accessing and retaining the docu-ments; and

May 12, 2003 890 2003–19 I.R.B.

(D) The information required by para-graph (c)(1)(ii) of this Q&A–13; and

(iv) After consenting, if a change inhardware or software requirements neededto access or retain electronic records cre-ates a material risk that the applicable in-dividual will be unable to access or retainthe section 204(h) notice—

(A) The applicable individual is pro-vided with a statement of the revised hard-ware and software requirements for accessto and retention of the section 204(h) no-tice and is given the right to withdraw con-sent without the imposition of any fees forsuch withdrawal and without the imposi-tion of any condition or consequence thatwas not disclosed at the time of the ini-tial consent; and

(B) The requirement of paragraph(c)(3)(i) of this Q&A–13 is again com-plied with.

Q–14. What are the consequences if aplan administrator fails to provide section204(h) notice?

A–14. (a) Egregious failures—(1) Ef-fect of egregious failure to provide sec-tion 204(h) notice. Section 204(h)(6)(A) ofERISA provides that, in the case of anyegregious failure to meet the notice re-quirements with respect to any plan amend-ment, the plan provisions are applied so thatall applicable individuals are entitled to thegreater of the benefit to which they wouldhave been entitled without regard to theamendment, or the benefit under the planwith regard to the amendment. For a spe-cial rule applicable in the case of a plan ter-mination, see Q&A–17(b) of this section.

(2) Definition of egregious failure. Forpurposes of section 204(h) of ERISA andthis Q&A–14, there is an egregious fail-ure to meet the notice requirements if a fail-ure to provide required notice is within thecontrol of the plan sponsor and is either anintentional failure or a failure, whether ornot intentional, to provide most of the in-dividuals with most of the information theyare entitled to receive. For this purpose, anintentional failure includes any failure topromptly provide the required notice or in-formation after the plan administrator dis-covers an unintentional failure to meet therequirements. A failure to give section204(h) notice is deemed not to be egre-gious if the plan administrator reasonablydetermines, taking into account section4980F, section 204(h), these regulations,other administrative pronouncements, and

relevant facts and circumstances, that thereduction in the rate of future benefit ac-crual resulting from an amendment is notsignificant (as described in Q&A–8 of thissection), or that an amendment does not sig-nificantly reduce an early retirement ben-efit or retirement-type subsidy.

(3) Example. The following example il-lustrates the provisions of this paragraph (a):

Example. (i) Facts. Plan A is amended to reducesignificantly the rate of future benefit accrual effec-tive January 1, 2003. Section 204(h) notice is re-quired to be provided 45 days before January 1, 2003.Timely section 204(h) notice is provided to all ap-plicable individuals (and to each employee organiza-tion representing participants who are applicableindividuals), except that the employer intentionally failsto provide section 204(h) notice to certain partici-pants until May 16, 2003.

(ii) Conclusion. The failure to provide section204(h) notice is egregious. Accordingly, for the pe-riod from January 1, 2003, through June 30, 2003(which is the date that is 45 days after May 16, 2003),all participants and alternate payees are entitled to thegreater of the benefit to which they would have beenentitled under Plan A as in effect before the amend-ment or the benefit under the plan as amended.

(b) Effect of non-egregious failure to pro-vide section 204(h) notice. If an egregiousfailure has not occurred, the amendmentwith respect to which section 204(h) no-tice is required may become effective withrespect to all applicable individuals. How-ever, see section 502 of ERISA for civil en-forcement remedies. Thus, where there isa failure, whether or not egregious, to pro-vide section 204(h) notice in accordancewith this section, individuals may have re-course under section 502 of ERISA.

(c) Excise taxes. See section 4980F andQ&A–15 of this section for excise taxes thatmay apply to a failure to notify applicableindividuals of a pension plan amendmentthat provides for a significant reduction inthe rate of future benefit accrual or elimi-nates or significantly reduces an early re-tirement benefit or retirement-type subsidy,regardless of whether or not the failure isegregious.

Q–15. What are some of the rules thatapply with respect to the excise tax undersection 4980F?

A–15. (a) Person responsible for ex-cise tax. In the case of a plan other than amultiemployer plan, the employer is re-sponsible for reporting and paying the ex-cise tax. In the case of a multiemployerplan, the plan is responsible for reportingand paying the excise tax.

(b) Excise tax inapplicable in certaincases. Under section 4980F(c)(1) of the In-

ternal Revenue Code, no excise tax is im-posed on a failure for any period duringwhich it is established to the satisfaction ofthe Commissioner that the employer (orother person responsible for the tax) exer-cised reasonable diligence, but did not knowthat the failure existed. Under section4980F(c)(2) of the Internal Revenue Code,no excise tax applies to a failure to pro-vide section 204(h) notice if the employer(or other person responsible for the tax) ex-ercised reasonable diligence and corrects thefailure within 30 days after the employer(or other person responsible for the tax) firstknew, or exercising reasonable diligencewould have known, that such failure ex-isted. For purposes of section 4980F(c)(1)of the Internal Revenue Code, a person hasexercised reasonable diligence, but did notknow that the failure existed if and onlyif—

(1) The person exercised reasonable dili-gence in attempting to deliver section 204(h)notice to applicable individuals by the lat-est date permitted under this section; and

(2) At the latest date permitted for de-livery of section 204(h) notice, the per-son reasonably believes that section 204(h)notice was actually delivered to each ap-plicable individual by that date.

(c) Example. The following example il-lustrates the provisions of paragraph (b) ofthis Q&A–15:

Example. (i) Facts. Plan A is amended to reducesignificantly the rate of future benefit accrual. The em-ployer sends out a section 204(h) notice to all af-fected participants and other applicable individuals andto any employee organization representing appli-cable individuals, including actual delivery by handto employees at worksites and by first-class mail forany other applicable individual and to any employeeorganization representing applicable individuals. How-ever, although the employer exercises reasonable dili-gence in seeking to deliver the notice, the notice isnot delivered to any participants at one worksite dueto a failure of an overnight delivery service to pro-vide the notice to appropriate personnel at that site forthem to timely hand deliver the notice to affected em-ployees. The error is discovered when the employersubsequently calls to confirm delivery. Appropriate sec-tion 204(h) notice is then promptly delivered to all af-fected participants at the worksite.

(ii) Conclusion. Because the employer exercisedreasonable diligence, but did not know that a failureexisted, no excise tax applies, assuming that partici-pants at the worksite receive section 204(h) noticewithin 30 days after the employer first knew, or ex-ercising reasonable diligence would have known, thatthe failure occurred.

Q–16. How do section 4980F and sec-tion 204(h) apply when a business is sold?

A–16. (a) Generally. Whether section204(h) notice is required in connection with

2003–19 I.R.B. 891 May 12, 2003

the sale of a business depends on whethera plan amendment is adopted that signifi-cantly reduces the rate of future benefit ac-crual or significantly reduces an earlyretirement benefit or retirement-type sub-sidy.

(b) Examples. The following examplesillustrate the rules of this Q&A–16:

Example 1. (i) Facts. Corporation Q maintains PlanA, a defined benefit plan that covers all employeesof Corporation Q, including employees in its Divi-sion M. Plan A provides that participating employ-ees cease to accrue benefits when they cease to beemployees of Corporation Q. On January 1, 2006, Cor-poration Q sells all of the assets of Division M to Cor-poration R. Corporation R maintains Plan B, whichcovers all of the employees of Corporation R. Un-der the sale agreement, employees of Division M be-come employees of Corporation R on the date of thesale (and cease to be employees of Corporation Q),Corporation Q continues to maintain Plan A follow-ing the sale, and the employees of Division M be-come participants in Plan B.

(ii) Conclusion. No section 204(h) notice is re-quired because no plan amendment was adopted thatreduced the rate of future benefit accrual. The em-ployees of Division M who become employees of Cor-poration R ceased to accrue benefits under Plan Abecause their employment with Corporation Q ter-minated.

Example 2. (i) Facts. Subsidiary Y is a whollyowned subsidiary of Corporation S. Subsidiary Y main-tains Plan C, a defined benefit plan that covers em-ployees of Subsidiary Y. Corporation S sells all of thestock of Subsidiary Y to Corporation T. At the effec-tive date of the sale of the stock of Subsidiary Y, inaccordance with the sale agreement between Corpo-ration S and Corporation T, Subsidiary Y amends PlanC so that all benefit accruals cease.

(ii) Conclusion. Section 204(h) notice is requiredto be provided because Subsidiary Y adopted a planamendment that significantly reduced the rate of fu-ture benefit accrual in Plan C.

Example 3. (i) Facts. As a result of an acquisi-tion, Corporation U maintains two defined benefitplans: Plan D covers employees of Division N andPlan E covers the rest of the employees of Corpora-tion U. Plan E provides a significantly lower rate offuture benefit accrual than Plan D. Plan D is mergedwith Plan E, and all of the employees of Corpora-tion U will accrue benefits under the merged plan inaccordance with the benefit formula of former PlanE.

(ii) Conclusion. Section 204(h) notice is required.Example 4. (i) Facts. The facts are the same as

in Example 3, except that the rate of future benefit ac-crual in Plan E is not significantly lower. In addi-tion, Plan D has a retirement-type subsidy that PlanE does not have and the Plan D employees’ rights tothe subsidy under the merged plan are limited to ben-efits accrued before the merger.

(ii) Conclusion. Section 204(h) notice is requiredfor any participants or beneficiaries for whom the re-duction in the retirement-type subsidy is significant(and for any employee organization representing suchparticipants).

