Part III. — Internal Revenue Bulletin 2002-21

revenue rulings, notices or other guidance published in the Internal Revenue Bulletin.

The rate of interest on 30-year Treasury Securities for April 2002 is 5.68 percent. Pursuant to Notice 2002–26 (2002–15 I.R.B. 743), the Service has determined this rate as the monthly average of the daily determination of yield on the 30-year Treasury bond maturing in February 2031.

Section 405 of the Job Creation and Worker Assistance Act of 2002 amended § 412(l)(7)(C) of the Code to provide that for plan years beginning in 2002 and 2003 the permissible range is extended to 120 percent. The following rates were determined for the plan years beginning in the month shown below.

Weighted Average Interest Rate Update

Notice 2002–32

Sections 412(b)(5)(B) and 412(l) (7)(C)(i) of the Internal Revenue Code provide that the interest rates used to calculate current liability for purposes of determining the full funding limitation under § 412(c)(7) and the required contribution under § 412(l) must be within a permissible range around the weighted average of the rates of interest on 30-year Treasury securities during the four-year period ending on the last day before the beginning of the plan year.

Notice 88–73 (1988–2 C.B. 383) provides guidelines for determining the

Month Year

weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability for the purpose of the full funding limitation of § 412(c)(7) of the Code.

Section 417(e)(3)(A)(ii)(II) of the Code defines the applicable interest rate, which must be used for purposes of determining the minimum present value of a participant’s benefit under § 417(e)(1) and (2), as the annual rate of interest on 30-year Treasury securities for the month before the date of distribution or such other time as the Secretary may by regulations prescribe. Section 1.417(e)– 1(d)(3) of the Income Tax Regulations provides that the applicable interest rate for a month is the annual interest rate on 30-year Treasury securities as specified by the Commissioner for that month in

Weighted

Average

90% to 120% Permissible

Range

90% to 110% Permissible

Range

May 2002 5.69 5.12 to 6.25 5.12 to 6.82

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 contact the Employee Plans’ taxpayer assistance telephone service at 1–877–829–5500 (a tollfree number), between the hours of 8:00 a.m. and 6:30 p.m. Eastern time, Monday through Friday. Mr. Newman may be reached at 1–202–283–9888 (not a tollfree number).

Suspension of Requirement to File Form 8390 ( Information Return for Determination of Life Insurance Company Earnings Rate Under Section 809)

Notice 2002–33

Section 809 of the Internal Revenue Code reduces the policyholder dividends that a mutual life insurance company is permitted to deduct under section 808. Each year, the Internal Revenue Service publishes the differential earnings rate (DER) and the recomputed differential earnings rate (RDER) to be used in computing the amount of the reduction. The DER and RDER are determined by the Service on the basis of information reported by mutual life insurance companies and the 50 largest stock life insurance companies (as determined by the Service) on Form 8390, Information Return for Determination of Life Insur- ance Company Earnings Rate Under Sec- tion 809 .

The Job Creation and Worker Assistance Act of 2002, Pub. L. No. 107–147,

§ 611, amended section 809 of the Code by adding new paragraph (j). As amended, section 809(j) provides that the DER shall be treated as zero for purposes of computing both the differential earnings amount and the recomputed differential earnings amount for a mutual life insurance company’s taxable years beginning in 2001, 2002, or 2003.

As a result of this amendment to section 809, the Service will not be computing the DER and RDER for 2001, 2002, or 2003. ^* The determination of the 50 largest stock companies, however, will be made for those years.

The suspension of section 809 by section 809(j) expires in 2004. Accordingly, life insurance companies will not be required to file Form 8390 in either 2002 or 2003.

*Notice 2002–19 (2002–10 I.R.B. 619) provided that the tentative DER for 2001 and RDER for 2000 are zero.

2002–21 I.R.B. 989 May 28, 2002

The Service will be required to compute a 2004 DER and RDER using prior year income information from both stock and mutual life insurance companies. Therefore, it is expected that the requirement that companies file Form 8390 will be reinstated in 2004. Mutual life insurance companies will be required to file a Form 8390 with respect to calendar years 2002 and 2003. Any stock life insurance company that is determined to be one of the 50 largest stock life insurance companies during 2001, 2002, or 2003 will be required to file a Form 8390 with respect to that year. All life insurance companies that may be required to report 2001, 2002, or 2003 information are obligated to retain the records necessary to report the appropriate information in 2004.

Life insurance companies that will be required to file a Form 8390 with respect to calendar years 2001 or 2002 will be required to file such form no later than July 1, 2004. Life insurance companies that will be required to file a Form 8390 with respect to calendar year 2003 will be required to file such form no later than October 1, 2004.

