Part I. Rulings — Internal Revenue Bulletin 2003-22

Section 213.—Medical, Dental, etc., Expenses

26 CFR 1.213–1: Medical, dental, etc., expenses.

Medical expenses. Amounts paid by individuals for procedures that are directed to improving appearance and do not promote the proper function of the body are not expenses for medical care deductible under section 213 of the Code unless the procedure is necessary to correct a deformity arising from a birth defect, disfiguring disease, or injury. Therefore, breast reconstruction surgery following a mastectomy for cancer and vision correction surgery such as LASIK are deductible under section 213, but teeth whitening procedures are not deductible under section 213.

Rev. Rul. 2003–57

ISSUE

Are amounts paid by individuals for breast reconstruction surgery, vision correction surgery, and teeth whitening medical care expenses within the meaning of § 213(d) and deductible under § 213 of the Internal Revenue Code?

FACTS

Taxpayer A undergoes mastectomy surgery that removes a breast as part of treatment for cancer and pays a surgeon to reconstruct the breast. Taxpayer B wears glasses to correct myopia and pays a doctor to perform laser eye surgery to correct the myopia. Taxpayer C ’s teeth are discolored as a result of age. C pays a dentist to perform a teeth-whitening procedure. A, B, and C are not compensated for their expenses by insurance or otherwise.

LAW AND ANALYSIS

Section 213(a) allows a deduction for expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, spouse, or dependent, to the extent the expenses exceed 7.5 percent of adjusted gross income. Under § 213(d)(1)(A), medical care includes amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.

Medical care does not include cosmetic surgery or other similar procedures, unless the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease. Section 213(d)(9)(A). Cosmetic surgery means any procedure that is directed at improving the patient’s appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease. Section 213(d)(9)(B).

A ’s cancer is a disfiguring disease because the treatment results in the loss of A ’s breast. Accordingly, the breast reconstruction surgery ameliorates a deformity directly related to a disease and the cost is an expense for medical care within the meaning of § 213(d) that A may deduct under § 213 (subject to the limitations of that section).

The cost of B ’s laser eye surgery is allowed under § 213(d)(9) because the surgery is a procedure that meaningfully promotes the proper function of the body. Vision correction with eyeglasses or contact lenses qualifies as medical care. See Rev. Rul. 74–429, 1974–2 C.B. 83. Eye surgery to correct defective vision, including laser procedures such as LASIK and radial keratotomy, corrects a dysfunction of the body. Accordingly, the cost of the laser eye surgery is an expense for medical care within the meaning of § 213(d) that B may deduct under § 213 (subject to the limitations of that section).

In contrast, the teeth-whitening procedure does not treat a physical or mental disease or promote the proper function of the body, but is directed at improving C ’s appearance. The discoloration is not a deformity and is not caused by a disfiguring disease or treatment. Accordingly, C may not deduct the cost of whitening teeth as an expense for medical care.

HOLDING

Amounts paid by individuals for breast reconstruction surgery following a mastectomy for cancer and for vision correction surgery are medical care expenses under § 213(d) and are deductible under § 213 (subject to the limitations of that section). Amounts paid by individuals to whiten teeth

discolored as a result of age are not medical care expenses under § 213(d) and are not deductible.

DRAFTING INFORMATION

The principal author of this revenue ruling is John T. Sapienza, Jr., of the Office of the Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Sapienza at (202) 622–7900 (not a tollfree call).

Medical expenses. Uncompensated amounts paid by individuals for medicines or drugs that may be purchased without a prescription of a physician are not deductible under section 213 of the Code. Amounts paid for equipment, supplies, or diagnostic devices may be expenses for medical care deductible under section 213.

Rev. Rul. 2003–58

ISSUES

(1) Are amounts paid by an individual for medicines that may be purchased without a prescription of a physician deductible under § 213 of the Internal Revenue Code?

(2) Are amounts paid by an individual for equipment, supplies, or diagnostic devices that may be purchased without a prescription of a physician deductible under § 213?

FACTS

Taxpayer A has an injured leg and uses crutches to enhance mobility while the leg is healing. A uses bandages to cover torn skin on the leg. A ’s physician recommends that A take aspirin to treat pain in the leg. A also has diabetes and uses a blood sugar test kit to monitor A ’s blood sugar level. A is not compensated for these expenses by insurance or otherwise.

LAW AND ANALYSIS

Section 213(a) allows a deduction for expenses paid during the taxable year, not compensated for by insurance or other

2003–22 I.R.B. 959 June 2, 2003

Having transferred most of the responsibility for running the farm to the children, Father and Mother remain neutral on the disagreement between their children. However, because of the disagreement, Father and Mother would prefer to bequeath separate interests in the farm business to their children.

For reasons unrelated to X’s farm business, Son and Daughter’s husband dislike each other. Although this has not impaired the farm’s operation to date, Father and Mother believe that requiring Son and Daughter to run a single business together is likely to cause family discord over the long run.

To enable Son and Daughter each to devote his or her undivided attention to, and apply a consistent business strategy to, the farming business in which he or she is most interested, to further the estate planning goals of Father and Mother, and to promote family harmony, X transfers the livestock business to newly formed, wholly owned domestic corporation Y and distributes 50 percent of the Y stock to Son in exchange for all of his stock in X. X distributes the remaining Y stock equally to Father and Mother in exchange for half of their X stock. Going forward, Daughter will manage and operate X and have no stock interest in Y, and Son will manage and operate Y and have no stock interest in X. Father and Mother will also amend their wills to provide that Son and Daughter will inherit stock only in Y and X, respectively. After the distribution, Father and Mother will still each own 25 percent of the outstanding stock of X and Y and will continue to participate in some major management decisions related to the business of each corporation.

Apart from the issue of whether the business purpose requirement of §1.355–2(b) is satisfied, the distribution meets all of the requirements of §§ 368(a)(1)(D) and 355 of the Internal Revenue Code.

LAW

Section 355 provides that if certain requirements are met, a corporation may distribute stock and securities in a controlled corporation to its shareholders and security holders without causing the distributing corporation or the distributees to recognize gain or loss.

To qualify as a distribution described in § 355, a distribution must, in addition to sat

wise, for medical care of the taxpayer, spouse, or dependent, to the extent the expenses exceed 7.5 percent of adjusted gross income. Under § 213(d)(1), medical care includes amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.

Section 213(b) permits an amount paid for a medicine or drug to be taken into account for purposes of the § 213 deduction for medical care expenses only if the medicine or drug is a prescribed drug or insulin. Section 213(d)(3) defines a prescribed drug as a drug or biological that requires a prescription of a physician for its use by an individual. Because aspirin is a drug and does not require a physician’s prescription for use by an individual, pursuant to § 213(b), its cost may not be taken into account under § 213, even if a physician recommends its use to a patient. Accordingly, A may not deduct the cost of the aspirin under § 213.

