Part III. Administrative, Procedural, and Miscellaneous

the Form 5701 ( Notice of Proposed Adjustment ) has been issued, and a written response has been provided by the taxpayer, but before the issuance of the 30–day letter. LMSB Fast Track is generally available for all LMSB cases within Compliance’s jurisdiction. LMSB Fast Track is appropriate for cases where:

• Issues are fully developed;

• The taxpayer has stated its position in writing; and

• There are a limited number of unagreed issues. LMSB Fast Track will not be available for:

• Issues designated for litigation by Chief Counsel;

• An issue that is the subject of a request for competent authority assistance;

• An issue for which the taxpayer has requested the simultaneous Appeal/ Competent Authority procedure described in section 8 of Rev. Proc. 96–13 (1996–1 C.B. 616);

• Issues outside LMSB’s jurisdiction; or

• Issues outside Appeals’ settlement authority ( e.g., application of certain international penalty provisions under Chapter 61 of the Internal Revenue Code (Code)). LMSB Fast Track may not be the appropriate dispute resolution process for all cases. The LMSB Team Manager and the taxpayer will evaluate their individual circumstances to determine if this process meets their needs.

4. PROCEDURES FOR REQUESTING PARTICIPATION IN THE LMSB FAST TRACK DISPUTE RESOLUTION PILOT PROGRAM

A taxpayer that is interested in participating in LMSB Fast Track, or that has questions about the program and its suitability for the taxpayer’s case, may contact the LMSB Team Manager for the year currently under examination. Taxpayers may also contact Jim Fike, LMSB Fast Track Program Manager, at (202) 283–8353 (not a toll-free number), or

Notice 2001–67

1. ANNOUNCEMENT OF THE LMSB FAST TRACK DISPUTE RESOLUTION PILOT PROGRAM

This Notice announces the LMSB Fast Track Dispute Resolution Pilot Program (LMSB Fast Track) which establishes new opportunities for large and mid-size business taxpayers, with the assistance of the IRS Office of Appeals (Appeals), to expedite case resolution at the lowest level within the IRS’s Large and MidSize Business organization (LMSB). The purpose of the LMSB Fast Track program is to enable taxpayers and the IRS to work together in a concentrated and expedited fashion to resolve outstanding issues while the case is still in LMSB jurisdiction. The purpose of the pilot phase of the program is to test, measure, and explore whether the process described in this Notice, in fact, reduces cost and time to the parties.

The program is jointly administered by LMSB and Appeals. In the pilot phase, the program is available to large and midsize businesses under LMSB jurisdiction that currently have unagreed issues in at least one open year under examination. LMSB Fast Track is a collaborative process among the taxpayer, LMSB, and Appeals. LMSB Fast Track is one process with two options for dispute resolution: Fast Track Mediation and Fast Track Settlement. Under Fast Track Mediation, an Appeals Officer or an Appeals Team Case Leader will act in the role of mediator to help the parties resolve factual issues. Under Fast Track Settlement, an Appeals Team Case Leader will facilitate communications to help the taxpayer and LMSB resolve factual and legal issues. During the pilot phase of the program, the program managers for LMSB and Appeals plan to select, from cases for which the taxpayer and the LMSB Team Manager agree that LMSB Fast Track might be beneficial, a minimum of one case from each of the five LMSB industry groups for Fast Track Mediation and a

minimum of one case from each of the five LMSB industry groups for Fast Track Settlement.

The IRS believes that LMSB Fast Track has the potential to offer significant benefits for taxpayers as well as the IRS, and invites large and mid–size business taxpayers to participate.

2. DESCRIPTION OF THE LMSB FAST TRACK DISPUTE RESOLUTION PILOT PROGRAM

LMSB Fast Track establishes new opportunities designed to expedite case resolution at the lowest level within the LMSB organization. LMSB Fast Track offers two options using Alternative Dispute Resolution (ADR) techniques. The first option, Fast Track Mediation, involves an Appeals Officer or an Appeals Team Case Leader who has been trained in mediation techniques acting as a mediator between the taxpayer and the LMSB audit team.

The second option, Fast Track Settlement, involves an Appeals Team Case Leader who assists the parties to reach a resolution of the disputed issues.

