Part I. Rulings — Internal Revenue Bulletin 2003-32

Section 66.—Treatment of SUPPLEMENTARY INFORMATION: these transfers will rarely constitute an Community Income arm's length transaction.

SUPPLEMENTARY INFORMATION:

these transfers will rarely constitute an arm's length transaction.

Background

26 CFR 1.66–4(b): Equitable relief from the federal income tax liability resulting from the operation of community property law.

This revenue procedure provides guidance for taxpayers seeking equitable relief from income tax liability under section 66(c) or section 6015(f). See Rev. Proc. 2003-61, page 296.

Section 83.—Property Transferred in Connection With Performance of Services

T.D. 9067

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Transfers of Compensatory Options

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains regulations that provide rules governing transfers of certain compensatory stock options (nonstatutory stock options). The regulations affect persons who have been granted nonstatutory stock options, as well as service recipients who may be entitled to deductions related to the options. The text of the temporary regulations also serves as the text of the proposed regulations (REG–116914–03) on this subject in this issue of the Bulletin.

DATES: Effective Date: These regulations are effective July 2, 2003.

Applicability Dates: For dates of applicability, see §§1.83–7(d) and 1.83–7T(d).

FOR FURTHER INFORMATION CONTACT: Stephen Tackney (202) 622–6030 (not a toll-free number).

These regulations amend 26 CFR part

Section 83 of the Internal Revenue Code (Code) provides that if, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of (1) the fair market value of the property (determined without regard to lapse restrictions) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over (2) the amount (if any) paid for such property, is included in the gross income of the service provider in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture.

Section 83(e)(4) provides that section 83 does not apply to the transfer of property pursuant to the exercise of an option with a readily ascertainable fair market value at the date of grant.

Section 83(e)(3) provides that section 83 does not apply to the transfer of an option without a readily ascertainable fair market value. Under §1.83–7(a), section 83 generally applies to the transfer of the property subject to the option at the time of exercise.

Section 1.83–7(a) further provides that section 83 applies to the transfer of money or other property received upon the sale or disposition in an arm's length transaction of an option without a readily ascertainable fair market value at the time of grant.

Recent transactions promoted by certain parties have raised issues concerning when a transfer of an option to a related person, typically a family member or an entity a substantial interest in which is owned by the option holder or family members, is an arm's length transaction. See Notice 2003–47, 2003–30 I.R.B. 132. The determination of whether a transfer to a related person is an arm's length transaction requires scrutiny of the facts and circumstances surrounding the transfer. Furthermore, if conducted under the terms promoted, Treasury and the IRS believe

Explanation of Provisions

The regulations provide that a sale or other disposition of a nonstatutory stock option to a related person will not be treated as a transaction that closes the application of section 83 with respect to the option. For these purposes, a person is related to the service provider if (I) the person and the service provider bear a relationship to each other that is specified in section 267(b) or 707(b)(1), subject to the modifications (i) that “20 percent” is used in place of “50 percent” each place it appears in section 267(b) and section 707(b)(1) and (ii) that section 267(c)(4) is applied as if the family of an individual includes the spouse of any member of the family, or (II) the service provider and such person are engaged in trades or businesses under common control (within the meaning of section 52(a) and (b)); provided that a person is not related to the service provider if the person is the service recipient with respect to the option or the grantor of the option. The regulations do not alter the treatment of the sale or disposition of an option in an arm's length transaction with an unrelated person. In those circumstances, section 83 applies to the transfer of money or other property received in the exchange.

Special Analyses

It has been determined that these regulations are 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 these 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, these regulations are being submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

2003-32 I.R.B. 287 August 11, 2003

Section 167.—Depreciation

26 CFR 1.167(a)–11: Depreciation based on class lives and asset depreciation ranges for property placed in service after December 31, 1970.

A safe harbor method is provided under which the Service will treat a node and fiber optic cable used in a cable television distribution system providing one-way and two-way communication services as the unit of property for computing depreciation under sections 167 and 168 of the Internal Revenue Code. See Rev. Proc. 2003-63, page 304.

