SECTION 9. EFFECTIVE DATE

This revenue procedure is effective for taxable years ending on or after December 31, 2001. However, the Service will not challenge a taxpayer’s use of the cash method under § 446, or a taxpayer’s failure to account for inventories under § 471, for a trade or business in an earlier year if the taxpayer, for that year, was a qualifying small business taxpayer as described in section 3 of this revenue procedure and the taxpayer was eligible to use the cash method for such trade or

90% to 110% Permissible

90% to 105% Permissible

Range

Month Year Average Range Range

December 2001 5.72 5.15 to 6.01 5.15 to 6.29

Month Year

Weighted

Average

Among other changes to § 529, EGTRRA: (1) expands the definition of “qualified tuition program” to include certain prepaid tuition programs established and maintained by one or more eligible educational institutions; (2) provides an exclusion from gross income for distributions from a State § 529 program (and, beginning in 2004, a prepaid tuition program established and maintained by one or more eligible educational institutions) which are used to pay for qualified

DRAFTING INFORMATION

The principal author of this notice is Todd Newman of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please call Mr. Newman at (202) 283–9888 (not a toll-free number).

Section 529 Programs

Notice 2001–81

This notice provides guidance regarding certain recordkeeping, reporting, and other requirements applicable to qualified tuition programs described in § 529 of the Internal Revenue Code, in light of certain amendments made to § 529 by the Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub. L. No. 107–16, 115 Stat. 38) (EGTRRA).

2001–52 I.R.B 617 December 26, 2001

gross income under any other provision of Chapter 1 of the Code. Section 529(c)(3)(D)(iii) provides that, except to the extent provided by the Secretary, the value of the contract, income on the contract, and the investment in the contract are to be computed as of the close of the calendar year.

2. Recordkeeping requirements with respect to rollover contributions.

Section 529(b)(3) ² states that a program must provide a separate accounting for each designated beneficiary. Prop. Treas. Reg. § 1.529–2(f) requires a § 529 program to maintain records with respect to the designated beneficiary of each account showing the total investment in the account and any earnings attributable thereto.

In the case of a contribution to a § 529 account that represents a transfer from a Coverdell education savings account described in § 530(b)(2)(B), a transfer of proceeds of a qualified U.S. Savings Bond described in § 135(c)(2)(C), or a “rollover” of amounts from another § 529 program account (each, a “rollover contribution”), the recipient § 529 program must determine the basis and earnings portions of the amounts contributed. (See Prop. Treas. Reg. § 1.529–3(a)(2), which provides that the earnings portion of the rollover amount must be added to the earnings of the account that received the contribution.)

Although this requirement was not changed by EGTRRA, § 529 programs have indicated that there is some confusion about the requirement that a § 529 program determine and maintain records that reflect the basis and earnings portions of any rollover contribution. Accordingly, it is expected that final regulations will clarify that, when accepting a contribution, a § 529 program must ask whether the contribution is a rollover contribution from a Coverdell education savings account, a qualified U.S. Savings Bond, or another § 529 program. If the contribution is a rollover contribution, the § 529 program must determine the earnings portion of the contribution, and add that amount to the earnings recorded in the account to which the rollover contribution

higher education expenses of the designated beneficiary; (3) repeals the requirement that a § 529 program impose a more than de minimis penalty on any refund of earnings not used for qualified higher education expenses of the beneficiary; and (4) replaces that penalty with an additional 10–percent tax on the amount of a distribution from a § 529 program that is includible in gross income (with certain exceptions). In general, these amendments are effective for taxable years beginning after December 31, 2001. ¹

In light of these changes, and to give § 529 programs adequate time to implement appropriate recordkeeping and reporting procedures, the Internal Revenue Service and the Treasury Department are issuing this guidance, which they intend to incorporate in final regulations under § 529. Section 529 programs and their participants may rely on this notice pending the issuance of final regulations under § 529.

a. Imposition of a penalty and verifica- tion of purpose of a distribution.

As currently in effect (prior to the effective date of EGTRRA), § 529(b)(3) provides that a program is not treated as a qualified § 529 program unless it imposes a more than de minimis penalty on any refund of earnings that is not: (a) used for qualified higher education expenses of the designated beneficiary; (b) made on account of the death or disability of the designated beneficiary; or (c) made on account of certain scholarships or other educational assistance received by the beneficiary. Prop. Treas. Reg. § 1.529–2(e) provides rules on de minimis penalties and procedures for verifying the use of distributions and imposing and collecting penalties.

