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

Section 42.—Low-Income Housing Credit

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of November 2002. See Rev. Rul. 2002–74, page 814.

Section 263.—Capital Expen- ditures

If a taxpayer writes a qualified covered call, owns the underlying equity, and holds a put option on the same underlying stock, do the combined positions form a straddle that triggers to the capitalization rules of section 263(g). See Rev. Rul. 2002–66, page 812.

Section 280G.—Golden Para- chute Payments

Federal short-term, mid-term, and long-term rates are set forth for the month of November 2002. See Rev. Rul. 2002–74, page 814.

Section 382.—Limitation on Net Operating Loss Carryfor- wards and Certain Built-In Losses Following Ownership Change

The adjusted applicable federal long-term rate is set forth for the month of November 2002. See Rev. Rul. 2002–74, page 814.

Section 401. — Qualified Pension, Profit-Sharing, and Stock Bonus Plans

26 CFR 1.401(l)–1: Permitted disparity in employer-provided contributions or benefits.

Covered compensation tables; 2003. The covered compensation tables for the year 2003 are provided for use in determining contributions to defined benefit plans and permitted disparity.

Rev. Rul. 2002–63

This revenue ruling provides tables of covered compensation under section 401( l )(5)(E) of the Internal Revenue Code (the “Code”) and the Income Tax Regulations, thereunder, for the 2003 plan year.

Section 401( l )(5)(E)(i) defines covered compensation with respect to an employee, as the average of the contribution and benefit bases in effect under section 230 of the Social Security Act (the “Act”) for each year in the 35-year period ending with the year in which the employee attains social security retirement age.

Section 401( l )(5)(E)(ii) states that the determination for any year preceding the year in which the employee attains social security retirement age shall be made by assuming that there is no increase in covered compensation after the determination year and before the employee attains social security retirement age.

Section 1.401( l )–1(c)(34) of the Income Tax Regulations defines the taxable wage base as the contribution and benefit base under section 230 of the Act.

2003 COVERED COMPENSATION TABLE

Section 1.401( l )–1(c)(7)(i) defines covered compensation for an employee as the average (without indexing) of the taxable wage bases in effect for each calendar year during the 35-year period ending with the last day of the calendar year in which the employee attains (or will attain) social security retirement age. A 35-year period is used for all individuals regardless of the year of birth of the individual. In determining an employee’s covered compensation for a plan year, the taxable wage base for all calendar years beginning after the first day of the plan year is assumed to be the same as the taxable wage base in effect as of the beginning of the plan year. An employee’s covered compensation for a plan year beginning after the 35-year period applicable under § 1.401( l )–1(c)(7)(i) is the employee’s covered compensation for a plan year during which the 35-year period ends. An employee’s covered compensation for a plan year beginning before the 35-year period applicable under § 1.401( l )–1(c)(7)(i) is the taxable wage base in effect as of the beginning of the plan year.

Section 1.401( l )–1(c)(7)(ii) provides that, for purposes of determining the amount of an employee’s covered compensation under § 1.401( l )–1(c)(7)(i), a plan may use tables, provided by the Commissioner, that are developed by rounding the actual amounts of covered compensation for different years of birth.

For purposes of determining covered compensation for the 2003 year, the taxable wage base is $87,000.

The following tables provide covered compensation for 2003:

CALENDAR

CALENDAR YEAR OF

SOCIAL SECURITY

RETIREMENT AGE

2003 COVERED COMPENSATION

TABLE II

YEAR OF

BIRTH

1907 1972 $4,488 1908 1973 4,704 1909 1974 5,004 1910 1975 5,316 1911 1976 5,664 1912 1977 6,060 1913 1978 6,480

2002–45 I.R.B. 803 November 12, 2002

2003 COVERED COMPENSATION TABLE

2003 COVERED COMPENSATION

TABLE II

CALENDAR

CALENDAR YEAR OF

SOCIAL SECURITY

RETIREMENT AGE

YEAR OF

BIRTH

1914 1979 7,044 1915 1980 7,692 1916 1981 8,460 1917 1982 9,300 1918 1983 10,236 1919 1984 11,232 1920 1985 12,276 1921 1986 13,368 1922 1987 14,520 1923 1988 15,708 1924 1989 16,968 1925 1990 18,312 1926 1991 19,728 1927 1992 21,192 1928 1993 22,716 1929 1994 24,312 1930 1995 25,920 1931 1996 27,576 1932 1997 29,304 1933 1998 31,128 1934 1999 33,060 1935 2000 35,100 1936 2001 37,212 1937 2002 39,444 1938 2004 43,968 1939 2005 46,236 1940 2006 48,492 1941 2007 50,724 1942 2008 52,908 1943 2009 55,008 1944 2010 57,096 1945 2011 59,148 1946 2012 61,152 1947 2013 63,132 1948 2014 64,968 1949 2015 66,720 1950 2016 68,352 1951 2017 69,912 1952 2018 71,376 1953 2019 72,780 1954 2020 74,136 1955 2022 76,656 1956 2023 77,856 1957 2024 78,972 1958 2025 79,992 1959 2026 80,952 1960 2027 81,852

November 12, 2002 804 2002–45 I.R.B.

2003 COVERED COMPENSATION TABLE

2003 COVERED COMPENSATION

TABLE II

CALENDAR

CALENDAR YEAR OF

SOCIAL SECURITY

RETIREMENT AGE

YEAR OF

BIRTH

1961 2028 82,692 1962 2029 83,448 1963 2030 84,180 1964 2031 84,876 1965 2032 85,500 1966 2033 86,028 1967 2034 86,436 1968 2035 86,748 1969 2036 86,940 1970 or later 2037 87,000

2003 ROUNDED COVERED COMPENSATION TABLE

YEAR OF BIRTH COVERED COMPENSATION

1937 39,000 1938–1939 45,000 1940 48,000 1941 51,000 1942–1943 54,000 1944 57,000 1945–1946 60,000 1947 63,000 1948–1949 66,000 1950–1951 69,000 1952–1953 72,000 1954 75,000 1955–1957 78,000 1958–1960 81,000 1961–1964 84,000 1965 and later 87,000

The principal author of this revenue ruling is Todd Newman of Employee Plans Customer Education and Outreach of the Tax Exempt and Government Entities Division. For further information regarding this revenue ruling, please contact the Employee Plans taxpayer assistance telephone service at 1–877–829–5500, between the hours of 8:00 a.m. and 6:30 p.m. Eastern time, Monday through Friday (a toll-free number). Mr. Newman’s number is (202) 283–9702 (not a toll-free number).

Section 404.—Deduction for Con- tributions of an Employer to an Employees’ Trust or Annuity Plan and Compensation Under a Deferred-Payment Plan

Deductibility; timing . This ruling modifies Rev. Rul. 2002–46 to provide that the scope limitations imposed by Rev. Proc. 2002–9 (providing for automatic consent to change a method of accounting) are waived for taxpayers who wish to change their method of accounting to comply with the holding of Rev. Rul. 2002–46. This ap

plies only for the taxpayers’ first taxable year ending on or after October 16, 2002, effective on that date.

Rev. Rul. 2002–73

Rev. Rul. 2002–46, 2002–29 I.R.B. 117, holds that grace period contributions to a qualified cash or deferred arrangement within the meaning of § 401(k) of the Internal Revenue Code or to a defined contribution plan as matching contributions within the meaning of § 401(m) are not deductible by the employer for a taxable year

2002–45 I.R.B. 805 November 12, 2002

Section 467.—Certain Pay- ments for the Use of Property or Services

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of November 2002. See Rev. Rul. 2002–74, page 814.

Section 468.—Special Rules for Mining and Solid Waste Reclamation and Closing Costs

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of November 2002. See Rev. Rul. 2002–74, page 814.

Section 472.—Last-in, First- out Inventories

26 CFR 1.472–1: Last-in, first-out inventories.

LIFO; price indexes; department stores. The September 2002 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, September 30, 2002.

Rev. Rul. 2002–77

The following Department Store Inventory Price Indexes for September 2002 were issued by the Bureau of Labor Statistics. The indexes are accepted by the Internal Revenue Service, under § 1.472–1(k) of the Income Tax Regulations and Rev. Proc. 86– 46, 1986–2 C.B. 739, for appropriate application to inventories of department stores employing the retail inventory and lastin, first-out inventory methods for tax years ended on, or with reference to September 30, 2002. The Department Store Inventory Price Indexes are prepared on a national basis and include (a) 23 major groups of departments, (b) three special combinations of the major groups — soft goods, durable goods, and miscellaneous goods, and (c) a store total, which covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.

if the contributions are attributable to compensation earned by plan participants after the end of that taxable year.

Rev. Rul. 2002–46 modifies Rev. Proc. 2002–9, 2002–3 I.R.B. 327 (as modified and amplified by Rev. Proc. 2002–19, 2002–13 I.R.B. 696, modified and clarified by Announcement 2002–17, 2002–8 I.R.B. 561, and amplified, clarified, and modified by Rev. Proc. 2002–54, 2002–35 I.R.B. 432) to add to the Appendix of Rev. Proc. 2002–9 a change in method of accounting to conform to the holding of Rev. Rul. 2002–46. Thus, taxpayers wishing to change to a method consistent with Rev. Rul. 2002–46 must apply for automatic approval under Rev. Proc. 2002–9. Rev. Rul. 2002–46 provides that the scope limitations in section 4.02 of Rev. Proc. 2002–9 do not apply to a change to a method consistent with Rev. Rul. 2002–46, unless the taxpayer’s method of accounting is an issue under consideration for a taxable year under examination within the meaning of section 3.09(1) of Rev. Proc. 2002–9 when the Form 3115, Application to Change a Method of Accounting, is filed with the national office.

Upon further consideration, the Internal Revenue Service has determined that it is appropriate to waive the scope limitations of section 4.02 for this change only for a limited period of time. Accordingly, the APPLICATION section of Rev. Rul. 2002–46 is modified to read as follows:

APPLICATION

A change in a taxpayer’s treatment of contributions to a method consistent with this revenue ruling is a change in method of accounting to which §§ 446 and 481 apply. A taxpayer that wants to change its treatment of contributions to a method consistent with this revenue ruling must follow the automatic change in method of accounting provisions in Rev. Proc. 2002–9, 2002–3 I.R.B. 327 (as modified and amplified by Rev. Proc. 2002–19, 2002–13 I.R.B. 696, modified and clarified by Announcement 2002–17, 2002–8 I.R.B. 561, and amplified, clarified, and modified by Rev. Proc. 2002–54, 2002–35 I.R.B. 432), with the following modifications:

(1) The scope limitations in section 4.02 of Rev. Proc. 2002–9 do not apply to a tax

payer that wants to make the change for its first taxable year ending on or after October 16, 2002, provided the taxpayer’s method of accounting for contributions addressed in this revenue ruling is not an issue under consideration for taxable years under examination, within the meaning of section 3.09(1) of Rev. Proc. 2002–9, at the time the Form 3115 is filed with the national office;

(2) To assist the Service in processing changes in method of accounting under this revenue ruling, and to ensure proper handling, section 6.02(4)(a) of Rev. Proc. 2002–9 is modified to require that a Form 3115 filed under this revenue ruling include the statement: “Automatic Change Filed Under Rev. Rul. 2002–46.” This statement should be legibly printed or typed on the appropriate line on any Form 3115 filed under this revenue ruling.”

EFFECTIVE DATE

This modification is effective October 16, 2002.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 2002–46 is modified. Rev. Proc. 2002–9 is modified and amplified.

DRAFTING INFORMATION

The principal author of this revenue ruling is Grant D. Anderson of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Anderson at (202) 622–4970 (not a tollfree call). For information regarding any other aspect of Rev. Rul. 2002–46, contact the Employee Plans taxpayer assistance telephone service at 1–877–829– 5500 (a toll-free number) between the hours of 8:00 a.m. and 4:00 p.m., Eastern Time, Monday through Friday.

Section 412.—Minimum Funding Standards

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of November 2002. See Rev. Rul. 2002–74, page 814.

November 12, 2002 806 2002–45 I.R.B.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Groups Sep. Sep. 2001 2002

Percent Change from Sep. 2001

to Sep. 2002 ¹

1. Piece Goods ........................................................................................ 509.9 484.6 –5.0
2. Domestics and Draperies.................................................................... 589.1 574.2 –2.5
3. Women’s and Children’s Shoes ......................................................... 668.9 658.0 –1.6
4. Men’s Shoes........................................................................................ 854.7 886.9 3.8
5. Infants’ Wear....................................................................................... 625.4 618.5 –1.1
6. Women’s Underwear .......................................................................... 571.0 548.2 –4.0
7. Women’s Hosiery................................................................................ 356.7 343.2 –3.8
8. Women’s and Girls’ Accessories........................................................ 557.9 549.2 –1.6
9. Women’s Outerwear and Girls’ Wear................................................ 392.0 385.7 –1.6
10. Men’s Clothing ................................................................................... 578.4 561.1 –3.0
11. Men’s Furnishings .............................................................................. 603.1 593.8 –1.5
12. Boys’ Clothing and Furnishings......................................................... 477.1 446.2 –6.5
13. Jewelry ................................................................................................ 899.0 896.7 –0.3
14. Notions ................................................................................................ 795.0 809.1 1.8
15. Toilet Articles and Drugs.................................................................... 979.9 971.4 –0.9
16. Furniture and Bedding........................................................................ 632.8 625.9 –1.1
17. Floor Coverings .................................................................................. 622.9 601.1 –3.5
18. Housewares ......................................................................................... 767.5 748.9 –2.4
19. Major Appliances................................................................................ 227.0 222.2 –2.1
20. Radio and Television .......................................................................... 52.9 47.7 –9.8
21. Recreation and Education ² ................................................................. 89.3 85.4 –4.4
22. Home Improvements ² ......................................................................... 125.6 124.9 –0.6
23. Auto Accessories ² ............................................................................... 110.1 112.0 1.7

Groups 1 - 15: Soft Goods ............................................................................ 588.6 578.4 –1.7 Groups 16 - 20: Durable Goods .................................................................... 421.2 407.9 –3.2 Groups 21 - 23: Misc. Goods ² ....................................................................... 98.3 96.0 –2.3 Store Total ³ ......................................................................................... 526.8 515.8 –2.1

1 Absence of a minus sign before the percentage change in this column signifies a price increase. 2 Indexes on a January 1986=100 base. 3 The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.