Section 168.—Accelerated Cost Recovery System

Section 442.—Change of Annual Accounting Period

26 CFR 1.442–1: Change of annual accounting pe- riod.

What significant changes were made in finalizing Notice 2002-75, which provided proposed procedures for certain individuals to obtain automatic approval of the Commissioner to change their annual accounting period under section 442 to the calendar year. See Announcement 2003-49, page 339.

Section 446.—General Rule for Methods of Accounting

26 CFR 1.1446–1: General rule for methods of ac- counting.

Section 481.—Adjustments Required by Changes in Method of Accounting

Drafting Information

The principal author of these temporary regulations is Stephen Tackney of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and Treasury Department participated in their development.

- - - -

Adoption of 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 * * *.

Par. 2. Section 1.83–7 is amended by adding paragraph (d) to read as follows:

§1.83–7 Taxation of nonqualified stock options.

- - - (d) Effective dates . This section applies for periods before July 2, 2003. For periods on or after July 2, 2003, see §1.83–7T.

Par. 3. Section 1.83–7T is added to read as follows:

§1.83–7T Taxation of nonqualified stock options (Temporary).

(a) In general . If there is granted to an employee or independent contractor (or beneficiary thereof) in connection with the performance of services, an option to which section 421 (relating generally to certain qualified and other options) does not apply, section 83(a) shall apply to such grant if the option has a readily ascertainable fair market value (determined in accordance with paragraph (b) of this section) at the time the option is granted. The person who performed such services realizes compensation upon such grant at the time and in the amount determined under section 83(a). If section 83(a) does not apply to the grant of such an option because the option does not have a readily ascertainable fair market value at the time of grant, sections 83(a) and 83(b) shall apply at the time the option is exercised or otherwise disposed of, even though the

fair market value of such option may have become readily ascertainable before such time. If the option is exercised, sections 83(a) and 83(b) apply to the transfer of property pursuant to such exercise, and the employee or independent contractor realizes compensation upon such transfer at the time and in the amount determined under section 83(a) or 83(b). If the option is sold or otherwise disposed of in an arm's length transaction, sections 83(a) and 83(b) apply to the transfer of money or other property received in the same manner as sections 83(a) and 83(b) would have applied to the transfer of property pursuant to an exercise of the option. The preceding sentence does not apply to a sale or other disposition of the option to a person related to the service provider that occurs on or after July 2, 2003. For this purpose, a person is related to the service provider if—

(1) The person and the service provider bear a relationship to each other that is specified in section 267(b) or 707(b)(1), subject to the modifications that the language “20 percent” is used instead of “50 percent” each place it appears in sections 267(b) and 707(b)(1), and section 267(c)(4) is applied as if the family of an individual includes the spouse of any member of the family; or

(2) The person and the service provider are engaged in trades or businesses under common control (within the meaning of section 52(a) and (b)); provided that a person is not related to the service provider if the person is the service recipient with respect to the option or the grantor of the option.

(b) and (c) For further guidance, see §1.83–7(b) and (c).

(d) Effective dates . This section applies on or after July 2, 2003. For dates before July 2, 2003, see §1.83–7.

Robert E. Wenzel, Deputy Commissioner of

Internal Revenue.

Approved June 26, 2003.

Pamela F. Olson, Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on July 1, 2003, 8:45 a.m., and published in the issue of the Federal Register for July 2, 2003, 68 F.R. 39453)

August 11, 2003 288 2003-32 I.R.B.

the [1940] Act . . ., the acquisition of a Refunded Security is deemed to be an acquisition of the escrowed Government Securities.” Rule 5b–3(b). The effect of this Rule is that investments in Refunded Securities are treated as investments in Government Securities for purposes of the definition of a diversified investment company in section 5 of the 1940 Act.