Although the two options have many similarities, Fast Track Settlement is different from Fast Track Mediation because Fast Track Settlement allows the parties to consider both factual and legal issues and to take Appeals’ assessment of the hazards of litigation into account in resolving disputes. Both options, Fast Track Settlement and Fast Track Mediation, take place prior to the issuance of the 30–day letter to the taxpayer, and each is designed to be completed in approximately 120 days.

3. SUBJECT MATTER FOR THE LMSB FAST TRACK DISPUTE RESOLUTION PILOT PROGRAM

The LMSB Fast Track process will assist taxpayers and Compliance to resolve factual and/or legal issues and is generally available to all LMSB taxpayers. Fast Track Mediation or Fast Track Settlement may be initiated at any time after an issue has been fully developed,

December 3, 2001 544 2001–49 I.R.B.

J.W. Wyatt, Appeals Fast Track Acting Program Manager, at (314) 612–4639 (not a toll-free number), for further information about the pilot program.

Initiating the Request for Participation in the Pilot Program

Either the taxpayer or the LMSB Team Manager can suggest the use of LMSB Fast Track procedures. A request to participate in the LMSB Fast Track pilot program must be initiated before a 30–day letter is issued, and both parties must enter into an agreement to participate in the process by executing an LMSB Fast Track Agreement.

Contents of the Request

The LMSB Fast Track Agreement form used to request either Fast Track Mediation or Fast Track Settlement is attached to this Notice. The LMSB Team Manager and the taxpayer together indicate which LMSB Fast Track option, Fast Track Mediation or Fast Track Settlement, they believe is best suited for the case.

The goal is to complete the entire LMSB Fast Track process in approximately 120 days. A projected process ending date is agreed to and documented on the LMSB Fast Track Agreement form. The LMSB Team Manager and the taxpayer will identify a preferred conference site. The Notices of Proposed Adjustment (Forms 5701) and a written response from the taxpayer should be included with the LMSB Fast Track Agreement to complete the package. A formal protest is not required.

If the case is not accepted for inclusion in the LMSB Fast Track pilot program, the LMSB Team Manager will discuss other dispute resolution opportunities with the taxpayer. A taxpayer is not entitled to a conference to appeal a decision not to accept a case into the LMSB Fast Track pilot program.

5. SELECTION OF TAXPAYERS FOR THE LMSB FAST TRACK DISPUTE RESOLUTION PILOT PROGRAM

In general, LMSB Fast Track requests will be evaluated and selected for inclusion in the pilot program by applying criteria that include the following:

• LMSB Team Manager and taxpayer: Ensure that the issues identified for the process qualify for inclusion in the program.

• Appeals Officer or Appeals Team Case Leader and the Appeals Fast Track Program Manager: Concur with the taxpayer and LMSB Team Manager that the issues are appropriate for LMSB Fast Track under the option selected, and confirm that a different Appeals Officer will be able to handle any unagreed issues following the LMSB Fast Track process.

• LMSB Fast Track Program Manager and Appeals Fast Track Program Manager: Ensure that a crosssection of taxpayers of varying sizes and representing different industry lines, a geographical dispersion of cases and a variety of issues are included in the program.

6. CONDUCTING THE LMSB FAST TRACK PROCESS

LMSB Fast Track is one process with two options for dispute resolution: Fast Track Mediation and Fast Track Settlement.

Fast Track Mediation is designed to expedite case resolution using mediation techniques. An Appeals Officer or an Appeals Team Case Leader trained in mediation techniques acts as a mediator between the taxpayer and LMSB. The purpose is to facilitate communication and to help the parties resolve factual issues. The mediator will not have settlement authority and will not render a decision regarding any issue subject to the Fast Track Mediation process.

Fast Track Settlement involves an Appeals Team Case Leader who will use various dispute resolution techniques to propose solutions. The Appeals Team Case Leader will first attempt to facilitate an agreement between LMSB and the taxpayer regarding the Fast Track Settlement issues, and may ultimately make a recommendation regarding the settlement of any or all issues (both factual and legal). If the recommendation is acceptable to LMSB and the taxpayer, the settlement proposal may be adopted. The Appeals Team Case Leader will have settlement authority and may exercise that authority

to write up the settlement of Fast Track Settlement issues agreed to by the parties.

Participants

During the LMSB Fast Track process, taxpayer and LMSB representatives, including a representative with decisionmaking authority from both the taxpayer and LMSB, will meet with the Appeals representative. The taxpayer and LMSB representatives should include persons with the information and expertise that will aid the decision-makers for the taxpayer and LMSB as well as the Appeals representative. In some cases, the Appeals representative may ask that the number of participants be limited.