DRAFTING INFORMATION

The principal author of this revenue ruling is Michael Burkom of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Burkom at (202) 622–7718 (not a tollfree call).

Section 482.—Allocation of Income and Deductions Among Taxpayers

Federal short-term, mid-term, and long-term rates are set forth for the month of November 2002. See Rev. Rul. 2002–74, page 814.

Section 483.—Interest on Certain Deferred Payments

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of November 2002. See Rev. Rul. 2002–74, page 814.

2002–45 I.R.B. 807 November 12, 2002

Section 642.—Special Rules for Credits and Deductions

Federal short-term, mid-term, and long-term rates are set forth for the month of November 2002. See Rev. Rul. 2002–74, page 814.

Section 807.—Rules for Cer- tain Reserves

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of November 2002. See Rev. Rul. 2002–74, page 814.

Section 846.—Discounted Unpaid Losses Defined

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of November 2002. See Rev. Rul. 2002–74, page 814.

Section 995.—Taxation of DISC Income to Shareholders

2002 base period T-bill rate. The “base period T-bill rate” for the period ending September 30, 2002, is published, as required by section 995(f) of the Code.

Rev. Rul. 2002–68

Section 995(f)(1) of the Internal Revenue Code provides that a shareholder of a DISC shall pay interest each taxable year in an amount equal to the product of the shareholder’s DISC-related deferred tax liability for the year and the “base period T-bill rate.” Under section 995(f)(4), the base period T-bill rate is the annual rate of interest determined by the Secretary to be equivalent to the average of the 1-year constant maturity Treasury yields, as published by the Board of Governors of the Federal Reserve System, for the 1-year period ending on September 30 of the calendar year ending with (or of the most recent calendar year ending before) the close of the taxable year of the shareholder. The base period T-bill rate for the period ending September 30, 2002 is 2.18 percent.

Pursuant to section 6222 of the Code, interest must be compounded daily. The table below provides factors for compounding the base period T-bill rate daily for any number of days in the shareholder’s taxable year (including a 52–53 week accounting pe

riod) for the 2002 base period T-bill rate. To compute the amount of the interest charge for the shareholder’s taxable year, multiply the amount of the shareholder’s DISC-related deferred tax liability (as defined in section 995(f)(2)) for that year by the base period T-bill rate factor corresponding to the number of days in the shareholder’s taxable year for which the interest charge is being computed. Generally, one would use the factor for 365 days. One would use a different factor only if the shareholder’s taxable year for which the interest charge being determined is a short taxable year, if the shareholder uses the 52–53 week taxable year, or if the shareholder’s taxable year is a leap year.

For the base period T-bill rates for the periods ending in prior years, see Rev. Rul. 2001–56, 2001–2 C.B. 500, and Rev. Rul. 2000–52, 2000–2 C.B. 516.

DRAFTING INFORMATION

The principal author of this revenue ruling is David Bergkuist of the Office of the Associate Chief Counsel (International). For further information about this revenue ruling, contact Mr. Bergkuist at (202) 622– 3850 (not a toll-free call).

ANNUAL RATE, COMPOUNDED DAILY

DAYS 2.180 PERCENT FACTOR

1 .000059726 2 .000119456 3 .000179189 4 .000238926 5 .000298666

6 .000358410 7 .000418157 8 .000477908 9 .000537663 10 .000597421

11 .000657183 12 .000716948 13 .000776717 14 .000836489 15 .000896265

DAYS 2.180 PERCENT FACTOR

16 .000956045 17 .001015828 18 .001075614 19 .001135405 20 .001195199

21 .001254996 22 .001314797 23 .001374602 24 .001434410 25 .001494221

26 .001554037 27 .001613855 28 .001673678 29 .001733504 30 .001793333

31 .001853167 32 .001913003 33 .001972844 34 .002032687 35 .002092535

36 .002152386 37 .002212240 38 .002272099 39 .002331960 40 .002391826

41 .002451694 42 .002511567 43 .002571443 44 .002631323 45 .002691206

46 .002751093 47 .002810983 48 .002870877 49 .002930774 50 .002990675

51 .003050580 52 .003110488 53 .003170400 54 .003230315 55 .003290234

November 12, 2002 808 2002–45 I.R.B.

DAYS 2.180 PERCENT FACTOR

136 .008155574 137 .008215787 138 .008276004 139 .008336224 140 .008396448

141 .008456676 142 .008516907 143 .008577142 144 .008637380 145 .008697622

146 .008757867 147 .008818116 148 .008878369 149 .008938625 150 .008998885

151 .009059149 152 .009119416 153 .009179687 154 .009239961 155 .009300239

156 .009360520 157 .009420805 158 .009481094 159 .009541386 160 .009601682

161 .009661982 162 .009722285 163 .009782592 164 .009842902 165 .009903216

166 .009963533 167 .010023854 168 .010084179 169 .010144507 170 .010204839

171 .010265175 172 .010325514 173 .010385857 174 .010446203 175 .010506553

DAYS 2.180 PERCENT FACTOR

56 .003350157 57 .003410083 58 .003470013 59 .003529946 60 .003589883

61 .003649823 62 .003709767 63 .003769715 64 .003829666 65 .003889621

66 .003949579 67 .004009541 68 .004069507 69 .004129476 70 .004189448

71 .004249425 72 .004309404 73 .004369388 74 .004429375 75 .004489365

76 .004549360 77 .004609357 78 .004669359 79 .004729364 80 .004789372

81 .004849384 82 .004909400 83 .004969419 84 .005029442 85 .005089468

86 .005149498 87 .005209532 88 .005269569 89 .005329610 90 .005389654

91 .005449702 92 .005509754 93 .005569809 94 .005629867 95 .005689930

ANNUAL RATE, COMPOUNDED DAILY—CONTINUED

DAYS 2.180 PERCENT FACTOR

96 .005749996 97 .005810065 98 .005870138 99 .005930215 100 .005990295

101 .006050379 102 .006110466 103 .006170557 104 .006230652 105 .006290750

106 .006350852 107 .006410957 108 .006471066 109 .006531178 110 .006591294

111 .006651414 112 .006711537 113 .006771664 114 .006831795 115 .006891929

116 .006952066 117 .007012208 118 .007072353 119 .007132501 120 .007192653

121 .007252809 122 .007312968 123 .007373131 124 .007433297 125 .007493467

126 .007553641 127 .007613818 128 .007673999 129 .007734183 130 .007794371

131 .007854562 132 .007914758 133 .007974956 134 .008035159 135 .008095365

2002–45 I.R.B. 809 November 12, 2002

DAYS 2.180 PERCENT FACTOR

256 .015406887 257 .015467534 258 .015528183 259 .015588837 260 .015649494

261 .015710155 262 .015770819 263 .015831487 264 .015892159 265 .015952834

266 .016013513 267 .016074195 268 .016134881 269 .016195571 270 .016256264

271 .016316961 272 .016377662 273 .016438366 274 .016499074 275 .016559785

276 .016620500 277 .016681219 278 .016741941 279 .016802667 280 .016863397

281 .016924130 282 .016984867 283 .017045607 284 .017106351 285 .017167099

286 .017227850 287 .017288605 288 .017349364 289 .017410126 290 .017470892

291 .017531662 292 .017592435 293 .017653212 294 .017713992 295 .017774776

DAYS 2.180 PERCENT FACTOR

176 .010566906 177 .010627264 178 .010687624 179 .010747989 180 .010808357

181 .010868728 182 .010929103 183 .010989482 184 .011049865 185 .011110251

186 .011170640 187 .011231033 188 .011291430 189 .011351831 190 .011412235

191 .011472642 192 .011533054 193 .011593468 194 .011653887 195 .011714309

196 .011774735 197 .011835164 198 .011895597 199 .011956033 200 .012016473

201 .012076917 202 .012137364 203 .012197815 204 .012258270 205 .012318728

206 .012379190 207 .012439655 208 .012500124 209 .012560597 210 .012621073

211 .012681553 212 .012742036 213 .012802523 214 .012863014 215 .012923508

ANNUAL RATE, COMPOUNDED DAILY—CONTINUED

DAYS 2.180 PERCENT FACTOR

216 .012984006 217 .013044508 218 .013105013 219 .013165522 220 .013226034

221 .013286550 222 .013347070 223 .013407593 224 .013468120 225 .013528650

226 .013589184 227 .013649722 228 .013710263 229 .013770808 230 .013831356

231 .013891908 232 .013952464 233 .014013024 234 .014073587 235 .014134153

236 .014194723 237 .014255297 238 .014315875 239 .014376456 240 .014437040

241 .014497629 242 .014558221 243 .014618816 244 .014679415 245 .014740018

246 .014800624 247 .014861234 248 .014921848 249 .014982465 250 .015043086

251 .015103711 252 .015164339 253 .015224970 254 .015285606 255 .015346245

November 12, 2002 810 2002–45 I.R.B.

DAYS 2.180 PERCENT FACTOR

346 .020879579 347 .020940552 348 .021001529 349 .021062510 350 .021123494

351 .021184481 352 .021245472 353 .021306467 354 .021367466 355 .021428468

356 .021489474 357 .021550484 358 .021611497 359 .021672514 360 .021733534

361 .021794558 362 .021855586 363 .021916617 364 .021977652 365 .022038691

366 .022099733 367 .022160779 368 .022221829 369 .022282882 370 .022343939

371 .022404999

DAYS 2.180 PERCENT FACTOR

296 .017835564 297 .017896355 298 .017957150 299 .018017948 300 .018078750

301 .018139556 302 .018200366 303 .018261179 304 .018321995 305 .018382816

306 .018443640 307 .018504467 308 .018565299 309 .018626133 310 .018686972

311 .018747814 312 .018808660 313 .018869509 314 .018930362 315 .018991219

316 .019052079 317 .019112943 318 .019173811 319 .019234682 320 .019295557

ANNUAL RATE, COMPOUNDED DAILY—CONTINUED

DAYS 2.180 PERCENT FACTOR

321 .019356435 322 .019417317 323 .019478203 324 .019539092 325 .019599985

326 .019660882 327 .019721782 328 .019782686 329 .019843594 330 .019904505

331 .019965420 332 .020026338 333 .020087261 334 .020148186 335 .020209116

336 .020270049 337 .020330985 338 .020391926 339 .020452870 340 .020513817

341 .020574769 342 .020635723 343 .020696682 344 .020757644 345 .020818610

2002–45 I.R.B. 811 November 12, 2002

in Contract B is included in A’s investment in Contract C immediately after the exchange.

HOLDINGS

(1) The assignment by A of Contract B to Company C for consolidation with pre-existing Contract C is a tax-free exchange under § 1035.

(2) After the assignment, pursuant to § 1035, A’s basis in Contract C immediately after the exchange equals the sum of A’s basis in Contract B and A’s basis in Contract C immediately prior to the exchange.

(3) After the assignment, A’s investment in Contract C under § 72 equals the sum of A’s investment in Contract B and A’s investment in Contract C immediately prior to the exchange.

DRAFTING INFORMATION

The principal author of this revenue ruling is Ann H. Logan of the Office of Associate Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling, contact her at (202) 622–3970 (not a toll-free call).

Section 1092.—Straddles

26 CFR 1.1092(c)–1: Qualified covered call op-

tions.

(Also § 263; 1.1092(c)–2; 1.1092(c)–3;

1.1092(c)–4.)

Effect of collars on qualified covered calls . Guidance is provided under section 1092 of the Code regarding the effect of collars upon qualified covered call options.

Rev. Rul. 2002–66

ISSUE

If the grantor of a qualified covered call option holds a put option on the same underlying equity, is the straddle consisting of the underlying equity and the written call option part of a larger straddle and therefore not excluded from straddle treatment by § 1092(c)(4)(A) of the Internal Revenue Code?

Section 1035.—Certain Exchanges of Insurance Policies

26 CFR 1.1035–1: Certain exchanges of insurance policies. (Also Part I, §§ 72, 1031)

Tax-free exchange of annuity con- tracts . This ruling states that the transfer of an entire annuity contract into another pre-existing annuity contract qualifies as a tax-free exchange and defines the basis and investment in the contract for the surviving contract.

Rev. Rul. 2002–75

ISSUES

Is the taxpayer’s assignment of an entire annuity contract to a second insurance company, which then deposits the cash surrender value of the assigned annuity contract into a pre-existing annuity contract owned by the same taxpayer, and issued by the second insurance company, a tax-free exchange under § 1035? What is the basis under § 1035 and the investment in the surviving contract under § 72 after the transfer?

FACTS

A owns Contract B, an annuity contract issued by Company B, and Contract C, an annuity contract issued by Company C. A is the obligee for both contracts. A seeks to consolidate Contract B and Contract C. A assigns Contract B to Company C. Company B transfers the entire cash surrender value of Contract B directly to Company C. Company C includes the transferred cash surrender value of Contract B in Contract C. A will not receive any of the cash surrender value of Contract B that is transferred to Company C and deposited into Contract C. No other consideration will be paid by A in this transaction. The terms of Contract C are unchanged by this transaction, and Contract B terminates.