LAW AND ANALYSIS

Section 851(b) provides that certain requirements must be satisfied in order for a domestic corporation to be taxed as a RIC under subchapter M, part I. Section 851(b)(3) imposes certain asset diversification requirements with respect to a corporation's total assets that must be satisfied as of the close of each quarter of the corporation's taxable year.

Section 851(b)(3)(A) requires that at least 50 percent of the value of a corporation's total assets must be represented by cash and cash items (including receivables), Government securities, securities of other RICs, and other securities generally limited in respect of any one issuer to an amount not greater in value than 5 percent of the value of the total assets of the corporation and to not more than 10 percent of the outstanding voting securities of such issuer.

Section 851(b)(3)(B) provides that not more than 25 percent of the corporation's total assets may be invested in the securities (other than Government securities and the securities of other RICs) of any one issuer, or of two or more issuers that the corporation controls and that are determined, under regulations, to be engaged in the same or similar trades or businesses or related trades or businesses.

Section 851(c)(5) provides that, for purposes of § 851(b)(3), all terms not specifically defined in § 851(c) shall have the same meaning as when used in the 1940 Act, as amended. The term “government security” is not specifically defined in § 851.

The RIC diversification rules of subchapter M are substantially similar in structure and purpose to those of the 1940 Act. Both sets of rules impose numerical limitations on the percentages and types of assets that may be held by an investment company. Both are intended to protect the investor from the risks of

sections 167 and 168 of the Internal Revenue Code. See Rev. Proc. 2003-63, page 304.

Section 851.—Definition of Regulated Investment Company

26 CFR 1.851–2: Limitations. (Also § 851(b)(3).)

Regulated investment company (RIC). This ruling provides that, for purposes of qualifying as a regulated investment company (RIC) under the tax law, a RIC shall treat its investment in refunded bonds as an investment in Government securities, to the extent that the acquisition of the refunded bonds would be treated under Rule 5b–3 under the Investment Company Act of 1940 as an acquisition of the Government securities placed in escrow to fund payment of principal and interest on the refunded bonds.

Rev. Rul. 2003–84

ISSUE

If one or more government securities have been placed in escrow to fund payment of principal and interest on a bond and if Rule 5b–3, 17 CFR 270.5b–3, under the Investment Company Act of 1940, 15 U.S.C. 80a–1 et seq . (“the 1940 Act”), would treat acquisition of the bond as an acquisition of a Government Security within the meaning of the 1940 Act, is the bond a government security for purposes of § 851(b)(3)?

FACTS

R, a domestic corporation, is registered under the 1940 Act as a diversified management company and elects to be treated as a RIC under subchapter M, part 1, of the Code. R invests primarily in bonds issued by states and municipalities.

R invests in certain bonds that, together with other bonds (collectively, the “refunded bonds”), have been refunded through a transaction in which Government Securities, as defined in § 2(a)(16) of the 1940 Act, were placed in escrow for the purpose of providing the funds needed to make all future payments of principal and interest on the refunded bonds. Pursuant to an agreement between the issuer of the refunded bonds and the escrow agent,

the deposit in escrow is irrevocable, and the Government Securities are pledged only to payment of the debt service of the refunded bonds. The escrow agreement prohibits any substitution for the deposited Government Securities unless the substituted securities are also Government Securities. Either the refunded bonds have received the highest rating from a nationally recognized statistical rating organization, or an independent certified public accountant has certified to the escrow agent that the escrowed securities will satisfy all scheduled payments of principal, interest, and applicable premiums on the refunded bonds.

Section 5(b)(1) of the 1940 Act imposes certain asset diversification requirements on diversified investment companies for purposes of the securities laws. To be classified as a diversified investment company under § 5(b)(1), a fund is required to invest at least 75 percent of its assets in cash and cash items, Government Securities, securities of other investment companies, and other securities generally limited in respect of any one issuer to an amount not greater than 5 percent of the value of its total assets and to not more than 10 percent of the outstanding voting securities of the issuer. The remaining 25 percent of the fund's assets may be invested in any manner.

