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

native to providing a surety bond for taxpayers to avoid or defer recapture of the low-income housing tax credits under § 42(j)(6). Under this program, taxpayers may establish a Treasury Direct Account and pledge certain United States Treasury securities to the Internal Revenue Service as security.

This revenue ruling provides in Table 1 the bond factor amounts for calculating the amount of bond considered satisfactory under § 42(j)(6) or the amount of United States Treasury securities to pledge in a Treasury Direct Account under Rev. Proc. 99–11 for dispositions of qualified lowincome buildings or interests therein during the period January through March 2003.

Section 42.— Low Income Housing Credit

The adjusted applicable federal short-term,

mid-term, and long-term rates are set forth for the

month of January 2003. See Rev. Rul. 2003–5,

page 254.

Low-income housing credit; satisfac- tory bond; “bond factor” amounts for the period January through March 2003. This ruling announces the monthly bond factor amounts to be used by taxpayers who dispose of qualified low-income buildings or interests therein during the period January through March 2003.

Rev. Rul. 2003–2

In Rev. Rul. 90–60, 1990–2 C.B. 3, the Internal Revenue Service provided guidance to taxpayers concerning the general methodology used by the Treasury Department in computing the bond factor amounts used in calculating the amount of bond considered satisfactory by the Secretary under § 42(j)(6) of the Internal Revenue Code. It further announced that the Secretary would publish in the Internal Revenue Bulletin a table of bond factor amounts for dispositions occurring during each calendar month.

Rev. Proc. 99–11, 1999–1 C.B. 275, established a collateral program as an alter

Table 1 Rev. Rul. 2003–2 Monthly Bond Factor Amounts for Dispositions Expressed

As a Percentage of Total Credits

Calendar Year Building Placed in Service or, if Section 42(f)(1) Election Was Made,

the Succeeding Calendar Year

Month of Disposition

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Jan ’03 17.21 31.84 44.34 55.05 64.12 64.48 65.00 65.64 66.37 67.26 68.18 Feb ’03 17.21 31.84 44.34 55.05 64.12 64.31 64.83 65.47 66.20 67.09 68.01 Mar ’03 17.21 31.84 44.34 55.05 64.12 64.15 64.67 65.31 66.03 66.92 67.84

Table 1 (cont’d) Rev. Rul. 2003–2 Monthly Bond Factor Amounts for Dispositions Expressed

As a Percentage of Total Credits

Calendar Year Building Placed in Service or, if Section 42(f)(1) Election Was Made,

the Succeeding Calendar Year

Month of Disposition

2000 2001 2002 2003

Jan ’03 69.16 70.58 72.28 72.55 Feb ’03 68.98 70.39 72.05 72.55 Mar ’03 68.82 70.21 71.84 72.55

For a list of bond factor amounts applicable to dispositions occurring during other

calendar years, see: Rev. Rul. 98–3, 1998–1 C.B. 248; Rev. Rul. 2001–2, 2001–1 C.B.

255; Rev. Rul. 2001–53, 2001–2 C.B. 488; and Rev. Rul. 2002–72, 2002–44 I.R.B. 759.

2003–2 I.R.B. 251 January 13, 2003

DRAFTING INFORMATION

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

Section 280G.—Golden Para- chute Payments

Federal short-term, mid-term, and long-term rates are set forth for the month of January 2003. See Rev. Rul. 2003–5, page 254.

Section 382.—Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Fol- lowing Ownership Change

The adjusted applicable federal long-term rate is

set forth for the month of January 2003. See Rev. Rul.

2003–5, page 254.

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

26 CFR 1.401(a)(9)–1: Minimum distribution re- quirement in general.

A revenue procedure delays the amendment date

for defined benefit pension plans for certain mini mum distribution regulations. See Rev. Proc. 2003–

10, page 259.

Section 412.—Minimum Fund- ing Standards

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

of January 2003. See Rev. Rul. 2003–5, page 254.

Section 451.—General Rule for Taxable Year of Inclusion

26 CFR 1.451–1: General rule for taxable year of in-

clusion.