LAW AND ANALYSIS

Section 1035(a)(3) provides that no gain or loss shall be recognized on the exchange of an annuity contract for an annuity contract. Section 1.1035–1 of the Income Tax Regulations provides that the exchange,

without recognition of gain or loss, of an annuity contract for another annuity contract under § 1035(a)(3) is limited to cases where the same person or persons are the obligee or obligees under the contract received in the exchange as under the original contract.

The legislative history of § 1035 states that exchange treatment is appropriate for “individuals who have merely exchanged one insurance policy for another better suited to their needs and who have not actually realized gain.” H.R. Rep. No. 1337, 83d Cong., 2d Sess. 81 (1954). Section 1035(d)(2) cross-references § 1031 for the rules to determine the basis of property acquired in a § 1035 exchange. Section 1031(d) provides that property acquired in a § 1035 exchange has the same basis as that of the property exchanged, decreased by the amount of any money received by the taxpayer and increased by any gain (or decreased by any loss) recognized by the taxpayer on the exchange.

Section 1.1031(d)–1 provides, in part, that in a § 1035 exchange the basis of the property acquired is the same as the basis of the property transferred by the taxpayer with proper adjustments to the date of the exchange.

Section 72 governs the federal tax treatment of distributions from an annuity contract. For purposes of determining income, gain, or loss from an annuity contract, § 72 contains two special definitions of investment in the contract. When amounts received are not annuity payments, § 72(e)(6) defines the investment in the contract. For purposes of § 72(b), which applies to annuity payments, § 72(c)(1) defines the investment in the contract in a similar, but not identical, manner.

After completion of the transaction, A owns only Contract C, which has been increased in value to reflect the cash surrender value transferred into it from Contract B. A had no access to the cash surrender value transferred in the exchange. Therefore, this transaction is treated as an exchange that is tax-free under § 1035.

As a result of the application of § 1035(d), A’s basis in Contract B is included in A’s basis in Contract C immediately after the exchange, and under § 72(c)(1) and § 72(e)(6), A’s investment

November 12, 2002 812 2002–45 I.R.B.

wing to the body and from the body to the second wing are equal. Essentially, a butterfly spread creates two spreads, one bullish and one bearish. Thus, a butterfly spread presents less chance of either an adverse or a favorable spread movement and is, therefore, less likely to result in a different loss or gain than an ordinary straddle.

The 1981 legislative history to § 1092(a)(2) (B)(iii), while not directly applicable to § 1092(c)(4), supports the treatment of a qualified covered call option as being “part of a larger straddle” if the taxpayer holds one or more additional positions that substantially diminish the risk of holding the equity by itself and the risk of the combination of holding the equity and writing the qualified covered call option.

The legislative history of the qualified covered call option exception to § 1092 straddle treatment does not clarify the meaning of the phrase “larger straddle” but does discuss considerations underlying the decision to create the exemption. The report of the House Committee on Ways and Means contains this explanation:

One widely used investment strategy that would be affected by the extension of the straddle rules to stock options and stock involves writing call options on stock owned by the taxpayer. The committee believes that it may be appropriate to exempt these transactions where they are undertaken primarily to enhance the taxpayer’s investment return on the stock and not to reduce the taxpayer’s risk of loss on the stock.

H. R. Rep. No. 432, 98 ^th Cong., 2d Sess. 1266 (1984).

In the three situations described above, the presence of a purchased put substantially reduces the taxpayer’s risk of loss with respect to the stock, and also reduces any potential for enhancing the taxpayer’s investment return through premium income. In each of the three situations, the put option protects against a decrease in the value of the stock below the exercise price of the put option and also reduces the impact of changes in the value of the stock through the inverse relationship between the value of the stock and the value of the put option. Both factors substantially diminish the risk of loss with respect to the holding of the stock by itself and the risk of loss with

FACTS

In each of the following situations, assume that:

1. at the time the call option is written and at the time the put option is acquired, there is an inverse relationship between the value of the underlying equity and the value of each option position;

2. as a result of the magnitude of the inverse relationships, each option position substantially diminishes the risk arising from holding the equity;

3. The acquisition of the put option substantially diminishes the risk of loss with respect to the combined position consisting of the equity and the qualified covered call option on that equity; and

4. the call option is a qualified covered call option under § 1092(c)(4)(B).

Situation 1 . On August 1, 2002, A purchases 100 shares of Corporation X stock for $100 per share, writes a 12-month call option on 100 shares of X stock with a strike price of $110, and purchases a 12month put option on 100 shares of X stock with a strike price of $100.

Situation 2 . On September 3, 2002, B purchases 100 shares of Corporation Y stock for $102 per share. On September 6, 2002, when the fair market value of Y stock is $100, B writes a 12-month call option for 100 shares of Y stock with a strike price of $110 and purchases a 12-month put option on 100 shares of Y stock with a strike price of $100.

Situation 3. On October 1, 2002, C purchases 100 shares of Corporation Z stock for $102 per share. On October 3, 2002, when the fair market value of Z stock is $100, C writes a 12-month call option on 100 shares of Z stock with a strike price of $110. On December 2, 2002, when the fair market value of the Z stock remains $100, C purchases a 12-month put option on 100 shares of Z stock with a strike price of $100.

LAW AND ANALYSIS

Section 1092(a) limits the recognition of losses on one or more positions in a straddle to the amount by which the losses exceed the unrecognized gain in any offsetting positions in that straddle. Section 1092(c) defines a straddle as offsetting positions with respect to personal property, and § 1092(d)(3) treats stock as personal prop

erty if the stock is a position in the straddle and an option on that stock or on substantially identical stock or securities is an offsetting position in that straddle.

Section 1092(c)(4)(A) provides that a straddle will not be treated as a straddle for purposes of §§ 1092 or 263(g) if:

(i) all of the offsetting positions making up any straddle consist of one or more qualified covered call options and the stock to be purchased from the taxpayer under such options, and

(ii) such straddle is not part of a larger straddle. The two clauses of § 1092(c)(4)(A) work together to delineate the scope of the exemption from straddle treatment provided by § 1092(c)(4). Clause (i) requires that, in order to obtain this exemption with respect to a given straddle, the straddle must consist only of one or more qualified covered call options and the stock to be purchased from the taxpayer under the options. Even if this requirement is satisfied, however, clause (ii) precludes the exemption from applying if the taxpayer holds at least one other position ( i.e., a position other than qualified covered call options and the stock to be purchased thereunder) that, when considered together with the stock and qualified covered call options described in clause (i), creates a larger straddle.

Neither the statutory language nor the legislative history of § 1092(c)(4) defines the term “part of a larger straddle.” Section 1092(a)(2)(B)(iii) uses the same phrase in the definition of an identified straddle but does not define the term “larger straddle.” The legislative history to § 1092(a)(2)(B)(iii) also does not define the term but does state that “[i]n addition, an identified straddle cannot constitute part of a larger straddle (for example, a butterfly).” S. Rep. No. 144, 97 ^th Cong., 1 ^st Sess. 148 (1981), 1981–2 C.B. 412, 471. An example of a “butterfly” is a commodity straddle consisting of a 5 unit short position expiring in May 2002, a 10 unit long position expiring in June 2002, and a 5 unit short position expiring in July 2002. The relationship among the three positions in a butterfly is explained in Leslie v. Commissioner, T.C. Memo 1996–86, aff’d, 146 F.3d 643 (9 ^th

Cir. 1998), cert. denied, 525 U.S. 1071 (1999):

The center position or body of a butterfly spread is twice as large as either wing, and the time periods for the delivery of the commodity from the first

2002–45 I.R.B. 813 November 12, 2002

long-term exempt rate. For purposes of sections 382, 1274, 1288, and other sections of the Code, tables set forth the rates for November 2002.

Rev. Rul. 2002–74

This revenue ruling provides various prescribed rates for federal income tax purposes for November 2002 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the longterm tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(2) for buildings placed in service during the current month. Finally, Table 5 contains the federal rate for determining the present value of annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.

respect to the combination of the stock and the written qualified covered call option. In addition, when the owner of the stock acquires the put, the amount of the premium received from the call option is offset, in whole or in part, by the amount of the premium paid for the put option, thus reducing any potential enhancement of investment return on the stock resulting from the receipt of the call option premium. In effect, when the writer of the call option purchases the put, the writer gives up potential enhancement of return on investment to acquire additional risk protection.

Accordingly, in each of the three situations described above, the presence of the purchased put causes the stock and the qualified covered call option to constitute part of a larger straddle within the meaning of § 1092(c)(4)(A).

HOLDINGS

Situation 1 . All of the positions in X stock are treated as part of a larger straddle. Section 1092(c)(4) does not apply to any of the positions in X stock.

Situation 2 . All of the positions in Y stock are part of a larger straddle beginning on September 6, 2002. Section 1092(c)(4) does not apply to any of the positions in Y stock beginning on that date.

Situation 3 . Prior to December 2, 2002, the combination of the qualified covered call option and the underlying shares are not treated as a straddle for purposes of §§ 1092 and 263(g). However, beginning on December 2, 2002, all of the positions in Z stock are part of a larger straddle, and § 1092(c)(4), therefore, does not apply to any of the positions in Z stock beginning on that date.

DRAFTING INFORMATION

The principal author of this revenue ruling is Pamela Lew of the Office of Associate Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling, contact Pamela Lew at (202) 622–3950 (not a tollfree call).

Section 1274.—Determina- tion of Issue Price in the Case of Certain Debt Instruments Issued for Property

(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 the

REV. RUL. 2002–74 TABLE 1

Applicable Federal Rates (AFR) for November 2002

Period for Compounding

Annual Semiannual Quarterly Monthly Short-Term

AFR 1.82% 1.81% 1.81% 1.80% 110% AFR 2.00% 1.99% 1.99% 1.98% 120% AFR 2.18% 2.17% 2.16% 2.16% 130% AFR 2.36% 2.35% 2.34% 2.34%

Mid-Term

AFR 3.06% 3.04% 3.03% 3.02% 110% AFR 3.37% 3.34% 3.33% 3.32% 120% AFR 3.68% 3.65% 3.63% 3.62% 130% AFR 3.99% 3.95% 3.93% 3.92% 150% AFR 4.61% 4.56% 4.53% 4.52% 175% AFR 5.39% 5.32% 5.29% 5.26%

Long-Term

AFR 4.60% 4.55% 4.52% 4.51% 110% AFR 5.07% 5.01% 4.98% 4.96% 120% AFR 5.53% 5.46% 5.42% 5.40% 130% AFR 6.01% 5.92% 5.88% 5.85%

November 12, 2002 814 2002–45 I.R.B.

REV. RUL. 2002–74 TABLE 2

Adjusted AFR for November 2002

Period for Compounding

Annual Semiannual Quarterly Monthly Short-term adjusted AFR 1.64% 1.63% 1.63% 1.62%

Mid-term adjusted AFR 2.82% 2.80% 2.79% 2.78%

Long-term adjusted AFR 4.31% 4.26% 4.24% 4.22%

REV. RUL. 2002–74 TABLE 3

Rates Under Section 382 for November 2002

Adjusted federal long-term rate for the current month 4.31%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.) 4.63%

REV. RUL. 2002–74 TABLE 4

Appropriate Percentages Under Section 42(b)(2) for November 2002

Appropriate percentage for the 70% present value low-income housing credit 7.89%

Appropriate percentage for the 30% present value low-income housing credit 3.38%

REV. RUL. 2002–74 TABLE 5

Rate Under Section 7520 for November 2002

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 3.6%

Section 1288.—Treatment of Original Issue Discounts on Tax-Exempt Obligations

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of November 2002. See Rev. Rul. 2002-74, page 814.

Section 6011.—General Re- quirement of Return, Statement, or List

26 CFR 1.6011–4T: Requirement of statement dis- closing participation in certain transactions by

taxpayers (temporary).

T.D. 9017

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1, 20, 25, 31, 53, 54, 56, and 301

Tax Shelter Disclosure Statements

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: These temporary regulations modify the rules relating to the filing by certain taxpayers of a disclosure statement with their Federal tax returns under section 6011(a) and include conforming changes to the rules relating to the registration of confidential corporate tax shelters under section 6111(d). These regulations affect taxpayers participating in reportable transactions and persons responsible for registering confidential corporate tax shelters. The text of these temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject on page 832 in this issue of the Bulletin.

2002–45 I.R.B. 815 November 12, 2002

of sections 6011, 6111, and 6112. On March 20, 2002, Treasury released its Plan to Combat Abusive Tax Avoidance Transactions (PO–2018), which describes changes to the rules under sections 6011, 6111, and 6112 that will establish a more effective disclosure regime and improve compliance. See http://www.treas.gov/press/releases/po 2018.htm . The amended temporary regulations under section 6011 revise the categories of transactions that must be disclosed on returns. Certain conforming changes are being made to the temporary regulations under section 6111. Concurrent with these amended temporary regulations under sections 6011 and 6111, the IRS and Treasury are publishing elsewhere in this issue of the Bulletin temporary regulations under section 6112. The amendments to the temporary regulations under section 6112 generally require organizers and sellers (material advisors) to maintain lists of persons for transactions required to be registered under section 6111 and for reportable transactions subject to disclosure under § 1.6011–4T, 20.6011–4T, 25.6011– 4T, 31.6011–4T, 53.6011–4T, 54.6011– 4T, or 56.6011–4T. Pending legislation would modify section 6111 to require registration of transactions that are required to be disclosed under section 6011. The IRS and Treasury intend to revise the regulations under section 6111 when such legislation is enacted.

