Bulletin No. 2002–21 HIGHLIGHTS OF THIS ISSUEBulletin No. 2002–21 May 28, 2002. EXEMPT...

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 2002–30, page 971.Notional principal contract. This ruling provides that wherea nonperiodic payment made pursuant to a notional principalcontract is comprised of noncontingent and contingent compo-nents, the parties must recognize the noncontingent compo-nent of the nonperiodic payment over the term of the notionalprincipal contract.

T.D. 8992, page 981.Final regulations under section 6050S relate to informationreporting, including magnetic media reporting requirements forpayments of interest on qualified education loans (Form1098–E) and the continuation of Notice 98–7 for the calendaryear 2002.

REG–161424–01, page 1010.Proposed regulations under section 6050S relate to informa-tion reporting, including magnetic media reporting for qualifiedtuition and related expenses (Form 1098–T) and the continua-tion of Notice 97–73 for the calendar year 2002. A public hear-ing is scheduled for August 13, 2002. REG–105316–98 with-drawn.

Notice 2002–35, page 992.Notional principal contract tax shelter. The Service maychallenge transactions using notional principal contracts toclaim current deductions for periodic payments made by a tax-payer while disregarding the accrual of a right to receive offset-ting payments in the future. These transactions are designatedas “listed transactions” for purposes of sections 1.6011–4T(b)(2) and 301.6111–2T of the regulations.

Rev. Proc. 2002–36, page 993.Methods of accounting; taxable year of inclusion; basis.This procedure provides taxpayers that purchase vehicles sub-ject to leases and assume the associated leases from motorvehicle dealers with a safe harbor method of accounting forcapital cost reduction payments made by vehicle lessees, anda procedure for taxpayers to obtain automatic consent of theCommissioner to change to the safe harbor method ofaccounting. Rev. Proc. 2002–9 modified and amplified.

EMPLOYEE PLANS

REG–136193–01, page 995.Proposed regulations under section 4980F of the Code provideguidance on the requirements for plan administrators to givenotice of plan amendments that provide for significant reduc-tion in the rate of future benefit accrual or an early retirementbenefit or retirement-type subsidy. When finalized, the regula-tions will affect businesses, nonprofit organizations, and indi-viduals. A public hearing is scheduled for August 15, 2002.

Notice 2002–32, page 989.Weighted average interest rate update. The weighted aver-age interest rate for May 2002 and the resulting permissiblerange of interest rates used to calculate current liability for pur-poses of the full funding limitation of section 412(c)(7) of theCode are set forth.

(Continued on the next page)Finding Lists begin on page ii.

Bulletin No. 2002–21May 28, 2002

EXEMPT ORGANIZATIONS

T.D. 8991, page 972.Final regulations under section 513 of the Code provide guid-ance concerning whether corporate sponsorship payments totax-exempt organizations are unrelated business taxableincome.

Notice 2002–34, page 990.This notice announces and provides guidance for a voluntarycompliance program to promote disclosure for political organi-zations that file Forms 8871, 8872, 1120–POL, 990, and990–EZ by July 15, 2002.

ADMINISTRATIVE

Notice 2002–33, page 989.Section 809 information return. This notice suspends therequirement that mutual life insurance companies and the 50largest stock life insurance companies file Form 8390, Infor-mation Return for Determination of Life Insurance Com-pany Earnings Rate Under Section 809, in 2002 and 2003due to section 809(j) which was added to the Code by the JobCreation and Workers Assistance Act of 2002.

May 28, 2002 2002–21 I.R.B.

The IRS MissionProvide America’s taxpayers top quality service by helpingthem understand and meet their tax responsibilities and by

applying the tax law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are consolidated semiannually into Cumulative Bulle-tins, which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in the Bul-letin. All published rulings apply retroactively unless otherwiseindicated. Procedures relating solely to matters of internalmanagement are not published; however, statements of inter-nal practices and procedures that affect the rights and dutiesof taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in the rev-enue ruling. In those based on positions taken in rulings to tax-payers or technical advice to Service field offices, identifyingdetails and information of a confidential nature are deleted toprevent unwarranted invasions of privacy and to comply withstatutory requirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A, TaxConventions and Other Related Items, and Subpart B, Legisla-tion and Related Committee Reports.

Part III.—Administrative, Procedural, andMiscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Secre-tary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The first Bulletin for each month includes a cumulative index forthe matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the first Bulletin of the succeeding semiannualperiod, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2002–21 I.R.B. May 28, 2002

This page is reserved for Austin Hernandez.

May 28, 2002 2002–21 I.R.B.

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

Section 61.—Gross IncomeDefined

26 CFR 1.61–1: Gross income.

Under the CCR method of accounting, theamount of a CCR payment is not includible in thetaxpayer’s gross income and may not be included inthe taxpayer’s basis in the purchased vehicle. SeeRev. Proc. 2002–36, page 993.

Section 446.—General Rulefor Methods of Accounting

26 CFR 1.446–1: General rule for methods ofaccounting.


26 CFR 1.446–3: Notional Principal Contracts.

Notional Principal Contract. Thisruling provides that where a nonperiodicpayment made pursuant to a notionalprincipal contract is comprised of non-contingent and contingent components,the parties must recognize the noncontin-gent component of the nonperiodic pay-ment over the term of the notional princi-pal contract.

Rev. Rul. 2002–30

ISSUE

What is the appropriate method for theinclusion into income or deduction of anonperiodic payment made pursuant to anotional principal contract where the pay-ment is comprised of noncontingent andcontingent components?