However, § 213(b) does not apply to items that are not medicines or drugs, including equipment such as crutches, supplies such as bandages, and diagnostic devices such as blood sugar test kits. Such items may qualify as medical care if they otherwise meet the definition in § 213(d)(1). In this case, the crutches and bandages mitigate the effect of A ’s injured leg and the blood sugar test kit monitors and assists in treating A ’s diabetes. Therefore, the costs of these items are amounts paid for medical care under § 213(d)(1) and are deductible, subject to the limitations of § 213.

HOLDINGS

(1) Amounts paid by an individual for medicines or drugs that may be purchased without a prescription of a physician are not taken into account pursuant to § 213(b) and are not deductible under § 213.

(2) Amounts paid by an individual for equipment, supplies, or diagnostic devices may be expenses for medical care deductible under § 213 (subject to the other limitations of that section).

DRAFTING INFORMATION

The principal author of this revenue ruling is John T. Sapienza, Jr., of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact

Mr. Sapienza at (202) 622–7900 (not a tollfree call).

Section 355.—Distribution of Stock and Securities of a Controlled Corporation

26 CFR 1.355–2(b): Independent business purpose.

Spin off. In the described situation, the division of a farm business to permit the principal managing shareholders to go their separate ways, promote family harmony, and further the personal estate planning of the principal managing shareholders’ parents satisfies the business purpose requirement of section 1.355–2(b) of the regulations.

Rev. Rul. 2003–52

ISSUE

Whether, in the situation described below, the distribution of the stock of a controlled corporation satisfies the business purpose requirement of § 1.355–2(b) of the Income Tax Regulations.

FACTS

Corporation X is a domestic corporation that has been engaged in the farming business for more than five years. The stock of X is owned 25 percent each by Father, age 68, Mother, age 67, Son, and Daughter. Although Father and Mother participate in some major management decisions, most of the management and all of the operational activities are performed by Son, Daughter, and several farmhands. The farm operation consists of breeding and raising livestock and growing grain.

Son and Daughter disagree over the appropriate future direction of X’s farming business. Son wishes to expand the livestock business, but Daughter is opposed because this would require substantial borrowing by X. Daughter would prefer to sell the livestock business and concentrate on the grain business. Despite the disagreement, the two siblings have cooperated on the operation of the farm in its historical manner without disruption. Nevertheless, it has prevented each sibling from developing, as he or she sees fit, the business in which he or she is most interested.

June 2, 2003 960 2003–22 I.R.B.

as the result of an unexpected change in circumstances following the distribution?

FACTS

D is a publicly traded corporation that conducts Business A and Business B directly and Business C through its wholly owned subsidiary C. Business C needs to raise a substantial amount of capital in the near future to invest in plant and equipment and to make acquisitions. D has been advised by its investment banker that the best way to raise this capital is through an initial public offering of C stock after C has been separated from D. The investment banker believes, based on its analysis of comparable situations, and taking into account the current market climate, that such an offering would be more efficient than a stock offering by C or D without first separating from the other because it would raise the needed capital with significantly less dilution of the existing shareholders’ interests in the combined enterprises.

In reliance on the investment banker’s opinion, D distributes the stock of C to its shareholders, and C prepares to offer its stock to the public as soon as practicable but with a target date approximately six months after the distribution. Following the distribution and before the offering can be undertaken, market conditions unexpectedly deteriorate to such an extent that, in the judgment of C and its advisors, the offering should be postponed. One year after the distribution, conditions have not improved sufficiently to permit the offering to go forward and C funds its capital needs through the sale of debentures.

Apart from the issue of whether the business purpose requirement of § 1.355–2(b) is satisfied, the distribution meets all of the requirements of § 355 of the Internal Revenue Code.

LAW

To qualify as a distribution described in § 355, a distribution must, in addition to sat

isfying the statutory requirements of § 355, satisfy certain requirements in the regulations, including the business purpose requirement. Section 1.355–2(b)(1) provides that a distribution must be motivated, in whole or substantial part, by one or more corporate business purposes. A corporate business purpose is a real and substantial non-federal tax purpose germane to the business of the distributing corporation, the controlled corporation, or the affiliated group to which the distributing corporation belongs. Section 1.355–2(b)(2). A shareholder purpose (for example, the personal planning purposes of a shareholder) is not a corporate business purpose. Id . Depending upon the facts of a particular case, however, a shareholder purpose for a transaction may be so nearly coextensive with a corporate business purpose as to preclude any distinction between them. Id . In such a case, the transaction is carried out for one or more corporate business purposes. Id . A transaction motivated in substantial part by a corporate business purpose does not fail the business purpose requirement merely because it is motivated in part by non-federal tax shareholder purposes. Preamble to the § 355 regulations, T.D. 8238, 1989–1 C.B. 92, 94.

In Example (2) of § 1.355–2(b)(5), Corporation X is engaged in two businesses: the manufacture and sale of furniture and the sale of jewelry. The businesses are of equal value. The outstanding stock of X is owned equally by unrelated individuals A and B. A is more interested in the furniture business, while B is more interested in the jewelry business. A and B decide to split up the businesses and go their separate ways. A and B expect that the operations of each business will be enhanced by the separation because each shareholder will be able to devote his undivided attention to the business in which he is more interested and more proficient. Accordingly, X transfers the jewelry business to new corporation Y and distributes the stock of Y to B in exchange for all of B’s stock in X. The example concludes that the distribution is carried out for a corporate business purpose, notwithstanding that it is also carried out in part for shareholder purposes.

ANALYSIS

The disagreement of Son and Daughter over the farm’s future direction has pre

vented each sibling from developing, as he or she sees fit, the business in which he or she is most interested. The distribution will eliminate this disagreement and allow each sibling to devote his or her undivided attention to, and apply a consistent business strategy to, the farming business in which he or she is most interested, with the expectation that each business will benefit. Therefore, although the distribution is intended, in part, to further the personal estate planning of Father and Mother and to promote family harmony, it is motivated in substantial part by a real and substantial non-federal tax purpose that is germane to the business of X. Hence, the business purpose requirement of § 1.355–2(b) is satisfied.

HOLDING

In the situation described above, the distribution of the stock of a controlled corporation satisfies the business purpose requirement of § 1.355–2(b).

DRAFTING INFORMATION

The principal author of this revenue ruling is Richard H. Cox of the Office of Associate Chief Counsel (Corporate). For further information regarding this revenue ruling, contact Mr. Cox at (202) 622–7790 (not a toll-free call).

Spin off. If a stock offering business purpose motivates a distribution of controlled corporation stock by a distribution corporation, the inability of the controlled corporation to complete the offering as a result of an unexpected deterioration in market conditions will not prevent the distribution from having satisfied the corporate business purpose requirement of section 1.355–2(b)(1) of the regulations.