Example 5. (i) Facts. Corporation V maintains sev-eral plans, including Plan F, which covers employ-

ees of Division P. Plan F provides that participatingemployees cease to accrue further benefits under theplan when they cease to be employees of Corpora-tion V. Corporation V sells all of the assets of Divi-sion P to Corporation W, which maintains Plan G forits employees. Plan G provides a significantly lowerrate of future benefit accrual than Plan F. Plan F ismerged with Plan G as part of the sale, and employ-ees of Division P who become employees of Corpo-ration W will accrue benefits under the merged planin accordance with the benefit formula of former PlanG.

(ii) Conclusion. No section 204(h) notice is re-quired because no plan amendment was adopted thatreduces the rate of future benefit accrual or elimi-nates or significantly reduces an early retirement ben-efit or retirement-type subsidy. Under the terms of PlanF as in effect prior to the merger, employees of Di-vision P cease to accrue any further benefits (includ-ing benefits with respect to early retirement benefitsand any retirement-type subsidy) under Plan F afterthe date of the sale because their employment withCorporation V terminated.

Q–17. How are amendments to cease ac-cruals and terminate a plan treated undersection 4980F and section 204(h)?

A–17. (a) General rule—(1) Rule. Anamendment providing for the cessation ofbenefit accruals on a specified future dateand for the termination of a plan is sub-ject to section 4980F and section 204(h).

(2) Example. The following example il-lustrates the rule of paragraph (a)(1) of thisQ&A–17:

Example. (i) Facts. An employer adopts an amend-ment that provides for the cessation of benefit accru-als under a defined benefit plan on December 31, 2003,and for the termination of the plan pursuant to titleIV of ERISA as of a proposed termination date thatis also December 31, 2003. As part of the notice ofintent to terminate required under title IV in order toterminate the plan, the plan administrator gives sec-tion 204(h) notice of the amendment ceasing accru-als, which states that benefit accruals will cease “onDecember 31, 2003, whether or not the plan is ter-minated on that date.” However, because all the re-quirements of title IV for a plan termination are notsatisfied, the plan cannot be terminated until a datethat is later than December 31, 2003.

(ii) Conclusion. Nonetheless, because section204(h) notice was given stating that the plan wasamended to cease accruals on December 31, 2003, sec-tion 204(h) does not prevent the amendment to ceaseaccruals from being effective on December 31, 2003.The result would be the same had the section 204(h)notice informed the participants that the plan wasamended to provide for a proposed termination dateof December 31, 2003, and to provide that “benefitaccruals will cease on the proposed termination datewhether or not the plan is terminated on that date.”However, neither section 4980F nor section 204(h)would be satisfied with respect to the December 31,2003, effective date if the section 204(h) notice hadmerely stated that benefit accruals would cease “onthe termination date” or “on the proposed termina-tion date.”

(3) Additional requirements under titleIV of ERISA. See 29 CFR 4041.23(b)(4) and

4041.43(b)(5) for special rules applicableto plans terminating under title IV ofERISA.

(b) Terminations in accordance with titleIV of ERISA. A plan that is terminated inaccordance with title IV of ERISA isdeemed to have satisfied section 4980F andsection 204(h) not later than the termina-tion date (or date of termination, as appli-cable) established under section 4048 ofERISA. Accordingly, neither section 4980Fnor section 204(h) would in any event re-quire that any additional benefits accrue af-ter the effective date of the termination.

(c) Amendment effective before termi-nation date of a plan subject to title IV ofERISA. To the extent that an amendmentproviding for a significant reduction in therate of future benefit accrual or a signifi-cant reduction in an early retirement ben-efit or retirement-type subsidy has aneffective date that is earlier than the ter-mination date (or date of termination, as ap-plicable) established under section 4048 ofERISA, that amendment is subject to sec-tion 4980F and section 204(h). Accord-ingly, the plan administrator must providesection 204(h) notice (either separately, with,or as part of the notice of intent to termi-nate) with respect to such an amendment.

Q–18. What are the effective dates ofsection 4980F, section 204(h), as amendedby EGTRRA, and these regulations?

A–18. (a) Statutory effective date—(1)General rule. Section 4980F and section204(h), as amended by EGTRRA, apply toplan amendments taking effect on or af-ter June 7, 2001 (statutory effective date),which is the date of enactment ofEGTRRA.

(2) Transition rule. For amendments ap-plying after the statutory effective date inparagraph (a)(1) of this Q&A–18 and priorto the regulatory effective date in para-graph (c) of this Q&A–18, the require-ments of section 4980F(e)(2) and (3) of theInternal Revenue Code and section 204(h),as amended by EGTRRA, are treated as sat-isfied if the plan administrator makes a rea-sonable, good faith effort to comply withthose requirements.

(3) Special notice rule—(i) In general.Notwithstanding Q&A–9 of this section,section 204(h) notice is not required by sec-tion 4980F(e) of the Internal Revenue Codeor section 204(h), as amended by EGTRRA,to be provided prior to September 7, 2001

May 12, 2003 892 2003–19 I.R.B.

(the date that is three months after the dateof enactment of EGTRRA).

(ii) Reasonable notice. The require-ments of section 4980F and section 204(h),as amended by EGTRRA, do not apply toany plan amendment that takes effect on orafter June 7, 2001 if, before April 25, 2001,notice was provided to participants and ben-eficiaries adversely affected by the planamendment (and their representatives) whichwas reasonably expected to notify them ofthe nature and effective date of the planamendment. For purposes of this para-graph (a)(3)(ii), notice that complies with§1.411(d)–6 of this chapter, as it appearedin the April 1, 2001, edition of 26 CFR part1, is deemed to be notice which was rea-sonably expected to notify participants andbeneficiaries adversely affected by the plan

amendment (and their representatives) of thenature and effective date of the plan amend-ment.

(b) Regulatory effective date— (1) Gen-eral effective date. Except for Q&A–7(a)(2),Q&A–1 through Q&A–18 of this sectionapply to amendments with an effective datethat is on or after September 1, 2003.

(2) Effective date for Q&A–7(a)(2).Q&A–7(a)(2) of this section applies toamendments with an effective date that ison or after January 1, 2004.

(c) Amendments taking effect prior toJune 7, 2001. For rules applicable toamendments taking effect prior to June 7,2001, see §1.411(d)–6 of this chapter, as itappeared in the April 1, 2001, edition of 26CFR part 1.

PART 602—OMB CONTROLNUMBERS UNDER THEPAPERWORK REDUCTION ACT

Par. 5. The authority citation for part 602continues to read as follows:

Authority: 26 U.S.C. 7805.Par. 6. In §602.101, paragraph (b) is

amended by adding the following entry innumerical order to the table to read asfollows:

§602.101 OMB Control numbers.

*****(b) ***

CFR part or section whereidentified and described

Current OMBControl No.

*****54.4980F–1 ........................................................................................................................................................... 1545–1780*****

David A. Mader,Assistant Deputy Commissioner of

Internal Revenue.

Approved March 27, 2003.

Pamela F. Olson,Assistant Secretary of the Treasury

(Tax Policy).

(Filed by the Office of the Federal Register on April 8, 2003,8:45 a.m., and published in the issue of the Federal Regis-ter for April 9, 2003, 68 F.R. 17277)

Section 7520.—ValuationTables


Section 7872.—Treatment ofLoans With Below-MarketInterest Rates


2003–19 I.R.B. 893 May 12, 2003

Part III. Administrative, Procedural, and Miscellaneous

Eligible DeferredCompensation Plans UnderSection 457

Notice 2003–20

I. PURPOSE AND SCOPE

This notice describes the withholding andreporting requirements applicable to eli-gible deferred compensation plans describedin § 457(b) of the Internal Revenue Code(“§ 457(b) plans”) for periods after De-cember 31, 2001.

Specifically, this notice addresses —• income tax withholding and report-

ing with respect to annual deferralsmade to a § 457(b) plan;

• income tax withholding and report-ing with respect to distributions froma § 457(b) plan, including changes fora § 457(b) plan established by a stateor local government employer en-acted in the Economic Growth andTax Relief Reconciliation Act of 2001(EGTRRA), Pub. L. No. 107–16;

• Federal Insurance Contributions Act(FICA) payment and reporting withrespect to annual deferrals under a§ 457(b) plan;

• employer identification numbers(EINs) used in connection with trustsestablished under § 457(g); and

• the application of annual reporting re-quirements to § 457(b) plan admin-istrators and trustees holding assets ofa § 457(b) plan in accordance with§ 457(g).

The rules provided in this notice applyto deferrals and distributions from eligible§ 457(b) plans made after December 31,2001. This notice addresses only report-ing and withholding rules that apply to§ 457(b) plan participants who are or wereemployees of state and local governmentsor tax-exempt organizations and does notcover special reporting rules that may ap-ply to § 457(b) plan participants who areor were independent contractors. Notice2000–38, 2000–2 C.B. 174, applies to§ 457(b) plan distributions made beforeJanuary 1, 2002, but see Section IX of thisnotice concerning its effective date provi-sions.

II. BACKGROUND

Section 457 provides rules for nonquali-fied deferred compensation plans estab-lished by eligible employers. State and localgovernments and tax-exempt organiza-tions are eligible employers. They can es-tablish either eligible plans that meet therequirements of § 457(b) or plans that donot meet the requirements of § 457(b) andthat are therefore subject to § 457(f).