When filing Form 1120–L ( U.S. Life Insurance Company Income Tax Return ) for 2001, mutual life insurance companies should treat the DER as zero for purposes of computing the differential earnings amount in Schedule C ( Differential Earn- ings Amount ). Appropriate changes will be made to Form 1120–L for 2002.

For 2004 and years thereafter, the Service will issue additional guidance regarding the filing of Form 8390 by life insurance companies as needed.

Comments are requested on the implementation of section 809(j), the requirement that information with respect to 2001 and 2002 and information with respect to 2003 be filed separately, and any required changes to Form 1120–L (such as temporarily eliminating Schedule C). Comments should be sent to CC: ITA:RU (Notice 2002–33), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Comments may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:ITA:RU (Notice 2002–33), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. In the alternative, e-mail comments to Notice.Comments@irscounsel.treas.gov .

DRAFTING INFORMATION

The principal author of this notice is Katherine A. Hossofsky of the Office of the Associate Chief Counsel (Financial Institutions and Products). For further information regarding this notice, contact Ms. Hossofsky at 202–622–3477 (not a toll-free call).

IRS Announces Voluntary Compliance Program to Promote Disclosure by Political Organizations

Notice 2002–34

The Internal Revenue Service (IRS) announces a voluntary compliance program to promote disclosure by political organizations described in § 527 of the Internal Revenue Code (political organizations) that file certain forms by July 15, 2002 .

BACKGROUND

On July 1, 2000, Pub. L. 106–230 was enacted, imposing new reporting and disclosure requirements on political organizations in connection with their taxexempt status. The IRS is aware that there is a great deal of confusion concerning the new filing requirements. Because of this confusion, many political organizations have either failed to file or need to correct previously filed forms. The IRS believes that implementing this voluntary compliance program for these political organizations is most likely to achieve the congressional goal of maximum disclosure and is in the best interest of sound tax administration.

FILING REQUIREMENTS

The law generally requires a taxexempt political organization to file:

an initial notice of status on Form 8871,
periodic reports of contributions and expenditures on Form 8872,
annual information returns on Form 990 or Form 990–EZ, and
annual income tax returns on Form 1120–POL.

See Rev. Rul. 2000–49 (2000–2 C.B. 430), and the attachment below for more information on the basic filing requirements. Forms may be downloaded from the IRS Web site at www.irs.gov . The IRS Web site also describes filing requirements at www.irs.gov/polorgs . To obtain assistance from the IRS, please call 877– 829–5500 (a toll-free call).

VOLUNTARY COMPLIANCE PROGRAM

The IRS will not assert any tax, penalty or interest that arises solely because a political organization failed to file a form or filed an incorrect form, if the form is filed or corrected by July 15, 2002 . This voluntary compliance program applies with respect to the following forms:

Any Form 8871, Political Organization Notice of 527 Status, due on or before July 15, 2002,
Any Form 8872, Report of Contribu- tions and Expenditures, due on or before July 15, 2002,
Any Form 1120–POL, U.S. Income Tax Return for Certain Political Organiza- tions, due on or before July 15, 2002, including any applicable extensions,
Any Form 990, Return of Organization Exempt from Income Tax, or Form 990–EZ, Short Form Return of Organi- zation Exempt from Income Tax, due on or before July 15, 2002, including any applicable extensions.

If a political organization does not completely report its contributions and expenditures on all applicable Forms 8872 filed by July 15, 2002, it remains liable for the amount due under § 527(j)(1) on the unreported amounts. For any form described above that is filed or corrected after July 15, 2002, any applicable taxes, penalties and interest will be due from the original due date. In addition, this voluntary compliance program does not apply to any Form 1120– POL required to be filed under rules in effect before July 1, 2000, so a political organization remains liable for the tax on its investment income due under § 527(b).

FILING INFORMATION

Any paper forms and correspondence filed in accordance with this notice

May 28, 2002 990 2002–21 I.R.B.

the purpose of influencing the “selection, nomination, election, or appointment of any individual to Federal, State, or local public office or office in a political organization, or the election of Presidential electors.” Political organizations include political party committees, Federal, State and local candidate committees and other political committees such as political action committees (PACs).

Who Has to File

The filing requirements in the chart below apply to those political organizations that:

wish to be exempt from federal income tax provisions, and
receive or expect to receive $25,000 or more in gross receipts in any taxable year

should contain the following information at the top of the form and on the envelope.

This is filed in accordance with Notice

2002–34 . Electronic versions of Forms 8871 and 8872 are not required to include this information.

DRAFTING INFORMATION

The principal author of this notice is Judith E. Kindell of the Exempt Organizations Rulings and Agreements Division. For further information regarding this notice, please call TE/GE Customer Service at 877–829–5500 (a toll-free call).