Explanation of Provisions

1. In General

Section 1.6011–4T generally provides that certain taxpayers must disclose their direct or indirect participation in reportable transactions when they file their Federal income tax returns. Under the current temporary regulations, in the case of a partnership or an S corporation that participates in a listed transaction, that partnership or S corporation must disclose its participation and the partners and shareholders also must disclose their participation in the listed transaction. A reportable transaction is either: (1) a listed transaction, or (2) a transaction that meets two of five characteristics, satisfies a projected tax effect test, and does not satisfy any of the exceptions provided in the regulations. The IRS and Treasury have found that taxpayers are interpreting the five characteris

DATES: Effective Date: These temporary regulations are effective January 1, 2003. Applicability date: For dates of applicability, see § 1.6011–4T(h), § 20.6011– 4T(b), § 25.6011–4T(b), § 31.6011–4T(b), § 53.6011–4T(b), § 54.6011–4T(b), § 56.6011–4T(b), and § 301.6111–2T(h).

FOR FURTHER INFORMATION CONTACT: Tara P. Volungis, Danielle M. Grimm, or Charlotte Chyr, 202–622–3070 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

These regulations are being issued without prior notice and public procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, the collections of information contained in these regulations have been reviewed and, pending receipt and evaluation of public comments, approved by the Office of Management and Budget under control numbers 1545–1685 and 1545–1687. Responses to these collections of information are mandatory.

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.

For further information concerning these collections of information, and where to submit comments on the collections of information and the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble to the cross-referencing notice of proposed rulemaking published in the Proposed Rules section of this issue of the Federal Reg- ister .

Books and 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.

Background

This document amends 26 CFR parts 1 and 301 to provide modified rules relating to the disclosure of reportable transactions by certain taxpayers on their Federal income tax returns under section 6011 and

includes conforming changes to the rules regarding the registration of confidential corporate tax shelters under section 6111. This document also amends 26 CFR parts 20, 25, 31, 53, 54, and 56 to provide rules for purposes of estate, gift, employment, and pension and exempt organizations excise taxes requiring the disclosure of listed transactions by certain taxpayers on their Federal tax returns under section 6011.

On February 28, 2000, the IRS issued temporary and proposed regulations regarding sections 6011 and 6111 (T.D. 8877, 2000–1 C.B. 747; REG–103735–00, 2000–1 C.B. 770; T.D. 8876, 2000–1 C.B. 753; REG–110311–98, 2000–1 C.B. 767) (the February 2000 regulations). The February 2000 regulations were published in the Federal Register (65 FR 11205, 65 FR 11269; 65 FR 11215, 65 FR 11272) on March 2, 2000. On August 11, 2000, the IRS issued temporary and proposed regulations modifying the rules under sections 6011 and 6111 (T.D. 8896, 2000–2 C.B. 249; REG–103735–00, REG–110311–98, 2000–2 C.B. 258) (the August 2000 regulations). The August 2000 regulations were published in the Federal Register (65 FR 49909, 65 FR 49955) on August 16, 2000. On August 2, 2001, the IRS issued temporary and proposed regulations modifying the rules under sections 6011 and 6111 (T.D. 8961, 2001–2 C.B. 194; REG– 103735–00, REG–110311–98, 2001–2 C.B. 204) (the August 2001 regulations). The August 2001 regulations were published in the Federal Register (66 FR 41133, 66 FR 41169) on August 7, 2001. On June 14, 2002, the IRS issued temporary and proposed regulations modifying the rules under sections 6011 and 6111 (T.D. 9000, 2002–28 I.R.B. 87; REG–103735–00, REG–110311–98, 2002–28 I.R.B. 109) (the June 2002 regulations). The June 2002 regulations were published in the Federal Reg- ister (67 FR 41324, 67 FR 41362) on June 18, 2002. The rules under sections 6011, 6111, and 6112 for disclosure, registration, and list maintenance are intended to provide the IRS and Treasury with information needed to evaluate potentially abusive transactions. The IRS and Treasury have considered and evaluated compliance with those rules, and have determined that certain additional changes to the current temporary and proposed regulations are necessary to improve compliance and to carry out the purposes

November 12, 2002 816 2002–45 I.R.B.

claimed under section 475(a) or section 1296(a). The IRS and Treasury specifically request comments on whether these or other exceptions should be added to the regulations.

4. Transactions with a Significant Book-Tax Difference

A transaction with a significant booktax difference is a transaction where the treatment for Federal income tax purposes of any item or items from the transaction differs, or is reasonably expected to differ, by more than $10 million on a gross basis from the treatment of the item or items for book purposes in any taxable year. When making this determination, offsetting items are not netted for either tax or book purposes. Book income is determined by applying U.S. generally accepted accounting principles (GAAP) for worldwide income.

This category of transaction generally applies to taxpayers that are reporting companies under the Securities Exchange Act of 1934 (15 USCS 78a) (and related business entities) and to business entities that have $100 million or more in gross assets. Specific rules are provided for taxpayers that file consolidated returns, foreign persons, disregarded entities, partnerships, and shareholders of certain foreign corporations. For example, where a taxpayer is considered to participate in a transaction indirectly through a partnership or foreign corporation, items from the transaction that otherwise may be considered items of the partnership or foreign corporation (for tax or book purposes) are treated as items of the taxpayer (to the extent of the taxpayer’s allocable share). The mere fact that an item may be reported by different persons for tax and book purposes ( e.g., on the taxpayer’s U.S. tax return and on the entity’s books and records), without more, is not considered a significant book-tax difference in such cases. Instead, the taxpayer must test such items for a book-tax difference in the same manner as items from a transaction in which the taxpayer participated directly.

The regulations provide various exceptions for this category of transaction. The IRS and Treasury specifically request comments on the exceptions and whether other exceptions should be provided.

tics in an overly narrow manner and are interpreting the exceptions in an overly broad manner.

These new temporary regulations provide more objective rules. The regulations redefine a reportable transaction as a transaction that satisfies any one of six categories of transactions. The regulations also eliminate the projected tax effect test and the general exceptions. The six categories of reportable transactions are: listed transactions, confidential transactions, transactions with contractual protection, loss transactions, transactions with a significant book-tax difference, and transactions involving a brief asset holding period. Further, the new temporary regulations require disclosure of participation in reportable transactions by all direct and indirect participants. Disclosure must be made on Form 8886, “Reportable Transaction Disclo- sure Statement”, which will be available when these regulations become effective.

A provision has been added to § 1.6011–4T allowing taxpayers to request a ruling as to whether a transaction must be disclosed under § 1.6011–4T. A transaction will not be considered a reportable transaction, or will be excluded from any individual category of reportable transaction, if the Commissioner makes a determination, by published guidance, individual ruling under § 1.6011–4T, or otherwise, that the transaction is not subject to the disclosure requirements of § 1.6011–4T. While some exceptions to the disclosure requirements are included in these regulations, the IRS and Treasury specifically request comments on particular types of transactions that should be either treated as not subject to the disclosure requirements of § 1.6011–4T or excluded from an individual category of reportable transaction.

The major changes to the categories of reportable transactions are discussed below.

2. Confidential Transactions

A confidential transaction is a transaction that is offered under conditions of confidentiality, unless the presumption in the regulations regarding written authorization to disclose the structure and tax aspects of the transaction is satisfied. These regulations clarify, however, that the presumption is available only in cases in which

the written authorization to disclose is effective without limitation of any kind from the commencement of discussions.

3. Loss Transactions

A loss transaction is any transaction resulting in, or that is reasonably expected to result in, a loss under section 165 of at least: $10 million in any single taxable year or $20 million in any combination of taxable years for corporations; $5 million in any single taxable year or $10 million in any combination of taxable years for partnerships or S corporations, whether or not any losses flow through to one or more partners or shareholders; $2 million in any single taxable year or $4 million in any combination of taxable years for individuals or trusts, whether or not any losses flow through to one or more beneficiaries; and $50,000 in any single taxable year for individuals or trusts, whether or not the loss flows through from an S corporation or partnership, if the loss arises with respect to a section 988 transaction (as defined in section 988(c)(1) relating to foreign currency transactions). In determining the monetary thresholds, the amount of a section 165 loss is adjusted for any salvage value and for any insurance or other compensation received. However, a section 165 loss does not take into account offsetting gains or other income or limitations.

A section 165 loss includes an amount deductible by virtue of a provision that treats a transaction as a sale or other disposition, or otherwise results in a deduction under section 165. A section 165 loss includes, for example, a loss resulting from a sale or exchange of a partnership interest under section 741 and a loss resulting from a section 988 transaction. Under these regulations, casualty losses and losses resulting from involuntary conversions are not subject to the disclosure requirements under § 1.6011–4T.

The IRS and Treasury also are considering adding two other exceptions. One exception would be for losses resulting from a sale of securities on an established securities market within the meaning of § 1.7701–1(b), but only if the amount of basis used in computing the amount of the loss is equal to the amount of cash paid by the taxpayer for the securities. The other potential exception would be for losses

2002–45 I.R.B. 817 November 12, 2002

5. Transactions Involving a Brief Asset Holding Period

A transaction involving a brief asset holding period is a transaction resulting in, or that is reasonably expected to result in, a tax credit exceeding $250,000 (including a foreign tax credit) if the underlying asset giving rise to the credit is held by the taxpayer for less than 45 days. For purposes of determining the holding period, the principles in section 246(c)(3) and (c)(4) apply.

6. Application of Section 6011 to Estate, Gift, Employment, and Pension and Exempt Organizations Excise Taxes

A listed transaction that involves Federal estate, gift, employment, or pension or exempt organizations excise taxes must be disclosed in accordance with published guidance identifying such transaction as a listed transaction.

Effective Date

These regulations apply to transactions entered into on or after January 1, 2003.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. Because no notice of proposed rulemaking is required, the provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply. Pursuant to section 7805(f) of the Internal Revenue Code, these regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Drafting Information

The principal authors of these regulations are Tara P. Volungis, Danielle M. Grimm, and Charlotte Chyr, Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.

* * * * *

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1, 20, 25, 31, 53, 54, 56, and 301 are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.6011–4T is revised to read as follows:

§ 1.6011–4T Requirement of statement disclosing participation in certain transactions by taxpayers (temporary).

(a) In general . Every taxpayer that has participated, directly or indirectly, in a reportable transaction within the meaning of paragraph (b) of this section must attach to its return for the taxable year described in paragraph (e) of this section a disclosure statement in the form prescribed by paragraph (d) of this section. The fact that a transaction is a reportable transaction shall not affect the legal determination of whether the taxpayer’s treatment of the transaction is proper.

(b) Reportable transactions —(1) In gen- eral . A reportable transaction is a transaction described in any of the paragraphs (b)(2) through (7) of this section. The term transaction includes all of the factual elements relevant to the expected tax treatment of any investment, entity, plan, or arrangement, and includes any series of steps carried out as part of a plan, and any series of substantially similar transactions entered into in the same taxable year. There are six categories of reportable transactions: listed transactions, confidential transactions, transactions with contractual protection, loss transactions, transactions with a significant book-tax difference, and transactions involving a brief asset holding period.

(2) Listed transactions . A listed transaction is a transaction that is the same as or substantially similar to one of the types of transactions that the Internal Revenue Service has determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a listed transaction.

(3) Confidential transactions —(i) In gen- eral . A confidential transaction is a trans

action that is offered under conditions of confidentiality. All the facts and circumstances relating to the transaction will be considered when determining whether a transaction is offered under conditions of confidentiality, including the prior conduct of the parties. If a taxpayer’s disclosure of the structure or tax aspects of the transaction is limited in any way by an express or implied understanding or agreement with or for the benefit of any person who makes or provides a statement, oral or written, (or for whose benefit a statement is made or provided) as to the potential tax consequences that may result from the transaction, a transaction is considered offered under conditions of confidentiality, whether or not such understanding or agreement is legally binding. A transaction also will be considered offered under conditions of confidentiality if the taxpayer knows or has reason to know that the taxpayer’s use or disclosure of information relating to the structure or tax aspects of the transaction is limited in any other manner (such as where the transaction is claimed to be proprietary or exclusive) for the benefit of any person, other than the taxpayer, who makes or provides a statement, oral or written, (or for whose benefit a statement is made or provided) as to the potential tax consequences that may result from the transaction.

(ii) Privilege . A taxpayer’s privilege to maintain the confidentiality of a communication relating to a reportable transaction in which the taxpayer might participate or has agreed to participate, including a taxpayer’s confidential communication with the taxpayer’s attorney, is not itself a condition of confidentiality.

(iii) Securities law exception . A transaction is not considered offered under conditions of confidentiality if disclosure of the structure or tax aspects of the transaction is subject to restrictions reasonably necessary to comply with federal or state securities laws and such disclosure is not otherwise limited.

(iv) Presumption . Unless the facts and circumstances indicate otherwise, a transaction is not considered offered under conditions of confidentiality if every person who makes or provides a statement, oral or written, (or for whose benefit a statement is made or provided) as to the potential tax consequences that may result from the transaction, provides express written authoriza

November 12, 2002 818 2002–45 I.R.B.

erally accepted accounting principles (GAAP) for worldwide income. Adjustments to any reserve for taxes are disregarded for purposes of determining the book-tax difference.

(ii) Applicability —(A) In general . This paragraph (b)(6) applies only to—

( 1 ) Taxpayers that are reporting companies under the Securities Exchange Act of 1934 (15 USCS 78a) and related business entities (as described in section 267(b) or 707(b)); or

( 2 ) Business entities that have $100 million or more in gross assets (the assets of all related business entities (as defined in section 267(b) or 707(b)) must be aggregated).

