SECTION 8. PROCEDURAL

INFORMATION

This notice serves as an “administrative pronouncement” as that term is described in § 1.6661–3(b)(2) of the regulations and may be relied upon to the same extent as a revenue ruling or a revenue procedure.

DRAFTING INFORMATION

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

Returns Relating to Interest Payments on Qualified Education Loans

Notice 2004–63

PURPOSE

This notice announces that the Internal Revenue Service will not assert penalties under section 6721 (failure to file correct information returns) or section 6722 (failure to furnish correct information statements) of the Internal Revenue Code for

the failure to report under section 6050S payments attributable to loan origination fees and capitalized interest received in calendar year 2004 on qualified education loans made on or after September 1, 2004, if a person receiving payments satisfies the requirements set forth below. This notice also announces that a borrower who receives an information statement indicating that it does not include payments of loan origination fees may use any reasonable method to allocate the loan origination fees over the term of the loan for purposes of the deduction allowable under section 221.

BACKGROUND

Section 6050S requires certain persons (payees) who receive payments of interest on one or more qualified education loans, as defined in section 221(d)(1), to file information returns with the Service and to furnish a corresponding information statement to the individual named on the information return (borrower) showing the information that is reported to the Service. The return and statement are required to include information concerning the aggregate amount of interest received from the individual during the calendar year to assist taxpayers and the Service in determining the amount of qualified education loan interest that taxpayers may deduct under section 221. The specific information reporting requirements applicable to payees for the calendar years 1998 through 2001 are described in Notice 98–7, 1998–1 C.B. 339 (as modified by Notice 98–54, 1998–2 C.B. 641; Notice 99–37, 1999–2 C.B. 124; and Notice 2000–62, 2000–2 C.B. 587).

On April 29, 2002, the Treasury Department and the Service issued final regulations under section 6050S. See 67 Fed. Reg. 20901. The final regulations extended the reporting requirements described in Notice 98–7 (as modified) for calendar year 2002. The final regulations apply to information returns required to be filed, and information statements required to be furnished, for payments received during calendar year 2003 and later years. Section 1.6050S–3(e)(1) of the Income Tax Regulations contained a special transitional rule under which payees were not required to report payments of loan origination fees or capitalized interest received on qualified education loans made before January 1, 2004.

2004–41 I.R.B. 597 October 12, 2004

On May 7, 2004, the Treasury Department and the Service finalized the section 221 regulations and amended section 1.6050S–3(e) by extending the special transitional rule. See 69 Fed. Reg. 25489. Amended section 1.6050S–3(e)(1) provides that payees are not required to report payments of loan origination fees and capitalized interest for qualified education loans made before September 1, 2004. For qualified education loans made on or after September 1, 2004, however, payees are required to report payments of interest (including loan origination fees and capitalized interest) received on qualified education loans on Form 1098-E, “ Student Loan Interest Statement .”

Payees have advised the Treasury Department and the Service that the period of time between May 7, 2004, the publication date of the section 221 regulations and the amended section 6050S regulations, and September 1, 2004, the date as of which payees must begin to capture information on payments of loan origination fees and capitalized interest, does not provide sufficient lead time for some payees to make the necessary programming changes to comply with the reporting requirements.

PENALTY RELIEF

In light of these comments, the Service will not assert penalties under section 6721 or section 6722 for failure to report payments attributable to loan origination fees and capitalized interest received in calendar year 2004 on a qualified education loan made on or after September 1, 2004, if the payee:

(1) files and furnishes in a timely manner a Form 1098-E (or other appropriate information statement) that (i) includes the amount of interest (except for any loan origination fees or capitalized interest) received in 2004 in box 1, (ii) does not include a check in box 2, and (iii) includes all other required information; and

(2) furnishes a statement to the borrower indicating that the amount of interest reported in box 1 of Form 1098-E for calendar year 2004 does not include payments attributable to either loan origination fees or capitalized interest received on qualified education loans made on or after September 1, 2004, and that the borrower may be able to deduct amounts in addition to the amount reported in box 1.

The penalty relief under this notice will allow additional time for payees to make the necessary programming changes to enable them to capture information on and report payments of loan origination fees and capitalized interest received in 2005 and future calendar years consistent with the reporting requirements of the amended section 6050S regulations for qualified education loans made on or after September 1, 2004. Forms 1098-E for calendar year 2004 must be filed with the Service by February 28, 2005, if filed on paper or by magnetic media, or by March 31, 2005, if filed electronically. In addition, payees must furnish information statements to the borrower on or before January 31, 2005.

Notwithstanding sections 1.163–7(a) and 1.1275–2(a), a borrower who receives a Form 1098-E (or other appropriate information statement) indicating that it does not include payments of loan origination fees may use any reasonable method to allocate the loan origination fees over the term of the loan for purposes of the deduction allowable under section 221. A method that results in the double deduction of the same portion of a loan origination fee would not be reasonable.