ATTACHMENT - POLITICAL ORGANIZATION FILING REQUIREMENTS

Tax-exempt political organizations, as defined in § 527 of the Internal Revenue Code (political organizations), must file some or all of four forms as a condition of tax-exempt status. This attachment discusses the filing requirements for political organizations without regard to the voluntary compliance program announced in this notice.

Political organizations include parties, committees, associations, funds or other entities organized and operated “primarily for the purpose of directly or indirectly accepting contributions or making expenditures.” Political organizations accept contributions and make expenditures for

If You Are A You File

Federal candidate committee, political party committee, or PAC required to report to the Federal Election Commission (FEC)

State or local candidate committee or state or local committee of a political party

Any other political organization, including state or local PACs and federal political organizations that are not required to report to the FEC

➢ Form 1120–POL; and ➢ Form 990 or Form 990–EZ

➢ Form 8871; ➢ Form 1120–POL; and ➢ Form 990 or Form 990–EZ

➢ Form 8871; ➢ Form 8872; ➢ Form 1120–POL; and ➢ Form 990 or Form 990–EZ

NOTE: You still file a Form 1120–POL if you are:

A political organization that does not seek tax-exemption, or
A tax-exempt political organization that does not have gross receipts of at least $25,000, but does receive in excess of $100 in taxable income in any taxable year.

Form Filing Requirements

1. Form 8871 — Notice of 527 Status To be tax-exempt, a political organization that expects to receive $25,000 or more in gross receipts in any taxable year must file Form 8871 with the IRS, unless it is required to report as a political committee to the FEC. Form 8871, Political Organization Notice of 527 Status, must be filed both electronically and in writing, within 24 hours of the political organiza

tion’s establishment. Until the political organization files the form, its income (including contributions) is subject to taxation and is reported on Form 1120– POL.

2. Form 8872 — Report of Contri- butions and Expenditures Political organizations file Form 8872, Political Organization Report of Contri- butions and Expenditures, to disclose information concerning:

persons receiving expenditures that aggregate $500 or more per person, per calendar year; and
persons making contributions that aggregate $200 or more per person, per calendar year.

A political organization that does not disclose this information must pay an amount equal to the highest corporate tax rate (35 percent) multiplied by the amount of contributions and expenditures

not disclosed and report this on the Form 1120–POL. If a political organization does not file Form 8871 and is subject to tax on its income, it is not required to file Form 8872.

For filing dates, see Q&A–28 through Q&A–33 of Rev. Rul. 2000–49.

3. Form 1120–POL — U.S. Income Tax Return for Certain Political Organizations Form 1120–POL, U.S. Income Tax Return for Certain Political Organiza- tions, is due by the 15th day of the 3rd month after the end of the organization’s taxable year. Political organizations may request a six-month extension of the filing deadline by filing Form 7004, Appli- cation for Automatic Extension of Time to File Corporate Income Tax Return . This extension must be filed by the due date of

2002–21 I.R.B. 991 May 28, 2002

Form 1120–POL. There is a penalty for failure to file Form 1120–POL.

4. Form 990 or 990–EZ — Return of Organization Exempt from Income Tax Exempt political organizations with gross receipts of less than $100,000 and assets of less than $250,000 at the end of the year may file a Form 990–EZ, Short

Form Return of Organization Exempt From Income Tax . All other exempt political organizations should file a Form 990, Return of Organization Exempt From Income Tax .

Forms 990 or 990–EZ are due on the 15th day of the 5th month after the end of the organization’s taxable year. There is a penalty for failure to file this return.

Organizations may request a threemonth extension, without showing cause, by filing Form 8868, Application for Extension of Time to File an Exempt Organization Return, by the due date. A second three-month extension, with cause, may also be requested through Form 8868.

Form When filed Exceptions to filing requirement 8871 Within 24 hours of establishment ➢ Political committee required to report to the FEC;

➢ Organization that reasonably expects annual gross receipts to

always be less than $25,000 8872 At organization’s option, ➢ Political committees required quarterly/semiannually or ➢ State and local committees monthly, on same basis for entire ➢ Campaign committees of calendar year (see form instruc- ➢ Organizations that reasonably tions for detailed information) less than $25,000

➢ Political committees required to report to the FEC; ➢ State and local committees of political parties; ➢ Campaign committees of state and local candidates; ➢ Organizations that reasonably expect gross receipts to always be

less than $25,000

1120–POL Due the 15th day of the 3rd month after the close of the taxable year

990 or 990–EZ Due the 15th day of the 5th month after the close of the taxable year

➢ Political organizations whose annual gross receipts are less than

$25,000

➢ Political organizations whose annual gross receipts are less than

$25,000, and who have taxable income less than $100

NPC prior to the scheduled payment date of CP ’s payment.