Rev. Rul. 2003–55

ISSUE

Is the business purpose requirement of § 1.355–2(b) of the Income Tax Regulations satisfied if the distribution of the stock of a controlled corporation is, at the time of the distribution, motivated, in whole or substantial part, by a corporate business purpose, but that purpose cannot be achieved

2003–22 I.R.B. 961 June 2, 2003

SUPPLEMENTARY INFORMATION:

Background

On June 3, 2002, the Treasury Department and the IRS published a notice of proposed rulemaking (REG–248110–96, 2002–26 I.R.B. 19 [67 FR 38214]) under section 817A of the Internal Revenue Code (Code) in the Federal Register . The notice was corrected in the Federal Regis- ter (67 FR 41653) on June 19, 2002. The proposed regulations were designed, in part, to reflect the addition of section 817A to the Code by section 1612 of the Small Business Job Protection Act of 1996, Public Law 104–188 (110 Stat. 1755). No one requested to speak at the public hearing scheduled for August 27, 2002. Accordingly, the public hearing was canceled on August 15, 2002 (67 FR 53327). Comments in response to the notice of proposed rulemaking were received and are addressed in the following Explanation and Summary of Comments. After consideration of all the comments, this document adopts the proposed regulations as revised by this Treasury decision. In addition, previous guidance under section 817A is revoked.

Explanation and Summary of Com- ments

Two comments were filed with the Office of the Chief Counsel of the Internal Revenue Service. Both commentators generally agreed with the decisions incorporated in the proposed regulations. However, both commentators raised concern as to the interaction of the interest rates to be used for the reserve computations for modified guaranteed contracts (MGCs) with the reserve computation rules of section 811(d). That provision imposes an additional reserve computation rule for contracts that guarantee beyond the end of the taxable year payment or crediting of amounts in the nature of interest in excess of the greater of the prevailing state assumed interest rate or the applicable federal interest rate. In those circumstances, section 811(d) requires that the contract’s future guaranteed benefits be determined as though the interest in excess of the greater of the prevailing state assumed interest rate or the applicable federal rate were guaranteed only to the end of the taxable year.

Material was submitted as to the possible distortion of taxable income with re

isfying the statutory requirements of § 355, satisfy certain requirements in the regulations, including the business purpose requirement. Section 1.355–2(b)(1) provides that a distribution must be motivated, in whole or substantial part, by one or more corporate business purposes. A corporate business purpose is a real and substantial non-federal tax purpose germane to the business of the distributing corporation, the controlled corporation, or the affiliated group to which the distributing corporation belongs. Section 1.355–2(b)(2). The principal reason for the business purpose requirement is to provide nonrecognition treatment only to distributions that are incident to readjustments of corporate structures required by business exigencies and that effect only readjustments of continuing interests in property under modified corporate forms. Section 1.355–2(b)(1).

ANALYSIS

To satisfy the business purpose requirement of § 1.355–2(b)(1), a distribution of controlled corporation stock must be motivated, in whole or substantial part, by a corporate business purpose. A corporate business purpose is a real and substantial non-federal tax purpose germane to the business of the distributing corporation, the controlled corporation, or the affiliated group to which the distributing corporation belongs. The regulations do not require that the corporation in fact succeed in meeting its corporate business purpose, as long as, at the time of the distribution, such a purpose exists and motivates, in whole or substantial part, the distribution. An unexpected change in market or business conditions following a distribution that prevents achievement of the business purpose will not prevent satisfaction of the business purpose requirement. Hence, notwithstanding the fact that, as a result of the unexpected deterioration in market conditions, C does not complete the stock offering that motivated its separation from D, the business purpose requirement of § 1.355–2(b)(1) is satisfied.

HOLDING

The business purpose requirement of § 1.355–2(b) is satisfied if the distribution of the stock of a controlled corporation is, at the time of the distribution, motivated, in whole or substantial part, by

a corporate business purpose, but that purpose cannot be achieved as the result of an unexpected change in circumstances following the distribution.

DRAFTING INFORMATION

The principal author of this revenue ruling is Wayne T. Murray of the Office of Associate Chief Counsel (Corporate). For further information regarding this revenue ruling, contact Mr. Murray at (202) 622– 7700 (not a toll-free call).

Section 817A.—Special Rules for Modified Guaranteed Contracts

26 CFR 1.817A–1: Certain modified guaranteed contracts.

T.D. 9058

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Guidance Under Section 817A Regarding Modified Guaranteed Contracts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations affecting insurance companies that define the interest rate to be used with respect to certain insurance contracts that guarantee higher returns for an initial, temporary period. Specifically, the final regulations define the appropriate interest rate to be used in the determination of tax reserves and required interest for certain modified guaranteed contracts. The final regulations also address how temporary guarantee periods that extend past the end of a taxable year are to be taken into account.

DATES: Effective Date: These regulations are effective as of May 7, 2003.

Applicability Date: For dates of applicability, see §1.817A–1(d).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Ann H. Logan, 202–622–3970 (not a toll-free number).

June 2, 2003 962 2003–22 I.R.B.

(b) Applicable interest rates for nonequity-indexed modified guaranteed contracts.

(1) Tax reserves during temporary guarantee period.

(2) Required interest during temporary guarantee period.

(3) Application of section 811(d). (4) Periods after the end of the temporary guarantee period.

(5) Examples. (c) Applicable interest rates for equityindexed modified guaranteed contracts. [Reserved.]

(d) Effective date.

§1.817A–1 Certain modified guaranteed contracts.

(a) Definitions —(1) Modified guaran- teed contract . The term modified guaran- teed contract (MGC) is defined in section 817A(d) as an annuity, life insurance, or pension plan contract (other than a variable contract described in section 817) under which all or parts of the amounts received under the contract are allocated to a segregated account. Assets and reserves in this segregated account must be valued from time to time with reference to market values for annual statement purposes. Further, an MGC must provide either for a net surrender value or for a policyholder’s fund (as defined in section 807(e)(1)). If only a portion of a contract is not described in section 817, such portion is treated as a separate contract for purposes of applying section 817A.

(2) Temporary guarantee period . An MGC may temporarily guarantee a return other than the permanently guaranteed crediting rate for a period specified in the contract (the temporary guarantee period ). During the temporary guarantee period, the amount paid to the policyholder upon surrender is usually increased or decreased by a market value adjustment, which is determined by a formula set forth under the terms of the MGC.

(3) Equity-indexed modified guaran- teed contract . An equity-indexed MGC is an MGC, as defined in paragraph (a)(1) of this section, that provides a return during or at the end of the temporary guarantee period based on the performance of stocks, other equity instruments, or equity-based derivatives.

(4) Non-equity-indexed modified guar- anteed contract . A non-equity-indexed MGC is an MGC, as defined in paragraph (a)(1)

spect to MGCs in declining interest rate environments. Notably, in cases where the interest rate required to be used under the regulations as proposed falls below the contract crediting rate during the guarantee period, section 811(d) will operate in a manner that does not match taxable income to actual income. As section 811(d) precludes taking future guaranteed interest amounts into account, examples showed that income distortion could occur under this fact pattern.