EFFECTIVE DATE

This notice is effective as of September 1, 2004.

CONTACT INFORMATION

The principal author of this notice is Tonya L. Christianson of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this notice, contact Ms. Christianson at (202) 622–4910 (not a toll-free call).

Modification of Exemption From Tax for Small Property and Casualty Insurance Companies

Notice 2004–64

This notice alerts taxpayers to recent amendments to § 501(c)(15) of the Internal Revenue Code. These amendments may affect the qualification of entities as

tax-exempt property and casualty insurance companies described in § 501(c)(15). This notice advises taxpayers that the Service will continue to scrutinize the eligibility of entities claiming to be tax-exempt property and casualty insurance companies. See Notice 2003–35, 2003–1 C.B. 992.

BACKGROUND AND PRIOR LAW

Section 501(a) provides that an organization described in § 501(c) is exempt from federal income tax. Prior to the recent amendments, former § 501(c)(15)(A) provided that an insurance company, other than a life insurance company, was tax-exempt if its net written premiums (or, if greater, its direct written premiums) did not exceed $350,000. For purposes of determining whether the insurance company met the $350,000 premium test for the taxable year, the premiums received in that taxable year by all companies or associations in the same controlled group (as defined in § 831(b)(2)(B)(ii) of the Code) as the insurance company were treated as though received by the insurance company.

PENSION FUNDING EQUITY ACT OF 2004

The Pension Funding Equity Act, P.L. 108–218, (the “Act”) was enacted on April 10, 2004. Section 206 of the Act made several changes to § 501(c)(15) that, in general, are effective for taxable years beginning after December 31, 2003. Specifically, the Act amended § 501(c)(15) to provide that a property and casualty insurance company is eligible to be exempt from federal income tax if (a) its gross receipts for the taxable year do not exceed $600,000, and (b) more than 50 percent of its gross receipts for the taxable year consist of premiums. See § 501(c)(15)(A)(i). For purposes of these tests, amounts received by all members of the insurance company’s controlled group (including foreign and tax-exempt companies) are taken into account. See § 501(c)(15)(C). Alternative gross receipts and premium tests apply to small mutual insurance companies. See § 501(c)(15)(A)(ii).

The Act clarifies that, for purposes of § 501(c)(15), the term “insurance company” has the same meaning as in § 816(a)

October 12, 2004 598 2004–41 I.R.B.

of the Code, which provides that a company is an insurance company if more than half of its business during the taxable year is the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies.

The recent amendments to § 501(c)(15) may affect the qualification of some insurance companies under § 501(c)(15) for taxable years beginning after December 31, 2003. For example, a non-life stock insurance company with $650,000 of gross receipts in a taxable year would have been eligible to be exempt from federal income tax before the recent amendments to § 501(c)(15) if the company’s written premiums for the year were $350,000 or less. However, for taxable years beginning after December 31, 2003, an insurance company with $650,000 of gross receipts in a taxable year will not be eligible for exemption from tax under § 501(c)(15), as amended by the Act, because the $600,000 gross receipts test will not be met.

Conversely, a non-life stock insurance company with $500,000 of gross receipts in a taxable year would not have been eligible to be exempt from federal income tax under former § 501(c)(15) if the company’s written premiums for the year were $375,000. However, for taxable years beginning after December 31, 2003, an insurance company with $500,000 of gross receipts in a taxable year, including $375,000 from premiums, will be eligible for exemption from tax under § 501(c)(15), as amended by the Act. Nonetheless, if the same company is a member of a controlled group (as defined in § 501(c)(15)(C)), it will not qualify if other members of the group have gross receipts in the taxable year in excess of $100,000 because the $600,000 gross receipts test will not be met.

As previously described in Notice 2003–35, 2003–1 C.B. 992, the Service will continue to challenge the exemption of any entity that claims to be described in § 501(c)(15), but that does not meet the requirements of that section, regardless of whether the exemption is claimed pursuant to an existing determination letter or on a return filed with the Service. The Service will challenge the qualification of an entity under former § 501(c)(15) for any open taxable year beginning prior to January 1, 2004. The Service will chal

lenge the qualification of an entity under § 501(c)(15), as amended by the Act, for taxable years beginning after December 31, 2003.

EFFECTIVE DATE OF AMENDMENTS

The amendments to § 501(c)(15) of the Code generally are effective for taxable years beginning after December 31, 2003. A special transition rule applies with respect to certain insurance companies in receivership or liquidation.

DRAFTING INFORMATION

The principal author of this notice is Lee T. Phaup, TE/GE Division, Exempt Organizations. For further information regarding this notice, contact Ms. Phaup at (202) 283–8935 (not a toll-free call).

