Part I. Rulings — Internal Revenue Bulletin 2004-49

Section 42.—Low-Income Housing Credit

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of December 2004. See Rev. Rul. 2004-106, page 893.

Section 62.—Adjusted Gross Income Defined

26 CFR 1.62–2: Reimbursements and other expense allowance arrangements.

Rules are provided under which a reimbursement or other expense allowance arrangement for the cost of operating an automobile for business purposes will satisfy the requirements of section 62(c) of the Code as to business connection, substantiation, and returning amounts in excess of expenses. See Rev. Proc. 2004-64, page 898.

Section 106.—Contri- butions by Employer to Accident and Health Plans

A notice provides guidance regarding the effect of the Working Families Tax Relief Act of 2004 (WFTRA) on the exclusion from the gross income of an employee under § 106 of the Code. See Notice 2004-79, page 898.

Section 162.—Trade or Business Expenses

26 CFR 1.162–17: Reporting and substantiation of certain business expenses of employees.

Rules are provided for substantiating the amount of a deduction or an expense for business use of an automobile. See Rev. Proc. 2004-64, page 898.

Section 170.—Charitable, etc., Contributions and Gifts

26 CFR 1.170A–1: Charitable, etc., contributions and gifts; allowance of deduction.

Rules are provided for substantiating the amount of a deduction or an expense for charitable use of an automobile. See Rev. Proc. 2004-64, page 898.

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

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

Rules are provided for substantiating the amount of a deduction or an expense for use of an automobile to obtain medical services. See Rev. Proc. 2004-64, page 898.

Section 217.—Moving Expenses

26 CFR 1.217–2: Moving expenses

Rules are provided for substantiating the amount of a deduction or an expense for use of an automobile as part of a move. See Rev. Proc. 2004-64, page 898.

Section 274.—Disallowance of Certain Entertainment, etc., Expenses

26 CFR 1.274–5: Substantiation requirements.

Rules are provided for substantiating the amount of ordinary and necessary business expenses of an employee for automobile expenses when a payor provides a mileage allowance for the expenses. Rules are also provided for employees and self-employed individuals to use in substantiating a trade or business deduction for automobile expenses. See Rev. Proc. 2004-64, page 898.

Section 280G.—Golden Parachute Payments

Federal short-term, mid-term, and long-term rates are set forth for the month of December 2004. See Rev. Rul. 2004-106, page 893.

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

The adjusted applicable federal long-term rate is set forth for the month of December 2004. See Rev. Rul. 2004-106, page 893.

Section 412.—Minimum Funding Standards

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

of December 2004. See Rev. Rul. 2004-106, page 893.

Section 467.—Certain Payments for the Use of Property or Services

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of December 2004. See Rev. Rul. 2004-106, page 893.

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

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of December 2004. See Rev. Rul. 2004-106, page 893.

Section 482.—Allocation of Income and Deductions Among Taxpayers

Federal short-term, mid-term, and long-term rates are set forth for the month of December 2004. See Rev. Rul. 2004-106, page 893.

Section 483.—Interest on Certain Deferred Payments

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of December 2004. See Rev. Rul. 2004-106, page 893.

Section 642.—Special Rules for Credits and Deductions

Federal short-term, mid-term, and long-term rates are set forth for the month of December 2004. See Rev. Rul. 2004-106, page 893.

Section 807.—Rules for Certain Reserves

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of December 2004. See Rev. Rul. 2004-106, page 893.

2004–49 I.R.B. 892 December 6, 2004

Section 832.—Insurance Company Taxable Income

26 CFR 1.832–4: Gross income.

The salvage discount factors are set forth for 2004. These factors must be used to compute discounted estimated salvage recoverable for purposes of section 832 of the Code. See Rev. Proc. 2004-70, page 918.

Section 846.—Discounted Unpaid Losses Defined

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of December 2004. See Rev. Rul. 2004-106, page 893.

26 CFR 1.846–1: Application of discount factors.

The loss payment patterns and discount factors are set forth for the 2004 accident year. These factors will be used for computing discounted unpaid losses under section 846 of the Code. See Rev. Proc. 200469, page 906.

26 CFR 1.846–1: Application of discount factors.

The salvage discount factors are set forth for the 2004 accident year. These factors will be used for computing estimated salvage recoverable for pur

poses of section 832 of the Code. See Rev. Proc. 2004-70, page 918.