After review of the comments, the proposed regulations have been amended to waive section 811(d) throughout the guarantee period of non-equity-indexed MGCs.

Effect on Other Documents

Notice 97–32, 1997–1 C.B. 420, is revoked as of May 7, 2003. Accordingly, the notice may continue to be used by taxpayers if they wish through the effective date of these final regulations.

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, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking were submitted to the Small Business Administration for comment on the regulations’ impact on small business.

Drafting Information

The principal author of these proposed regulations is Ann H. Logan, Office of the Associate Chief Counsel (Financial Institutions and Products), Office of Chief Counsel, Internal Revenue Service. However, personnel from other offices of the IRS and the Treasury Department participated in their development.

* * * * *

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAX

Paragraph 1. The authority citation for part 1 is amended by adding entries in numerical order to read as follows:

Authority: 26 U.S.C. 7805 - - Section 1.807–2 also issued under 26 U.S.C. 817A(e) - - Section 1.811–3 also issued under 26 U.S.C. 817A(e) - - Section 1.812–9 also issued under 26 U.S.C. 817A(e) - - Section 1.817A–1 also issued under 26 U.S.C. 817A(e) - - Par. 2. Section 1.807–2 is added to read as follows:

§1.807–2 Cross-Reference.

For special rules regarding the treatment of modified guaranteed contracts (as defined in section 817A and §1.817A– 1(a)(1)), see §1.817A–1. Par. 3. Section 1.811–3 is added to read as follows:

§1.811–3 Cross-Reference.

For special rules regarding the treatment of modified guaranteed contracts (as defined in section 817A and §1.817A– 1(a)(1)), see §1.817A–1. Par. 4. Section §1.812–9 is added to read as follows:

§1.812–9 Cross-Reference.

For special rules regarding the treatment of modified guaranteed contracts (as defined in section 817A and §1.817A– 1(a)(1)), see §1.817A–1. Par. 5. Sections §1.817A–0 and §1.817A–1 are added to read as follows:

§1.817A–0 Table of contents.

This section lists the captions that appear in section §1.817A–1:

§1.817A–1 Certain modified guaranteed contracts.

(a) Definitions. (1) Modified guaranteed contract. (2) Temporary guarantee period. (3) Equity-indexed modified guaranteed contract.

(4) Non-equity-indexed modified guaranteed contract.

(5) Current market rate for non-equityindexed modified guaranteed contract.

(6) Current market rate for equityindexed modified guaranteed contract. [Reserved.]

2003–22 I.R.B. 963 June 2, 2003

7, 2003. However, pursuant to section 7805(b)(7), taxpayers may elect to apply those paragraphs retroactively for all taxable years beginning after December 31, 1995, the effective date of section 817A.

David A. Mader, Assistant Deputy Commissioner

of Internal Revenue.

Approved April 25, 2003.

Pamela F. Olson, Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on May 6, 2003, 8:45 a.m., and published in the issue of the Federal Register for May 7, 2003, 68 F.R. 24349)

Section 1502.—Regulations

26 CFR 1.1502–20T: Disposition or deconsolidation of subsidiary stock (temporary).

T.D. 9057

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Guidance Under Section 1502; Amendment of Waiver of Loss Carryovers From Separate Return Limitation Years

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains temporary regulations under section 1502 that permit the amendment of certain elections to waive the loss carryovers of an acquired subsidiary. The text of these temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking (REG–152524–02) on this subject on page 979 of this Bulletin. These regulations apply to corporations filing consolidated returns. This document also provides notice of a public hearing on these temporary and proposed regulations.

DATES: Effective Date: These regulations are effective May 7, 2003.

of this section, that provides a return during or at the end of the temporary guarantee period not based on the performance of stocks, other equity instruments, or equitybased derivatives.

(5) Current market rate for non-equity- indexed modified guaranteed contracts . The current market rate for a non-equity-indexed MGC issued by an insurer (whether issued in that tax year or a previous one) is the appropriate Treasury constant maturity interest rate published by the Board of Governors of the Federal Reserve System for the month containing the last day of the insurer’s taxable year. The appropriate rate is that rate published for Treasury securities with the shortest published maturity that is greater than (or equal to) the remaining duration of the current temporary guarantee period under the MGC.

(6) Current market rate for equity- indexed modified guaranteed contracts . [Reserved]

(b) Applicable interest rates for non- equity-indexed modified guaranteed contracts —(1) Tax reserves during tempo- rary guarantee period . An insurance company is required to determine the tax reserves for an MGC under sections 807(c)(3) or (d)(2). During a non-equityindexed MGC’s temporary guarantee period, the applicable interest rate to be used under sections 807(c)(3) and (d)(2)(B) is the current market rate, as defined in paragraph (a)(5) of this section.

(2) Required interest during temporary guarantee period . During the temporary guarantee period of a non-equity-indexed MGC, the applicable interest rate to be used to determine required interest under section 812(b)(2)(A) is the same current market rate, defined in paragraph (a)(5) of this section, that applies for that period for purposes of sections 807(c)(3) or (d)(2)(B).

(3) Application of section 811(d) . An additional reserve computation rule applies under section 811(d) for contracts that guarantee certain interest payments beyond the end of the taxable year. Section 811(d) is waived for non-equity-indexed MGCs.

(4) Periods after the end of the tempo- rary guarantee period . For periods after the end of the temporary guarantee period, sections 807(c)(3), 807(d)(2)(B), 811(d), and 812(b)(2)(A) are not modified when applied to non-equity-indexed MGCs. None of these sections are affected by the defi

nition of current market rate contained in paragraph (a)(5) of this section once the temporary guarantee period has expired.

(5) Examples . The following examples illustrate this paragraph (b):

Example 1 . (i) IC, a life insurance company as defined in section 816, issues a MGC (the Contract) on August 1 of 1996. The Contract is an annuity contract that gives rise to life insurance reserves, as defined in section 816(b). IC is a calendar year taxpayer. The Contract guarantees that interest will be credited at 8 percent per year for the first 8 contract years and 4 percent per year thereafter. During the 8-year temporary guarantee period, the Contract provides for a market value adjustment based on changes in a published bond index and not on the performance of stocks, other equity instruments or equity based derivatives. IC has chosen to avail itself of the provisions of these regulations for 1996 and taxable years thereafter. The 10-year Treasury constant maturity interest rate published for December of 1996 was 6.30 percent. The next shortest maturity published for Treasury constant maturity interest rates is 7 years. As of the end of 1996, the remaining duration of the temporary guarantee period for the Contract was 7 years and 7 months.

(ii) To determine under section 807(d)(2) the end of 1996 reserves for the Contract, IC must use a discount interest rate of 6.30 percent for the temporary guarantee period. The interest rate to be used in computing required interest under section 812(b)(2)(A) for 1996 reserves is also 6.30 percent. (iii) The discount rate applicable to periods outside the 8-year temporary guarantee period is determined under sections 807(c)(3), 807(d)(2)(B), 811(d), and 812(b)(2)(A) without regard to the current market rate.