(B) Consolidated returns . For purposes of this paragraph (b)(6), in the case of taxpayers that are members of a group of affiliated corporations filing a consolidated return, transactions solely between or among members of the group will be disregarded. Moreover, where two or more members of the group participate in a transaction that is not solely between or among members of the group, items shall be aggregated (as if such members were a single taxpayer), but any offsetting items shall not be netted.

(C) Foreign persons . In the case of a taxpayer that is a foreign person (other than a foreign corporation that is treated as a domestic corporation for Federal tax purposes under section 269B, 953(d), 1504(d) or any other provision of the Internal Revenue Code), only assets that are U.S. assets under § 1.884–1(d) shall be taken into account for purposes of paragraph (b)(6)(ii)(A)( 2 ) of this section, and only transactions that give rise to income that is effectively connected with the conduct of a trade or business within the United States (or to losses, expenses, or deductions allocated or apportioned to such income) shall be taken into account for purposes of this paragraph (b)(6).

(D) Owners of disregarded entities . In the case of an eligible entity that is disregarded as an entity separate from its owner for Federal tax purposes, items of income, loss, expense, or deduction that otherwise are considered items of the entity for book purposes shall be treated as items of its owner, and items arising from transactions between the entity and its owner shall be disregarded, for purposes of this paragraph (b)(6).

tion to the taxpayer permitting the taxpayer (and each employee, representative, or other agent of such taxpayer) to disclose to any and all persons, without limitation of any kind, the structure and tax aspects of the transaction, and all materials of any kind (including opinions or other tax analyses) that are provided to the taxpayer related to such structure and tax aspects. This presumption is available only in cases in which the written authorization to disclose is effective without limitation of any kind from the commencement of discussions.

(4) Transactions with contractual pro- tection . A transaction with contractual protection is a transaction for which the taxpayer has obtained or been provided with contractual protection against the possibility that part or all of the intended tax consequences from the transaction will not be sustained, including, but not limited to, recission rights, the right to a full or partial refund of fees paid to any person, fees that are contingent on the taxpayer’s realization of tax benefits from the transaction, insurance protection with respect to the tax treatment of the transaction, or a tax indemnity or similar agreement (other than a customary indemnity provided by a principal to the transaction that did not participate in the promotion or offering of the transaction to the taxpayer). Notwithstanding the foregoing, a transaction will not be considered to have contractual protection solely because the issuer of a debt instrument agrees to pay additional interest to compensate the holder of such debt instrument for withholding tax imposed on interest paid on the debt instrument, or because the requirement to pay such additional interest entitles the issuer to redeem the debt instrument.

(5) Loss transactions —(i) In general . A loss transaction is any transaction resulting in, or that is reasonably expected to result in, a taxpayer claiming a loss under section 165 of at least—

(A) $10 million in any single taxable year or $20 million in any combination of taxable years for corporations;

(B) $5 million in any single taxable year or $10 million in any combination of taxable years for partnerships or S corporations, whether or not any losses flow through to one or more partners or shareholders;

(C) $2 million in any single taxable year or $4 million in any combination of tax

able years for individuals or trusts, whether or not any losses flow through to one or more beneficiaries; or

(D) $50,000 in any single taxable year for individuals or trusts, whether or not the loss flows through from an S corporation or partnership, if the loss arises with respect to a section 988 transaction (as defined in section 988(c)(1) relating to foreign currency transactions).

(ii) Section 165 loss . (A) For purposes of this section, in determining the thresholds in paragraph (b)(5)(i) of this section, the amount of a section 165 loss is adjusted for any salvage value and for any insurance or other compensation received. See § 1.165–1(c)(4). However, a section 165 loss does not take into account offsetting gains or other income or limitations. For example, a section 165 loss does not take into account the limitation in section 165(d)(relating to wagering losses) or the limitations in sections 165(f), 1211, and 1212 (relating to capital losses).

(B) For purposes of this section, a section 165 loss includes an amount deductible by virtue of a provision that treats a transaction as a sale or other disposition, or otherwise results in a deduction under section 165. A section 165 loss includes, for example, a loss resulting from a sale or exchange of a partnership interest under section 741 and a loss resulting from a section 988 transaction. (iii) Exceptions . Transactions that result in the following losses under section 165 are not loss transactions under this paragraph (b)(5)—

(A) A loss from fire, storm, shipwreck, or other casualty, or from theft, as defined in section 165(c)(3); or

(B) A loss from a compulsory or involuntary conversion as described in section 1231(a)(3)(A)(ii) and section 1231(a)(4)(B). (6) Transactions with a significant book- tax difference —(i) In general . A transaction with a significant book-tax difference is a transaction where the treatment for Federal income tax purposes of any item or items from the transaction differs, or is reasonably expected to differ, by more than $10 million on a gross basis from the treatment of the item or items for book purposes in any taxable year. For purposes of this determination, offsetting items shall not be netted for either tax or book purposes. For purposes of this paragraph (b)(6), book income is determined by applying U.S. gen

2002–45 I.R.B. 819 November 12, 2002

partner in a partnership, as a shareholder in an S corporation, or through a trust or a controlled entity). Moreover, a taxpayer will have indirectly participated in a reportable transaction if the taxpayer knows or has reason to know that the tax benefits claimed from the taxpayer’s transaction are derived from a reportable transaction.

(ii) Shareholders of foreign corpora- tions —(A) In general . A taxpayer that is a shareholder in a foreign corporation will not be considered to have participated indirectly in a transaction to which the foreign corporation is a direct party merely because the taxpayer is a shareholder in the foreign corporation unless the taxpayer is a reporting shareholder (as defined in paragraph (c)(3)(ii)(B) of this section) and the transaction either is described in any of the paragraphs (b)(2) through (5) or in paragraph (b)(7) of this section, or reduces or eliminates an income inclusion that otherwise would be required under section 551, 951, or 1293. (B) Reporting shareholder . For purposes of paragraph (c)(3)(ii)(A) of this section, the term reporting shareholder means a United States shareholder (as defined in section 551(a)) in a foreign personal holding company (as defined in section 552), a United States shareholder (as defined in section 951(b)) in a controlled foreign corporation (as defined in section 957), or a 10 percent shareholder (by vote or value) of a qualified electing fund (as defined in section 1295).

(iii) Example. . The following example illustrates the provisions of paragraph (c)(3)(i) of this section:

Example Notice 95–53, 1995–2 C.B. 334 (see § 601.601(d)(2) of this chapter), describes a lease stripping transaction in which one party (the transferor) assigns the right to receive future payments under a lease of tangible property and receives consideration which the transferor treats as current income. The transferor later transfers the property subject to the lease in a transaction intended to qualify as a substituted basis transaction, for example, a transaction described in section 351. In return, the transferor receives stock (with low value and high basis) from the transferee corporation. The transferee corporation claims the deductions associated with the high basis property subject to the lease. The transferor and transferee corporation have directly participated in the listed transaction. If the transferor subsequently transfers the high basis/low value stock to a taxpayer in another transaction intended to qualify as a substituted basis transaction and the taxpayer uses the stock to generate a loss, and if the taxpayer knows or has reason to know that the tax loss claimed was derived from the lease stripping transaction, then the taxpayer is indirectly participating in a reportable transaction. Ac

(E) Partners of partnerships . In the case of a taxpayer that is a member or a partner of an entity that is treated as a partnership for Federal tax purposes, items of income, loss, expense, or deduction that are allocable to the taxpayer for Federal tax purposes but otherwise are considered items of the entity for book purposes shall be treated as items of the taxpayer, for purposes of this paragraph (b)(6).

(F) Shareholders of certain foreign cor- porations . To the extent that a taxpayer is considered under paragraph (c)(3)(ii) of this section to have indirectly participated in a transaction to which a foreign corporation is a direct party, all items from the transaction that otherwise are considered items of the foreign corporation for Federal tax purposes or book purposes shall be considered items of the taxpayer for purposes of this paragraph (b)(6).

(iii) Exceptions . Items listed in paragraphs (b)(6)(iii)(A) through (M) of this section are not items for which reporting is required under this paragraph (b)(6).

(A) Items to the extent a book loss or expense is reported before or without a loss or deduction for Federal income tax purposes.

(B) Items to the extent income or gain for Federal income tax purposes is reported before or without book income or gain.

(C) Depreciation, depletion, and amortization relating solely to differences in methods, lives (for example, useful lives, recovery periods), or conventions.

(D) Bad debts or cancellation of indebtedness income.

(E) Federal, state, local, and foreign taxes.

(F) Compensation of employees and independent contractors, including stock options and pensions.

(G) Items that for Federal tax purposes cannot be deducted or capitalized, such as certain payments for meals and entertainment, and certain fines and penalties.

(H) Charitable contributions of cash or tangible property.

(I) Tax exempt interest, including municipal bond interest.

(J) Dividends, including amounts treated as dividends under section 78, distributions of previously taxed income under sections 959 and 1293, and income inclusions under sections 551, 951, and 1293.

(K) Items resulting from transactions under section 1033.

(L) Gains and losses arising under section 475 or section 1296.

(M) Section 481 adjustments. (7) Transactions involving a brief as- set holding period . A transaction involving a brief asset holding period is a transaction resulting in, or that is reasonably expected to result in, a tax credit exceeding $250,000 (including a foreign tax credit) if the underlying asset giving rise to the credit is held by the taxpayer for less than 45 days. For purposes of determining the holding period, the principles in section 246(c)(3) and (c)(4) apply.

(8) Exceptions —(i) In general . A transaction will not be considered a reportable transaction, or will be excluded from any individual category of reportable transaction under paragraphs (b)(2) through (7) of this section, if the Commissioner makes a determination, by published guidance, individual ruling under paragraph (f) of this section, or otherwise, that the transaction is not subject to the reporting requirements of this section.

(ii) Special rules for RICs . For purposes of this section, a regulated investment company as defined in section 851 is not required to disclose transactions described in paragraph (b)(5) or (6) of this section.

(c) Definitions . For purposes of this section, the following terms are defined as follows:

(1) Taxpayer . The term taxpayer means any person described in section 7701(a)(1), including S corporations. The term tax- payer also includes, unless specifically provided elsewhere in this section, an affiliated group of corporations that joins in the filing of a consolidated return under section 1501. (2) Corporation . When used specifically in this section, the term corporation means an entity that is required to file a return for a taxable year on any 1120 series form, or successor form, excluding S corporations.

(3) Indirect participation —(i) In gen- eral . A taxpayer will have indirectly participated in a reportable transaction if the taxpayer’s Federal tax liability is affected (or in the case of a partnership or an S corporation, if a partner’s or shareholder’s Federal tax liability is reasonably expected to be affected) by the transaction even if the taxpayer is not a direct party to the transaction ( e.g., the taxpayer participates as a

November 12, 2002 820 2002–45 I.R.B.

attachment to the taxpayer’s Federal income tax return next filed after the date the transaction becomes a reportable transaction (whether or not the transaction affects the taxpayer’s or any partner’s or shareholder’s Federal income tax liability for that year). The taxpayer must disclose the transaction in the time and manner provided for under the provisions of this section regardless of whether the taxpayer also plans to disclose the transaction under other published guidance, for example, Rev. Proc. 94–69, 1994–2 C.B. 804 (see § 601.601(d)(2) of this chapter).

(2) Example . The following example illustrates the application of this paragraph (e):

Example. In January of 2003, F, a domestic calendar year corporation, enters into a transaction that F reasonably expects will result in an $8 million section 165 loss in a single year and a $15 million section 165 loss over a combination of years. Assume that the transaction is not a transaction described in any of the paragraphs (b)(2) through (7) of this section, and, therefore, is not a reportable transaction under paragraph (b) of this section. On March 1, 2005, the IRS publishes a notice identifying the transaction as a listed transaction described in paragraph (b)(2) of this section. Thus, upon issuance of the notice, the transaction becomes a reportable transaction described in paragraph (b) of this section. F is required to file Form 8886 for the transaction as an attachment to F’s next filed Federal income tax return. If F’s 2004 Federal income tax return has not been filed on or before the date the Service identifies the transaction as a listed transaction, the disclosure statement must be attached to F’s 2004 return and at that time a copy of the form must be sent to OTSA.

(f) Rulings and protective disclosures (1) Requests for ruling . If a taxpayer is uncertain whether a transaction must be disclosed under this section, that taxpayer may, on or before the date that disclosure would otherwise be required under this section, submit a request to the IRS for a ruling as to whether the transaction is subject to the disclosure requirements of this section. If the request fully discloses all relevant facts relating to the transaction, the potential obligation of that taxpayer to disclose the transaction will be suspended during the period that the ruling request is pending and, if the IRS subsequently concludes that the transaction is a reportable transaction subject to disclosure under this section, until the 60th day after the issuance of the ruling (or, if the request is withdrawn, 60 days after the date that the request is withdrawn).

(2) Protective disclosures . If a taxpayer is uncertain whether a transaction must be disclosed under this section, the taxpayer

cordingly, the taxpayer must disclose the reportable transaction and the manner of the taxpayer’s indirect participation in the reportable transaction under the rules of this section.