Section 1016.—Adjust- ments to Basis

26 CFR 1.1016–3: Exhaustion, wear and tear, ob- solescence, amortization, and depletion for periods since February 28, 1913.

Rules are provided for reduction of basis for business use of an automobile under either the optional standard mileage rate method or a mileage allowance under a reimbursement or other expense allowance arrangement. See Rev. Proc. 2004-64, page 898.

Section 1274.—Determi- nation of Issue Price in the Case of Certain Debt Instru- ments Issued for Property

(Also Sections 42, 280G, 382, 412, 467, 468, 482, 483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 642, 1274, 1288, and other sections of the Code, tables set forth the rates for December 2004.

REV. RUL. 2004–106 TABLE 1

Rev. Rul. 2004–106

This revenue ruling provides various prescribed rates for federal income tax purposes for December 2004 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(2) for buildings placed in service during the current month. Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520. Finally, Table 6 contains the 2005 interest rate for sections 846 and 807.

Applicable Federal Rates (AFR) for December 2004

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term

AFR 2.48% 2.46% 2.45% 2.45% 110% AFR 2.73% 2.71% 2.70% 2.69% 120% AFR 2.97% 2.95% 2.94% 2.93% 130% AFR 3.23% 3.20% 3.19% 3.18%

Mid-term

AFR 3.56% 3.53% 3.51% 3.50% 110% AFR 3.92% 3.88% 3.86% 3.85% 120% AFR 4.28% 4.24% 4.22% 4.20% 130% AFR 4.64% 4.59% 4.56% 4.55% 150% AFR 5.37% 5.30% 5.27% 5.24% 175% AFR 6.28% 6.18% 6.13% 6.10%

Long-term

AFR 4.68% 4.63% 4.60% 4.59% 110% AFR 5.15% 5.09% 5.06% 5.04% 120% AFR 5.64% 5.56% 5.52% 5.50% 130% AFR 6.11% 6.02% 5.98% 5.95%

December 6, 2004 893 2004–49 I.R.B.

REV. RUL. 2004–106 TABLE 2

Adjusted AFR for December 2004

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjusted 1.88% 1.87% 1.87% 1.86% AFR

Mid-term adjusted AFR 2.84% 2.82% 2.81% 2.80%

Long-term adjusted 4.19% 4.15% 4.13% 4.11% AFR

REV. RUL. 2004–106 TABLE 3

Rates Under Section 382 for December 2004

Adjusted federal long-term rate for the current month 4.19%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.) 4.27%

REV. RUL. 2004–106 TABLE 4

Appropriate Percentages Under Section 42(b)(2) for December 2004 Appropriate percentage for the 70% present value low-income housing credit 7.96%

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

REV. RUL. 2004–106 TABLE 5

Rate Under Section 7520 for December 2004

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 4.20%

REV. RUL. 2004–106 TABLE 6

Applicable rate of interest for 2005 for purposes of sections 846 and 807 4.44%

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

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of December 2004. See Rev. Rul. 2004-106, page 893.

2004–49 I.R.B. 894 December 6, 2004

Section 3121.—Definitions

26 CFR 31.3121(a)(5)–2T: Payments under or to an annuity contract described in section 403(b) (tempo- rary).

T.D. 9159

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 31

Payments Made by Reason of a Salary Reduction Agreement

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulation.

SUMMARY: This document contains a temporary regulation that defines the term “salary reduction agreement” for purposes of section 3121(a)(5)(D) of the Internal Revenue Code (Code). The temporary regulation provides guidance to employers (public educational institutions and section 501(c)(3) organizations) purchasing annuity contracts described in section 403(b) on behalf of their employees. The text of the temporary regulation also serves as the text of the proposed regulation (REG–155608–02) set forth in the notice of proposed rulemaking on this subject in this issue of the Bulletin.

DATES: Effective Date : This regulation is effective on November 16, 2004.

Applicability Date : For dates of applicability, see §31.3121(a)(5)–2T(b).

FOR FURTHER INFORMATION CONTACT: Neil D. Shepherd, (202) 622–6040 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This temporary regulation amends the Employment Tax Regulations (26 CFR part 31) by providing guidance relating to section 3121(a)(5)(D). The Federal Insurance Contributions Act (FICA) imposes taxes on employees and employers equal to a percentage of the wages received with respect to employment. Code section 3121(a) defines wages for FICA tax purposes as all remuneration for

employment unless otherwise excepted. Code section 3121(a)(5)(D), added by the Social Security Amendments of 1983 (Public Law 98–21 (97 Stat. 65)), generally excepts from wages payments made by an employer for the purchase of an annuity contract described in section 403(b). In a codification of long–standing administrative practice, however, section 3121(a)(5)(D) expressly excludes from the exception payments made by reason of a salary reduction agreement (whether evidenced by a written instrument or otherwise). See Rev. Rul. 65–208, 1965–2 C.B. 383, and S. Rep. No. 98–23, at 41, 98 ^th Cong., 1 ^st Sess. (1983). This temporary regulation defines the term “salary reduction agreement” for purposes of section 3121(a)(5)(D).