Accrual of income; state tax refunds. This ruling holds that a state or local income or franchise tax refund is includible in the income of a taxpayer using the accrual method of accounting when the taxpayer receives payment or notice that the

refund claim has been approved, whichever is earlier. Rev. Ruls. 65–190 and 69– 372 revoked. Rev. Proc. 2002–9 modified and amplified.

Rev. Rul. 2003–3

ISSUE

When is a state or local income or franchise tax refund includible in the income of a taxpayer using the accrual method of accounting under § 451 of the Internal Revenue Code?

FACTS

Taxpayer N is a corporation doing business in the State of New York. N uses an accrual method of accounting and a calendar taxable year. New York permits a net operating loss deduction for state corporate franchise tax purposes. N.Y. Tax Law § 208(9)(f) (McKinney 1998). In order to obtain a refund of New York corporate franchise taxes arising out of a net operating loss carryback, a taxpayer must file a claim with the New York State Department of Taxation and Finance (N.Y. Department). N.Y. Tax Law § 1087(d) (McKinney 1998). The N.Y. Department has the right to examine any refund claim before determining whether to allow the claim and the refund amount. N incurs a net operating loss for federal income tax purposes in tax year 2001. In 2002, N files a Form 1139 to carry back the net operating loss for federal tax purposes. Based on the federal tax net operating loss carryback, N files a claim for refund of New York corporate franchise taxes with the N.Y. Department in 2002. In 2003, N receives notice that the N.Y. Department has approved N ’s refund claim.

LAW AND ANALYSIS

Section 451(a) provides that an item of income shall be included in gross income for the taxable year it is received by the taxpayer, unless, under the method of accounting used in computing taxable income, the amount is to be properly accounted for as of a different period.

Section 1.451–1(a) of the Income Tax Regulations provides, in part, that under an accrual method of accounting, income is includible in gross income when all the events have occurred that fix the right to receive the income and the amount thereof can be determined with reasonable accuracy.

Generally, if a requirement that documentation be submitted is ministerial, the requirement does not affect the determination of whether all events that fix the right to receive income or that establish the fact of liability have occurred. See United States v. General Dynamics Corp., 481 U.S. 239 (1987); United States v. Hughes Proper- ties, 476 U.S. 593 (1986); Continental Tie & Lumber Co. v. United States, 286 U.S. 290 (1932); Anderson v. United States, 269 U.S. 422 (1926).

Rev. Rul. 65–190, 1965–2 C.B. 150, holds that a refund of New York State corporate franchise taxes resulting from a net operating loss carryback is accruable in the taxable year of the loss giving rise to the refund, rather than in a later year when the state authorities approve the refund claim, because the approval process is deemed to be ministerial.

Rev. Rul. 69–372, 1969–2 C.B. 104, follows Rev. Rul. 65–190 in concluding that a taxpayer must accrue Colorado State income tax refunds resulting from net operating loss carrybacks in income in the year of the loss giving rise to the refund.

In Doyle, Dane, Bernbach, Inc. v. Com- missioner, 79 T.C. 101 (1982), nonacq., 1988–2 C.B. 1, the taxpayer sought a refund of its New York City corporate tax and New York State franchise tax resulting from net operating loss carrybacks. The court noted that the New York State and New York City tax authorities had the right to examine and deny all or part of a taxpayer’s refund claim. Therefore, the refund was not included in the taxpayer’s federal gross income until the state or local tax authorities determined that the taxpayer had a right to receive the refund.

In Yapp Corp. v. Commissioner, T.C. Memo. 1992–348, the taxpayer sought a refund of Illinois income and replacement taxes based on net operating loss carrybacks. Pointing out the factual similarities to Doyle, the court noted that the state actively examined refund claims and held that the refund was accruable in the tax year the state tax department determined that the taxpayer was entitled to a refund.

The Service has reconsidered the position taken in Rev. Rul. 65–190 and Rev. Rul. 69–372 and has concluded that approval by state authorities of state income and franchise tax refund claims is not ministerial but involves substantive review. Accordingly, N accrues the refund of its New

January 13, 2003 252 2003–2 I.R.B.

Section 642.—Special Rules for Credits and Deductions

Federal short-term, mid-term, and long-term rates are set forth for the month of January 2003. See Rev. Rul. 2003–5, page 254.