FACTS

T enters into a notional principal con-tract (“NPC”) with CP on October 1,2002, for a term of 18 months. Pursuantto the terms of the NPC, T agrees to makequarterly payments to CP based on three-month LIBOR multiplied by a notionalprincipal amount of $100,000,000. Inexchange, CP agrees that upon expiration

of the NPC on March 31, 2004, CP willpay T 6 percent per year multiplied by anotional principal amount of $92,000,000(the fixed payment amount). In addition,CP or T will make a payment upon expi-ration equal to the percentage change inthe value of the S&P 500 stock indexmultiplied by a notional principal amountof $8,000,000. If the change is positive(an appreciation amount), CP will make apayment to T; if the change is negative (adepreciation amount), T will make a pay-ment to CP. Any depreciation amountpayable by T will be netted against thefixed payment amount payable by CP.

LAW

Section 1.446–3 of the Income TaxRegulations provides rules on the timingof inclusion of income and deductions foramounts paid or received pursuant toNPCs.

Section 1.446–3(c)(1)(i) defines aNPC as a financial instrument that pro-vides for the payment of amounts by oneparty to another at specified intervals cal-culated by reference to a specified indexupon a notional principal amount, inexchange for specified consideration or apromise to pay similar amounts. Pay-ments made pursuant to NPCs are dividedinto three categories (periodic, nonperi-odic, and termination payments), and theregulations provide separate timingregimes for each.

Section 1.446–3(e)(1) defines periodicpayments as payments made or receivedpursuant to a NPC that are payable atintervals of one year or less during theentire term of the contract, that are basedon a specified index, and that are basedon a notional principal amount. Section1.446–3(e)(2) provides that all taxpayers,regardless of their methods of accounting,must recognize the ratable daily portionof a periodic payment for the taxable yearto which that portion relates.

Section 1.446–3(h)(1) defines a termi-nation payment as a payment made orreceived to extinguish or assign all or aproportionate part of the remaining rightsand obligations of any party under aNPC.

Section 1.446–3(f)(1) provides that anonperiodic payment is any payment

made or received with respect to a NPCthat is not a periodic payment or a termi-nation payment. The recognition rules fornonperiodic payments are set forth in§ 1.446–3(f)(2). Section 1.446–3(f)(2)(i)provides that all taxpayers, regardless oftheir methods of accounting, must recog-nize the ratable daily portion of a nonpe-riodic payment for the taxable year towhich that portion relates. Generally, anonperiodic payment must be recognizedover the term of a NPC in a manner thatreflects the economic substance of thecontract.

Section 1.446–3(f)(2)(ii) provides gen-erally that a nonperiodic payment must berecognized over the term of the contractby allocating it in accordance with theforward rates of a series of cash-settledforward contracts that reflect the speci-fied index and the notional principalamount.

Section 1.446–3(f)(2)(iii)(A) providesthat an upfront payment may be amor-tized by assuming that the nonperiodicpayment represents the present value of aseries of equal payments made through-out the term of the swap contract (thelevel payment method).

Section 1.446–3(f)(2)(iii)(B) providesthat nonperiodic payments other than anupfront payment may be amortized bytreating the contract as if it provided for asingle upfront payment (equal to thepresent value of the nonperiodic pay-ments) and a loan between the parties.The single upfront payment is then amor-tized under the level payment methoddescribed in § 1.446–3(f)(2)(iii)(A). Thetime value component of the loan is nottreated as interest, but together with theamortized amount of the deemed upfrontpayment, is recognized as a periodic pay-ment. See § 1.446–3(f)(4), Example 6, foran illustration of these rules.

Section 1.446–3(g)(4) provides that aswap with significant nonperiodic pay-ments is treated as two separate transac-tions consisting of an on-market, levelpayment swap and a loan. The loan mustbe accounted for by the parties to the con-tract independently of the swap. The timevalue component associated with the loanis not included in the net income or netdeduction from the swap under § 1.446–3(d) of this section, but is recognized as

2002–21 I.R.B. 971 May 28, 2002

interest for all purposes of the InternalRevenue Code.

Section 1.446–3(d) provides that forall purposes of the Code, the net incomeor net deduction from a NPC for a taxableyear is included in, or deducted from,gross income for that taxable year. Thenet income or net deduction from a NPCfor a taxable year equals the total of all ofthe periodic payments that are recognizedfrom that contract for the taxable yearunder § 1.446–3(e), and all of the nonpe-riodic payments that are recognized fromthat contract for the taxable year under§ 1.446–3(f). Each party to the NPCdetermines its payments and receiptsattributable to the taxable year and takesinto account, as net income or net deduc-tion, the result of those payments andreceipts. See § 1.446–3(e)(3), Example 1;and § 1.446–3(g)(6), Example 3.

ANALYSIS

The agreement between T and CP is aNPC as defined in § 1.446–3(c)(1)(i).Pursuant to the terms of the contract, Twill pay to CP amounts based on LIBORquarterly, in exchange for CP’s promiseto pay specified consideration at expira-tion.

The amounts that T pays to CP areperiodic payments as defined in § 1.446–3(e)(1). These LIBOR-based paymentsare payable at intervals of less than oneyear and are calculated by reference to aspecified index upon a notional principalamount of $100,000,000. Pursuant to§ 1.446–3(e)(2), T and CP must recognizethe ratable daily portion of each periodicpayment for the taxable year to whichthat portion relates.