T deducts the ratable daily portion of each periodic payment for the taxable year to which that portion relates. However, T does not accrue income with respect to the nonperiodic payment until the year the payment is received. T intends to report as capital any gain it realizes upon the termination of the NPC.

ANALYSIS

The requirement of § 1.446–3(f)(2)(i) that a nonperiodic payment must be recognized over the term of a NPC in a manner that reflects the economic substance of the contract must be applied separately to the noncontingent component of the contract, whether that component is based on a fixed or a floating interest rate.

For a discussion of the proper treatment of the periodic and nonperiodic payments made pursuant to the interest rate swap if the noncontingent component is based on a fixed interest rate, see Rev. Rul. 2002–30 (2002–21 I.R.B. 971), May 28, 2002 (holding that the nonperiodic payment must be accrued ratably over the

Tax Avoidance Using Notional Principal Contracts

Notice 2002–35

The Internal Revenue Service and the Treasury Department have become aware of a type of transaction, described below, that is used by taxpayers to generate tax losses. This Notice alerts taxpayers and their representatives that the tax benefits purportedly generated by these transactions are not allowable for federal income tax purposes. This Notice also alerts taxpayers, their representatives, and promoters of these transactions of certain responsibilities that may arise from participating in these transactions.

FACTS

In general, the transaction involves the use of a notional principal contract (“NPC”) to claim current deductions for periodic payments made by a taxpayer (“T”) while disregarding the accrual of a right to receive offsetting payments in the future. The NPC has a term of more than

one year. Under the NPC, T is required to make periodic payments to CP at regular intervals of one year or less based on a fixed or floating rate index. In return, CP is required to make a single payment at the end of the term of the NPC that consists of a noncontingent component and a contingent component. The noncontingent component, which is relatively large in comparison to the contingent component, may be based upon a fixed or floating interest rate. The contingent component may reflect changes in the value of a stock index or currency.

T may fund its obligation to make periodic payments in whole or in part by borrowing funds from a lender, who may be CP . In addition, T may engage in other transactions, such as interest rate collars, for purposes of limiting risk with respect to the NPC transaction. T may engage in short-term trading activity in securities with a view to establishing a trade or business. T may also engage in the transaction through a partnership, in which case instead of T, the partnership may engage in some or all of the activities described above. T will likely enter into an agreement with CP to terminate the

May 28, 2002 992 2002–21 I.R.B.

term of the NPC). In addition, depending on the facts of the particular case, the Service may challenge the purported tax results of these transactions on other grounds, including by: (i) recharacterizing one or more of the transactions under §§ 1.446–3(g)(2) or 1.446–3(i); (ii) determining that the swap expense, if any, was not incurred in the course of a trade or business and was therefore subject to the 2-percent floor limitation in section 67 of the Internal Revenue Code; (iii) disregarding the combination of the loans and the periodic payments as circular flows of cash; or (iv) applying other variations of the doctrine of substance-over-form.

The Service may impose penalties on participants in these transactions or, as applicable, on persons who participate in the promotion or reporting of these transactions, including the accuracy-related penalty under section 6662, the return preparer penalty under section 6694, the promoter penalty under section 6700, and the aiding and abetting penalty under section 6701.

Transactions that are the same as, or substantially similar to, the transaction described in this Notice 2002–35 are identified as “listed transactions” for purposes of § 1.6011–4T(b)(2) of the Temporary Income Tax Regulations and § 301.6111–2T(b)(2) of the Temporary Procedure and Administrative Regulations. See also § 301.6112–1T, A–4. It should be noted that, independent of their classification as “listed transactions” for purposes of §§ 1.6011–4T(b)(2) and 301.6111–2T(b)(2), such transactions may already be subject to the tax shelter registration and list maintenance requirements of §§ 6111 and 6112 under the regulations issued in February 2000 (§§ 301.6111–2T and 301.6112–1T, A–4), as well as the regulations issued in 1984 and amended in 1986 (§§ 301.6111–1T and 301.6112–1T, A–3). Persons required to register these tax shelters who have failed to register the shelters may be subject to the penalty under section 6707(a), and to the penalty under section 6708(a) if the requirements of section 6112 are not satisfied.

The Service and the Treasury recognize that some taxpayers may have filed tax returns taking the position that they were entitled to the purported tax benefits of the type of transaction described in this

Notice. These taxpayers are advised to take prompt action to file amended returns.

The principal author of this Notice is Elizabeth Handler of the Office of Associate Chief Counsel (Financial Institutions and Products). For further information regarding this Notice, contact Ms. Handler at (202) 622–3930 (not a toll-free call).

26 CFR 601.204: Changes in accounting periods and methods of accounting. (Also Part I, §§ 61, 446, 451, 481, 1012; 1.61–1, 1.446–1, 1.451–1, 1.481–1, 1.1012–1.)

Rev. Proc. 2002–36