Time Frames

Stringent time frames have been established in order to provide taxpayers an expedited resolution of tax disputes. The LMSB Fast Track process is designed to be completed within an average of 90 to 120 days.

Site, Date and Agenda

The LMSB Fast Track session will be held at a date and location agreeable to the parties. The representatives with decision-making authority for the taxpayer and LMSB must be present during the LMSB Fast Track session. Prior to or during the LMSB Fast Track session, the Appeals representative will advise the participants of the procedures and establish ground rules.

Confidentiality

The LMSB Fast Track process is confidential. IRS employees involved in any way with the LMSB Fast Track process are subject to the confidentiality and disclosure provisions of the Code. By signing the Fast Track Agreement, the taxpayer consents, pursuant to § 6103(c) of the Code, to the disclosure of the taxpayer’s returns and return information pertaining to the issues being considered in the LMSB Fast Track process to those persons named on the agreement as participants in the process. If any person will be engaging in practice before the IRS, as defined in Publication 216, Conferences and Practice Requirements, a power of attorney, such as IRS Form 2848 ( Power

2001–49 I.R.B 545 December 3, 2001

request Appeals consideration of such unagreed issues. Appeals will assign a different Appeals Officer to handle the unagreed issues unless the taxpayer agrees otherwise.

Term of Pilot Program

The LMSB Fast Track Dispute Resolution Pilot Program will accept applications through November 14, 2002.

9. EFFECTIVE DATE

The LMSB Fast Track Dispute Resolution Pilot Program is effective beginning November 14, 2001.

10. COMMENTS

The IRS invites interested persons to comment on this program. Send submissions to:

Internal Revenue Service Attn: Jim Fike Large and Mid-Size Business Division LM:Q Mint Building, 3rd Floor, M–3–148 1111 Constitution Avenue, NW Washington, D.C. 20224

11. FURTHER INFORMATION

For further information regarding this notice, contact either: Jim Fike, LMSB Fast Track Program Manager, at (202) 283–8353 (not a toll-free number); or J.W. Wyatt, Appeals Fast Track Acting Program Manager, at (314) 612–4639 (not a toll-free number).

of Attorney and Declaration of Represen- tative ) will be required in addition to the Fast Track Agreement, unless such person has already been designated as the taxpayer’s representative under a valid power of attorney.

IRS employees, the taxpayer and persons invited to participate by the IRS or the taxpayer shall not voluntarily disclose information regarding any communication made during the LMSB Fast Track session, except as provided by statute, such as in § 6103 of the Code and 5 U.S.C. § 574.

Ex Parte

Generally, the prohibition of ex parte communications between Appeals Officers and other IRS employees provided by § 1001(a) of the Internal Revenue Service Restructuring and Reform Act of 1998 does not apply to the communications arising in the LMSB Fast Track process because the Appeals personnel are facilitating an agreement between the taxpayer and LMSB and are not acting in their traditional Appeals’ settlement role. In some circumstances, the role the parties are asking Appeals to play may begin to resemble Appeals’ traditional settlement role. In that case, Appeals may request that the taxpayer waive the ex parte rules if Appeals determines such a waiver is necessary in order for Appeals to fulfill its role in the LMSB Fast Track process. Regardless of whether a waiver is obtained, the LMSB Fast Track process may still continue if the taxpayer is present at any discussion that the Appeals representative has with LMSB.

Closing Procedures

If the parties reach an agreement on all or some issues through the Fast Track Mediation or the Fast Track Settlement process, LMSB or Appeals, as appropri

ate, will use established issue or case closing procedures, including preparation of a specific matters closing agreement.

7. WITHDRAWAL FROM THE LMSB FAST TRACK DISPUTE RESOLUTION PILOT PROGRAM

The taxpayer may withdraw from the LMSB Fast Track process at any time by notifying the LMSB Team Manager and the Appeals representative in writing. The Appeals representative or the LMSB Team Manager also may terminate the LMSB Fast Track process if it becomes apparent that meaningful progress toward resolution of the issues has stopped.