EGTRRA made numerous revisions to§ 457, most of them effective after Decem-ber 31, 2001. EGTRRA § 641(a)(1)(D)(i)added new § 3401(a)(12)(E) which pro-vides that remuneration paid to an em-ployee or beneficiary from a § 457(b) planmaintained by a state or local governmen-tal employer (a governmental § 457(b) plan)is no longer treated as wages for purposesof income tax withholding under section3402(a), but is now subject to income taxwithholding under section 3405. Thischange is effective for distributions madeafter December 31, 2001. However,EGTRRA did not revise the provision ofChapter 21 of the Internal Revenue Codetreating amounts deferred under a § 457(b)plan as subject to FICA taxes. See§ 3121(v)(2) and (3). FICA taxes includeboth the Old Age, Survivors, and Disabil-ity Insurance (OASDI) tax and the Hospi-tal Insurance (HI) tax, which are referredto in federal tax forms as social security andMedicare tax, respectively. This notice in-cludes guidance under these new provi-sions regarding income tax withholding andreporting upon distributions from govern-mental § 457(b) plans.

Section 1448 of the Small Business JobProtection Act of 1996 (“SBJPA”), Pub. L.104–188, 1996–3 C.B. 155, 212, amended§ 457 by adding § 457(g), which requiresthat governmental § 457(b) plans hold allplan assets and income in trust, or in cus-todial accounts or annuity contracts de-scribed in § 401(f), for the exclusive benefitof participants and their beneficiaries. Sec-tion 457(g) does not apply to a § 457(b)plan established by a tax-exempt organi-zation that is not a state or local govern-mental entity. Notice 2000–38 providedguidance in response to inquiries concern-ing withholding and reporting upon § 457(b)plan distributions in light of this SBJPA

amendment and certain changes made bythe Taxpayer Relief Act of 1997, Pub. L.No. 105–34.

This notice updates and supersedes No-tice 2000–38 for contributions and distri-butions made after December 31, 2001.

III. INCOME TAX WITHHOLDINGAND REPORTING ON ANNUALDEFERRALS

As amended by EGTRRA, § 457(a)(1)(A) provides that annual deferrals un-der a governmental § 457(b) plan and anyincome attributable to the amounts so de-ferred are not includible in a participant’sgross income until that amount is paid tothe participant or beneficiary. Section457(a)(1)(B) retains the pre-EGTRRA rulethat annual deferrals under a § 457(b) planof a tax-exempt entity and any income at-tributable to the amounts so deferred are notincludible in a participant’s gross incomeuntil that amount is paid or made avail-able to the participant or beneficiary. There-fore, annual deferrals under a § 457(b) planare not subject to income tax withholdingat the time of the deferral. However, a par-ticipant’s annual deferrals during the tax-able year under a § 457(b) plan are reportedon Form W–2, Wage and Tax Statement, inthe manner described in the instructions tothat form. “Annual deferrals,” as used in thisnotice, means the amount of compensa-tion deferred under the plan in accordancewith § 457(b), and in compliance with theannual maximum deferral limitation un-der the plan, whether by elective deferralor nonelective employer contribution, dur-ing a taxable year. Deferrals in a single em-ployer’s eligible plan or plans in excess ofthe § 457(b) limitations are not annual de-ferrals and thus are subject to income taxwithholding rules.

IV. INCOME TAX WITHHOLDINGAND REPORTING ONGOVERNMENTAL § 457(b) PLANDISTRIBUTIONS

A. Income Tax Withholding on Gov-ernmental § 457(b) Plan Distributions

“Distributions” from a governmental§ 457(b) plan to a participant or benefi-ciary (including an alternate payee) in-

May 12, 2003 894 2003–19 I.R.B.

clude all amounts that are paid from thegovernmental § 457(b) plan. See Section Vfor provisions regarding income tax with-holding on distributions from a § 457(b)plan of a non-governmental tax-exempt or-ganization.

EGTRRA revises Chapter 24 of theCode, to provide that, effective after De-cember 31, 2001, distributions to an indi-vidual from a governmental § 457(b) planare subject to income tax withholding in ac-cordance with the income tax withhold-ing requirements of § 3405 applicable todistributions from qualified plans, annu-ities, and individual retirement arrange-ments (IRAs). Thus, EGTRRA extends the§ 3405(c) direct rollover and mandatory 20percent withholding rules to governmen-tal § 457(b) plan distributions that qualifyas eligible rollover distributions as de-fined under § 402(c)(4).

In addition, EGTRRA provides that the§ 3405(a) and (b) elective withholding rulesapplicable to distributions from qualifiedplans, § 403(b) annuities, and IRAs that arenot eligible rollover distributions are alsoextended to distributions from governmen-tal § 457(b) plans. Thus, periodic distribu-tions from governmental § 457(b) plans thatare not eligible rollover distributions aresubject to withholding under § 3405(a) asif the distribution were wages, and nonpe-riodic distributions from such plans that arenot eligible rollover distributions are sub-ject to withholding under § 3405(b) at a 10-percent rate. In either case (periodic ornonperiodic distributions), the recipient mayelect not to have withholding apply under§ 3405(a) or (b) to a distribution that is notan eligible rollover distribution from a gov-ernmental § 457(b) plan. For additional in-formation regarding the provisions of § 3405and related sections, see § 35.3405–1T ofthe Employment Taxes and Collection of In-come Tax at Source Regulations under theTax Equity and Fiscal Responsibility Actof 1982, § 31.3405(c)–1 of the Employ-ment Taxes and Collection of Income Taxat Source Regulations, and §§ 1.401(a)(31)–1, 1.402(c)–2, and 1.402(f)–1 of theIncome Tax Regulations.

B. Person Responsible for Income TaxWithholding on Distributions

EGTRRA amended § 3405(d) of theCode to make plan administrators of eli-gible governmental plans, rather than thepayor of the designated distribution, gen-

erally liable for withholding under § 3405upon distributions from such plans. How-ever, under § 3405(d)(2)(A), a plan admin-istrator is not liable for withholding if theadministrator directs the payor to with-hold income tax under § 3405 and pro-vides the payor with the necessaryinformation required by regulations at§ 35.3405–1T, E 2–5. In that case, the payoris liable for withholding income tax. Sub-sections C, D, and E of this Section IV pro-vide additional information on thewithholding, deposit, and reporting obli-gations of the plan administrator or payor.

C. Reporting Governmental § 457(b)Plan Distributions on Form 1099–R

Distributions to an individual during ataxable year under a governmental § 457(b)plan are reported on Form 1099–R, Dis-tributions From Pensions, Annuities, Re-tirement or Profit-Sharing Plans, IRAs,Insurance Contracts, etc., in the manner de-scribed in the instructions to that form. In-come tax withheld from governmental§ 457(b) plan distributions is reported an-nually on Form 945, Annual Return of With-held Federal Income Tax.

D. EINs and Income Tax Deposits forSection 457(g) Trust Accounts

Generally, the income tax withheld ondistributions should be reported on the Form945 of the person responsible for withhold-ing, usually the plan administrator, as de-scribed in section IV–B of this notice. Theincome tax withheld must be aggregatedwith other amounts reported by that per-son on Form 945 to determine the fre-quency of federal tax deposits under§ 31.6302–4. This is the same as the firstalternative described in Announcement 84–40, 1984–17 I.R.B. 31. Alternatively, theIRS will permit the plan administrator (orpayor) of § 457(g) trusts, or custodial ac-counts or insurance contracts treated astrusts under § 457(g)(3) to use the other twoalternatives contained in Announcement84–40 for the tax administration of suchwithholdings:

1. The plan administrator or payor mayrequest and use an EIN solely for the pur-pose of reporting the aggregated withhold-ing from the distributions of every § 457(g)trust, custodial account, or annuity con-tract under its control, making deposits andfiling Form 945 accordingly.

2. The plan administrator or payor mayrequest and use a separate EIN for each

§ 457(g) trust (or custodial account or in-surance contract), making deposits and fil-ing Form 945 accordingly.

The plan administrator or payor exer-cising any of the above alternatives for de-positing and reporting the tax withheld from§ 457(g) trust distributions must also fol-low the same option in filing the related in-formation returns, such as Forms 1099–Rand Form 945. That is, the plan adminis-trator or payor must use the same name andEIN on Forms 1099–R as that under whichthe tax was deposited and the annual Form945 return filed. The plan administrator orpayor must aggregate and deposit all taxespursuant to § 31.6302–4 under the EIN cho-sen. The above-described options relate onlyto trusts, annuity contracts, or custodial ac-counts established pursuant to § 457(g) foramounts deferred under a governmental§ 457(b) plan. For information on the re-mittance of social security, Medicare, andFUTA taxes by the employer, see sectionVI–D below.

V. INCOME TAX WITHHOLDINGAND REPORTING ONTAX-EXEMPT EMPLOYERS’§ 457(b) PLAN DISTRIBUTIONS

A. Income Tax Withholding on Tax-Exempt Employer’s § 457(b) Plan Dis-tributions

“Distributions” from a § 457(b) plan ofa non-governmental tax-exempt entity to aparticipant include all amounts that are paidor made available under the § 457(b) plan.Distributions to a participant from a tax-exempt employer’s § 457(b) plan are wagesunder § 3401(a) that are subject to incometax withholding in accordance with the in-come tax withholding requirements of§ 3402(a). The pension withholding rulesof § 3405 do not apply to distributions froma tax-exempt employer’s § 457(b) plan. See§ 35.3405–1T, Q&A–23. See Section IV ofthis notice for provisions regarding in-come tax withholding on distributions froma governmental § 457(b) plan.

Income tax withholding on distribu-tions to a participant under a tax-exemptemployer’s § 457(b) plan is calculated in thesame manner as withholding on other typesof wage payments. For guidance on the useof the flat rate withholding method as asupplement to regular wage withholding incases where the tax-exempt employer or itsagent is paying wages to the participant in

2003–19 I.R.B. 895 May 12, 2003

addition to the distribution from the § 457(b)plan, see § 31.3402(g)–1(a) and Rev. Rul.82–46, 1982–1 C.B. 158. If an eligiblepayor uses the flat rate of withholding asan alternative to regular wage withhold-ing on a lump sum payment, § 101(c)(11)of EGTRRA provides that this flat rate be-came 27 percent in 2002, then becomes 26percent in 2004, and 25 percent in 2006 andthereafter.