(4) Substantially similar . The term sub- stantially similar includes any transaction that is expected to obtain the same or similar types of tax consequences and that is either factually similar or based on the same or similar tax strategy. Receipt of an opinion regarding the tax consequences of the transaction is not relevant to the determination of whether the transaction is the same as or substantially similar to another transaction. Further, the term substantially simi- lar must be broadly construed in favor of disclosure. The following examples illustrate situations where a transaction is the same as or substantially similar to a listed transaction under paragraph (b)(2) of this section. (Such transactions may also be reportable transactions under paragraphs (b)(3) through (7) of this section.) The following examples illustrate the provisions of this paragraph (c)(4):

Example 1. Notice 2000–44, 2000–2 C.B. 255 (see § 601.601(d)(2) of this chapter), sets forth a listed transaction involving offsetting options transferred to a partnership where the taxpayer claims basis in the partnership for the cost of the purchased options but does not adjust basis under section 752 as a result of the partnership’s assumption of the taxpayer’s obligation with respect to the options. Transactions using short sales, futures, derivatives or any other type of offsetting obligations to inflate basis in a partnership interest would be the same as or substantially similar to the transaction described in Notice 2000– 44. Moreover, use of the inflated basis in the partnership interest to diminish gain that would otherwise be recognized on the transfer of a partnership asset would also be the same as or substantially similar to the transaction described in Notice 2000–44.

Example 2. Notice 2001–16, 2001–1 C.B. 730 (see § 601.601(d)(2) of this chapter), sets forth a listed transaction involving a seller (X) who desires to sell stock of a corporation (T), an intermediary corporation (M), and a buyer (Y) who desires to purchase the assets (and not the stock) of T. M agrees to facilitate the sale to prevent the recognition of the gain that T would otherwise report. Notice 2001–16 describes M as a member of a consolidated group that has a loss within the group or as a party not subject to tax. Transactions utilizing different intermediaries to prevent the recognition of gain would be the same as or substantially similar to the transaction described in Notice 2001– 16. An example is a transaction in which M is a corporation that does not file a consolidated return but which buys T stock, liquidates T, sells assets of T to Y, and offsets the gain recognized on the sale of those assets with currently generated losses.

(d) Form and content of disclosure state- ment . The IRS will release Form 8886, “Re- portable Transaction Disclosure Statement” (or a successor form), for use by taxpayers in accordance with this paragraph (d).

A taxpayer required to file a disclosure statement under this section must file a completed Form 8886 in accordance with the instructions to the form. The form must be attached to the appropriate tax returns as provided in paragraph (e) of this section. If a copy of a disclosure statement is required to be sent to the Office of Tax Shelter Analysis (OTSA) under paragraph (e) of this section, it must be sent to: Internal Revenue Service LM:PFTG:OTSA, Large & Mid-Size Business Division, 1111 Constitution Ave., NW, Washington, DC 20224, or to such other address as provided by the Commissioner.

(e) Time of providing disclosure —(1) In general . The disclosure statement for a reportable transaction must be attached to the taxpayer’s Federal income tax return for each taxable year for which the taxpayer’s Federal income tax liability is affected by the taxpayer’s participation in the transaction. In addition, a copy of the disclosure statement must be sent to OTSA at the same time that any disclosure statement is first filed with the taxpayer’s Federal income tax return. If a reportable transaction results in a loss which is carried back to a prior year, the disclosure statement for the reportable transaction must be attached to the taxpayer’s application for tentative refund or amended Federal income tax return for that prior year. In the case of a taxpayer that is a partnership or S corporation, the disclosure statement for a reportable transaction must be attached to the partnership’s or S corporation’s Federal income tax return for each taxable year ending with or within the taxable year of any partner or shareholder whose income tax liability is affected or is reasonably expected to be affected by the partnership’s or S corporation’s participation in the transaction. If a transaction becomes a reportable transaction ( e.g., the transaction subsequently becomes one identified in published guidance as a listed transaction described in paragraph (b)(2) of this section, or there is a change in facts affecting the expected Federal income tax effect of the transaction such that the transaction is reportable under any of the paragraphs (b)(5) through (7)) on or after the date the taxpayer has filed the return for the first taxable year for which the transaction affected the taxpayer’s or a partner’s or a shareholder’s Federal income tax liability, the disclosure statement must be filed as an

2002–45 I.R.B. 821 November 12, 2002

may disclose the transaction in accordance with the requirements of this section, and indicate on the disclosure statement that the taxpayer is uncertain whether the transaction is required to be disclosed under this section and that the disclosure statement is being filed on a protective basis.

(g) Retention of documents . The taxpayer must retain a copy of all documents and other records related to a transaction subject to disclosure under this section that are material to an understanding of the facts of the transaction, the expected tax treatment of the transaction, or the taxpayer’s decision to participate in the transaction. Such documents must be retained until the expiration of the statute of limitations applicable to the final taxable year for which disclosure of the transaction was made in accordance with the requirements of this section. (This document retention requirement is in addition to any document retention requirements that section 6001 generally imposes on the taxpayer.) Such documents generally include, but are not limited to, the following: marketing materials related to the transaction; written analyses used in decision-making related to the transaction; correspondence and agreements between the taxpayer and any advisor, lender, or other party to the reportable transaction that relate to the transaction; documents discussing, referring to, or demonstrating the tax benefits arising from the reportable transaction; and documents, if any, referring to the business purposes for the reportable transaction.

(h) Effective dates . This section applies to Federal income tax returns filed after February 28, 2000. However, paragraphs (a) through (g) of this section apply to transactions entered into on or after January 1, 2003. The rules that apply with respect to transactions entered into on or before December 31, 2002, are contained in § 1.6011–4T in effect prior to January 1, 2003 (see 26 CFR part 1 revised as of April 1, 2002, and 2002–28 I.R.B. 90 (see § 601.601(d)(2) of this chapter)).

PART 20—ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16, 1954

Par. 3. The authority citation for part 20 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 4. Section 20.6011–4T is added to read as follows:

§ 20.6011–4T Requirement of statement dis- closing participation in certain transac- tions by taxpayers (temporary).

(a) In general . If a transaction is identified as a “listed transaction” as defined in § 1.6011–4T of this chapter by the Commissioner in published guidance (see § 601.601(d)(2) of this chapter), and the listed transaction involves an estate tax under chapter 11 of subtitle B of the Internal Revenue Code, the transaction must be disclosed in the manner stated in such published guidance.

(b) Effective date. This section applies to transactions entered into on or after January 1, 2003.

PART 25—GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954

Par. 5. The authority citation for part 25 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 6. Section 25.6011–4T is added to read as follows:

§ 25.6011–4T Requirement of statement dis- closing participation in certain transac- tions by taxpayers (temporary).

(a) In general . If a transaction is identified as a “listed transaction” as defined in § 1.6011–4T of this chapter by the Commissioner in published guidance (see § 601.601(d)(2) of this chapter), and the listed transaction involves a gift tax under chapter 12 of subtitle B of the Internal Revenue Code, the transaction must be disclosed in the manner stated in such published guidance.

(b) Effective date . This section applies to transactions entered into on or after January 1, 2003.

PART 31—EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT THE SOURCE

Par. 7. The authority citation for part 31 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 8. Section 31.6011–4T is added to read as follows:

§ 31.6011–4T Requirement of statement dis- closing participation in certain transac- tions by taxpayers (temporary).

(a) In general . If a transaction is identified as a “listed transaction” as defined in § 1.6011–4T of this chapter by the Com

missioner in published guidance (see § 601.601(d)(2) of this chapter), and the listed transaction involves an employment tax under chapters 21 through 25 of subtitle C of the Internal Revenue Code, the transaction must be disclosed in the manner stated in such published guidance.

(b) Effective date . This section applies to transactions entered into on or after January 1, 2003.

PART 53—FOUNDATION AND SIMILAR EXCISE TAXES

Par. 9. The authority citation for part 53 continues to read as follows:

Authority: 26 U.S.C. 7805 Par. 10. Section 53.6011–4T is added to read as follows:

§ 53.6011–4T Requirement of statement disclosing participation in certain transactions by taxpayers (temporary).

(a) In general . If a transaction is identified as a “listed transaction” as defined in § 1.6011–4T of this chapter by the Commissioner in published guidance (see § 601.601(d)(2) of this chapter), and the listed transaction involves an excise tax under chapter 42 of subtitle D of the Internal Revenue Code (relating to private foundations and certain other tax-exempt organizations), the transaction must be disclosed in the manner stated in such published guidance.

(b) Effective date . This section applies to transactions entered into on or after January 1, 2003.

PART 54—PENSION EXCISE TAXES

Par. 11. The authority citation for part 54 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 12. Section 54.6011–4T is added to read as follows:

§ 54.6011–4T Requirement of statement disclosing participation in certain transactions by taxpayers (temporary).

(a) In general . If a transaction is identified as a “listed transaction” as defined in § 1.6011–4T of this chapter by the Commissioner in published guidance (see § 601.601(d)(2) of this chapter), and the listed transaction involves an excise tax under chapter 43 of subtitle D of the Internal Revenue Code (relating to qualified

November 12, 2002 822 2002–45 I.R.B.

Robert E. Wenzel, Deputy Commissioner

of Internal Revenue.

Approved October 15, 2002.

Pamela F. Olson, Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on October 17, 2002, 3:10 p.m., and published in the issue of the Federal Register for October 22, 2002, 67 F.R. 64799)

Section 6112.—Organizers and Sellers of Potentially Abu- sive Tax Shelters Must Keep Lists of Inventors

301.6112–1T: Requirement to prepare, maintain, and

furnish lists with respect to potentially abusive tax shel-

ters (temporary).

T.D. 9018

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 301

Requirement to Maintain a List of Investors in Potentially Abusive Tax Shelters

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regualations.

SUMMARY: These temporary regulations relate to the preparation, maintenance, and furnishing of lists of persons in potentially abusive tax shelters under section 6112. These regulations apply to organizers and sellers of potentially abusive tax shelters. The text of these temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject on page 834 of this Bulletin.

DATES: Effective Date: These temporary regulations are effective January 1, 2003. Applicability date: For dates of applicability, see § 301.6112–1T(j).

FOR FURTHER INFORMATION CONTACT: Charlotte Chyr, Tara P. Volungis, or Danielle M. Grimm, 202– 622–3070 (not a toll-free number).

pension, etc., plans), the transaction must be disclosed in the manner stated in such published guidance.

(b) Effective date . This section applies to transactions entered into on or after January 1, 2003.

PART 56—PUBLIC CHARITY EXCISE TAXES

Par. 13. The authority citation for part 56 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 14. Section 56.6011–4T is added to read as follows:

§ 56.6011–4T Requirement of statement disclosing participation in certain transactions by taxpayers (temporary).

(a) In general . If a transaction is identified as a “listed transaction” as defined in § 1.6011–4T of this chapter by the Commissioner in published guidance (see § 601.601(d)(2) of this chapter), and the listed transaction involves an excise tax under chapter 41 of subtitle D of the Internal Revenue Code (relating to public charities), the transaction must be disclosed in the manner stated in such published guidance.

(b) Effective date . This section applies to transactions entered into on or after January 1, 2003.

PART 301—PROCEDURE AND ADMINISTRATION

Par. 15. The authority citation for part 301 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * Par. 16. Section 301.6111–2T is amended as follows:

1. Paragraphs (a)(3) and (b)(3)(i) are revised.

2. Paragraph (c)(3) is amended by adding a sentence at the end of the paragraph.

3. Paragraph (h) is amended by revising the paragraph heading and removing the third sentence through the last sentence and adding two new sentences in their place.

The revisions and additions read as follows:

§ 301.6111–2T Confidential corporate tax shelters (temporary).

(a) * * * (3) For purposes of this section, references to the term “transaction” include all of the factual elements relevant to the ex

pected tax treatment of any investment, entity, plan, or arrangement, and include any series of steps carried out as part of a plan. For purposes of this section, the term “substantially similar” includes any transaction that is expected to obtain the same or similar types of tax consequences and that is either factually similar or based on the same or similar tax strategy. Receipt of an opinion regarding the tax consequences of the transaction is not relevant to the determination of whether the transaction is the same as or substantially similar to another transaction. Further, the term “substantially similar” must be broadly construed in favor of registration. For examples, see § 1.6011–4T(c)(4) of this chapter.

* * * * * (b) * * * (3) * * * (i) The potential participant is expected to participate in the transaction in the ordinary course of its business in a form consistent with customary commercial practice (a transaction involving the acquisition, disposition, or restructuring of a business, including the acquisition, disposition, or other change in the ownership or control of an entity that is engaged in a business, or a transaction involving a recapitalization or an acquisition of capital for use in the taxpayer’s business, shall be considered a transaction carried out in the ordinary course of a taxpayer’s business); and

* * * * * (c) (3) * * * This presumption is available only in cases in which the written authorization to disclose is effective without limitation of any kind from the commencement of discussions.

* * * * * (h) Effective dates . * * * However, paragraphs (a)(3), (b)(3)(i), and (c)(3) of this section apply to confidential corporate tax shelters in which any interests are offered for sale on or after January 1, 2003. The rules that apply to confidential corporate tax shelters in which any interests are offered for sale after February 28, 2000, and on or before December 31, 2002, are contained in § 301.6111–2T in effect prior to January 1, 2003 (see 26 CFR part 301 revised as of April 1, 2002, and 2002–28 I.R.B. 91 (see § 601.601(d)(2) of this chapter)).

2002–45 I.R.B. 823 November 12, 2002

IRS as a tax shelter under section 6111, and any transaction that has a potential for tax avoidance or evasion.

Under these regulations, a transaction has the potential for tax avoidance or evasion if it is a listed transaction or if a potential material advisor, at the time the transaction is entered into, knows or has reason to know that the transaction is otherwise a reportable transaction as defined in § 1.6011– 4T. For purposes of section 6112, listed transactions that involve Federal estate, gift, employment, and pension and exempt organizations excise taxes are also potentially abusive tax shelters that require list maintenance. If a transaction that involves Federal income taxes becomes a listed transaction on or after January 1, 2003, it is a potentially abusive tax shelter for purposes of section 6112 and, whether or not the material advisor is already required to maintain a list, the material advisor must begin, at the time of listing, to include on the list those persons who acquired an interest in the transaction after February 28, 2000.