8. MISCELLANEOUS

Precedent

A resolution reached by the parties through the LMSB Fast Track process will not be binding on the parties for taxable years not covered by the LMSB Fast Track Agreement. Except as provided in the LMSB Fast Track Agreement, Delegation Order 236 (relating to the authority delegated to an Examination Team Manager in a CIC case to settle issues where a settlement has been effected by Appeals in a prior, subsequent or the same tax period on the same issue) and Delegation Order 247 (relating to the authority delegated to an Examination Team Manager for coordinated issues in the Office of Pre-Filing and Technical Guidance for which Appeals has approved settlement guidelines or positions), any such resolution shall not be used as precedent.

Appeals Rights

If any issues remain unresolved after the LMSB Fast Track process, the taxpayer will retain all the usual rights to

December 3, 2001 546 2001–49 I.R.B.

2001–49 I.R.B 547 December 3, 2001

tax withholding. X also has capital gain of $40 per share equal to the appreciation in value of the stock from the time of exercise to the time of sale. The capital gain of $40 per share is not remuneration and is not subject to income tax withholding.

IV. Proposed Rules - Reporting

Treasury and the Service propose the following rules:

Section 1.6041–2(a)(1) requires that, under certain circumstances, a payment made by an employer to an employee be reported on Form W–2 even if the payment is not subject to income tax withholding. Specifically, section 1.6041– 2(a)(1) generally requires reporting if the total amount of the payment and other payments of remuneration, if any, made to the employee that are required to be reported on Form W–2, aggregate at least $600 in a calendar year. An employer must make reasonable efforts to ascertain whether it must provide a Form W–2 to an employee who has received remuneration not subject to income tax withholding upon a sale or disposition of stock acquired pursuant to the exercise of an ISO or option granted under an ESPP. An employer has not made reasonable efforts in any case in which it claims a deduction under section 83 for payment of the remuneration to an employee but fails to provide a Form W–2 reporting that remuneration to the employee, if the total amount of that payment, along with any other payments of remuneration made to the employee that are required to be reported on Form W–2, aggregate at least $600 in that calendar year. The employer is not required to provide a Form W–2 if the employer has made reasonable efforts and cannot determine whether a payment of remuneration has been made.

V. Former Employees

For purposes of this notice, the term “employee” includes any former employee.

VI. Request for Comments

Comments are requested regarding the proposed rules regarding income tax withholding and reporting obligations upon the sale or disposition of stock acquired pursuant to the exercise of a statutory stock option. All comments will be available for public inspection and

Notice of Proposed Rules Regarding Income Tax Withholding and Reporting Obligations Upon the Sale or Disposition of Stock Acquired Pursuant to the Exercise of a Statutory Stock Option

Notice 2001–72

I. Overview and Purpose

This notice provides proposed rules regarding an employer’s income tax withholding and reporting obligations upon sale or disposition of stock acquired by an individual pursuant to the exercise of a statutory stock option, i.e., an incentive stock option (ISO) under section 422 or an option granted under an employee stock purchase plan (ESPP) under section 423. This notice is being published at the time of publication of related proposed regulations (REG–142686–01 on page 561) clarifying the application of employment taxes to statutory stock options. This notice solicits comments regarding the proposed rules. Treasury and the Service anticipate issuing a notice with final rules when the final regulations addressing the application of FICA tax, FUTA tax, and income tax withholding with respect to statutory stock options are issued.

II. Comments Received Pursuant to Notice 2001–14

On February 6, 2001, Treasury and the Service issued Notice 2001–14 (2001–6 I.R.B. 416). Notice 2001–14 addresses the application of employment taxes to statutory stock options. Notice 2001–14 announced the intent to issue administrative guidance that would clarify, among other issues, the application of income tax withholding to statutory stock options, and requested comments regarding the anticipated administrative guidance.

In response to Notice 2001–14, commentators stated that determining the occurrence of a disqualifying disposition ( i.e., a disposition of stock acquired pursuant to the exercise of a statutory stock option that results in loss of the special income tax treatment provided in section 421) to fulfill the income tax withholding

deposit requirements on a timely basis would be burdensome, especially as to former employees.

Commentators also stated that fulfilling the income tax withholding obligations would be difficult as to certain employees, because those employees would not have sufficient other cash compensation from which to fund the withholding. Specifically, the commentators referred to former employees who are no longer receiving other cash compensation, as well as employees with disqualifying dispositions resulting in large income tax withholding obligations whose current other cash compensation would not be sufficient to fund these amounts.