B. Person Responsible for Income TaxWithholding on Distributions

When distributions are made under a tax-exempt employer’s § 457(b) plan, the tax-exempt organization or other person havingcontrol of the payment of the distribu-tions, as determined under § 3401(d)(1), isresponsible for income tax withholding onthe distributions.

C. Reporting Tax-Exempt Employer’s§ 457(b) Plan Distributions on FormW–2

Distributions to a participant during ataxable year under a tax-exempt employ-er’s § 457(b) plan are wages and are re-ported on Form W–2, Wage and TaxStatement, in the manner described in theinstructions to that form. See also Rev. Rul.82–46, supra. Income tax withheld from atax-exempt employer’s § 457(b) plan dis-tributions is deposited in accordance with§ 31.6302–1 and reported quarterly on Form941, Employer’s Quarterly Federal Tax Re-turn.

D. Reporting Death Benefit Payments

Distributions to a beneficiary of a de-ceased participant under a § 457(b) plan arereported on Form 1099–R, DistributionsFrom Pensions, Annuities, Retirement orProfit-Sharing Plans, IRAs, Insurance Con-tracts, etc. See Rev. Rul. 86–109, 1986–2C.B. 196. No income tax withholding is re-quired for distributions from § 457(b) plansto beneficiaries. See Rev. Rul. 59–64,1959–1 C.B. 31. The instructions for Form1099–R describe how this form is com-pleted for distributions made to a benefi-ciary from a nonqualified deferredcompensation plan, such as a § 457(b) plan.

VI. FICA AND FUTA TAXES ANDREPORTING

A. Scope

The rules described in this Section VIrelating to FICA (social security and Medi-

care) tax apply to employees of state andlocal governments only if they are sub-ject to social security or Medicare tax un-der § 3121(u) (relating to Medicare),§ 3121(b)(7)(E) (relating to agreements en-tered into pursuant to section 218 of the So-cial Security Act), or other provisions of theCode, such as § 3121(b)(7)(F) (relating tostate and local government employees whoare not members of a state or local retire-ment system). As previously noted,EGTRRA did not revise the provision ofChapter 21 of the Internal Revenue Codetreating § 457(b) plan distributions as“wages” for purposes of subjecting them tosocial security and Medicare taxes. TheFICA rules discussed in this section gen-erally apply to employees of tax-exempt or-ganizations, unless a specific exclusion isapplicable. The FICA tax discussed in thissection includes the employer’s share of theFICA tax imposed under § 3111 as well asthe employee’s share imposed under § 3101.Any FICA tax imposed on an employee’s§ 457(b) plan deferrals or distributions mustbe reported on a Form W–2 for that em-ployee.

The rules described in this Section VIrelating to the Federal Unemployment TaxAct (FUTA) do not apply to service for astate or local governmental entity because§ 3306(c)(7) provides a FUTA exemptionfor service performed in the employ of astate or any political subdivision thereof orany instrumentality of any one or more ofthe foregoing. The rules described in thissection relating to FUTA apply to servicefor a tax-exempt organization other than atax-exempt organization described in§ 501(c)(3). See § 3306(c)(8).

B. Timing of Social Security, Medi-care, and FUTA Taxes

Sections 3121(a) (relating to social se-curity and Medicare) and 3306(b) (relat-ing to FUTA) define “wages” as allremuneration for employment, unless spe-cifically excluded (see section VI–A,above). If social security, Medicare, orFUTA taxes apply, §§ 3121(v)(2) and3306(r)(2) contain special timing rules thatapply in determining when amounts de-ferred under a nonqualified deferred com-pensation plan (including employers’contributions) are required to be taken intoaccount. Under these sections, an amountdeferred under a nonqualified deferred com-pensation plan, including a § 457(b) plan,

is required to be taken into account for pur-poses of social security, Medicare, andFUTA taxes as of the later of when the ser-vices are performed or when there is nosubstantial risk of forfeiture of the rights tosuch amount.

Thus, to the extent a § 457(b) plan pro-vides that annual deferrals are immedi-ately vested, the annual deferrals are subjectto social security, Medicare, and FUTAtaxes at the time of deferral. However, tothe extent the annual deferrals are subjectto a substantial risk of forfeiture, the an-nual deferrals (plus earnings thereon) aregenerally taken into account for purposesof social security, Medicare, and FUTA atthe time such amounts are no longer sub-ject to a substantial risk of forfeiture. Forpurposes of social security, Medicare, andFUTA taxes, the determination of whethera substantial risk of forfeiture exists is madein accordance with the principles of § 83and the regulations thereunder. See§§ 31.3121(v)(2)–1(e)(3) and 31.3306(r)(2)–1.

If amounts deferred under a § 457(b)plan are properly taken into account as so-cial security, Medicare, and FUTA wageswhen deferred (or, if later, when they ceaseto be subject to a substantial risk of for-feiture), the amounts subsequently paid ormade available to a participant or benefi-ciary under the § 457(b) plan that are at-tributable to those deferrals generally arenot subject to social security, Medicare, orFUTA taxes. See §§ 3121(v)(2)(B) and3306(r)(2)(B) and §§ 31.3121(v)(2)–1(a)(2)(iii) and 31.3121(v)(2)–1(d)(2). If anamount deferred for a period is not prop-erly taken into account, distributions at-tributable to that amount, including incomeon the amounts deferred, may be wages forFICA purposes when paid or made avail-able. See § 31.3121(v)(2)–1(d)(1)(ii). Ad-ditional special rules apply to § 457(b) plansin which benefits are not based solely ona participant’s account balance. See§ 31.3121(v)(2)–1(e)(4).

C. Examples

The application of social security andMedicare tax is illustrated by the follow-ing examples:

Example 1. (i) State R’s § 457(b) plan providesfor elective deferrals from current salary, as well asa one percent of salary nonelective contribution foreach employee who participates in the plan and whois employed with State R during the plan year. All em-ployees who participate in the plan are covered by an

May 12, 2003 896 2003–19 I.R.B.

agreement under section 218 of the Social SecurityAct. All deferrals and contributions, including thestate’s contribution, are fully and immediately vested.

(ii) Because these contributions are not subject toa substantial risk of forfeiture (and the services towhich they relate have already been performed), theelective deferrals are required to be taken into ac-count as wages at the time of the deferral and StateR’s nonelective contribution is required to be takeninto account as wages at the time of the contribu-tion for purposes of the social security and Medi-care tax.

Example 2—(i) Assume the same facts as in Ex-ample 1, except that the plan has three-year vestingfor State R’s nonelective contribution. Therefore, anemployee’s rights to the nonelective contributions (andthe associated earnings) are subject to a substantial riskof forfeiture until the employee has been employedby State R for three years.

(ii) State R’s nonelective contributions (and earn-ings thereon) are not wages for purposes of the so-cial security and Medicare tax until the employee hascompleted three years of service. At that time, the ag-gregate amount of State R’s nonelective contribu-tions, plus earnings thereon, is required to be takeninto account as wages for purposes of the social se-curity and Medicare tax. Once an individual has metthe vesting requirements, future nonelective contri-butions by State R are required to be taken into ac-count as wages for purposes of the social security andMedicare tax at the time of the contribution. Be-cause the elective deferrals are not subject to a sub-stantial risk of forfeiture (and the services to whichthey relate have already been performed), the elec-tive deferrals are required to be taken into account aswages at the time of deferral.

D. Deposit and Reporting of SocialSecurity, Medicare and FUTA Taxes

The employer must aggregate and de-posit social security and Medicare taxes as-sociated with a § 457(b) plan (including theemployer’s share of social security andMedicare taxes under § 3111) with all othersocial security and Medicare taxes and with-held income taxes paid on behalf of its em-ployees in accordance with § 31.6302–1 andmust report these taxes on Form 941. Em-ployers subject to FUTA must aggregate anddeposit FUTA amounts associated with a§ 457(b) plan with all other FUTA amountspaid on behalf of its employees in accor-dance with § 31.6302(c)–3 and must re-port these payments on Form 940.

VII. ANNUAL REPORTING FOR§ 457 PLANS

A. § 457(g) Trusts

A trust described in § 457(g) is not re-quired to file Form 990, Return of Orga-nization Exempt From Income Tax, Form1041, U.S. Income Tax Return for Estatesand Trusts, Form 1120, U.S. CorporationIncome Tax Return, or Form 5500, An-nual Return/Report of Employee BenefitPlans. See, for example, Rev. Proc. 95–48, 1995–2 C.B. 418, which provides thatgovernmental units and affiliates of gov-ernmental units that are exempt from fed-eral income tax under § 501(a) are notrequired to file annual information returnson Form 990, Return of Organization Ex-empt From Income Tax. A trust describedin § 457(g) may be required to file Form990–T, Exempt Organization Business In-come Tax Return. See §§ 1.6012–2(e) and1.6012–3(a)(5) for the requirements for fil-ing Form 990–T.

B. Section 457(b) Plans of Tax-ExemptOrganizations

Annual deferrals and payments to cer-tain participants in a § 457(b) plan of a tax-exempt organization are reported on theorganization’s Form 990 in the manner de-scribed in the instructions to that form.