The amount payable on March 31,2004, is a nonperiodic payment, which Tand CP are required to recognize over theterm of the NPC in a manner that reflectsthe economic substance of the NPC. Insubstance, the nonperiodic payment thatCP must pay T on expiration equals thesum of two independent components, onenoncontingent and the other contingent.The noncontingent component (the fixedpayment amount) equals $8,280,000, thatis the product of 6 percent per year, or 9percent for 18 months, and the notionalprincipal amount of $92,000,000. Thecontingent component (the appreciation

or depreciation amount) equals the prod-uct of the percentage appreciation ordepreciation in the value of the S&P 500stock index and the notional principalamount of $8,000,000. In order to reflectthe economic substance of the NPC, eachcomponent must be treated separately forpurposes of applying the NPC rules in§ 1.446–3. As a result, pursuant to§ 1.446–3(f)(2)(i), the fixed paymentamount due on March 31, 2004, must berecognized over the term of the NPC in amanner consistent with § 1.446–3(f)(2)(ii)or (iii). This treatment of the fixed pay-ment amount payable by CP is notaffected by the possibility that T may berequired to pay a depreciation amount toCP that, under the terms of the NPC, willbe netted against CP’s obligation to paythe fixed payment amount. Pursuant to§ 1.446–3(g)(4), T must accrue interestincome and CP may accrue interestdeductions.

HOLDING

T and CP must recognize the noncon-tingent component of the nonperiodicpayment over the term of the NPC, andmust also account for interest, in a man-ner consistent with §§ 1.446–3(f)(2)(ii) or(iii), and 1.446–3(g)(4).

DRAFTING INFORMATION

The principal author of this revenueruling is Elizabeth Handler of the Officeof Associate Chief Counsel (FinancialInstitutions and Products). For furtherinformation regarding this revenue ruling,contact Ms. Handler at (202) 622–3930(not a toll-free call).

Section 451.—General Rulefor Taxable Year of Inclusion

26 CFR 1.451–1: General rule for taxable year ofinclusion.


Section 481.—AdjustmentsRequired for Changes inMethod of Accounting

26 CFR 1.481–1: Adjustments in general.26 CFR 1.481–4: Adjustments taken into accountwith consent.

A purchaser of a motor vehicle that is subject toa lease in connection with which a lessee has madea CCR payment to the dealer from which the lesseeoriginally leased the vehicle may obtain automaticconsent to change to the CCR method of account-ing. See Rev. Proc. 2002–36, page 993.

Section 513.—UnrelatedTrade or Business

26 CFR 1.513–4: Certain sponsorship not unrelatedtrade or business.

T.D. 8991

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Taxation of Tax-ExemptOrganizations’ Income FromCorporate Sponsorship

AGENCY: Internal Revenue Service(IRS), Treasury Department.

ACTION: Final regulations.

SUMMARY: This document containsfinal regulations relating to the tax treat-ment of corporate sponsorship paymentsreceived by tax-exempt organizations.The final regulations affect exempt orga-nizations that receive sponsorship pay-ments.

DATES: Effective Date: These regula-tions are effective April 25, 2002.

Applicability Date: These regulationsare applicable for payments solicited orreceived after December 31, 1997.

FOR FURTHER INFORMATION CON-TACT: Stephanie Lucas Caden or BarbaraE. Beckman of Office of Associate ChiefCounsel (TE/GE), (202) 622–6080 (not atoll-free number).

May 28, 2002 972 2002–21 I.R.B.

SUPPLEMENTARY INFORMATION:

Background

Exempt organizations generally mustpay tax on unrelated business taxableincome, as defined in section 512. Section512(a)(1) defines unrelated business tax-able income (UBTI) as the gross incomederived by an organization from anyunrelated trade or business (as defined insection 513) regularly carried on by it,less the deductions that are directly con-nected with the carrying on of the trade orbusiness, both computed with the modifi-cations provided in section 512(b).

Section 513(a) defines unrelated tradeor business as any trade or business theconduct of which is not substantiallyrelated (aside from the need of an organi-zation for income or funds or the use itmakes of the profits derived) to the exer-cise or performance by the organizationof its charitable, educational, or other pur-pose or function constituting the basis forits exemption under section 501. Section513(c), captioned “Advertising, etc.,activities,” provides that the term trade orbusiness includes any activity carried onfor the production of income from thesale of goods or the performance of ser-vices, and that an activity does not loseidentity as a trade or business merelybecause it is carried on within a largeraggregate of similar activities or within alarger complex of other endeavors whichmay, or may not, be related to the exemptpurposes of the organization. See § 1.513–1(b).

The IRS first published a notice ofproposed rulemaking (EE–74–92, 1993–1C.B. 708) (1993 proposed regulations) onJanuary 22, 1993 (58 F.R. 5687), propos-ing that the regulations under section 513be amended to provide guidance on theproper tax treatment of sponsorship pay-ments received by an exempt organiza-tion. The 1993 proposed regulationsfocused on the nature of the services pro-vided by the exempt organization ratherthan the benefit received by the sponsor,and distinguished advertising, which is anunrelated trade or business activity, fromacknowledgments, which are the mererecognition of a sponsor’s payment andtherefore do not result in UBTI. In aso-called “tainting rule,” the 1993 pro-posed regulations provided that if anyactivities, messages or programming

material constituted advertising withrespect to a sponsorship payment, then allrelated activities, messages, or program-ming material that might otherwise beacknowledgments would be consideredadvertising. The 1993 proposed regula-tions also proposed to amend the regula-tions under section 512(a) by addingexamples of the allocation rule governingexploitation of exempt activities in casesinvolving sponsorship income.

The Taxpayer Relief Act of 1997, Pub-lic Law 105–34, section 965 (111 Stat.788, 893–94), amended the Internal Rev-enue Code (Code) by adding section513(i). Section 513(i) governs the treat-ment of certain sponsorship payments byproviding that qualified sponsorship pay-ments are not subject to the unrelatedbusiness income tax (UBIT). Section513(i) defines qualified sponsorship pay-ments as payments made by a personengaged in a trade or business withrespect to which there is no arrangementor expectation that such person willreceive any substantial return benefitother than the use or acknowledgment ofthe name or logo (or product lines) of theperson’s trade or business in connectionwith the exempt organization’s activities.Section 513(i) further provides that use oracknowledgment does not include adver-tising (including messages containingqualitative or comparative language, priceinformation or other indications of sav-ings or value, or an endorsement or otherinducement to purchase, sell, or use asponsor’s products or services).