Section 2(a)(16) of the 1940 Act defines the term Government Security for purposes of the 1940 Act as meaning—

[A]ny security issued or guaranteed as to principal or interest by the United States, or by a person controlled or supervised by and acting as an instrumentality of the Government of the United States pursuant to authority granted by the Congress of the United States; or any certificate of deposit for any of the foregoing. 15 U.S.C. 80a–2. The statute does not make any specific reference to refunded securities. Effective August 15, 2001, however, the term Refunded Security is defined, and the treatment of Refunded Securities is governed, by Rule 5b–3. See Securities and Exchange Commission (SEC) Release No. IC–25058, 66 FR 36156 (July 11, 2001). This rule applies if a fund acquires a Refunded Security, that is, a security the payment of which has been fully funded within the meaning of Rule 5b–3(c)(4) by escrowed Government Securities. “For purposes of section 5 of

2003-32 I.R.B. 289 August 11, 2003

loss and of illiquidity inherent in the concentration of assets in the securities of a single or a small number of issuers. See H.R. Rep. No. 2020, 86th Cong., 2d Sess. 820–26. In view of the commonality of structure and purpose of both sets of rules and in view of the need for RICs simultaneously to comply with both, the diversification provisions of the Code and those of the1940 Act should be interpreted consistently.

As a result of Rule 5b–3(b), R 's investment in certain of the refunded bonds is treated as an investment in Government Securities for purposes of the diversification requirements under the 1940 Act. Accordingly, for each calendar quarter the end of which occurs after the refunding transaction that created the escrow deposit, the refunded bonds are government securities for purposes of § 851(b)(3), regardless of whether the RIC acquired the refunded bonds before or after that refunding transaction.

HOLDING

For purposes of applying the diversification requirements under § 851(g)(3), a RIC's investment in refunded bonds is an investment in government securities to the extent that an acquisition of the refunded bonds would be treated by Rule 5b–3 as an acquisition of the Government Securities that were deposited in the escrow for the bonds.

DRAFTING INFORMATION

The principal author of this revenue ruling is Susan Thompson Baker of the Office of the Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling, contact her at (202) 622–3940 (not a toll-free call).

Section 856.—Definition of Real Estate Investment Trust

If a taxable REIT subsidiary of a REIT and an independent contractor from whom the REIT does not derive income from a joint venture to provide noncustomary services to tenants of the REIT, will rents paid to the REIT by tenants fail to qualify as "rents from real property" under section 856 of the Code. See Rev. Rul. 2003-86, page 290.

26 CFR 1.856–3: Definitions relating to real estate investment trusts. 26 CFR 1.856–5: Treatment of interest by real estate investment trusts. 26 CFR 301.7701–3: Classification of certain busi- ness entities.

If a REIT under certain circumstances makes a loan that is secured either by a partnership interest in a partnership or by the sole membership interest in a disregarded entity, how will the loan and interest be treated under section 856? See Rev. Proc. 2003-65, page 336.

26 CFR 1.856–4: Rents from Real Property.

Noncustomary services provided to REIT tenants by a joint venture between a taxable REIT subsidiary and an inde- pendent contractor. This ruling provides that a joint venture between a taxable REIT subsidiary and an independent contractor to provide noncustomary services to REIT tenants will not cause rents paid by tenants to fail to qualify as “rents from real property” under section 856 of the Code.

Rev. Rul. 2003–86

ISSUE

If a joint venture partnership between a taxable REIT subsidiary (TRS) of a real estate investment trust (REIT) and a corporation that qualifies as an independent contractor of the REIT under § 856(d)(3)(B) of the Internal Revenue Code provides noncustomary services to tenants of the REIT in the situation described below, will rents paid by the tenants to the REIT fail to qualify as rents from real property under § 856(d)?

FACTS

R is a corporation that has elected and qualifies to be treated as a REIT under subchapter M of Chapter 1 of the Code. R owns and operates rental apartment properties in several major metropolitan areas. In 2002, R formed a wholly owned corporation, T, to provide services to tenants of its properties. R and T filed Form 8875 to jointly elect for T to be treated as a TRS of R effective as of the date of T 's formation. The services provided to tenants by T are services that are not customarily provided to tenants of rental apartment properties in the metropolitan areas in which R 's properties are located.