Example 2 . Assume the same facts as in Example 1 except that it is now the last day of 1998. The remaining duration of the temporary guarantee period under the Contract is now 5 years and 7 months. The 7-year Treasury constant maturity interest rate published for December of 1998 was 4.65 percent. The next shortest duration published for Treasury constant maturity interest rates is 5 years. A discount rate of 4.65 percent is used for the remaining duration of the temporary guarantee period for the purpose of determining a reserve under section 807(d) and for the purpose of determining required interest under section 812(b)(2)(A).

Example 3 . Assume the same facts as in Example 1 except that it is now the last day of 2001. The remaining duration of the temporary guarantee period under the Contract is now 2 years and 7 months. The 3-year Treasury constant maturity interest rate published for December of 2001 was 3.62 percent. The next shortest duration published for Treasury constant maturity interest rates is 2 years. A discount rate of 3.62 percent is used for the remaining duration of the temporary guarantee period for the purpose of determining a reserve under section 807(d) and for the purpose of determining required interest under section 812(b)(2)(A).

(d) Effective date . Paragraphs (a), (b), and (d) of this section are effective on May

June 2, 2003 964 2003–22 I.R.B.

ryovers pursuant to §1.1502–32(b)(4), the selling group can exclude the waived loss carryovers from its computation of duplicated loss. In certain cases, the waiver could have the effect of increasing the amount of stock loss allowed on the disposition of subsidiary stock or reducing the basis reduction required on the deconsolidation of subsidiary stock. The IRS and Treasury understand that certain waivers of loss carryovers that were made pursuant to §1.1502–32(b)(4) were made so as to increase the amount of allowed loss on a disposition of subsidiary stock.

In Rite Aid Corp. v. United States, 255 F.3d 1357 (Fed. Cir. 2001), the United States Court of Appeals for the Federal Circuit held that the duplicated loss component of §1.1502–20 was an invalid exercise of regulatory authority. In response to the Rite Aid decision, on March 7, 2002, the IRS and Treasury Department filed with the Federal Register temporary regulations (T.D. 8984, 2002–1 C.B. 668 [11034]) under sections 337(d) and 1502 governing the determination of a consolidated group’s allowable stock loss and basis reduction required on a disposition or deconsolidation of subsidiary member stock. Under the temporary regulations, consolidated groups can compute the allowable loss or the basis reduction required on dispositions and deconsolidations of subsidiary stock before March 7, 2002, and certain dispositions and deconsolidations of subsidiary stock on or after March 7, 2002, by applying §1.1502–20 in its entirety, by applying the provisions of §1.1502–20 without regard to the duplicated loss factor of the loss disallowance formula, or by applying the provisions of §1.337(d)–2T. See §1.1502– 20T(i)(2). The IRS and Treasury Department believe that in certain cases in which a selling group elects to compute the allowable loss or the basis reduction required on a disposition or deconsolidation of subsidiary member stock by applying §1.1502–20 without regard to the duplicated loss factor of the loss disallowance formula, or by applying the provisions of §1.337(d)–2T, it is appropriate to permit an acquiring group to amend certain prior waivers of loss carryovers. The following paragraphs describe these cases and the amendments that this document makes to §§1.1502–20T and 1.1502–32T to allow certain amendments to prior waivers of loss carryovers.

Applicability Date: For dates of applicability, see §1.1502–20T(i)(3)(viii)(C), §1.1502–20T(i)(5)(ii), and §1.1502– 32T(b)(4)(vii)(F). The applicability of these sections expires on May 2, 2006.

FOR FURTHER INFORMATION CONTACT: Alison G. Burns or Jeffrey B. Fienberg (202) 622–7930 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these regulations has been previously reviewed and approved by the Office of Management and Budget under control number 1545–1774. Responses to this collection of information are required to obtain a benefit. This collection of information is revised by these regulations. These amended 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 revised collection of information contained in these regulations has been reviewed and, pending receipt and evaluation of public comments, approved by the Office of Man- agement and Budget under control number 1545–1774.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Bud- get .

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

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

Background and Explanation of Provi- sions

In 1991, the IRS and Treasury Department promulgated §1.1502–20 setting forth

rules regarding the extent to which a loss recognized by a member of a consolidated group on the disposition of stock of a subsidiary member of the same group was allowed and the extent to which the basis of subsidiary member stock was required to be reduced prior to its deconsolidation. Section 1.1502–20 provides that a loss recognized by a group member on the disposition of subsidiary member stock is allowable only to the extent it exceeds the sum of “extraordinary gain dispositions,” “positive investment adjustments,” and “duplicated loss.” In addition, it provides that the basis of subsidiary member stock that is deconsolidated is reduced to its value to the extent of the sum of the same amounts immediately prior to its deconsolidation. The duplicated loss amount equals the sum of the aggregated adjusted basis of the assets of the subsidiary (other than any stock and securities that the subsidiary owns in another member), the losses attributable to the subsidiary that are carried forward to the subsidiary’s first taxable year following the disposition or deconsolidation, and any deferred deductions of the subsidiary, over the sum of the value of the subsidiary’s stock and its liabilities.

Section 1.1502–32(b)(4) provides that, if a subsidiary has a loss carryover from a separate return limitation year when it becomes a member of a consolidated group, the group may make an election to treat all or any portion of the loss carryover as expiring immediately before the subsidiary becomes a member of the consolidated group. This election allows an acquiring group to prevent the loss of stock basis that otherwise would result if the subsidiary’s loss carryovers were to expire before the group could absorb them. See §1.1502– 32(b)(2)(iii). Section 1.1502–32(b)(4) further provides that, if the subsidiary was a member of another group immediately before it became a member of the consolidated group, the losses are treated as expiring immediately after the subsidiary ceases to be a member of the prior group. The election described in §1.1502–32(b)(4) may be made by identifying either the amount of each loss carryover deemed to expire or the amount of each loss carryover deemed not to expire.

If stock of a subsidiary with loss carryovers is sold by one consolidated group to another and the acquiring group waives all or a portion of the subsidiary’s loss car

2003–22 I.R.B. 965 June 2, 2003

ant to these regulations, the acquiring group may amend its election made pursuant to §1.1502–32(b)(4) to provide that all or a portion of the loss carryovers of the subsidiary that are treated as loss carryovers of the subsidiary as a result of the prior group’s election are deemed not to expire.

The regulations contained in this document only permit acquiring groups to reduce the amount of loss carryovers deemed to expire, or increase the amount of loss carryovers deemed not to expire, as a result of an election under §1.1502–32(b)(4). The regulations, however, do not permit acquiring groups to increase the amount of loss carryovers deemed to expire, or reduce the amount of loss carryovers deemed not to expire, as a result of such an election. The regulations, therefore, permit increases, but not decreases, of the amount of loss carryovers available to acquiring groups.