VIII. OTHER INFORMATIONAVAILABLE

Further information regarding the re-porting, payment and deposit of employ-ment taxes such as social security, Medicare,FUTA, and withheld income tax can befound in Publication 15, Circular E, Em-ployer’s Tax Guide; Publication 15–A, Em-ployer’s Supplemental Tax Guide; andPublication 963, Federal-State ReferenceGuide: Social Security Coverage and FICAReporting by State and Local GovernmentEmployers. These publications will be re-vised, as appropriate, to reflect the revi-sions enacted in EGTRRA.

IX. EFFECTIVE DATE

This notice is applicable with respect todeferrals and distributions made after De-cember 31, 2001. However, for deferrals or

distributions made after December 31, 2001,and before January 1, 2004, the InternalRevenue Service (IRS) will not assert thatthere has been a failure to comply with ap-plicable reporting and withholding require-ments if the applicable reporting andwithholding requirements set forth in No-tice 2000–38 have been satisfied. Thus, forexample, in any case in which a series ofdistributions commenced before January 1,2002, and the distributions are eligible roll-over distributions (as defined in § 402(f)(2)(A)) that are payable over a specified pe-riod of less than 10 years, the IRS will notassert that there has been a failure to com-ply with applicable withholding require-ments through December 31, 2003, if theapplicable withholding requirements setforth in Notice 2000–38 have been satis-fied.

X. REQUEST FOR COMMENTS

The IRS requests comments concern-ing this notice, and welcomes comments onany other useful approaches the Servicemight consider regarding the administra-tion of § 457(b) plans. Comments can beaddressed to the Internal Revenue Ser-vice, Office of Division Counsel/AssociateChief Counsel (TEGE), CC:TEGE:EB:QP2, Room 5201, 1111 Constitution Av-enue, Washington, D.C. 20224. In addition,comments may be submitted electroni-cally via the Internet by sending them in ane-mail to: [email protected] and specifying that the commentsconcern Notice 2003–20.


The principal author of this notice isJohn Tolleris of the Office of the Divi-sion Counsel/Associate Chief Counsel (TaxExempt and Government Entities). How-ever, other personnel from the IRS andTreasury participated in its development. Forfurther information regarding this notice,contact John Tolleris at (202) 622–6060 (nota toll-free number).

2003–19 I.R.B. 897 May 12, 2003

Nonconventional Source FuelCredit, Section 29 InflationAdjustment Factor, andSection 29 Reference Price

Notice 2003–27

This notice publishes the nonconven-tional source fuel credit, inflation adjust-ment factor, and reference price under § 29of the Internal Revenue Code for calen-dar year 2002. These are used to deter-mine the credit allowable on fuel producedfrom a nonconventional source under § 29.The calendar year 2002 inflation-adjustedcredit applies to the sales of barrel-of-oilequivalent of qualified fuels sold by a tax-payer to an unrelated person during the2002 calendar year, the domestic produc-tion of which is attributable to the tax-payer.

BACKGROUND

Section 29(a) provides for a credit forproducing fuel from a nonconventionalsource, measured in barrel-of-oil equiva-lent of qualified fuels, the production ofwhich is attributable to the taxpayer andsold by the taxpayer to an unrelated per-son during the tax year. The credit is equalto the product of $3.00 and the appropri-ate inflation adjustment factor.

Section 29(b)(1) and (2) provides for aphaseout of the credit. The credit allow-able under § 29(a) must be reduced by anamount which bears the same ratio to theamount of the credit (determined withoutregard to § 29(b)(1)) as the amount bywhich the reference price for the calendaryear in which the sale occurs exceeds$23.50 bears to $6.00. The $3.00 in § 29(a)and the $23.50 and $6.00 must each be ad-justed by multiplying these amounts by the2002 inflation adjustment factor. In the caseof gas from a tight formation, the $3.00amount in § 29(a) must not be adjusted.

Section 29(c)(1) defines the term “quali-fied fuels” to include oil produced fromshale and tar sands; gas produced fromgeopressurized brine, Devonian shale, coalseams, or a tight formation, or biomass; andliquid, gaseous, or solid synthetic fuels pro-duced from coal (including lignite), includ-ing such fuels when used as feedstocks.

Section 29(d)(1) provides that the creditis to be applied only for sale of qualifiedfuels the production of which is within theUnited States (within the meaning of

§ 638(1)) or a possession of the UnitedStates (within the meaning of § 638(2)).

Section 29(d)(2)(A) requires that the Sec-retary, not later than April 1 of each cal-endar year, determine and publish in theFederal Register the inflation adjustmentfactor and the reference price for the pre-ceding calendar year.

Section 29(d)(2)(B) defines “inflation ad-justment factor” for a calendar year as thefraction the numerator of which is the GNPimplicit price deflator for the calendar yearand the denominator of which is the GNPimplicit price deflator for calendar year1979. The term “GNP implicit price defla-tor” means the first revision of the im-plicit price deflator for the gross nationalproduct as computed and published by theDepartment of Commerce.

Section 29(d)(2)(C) defines “referenceprice” to mean with respect to a calendaryear the Secretary’s estimate of the an-nual average wellhead price per barrel forall domestic crude oil the price of which isnot subject to regulation by the UnitedStates.

Section 29(d)(3) provides that in the caseof a property or facility in which more thanone person has an interest, except to the ex-tent provided in regulations prescribed bythe Secretary, production from the prop-erty or facility (as the case may be) mustbe allocated among the persons in propor-tion to their respective interests in the grosssales from the property or facility.

Section 29(d)(5) provides that the term“barrel-of-oil equivalent” with respect to anyfuel generally means that amount of the fuelwhich has a Btu content of 5.8 million.

INFLATION ADJUSTMENT FACTORAND REFERENCE PRICE

The inflation adjustment factor for cal-endar year 2002 is 2.1169. The referenceprice for calendar year 2002 is $22.51.These amounts will be published in the Fed-eral Register on April 9, 2003.

PHASEOUT CALCULATION

Because the calendar year 2002 refer-ence price does not exceed $23.50 multi-plied by the inflation adjustment factor, thephaseout of the credit provided for in§ 29(b)(1) does not occur for any quali-fied fuel sold in calendar year 2002.

CREDIT AMOUNT

The nonconventional source fuel creditunder § 29(a) is $6.35 per barrel-of-oil

equivalent of qualified fuels ($3.00 x2.1169). This amount will be published inthe Federal Register on April 9, 2003.


The principal author of this notice isJamie Park of the Office of Associate ChiefCounsel (Passthroughs and Special Indus-tries). For further information regarding thisnotice, contact Ms. Park at (202) 622–3120 (not a toll-free call).

May 12, 2003 898 2003–19 I.R.B.

Part IV. Items of General Interest

Foundations Status of CertainOrganizations

Announcement 2003–28

The following organizations have failedto establish or have been unable to main-tain their status as public charities or as op-erating foundations. Accordingly, grantorsand contributors may not, after this date,rely on previous rulings or designations inthe Cumulative List of Organizations (Pub-lication 78), or on the presumption aris-ing from the filing of notices under section508(b) of the Code. This listing does notindicate that the organizations have lost theirstatus as organizations described in sec-tion 501(c)(3), eligible to receive deduct-ible contributions.

Former Public Charities. The follow-ing organizations (which have been treatedas organizations that are not private foun-dations described in section 509(a) of theCode) are now classified as privatefoundations:

21st Century Life Skills, Inc.,Palm City, FL

79th Street Business Association,Chicago, IL

90 Ways, Inc., Omaha, NEAbout Face, West Columbia, SCAcademic Excellence FDN Serving

Esparto Madison & Capay Valley,Esparto, CA

Advocates for Enhanced Long TermCare, Rockville, MD

Advocates in Action, Alpena, MIAfrican Heritage Institute, Inc.,

Worcester, MAAgency for Sustainable Systems in

Science & Technology, Inc.,Arcata, CA

Ahlul Bayt Assembly of America, Inc.,Potomac, MD

AIDS Service Society of Arkansas,North Little Rock, AR

Al Baqir the Knowledge Expounder,Long Beach, CA

Al Maun Community DevelopmentCorporation, Atlanta, GA

Alaska Volleyball Association,Chugiak, AK

Alpha Foundation, Inc., Mobile, ALAlzheimer Alliance of America,

Bellingham, WA

American Animal Protection Charities,Inc., Boca Raton, FL

American Center for Law and Justice ofTexas, Inc., Irving, TX

American Friends of Pamela,South Euclid, OH

American Institute of Natural Education,Inc., Holliswood, NY

American Library in Ukraine CharitableTrust, Tulsa, OK

American Medical Society Foundation,La Jolla, CA

American School for International TourDirecting, Inc., Scottsdale, AZ

Anash, Inc., Los Angeles, CAAngels Tough Foundation, Clovis, CAArizona Science Teachers Association,

Inc., Tempe, AZAttention Deficit Disorder A.D.D.

Crusade, Portland, MEAugust Ensemble Corporation,

Carmichael, CABand-Aid Foundation, Inc.,

Littleton, COBarrio Crisis Center, Dallas, TXBay Area Symphonic Band Society,

Webster, TXBean Equine Educational Foundation,

El Cajon, CABeaverdam Youth League, Inc.,

Beaverdam, VABenei Avrohom, Inc., Brooklyn, NYBlack Sisters Sharing, Inglewood, CABooth Manor of St. Louis, Inc.,

St. Louis, MOBoston Dnepropetrovsk Health Care

Foundation, Inc., Boston, MABoys and Girls Clubs of the Columbia

Area, Columbia, MOBuffalo Soldier Memorial Association,

Fort Bliss, TXCaledonia Animal Rescue, Inc.,

St. Johnsbury, VTCaliban Foundation, Tacoma, WACamden Clinic, San Antonia, TXCamp Moraine, Inc., Lake Bluff, ILCareer Development & Training Rehab.