Commentators also pointed out that the current reporting requirements mandate that the amounts be reported to the employees, so that the compensation will not escape Federal income tax. They also noted that employers have an incentive to report these amounts under section 1.83– 6(a)(2) of the Income Tax Regulations.

III. Proposed Rule - Income Tax Withholding

In response to these comments, Treasury and the IRS propose the following rule:

An employer would have no income tax withholding obligation when an employee sells or disposes of stock acquired by the employee pursuant to the exercise of an ISO under section 422 or an option granted under an ESPP under section 423.

Example of proposed rule: (a) Individual X is granted an option under a plan that satisfies the requirements of section 423(b). The option allows X to acquire 50 shares of the stock of X’s employer, Y, at an exercise price equal to 85% of the fair market value of the stock at the time the option is granted. The fair market value of the Y stock at the time the option is granted is $100 per share. X exercises the option later when the fair market value of the Y stock is $120 per share. Thus, at the time of exercise, X acquires 50 shares of Y stock having a fair market value of $120 per share for $85 per share. X pays cash to acquire the shares of Y stock. Four months later, X sells the shares of Y stock for $160 a share.

(b) In this example, when X sells the shares of Y stock, X recognizes ordinary income under section 421(b) equal to the excess of the fair market value of the Y stock at the time of exercise ($120 per share) over the amount paid for the stock ($85 per share) which equals $35 per share, for a total of $1,750. Under the proposed rule, this $1,750 is remuneration that would not be subject to income

December 3, 2001 548 2001–49 I.R.B.

annual, annual, or other basis. An employer also could choose to treat FICA and FUTA wages resulting from the exercise of a statutory stock option as paid over more than one period. The deemed payment or payments could not commence before the exercise occurred and all payments would be required to be treated as paid on or before December 31 of the year of the exercise (except as provided under Section B below). The employer could change the method used at any time. A formal election would not be required, and the employer would not need to notify the Service of the use of any method or change in method used.

Examples (i) Employer A sponsors an employee stock purchase plan under section 423 that permits the purchase of stock on a quarterly basis (January 1, April 1, July 1, and October 1). Employer A elects to treat the wages resulting from the exercises of ESPP options ( i.e., the stock purchases) as paid ratably over the calendar quarter in which the exercises occur, with an automatic acceleration upon the employee’s termination of employment.

(ii) Employer B sponsors an incentive stock option plan under section 422. Employer B elects to treat all wages resulting from the exercises of incentive stock options in a calendar year as paid on December 31 of that year.

(iii) Employer C sponsors an incentive stock option plan under section 422 that permits employees to exercise stock options during employment and within the 90–day period following a termination of employment. Employer C chooses to treat the FICA and FUTA wages resulting from an exercise in a calendar year as paid on December 31 of the calendar year, except that if the employee terminates employment before December 31, Employer C treats the wages as paid on the later of the date of termination of employment or the date of exercise of the statutory stock option.

B. Special Accounting Rule

Under the proposed rules, the employer would be permitted to choose to treat the wages resulting from the exercise of a statutory stock option occurring in the last month of the calendar year (December), or any shorter period ending on December 31, as paid in the first calendar quarter of the next following calendar year. However, an employer who treats any or all wages resulting from the exercise of a statutory stock option during the first 11 months of the calendar year as paid, in whole or in part, during the month of December would not then be permitted to treat those wages as paid in the first calendar quarter of the following calendar year. Rather, only the wages

copying. Comments must be submitted by February 14, 2002. Comments should reference Notice 2001–72, and be addressed to:

Associate Chief Counsel (Tax Exempt and Government Entities) CC:TEGE ATTN: Statutory Stock Options and Income Tax Withholding Room 5214 Internal Revenue Service 1111 Constitution Ave., NW Washington, DC 20224

VII. Effective Date

The proposed rules set forth in this notice are not effective until a subsequent notice is issued with final rules. Treasury and the Service anticipate issuing such a notice to accompany the issuance of final regulations addressing the application of FICA tax, FUTA tax, and income tax withholding to statutory stock options.

VIII. Drafting Information

The principal author of this notice is Stephen Tackney of the Office of the Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from Treasury and the Service participated in its development. For further information regarding this notice, contact Stephen Tackney at (202) 622–6040 (not a toll-free call).