Limited Extension of Time to Apply Alternative Regime

In addition to the provisions described above, the regulations include a limited extension of time for selling groups to make an election to compute the allowable loss or the basis reduction required on a disposition or deconsolidation of subsidiary stock by applying the provisions of §1.1502–20 without regard to the duplicated loss factor of the loss disallowance formula, or by applying the provisions of §1.337(d)–2T, if the acquiring group is otherwise eligible to amend an election under §1.1502–32(b)(4) pursuant to these regulations, but the time period during which the selling group could make its election has or has almost expired.

Additional Adjustments

In promulgating §1.1502–20T and related provisions, the IRS and Treasury have attempted to ameliorate where possible the situation of groups that relied on the provisions of §1.1502–20 in prior periods. The IRS and Treasury recognize that the loss disallowance rule in §1.1502–20 affected the manner in which some transactions were structured. For example, some groups caused subsidiaries to sell their assets rather than engage in stock sales subject to loss disallowance under §1.1502–20. Alternatively, groups may have engaged in deemed asset sales under §338(h)(10). The IRS and Treasury believe that transactions cast in the

Prior Waivers of Loss Carryovers Made to Increase Allowable Loss or Reduce Basis Reduction Required

If a selling group elects to compute the allowable loss or the basis reduction required on a disposition or deconsolidation of subsidiary stock by applying the provisions of §1.1502–20 without regard to the duplicated loss factor of the loss disallowance formula, or by applying the provisions of §1.337(d)–2T, the acquiring group’s prior waiver of loss carryovers of the subsidiary or lower-tier corporation of such subsidiary will have no effect on the selling group’s allowable loss or the basis reduction required with respect to the disposed of or deconsolidated subsidiary stock. To the extent, therefore, that an acquiring group made an election to waive loss carryovers to increase the allowable loss or to reduce the basis reduction required with respect to the disposed of or deconsolidated subsidiary stock, the IRS and Treasury Department believe that the acquiring group should be permitted to amend such waivers to decrease, to a limited extent, the amounts of loss carryovers deemed to expire.

Accordingly, the regulations contained in this document provide that, if the acquiring group made an election pursuant to §1.1502–32(b)(4) to waive a subsidiary’s loss carryovers, that election increased the amount of the allowable loss or reduced the basis reduction required with respect to the disposed of or deconsolidated subsidiary stock, and the selling group elects to compute the allowable loss or the basis reduction required with respect to the disposed of or deconsolidated subsidiary stock by applying the provisions of §1.1502–20 without regard to the duplicated loss factor of the loss disallowance formula, or by applying the provisions of §1.337(d)–2T, then the acquiring group may reduce the amount of any loss carryover deemed to expire (or increase the amount of any loss carryover deemed not to expire) as a result of the election made pursuant to §1.1502–32(b)(4). The aggregate amount of loss carryovers that may be treated as not expiring as a result of such an amendment of a waiver of a loss carryover of the subsidiary the stock of which is disposed of or deconsolidated and any lower-tier corporation of such subsidiary, however, may not exceed the duplicated loss with respect to the disposed of or deconsolidated subsidiary stock. This

limitation is intended to ensure that all of the loss carryovers that do not expire as a result of the amendment did, in fact, increase the amount of the allowable loss or reduce the basis reduction required with respect to the disposed of or deconsolidated subsidiary stock. In addition, to enable the acquiring group’s use of loss carryovers that are not deemed to expire as a result of such an amendment, these regulations permit a selling group to reapportion separate, subgroup, and consolidated section 382 limitations.

Inadvertent Waivers of Loss Carryovers

A selling group’s election to compute the allowable loss or the basis reduction required on a disposition or deconsolidation of subsidiary stock by applying the provisions of §1.1502–20 without regard to the duplicated loss factor of the loss disallowance formula, or by applying the provisions of §1.337(d)–2T, may result in a reduction of the amount of losses treated as reattributed to the selling group pursuant to an election described in §1.1502– 20(g). To the extent that losses treated as reattributed to the selling group are reduced, the losses of a subsidiary are increased. In this case, if the acquiring group made an election to waive certain loss carryovers of the subsidiary by identifying those losses that were deemed not to expire, it may have inadvertently waived those losses that are treated as losses of the subsidiary as a result of the election by the selling group. The IRS and Treasury Department believe that such acquiring groups should be permitted to make certain amendments of such waivers.

Accordingly, these regulations permit acquiring groups to amend an election made pursuant to §1.1502–32(b)(4) where the group of which the subsidiary was a member immediately before the acquisition (the prior group) elected to determine the amount of the allowable loss or the basis reduction required with respect to the stock of the subsidiary or a higher-tier corporation of the subsidiary by applying §1.1502–20 without regard to the duplicated loss factor of the loss disallowance formula, or by applying the provisions of §1.337(d)–2T, the subsidiary’s loss carryovers are increased by such election by the prior group, and the acquiring group made an election pursuant to §1.1502–32(b)(4) by identifying those losses that would be deemed not to expire. In this case, pursu

June 2, 2003 966 2003–22 I.R.B.

gard to extensions). The statement must set forth the name and employer identification number (E.I.N.) of the subsidiary and both the original and the adjusted apportionment of a separate section 382 limitation, a subgroup section 382 limitation, and a consolidated section 382 limitation, as applicable. The requirements of this paragraph (i)(3)(viii)(B) will be treated as satisfied if the information required by this paragraph (i)(3)(viii)(B) is included in the statement required by paragraph (i)(4) of this section rather than in a separate statement.

* * * * *

(5) Special time for filing election in the case of a waiver under §1.1502–32(b)(4) . (i) In general . Notwithstanding the provisions of paragraph (i)(4) of this section, the election to determine allowable loss or basis reduction provided in this paragraph (i) may be made by including the statement required by paragraph (i)(4) of this section with or as part of an original or amended return that is filed on or before June 15, 2003, if— (A) the group that includes the acquirer of the subsidiary stock made an election pursuant to §1.1502–32(b)(4) to treat all or a portion of the loss carryovers of the subsidiary (or a lower-tier corporation of such subsidiary) as expiring for all federal income tax purposes;

(B) the timely filing of an election to determine allowable loss or basis reduction by applying the provisions described in paragraph (i)(2)(i) or (ii) of this section would permit the acquiring group to amend its election under §1.1502–32(b)(4) pursuant to §1.1502–32T(b)(4)(vii);

(C) June 6, 2003, is after the date the original return of the consolidated group for the taxable year that includes March 7, 2002, is due (including extensions); and (D) the statement required by paragraph (i)(4) of this section specifies that the filing of the election is permitted under this paragraph (i)(5).

(ii) Effective date. This paragraph (i)(5) is applicable on and after May 7, 2003.

* * * * *

Par. 4. Section 1.1502–32T is amended by adding paragraph (b)(4)(vii) to read as follows:

form of actual or deemed asset sales should not be undone, notwithstanding the possible role of §1.1502–20 in their planning. However, as was the case with the relief provided earlier in §1.1502–20T and its related amendments, the IRS and Treasury have concluded that relief is appropriate and administrable in the situation that is the subject of these temporary regulations.