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 January 2003. See Rev. Rul. 2003–5, page 254.

Section 809.—Reduction in Certain Deductions of Mutual Life Insurance Companies

26 CFR 1.809–9: Computation of the differential earn-

ings rate and the recomputed differential earnings rate.

Mutual life insurance companies; re- computed differential earnings rate. The recomputed differential earnings rate for 2000 and the differential earnings rate for 2001 are set forth for purposes of section 809 of the Code for use by mutual life insurance companies.

Rev. Rul. 2003–4

This revenue ruling contains the differential earnings rate for 2001 and the recomputed differential earnings rate for 2000. Under § 809 of the Internal Revenue Code, mutual life insurance companies use this rate in computing their federal income tax liability for tax years beginning in 2001. Notice 2002–19, 2002–10 I.R.B. 619, provided that the tentative differential earnings rate (DER) for 2001 and recomputed differential earnings rate (RDER) for 2000 are zero. Subsequently, the Job Creation and Worker Assistance Act of 2002, Pub. L. No. 107–147, § 611, amended section 809 of the Code by adding new paragraph (j). As amended, section 809(j) provides that the DER shall be treated as zero for purposes of computing both the differential earnings amount and the recomputed differential earnings amount for a mutual life insurance company’s taxable year beginning in 2001, 2002, or 2003. See Notice 2002–33, 2002–21 I.R.B. 989. Accordingly, for purposes of § 809, the differential earnings rate for 2001 and the recomputed differential earnings rate for 2000 are as follows:

York State corporate franchise taxes attributable to a 2001 net operating loss carryback in 2003, the year N receives notice that the N.Y. Department has approved the refund claim.

HOLDING

A state or local income or franchise tax refund is includible in the income of a taxpayer using the accrual method of accounting when the taxpayer receives payment or notice that the refund claim has been approved, whichever is earlier.

AUTOMATIC CHANGE IN METHOD OF ACCOUNTING

Any change in the timing of a taxpayer’s inclusion in income of state or local income taxes or franchise tax refunds to conform with this revenue ruling is a change in method of accounting to which the provisions of §§ 446 and 481 and the regulations thereunder apply. Therefore, a taxpayer that does not accrue state or local income or franchise tax refunds in the year the taxpayer receives payment or notification of approval of the refund claim (whichever is earlier), but wants to use this method of accounting for taxable years ending on or after December 11, 2002, must file a Form 3115.

A taxpayer must file this Form 3115 in accordance with the automatic change in method of accounting provisions of Rev. Proc. 2002–9, 2002–3 I.R.B. 327 (or successor), as modified by Rev. Proc. 2002– 19, 2002–13 I.R.B. 696, with the following additional modifications: (1) the scope limitations in section 4.02 of Rev. Proc. 2002–9 do not apply to a taxpayer that wants to make the change for its first taxable year ending on or after December 11, 2002, provided the taxpayer’s method of accruing state or local income or franchise tax refunds is not an issue under consideration for taxable years under examination, within the meaning of section 3.09 of Rev. Proc. 2002–9, at the time the Form 3115 is filed with the national office; and (2) when filing the Form 3115, a taxpayer must complete all applicable parts of the form and, in lieu of the label required by section 6.02(4) of Rev. Proc. 2002–9, must write “Filed under Rev. Rul. 2003–3” at the top of the form.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 65–190 and Rev. Rul. 69– 372 are revoked. Rev. Proc. 2002–9 is modified and amplified to include this automatic change in section 5A of the APPENDIX. The non-acquiescence in Doyle, Dane, Bernbach, Inc. v. Commissioner, non- acq., 1988–2 C.B. 1, is withdrawn separately elsewhere in this issue of the Internal Revenue Bulletin.

DRAFTING INFORMATION

The principal author of this revenue ruling is Norma Rotunno of the Office of the Associate Chief Counsel (Income Tax & Accounting). For further information regarding this revenue ruling, contact Ms. Rotunno at (202) 622–7900 (not a tollfree call).

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

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

of January 2003. See Rev. Rul. 2003–5, page 254.