X is a corporation unrelated, either directly or indirectly, to either R or T . X qualifies as an independent contractor under § 856(d)(3)(B). X provides various services to R 's tenants and tenants of other rental apartments in the areas where R 's properties are located. The services provided by X are noncustomary in the areas where R 's properties are located and are primarily for the convenience of tenants.

X and T formed P, which is treated as a partnership for federal income tax purposes, to provide the noncustomary services that formerly were separately provided to R 's tenants by either X or T . X and T made equal capital contributions to P . X and T share in all items of P 's income, gain, loss, and deduction in proportion to their capital contributions. R 's tenants contract directly with P for services. R does not receive any payments related to the services from P, X or tenants. R receives quarterly dividends from T.

LAW AND ANALYSIS

To qualify as a REIT, an entity must derive at least 95 percent of its gross income from sources listed in § 856(c)(2) and at least 75 percent of its gross income from sources listed in § 856(c)(3). “Rents from real property” are among the sources listed in both of those sections. Section 856(d)(1) defines rents from real property to include rents from interests in real property, charges for services customarily rendered in connection with the rental of real property, and rent attributable to certain leased personal property. However, § 856(d)(2)(C) excludes “impermissible tenant service income” from the definition of rents from real property.

Section 856(d)(7)(A) defines “impermissible tenant service income” to include, with respect to any real or personal property, any amount received or accrued directly or indirectly by a REIT for services furnished or rendered by the REIT to tenants of the property. Section 856(d)(7)(B) provides that if impermissible tenant service income from a property for any tax year exceeds 1 percent of all amounts received or accrued directly or indirectly by the REIT during the tax year from the property, the impermissible tenant service income from the property shall include all amounts received or accrued from the property for the tax year.

August 11, 2003 290 2003-32 I.R.B.

Section 856(d)(7)(C)(i) provides that services furnished or rendered through a TRS or an independent contractor from whom the REIT does not derive or receive any income are not treated as furnished, rendered, or provided by the REIT for purposes of § 856(d)(7)(A). Thus, services rendered by a TRS do not give rise to impermissible tenant service income, and services rendered by an independent contractor do not give rise to impermissible tenant service income if the REIT does not receive or derive income from the independent contractor.

R 's tenants contract directly with P to perform noncustomary services. Thus, R does not receive directly any payments related to the services from P . Also, R does not directly or indirectly receive income from X, an independent contractor. T is entitled to its share of income from the performance of services in proportion to its interest in P, and R may indirectly receive this income in the form of dividends from T . Under § 856(d)(7)(A), amounts received directly or indirectly by a REIT for services furnished or rendered to tenants constitute impermissible tenant service income. However, § 856(d)(7)(C)(i) provides an exception for services furnished or rendered through a TRS. R 's only interest in P is through T, which is a TRS. Accordingly, the services provided by P are treated as provided by T to the extent of T 's interest in P . Therefore, R will not be treated as providing impermissible tenant services to its tenants.

HOLDING

Under the circumstances described above, a joint venture partnership between a TRS of a REIT and a corporation that qualifies as an independent contractor of the REIT under § 856(d)(3)(B) may provide noncustomary services to tenants of the REIT without causing the rents paid by the tenants to the REIT to fail to qualify as rents from real property under § 856(d).

DRAFTING INFORMATION

The principal author of this revenue ruling is Jonathan D. Silver of the Office of

Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling, contact Mr. Silver at (202) 622–3920 (not a toll-free call).

Section 4971.—Taxes on Failure to Meet Minimum Funding Standards

Whether the filing of a Form 5330 or the filing of a Form 5500 starts the running of the statute of limitations within the meaning of section 6501 of the Internal Revenue Code with respect to the excise taxes described in section 4971. See Rev. Rul. 2003-88, page 292.