EGTRRA repeals § 529(b)(3), effective for taxable years beginning after December 31, 2001. Therefore, the final regulations under § 529 will provide that, with respect to any distributions made after December 31, 2001, a § 529 program will no longer be required to verify how distributions are used or to collect any penalty. However, with respect to any distributions made on or before December 31, 2001, a § 529 program must con

tinue to verify whether the distribution is used for qualified higher education expenses of the beneficiary and to collect a more than de minimis penalty on nonqualified distributions.

b. Reporting of distributions.

Section 529(d) provides that a § 529 program shall make reports regarding the program to the Internal Revenue Service and to designated beneficiaries regarding contributions, distributions, and such other matters as the Internal Revenue Service may require. Prop. Treas. Reg. § 1.529–4 requires a State tuition program to report on Form 1099–G, Certain Government Payments, the earnings portion of any distribution made during the year, together with other information such as the name, address and TIN of the distributee. A § 529 program must furnish a statement to the distributee on or before January 31st of the year following the calendar year in which the distribution is made. In addition, a § 529 program must file Form 1099–G on or before February 28th of the year following the calendar year in which the distribution is made.

These reporting requirements continue in effect for distributions made in 2001. Thus, with respect to any distributions made in 2001, a § 529 program must furnish statements to the distributees on or before January 31, 2002, and file returns on Form 1099–G on or before February 28, 2002. In light of the expansion of § 529 to include prepaid tuition programs established and maintained by one or more eligible educational institutions (which may be private institutions), the Internal Revenue Service will issue a new form, Form 1099–Q, for taxable years beginning after December 31, 2001. A copy of Form 1099–Q is available on the IRS website at www.irs.gov.

c. Calculation of earnings.

1. In general.

Section 529(c)(3)(A) provides that a distribution from a § 529 program is includible in the gross income of the distributee in the manner as provided under § 72, to the extent not excluded from

1 Unless otherwise indicated, references herein are to § 529 of the Internal Revenue Code, as amended by EGTRRA. 2 Section 529(b)(4) was renumbered as § 529(b)(3) by EGTRRA.

December 26, 2001 618 2001–52 I.R.B.

is made. Until the § 529 program receives appropriate documentation showing the earnings portion of the contribution, the program must treat the entire amount of the contribution as earnings in the § 529 account receiving the distribution. For this purpose, “appropriate documentation” means: (1) in the case of a rollover contribution from a Coverdell education savings account, an account statement issued by the financial institution that acted as trustee or custodian of the education savings account that shows basis and earnings in the account; (2) in the case of a rollover contribution from the redemption of qualified U.S. Savings Bonds, an account statement or Form 1099-INT issued by the financial institution that redeemed the bonds showing interest from the redemption of the bonds; and (3) in the case of a rollover contribution from another § 529 program, a statement issued by the distributing § 529 program that shows the earnings portion of the distribution.

3. Rollover statement between § 529 programs.

In the case of any direct transfer ( i.e., trustee-to-trustee rollover) between § 529 programs, the distributing program must provide to the receiving program a statement setting forth the earnings portion of the rollover distribution within 30 days after the distribution or by January 10th of the year following the calendar year in which the rollover occurred, whichever is earlier. This rule is effective for direct transfers between § 529 programs that occur on or after January 1, 2002.

4. Timing of earnings calculation.

Consistent with § 529(c)(3)(D), the proposed regulations provide that the earnings portion of any distribution is determined by applying an earnings ratio, generally the earnings allocable to an account as of the close of the year divided by the total account balance as of the close of the calendar year, determined by adding back the amount of all distributions made during the year. See Prop. Treas. Reg. § 1.529–1(c).

In response to comments received on the proposed regulations, and consis

tent with the Secretary’s authority under § 529(c)(3)(D)(iii) to adopt a different rule, the Treasury Department and the Internal Revenue Service expect that final regulations will revise the time for determining the earnings portion of any distribution from a § 529 account. It is expected that final regulations will provide that, effective for distributions made after December 31, 2002, programs will be required to determine the earnings portion of each distribution as of the date of distribution. In the case of direct transfers between § 529 programs, this requirement is effective for distributions made after December 31, 2001. In the case of any State program for which this change would require legislation and whose State legislature has a biennial legislative session, the program will have until January 1, 2004, to conform to this method of calculating earnings.