& Ind. Living Skills, Inc.,Mt. Clemens, MI

Caucus of South African Psychiatrists,Inc., Providence, RI

Celtic Regional Arts Institute ofCalifornia, Rolling Hills, CA

Chapel of Hope-Gatesville Area,Dallas, TX

Cheverly Young Actors Guild,Cheverly, MD

Chinese American Cancer Foundation,San Gabriel, CA

Chippewa Falls Committee for theTwenty-First Century, Inc.,Chippewa Falls, WI

Choralfest, Inc., Pittsburgh, PAChristmas in April Broom Country, Inc.,

Binghamton, NYCitizens for Community Action, Inc.,

Chicago, ILClinton House Non-Profit Corporation,

Detroit, MICommonwealth Education Organization

Pittsburgh, PACommunity Business Institute Inc., of

Trumbull, Trumbull, CTCommunity Counciling Center

Development, Inc., Lakeland, FLCommunity Social Services, Inc.,

Darby, PACorporation for Clean Air, Tiburon, CACoventry Village Main Street

Partnership, Coventry, CTCRCR Helps Foundation,

Washington, DCCued Speech and Language Association

of Utah, Park City, UTCulmore Community Action Committee,

Inc., Falls Church, VACulturelink Fieldwork Project,

Clearlake, CADaake Halani Development, Inc.,

Many Farms, AZDade Hialeah Community Development

Corp., Hialeah, FLDance Empowerment, Fresno, CADarlene Brickey Foundation,

Bakersfield, CADaughters of Zion, Inc., Yeadon, PADavid Scruggs Foundation, Dallas, TXDayton Youth Baseball League, Inc.,

Dayton, KYDeep East Texas Council of

Governments Regional 100 Club,Inc., Jasper, TX

Delusions of Magic, Tempe, AZDenison Kiwanis Club Charity, Inc.,

Denison, TXDick Sewell Memorial Golf Tournament,

Washington, DCDisabled Peoples International, Inc.,

W. Hempstead, NYDonald Ross Society Foundation, Inc.,

W. Hartford, CT

2003–19 I.R.B. 899 May 12, 2003

Douglas County Fair Association, Inc.,Ava, MO

E & R Youth Association, Dearborn, MIEarly Festival Association, Early, TXEast Central Community Development

Center, Meridian, MSEast-West Shrine Football Classic and

Pageant, San Mateo, CAEclectic Chorale, Highland, CAEdgecliff Fire Department EMS AUX.,

Ft. Worth, TXEmployment & Housing Ombuds

Service, Minneapolis, MNFairfield Hills of South Highlands

Neighborhood Association,Shreveport, LA

Family Life Awareness Council, Inc.,Sibley, IA

Family Life Learning Center,West Dundee, IL

Family Support & Life ManagementServices, Inc., Ft. Lauderdale, FL

Far West Texas & Southern NM TraumaRegional Advisory Council,El Paso, TX

Federal Bar Association FDN ofCincinnati, Inc., Cincinnati, OH

Fernald Community Reuse Organization,Inc., Ross, OH

Filarmonica Protuguesa De Tulare,Tulare, CA

Filipino-American Heritage AppreciationProject, San Jose, CA

Folk Traditions Conservancy,Santa Barbara, CA

Fort Wayne Christian Womens Retreat,Inc., Fort Wayne, IN

Fred D. Middleton ScholarshipFoundation, Wichita, KS

Freds House, Inc., Chicago, ILFretz Park Library Friends, Dallas, TXFriends and Family Alternative to

Alcohol & Drug Dependency,Hanford, CA

Friends of Erna Nixon Park, Inc.,Melbourne, FL

Friends of Utah Golf, Inc.,Salt Lake City, UT

Friends of Yeshivah Mikdash Shelomo,Inc., Brooklyn, NY

Garden Grove Police Activities League,Garden Grove, CA

Garden Variety Shakespeare,Birmingham, AL

Gatekeepers, Richmond, VAGenealogy Friends of Gladys Harrington

Library, Inc., Plano, TX

George Washington Carver ScholarshipFund, Inc., Louisville, KY

Girls Softball Association, Inc.,Spring Hill, FL

Godchaux-Reserve House HistoricalSociety, Reserve, LA

Gold Beach Booster Club, Inc.,Gold Beach, OR

Golden Heart, Dallas, TXGolden West Aviation, Inc.,

Marysville, CAGood Days Living, Signal Hill, CAGood Samaritan Community

Development, Inc., Washington, DCGrace Foundation, Royal, ARGreater Ohio Valley Fine Arts &

Cultural Awareness Council,Woodsfiled, OH

Harriet Tubman Project, Inc.,Dallas, TX

H. E. A. D. D. U. P., Royal Oak, MIHearts and Hands of Jefferson, Inc.,

Lake Hopatcong, NJHinson Road Office Addition Owners

Association, Inc., Little Rock, ARHispanic Health Program,

Little Rock, ARHIV-AIDS Human Rights Project, Inc.,

Red Hook, NYHollins Meaux Education & Recreation

Center, Kaplan, LAHome, Los Angeles, CAHope & Health Foundation Corp.,

Sarasota, FLHope Foundation for Education Denver

Parents Assoc., Denver, COHospice of Lincoln County, Inc.,

Ruidoso, NMHub of Belknap, Grand Rapids, MIHutson Weekend Ministries, Inc.,

Lakeview, MIImmaculate Community Center, Inc.,

Hamtramck, MIIndependent Lifestyles, Inc.,

Asheville, NCIndiana Friends of Animals, Inc.,

North Vernon, INIntegrated Business Management

Development Corporation,Dallas, TX

Intensive Learning Center,New York, NY

International Dental TechnologyFoundation, Los Angeles, CA

International Womens AthleticFoundation, Inc., Jupiter, FL

Jesus Cares Ministries, Inc.,Spring Valley, IL

Joliet Cyclones Baseball, Joliet, ILKansas Minority Business Development

Council, Inc., Wichita, KSKav Lachayim-Line to Life, Inc.,

Brooklyn, NYKeep Opelika Beautiful, Inc.,

Opelika, ALKeep Tallahassee Leon County

Beautiful, Inc., Tallahassee, FLKeren Yecheskial Duvid, Inc.,

Brooklyn, NYKeystone Team Gymnastics, Inc.,

Dunmore, PAKids for Kids, Marks, MSKids Money Club, Inc.,

Newport Beach, CAKWJ Community Outreach,

Pleasantville, NJLand of Milk & Honey Foundation for

Horses, Calabasas, CALatino Educational and Recreational

Network, Woodburn, ORLeetonia Little Bears Organization,

Leetonia, OHLegal Aid Rwanda Ltd., New York, NYLight is Coming, Inc., Mercer, PALouisiana Institute for Education in the

Arts, New Orleans, LALove for Life Animal Haven, Inc.,

Brooksville, FLLutheran Counseling Services, Inc.,

Dallas, TXMacon County Commission,

Tuskegee, ALManagement Opportunity of

Neighborhood Service, Inc.,Purvis, MS

Marine Animal Rescue Society, Inc.,North Miami, FL

Marine Sanctuaries and EstuarineReserves Foundation,Carmichael, CA

Marjan Foundation, South Gate, CAMassachusetts Special Technology

Access Center, Inc., Bedford, MAMasters Services Empowerment

Ministries, Milwaukee, WIMaxus Community Developers, Inc.,

Phoenix, AZMbegu Community Development

Corporation, Milpitas, CAMemphis Shelby Crime Commission,

Memphis, TNMenominee Indian Missionary, Inc.,

Suring, WIMercury Foundation, Incorporated,

Washington, DC

May 12, 2003 900 2003–19 I.R.B.

Michigan Greenscapes, Inc.,Dearborn, MI

Michigan Tradeswomen Association,Detroit, MI

Might Have Been Known TheatreCompany, St. Paul, MN

Mike Dubose Charities, Bessemer, ALMillennial Foundation, Inc.,

New York, NYMind & Body Foundation, Inc.,

Columbia, MDMinnesota Metro Alpha Phi Omega

Alumni Association, Eagan, MNMississippi Rural Development

Partnership, Inc., Jackson, MSMissouri Valley Health Span,

Warrensburg, MOMitakolapi, Inc., Silver Spring, MDMo Valley Magic, Inc., Springfield, MOMohona Cultural Group,

Lawrenceville, GAMonett Downtown Betterment Group,

Inc., Monett, MOMontbello-Green Valley Ranch-Gateway

Family Presrvtn Family Support,Denver, CO

Montgomery Area Crime Stopper, Inc.,Prattville, AL

Moore Fast Pitch Association,Moore, OK

Moore for a Clean Environment, Inc.,Southern Pines, NC

Mothers Voices Houston Gulf Coast,Houston, TX

Mothers Voices Illinois, Chicago, ILMuldoon Community Development

Corporation, Anchorage, AKMurrieta Soccer Club Hawks,

Murrieta, CANational Association of 10 Black

Women South Bay Chapter,San Jose, CA

National Association of Aides Educationand Training Centers, Detroit, MI

National Right to Compete LegalDefense Foundation, Inc.,Albany, NY

National Student Achievement Awards,Washington, DC

National Suffolk Foundation,Columbia, MO

Native American Association ofHorsemanship Safety, Flagstaff, AZ

New Beginning Child Nutrition Center,Inc., East Orange, NJ

New England Therapeutic RecreationAssociation, Hollis, NH

New Hanover County Parks Foundation,Wilmington, NC

New Serenity House, Austin, TXNewcomers Association,

San Francisco, CANon-Profit TV Productions, Inc.,

Miami, FLNorth East Texas Intertribal Alliance,

Daingerfield, TXNorthside Senior Citizens Center,

Unadilla, GANow More Than Ever, Inc.,

Nashville, TNNW Alabama Services & Development,

Inc., Muscle Shoals, ALOak Grove Optimist Baseball

Association, Inc., Hattieburg, MSOddlife Theater Company, Chicago, ILOhio Heart & Vascular Research