Section 513(i) specifically providesthat, to the extent a portion of a paymentwould (if made as a separate payment) bea qualified sponsorship payment, that por-tion of such payment and the other por-tion of such payment are treated as sepa-rate payments. Whether a separatetransaction that falls outside of the section513(i) safe harbor is subject to the UBITdepends on the application of existingrules under sections 512, 513, and 514.

Section 513(i) applies to paymentssolicited or received after December 31,1997. Section 513(i) does not apply toqualified convention and trade showact ivi t ies (descr ibed in sect ion513(d)(3)(B)) or to the sale of anacknowledgment or advertising in exemptorganization periodicals. For this purpose,the term periodicals means regularly

scheduled and printed material publishedby or on behalf of an exempt organizationthat is not related to and primarily distrib-uted in connection with a specific eventconducted by the exempt organization.

To reflect the differences between the1993 proposed regulations and section513(i), and in response to comments sub-mitted on the 1993 proposed regulations,new proposed regulations (REG–209601–92, 2000–1 C.B. 829) (2000 proposedregulations) were issued on March 1,2000 (65 F.R. 11012).

The 2000 proposed regulations amendthe regulations under section 513, andprovide that qualified sponsorship pay-ments within the meaning of section513(i) are not UBTI. The 2000 proposedregulations define the phrase “substantialreturn benefit” to mean any benefit otherthan (1) a use or acknowledgment of thepayor’s name or logo in connection withthe exempt organization’s activities, or(2) certain goods or services that have aninsubstantial value under existing IRSguidelines. Generally, according to the2000 proposed regulations, benefits suchas complimentary tickets, pro-am playingspots, and receptions for donors have aninsubstantial value only if they have a fairmarket value of not more than 2% of thepayment, or $74 (adjusted for inflationfor tax years beginning after calendaryear 2000 pursuant to section 1(f)(3)),whichever is less. See § 1.170A–13(f)(8)(i)(A); Rev. Proc. 90–12 (1990–1C.B. 471), as adjusted for inflation (forcalendar year 2002, the amount is $79,see Rev. Proc. 2001–59 (2001–52 I.R.B.623) (December 26, 2001)).

The 2000 proposed regulations clarifythat for an exempt organization to availitself of the section 513(i) safe harbor, itmust establish that some portion of thepayment exceeds the fair market value ofany substantial return benefit received bya payor in return for making the payment.In a sponsorship arrangement, the fairmarket value of the substantial returnbenefit may equal the entire amount ofthe sponsorship payment. The burden ofestablishing the fair market value of anysubstantial return benefit falls on theexempt organization. The 2000 proposedregulations state that the exempt organi-zation’s determination of the fair marketvalue of a substantial return benefit pro-vided to the payor will not be set aside

2002–21 I.R.B. 973 May 28, 2002

for purposes of applying the section513(i) safe harbor so long as the organi-zation makes a reasonable and good faithvaluation of the substantial return benefitreceived by the payor.

The 2000 proposed regulations pro-vide that the right to be the only sponsorof an activity, or the only sponsor repre-senting a particular trade, business, orindustry is generally not a substantialreturn benefit. Any portion of the pay-ment attributable to the exclusive spon-sorship arrangement, therefore, may be aqualified sponsorship payment. However,if in return for a payment, the exemptorganization agrees that products or ser-vices that compete with the payor’s prod-ucts or services will not be sold or pro-vided in connection with one or moreactivities of the exempt organization, thepayor has received a substantial returnbenefit and the portion of the paymentattributable to the exclusive providerarrangement is not a qualified sponsor-ship payment. Consistent with the alloca-tion rule described above, when a payorreceives both exclusive sponsorship andexclusive provider rights in exchange formaking a payment, the fair market valueof the exclusive provider arrangementand any other substantial return benefit isdetermined first (i.e., without regard tothe existence of the exclusive sponsorshiparrangement).

The 2000 proposed regulations clarifythat qualified sponsorship payments inthe form of money or property (but notservices) are treated as contributionsreceived by the exempt organization forpurposes of determining public support tothe organizat ion under sect ion170(b)(1)(A)(vi) or section 509(a)(2). Theexclusion of contributed services for pur-poses of determining public support isconsistent with the general rule regardingdonated services. See §§ 1.509(a)–3(f),1.170A–9(e)(7)(i) and 1.170A–1(g).

A public hearing was held on June 21,2000. After consideration of all the com-ments, the proposed regulations undersection 513(i) are revised as follows. Themajor areas of the comments and revi-sions are discussed below.

Explanation of Provisions andDiscussion of Comments

Like the 2000 proposed regulations,the final regulations define the phrase

substantial return benefit to mean anybenefit other than (1) a use or acknowl-edgment of the payor’s name or logo inconnection with the exempt organiza-tion’s activities, or (2) certain goods orservices that have an insubstantial value.If a payor receives a substantial returnbenefit in exchange for a payment, thesection 513(i) safe harbor does not applyto the payment (or portion thereof) attrib-utable to the substantial return benefit. Inthat case, whether the payment (or por-tion thereof) is subject to UBIT must bedetermined under existing principles andrules. Thus, the payment may not be sub-ject to UBIT because the exempt organi-zation’s activity is not an unrelated tradeor business within the meaning of section513(a) (for example, because substan-tially all of the work in carrying on thetrade or business is performed by volun-teers) or is not regularly carried on withinthe meaning of section 512(a)(1), orbecause one of the section 512(b) modifi-cations applies. See also Rev. Rul.77–367 (1977–2 C.B. 193) (inurement)and Rev. Rul. 66–358 (1966–2 C.B. 218)(private benefit).