Certain Reinsurance Arrangements

Notice 2004–65

This notice modifies Notice 2002–70, 2002–2 C.B. 765, and Notice 2003–76, 2003–49 I.R.B. 1181, by removing the identification of transactions that are the same as, or substantially similar to, transactions described in Notice 2002–70 as “listed transactions” for purposes of § 1.6011–4(b)(2) of the Income Tax Regulations and §§ 301.6111–2(b)(2) and 301.6112–1(b)(2) of the Procedure and Administration Regulations. The Service will, however, continue to scrutinize transactions described in Notice 2002–70 that are being used to shift income from taxpayers to related companies purported to be insurance companies that are subject to little or no U.S federal income tax.

BACKGROUND

Notice 2002–70 describes a reinsurance arrangement involving a taxpayer (“Taxpayer”) (typically a service provider, automobile dealer, lender, or retailer) that offers its customers the opportunity to purchase an insurance contract through Taxpayer in connection with the products or services being sold. The insurance provides coverage for repair or replacement costs if the product breaks down or is lost, stolen, or damaged, or coverage for the

customer’s payment obligations in case the customer dies, or becomes disabled or unemployed. Taxpayer offers the insurance to its customers by acting as an insurance agent for an unrelated insurance company (“Company X”). Taxpayer receives a sales commission from Company X equal to a percentage of the premiums paid by Taxpayer’s customers. Taxpayer forms a wholly owned corporation (“Company Y”), typically in a foreign country, to reinsure the policies sold by Taxpayer. Promoters sometimes refer to these companies as producer owned reinsurance companies or “PORCs.” If Company Y is a foreign corporation, it typically elects to be treated as a domestic insurance company under § 953(d) of the Internal Revenue Code. Company Y takes the position that it is entitled to the benefits of § 501(c)(15) (providing that certain small non-life insurance companies are tax exempt), § 806 (providing a deduction for certain life insurance companies with life insurance company taxable income not in excess of $15,000,000), or § 831(b) (allowing qualifying non-life insurance companies whose net written premiums do not exceed $1,200,000 to elect to be taxed solely on investment income). Taxpayer receives premiums from its customers and remits those premiums (typically net of its sales commission) to Company X. Company X pays any claims and state premium taxes due and retains an amount from the premiums received from Taxpayer. Under Company Y’s reinsurance agreement with Company X, Company Y reinsures all insurance policies that Taxpayer sells to its customers. Company X transfers the remainder of the premiums to Company Y as reinsurance premiums.

Notice 2002–70 alerts taxpayers that, in appropriate cases, the Service intends to challenge the purported tax benefits from these transactions on a number of grounds. Notice 2002–70 also identifies transactions that are the same as, or substantially similar to, the transaction described in the Notice 2002–70 as “listed transactions” for purposes of § 1.6011–4T(b)(2) of the temporary Income Tax Regulations (now § 1.6011–4(b)(2) of the Income Tax Regulations) and §§ 301.6111–2T(b)(2) of the temporary Procedure and Administration Regulations (now §§ 301.6111–2(b)(2) of the Procedure and Administration Regulations).

2004–41 I.R.B. 599 October 12, 2004

Section 206 of the Pension Funding Equity Act, P.L. 108–218, amended § 501(c)(15) effective for taxable years beginning after December 31, 2003. Notice 2004–64, 2004–41 I.R.B. 598 (October 12, 2004), describes the amendments and notifies taxpayers that the Service will continue to scrutinize the tax-exempt status of entities claiming to be described in § 501(c)(15).

DISCUSSION

The Treasury Department and the Service have concluded that these transactions no longer should be identified as “listed transactions” for purposes of the disclosure, registration, and list maintenance requirements. Since issuing Notice 2002–70, the Service has examined various types of these arrangements. These examinations have revealed fewer abusive transactions than anticipated. Further, the Treasury Department and the Service anticipate that the recent amendments to § 501(c)(15) will curtail the use of this provision by a number of these arrangements. Accordingly, transactions will no longer be identified as “listed transactions” for purposes of §§ 1.6011–4(b)(2), 301.6111–2(b)(2) and 301.6112–1(b)(2) solely because they are the same as, or substantially similar to, the transaction described in Notice 2002–70. However, the Service will continue to scrutinize transactions described in Notice 2002–70 that are being used to shift income from taxpayers to related companies purported to be insurance companies that are subject to little or no U.S federal income tax. Although a transaction is no longer a “listed transaction” solely because the transaction is described in Notice 2002–70, the transaction may still otherwise be subject to the disclosure requirement of § 6011, the registration requirement of § 6111, or the list maintenance requirement of § 6112.

EFFECT ON OTHER DOCUMENTS

Notice 2002–70 and Notice 2003–76 are modified by removing the identification of transactions that are the same as, or substantially similar to, transactions described in Notice 2002–70 as “listed transactions” effective for taxable years for which the due date of the return (including extensions, whether or not actually requested) is after September 24, 2004.

For further information regarding this notice, contact Nancy Vozar Knapp at (202) 283–8622, John E. Glover (202) 622–3970, or Theodore Setzer at (202) 622–3870 (not a toll-free call).

Listed Transactions

Notice 2004–67