B. Organizer and Seller (Material Advisor)

The regulations provide that a person is an organizer of, or a seller of any interest in, a transaction that is a potentially abusive tax shelter if that person is a material advisor with respect to that transaction. In general, a material advisor is any person who (i) receives, or expects to receive, at least a minimum fee in connection with a transaction that is a potentially abusive tax shelter, and (ii) who makes or provides any statement, oral or written, to any person as to the potential tax consequences of that transaction. The Internal Revenue Service and Treasury are considering whether the minimum fee requirement should be eliminated with respect to listed transactions.

The minimum fee is $250,000 for a transaction that is a potentially abusive tax shelter if all persons who acquire an interest, directly or indirectly, in the transaction are corporations (other than S corporations). The minimum fee for any other transaction that is a potentially abusive tax shelter is $50,000. In calculating the minimum fee, each transaction that is a potentially abusive tax shelter is evaluated separately to determine whether the minimum fee threshold is satisfied with re

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

These regulations are being issued without prior notice and public procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). For this reason, the collections of information contained in these regulations have been reviewed and, pending receipt and evaluation of public comments, approved by the Office of Management and Budget under control number 1545–1686. Responses to these collections of information are mandatory.

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.

For further information concerning these collections of information, and where to submit comments on the collections of information and the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble to the cross-referencing notice of proposed rulemaking published in this issue of the Bulletin.

Books and 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.

Background

This document amends 26 CFR part 301 regarding the requirement to maintain lists of persons for potentially abusive tax shelters under section 6112. Section 6708 provides penalties for failing to maintain a list under section 6112.

On February 28, 2000, the IRS issued temporary and proposed regulations regarding section 6112 (T.D. 8875, 2000–1 C.B. 761; REG–103736–00, 2000–1 C.B. 768). The February regulations were published in the Federal Register (65 FR 11211; 65 FR 11271) on March 2, 2000. On August 11, 2000, the IRS issued temporary and proposed regulations regarding section 6112 (T.D. 8896, 2000–2 C.B. 249; REG–103736–00, 2000–2 C.B. 258). The August 2000 regulations were published in the Federal Register (65 FR 49909; 65 FR 49955) on August 16, 2000, modifying the previous regulations.

The list maintenance rules under section 6112, along with the rules relating to disclosure of reportable transactions under section 6011 and the rules for registration of tax shelters under section 6111, are intended to provide the IRS and Treasury with information needed to evaluate potentially abusive transactions. The IRS and Treasury have considered and evaluated compliance with these rules and have determined that certain additional changes to the current temporary and proposed regulations are necessary to improve compliance and to carry out the purposes of sections 6011, 6111, and 6112. On March 20, 2002, Treasury released its Plan to Combat Abusive Tax Avoidance Transactions (PO–2018), which describes changes to the rules under sections 6011, 6111, and 6112 that will establish a more effective disclosure regime and improve compliance. See http://www.treas.gov/press/releases/po 2018.htm . These amendments to the temporary regulations under section 6112 generally require organizers and sellers (material advisors) to maintain lists of persons for transactions required to be registered under section 6111 and for reportable transactions defined in § 1.6011–4T(b) of the Income Tax Regulations.

Concurrent with these amended temporary regulations under section 6112, the IRS and Treasury are publishing elsewhere in this issue of the Bulletin amended temporary regulations under section 6011. The amended temporary regulations under section 6011 revise the categories of transactions that must be disclosed on returns.

Pending legislation would modify section 6111 to require registration of transactions that are required to be disclosed under section 6011. The IRS and Treasury intend to revise the regulations under section 6111 when such legislation is enacted.

Explanation of Provisions

A. Potentially Abusive Tax Shelter

Section 6112 provides that any person who organizes or sells any interest in a potentially abusive tax shelter must maintain a list identifying each person who was sold an interest in such shelter and containing any other information required by regulations. A potentially abusive tax shelter under section 6112 includes any tax shelter that is required to be registered with the

November 12, 2002 824 2002–45 I.R.B.

same or similar types of tax consequences and that is either factually similar or based on the same or similar tax strategy. Receipt of an opinion regarding the tax consequences of a transaction is not relevant to the determination of whether that transaction is the same as or substantially similar to another transaction. Further, the term substantially similar must be broadly construed in favor of list maintenance.

E. Effective Date

These amended temporary regulations apply to transactions that are potentially abusive tax shelters entered into, or interests acquired therein, on or after January 1, 2003. However, these regulations shall apply to any transaction that was entered into, or in which an interest was acquired, after February 28, 2000, if the transaction becomes a listed transaction as defined in § 1.6011–4T on or after January 1, 2003, and is subject to disclosure under § 1.6011– 4T.

Special Analysis

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. Because no notice of proposed rulemaking is required, the provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply. Pursuant to section 7805(f) of the Internal Revenue Code, these regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Drafting Information

The principal authors of these regulations are Charlotte Chyr, Tara P. Volungis, and Danielle M. Grimm, Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.

spect to that particular transaction. If the minimum fee threshold is satisfied with respect to one transaction that is a potentially abusive tax shelter, but not with respect to another separate transaction (whether or not it is substantially similar), a person is a material advisor with respect to only the transaction for which the minimum fee threshold is satisfied. Accordingly, the list required to be maintained includes only those persons who are participants in the transaction for which the minimum fee threshold is satisfied.

C. Preparing, Maintaining and Furnishing Lists

In general, a material advisor must prepare and maintain a separate list of persons for each transaction that is a potentially abusive tax shelter. However, to ensure that the IRS is able to identify all of the persons who are participants in potentially abusive tax shelters that are substantially similar, the regulations further provide that the material advisor must keep one list for all transactions that are substantially similar and are potentially abusive tax shelters.

Any person to whom a material advisor makes or provides a statement, oral or written, as to the potential tax consequences of a transaction that is a potentially abusive tax shelter must be included on a list if the material advisor knows or has reason to know that the person, or any related party, participated or will participate in the transaction. A person (including any related party) is treated as having participated in a transaction that is a potentially abusive tax shelter if the material advisor knows or has reason to know that the person sold or transferred, or will sell or transfer to another person (subsequent participant) an interest in that type of transaction that, if entered into, would be a potentially abusive tax shelter. The material advisor also must list any subsequent participant if the material advisor knows or has reason to know the identity of that subsequent participant and the material advisor knows or reasonably expects that the subsequent participant will participate in, or sell or transfer to another subsequent partici

pant an interest in that type of transaction that, if entered into, would be a potentially abusive tax shelter.

The required list must be maintained for ten years following the date on which the material advisor last made a statement, oral or written, as to the potential tax consequences that may result from the transaction that is a potentially abusive tax shelter. If a material advisor that is an entity dissolves or liquidates before the expiration of the ten-year period, the person responsible under state law for winding up the affairs of the material advisor is (or if state law does not specify any person, then each of the directors of the corporation, the general partners of the partnership, or the trustees, owners, or members of the entity are) responsible for preparing, maintaining, and furnishing the list, unless the dissolved or liquidated entity submits the list to the Office of Tax Shelter Analysis (OTSA) within 60 days after the dissolution or liquidation. The responsible person must also provide notice to OTSA of such dissolution or liquidation within 60 days after the dissolution or liquidation.

Each material advisor must, upon written request by the IRS, furnish the list of persons to the IRS within 20 business days after the date of the request. The list may be furnished to the IRS in any form that enables the IRS to determine without undue delay or difficulty the information required to be contained in the list.

As a general rule, the name of a participant in a transaction that is a potentially abusive tax shelter is not protected by either the attorney-client privilege or by the tax practitioner privilege under section 7525. No participant in a transaction that is a potentially abusive tax shelter should have a reasonable expectation of confidentiality with respect to that person’s identity. Moreover, a claim of privilege that is not based on a reasonable belief that the privilege applies may subject the material advisor to penalties under section 6708.

D. Substantially Similar Transactions

For purposes of section 6112, a substantially similar transaction includes any transaction that is expected to obtain the

2002–45 I.R.B. 825 November 12, 2002

directly, are corporations (other than S corporations), and $50,000 for any other transaction that is a potentially abusive tax shelter.

(ii) Determination of fees . In determining whether the minimum fee threshold is satisfied, all fees for advice (whether or not tax advice) regarding, or for implementation of, a transaction that is a potentially abusive tax shelter are taken into account. For purposes of this section, fees include consideration in whatever form paid, whether in cash or in kind, and whether paid or denominated as fees for tax advice or for some other function such as the preparation of documentation or tax return preparation. The Internal Revenue Service will scrutinize carefully all of the facts and circumstances in determining whether consideration received in connection with a transaction that is a potentially abusive tax shelter constitutes fees for purposes of this section.

(d) Definitions . For purposes of this section, the following terms are defined as follows:

(1) Interest . The term interest includes, but is not limited to, any right to participate in a transaction by reason of a partnership interest, a shareholder interest, or a beneficial interest in a trust; any interest in property (including a leasehold interest); the entry into a leasing arrangement or a consulting, management or other agreement for the performance of services; or any interest in any other investment, entity, plan, or arrangement. The term interest includes any interest that purportedly entitles the direct or indirect holder of the interest to any tax consequence (including, but not limited to, a deduction, loss, or adjustment to tax basis in an asset) arising from the transaction. An interest also includes the receipt of information or services regarding the organization or structure of the transaction if the information or services are relevant to the potential tax consequences of the transaction.

(2) Substantially similar . The term sub- stantially similar includes any transaction that is expected to obtain the same or similar types of tax consequences and that is either factually similar or based on the same or similar tax strategy. Receipt of an opinion regarding the tax consequences of the transaction is not relevant to the determination of whether the transaction is the same as or substantially similar to another trans

* * * * *

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 301 is amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 301.6112–1T is revised to read as follows:

§ 301.6112–1T Requirement to prepare, maintain, and furnish lists with respect to potentially abusive tax shelters (temporary).

(a) In general. Each organizer and seller, as described in paragraph (c) of this section, of a transaction that is a potentially abusive tax shelter, as described in paragraph (b) of this section, shall prepare and maintain a list of persons in accordance with paragraph (e) of this section and upon request shall furnish such list to the Internal Revenue Service in accordance with paragraph (g) of this section.

(b) Potentially abusive tax shelters . For purposes of this section, a potentially abusive tax shelter is any transaction that is a section 6111 tax shelter, as described in paragraph (b)(1) of this section, or that has a potential for tax avoidance or evasion, as described in paragraph (b)(2) of this section. The term “transaction” includes all of the factual elements relevant to support the expected tax treatment of any investment, entity, plan, or arrangement, and includes any series of steps carried out as part of a plan.

(1) Transaction that is a section 6111 tax shelter . A section 6111 tax shelter is any transaction that is required to be registered with the Internal Revenue Service under section 6111, regardless of whether that tax shelter is properly registered pursuant to section 6111.

(2) Transaction that has a potential for tax avoidance or evasion . A transaction that has a potential for tax avoidance or evasion is any transaction that is a listed transaction as defined in § 1.6011–4T of this chapter and is subject to disclosure under § 1.6011–4T, 20.6011–4T, 25.6011–4T, 31.6011–4T, 53.6011–4T, 54.6011–4T, or 56.6011–4T of this chapter, or any trans

action that a potential material advisor knows or has reason to know, at the time the transaction is entered into or an interest is acquired, meets one of the categories of a reportable transaction under § 1.6011–4T(b)(3) through (7) of this chapter.

(i) The determination of whether a transaction has the potential for tax avoidance or evasion does not depend upon whether the transaction is properly disclosed pursuant to § 1.6011–4T, 20.6011–4T, 25.6011– 4T, 31.6011–4T, 53.6011–4T, 54.6011– 4T, or 56.6011–4T of this chapter. (ii) If a transaction becomes a listed transaction as defined in § 1.6011–4T of this chapter and is subject to disclosure under § 1.6011–4T of this chapter, after the transaction is entered into or an interest in the transaction is acquired, this section shall apply with respect to any interests acquired after February 28, 2000. If a transaction becomes a listed transaction as defined in § 1.6011–4T of this chapter and is subject to disclosure under § 20.6011–4T, 25.6011–4T, 31.6011–4T, 53.6011–4T, 54.6011–4T, or 56.6011–4T of this chapter, after the transaction is entered into or an interest in the transaction is acquired, this section shall apply with respect to any interests acquired on or after January 1, 2003.

(c) Organizer and seller —(1) In gen- eral . A person is an organizer of, or a seller of an interest in, a transaction that is a potentially abusive tax shelter if that person is a material advisor, as described in paragraph (c)(2) of this section, with respect to that transaction.

(2) Material advisor . A material advisor is any person who (or through its employees, shareholders, partners, or agents) receives, or expects to receive, at least a minimum fee, as defined in paragraph (c)(3) of this section, in connection with a transaction that is a potentially abusive tax shelter and who makes or provides any statement, oral or written, to any person as to the potential tax consequences of that transaction. A person shall be treated as a material advisor if that person forms or avails of an entity with the purpose of avoiding the rules of section 6111 or 6112 or the penalties under section 6707 or 6708.

(3) Minimum fee —(i) In general . For purposes of this paragraph (c), the minimum fee is $250,000 for a transaction that is a potentially abusive tax shelter if all persons who acquire an interest, directly or in

November 12, 2002 826 2002–45 I.R.B.

action. Further, the term substantially simi- lar must be broadly construed in favor of list maintenance.