Section 4980.—Tax on Reversion of Qualified Plan Assets to Employer

Excise tax; terminating defined ben- efit plan; reversion. This ruling describes the treatment of a transfer from a terminating defined benefit plan to a defined contribution plan of an amount that is in excess of 25 percent of the potential amount otherwise available for reversion.

Rev. Rul. 2003–85

ISSUE

If a defined benefit plan is terminated, and an amount in excess of 25 percent of the maximum amount otherwise available for reversion is transferred from the terminating defined benefit plan to a defined contribution plan, what is the tax treatment of the amount transferred to the defined contribution plan and of any reversion to the employer from the terminating defined benefit plan?

FACTS

Company M maintains Plan A, a defined benefit plan qualified under § 401(a) of the Internal Revenue Code. On March 1, 2002, the Board of Directors of Company M adopted resolutions to terminate Plan A, effective July 1, 2002, and to adopt Plan B, a defined contribution plan. Company M did not amend Plan A in connection with the termination of the plan to provide for any increases in the accrued benefits of the participants.

All employees of Company M are eligible to participate in Plan B upon attainment of age 21 and completion of 1 year of service. Of the 1,000 participants with accrued benefits under Plan A that remained as employees of Company M as of July 1, 2002 (the termination date of Plan A), 95 percent were participants in Plan B on that date.

After satisfaction of all liabilities of Plan A, Company M could have received a reversion of $60X of surplus assets (determined without regard to § 4980(d)). After satisfaction of all the plan liabilities and before taking a reversion of the surplus assets under Plan A, Company M transferred $20X to Plan B. Plan B provides for the receipt and immediate allocation of excess assets in the form of a direct transfer from the terminating Plan A. The allocation of the excess assets will satisfy the requirements of §§ 401(a)(4) and 415.

LAW

Section 61 defines gross income as all income from whatever source derived (subject to certain exceptions). Section 111(a) provides that gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of the tax imposed by sections 1 through 1400L. Section 4980(a) provides for a 20 percent excise tax on the amount of any reversion from a qualified plan. Section 4980(d)(1) provides, in pertinent part, that the excise tax under § 4980(a) is increased to 50 percent with respect to any employer reversion from a qualified plan unless the employer establishes or maintains a qualified replacement plan or the plan provides pro rata benefit increases described in § 4980(d)(3).

Section 4980(c)(2) generally defines “employer reversion” as the amount of cash and the fair market value of other property received (directly or indirectly) by an employer from the qualified plan.

Under § 4980(d)(2), a plan is a “qualified replacement plan” if it is established or maintained by the employer in connection with a qualified plan termination (replacement plan) and certain additional requirements are met. Under § 4980(d)(2)(A), in

2003-32 I.R.B. 291 August 11, 2003

order for the replacement plan to be a qualified replacement plan, at least 95 percent of the active participants in the terminated plan who remain as employees of the employer after the termination are active participants in the replacement plan. Section 4980(d)(2)(C) provides rules for the allocation of the amount transferred.

Under § 4980(d)(2)(B), in order for the replacement plan to be a qualified replacement plan, a direct transfer must be made from the terminated plan to the replacement plan before any employer reversion, and the transfer must be in an amount equal to the excess (if any) of (I) 25 percent of the maximum amount the employer could receive as an employer reversion (determined without regard to § 4980(d)) over (II) the present value of the aggregate increases in the accrued benefits under the terminated plan of any participants or beneficiaries under a plan amendment which is adopted within 60 days before the plan termination and which takes effect immediately upon plan termination.

Section 4980(d)(2)(B)(iii) provides that, in the case of any amount transferred under § 4980(d)(2)(B)(i) from a terminated plan to a qualified replacement plan, such amount (I) shall not be includible in the gross income of the employer, (II) no deduction shall be allowable with respect to such transfer, and (III) such transfer shall not be treated as an employer reversion for purposes of § 4980.