Special Analyses

In light of the Federal Circuit’s decision in Rite Aid Corp. v. United States, 255 F.3d 1357 (Fed. Cir. 2001), these temporary regulations are necessary to provide taxpayers with immediate guidance regarding the amendment of certain elections to waive the loss carryovers of an acquired subsidiary. Without such immediate guidance, taxpayers may not be able to avail themselves of the relief provided for in these regulations. Accordingly, good cause is found for dispensing with notice and public procedure pursuant to 5 U.S.C. 553(b)(B) and with a delayed effective date pursuant to 5 U.S.C. 553(d)(1) and (3). For applicability of the Regulatory Flexibility Act, please refer to the cross-reference notice of proposed rulemaking published elsewhere in this issue of the Bulletin. Pursuant to §7805(f) of the Internal Revenue Code, these temporary regulations will be submitted to the Chief Counsel of Advocacy of the Small Business Administration for comment on their impact.

Drafting Information

The principal author of these regulations is Jeffrey B. Fienberg, Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department participated in their development.

* * * * *

Amendments to the Regulations

Accordingly, 26 CFR part 1 is 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 - - Section 1.1502–20T also issued under 26 U.S.C. 1502. - - Section 1.1502–32T also issued under 26 U.S.C. 1502. - -

Par. 2. In §1.1502–20T, paragraph (i)(5) is redesignated as (i)(6).

Par. 3. Section 1.1502–20T is amended by adding paragraphs (i)(3)(viii) and (i)(5) to read as follows:

§1.1502–20T — Disposition or deconsoli- dation of subsidiary stock (temporary).

* * * * *

(i) - - (3) - - (viii) Apportionment of section 382 limi- tation in the case of an amendment of an election made pursuant to §1.1502–32(b)(4) . (A) In general . If, in connection with a disposition or deconsolidation of subsidiary stock, the subsidiary the stock of which was disposed of or deconsolidated became a member of another consolidated group (the acquiring group), and, pursuant to §1.1502– 32T(b)(4)(vii), the acquiring group amends an election made pursuant to §1.1502– 32(b)(4) to treat all or a portion of the loss carryovers of such subsidiary (or a lowertier corporation of such subsidiary) as expiring for all federal income tax purposes, then the common parent may reapportion a separate, subgroup, or consolidated section 382 limitation with respect to such subsidiary or lower-tier corporation in a manner consistent with the principles of paragraph (i)(3)(iii)(A) through (D) of this section. Any reapportionment of a section 382 limitation made pursuant to the previous sentence shall have the effects described in paragraph (i)(3)(iii)(D)( ii ) and ( iii ) of this section. For purposes of this section, a lower-tier corporation is a corporation that was a member of the group of which the subsidiary was a member immediately before becoming a member of the acquiring group and that became a member of the acquiring group as a result of the subsidiary becoming a member of the acquiring group.

(B) Time and manner of adjustment of apportionment of section 382 limitation . The common parent must include a statement entitled Adjustment of Apportionment of Section 382 Limitation in Connection with Amendment of Election under §1.1502– 32(b)(4) with or as part of any timely filed (including any extensions) original return for a taxable year that includes any date on or before May 7, 2003, or with or as part of an amended return filed before the date the original return for the taxable year that includes May 7, 2003, is due (with re

2003–22 I.R.B. 967 June 2, 2003

( 3 ) The amount of each loss carryover of S deemed to expire (or the amount of loss carryover deemed not to expire) as set forth in the election made pursuant to §1.1502–32(b)(4);

( 4 ) The amended amount of each loss carryover of S deemed to expire (or the amended amount of loss carryover deemed not to expire); and

( 5 ) In the case of an amendment made pursuant to paragraph (b)(4)(vii)(A) of this section, a statement that the aggregate amount of loss carryovers of S and any higher- and lower-tier corporation of S that will be treated as not expiring as a result of amendments made pursuant to paragraph (b)(4)(vii)(A) of this section will not exceed the amount described in §1.1502– 20(c)(1)(iii) with respect to the acquired stock (computed without regard to the effect of the group’s election or elections pursuant to §1.1502–32(b)(4), but with regard to the effect of the prior group’s election pursuant to §1.1502–20(g), if any, prior to the application of §1.1502–20T(i)(3)).

(D) Items taken into account in open years . An amendment to an election made pursuant to §1.1502–32(b)(4) affects the group’s items of income, gain, deduction or loss only to the extent that the amendment gives rise, directly or indirectly, to items or amounts that would properly be taken into account in a year for which an assessment of deficiency or a refund for overpayment, as the case may be, is not prevented by any law or rule of law. Under this paragraph, if the year to which a loss previously deemed to expire as a result of an election made pursuant to §1.1502–32(b)(4) is deemed not to expire as a result of an election made pursuant to this paragraph would have been carried back or carried forward is a year for which a refund of overpayment is prevented by law, then to the extent that the absorption of such loss in such year would have affected the tax treatment of another item ( e.g., another loss that was absorbed in such year) that has an effect in a year for which a refund of overpayment is not prevented by any law or rule of law, the amendment to the election made pursuant to §1.1502–32(b)(4) will affect the treatment of such other item. Therefore, if the absorption of such loss (the first loss) in a year for which a refund of overpayment is prevented by law would have prevented the absorption of another loss (the second loss) in such year and such sec

§1.1502–32T — Investment adjustments (temporary).

* * * * *

(b) - - (4) - - (vii) Special rules for amending waiver of loss carryovers from separate return limi- tation year —(A) Waivers that increased al- lowable loss or reduced basis reduction required . If, in connection with the acquisition of S, the group made an election pursuant to §1.1502–32(b)(4) to treat all or any portion of S’s loss carryovers as expiring, and the prior group elected to determine the amount of the allowable loss or the basis reduction required with respect to the stock of S or a higher-tier corporation of S by applying the provisions described in §1.1502– 20T(i)(2)(i) or (ii), then the group may reduce the amount of any loss carryover deemed to expire (or increase the amount of any loss carryover deemed not to expire) as a result of the election made pursuant to §1.1502–32(b)(4). The aggregate amount of loss carryovers that may be treated as not expiring as a result of amendments made pursuant to this paragraph (b)(4)(vii)(A) with respect to S and any higher- and lower-tier corporation of S may not exceed the amount described in §1.1502–20(c)(1)(iii) with respect to the acquired stock (computed without regard to the effect of the group’s election or elections pursuant to §1.1502–32(b)(4), but with regard to the effect of the prior group’s election pursuant to §1.1502–20(g), if any, prior to the application of §1.1502–20T(i)(3)). For purposes of determining the aggregate amount of loss carryovers that may be treated as not expiring as a result of amendments made pursuant to this paragraph (b)(4)(vii)(A) with respect to S and any higher- and lower-tier corporation of S, the group may rely on a written notification provided by the prior group. Nothing in this paragraph shall be construed as permitting a group to increase the amount of any loss carryover deemed to expire (or reduce the amount of any loss carryover deemed not to expire) as a result of the election made pursuant to §1.1502–32(b)(4).