Foundation, Perrysburg, OHOmadi Foundation, So. Souix City, NEOmaha Jaycees Foundation, Inc.,

Omaha, NEOne Per Cent Connecting the

Community, Cincinnati, OHOpen Arms Housing, Inc.,

Washington, DCOptimist Penny Reapers of Southern

California, Chula Vista, CAOrchid Mania South Florida, Inc.,

South Miami, FLPaint it Yellow Productions, Inc.,

Stafford, TXPeace Community Development

Corporation, Columbus, OHPeacemakers Evangelistic Team, Inc.,

Dayton, OHPearland Enrichment Foundation,

Pearland, TXPecan Acres Resident Management

Corp., Petersburg, VAPeoples Health Care Corporation,

Washington, DCPerforming Arts-LA, Sherman Oaks, CAPhi Phi Social Action Foundation,

Richmond, VAPlatinum Foundation, Carbondale, ILPlymouth South High School Panther

Volleyball Booster Club, Inc.,Manomet, MA

Power Twistars Parents Association,Frederick, OK

Powhatan Youth Athletic Association,Inc., Powhatan, VA

Praise & Resurrection Ministries ofJesus Christ, Oxon Hill, MD

Prevent Child Abuse, Chicago, IL

Project Partnership, Incorporated,Pawcatuck, CT

Prufrock Childrens Basic Needs Fund,Los Angeles, CA

Raw, Inc., Hampton, VAReagan All Sports Booster Club, Inc.,

Austin, TXRecovery in Motion, Inc., Vista, CARecovery Lifestyles, Inc., Adrian, MIRed Rose Rising Foundation, Inc.,

New York, NYRefreshing Spring Alliance, Inc.,

Schenectady, NYReligious Committee for Community

Justice, Norristown, PAReserve Forces Educational Assistance

Foundation, Atlanta, GARestoration Community Development

Corp., Annapolis, MDRichardson Weekend Ministries, Inc.,

Sharpsville, INRl Charity Association, Lewisberry, PASaintes Assisted Independent Living at

Zebulon, Inc., Henderson, NCSanta Rosa Community Service, Inc.,

Milton, FLScholarship Foundation of the National

Supermarkets Assn., Inc.,Flushing, NY

Seattle Magic Basketball Club,Gig Harbor, WA

Shakespeare Festival, Kalamazoo, MIShiloh Ministries, Inc., Slidell, LASnug Harbor Foundation, Inc.,

Sky Valley, GASouthern Chesapeake Adaptive Maritime

Programs Scamp, Norfolk, VASouthern Nevada Therapeutic Riding

Center, Las Vegas, NVSouthwest Housing Assistance, Inc.,

Desert Hot Springs, CASparrow Association, Glendale, CASpecially Me, Inc., Sioux Falls, SDSportsworks, Jackson, MSSt. Francis House NWA, Inc.,

Springdale, ARSt. Marys Villa, Inc., Knoxville, TNStar Karts-the Race for the Right to a

Childhood, Ellendale, TNStarlight Friends, Inc., Euless, TXT.L. Kirkland 17th District Mission Co.,

Los Angeles, CATextilemuseum Associates of Southern

Cal, Inc., Glendale, CATheatre Atlantis, Inc., Eugene, ORThimble Islands Historical Society, Inc.,

Branford, CT

2003–19 I.R.B. 901 May 12, 2003

Three Sisters Animal Foundation,Denver, CO

Thumb Outreach Minority Services,Sandusky, MI

Tikvatam, Inc., Brooklyn, NYTomorrow, Inc., Lathrup Village, MITorrey Pines Pond Foundation,

Del Mar, CATribal Angels, Inc., New York, NYTriple Play Ballpark, Inc., Newalla, OKTriton Rainbow Foundation,

Dodge Center, MNUmoja Literary Group, Vista, CAUnited Child Guidance Council, Inc.,

Dallas, TXUnited Residents of Taylor Center, Inc.,

Las Cruces, NMUnited Resources Management, Inc.,

Beverly Hills, CAUrban Grasshopper, Inc., Brooklyn, NYUtah Grizzlies Youth Foundation,

W. Valley City, UTValues First, Washington, DC

Victory Fellowship, Chicago, ILVoting Integrity Project, Inc.,

Arlington, VAWelcome Place, Salt Lake City, UTWest Virginia K-Family Childrens

Festival Foundation, Inc.,Morgantown, WV

Western Colorado Camp Courage, Inc.,Eckert, CO

Williamsburg Housing Resident Council,Williamsburg, KY

Women After Gods Own Heart Ministry,Fayetteville, GA

Womens Wasatch Lacrosse,Salt Lake City, UT

Wonderland Opera, Inc., New York, NYWoodbridge Garden Apartments

Resident Council, Woodbridge, NJWoodland Terrace Resident Council,

Washington, DCWright Cause, Inc., Brooklyn, NYWright County Information Network &

Data Mining Organization, Ava, MO

Yaldei Eretz Yisroel, Inc., Brooklyn, NYYaldei Russia, Inc., Brooklyn, NYZainab Islamic Foundation, Inc.,

Glen Cove, NYZichron Yakov Menachem, Inc.,

Brooklyn, NY

If an organization listed above submitsinformation that warrants the renewal of itsclassification as a public charity or as a pri-vate operating foundation, the Internal Rev-enue Service will issue a ruling ordetermination letter with the revised clas-sification as to foundation status. Grant-ors and contributors may thereafter relyupon such ruling or determination letter asprovided in section 1.509(a)–7 of the In-come Tax Regulations. It is not the prac-tice of the Service to announce such revisedclassification of foundation status in the In-ternal Revenue Bulletin.

May 12, 2003 902 2003–19 I.R.B.

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as“rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe theeffect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus, ifan earlier ruling held that a principleapplied to A, and the new ruling holdsthat the same principle also applies to B,the earlier ruling is amplified. (Comparewith modified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previouslypublished ruling and points out an essen-tial difference between them.

Modified is used where the substanceof a previously published position isbeing changed. Thus, if a prior rulingheld that a principle applied to A but notto B, and the new ruling holds that it

applies to both A and B, the prior rulingis modified because it corrects a pub-lished position. (Compare with amplifiedand clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly usedin a ruling that lists previously publishedrulings that are obsoleted because ofchanges in law or regulations. A rulingmay also be obsoleted because the sub-stance has been included in regulationssubsequently adopted.

Revoked describes situations where theposition in the previously published rul-ing is not correct and the correct positionis being stated in the new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over aperiod of time in separate rulings. If the

new ruling does more than restate thesubstance of a prior ruling, a combinationof terms is used. For example, modifiedand superseded describes a situationwhere the substance of a previously pub-lished ruling is being changed in part andis continued without change in part and itis desired to restate the valid portion ofthe previously published ruling in a newruling that is self contained. In this case,the previously published ruling is firstmodified and then, as modified, is super-seded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further namesin subsequent rulings. After the originalruling has been supplemented severaltimes, a new ruling may be published thatincludes the list in the original ruling andthe additions, and supersedes all prior rul-ings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in currentuse and formerly used will appear inmaterial published in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.

E.O.—Executive Order.ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign Corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.

PO—Possession of the U.S.PR—Partner.PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statements of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D.—Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z—Corporation.

2003–19 I.R.B. i May 12, 2003

Numerical Finding List1

Bulletins 2003–1 through 2003–18

Announcements:

2003–1, 2003–2 I.R.B. 2812003–2, 2003–3 I.R.B. 3012003–3, 2003–4 I.R.B. 3612003–4, 2003–5 I.R.B. 3962003–5, 2003–5 I.R.B. 3972003–6, 2003–6 I.R.B. 4502003–7, 2003–6 I.R.B. 4502003–8, 2003–6 I.R.B. 4512003–9, 2003–7 I.R.B. 4902003–10, 2003–7 I.R.B. 4902003–11, 2003–10 I.R.B. 5852003–12, 2003–10 I.R.B. 5852003–13, 2003–11 I.R.B. 6032003–14, 2003–11 I.R.B. 6032003–15, 2003–11 I.R.B. 6052003–16, 2003–12 I.R.B. 6412003–17, 2003–15 I.R.B. 7222003–18, 2003–13 I.R.B. 6752003–19, 2003–15 I.R.B. 7232003–20, 2003–15 I.R.B. 7502003–21, 2003–17 I.R.B. 8462003–22, 2003–17 I.R.B. 8462003–23, 2003–16 I.R.B. 8082003–24, 2003–16 I.R.B. 8102003–25, 2003–17 I.R.B. 8462003–26, 2003–18 I.R.B. 862

Notices:

2003–1, 2003–2 I.R.B. 2572003–2, 2003–2 I.R.B. 2572003–3, 2003–2 I.R.B. 2582003–4, 2003–3 I.R.B. 2942003–5, 2003–3 I.R.B. 2942003–6, 2003–3 I.R.B. 2982003–7, 2003–4 I.R.B. 3102003–8, 2003–4 I.R.B. 3102003–9, 2003–5 I.R.B. 3692003–10, 2003–5 I.R.B. 3692003–11, 2003–6 I.R.B. 4222003–12, 2003–6 I.R.B. 4222003–13, 2003–8 I.R.B. 5132003–14, 2003–8 I.R.B. 5152003–15, 2003–9 I.R.B. 5402003–16, 2003–10 I.R.B. 5752003–17, 2003–12 I.R.B. 6332003–18, 2003–14 I.R.B. 6992003–19, 2003–14 I.R.B. 7032003–21, 2003–17 I.R.B. 8172003–22, 2003–18 I.R.B. 8512003–23, 2003–17 I.R.B. 8212003–24, 2003–18 I.R.B. 8532003–25, 2003–18 I.R.B. 8552003–26, 2003–18 I.R.B. 855