Explanation of Provisions

The FICA taxation of payments made by an employer for the purchase of annuity contracts described in section 403(b) has been shaped by a congressional concern for the social security revenue base and for employees’ social security benefits. In the context of contributions for the purchase of such annuity contracts, Congress has interpreted the term “wages” for FICA tax purposes more broadly than the term “gross income” for income tax purposes. See S. Rep. No. 98–23, at 39, 98 ^th

Cong., 1 ^st Sess. (1983) relating to the Social Security Amendments of 1983 (Public Law 98–21 (97 Stat. 65)).

An amount is generally includible in wages for FICA tax purposes at the time it is actually or constructively paid by the employer and received by the employee. Additionally, wages generally include an amount that an employer contributes to a plan only if the employee agrees to reduce his or her compensation. For income tax purposes, however, section 403(b) provides an exclusion from gross income for contributions made by an employer, including contributions made pursuant to a cash or deferred election or other salary reduction agreement. See section 1450(a) of the Small Business Job Protection Act of 1996 (Public Law 104–188 (110 Stat. 1755)). Conversely, for FICA tax purposes, wages include contributions made by an employer to a section 403(b) contract pursuant

to a cash or deferred election or other salary reduction agreement. See S. Rep. No. 98–23, at 40–41, 98 ^th Cong., 1 ^st Sess. (1983). Thus, while section 403(b) excludes from gross income contributions made pursuant to certain cash or deferred elections, such contributions are made by reason of a salary reduction agreement under section 3121(a)(5)(D) and are included in wages for FICA tax purposes. Consequently, this temporary regulation explicitly provides that the term “salary reduction agreement” includes a plan or arrangement whereby a payment will be made if the employee elects to reduce his or her compensation pursuant to a cash or deferred election as defined at §1.401(k)–1(a)(3) of the Income Tax Regulations.

Pursuant to regulation §1.401(k)– 1(a)(3)(iv) of this chapter, a cash or deferred election does not include a one-time irrevocable election made upon an employee’s commencement of employment with the employer. Similarly, pursuant to section 402(g)(3), while the term “elective deferrals” generally includes any employer contribution to purchase an annuity contract under section 403(b) under a salary reduction agreement (within the meaning of section 3121(a)(5)(D)), an employer contribution made pursuant to a one-time irrevocable election is not treated as an elective deferral. See H.R. Rep. No. 100–795, at 145, 100 ^th

Cong., 2 ^d Sess. (1988) and S. Rep. No. 100–445, at 151, 100 ^th Cong., 2 ^d

Sess. (1988) relating to the amendment of section 402(g)(3) by the Technical and Miscellaneous Revenue Act of 1988 (Public Law 100–647 (102 Stat. 3342)). Notwithstanding that section 403(b) contributions made pursuant to a one-time irrevocable election are excluded from cash or deferred elections under section 401(k) and from elective deferrals under section 402(g)(3), such contributions are made pursuant to a salary reduction agreement. If the employee had not made a one-time irrevocable election, the employer’s cash payment to the employee would be includible in the employee’s gross income and in wages for FICA tax purposes. Consequently, this temporary regulation explicitly provides that the term “salary reduction agreement” includes a plan or arrangement whereby a payment will be made if the employee elects to

December 6, 2004 895 2004–49 I.R.B.

Amendments to the Regulations

Accordingly, 26 CFR part 31 is amended as follows:

PART 31—EMPLOYMENT TAXES

Paragraph 1. The authority citation for part 31 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 31.3121(a)(5)–2T is added to read as follows:

§ 31.3121(a)(5)–2T Payments under or to an annuity contract described in section 403(b) (temporary).