Section 468.—Special Rules for Mining and Solid Waste Recla- mation and Closing Costs

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

of January 2003. See Rev. Rul. 2003–5, page 254.

Section 482.—Allocation of In- come and Deductions Among Taxpayers

Federal short-term, mid-term, and long-term rates

are set forth for the month of January 2003. See Rev. Rul. 2003–5, page 254.

Section 483.—Interest on Cer- tain Deferred Payments

The adjusted applicable federal short-term, mid term, and long-term rates are set forth for the month of January 2003. See Rev. Rul. 2003–5, page 254.

2003–2 I.R.B. 253 January 13, 2003

Differential Earnings Rate for 2001...................................................................................... 0 Recomputed Differential Earnings Rate for 2000................................................................ 0

DRAFTING INFORMATION

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

Section 846.—Discounted Un- paid Losses Defined

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

of January 2003. See Rev. Rul. 2003–5, on this page.

Section 1274.—Determi- nation of Issue Price in the Case of Certain Debt Instru- ments 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 long-term exempt rate. For purposes of sections 382, 1274, 1288, and other sections of the Code, tables set forth the rates for January 2003.

Rev. Rul. 2003–5

This revenue ruling provides various prescribed rates for federal income tax purposes for January 2003 (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 Rev enue Code. Table 2 contains the shortterm, 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 long-term taxexempt 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. 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. Finally, Table 6 contains the deemed rate of return for transfers made during calendar year 2003 to pooled income funds described in § 642(c)(5) that have been in existence for less than 3 taxable years immediately preceding the taxable year in which the transfer was made.

Applicable Federal Rates (AFR) for January 2003

Period for Compounding

Annual Semiannual Quarterly Monthly Short-Term

AFR 1.81% 1.80% 1.80% 1.79% 110% AFR 1.99% 1.98% 1.98% 1.97% 120% AFR 2.17% 2.16% 2.15% 2.15% 130% AFR 2.35% 2.34% 2.33% 2.33%

Mid-Term

AFR 3.43% 3.40% 3.39% 3.38% 110% AFR 3.77% 3.74% 3.72% 3.71% 120% AFR 4.12% 4.08% 4.06% 4.05% 130% AFR 4.47% 4.42% 4.40% 4.38% 150% AFR 5.17% 5.10% 5.07% 5.05% 175% AFR 6.04% 5.95% 5.91% 5.88%

Long-Term

AFR 4.90% 4.84% 4.81% 4.79% 110% AFR 5.39% 5.32% 5.29% 5.26% 120% AFR 5.89% 5.81% 5.77% 5.74% 130% AFR 6.39% 6.29% 6.24% 6.21%

January 13, 2003 254 2003–2 I.R.B.

REV. RUL. 2003–5 TABLE 2

Adjusted AFR for January 2003

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjusted AFR 1.69% 1.68% 1.68% 1.67%

Mid-term adjusted AFR 3.07% 3.05% 3.04% 3.03%

Long-term adjusted AFR 4.61% 4.56% 4.53% 4.52%

REV. RUL. 2003–5 TABLE 3

Rates Under Section 382 for January 2003

Adjusted federal long-term rate for the current month 4.61%

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.)

REV. RUL. 2003–5 TABLE 4

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

4.65%

Appropriate percentage for the 70% present value low-income housing credit 7.97%

Appropriate percentage for the 30% present value low-income housing credit 3.41%

REV. RUL. 2003–5 TABLE 5

Rate Under Section 7520 for January 2003

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 4.2%

REV. RUL. 2003–5 TABLE 6

Deemed Rate for Transfers to New Pooled Income Funds During 2003

Deemed rate of return for transfers during 2003 to pooled income funds that have been in existence for less than 3 taxable years 6.6%

2003–2 I.R.B. 255 January 13, 2003

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 January 2003. See Rev. Rul. 2003–5, page 254.

Section 7520.—Valuation Tab- les

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of January 2003. See Rev. Rul. 2003–5, page 254.

Section 7872.—Treatment of Loans With Below-Market Inter- est Rates

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

of January 2003. See Rev. Rul. 2003–5, page 254.

January 13, 2003 256 2003–2 I.R.B.