Notice of Proposed Rules of Administrative Convenience Regarding Application of the Federal Insurance Contributions Act and Federal Unemployment Tax Act to Statutory Stock Options

Notice 2001–73

I. Overview and Purpose

This notice provides proposed rules of administrative convenience relating to the application of the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) to statutory stock options, i.e., incentive stock options under section 422 (ISOs) and options

granted pursuant to an employee stock purchase plan under section 423 (ESPP options). The rules are proposed under the authority to be granted to the Commissioner under the regulations that are currently being proposed (as § 31.3121(a)–1(k) and § 31.3306(b)–1(l)) addressing the application of FICA tax, FUTA tax, and income tax withholding with respect to statutory stock options. This notice solicits comments regarding the proposed rules of administrative convenience. Treasury and the Service anticipate issuing a notice with final rules when the final regulations addressing the application of FICA tax, FUTA tax, and income tax withholding with respect to statutory stock options are issued.

On February 6, 2001, Treasury and the Service issued Notice 2001–14 (2001–6 I.R.B. 561). The notice states that Treasury and the Service anticipate issuing guidance clarifying the application of employment taxes to statutory stock options, and requests comments regarding the guidance. Proposed regulations are now being issued that generally provide that, at the time of the exercise of a statutory stock option, the individual who was granted the statutory stock option receives wages for FICA and FUTA purposes when the stock is transferred to the individual pursuant to the exercise.

To address the concerns raised by certain comments to Notice 2001–14, the proposed regulations would grant the Service authority to prescribe rules of administrative convenience to assist employers and employees in meeting the employment tax obligations that arise upon the exercise of a statutory stock option. To notify taxpayers of the potential rules, this notice describes the proposed rules of administrative convenience.

II. Proposed Rules of Administrative Convenience

Treasury and the Service propose the following rules of administrative convenience:

A. Payment Periods

Under the proposed rules, an employer would be permitted to treat FICA and FUTA wages resulting from the exercise of a statutory stock option as paid on a pay period, quarterly, semi

2001–49 I.R.B 549 December 3, 2001

pay the employee portion of FICA tax and obtain reimbursement of those funds from the employee.

Examples (i) Employer A sponsors an employee stock purchase plan under section 423 that permits the exercise of ESPP options on a quarterly basis (March 31, June 30, September 30, and December 31). Employees fund the ESPP option exercise price through payroll deductions. When an option is exercised, Employer A advances the funds to pay the employee portion of FICA tax arising from the exercise, and is repaid the advance from the employee’s payroll deductions over the following quarter. Any repayment due to Employer A is accelerated upon the employee’s termination of employment or termination of participation in the employee stock purchase plan.

(ii) Employer B sponsors an incentive stock option plan under section 422. When an incentive stock option granted under the plan is exercised, Employer B advances the funds to satisfy the employee portion of FICA tax arising from the exercise of the incentive stock option. Employer B is repaid the advance from the employee’s future payroll. Any repayment due to Employer B is accelerated upon the employee’s termination of employment.

E. Consistency Rule

For purposes of the rules of administrative convenience outlined in Sections A and B, the employer would be required to apply the chosen rule consistently to all employees eligible to participate under the relevant employee stock purchase plan under section 423 or incentive stock option plan under section 422. In addition, the requirements of section 423(b)(5) are applicable to an employee stock purchase plan under section 423. Section 423(b)(5) provides, with certain exceptions, that the terms of an employee stock purchase plan under section 423 must provide the same rights and privileges to all employees granted options under the plan.

Employers could impose conditions under which a chosen method would or would not apply to employees, provided that those conditions and the resulting method were applied consistently to all employees. For example, the employer could accelerate the deemed wage payment if an employee terminated employment, provided that the acceleration rule applied to all employees who terminated of employment. All of the examples provided in Sections A through E above would meet the consistency requirement

resulting from an actual exercise of a statutory stock option during the month of December could be treated as paid in the next following calendar quarter. Employers that choose to use the special accounting rule would not need to make a formal election, and employers would not need to notify the Service of the use of the rule or any change in the use of the rule.

Examples (i) Employer A sponsors an employee stock purchase plan under which ESPP options are exercised on a semi-annual basis (June 30 and December 31). Employer A chooses to treat the FICA and FUTA wages resulting from each December 31 exercise as paid on the earlier of March 31 of the subsequent year or the employee’s termination of employment.