Many comments were received regard-ing the disregarded benefits standard con-tained in the 2000 proposed regulations.Commentators generally believe thatvaluing insubstantial benefits places anundue administrative burden on exemptorganizations. Commentators also believethat the disregarded benefits standard inthe proposed regulation is too low andsignificantly diminishes an exempt orga-nization’s ability to appropriately thankits sponsors. While the $79 ceiling (asadjusted for 2002) is an appropriateamount for exempt organizations to thankindividual donors, the Treasury Depart-ment and IRS agree with the commenta-tors that the $79 ceiling is too low withrespect to corporations or personsengaged in a trade or business. Inresponse to these concerns, the final regu-lations eliminate the $79 ceiling placedon the fair market value of benefits thatmay be disregarded for purposes of sec-tion 513(i).

Several commentators suggest that inaddition to eliminating the $79 ceiling,the final regulations should increase thelevel of disregarded benefits to 10% or15% of the amount of the payment. TheTreasury Department and IRS believe 2%

is an appropriate level for several reasons.The 2% threshold is used in other areas ofthe Code and regulations to describeinsubstantial amounts. The 2000 proposedregulations allow the full amount ofqualified sponsorship payments (exceptfor payments in the form of services) tobe treated as contributions for purposes ofthe public support test under sections170(b)(1)(A)(vi) and 509(a)(2), withoutreduction for the amount of disregardedbenefits. The 2% ceiling keeps the levelof disregarded benefits low enough sothat the entire amount of a qualified spon-sorship payment may be treated as a con-tribution for public support purposes.Accordingly, the final regulations disre-gard benefits having a fair market valueof not more than 2% of the payment.

Many commentators to the 2000 pro-posed regulations object to a requirementthat exempt organizations must valuebenefits provided to payors where thepayment does not affect the organiza-tion’s tax liability, e.g., where the pay-ment attributable to the benefit constitutesincome from a trade or business that issubstantially related to the organization’sexempt purposes. The Treasury Depart-ment and IRS note that organizationsdescribed in section 170(c) (other thansection 170(c)(1)) are required to accountfor benefits provided to donors under sec-tion 6115. See Publication 1771, “Chari-table Contributions—Substantiation andDisclosure Requirements.” Pursuant tosection 6115, a section 170(c) organiza-tion that receives a quid pro quo contribu-tion in excess of $75 is required to informthe donor that the amount of the contribu-tion that is deductible for federal incometax purposes is limited to the amount bywhich the payment exceeds the value ofgoods or services (except as provided in§ 1.170A–13(f)(8)(i)) furnished by thecharity, and is required to provide a goodfaith estimate of the value of those goodsor services. Therefore, for exempt organi-zations eligible to receive tax deductiblecontributions, there is no additional taxadministrative burden imposed by the dis-regarded benefits provision of either the2000 proposed regulations or the finalregulations.

The final regulations provide that indetermining whether the 2% thresholdhas been exceeded in any year, all return

May 28, 2002 974 2002–21 I.R.B.

benefits (other than use or acknowledg-ment) must be considered. For example,if in exchange for a payment the exemptorganization provides both a license andadvertising the combined fair marketvalue of which does not exceed 2% of thetotal payment, the entire payment (eventhe portion attributable to the advertising)may be treated as a qualified sponsorshippayment, and the entire amount (exceptany payment in the form of services) con-stitutes public support under section 509.Alternatively, if the combined fair marketvalue exceeds 2% of the total payment,the value of both the license and advertis-ing is not disregarded and constitutes asubstantial return benefit. In that case, theportions of the payment attributable to thelicense and advertising each must be ana-lyzed separately under sections 512, 513,and 514. Only the portion of the payment,if any, that exceeds the fair market valueof the substantial return benefit consti-tutes a qualified sponsorship payment.

Consistent with the 2000 proposedregulations, the final regulations providethat the right to be the only sponsor of anactivity, or the only sponsor representinga particular trade, business or industry isgenerally not a substantial return benefit.The portion of any payment attributableto the exclusive sponsorship arrangement,therefore, may be a qualified sponsorshippayment. However, if in return for a pay-ment, the exempt organization agrees thatproducts or services that compete with thepayor’s products or services will not besold or provided in connection with oneor more activities of the exempt organiza-tion, the payor has received a substantialreturn benefit and the portion of the pay-ment attributable to the exclusive pro-vider arrangement is not a qualified spon-sorship payment.

Some commentators express concernthat the definition of exclusive providerarrangements contained in the 2000 pro-posed regulations may include vendorcontracts negotiated as part of a competi-tive bidding process required by state law.Both the 2000 proposed regulations andthe final regulations provide that unlessthe exempt organization agrees to limitdistribution of competing products inconnection with the payment, the exemptorganization has not entered into anexclusive provider arrangement. Forexample, when the nature of the goods or

services to be provided necessitates theuse of only one provider because of lim-ited space or because the competitive bid-ding process requires only the lowest bidbe accepted, the exempt organization hasnot entered into an exclusive providerarrangement unless it agrees to limit dis-tribution of competing products.

In particular, these commentatorsexpress concern about the tax-treatmentof discounts and rebates negotiated withvendors as part of the competitive biddingprocess. Generally, discounts (andrebates) are considered an adjustment tothe purchase price and do not constitutegross income to the purchaser. See Rev.Rul. 84–41 (1984–1 C.B. 130); Rev. Rul.76–96 (1976–1 C.B. 23). For example,when a university negotiates discountedrates for the soft drinks it purchases forits cafeterias, snack bars, and conces-sions, the amount of the discount is notincludible in UBTI.