(3) Person . The term person means any person described in section 7701(a)(1), including an affiliated group of corporations that join in the filing of a consolidated return under section 1501.

(4) Related party . A person is a related party with respect to another person if such person bears a relationship to such other person described in section 267 or 707.

(e) Preparation and maintenance of lists —(1) In general . A separate list of persons must be prepared and maintained for each transaction that is a potentially abusive tax shelter. However, one list must be maintained for substantially similar transactions that are potentially abusive tax shelters.

(2) Persons required to be included on lists . (i) A material advisor is required to list each person to whom the material advisor makes or provides a statement, oral or written, as to the potential tax consequences of a transaction that is a potentially abusive tax shelter, if the material advisor knows or has reason to know that the person or any related party participated in or will participate in the transaction (or a substantially similar transaction that is a potentially abusive tax shelter).

(ii) A material advisor shall treat a person (including any related party) as having participated in a transaction that is a potentially abusive tax shelter if the material advisor knows or has reason to know that the person sold or transferred, or will sell or transfer, to another person (subsequent participant) an interest in that type of transaction that, if entered into, would be a potentially abusive tax shelter. The material advisor also must list any subsequent participant if the material advisor knows or has reason to know the identity of that subsequent participant, and the material advisor knows or reasonably expects that the subsequent participant will participate in, or sell or transfer to another subsequent participant an interest in that type of transaction that, if entered into, would be a potentially abusive tax shelter.

(iii) The following examples illustrate the provisions of this section:

Example 1. An investment firm provides a statement describing the potential tax consequences of a type of transaction to three taxpayers: Corporation X, Corporation Y, and Corporation Z. Each taxpayer agrees to pay the investment firm $300,000 in con

nection with the transaction, and each taxpayer engages in a separate transaction (transaction X, transaction Y, and transaction Z, respectively). At the time the transactions are entered into, the investment firm knows, or has reason to know, that the transactions will result in a single taxable year loss of $9 million for Corporation X, $15 million for Corporation Y, and $12 million for Corporation Z. The transactions do not satisfy the definitions of a reportable transaction under § 1.6011–4T(b)(2), (3), (4), (6) or (7) of this chapter. All the persons who acquired an interest directly or indirectly in the transactions are C corporations.

(i) Transaction X. At the time transaction X is entered into, the investment firm does not know, or have reason to know, that the transaction is a reportable transaction, because the $9 million loss does not satisfy the $10 million threshold under § 1.6011–4T(b)(5) of this chapter (relating to loss transactions). Accordingly, transaction X is not a potentially abusive tax shelter. The investment firm is not required to maintain a list with respect to transaction X.

(ii) Transactions Y and Z . The investment firm satisfies the three requirements for being a material advisor with respect to transaction Y and with respect to transaction Z. First, both of the transactions are potentially abusive tax shelters with respect to the investment firm because the investment firm knows, or has reason to know, at the time the transactions are entered into, that the losses for each of Corporation Y and Z are expected to exceed the $10 million threshold and, thus, the transactions are reportable transactions under § 1.6011–4T(b)(5) of this chapter (relating to loss transactions). Second, the investment firm provides a statement as to the potential tax consequences of the transactions. Third, the investment firm receives $300,000 in connection with each transaction, which exceeds the minimum fee with respect to each transaction ($250,000). Accordingly, the investment firm must maintain a list with respect to transactions Y and Z. Because transactions Y and Z are based on the same or similar tax strategy, transactions Y and Z are substantially similar transactions, and the investment firm must keep one list with respect to both transactions. The list must contain information about Corporation Y and Corporation Z (see paragraph (e)(2)(i) of this section).

Example 2. (i) Corporation M provides a statement to Corporation N describing the potential tax consequences of a type of transaction. Corporation N pays Corporation M $90,000 for the information about that type of transaction. Corporation M knows that Corporation N will sell the information to Taxpayer O (a corporation) and Taxpayer P (an individual), and reasonably expects Taxpayer O and Taxpayer P to participate in transactions of the type that Corporation M described to Corporation N. Corporation N, in turn, provides a statement as to the potential tax consequences of that type of transaction to Taxpayer O and Taxpayer P. Each taxpayer agrees to pay Corporation N $80,000 in connection with their respective transactions, and each taxpayer engages in a separate transaction (transaction O and transaction P, respectively). At the time the transactions are entered into, both Corporation M and Corporation N know, or have reason to know, that the transactions are reportable transactions under § 1.6011–4T(b) of this chapter. All the persons who acquire an interest directly or indirectly in transaction O are C corporations.

(ii) Corporation N is not a material advisor with respect to transaction O because Corporation N receives only $80,000 in connection with transaction O, which is less than the minimum fee for that transaction ($250,000). Corporation N is a material advisor with respect to transaction P. First, at the time transaction P is entered into, Corporation N knows, or has reason to know, that transaction P is a reportable transaction and, thus, is a potentially abusive tax shelter. Second, Corporation N provides a statement as to the potential tax consequences of transaction P. Third, Corporation N receives $80,000 in connection with transaction P, which exceeds the minimum fee for that transaction ($50,000). Accordingly, Corporation N must keep a list with respect to transaction P. The list must contain information about Taxpayer P (see paragraph (e)(2)(ii) of this section).

(iii) Corporation M is not a material advisor with respect to transaction O because Corporation M receives only $90,000 in connection with transaction O, which is less than the minimum fee for that transaction ($250,000). Corporation M is a material advisor with respect to transaction P. First, at the time transaction P is entered into, Corporation M knows, or has reason to know, that transaction P is a reportable transaction and, thus, is a potentially abusive tax shelter. Second, Corporation M provides a statement as to the potential tax consequences of transaction P, and Corporation M receives $90,000 in connection with transaction P, which exceeds the minimum fee for that transaction ($50,000). Accordingly, Corporation M must keep a list with respect to transaction P. The list must contain information about Corporation N (see paragraph (e)(2)(ii) of this section) and Taxpayer P (see paragraph (e)(2)(ii) of this section).

(3) Contents —(i) In general . Each list must contain the following information—

(A) The name of each transaction that is a potentially abusive tax shelter and the registration number, if any, obtained under section 6111;

(B) The TIN (as defined in section 7701(a)(41)), if any, of each transaction; (C) The name, address, and TIN of each person required to be on the list;

(D) If applicable, the number of units ( i.e., percentage of profits, number of shares, etc.) acquired by each person required to be included on the list;

(E) The date on which each interest was acquired;

(F) The amount invested in each transaction by each person required to be included on the list;

(G) A detailed description of each transaction that describes both the structure and its expected tax consequences;

(H) A summary or schedule of the tax consequences that each person is intended or expected to derive from participation in each transaction, if known by the material advisor;

2002–45 I.R.B. 827 November 12, 2002

Large & Mid-Size Business Division, 1111 Constitution Ave., NW, Washington, DC 20224, or to such other address as provided by the Commissioner.

(g) Furnishing of lists . Each material advisor and person responsible for maintaining a list of persons must, upon written request by the Internal Revenue Service, furnish the list to the Internal Revenue Service within 20 business days after the date of the request. The request is not required to be in the form of an administrative summons. The list may be furnished to the Internal Revenue Service on paper, card file, magnetic media, or in any other form, provided the method of furnishing the list enables the Internal Revenue Service to determine without undue delay or difficulty the information required in paragraph (e)(3) of this section.

(h) Designation agreements . If more than one material advisor is required to maintain a list of persons, in accordance with paragraph (e) of this section, for a potentially abusive tax shelter, the material advisors may designate by written agreement a single material advisor to maintain the list or a portion of the list. The designation of one material advisor to maintain the list does not relieve the other material advisors from their obligation to furnish the list to the Internal Revenue Service in accordance with paragraph (g) of this section. The fact that a material advisor is unable to obtain the list from any designated material advisor, the fact that any designated material advisor did not maintain a list, or the fact that the list maintained by any designated material advisor is not complete, will not relieve any material advisor from the requirements of this section.

(i) Procedure for obtaining rulings . A person may submit a request to the Internal Revenue Service for a ruling as to whether a transaction is a potentially abusive tax shelter for purposes of this section and whether that person is a material advisor with respect to that transaction. If the request fully discloses all relevant facts relating to the transaction (including all facts relevant to the person’s relationship to such transaction), then the requirement to maintain a list shall be suspended for that person during the period that such ruling request is pending and for 60 days thereafter; however, if it is ultimately determined that the transaction is a potentially abusive tax shelter, the pendency of such

(I) Copies of any additional written materials, including tax analyses or opinions, relating to each transaction that have been shown or provided to any person who acquired or may acquire an interest in the transactions, or to their representatives, tax advisors, or agents, by the material advisor or any related party or agent of the material advisor; and

(J) For each person, if the interest in the transaction was not acquired from the material advisor maintaining the list, the name of the person from whom the interest was acquired.

(ii) Claims of privilege . In any case in which an attorney or federally authorized tax practitioner within the meaning of section 7525 is required to maintain a list with respect to a transaction that is a potentially abusive tax shelter, and that person has a reasonable belief that information required to be disclosed under this paragraph (e)(3) is protected by the attorneyclient privilege or by the confidentiality privilege of section 7525(a), the attorney or federally authorized tax practitioner must still maintain the list of persons pursuant to the requirements of this section. When the list is requested by the Internal Revenue Service, as provided in paragraph (g) of this section, the material advisor may assert a privilege claim subject to the requirements of this paragraph (e)(3)(ii).

(A) The claimed privilege must be supported by a statement that is signed by the attorney or federally authorized tax practitioner under penalties of perjury, must identify and describe (as set forth in paragraph (e)(3)(ii)(B) of this section) the nature of each document or category of information that is not produced which will allow the Service to determine the applicability of the privilege or protection claimed, without revealing the privileged information itself, and must include the following representations with respect to each document or category of information for which the privilege is claimed—

( 1 ) Specifically represent that the information was a confidential practitionerclient communication and, in the case of information which a federally authorized tax practitioner claims is privileged under section 7525, that the omitted information was not part of tax advice that constituted the promotion of the direct or indirect participation of a corporation in any tax shelter (as defined in section 662(d)(2)(iii)); and

( 2 ) Specifically represent that to the best of such person’s knowledge and belief, all others in possession of the omitted information did not disclose the omitted information to any person whose receipt of such information would result in a waiver of the privilege.

(B) Identification and description of a document or category of information includes, but is not limited to—

( 1 ) The date appearing on such document or, if it has no date, the date or approximate date that such document was created;

( 2 ) The general nature, description and purpose of such document and the identity of the person who signed such document, and, if it was not signed, the identity of each person who prepared it; and

( 3 ) The identity of each person to whom such document was addressed and the identity of each person, other than such addressee, to whom such document, or a copy thereof, was given or sent.

(f) Retention of lists . Each material advisor must maintain the list described in paragraph (e) of this section for ten years following the date on which the material advisor last made a statement, oral or written, as to the potential tax consequences of the transaction. If the material advisor required to prepare, maintain, and furnish the list is a corporation, partnership, or other entity (entity) that has dissolved or liquidated before completion of the ten-year period, the person responsible under state law for winding up the affairs of the entity must prepare, maintain and furnish the list on behalf of the entity, unless the entity submits the list to the Office of Tax Shelter Analysis (OTSA) within 60 days after the dissolution or liquidation. If state law does not specify any person as responsible for winding up the affairs, then each of the directors of the corporation, the general partners of the partnership, or the trustees, owners, or members of the entity are responsible for preparing, maintaining and furnishing the list on behalf of the entity, unless the entity submits the list to the Office of Tax Shelter Analysis (OTSA) within 60 days after the dissolution or liquidation. The responsible person must also provide notice to OTSA of such dissolution or liquidation within 60 days after the dissolution or liquidation. The list and the notice provided to OTSA may be sent to: Internal Revenue Service, LM:PFTG:OTSA,

November 12, 2002 828 2002–45 I.R.B.

a ruling request shall not affect the requirement to maintain the list, nor shall it affect the persons required to be included on the list (including persons who acquired interests in the potentially abusive tax shelter prior to and during the pendency of the ruling request), or the other information required to be included as part of the list.

(j) Effective date . This section applies to any transaction that is a potentially abusive tax shelter entered into, or any interest acquired therein, on or after January 1, 2003. However, this section shall apply to any transaction that was entered into, or in which an interest was acquired, after February 28, 2000, if the transaction becomes a listed transaction as defined in § 1.6011–4T of this chapter on or after January 1, 2003, and is subject to disclosure under § 1.6011–4T of this chapter. Otherwise, the rules that apply with respect to any other transaction that is a potentially abusive tax shelter entered into, or any interest acquired therein, on or before De

cember 31, 2002, are contained in § 301.6112–1T in effect prior to December 31, 2002 (see 26 CFR part 301 revised as of April 1, 2002).

Robert E. Wenzel, Deputy Commissioner

of Internal Revenue.

Approved October 15, 2002.

Pamela F. Olson, Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on October 17, 2002, 3:10 p.m., and published in the issue of the Federal Register for October 22, 2002, 67 F.R. 64807)

Section 7520.—Valuation Tables

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of November 2002. See Rev. Rul. 2002-74, page 814.

Section 7701.—Definitions

26 CFR 301.7701–3: Classification of certain busi- ness entities.

How do taxpayers treat, for federal tax purposes, an entity that is owned solely by a husband and wife as community property under the laws of a state, a foreign country, or a possession of the United States? See Rev. Proc. 2002–69, page 831.

Section 7872.—Treatment of Loans With Below-Market In- terest Rates

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of November 2002. See Rev. Rul. 2002–74, page 814.

2002–45 I.R.B. 829 November 12, 2002