(ii) Employer B sponsors an incentive stock option plan. Employer B chooses to treat the FICA and FUTA wages resulting from an exercise that occurs during the final seven days of December of any calendar year as paid on the earlier of January 31 of the subsequent year or the employee’s termination of employment.

The special accounting rule would only apply for purposes of determining the date on which the FICA and FUTA wages result from the exercise of a statutory stock option. Therefore, the choice would apply for purposes of both the employer portion of FICA tax and the employee portion of FICA tax. If the employer used the special accounting rule, the employee would be required to use the special accounting rule and to use it for the same period as the employer. In addition, the employee would be required to use the special accounting rule and the same period for all purposes. For example, the special accounting rule would apply in determining the calendar year in which the wages were paid for purposes of the credit or refund under section 6413(c) relating to FICA tax and wage payments from multiple employers in the same calendar year.

An employer’s choice to use the special accounting rule would be required to apply to all participants in the relevant employee stock purchase plan or incentive stock option plan. An employer that chose to use the special accounting rule would be required to notify the affected employees that the special accounting rule had been used and of the period for which it had been used. The employer would be required to provide the notice directly to each employee at or near the time the employer provided the employee with the Form W–2 for the calendar year in which the exercise occurred; the notice

could not be provided earlier than with the employee’s last paycheck of that calendar year.

C. Employee Pre-Funding of the Employee Portion of FICA Tax

Under current law, an employer and an employee may contractually arrange for the employee to pre-fund the amount of the employee portion of FICA tax that will arise upon the exercise of a statutory stock option.

Example (i) Employer A sponsors an employee stock purchase plan under section 423 under which ESPP options are exercised on a quarterly basis (March 31, June 30, September 30, December 31). Employees fund the ESPP option exercise through payroll deductions. The payroll deductions include an additional amount equal to one percent of the payroll deduction deducted each payroll period and the one percent amount is used to fund the employee portion of FICA tax due at the time of the exercise. Any shortfall in funds to pay the employee portion of FICA tax is settled through withholding from the employee’s current compensation at the time of the exercise, or such other method as may be available. Any excess over the amount necessary to pay the employee portion of FICA tax is returned to the employee.

Withholding to pre-fund the payment of the employee portion of FICA tax does not affect the taxation of, or the timing of taxation of, compensation. Therefore, the withheld amounts are included as gross income for income tax purposes, as well as wages paid to the employee for FICA tax, FUTA tax, and Federal income tax withholding purposes, as appropriate. In addition, for purposes of sections 3101 and 3102(a), this separate contractual arrangement does not satisfy either the employer’s collection obligation or the employee’s FICA tax liability until the funds are remitted to the Service. If the employer withholds funds from the employee and does not deposit the funds with the Service in satisfaction of the employee portion of FICA tax, the employee and the employer each remain liable for the tax, and any right of the employee to the pre-funded amounts held by the employer is not enforceable under the Internal Revenue Code.

D. Employer Advance of Employee Portion of FICA Tax

Under current law, an employer may arrange to advance the funds necessary to

December 3, 2001 550 2001–49 I.R.B.

instructions for making the election provided under Notice 2001–70.

In Notice 2001–70, the Treasury Department and the Internal Revenue Service announced their intention to issue regulations permitting taxpayers to elect not to apply the mid-quarter convention rules contained in § 168(d)(3) of the Internal Revenue Code to certain property placed in service in the taxable year that includes September 11, 2001, if the third quarter of the taxpayer’s 2001 taxable year includes September 11, 2001. Notice 2001–70 also provided that an eligible taxpayer that wishes to make the election must write “Election Pursuant to Notice 2001–70” across the top of the taxpayer’s Form 4562, Depreciation and Amortiza- tion, for the taxpayer’s taxable year that includes September 11, 2001.

Section 168(d)(3) generally provides that, except as provided in regulations, if the aggregate basis of property placed in service during the last three months of the taxable year exceeds 40 percent of the aggregate basis of property (other than property described in § 168(d)(3)(B)) placed in service during the taxable year, the applicable depreciation convention for all property (other than property described in § 168(d)(2)) to which § 168 applies placed in service during the taxable year is the mid-quarter convention.

Treasury and the Service have been made aware that certain taxpayers that are not entitled to relief under Notice 2001–70 because the third quarter of their 2001 taxable year does not include September 11, 2001, are purchasing property to replace property destroyed in the September 11, 2001, terrorist attack. As a result of these purchases, some of these taxpayers would be required to apply the mid-quarter convention. Such a result may place these taxpayers at a competitive disadvantage because other similarly situated taxpayers have received relief under Notice 2001–70.