Many commentators suggest that theexclusive provider provisions in the 2000proposed regulations create an implica-tion that exclusive provider arrangementsare automatically subject to UBITbecause they fall outside the scope of sec-tion 513(i). This assumption is incorrect;although the income from some exclusiveprovider arrangements may be includiblein UBTI, not all contracts will meet thecriteria for inclusion in UBTI pursuant tosections 511, 512, and 513. For example,a university that enters into a multi-yearcontract with a soft drink company to bethe exclusive provider of soft drinks oncampus in return for an annual payment isnot necessarily subject to UBIT on thatpayment. If the company agrees to pro-vide, stock, and maintain on-campusvending machines as needed, leavinglittle or no obligation on the university’spart to perform any services or conductactivities in connection with the enter-prise, then based on this contract alonethe university may not have the requisitelevel of activity to constitute a trade orbusiness under section 513(a). Thisexample assumes no agency relationshipexists between the company and the uni-versity. In determining the level of activ-ity, however, any promotional or market-ing efforts by the university pursuant tothe contract should be considered. If thecontract grants the company a license tomarket its products using the university’s

name and logo, the portion of the totalpayment attributable to the value of thelicense may be excludable as a royaltyunder section 512(b)(2). In some cases,payments in connection with the grant ofan exclusive concession, such as for theoperation of a campus bookstore or caf-eteria, may be treated as rental incomeunder section 512(b)(3).

When an exempt organization agreesto perform substantial services in connec-tion with the exclusive provider arrange-ment, income received by the organiza-tion may be includible in UBTI. Forexample, assume that a university entersinto a multi-year contract with a sportsdrink company under which the companywill be the exclusive provider of sportsdrinks for the university’s athletic depart-ment and concessions. As part of the con-tract, if the university agrees to performvarious services for the company, such asguaranteeing that coaches make promo-tional appearances on behalf of the com-pany (e.g., attending photo shoots, filmedcommercials, and retail store appear-ances), assisting the company in develop-ing marketing plans, and participating injoint promotional opportunities, then theuniversity’s activities are likely to consti-tute a regularly carried on trade or busi-ness. These activities are unlikely to besubstantially related to the university’sexempt purposes. Furthermore, theincome received by the university forthose services is not excludable as a roy-alty under section 512(b)(2). See Rev.Rul. 81–178 (1981–2 C.B. 135), situation2.

The 2000 proposed regulations solic-ited comments on the application of therules governing periodicals and tradeshows to an exempt organization’s Inter-net sites, and whether providing a link toa sponsor’s Internet site is advertisingwithin the meaning of section 513(i). Thecomments received generally suggest thata link to a corporate sponsor’s Internetsite as part of a sponsorship arrangementis not a message, but a convenient featureof the Internet that can only be activatedby the viewer, and thus constitutes a per-missible form of acknowledgment. Withregard to periodicals, most commentatorsexpressed the view that the term “periodi-cal”, for purposes of the section 513(i)exclusion, includes material published

2002–21 I.R.B. 975 May 28, 2002

electronically. Some commentators sug-gest that an exempt organization’s Inter-net site should not be treated as a periodi-cal simply because it has text thatchanges from time to time. Other com-mentators suggest criteria for analyzingwhether an Internet site is a periodical.

Only a few comments were receivedon the application of the trade showexclusion in section 513(i) to an exemptorganization’s Internet site. These com-ments generally suggest that trade showsconducted over the Internet be treated thesame as trade shows conducted in person.That is, payments made in connectionwith Internet-based trade shows wouldnot be exempt from UBIT as qualifiedsponsorship payments, but would beexempt from UBIT as income generatedby qualified convention and trade showactivity.

Many options for addressing the Inter-net in the final regulations were consid-ered. The final regulations take theapproach that, where possible, answersare provided. However, the TreasuryDepartment and IRS note that the analy-sis of particular Internet issues, such asthe use of hyperlinks, may be different forpurposes of section 513(i) than other sec-tions of the Code. The Treasury Depart-ment and IRS also conclude that someInternet issues addressed in comments arebeyond the scope of section 513(i).

For purposes of section 513(i), theissue of whether a hyperlink constitutesan acknowledgment or advertising isaddressed in the final regulations withtwo new examples. In the first newexample, the exempt organization posts alist of its sponsors on its website, includ-ing the sponsor’s Internet address, whichappears as a hyperlink from the exemptorganization’s website to the sponsor’swebsite. The example concludes thatposting the sponsor’s website addressconstitutes an acknowledgment, eventhough it appears as a hyperlink. In thesecond new example, a charity maintainsa website that contains a hyperlink to asponsor’s website where an endorsementby the charity for the sponsor’s productappears. The charity approved theendorsement before it was posted on thesponsor’s website. The example con-cludes that the endorsement is advertis-ing. These two examples address hyper-links for purposes of section 513(i) only,

and do not suggest how hyperlinks aretreated under other sections of the Code.

With respect to periodicals, section513(i) mentions periodicals only in thesense that the safe harbor does not applyto any payment which entitles the payorto the use or acknowledgment of thename or logo (or product lines) of thepayor’s trade or business in exempt orga-nization periodicals. Such payments areanalyzed instead under the existing UBITrules. Section § 1.512(a)–1(f) providesspecial rules for determining the amountof UBTI attributable to the sale of adver-tising in exempt organization periodicals.After considering the comments, theTreasury Department and IRS concludethat the regulations under section 512 arethe more appropriate place for an analysisof issues relating to electronic periodicals.Nevertheless, the Treasury Departmentand IRS clarify that periodicals mayinclude some forms of electronic publica-tion. The final regulations state that theterm periodical means regularly sched-uled and printed material published by oron behalf of the exempt organization thatis not related to and primarily distributedin connection with a specific event con-ducted by the exempt organization, andfor this purpose, printed material includesmaterial that is published electronically.