(B) Inadvertent waivers of loss carry- overs previously subject to an election de- scribed in §1.1502–20(g) . If, in connection with the acquisition of S, the group made an election pursuant to §1.1502–32(b)(4) to waive loss carryovers of S by identifying the amount of each loss carryover deemed

not to expire, the prior group elected to determine the amount of the allowable loss or the basis reduction required with respect to the stock of S or a higher-tier corporation of S by applying the provisions described in §1.1502–20T(i)(2)(i) or (ii), and the amount of S’s loss carryovers treated as reattributed to the prior group pursuant to the election described in §1.1502–20(g) is reduced pursuant to §1.1502–20T(i)(3), then the group may amend its election made pursuant to §1.1502–32(b)(4) to provide that all or a portion of the loss carryovers of S that are treated as loss carryovers of S as a result of the prior group’s election to apply the provisions described in §1.1502– 20T(i)(2)(i) or (ii) are deemed not to expire. This paragraph (b)(4)(vii)(B), however, does not permit a group to reduce the amount of any loss carryover deemed not to expire as a result of the election made pursuant to §1.1502–32(b)(4).

(C) Time and manner of amending an election under §1.1502–32(b)(4) . The amendment of an election made pursuant to §1.1502–32(b)(4) must be made in a statement entitled Amendment of Election to Treat Loss Carryover as Expiring Un- der §1.1502–32(b)(4) Pursuant to §1.1502– 32T(b)(4)(vii) . The statement must be filed with or as part of any timely filed (including extensions) original return for the taxable year that includes May 7, 2003, or with or as part of an amended return filed before the date the original return for the taxable year that includes May 7, 2003, is due (with regard to extensions). A separate statement shall be filed for each election made pursuant to §1.1502–32(b)(4) that is being amended pursuant to this paragraph (b)(4)(vii). For purposes of making this statement, the group may rely on the statements set forth in a written notification provided by the prior group. The statement filed under this paragraph must include the following—

( 1 ) The name and employer identification number (E.I.N.) of S;

( 2 ) In the case of an amendment made pursuant to paragraph (b)(4)(vii)(A), a statement that the group has received a written notification from the prior group confirming that the group’s prior election or elections pursuant to §1.1502–32(b)(4) had the effect of either increasing the prior group’s allowable loss on the disposition of subsidiary stock or reducing the prior group’s amount of basis reduction required;

June 2, 2003 968 2003–22 I.R.B.

ond loss would have been carried to and used in a year for which a refund of overpayment is not prevented by any law or rule of law (the other year), the amendment of the election makes the second loss available for use in the other year.

(E) Higher- and lower-tier corpora- tions of S . A higher-tier corporation of S is a corporation that was a member of the prior group and, as a result of such highertier corporation becoming a member of the group, S became a member of the group. A lower-tier corporation of S is a corporation that was a member of the prior group and became a member of the group as a result of S becoming a member of the group.

(F) Effective date . This paragraph (b)(4)(vii) is applicable on and after May 7, 2003.

* * * * *

David A. Mader, Assistant Deputy Commissioner

of Internal Revenue.

Approved April 25, 2003.

Pamela F. Olson, Assistant Secretary of the Treasury.

Farm Credit Bank District in Which Property Is Located

(Filed by the Office of the Federal Register on May 6, 2003, 8:45 a.m., and published in the issue of the Federal Register for May 7, 2003, 68 F.R. 24351)

Section 2032A.—Valuation of Certain Farm, etc., Real Property

26 CFR 20.2032A–4: Method of valuing farm real property.

Special use value; farms; interest rates. The 2003 interest rates to be used in computing the special use value of farm real property for which an election is made under section 203A of the Code are listed for estates of decedents.

Rev. Rul. 2003–53

This revenue ruling contains a list of the average annual effective interest rates on new loans under the Farm Credit Bank system. This revenue ruling also contains a list of the states within each Farm Credit Bank District.

Under § 2032A(e)(7)(A)(ii) of the Internal Revenue Code, rates on new Farm Credit Bank loans are used in computing the special use value of real property used as a farm for which an election is made under § 2032A. The rates in this revenue rul

REV. RUL. 2003–53 TABLE 1

TABLE OF INTEREST RATES

(Year of Valuation 2003)

ing may be used by estates that value farmland under § 2032A as of a date in 2003. Average annual effective interest rates, calculated in accordance with § 2032A(e)(7)(A) and § 20.2032A–4(e) of the Estate Tax Regulations, to be used under § 2032A(e)(7)(A)(ii), are set forth in the accompanying Table of Interest Rates (Table 1). The states within each Farm Credit Bank District are set forth in the accompanying Table of Farm Credit Bank Districts (Table 2). Rev. Rul. 81–170, 1981–1 C.B. 454, contains an illustrative computation of an average annual effective interest rate. The rates applicable for valuation in 2002 are in Rev. Rul. 2002–26, 2002–1 C.B. 906. For rate information for years prior to 2002, see Rev. Rul. 2001–21, 2001–1 C.B. 1144, and other revenue rulings that are referenced therein.

DRAFTING INFORMATION

The principal author of this revenue ruling is Lane Damazo of the Office of the Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Lane Damazo at (202) 622–3090 (not a toll-free call).

Interest

Rate

Columbia .................................................................................................................................................. 9.18

Omaha/Spokane........................................................................................................................................ 7.23

Sacramento ............................................................................................................................................... 6.92

St. Paul ..................................................................................................................................................... 7.36

Springfield................................................................................................................................................ 7.26

Texas......................................................................................................................................................... 7.19

Wichita...................................................................................................................................................... 7.44

2003–22 I.R.B. 969 June 2, 2003

REV. RUL. 2003–53 TABLE 2

TABLE OF FARM CREDIT BANK DISTRICTS

District States

Columbia....................................................................................... Delaware, District of Columbia, Florida, Georgia, Maryland,

North Carolina, Pennsylvania, South Carolina, Virginia, West Virginia.

Omaha/Spokane............................................................................ Alaska, Idaho, Iowa, Montana, Nebraska, Oregon,

South Dakota, Washington, Wyoming.

Sacramento ................................................................................... Arizona, California, Hawaii, Nevada, Utah.

St. Paul.......................................................................................... Arkansas, Illinois, Indiana, Kentucky, Michigan, Minnesota,

Missouri, North Dakota, Ohio, Tennessee, Wisconsin.

Springfield .................................................................................... Connecticut, Maine, Massachusetts, New Hampshire,

New Jersey, New York, Rhode Island, Vermont.

Texas............................................................................................. Alabama, Louisiana, Mississippi, Texas.

Wichita.......................................................................................... Colorado, Kansas, New Mexico, Oklahoma.

June 2, 2003 970 2003–22 I.R.B.