5. Aggregation of Accounts.

Section 529(c)(3)(D)(i) provides that to the extent provided by the Secretary, all § 529 programs of which an individual is a designated beneficiary shall be treated as one program. Prop. Treas. Reg. § 1.529–3(d) provides that all accounts maintained by a § 529 program for the benefit of a designated beneficiary shall be treated as a single account for purposes of calculating the earnings portion of any distribution. Based on comments received on the proposed regulations, it is expected that the final regulations will provide that only accounts maintained by a § 529 program and having the same account owner and the same designated beneficiary must be aggregated for purposes of computing the earnings portion of any distribution. For this purpose, a State that has both a prepaid § 529 program and a § 529 savings program should consider each program separately for purposes of calculating the earnings portion of any distribution from either the prepaid or the savings program. These changes will apply for purposes of the earnings calculation only, and will not affect the application of § 529(b)(6) (prohibition on excess contributions) ³ . The § 529(b)(6) limit will continue to be applied based upon all accounts, both savings and prepaid, in programs established and main

tained by the State for the benefit of the same designated beneficiary.

Comments on Future Guidance Invited

The Internal Revenue Service invites comments on the matters described in this notice and any other matters relating to § 529 and the regulations thereunder. Please send written comments by March 25, 2002, to: CC:ITA:RU (Notice 2001– 81), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submission may be hand-delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to CC:ITA:RU (Notice 2001–81), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically via the Internet by selecting the “Tax Regs” option on the IRS Home Page, or by submitting comments directly to the IRS Internet site at http://www.irs.gov/prod/ tax_regs/regslist.html . Comments will be available for public inspection.

DRAFTING INFORMATION

The principal author of this notice is Monice Rosenbaum of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this notice, contact Ms. Rosenbaum at (202) 622–6070 (not a toll-free number).

Expansion of Safe Harbor Provisions Under Notice 88–129

Notice 2001–82

PURPOSE

This notice amplifies and modifies Notice 88–129 (1988–2 C.B. 541) as modified and amplified by Notice 90–60 (1990–2 C.B. 345). Notice 88–129 provides that a regulated public utility (utility) will not realize income upon transfers of interties from qualifying small power

3 Section 529(b)(7) was renumbered as § 529(b)(6) by EGTRRA.

2001–52 I.R.B 619 December 26, 2001

1. The safe harbor provisions are extended to include transfers of interties from non-Qualifying Facilities. Accordingly, the term “QF transfer” appearing in Notice 88–129 will be construed as including “qualified transfers” of interties from non-Qualifying Facilities that meet the other requirements of the safe harbor provisions. Similarly, the term “Qualifying Facility” for purposes of Notice 88–129 will be construed as including “stand-alone generators” that are not Qualifying Facilities.

2. The safe harbor provisions also are extended to include transfers of interties used exclusively or in part to transmit power over the utility’s transmission grid for sale to consumers or intermediaries, including affiliated intermediaries (wheeling). This safe harbor only applies to transactions in which the intertie is transferred pursuant to a long-term interconnection agreement and in which ownership of the electricity wheeled passes to the purchaser prior to its transmission on the utility’s transmission grid. The ownership requirement of the preceding sentence is deemed satisfied if title to electricity wheeled passes to the purchaser at the busbar on the generator’s end of the intertie. The terms “power purchase contract” and “power supply contract” appearing in Notice 88–129 will be construed as including interconnection agreements in transactions in which the intertie is used for wheeling. Accordingly, a longterm interconnection agreement in lieu of a long-term power purchase contract or power supply contract may be used to satisfy the safe harbor provisions of Notice 88–129 in such transactions. The term “dual-use intertie” appearing in Notice 88–129 will be construed as including an intertie which may be used to transmit power from a third party for sale to the Qualifying Facility.

3. Section 6, sentence 4, of Notice 88–129, states, “The cost of property transferred in a QF transfer must be capitalized by the Qualifying Facility as an intangible asset and recovered as appropriate.” This sentence is modified to read as follows: “The cost of property transferred in a QF transfer must be capitalized by the Qualified Facility as an intangible asset and recovered using the straight-line method over a useful life of 20 years.”

producers and qualifying cogenerators (collectively, Qualifying Facilities), as defined in section 3 of the Federal Power Act, as amended by section 201 of the Public Utilities Regulatory Policies Act of 1978 (PURPA). This notice extends the safe harbor provisions of Notice 88–129 to include transfers of interties from nonQualifying Facilities. The safe harbor also is extended to transactions in which there is not a long-term power purchase contract between the utility and the power producer but rather the intertie is transferred pursuant to a long-term interconnection agreement and in which the intertie is used exclusively to transmit power across the utility’s transmission grid for sale to consumers or intermediaries.