As noted above, relatively few com-ments were received on the trade showexclusion. Because of the small samplingof comments received, and because tradeshow rules impact many different indus-tries and typically involve large sums ofmoney, the final regulations do notchange the rules on what constitutes aqualified convention and trade showactivity. Existing guidance on trade showsis found in section 513(d) and § 1.513–3,and any reference to trade shows in thefinal regulations under section 513(i) isintended to be consistent with these rules.

Many commentators wrote regardingthe valuation of substantial return ben-efits, and suggest that the 2000 proposedregulations do not offer enough guidanceon how to make a reasonable and goodfaith valuation of a substantial return ben-efit. Commentators also assert that thevaluation provisions do not furtheradministrative convenience and simplic-ity. The fair market value of any substan-tial return benefit provided as part of asponsorship arrangement is the price at

which the benefit would be providedbetween a willing recipient and a willingprovider of the benefit, neither beingunder any compulsion to enter into thearrangement and both having reasonableknowledge of relevant facts, and withoutregard to any other aspect of the sponsor-ship arrangement. While the TreasuryDepartment and IRS appreciate the diffi-culty an exempt organization has in valu-ing substantial return benefits, the finalregulations retain the valuation standardcontained in the 2000 proposed regula-tions. Several commentators suggestincorporating safe harbors into the finalregulations to determine the value of asubstantial return benefit. For example,one commentator suggests that a safe har-bor be added to provide that an exemptorganization’s valuation would not bechallenged if it were determined based onthe face amount of the tickets, cost of thedinner, or any reasonably comparablemeasure. Another commentator suggeststhat the fair market value be based ondata provided by the payor, or as agreedby the parties. Another commentatorfavors predicting values of yearly benefitsbased on actual benefits provided over athree-year period. After considering thesecomments, the Treasury Department andIRS conclude that the safe harbors sug-gested by the commentators either areinconsistent with the general rule, do notprovide any additional guidance, or areprone to abuse. For this reason, no safeharbors were added to the final regula-tions with respect to valuation.

Clarification is provided, however,with respect to the valuation date. The2000 proposed regulations provide that inallocating a sponsorship payment, the fairmarket value of the substantial returnbenefit is to be determined on the date theparties enter into the sponsorship arrange-ment. The final regulations take the sameapproach for binding, written sponsorshipcontracts. This rule, which is illustratedby two new examples, provides exemptorganizations the advantage of only hav-ing to value substantial return benefitsonce, even if the value of the substantialreturn benefit increases over the term ofthe contract. If the parties make a mate-rial change to a sponsorship contract, it istreated as a new contract as of the datethe material change is effective. A mate-rial change is defined as an extension or

May 28, 2002 976 2002–21 I.R.B.

renewal of the contract, or a more thanincidental change to any amount payable(or other consideration) under the con-tract. If there is no binding, written con-tract, the fair market value of the substan-tial return benefit is determined when thebenefit is provided. The reason for distin-guishing between written and oral agree-ments in the final regulations is to allowsmaller exempt organizations to arrangesponsorship informally on a year-to-yearbasis and value those benefits each yearas they occur.

Few comments were received on the§ 1.512(a)–1(e) example relating toexpense allocation. Of the commentsreceived, most state that the 1993 pro-posed regulations did not interpret theexploitation exception too broadly, andrequest that the prior examples be rein-stated. The commentators also suggestthat the new example is factually unreal-istic. Despite these comments, the finalregulations do not change the § 1.512(a)–1(e) example. The comments receivedgenerally do not contain substantive sug-gestions for change, and the TreasuryDepartment and IRS believe that the cur-rent example in the final regulations cor-rectly amplifies the technical provisionsof the regulation, which is very limited inscope.

Special Analyses

It has been determined that this deci-sion is not a significant regulatory actionas defined in Executive Order 12866.Therefore, a regulatory assessment is notrequired. It also has been determined thatsection 553(b) of the Administrative Pro-cedure Act (5 U.S.C. chapter 5) does notapply to these regulations, and becausethe final rule does not impose a collectionof information on small entities, theRegulatory Flexibility Act (5 U.S.C.chapter 6) does not apply. Therefore, aRegulatory Flexibility Analysis is notrequired. Pursuant to section 7805(f) ofthe Code, these regulations were previ-ously submitted to the Chief Counsel forAdvocacy of the Small Business Admin-istration for comment on their impact onsmall business.

Drafting Information

The principal author of these regula-tions is Stephanie Lucas Caden, Office of

Division Counsel/Associate Chief Coun-sel (Tax Exempt/Government Entities),Internal Revenue Service. However, per-sonnel from other offices of the Serviceand the Treasury Department participatedin their development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 isamended as follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * *Par. 2. In § 1.170A–9, a sentence is

added to the end of paragraph (e)(6)(i) toread as follows:

§ 1.170A–9 Definition of section170(b)(1)(A) organization.

* * * * *

(e) * * *(6) * * * (i) * * * For purposes of this

paragraph (e), the term contributionsincludes qualified sponsorship payments(as defined in § 1.513–4) in the form ofmoney or property (but not services).

* * * * *

Par. 3. Section 1.509(a)–3 is amendedby:

1. Adding a sentence to the end ofparagraph (f)(1).

2. Revising the paragraph heading andintroductory text for paragraph (f)(3).

3. Redesignating the current Examplein paragraph (f)(3) as Example 1 andrevising the heading.

4. Adding Example 2 and Example 3 toparagraph (f)(3).

The revisions and additions read asfollows;

§ 1.509(a)–3 Broadly, publicly supportedorganizations.