Proposed Regulations:

REG–209500–86, 2003–2 I.R.B. 262REG–104385–01, 2003–12 I.R.B. 634REG–116641–01, 2003–8 I.R.B. 518REG–125638–01, 2003–5 I.R.B. 373

Proposed Regulations—Continued:

REG–126016–01, 2003–7 I.R.B. 486REG–126485–01, 2003–9 I.R.B. 542REG–103580–02, 2003–9 I.R.B. 543REG–124069–02, 2003–7 I.R.B. 488REG–131478–02, 2003–13 I.R.B. 669REG–138882–02, 2003–8 I.R.B. 522REG–139768–02, 2003–10 I.R.B. 583REG–141097–02, 2003–16 I.R.B. 807REG–151043–02, 2003–3 I.R.B. 300REG–164464–02, 2003–2 I.R.B. 262

Revenue Procedures:

2003–1, 2003–1 I.R.B. 12003–2, 2003–1 I.R.B. 762003–3, 2003–1 I.R.B. 1132003–4, 2003–1 I.R.B. 1232003–5, 2003–1 I.R.B. 1632003–6, 2003–1 I.R.B. 1912003–7, 2003–1 I.R.B. 2332003–8, 2003–1 I.R.B. 2362003–9, 2003–8 I.R.B. 5162003–10, 2003–2 I.R.B. 2592003–11, 2003–4 I.R.B. 3112003–12, 2003–4 I.R.B. 3162003–13, 2003–4 I.R.B. 3172003–14, 2003–4 I.R.B. 3192003–15, 2003–4 I.R.B. 3212003–16, 2003–4 I.R.B. 3592003–17, 2003–6 I.R.B. 4272003–18, 2003–6 I.R.B. 4392003–19, 2003–5 I.R.B. 3712003–20, 2003–6 I.R.B. 4452003–21, 2003–6 I.R.B. 4482003–22, 2003–10 I.R.B. 5772003–23, 2003–11 I.R.B. 5992003–24, 2003–11 I.R.B. 5992003–25, 2003–11 I.R.B. 6012003–26, 2003–13 I.R.B. 6662003–27, 2003–13 I.R.B. 6672003–28, 2003–16 I.R.B. 7592003–30, 2003–17 I.R.B. 8222003–31, 2003–17 I.R.B. 8382003–32, 2003–16 I.R.B. 8032003–33, 2003–16 I.R.B. 8032003–34, 2003–18 I.R.B. 8562003–36, 2003–18 I.R.B. 859

Revenue Rulings:

2003–1, 2003–3 I.R.B. 2912003–2, 2003–2 I.R.B. 2512003–3, 2003–2 I.R.B. 2522003–4, 2003–2 I.R.B. 2532003–5, 2003–2 I.R.B. 2542003–6, 2003–3 I.R.B. 2862003–7, 2003–5 I.R.B. 3632003–8, 2003–3 I.R.B. 2902003–9, 2003–4 I.R.B. 3032003–10, 2003–3 I.R.B. 2882003–11, 2003–3 I.R.B. 2852003–12, 2003–3 I.R.B. 2832003–13, 2003–4 I.R.B. 3052003–14, 2003–4 I.R.B. 3022003–15, 2003–4 I.R.B. 302

Revenue Rulings—Continued:

2003–16, 2003–6 I.R.B. 4012003–17, 2003–6 I.R.B. 4002003–18, 2003–7 I.R.B. 4672003–19, 2003–7 I.R.B. 4682003–20, 2003–7 I.R.B. 4652003–21, 2003–8 I.R.B. 5092003–22, 2003–8 I.R.B. 4942003–23, 2003–8 I.R.B. 5112003–24, 2003–10 I.R.B. 5572003–25, 2003–13 I.R.B. 6422003–26, 2003–10 I.R.B. 5632003–27, 2003–11 I.R.B. 5972003–28, 2003–11 I.R.B. 5942003–29, 2003–11 I.R.B. 5872003–30, 2003–13 I.R.B. 6592003–31, 2003–13 I.R.B. 6432003–32, 2003–14 I.R.B. 6892003–33, 2003–13 I.R.B. 6422003–34, 2003–17 I.R.B. 8132003–35, 2003–14 I.R.B. 6872003–36, 2003–18 I.R.B. 8492003–37, 2003–15 I.R.B. 7172003–38, 2003–17 I.R.B. 8112003–39, 2003–17 I.R.B. 8112003–40, 2003–17 I.R.B. 8132003–41, 2003–17 I.R.B. 8142003–42, 2003–16 I.R.B. 7542003–44, 2003–18 I.R.B. 848

Treasury Decisions:

9024, 2003–5 I.R.B. 3659025, 2003–5 I.R.B. 3629026, 2003–5 I.R.B. 3669027, 2003–6 I.R.B. 4139028, 2003–6 I.R.B. 4159029, 2003–6 I.R.B. 4039030, 2003–8 I.R.B. 4959031, 2003–8 I.R.B. 5049032, 2003–7 I.R.B. 4719033, 2003–7 I.R.B. 4839034, 2003–7 I.R.B. 4539035, 2003–9 I.R.B. 5289036, 2003–9 I.R.B. 5339037, 2003–9 I.R.B. 5359038, 2003–9 I.R.B. 5249039, 2003–10 I.R.B. 5619040, 2003–10 I.R.B. 5689041, 2003–8 I.R.B. 5109042, 2003–10 I.R.B. 5649043, 2003–12 I.R.B. 6119044, 2003–14 I.R.B. 6909045, 2003–12 I.R.B. 6109046, 2003–12 I.R.B. 6149047, 2003–14 I.R.B. 6769048, 2003–13 I.R.B. 6449049, 2003–14 I.R.B. 6859050, 2003–14 I.R.B. 6939051, 2003–16 I.R.B. 755

1 A cumulative list of all revenue rulings, revenue

procedures, Treasury decisions, etc., published in

Internal Revenue Bulletins 2002–26 through 2002–52 is

in Internal Revenue Bulletin 2003–1, dated January 6, 2003.

May 12, 2003 ii 2003–19 I.R.B.

Finding List of Current Actionson Previously Published Items2

Bulletins 2003–1 through 2003–18

Notices:

97–19Modified byRev. Proc. 2003–1, 2003–1 I.R.B. 1

2001–26Obsoleted byT.D. 9032, 2003–7 I.R.B. 471

2001–46Modified byNotice 2003–6, 2003–3 I.R.B. 298

2001–69Modified and superseded byNotice 2003–1, 2003–2 I.R.B. 257

2002–20Superseded byRev. Proc. 2003–36, 2003–18 I.R.B. 859

2002–27Clarified byNotice 2003–3, 2003–2 I.R.B. 258

2002–40Modified byAnn. 2003–18, 2003–13 I.R.B. 675

2002–46Modified byNotice 2003–10, 2003–5 I.R.B. 369

Proposed Regulations:

REG–209500–86Corrected byAnn. 2003–6, 2003–6 I.R.B. 450


REG–126485–01Withdrawn byREG–126485–01, 2003–9 I.R.B. 542Corrected byAnn. 2003–25, 2003–17 I.R.B. 846




Revenue Procedures:

83–23Supplemented byRev. Proc. 2003–21, 2003–6 I.R.B. 448

Revenue Procedures—Continued:


93–38Obsoleted byRev. Proc. 2003–15, 2003–4 I.R.B. 321


98–13Obsoleted byT.D. 9032, 2003–7 I.R.B. 471









2002–9Modified and amplified byRev. Proc. 2003–20, 2003–6 I.R.B. 445Rev. Rul. 2003–3, 2003–2 I.R.B. 252

2002–20Supplemented byRev. Proc. 2003–26, 2003–13 I.R.B. 666




Revenue Procedures—Continued:






2002–67Supplemented byAnn. 2003–3, 2003–4 I.R.B. 361


2003–3Amplified byRev. Proc. 2003–14, 2003–4 I.R.B. 319

2003–7Corrected byAnn. 2003–4, 2003–5 I.R.B 396

Revenue Rulings:

53–131Modified byRev. Rul. 2003–12, 2003–3 I.R.B. 283

57–190Obsoleted byRev. Rul. 2003–18, 2003–7 I.R.B. 467

65–190Revoked byRev. Rul. 2003–3, 2003–2 I.R.B. 252

66–118Distinguished byRev. Rul. 2003–41, 2003–17 I.R.B. 814


92–19Supplemented in part byRev. Rul. 2003–24, 2003–10 I.R.B. 557


2 A cumulative list of current actions on previously

published items in Internal Revenue Bulletins

2002–26 through 2002–52 is in Internal Revenue

Bulletin 2003–1, dated January 6, 2003.

2003–19 I.R.B. iii May 12, 2003

Treasury Decisions:

9002Corrected byAnn. 2003–8, 2003–6 I.R.B. 451


9022Supplemented byAnn. 2003–7, 2003–6 I.R.B. 450Corrected byAnn. 2003–11, 2003–10 I.R.B. 585


May 12, 2003 iv *U.S. Government Printing Office: 2003—496–919/60082 2003–19 I.R.B.