BACKGROUND

At the time Notice 88–129 was issued, most generators that were not owned by regulated public utilities (stand-alone generators) were Qualifying Facilities for regulatory purposes. As a stand-alone generator, the Qualifying Facility had to be connected to a utility’s transmission lines in order to move its power to market. PURPA required that a utility interconnect with a Qualifying Facility for the purpose of allowing the sale of power produced by the Qualifying Facility. A Qualifying Facility generally sold its electricity under a long-term power purchase contract to the local utility with whom it was interconnecting at the utility’s avoided cost. A Qualifying Facility also arranged in certain cases for the interconnected utility to transmit electricity across its transmission grid for sale to another utility (wheeling) at that utility’s avoided cost.

Deregulation of the electric power industry has significantly changed the operation of the industry. Today, few new stand-alone generators are Qualifying Facilities. The Federal Energy Regulatory Commission (FERC) encouraged the construction of non-Qualifying Facilities starting in the late 1980’s by issuing a number of orders to individual projects (known in the industry as independent power producers) approving sales of power at market rates. In addition, the Energy Policy Act of 1992 created a new class of stand-alone generators, called exempt wholesale generators, that are permitted to sell their power at market

rates with FERC approval, and are exempted from certain utility regulation. Unlike PURPA, the Energy Policy Act has no requirement that utilities buy electricity from stand-alone generators.

In 1996, FERC issued Order No. 888 in an effort to ensure that every wholesale supplier of electricity, including, for example, power marketers and standalone generators, has open access to the national transmission grid. The order requires regulated utilities to allow standalone generators to interconnect to the grid and to file nondiscriminatory tariffs under which any wholesale supplier can pay to have its electricity wheeled. Standalone generators (including Qualifying Facilities) have additional outlets for their power today that they did not have in 1988, including sales of power at auction on regional power exchanges or spot markets and under short and medium-term contracts to specific customers or to power marketers that trade electricity. Regulated utilities have many more sources of supply for electricity than in 1988. As a result of these changes, very few utilities enter into long-term power purchase contracts with stand-alone generators. Electricity produced by standalone generators is more likely today than in 1988 to be wheeled across the transmission grid of the interconnected utility for sale to consumers or intermediaries rather than to be sold directly to the interconnected utility.

The new stand-alone generators still need to be interconnected to the transmission grid in order for a customer to take the power. Therefore, the stand-alone generator enters into a long-term interconnection agreement with the local utility. The term of a long-term interconnection agreement may be tied to the period that the stand-alone generator remains in commercial operation. This agreement may permit assignment of the agreement by the utility to accommodate future consolidation of local grids into regional transmission systems that will cover broad regions of the country.

MODIFICATIONS TO NOTICE 88–129 AND NOTICE 90–60

In light of the above-mentioned changes in the electric power industry, the safe harbor provisions of Notice 88–129 are modified as follows:

December 26, 2001 620 2001–52 I.R.B.

Publication 1494, shown below, provides tables that show the amount of an individual’s income that is exempt from a notice of levy used to collect delinquent tax in 2002.

(Amounts are for each pay period.)

EFFECT ON OTHER DOCUMENTS

Notice 88–129, as amplified and modified by Notice 90–60, is further amplified and modified.

EFFECTIVE DATE

This notice applies to transfers of property to regulated public utilities, pursuant to interconnection agreements, completed after December 26, 2001, the date this notice is published in the Bulletin. For transfers of interties occurring on or before December 26, 2001, and meeting the requirements of this notice, taxpayers may request application of this notice through a request for a private letter ruling (including in appropriate circumstances where the taxpayer’s return for the year of transfer has already been filed).

DRAFTING INFORMATION

The principal author of this notice is Gregory N. Doran of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, contact Mr. Doran at (202) 622–3040 (not a toll-free call).

Tables for Figuring Amount Exempt From Levy on Wages, Salary, and Other Income

Notice 2001–83

1. Table for Figuring Amount Exempt From Levy on Wages, Salary, and Other Income (Forms 668–W(c) and 668–W(c)(DO)) 2002

Filing Status: Single

Number of Exemptions Claimed on Statement

Pay Period

1 2 3 4 5 6 More Than 6

Daily 29.62 41.15 52.69 64.23 75.77 87.31 18.08 plus 11.54 for each exemption

Weekly 148.08 205.77 263.46 321.15 378.85 436.54 90.38 plus 57.69 for each exemption

Biweekly 296.15 411.54 526.92 642.31 757.69 873.08 180.77 plus 115.38 for each exemption