HOLDINGS

Plan B is a qualified replacement plan for purposes of § 4980(d).
In accordance with § 4980(d)(2)(B) (iii), the direct transfer from Plan A to Plan B of $20X, an amount that is at least 25 percent of the maximum amount which the employer could receive as an employer reversion, is treated as follows:

(a) the amount transferred is not includible in the gross income of the employer,

(b) no deduction is allowable with respect to the amount transferred, and

The $40X that the employer receives is subject to the 20 percent excise tax under § 4980(a) and is includible in income under § 61.

DRAFTING INFORMATION

The principal drafters of this revenue ruling are Steven Linder of the Employee Plans, Tax Exempt and Government Entities Division and Vernon Carter of the Office of the Division Counsel/Associate Chief Counsel (TEGE). For further information regarding this revenue ruling, please 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 6:30 p.m. Eastern Time, Monday through Friday. Mr. Linder may be reached at (202) 283–9888; Mr. Carter may be reached at (202) 622–6060. The telephone numbers in the preceding sentence are not toll-free.

Section 6015.—Relief From Joint and Several Liability on a Joint Return

26 CFR 1.6015–4: Equitable relief from joint and several liability.

This revenue procedure provides guidance for taxpayers seeking equitable relief from income tax liability under section 66(c) or section 6015(f). See Rev. Proc. 2003-61, page 296.

Section 6501.—Limitations on Assessment and Collection

(Also, § 4971.)

Section 4971; running of statute of limitations; and filing of form. This ruling states that the filing of a Form 5330, and not the filing of a Form 5500, starts the running of the statute of limitations with respect to the excise taxes described in section 4971 of the Code.

Rev. Rul. 2003–88

ISSUE

What starts the running of the statute of limitations for purposes of the excise taxes imposed by § 4971 of the Internal Revenue Code on failure to satisfy the minimum funding standards of § 412?

FACTS

Employer X maintains a defined benefit pension plan (“the Plan”) qualified under § 401(a) that is subject to the requirements of § 412. The Plan has an accumulated funding deficiency under § 412 as of the end of the 2002 plan year. As a result, X is liable for the initial excise tax under § 4971(a) for failure to meet the minimum funding standards. Form 5500 is timely filed for the Plan for the 2002 plan year and the form discloses the amount of the accumulated funding deficiency. However, X fails to file Form 5330 to report the excise tax liability on the accumulated funding deficiency.

LAW AND ANALYSIS

Section 4971 imposes excise taxes on the failure to satisfy the minimum funding standards of § 412. The amount of the taxes, for which the employer is liable, is related to the amount of an accumulated funding deficiency, as defined in § 412(a), and, in the case of a plan to which § 412(m)(5) applies, to the amount of an unpaid liquidity shortfall under § 4971(f). Although the determination of whether there is an accumulated funding deficiency is made at the end of the plan year, the tax on the accumulated funding deficiency is imposed for the taxable year (of the employer who maintains the plan) in which the plan year ends.

Section 6501(a) provides that, except as otherwise provided in that section, the amount of any tax imposed by Title 26 of the United States Code (which includes § 4971) shall be assessed within three years after the return was filed (whether or not the return was filed on or after the date prescribed), and no proceeding in court without assessment for the collection of the tax shall be begun after the expiration of that period. Section 6501(a) further provides that, for this purpose, the term “return” means the return required to be filed by the taxpayer.

However, there are exceptions to the three year rule in § 6501(a). Section 6501(e)(3) provides that, except as otherwise provided in § 6501(c), in the case of a return of a tax imposed under a provision of subtitle D (which includes § 4971), if the return omits an item of the tax properly includible thereon that exceeds 25 percent

August 11, 2003 292 2003-32 I.R.B.

In each case, the statute of limitations is determined without regard to whether the accumulated funding deficiency or unpaid liquidity shortfall has been disclosed on Form 5500.