Accordingly, Notice 2001–70 is expanded to provide that if the fourth quarter of a taxpayer’s taxable year includes September 11, 2001, then the taxpayer may elect, for purposes of § 168(d), to apply the half-year convention to all property (other than property described in § 168(d)(2)) placed in service during the taxpayer’s taxable year that includes September 11, 2001. The

of this notice as well as the requirements of section 423(b)(5).

III. Effective Date

The proposed rules are not effective until a subsequent notice is issued with final rules. Treasury and the Service anticipate issuing such a notice to accompany the issuance of final regulations addressing the application of FICA tax, FUTA tax, and income tax withholding to statutory stock options.

IV. Request for Comments

Comments are requested regarding the proposed rules of administrative convenience described in this notice. All comments will be available for public inspection and copying. Comments must be submitted by February 14, 2002. Comments should reference Notice 2001–73, and be addressed to:

Associate Chief Counsel (Tax Exempt and Government

Entities) CC:TEGE ATTN: Employment Taxes, Statutory

Stock Options and Proposed Rules of Administrative Convenience Room 5214 Internal Revenue Service 1111 Constitution Ave., NW Washington, DC 20224

wage payments made in December of a calendar year will be deemed paid during some specified period in the first quarter of the following calendar year. This information will be used to explain the wage reporting on the Forms W–2 that the employee receives. The collection of information is required if the employer chooses to use the special accounting rule. The likely respondents are business or other for-profit institutions.

The estimated total annual reporting and/or recordkeeping burden is 17,010 hours.

The estimated annual burden per respondent/recordkeeper varies from 1 to 10 hours, depending on individual circumstances, with an estimated average of 3 hours. The estimated number of respondents and/or recordkeepers is 5,670.

The estimated annual frequency of responses (used for reporting requirements only) is once per calendar year.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

VI. Drafting Information

The principal author of this notice is Stephen Tackney of the Office of Chief Counsel. However, other personnel from Treasury and the Service participated in their development. For further information regarding this notice, contact Stephen Tackney at (202) 622–6040 (not a tollfree call).

Expansion of Notice 2001–70

— Additional Disaster Relief for Taxpayers Following the September 11, 2001, Terrorist Attack — Mid- Quarter Convention Relief

Notice 2001–74

This notice supplements the tax relief granted in Notice 2001–70 (2001–45 I.R.B. 437) published November 5, 2001, by expanding the class of taxpayers entitled to the relief and clarifying the

V. Paperwork Reduction Act

Before final rules of administrative convenience are published, the collection of information contained in the proposed rules of administrative convenience described in this notice will be submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act (44 U.S.C. 3507(c)).

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

The collection of information in the proposed rules of administrative convenience is in section B, requiring employers who choose the special accounting rule to notify employees of the application of the rule. This information is required to inform employees that for purposes of FICA and FUTA, certain

2001–49 I.R.B 551 December 3, 2001

and Notice 2001–42 (2001–30 I.R.B. 70), provides an extension of the GUST remedial amendment period for employers who, by the end of the GUST remedial amendment period (determined without regard to the extension), have adopted a pre-approved plan (that is, a master or prototype or volume submitter plan) or certified their intent to adopt such a plan. If the requirements for the extension are satisfied, the GUST remedial amendment period for the employer’s plan will not end before the later of December 31, 2002, or the end of the 12th month beginning after the date on which the Service issues a GUST opinion or advisory letter for the pre-approved plan.

.04 Rev. Proc. 2001–6 (2001–1 I.R.B. 194) contains the Service’s procedures for issuing determination letters on the qualified status of employee plans under §§ 401(a), 403(a), 409, and 4975(e)(7) of the Code and the exempt status of related trusts or custodial accounts under § 501(a).

.05 Section 1.401(b)–1(f) of the Income Tax Regulations provides that, at his discretion, the Commissioner may extend the remedial amendment period or may allow a particular plan to be amended after the expiration of its remedial amendment period and any applicable extension of such period. In determining whether such an extension will be granted, the Commissioner shall consider, among other factors, whether substantial hardship to the employer would result if such an extension were not granted, whether such an extension is in the best interest of plan participants, and whether the granting of the extension is adverse to the interests of the government.