Semi-Monthly 320.83 445.83 570.83 695.83 820.83 945.83 195.83 plus 125.00 for each exemption

Monthly 641.67 891.67 1141.67 1391.67 1641.67 1891.67 391.66 plus 250.00 for each exemption

Filing Status: Unmarried Head of Household Pay Number of Exemptions Claimed on Statement Period 1 2 3 4 5 6 More Than 6

Daily 38.08 49.62 61.15 72.69 84.23 95.77 26.54 plus 11.54 for each exemption Weekly 190.38 248.08 305.77 363.46 421.15 478.85 132.69 plus 57.69 for each exemption Biweekly 380.77 496.15 611.54 726.92 842.31 957.69 265.38 plus 115.38 for each exemption

Semi-Monthly 412.50 537.50 662.50 787.50 912.50 1037.50 287.50 plus 125.00 for each exemption Monthly 825.00 1075.00 1325.00 1575.00 1825.00 2075.00 575.00 plus 250.00 for each exemption

2001–52 I.R.B 621 December 26, 2001

Filing Status: Married Filing Joint Return (and Qualifying Widow(er)s) Pay Period Number of Exemptions Claimed on Statement 1 2 3 4 5 6 More Than 6 Daily 41.73 53.27 64.81 76.35 87.88 99.42 30.19 plus 11.54 for each exemption Weekly 208.65 266.35 324.04 381.73 439.42 497.12 150.96 plus 57.69 for each exemption Biweekly 417.31 532.69 648.08 763.46 878.85 994.23 301.92 plus 115.38 for each exemption Semi-Monthly 452.08 577.08 702.08 827.08 952.08 1077.08 327.08 plus 125.00 for each exemption Monthly 904.17 1154.17 1404.17 1654.17 1904.17 2154.17 654.17 plus 250.00 for each exemption

Filing Status: Married Filing Separate Return Pay Period Number of Exemptions Claimed on Statement

1 2 3 4 5 6 More Than 6

Daily 26.63 38.17 49.71 61.25 72.79 84.33 15.10 plus 11.54 for each exemption

Weekly 133.17 190.87 248.56 306.25 363.94 421.63 75.48 plus 57.69 for each exemption

Biweekly 266.35 381.73 497.12 612.50 727.88 843.27 150.96 plus 115.38 for each exemption

Semi-Monthly 288.54 413.54 538.54 663.54 788.54 913.54 163.54 plus 125.00 for each exemption

Monthly 577.08 827.08 1077.08 1327.08 1577.08 1827.08 327.08 plus 250.00 for each exemption

2. Table for Figuring Additional Exempt Amount for Taxpayers at Least 65 Years Old and/or Blind

Additional Exempt Amount

Filing Status - Daily Wkly Bi-Wkly Semi-Mo Monthly

Single or Head of Household

Any Other Filing Status

1 4.42 22.12 44.23 47.92 95.83

2 8.85 44.23 88.46 95.83 191.57

1 3.46 17.31 34.62 37.50 75.00 2 6.92 34.62 69.23 75.00 150.00

3 10.38 51.92 103.85 112.50 225.00 4 13.85 69.23 138.46 150.00 300.00

• ADDITIONAL STANDARD DEDUCTION claimed on Parts 3, 4, & 5 of levy.

4. If the taxpayer in number 3 is over 65 and has a spouse who is blind, this taxpayer should write 2 in the ADDITIONAL STANDARD DEDUCTION space on Parts 3, 4, & 5 of the levy. Then, $601.92 is exempt from this levy ($532.69 plus $69.23).

Examples

These tables show the amount exempt from a levy on wages, salary, and other income.

For example:

1. A single taxpayer who is paid weekly and claims three exemptions (including one for the taxpayer) has $263.46 exempt from levy.

2. If the taxpayer in number 1 is over 65 and writes 1 in the ADDITIONAL STANDARD DEDUCTION space on Parts 3, 4, & 5 of the levy, $285.58 is exempt from this levy ($263.46 plus $22.12).

3. A taxpayer who is married, files jointly, is paid biweekly, and claims two exemptions (including one for the taxpayer) has $532.69 exempt from levy.

December 26, 2001 622 2001–52 I.R.B.

26 CFR 601.602: Tax forms and instructions. (Also Part I, §§ 1, 24, 25A, 32, 59, 63, 68, 132, 135, 151, 170, 213, 220, 512, 513, 685, 877, 2032A, 2503, 2523, 2631, 4001, 4003, 4261, 6033, 6039F, 6323, 6334, 6601, 7430, 7702B)

Rev. Proc. 2001–59

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