HOLDING

The filing of Form 5330 starts the running of the statute of limitations for purposes of the excise taxes imposed by § 4971 on failure to satisfy the minimum funding standards of § 412. If an accumulated funding deficiency or unpaid liquidity shortfall is disclosed on Form 5330 or in an attached statement, the three-year statute of limitations of § 6501(a) applies. However, if the deficiency or unpaid liquidity shortfall is not disclosed on Form 5330 or in an attached statement, the six-year statute of limitations of § 6501(e)(3) applies. If Form 5330 is not filed for that year, § 6501(c)(3) permits the tax to be assessed at any time after the date prescribed for filing the return. Because X has failed to file Form 5330 to disclose the accumulated funding deficiency, the tax under § 4971 may be assessed, or a proceeding in court for the collection of the tax may be begun without assessment, at any time.

DRAFTING INFORMATION

The principal author of this revenue ruling is James Flannery of the Employee Plans, 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 (a toll-free number), between the hours of 8:00 a.m. and 6:30 p.m. Eastern time, Monday through Friday. Mr. Flannery may be reached at 1–202–283–9888 (not a toll-free number).

of the amount of the tax reported thereon, the tax may be assessed, or a proceeding in court for the collection of the tax may be begun without assessment, at any time within six years after the return is filed. However, § 6501(e)(3) also provides that in determining the amount of tax omitted from the return, there shall not be taken into account any amount of tax imposed by chapter 43 (which includes § 4971) that is omitted from the return if the transaction giving rise to the tax is disclosed in the return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the Treasury or his delegate of the existence and nature of the item.

Section 6501(c) provides several rules that take precedence over the provisions of § 6501(e)(3). Section 6501(c)(3) provides that in the case of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of the tax may be begun without assessment, at any time. Also, § 6501(c)(4) provides that if both the taxpayer and the Secretary of the Treasury or his delegate have consented in writing before the expiration of the time prescribed in that section, the tax may be assessed at any time before the expiration of the period of extension.

Section 6058(a) requires employers that maintain certain funded plans of deferred compensation, including plans qualified under § 401(a), to file an annual information return. Section 301.6058–1(a)( 1 ) of the Procedure and Administration Regulations provides that the annual return of the plan is the appropriate Annual Return/Report of Employee Benefit Plan (Form 5500 series). Section 54.6011–1(a) of the Excise Tax Regulations, however, requires any employer liable for tax under § 4971 to file Form 5330, Return of Excise Taxes Related to Employee Benefit Plans . Generally, filing a Form 5500 does not

start the § 6501 statute of limitations for assessment for taxes. Absent a specific statutory or regulatory exception, Form 5500 is not designated for the reporting of tax. Section 6501(l)(1) provides an exception for taxes imposed by § 4975. Section 6501(l)(1) states, in pertinent part, that for purposes of § 4975, the return to be used for purposes of starting the running of the statute of limitations on assessments shall be the return filed by the plan for the year in which the act giving rise to the liability occurred. No such exception exists for § 4971. Therefore, the general rule of § 6501(a) applies. The return used for purposes of the statute of limitations for § 4971 is Form 5330, as designated by § 54.6011–1(a). Disclosure of information on Form 5500 does not commence the running of the statute of limitations under § 6501 because only disclosure on the return required to report and pay the tax (Form 5330) is relevant.

If an accumulated funding deficiency or unpaid liquidity shortfall is disclosed on the Form 5330 or in an attached statement, the statute of limitations for collecting the tax imposed by § 4971 expires three years after the filing of the Form 5330 in which the deficiency or unpaid liquidity shortfall is disclosed. If an accumulated funding deficiency or unpaid liquidity shortfall is not disclosed on the Form 5330 or in a statement attached to the Form 5330, the statute of limitations on assessment is six years. However, either of these periods may be extended by a written agreement for an agreed-upon period of time. If Form 5330 has not been filed for a year in which an accumulated funding deficiency or unpaid liquidity shortfall occurs, the tax may be assessed, or a proceeding in court for the collection of the tax may be begun without assessment, at any time after the date prescribed for filing the return.

2003-32 I.R.B. 293 August 11, 2003