(a) Salary reduction agreement defined . For purposes of section 3121(a)(5)(D), the term salary reduction agreement means a plan or arrangement (whether evidenced by a written instrument or otherwise) whereby payment will be made by an employer, on behalf of an employee or his or her beneficiary, under or to an annuity contract described in section 403(b)—

(1) If the employee elects to reduce his or her compensation pursuant to a cash or deferred election as defined at §1.401(k)–1(a)(3) of this chapter;

(2) If the employee elects to reduce his or her compensation pursuant to a onetime irrevocable election made at or before the time of initial eligibility to participate in such plan or arrangement (or pursuant to a similar arrangement involving a onetime irrevocable election); or

(3) If the employee agrees as a condition of employment (whether such condition is set by statute, contract, or otherwise) to make a contribution that reduces his or her compensation.

(b) Effective date . (1) This section is applicable on November 16, 2004.

(2) The applicability of this section expires on or before November 16, 2007.

Nancy Jardini, Acting Deputy Commissioner for

Services and Enforcement .

Approved November 1, 2004.

Gregory Jenner, Acting Assistant Secretary of the Treasury .

(Filed by the Office of the Federal Register on November 15, 2004, 8:45 a.m., and published in the issue of the Federal Register for November 16, 2004, 69 F.R. 67054)

reduce his or her compensation pursuant to a one-time irrevocable election made at or before the time of initial eligibility to participate in such plan or arrangement (or pursuant to a similar arrangement involving a one-time irrevocable election).

A contribution that is made as a condition of employment and that reduces an employee’s compensation generally constitutes an employee contribution includible in wages for FICA tax purposes. See section 1015 of the Employee Retirement Income Security Act of 1974 (Public Law 93–406 (88 Stat. 829)) relating to amounts designated as employee contributions under section 414(h) of the Code; see also H.R. Rep. No. 93–807, at 145, 93 ^d Cong., 2 ^d Sess. (1974) wherein Congress stated that “[u]nder present law, contributions which are designated as employee contributions are generally treated as employee contributions for purposes of the Federal tax law.” Code section 414(h)(1) merely codified the existing administrative and judicial treatment of amounts designated as employee contributions. See, for example, Howell v. United States, 775 F.2d 887 (7 ^th Cir. 1985) holding that mandatory contributions to a state retirement plan of amounts designated as employee contributions and withheld from the employee’s salary are employee contributions includible in the employee’s gross income. Thus, as with employer contributions made pursuant to cash or deferred elections and one-time irrevocable elections, employer contributions that are made as a condition of employment and in lieu of mandatory employee contributions and that reduce an employee’s compensation are amounts otherwise includible in wages for FICA tax purposes.

Whether a contribution that reduces an employee’s compensation is required by statute, contract, or otherwise, an employee implicitly agrees to the contribution as a condition of employment. The acceptance of employment and the subsequent performance of services manifests the employee’s agreement to the contribution. See H.R. Conf. Rep. No. 98–861, at 1415, 98 ^th Cong., 2 ^d Sess. (1984) relating to the amendment of section 3121(v)(1)(B), wherein Congress stated that “[t]he conferees intend that the term salary reduction agreement also includes any salary reduction arrangement, regardless of whether

there is approval or choice of participation by individual employees or whether such approval or choice is mandated by State statute.” In Public Employees’ Retirement Board v. Shalala, 153 F.3 ^rd 1160, at 1166 (10 ^th Cir. 1998), the court noted that “an employee’s decision to go to work or continue to work . . . constitutes conduct manifesting assent to a salary reduction.” Accordingly, the court held that a designated employee contribution picked up by an employer with a corresponding reduction in the employee’s gross salary constitutes a contribution made pursuant to a salary reduction agreement. Similarly, this temporary regulation explicitly provides that the term “salary reduction agreement” includes a plan or arrangement whereby a payment will be made if the employee agrees as a condition of employment (whether such condition is set by statute, contract, or otherwise) to make a contribution that reduces the employee’s compensation.

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 has also been determined that section 553(b) and (d) of the Administrative Procedure Act (5 U.S.C. chapter 5) do not apply to this regulation. For the applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the Special Analyses section in the preamble to the notice of proposed rulemaking published in this issue of the Bulletin. Pursuant to section 7805(f) of the Code, this temporary regulation will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses.

Drafting Information

The principal author of this regulation is Neil D. Shepherd, Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and Treasury Department participated in its development.

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2004–49 I.R.B. 896 December 6, 2004

Section 7520.—Valuation Tables

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of December 2004. See Rev. Rul. 2004-106, page 893.

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

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of December 2004. See Rev. Rul. 2004-106, page 893.

December 6, 2004 897 2004–49 I.R.B.