* * * * *

(f) * * * (1) * * * For purposes of sec-tion 509(a)(2), the term contributionsincludes qualified sponsorship payments

(as defined in § 1.513–4) in the form ofmoney or property (but not services).* * * * *

(3) Examples. The provisions of thisparagraph (f) may be illustrated by thefollowing examples:

Example 1. * * *Example 2. Q, a performing arts center, enters

into a contract with a large company to be the exclu-sive sponsor of the center’s theatrical events. Thecompany makes a payment of cash and products inthe amount of $100,000 to Q, and in return, Qagrees to make a broadcast announcement thankingthe company before each show and to provide$2,000 of advertising in the show’s program (2% of$100,000 is $2,000). The announcement constitutesuse or acknowledgment pursuant to section513(i)(2). Because the value of the advertising doesnot exceed 2% of the total payment, the entire$100,000 is a qualified sponsorship payment undersection 513(i), and $100,000 is treated as a contri-bution for purposes of section 509(a)(2)(A)(i).

Example 3. R, a charity, enters into a contractwith a law firm to be the exclusive sponsor of thecharity’s outreach program. Instead of making acash payment, the law firm agrees to perform$100,000 of legal services for the charity. In return,R agrees to acknowledge the law firm in all itsinformational materials. The total fair market valueof the legal services, or $100,000, is a qualifiedsponsorship payment under section 513(i), but noamount is treated as a contribution under section509(a)(2)(A)(i) because the contribution is of ser-vices.

* * * * * *

Par. 4. Section 1.512(a)–1 is amendedby:

1. Revising the paragraph heading andintroductory text for paragraph (e).

2. Redesignating the current Examplein paragraph (e) as Example 1 and revis-ing the heading.

3. Adding Example 2 to paragraph (e).The revisions and additions read as

follows:

§ 1.512(a)–1 Definition.

* * * * *

(e) Examples. This section is illus-trated by the following examples:

Example 1. * * *Example 2. (i) P, a manufacturer of photographic

equipment, underwrites a photography exhibitionorganized by M, an art museum described in section501(c)(3). In return for a payment of $100,000, Magrees that the exhibition catalog sold by M in con-nection with the exhibit will advertise P’s product.The exhibition catalog will also include educationalmaterial, such as copies of photographs included inthe exhibition, interviews with photographers, and

2002–21 I.R.B. 977 May 28, 2002

an essay by the curator of M’s department of pho-tography. For purposes of this example, assume thatnone of the $100,000 is a qualified sponsorship pay-ment within the meaning of section 513(i) and§ 1.513–4, that M’s advertising activity is regularlycarried on, and that the entire amount of the pay-

ment is unrelated business taxable income to M.Expenses directly connected with generating theunrelated business taxable income (i.e., direct adver-tising costs) total $25,000. Expenses directly con-nected with the preparation and publication of theexhibition catalog (other than direct advertising

costs) total $110,000. M receives $60,000 of grossrevenue from sales of the exhibition catalog.Expenses directly connected with the conduct of theexhibition total $500,000.

(ii) The computation of unrelated business tax-able income is as follows:

(A) Unrelated trade or business (sale of advertising):

Income $100,000

Directly-connected expenses (25,000)

Subtotal 75,000 $75,000

(B) Exempt function (publication of exhibition catalog):

Income (from catalog sales) 60,000

Directly-connected expenses (110,000)

Net exempt function income (loss) (50,000) (50,000)

Unrelated business taxable income 25,000

(iii) Expenses related to publication of the exhi-bition catalog exceed revenues by $50,000. Becausethe unrelated business activity (the sale of advertis-ing) exploits an exempt activity (the publication ofthe exhibition catalog), and because the publicationof editorial material is an activity normally con-ducted by taxable entities that sell advertising, thenet loss from the exempt publication activity isallowed as a deduction from unrelated businessincome under paragraph (d)(2) of this section. Incontrast, the presentation of an exhibition is not anactivity normally conducted by taxable entitiesengaged in advertising and publication activity forpurposes of paragraph (d)(2) of this section. Conse-quently, the $500,000 cost of presenting the exhibi-tion is not directly connected with the conduct of theunrelated advertising activity and does not have aproximate and primary relationship to that activity.Accordingly, M has unrelated business taxableincome of $25,000.

* * * * *

Par. 5. Section 1.513–4 is added toread as follows:

§ 1.513–4 Certain sponsorship not un-related trade or business.

(a) In general. Under section 513(i),the receipt of qualified sponsorship pay-ments by an exempt organization which issubject to the tax imposed by section 511does not constitute receipt of incomefrom an unrelated trade or business.

(b) Exception. The provisions of thissection do not apply with respect to pay-ments made in connection with qualifiedconvention and trade show activities. Forrules governing qualified convention andtrade show activity, see § 1.513–3. The

provisions of this section also do notapply to income derived from the sale ofadvertising or acknowledgments inexempt organization periodicals. For thispurpose, the term periodical means regu-larly scheduled and printed material pub-lished by or on behalf of the exempt orga-nization that is not related to andprimarily distributed in connection with aspecific event conducted by the exemptorganization. For this purpose, printedmaterial includes material that is pub-lished electronically. For rules governingthe sale of advertising in exempt organi-zation periodicals, see § 1.512(a)–1(f).

(c) Qualified sponsorship payment—(1) Definition. The term qualified spon-sorship payment means any payment byany person engaged in a trade or businesswith respect to which there is no arrange-ment or expectation that the person willreceive any substantial return benefit. Indetermining whether a payment is a quali-fied sponsorship payment, it is irrelevantwhether the sponsored activity is relatedor unrelated to the recipient organiza-tion’s exempt purpose. It is also irrelevantwhether the sponsored activity is tempo-rary or permanent. For purposes of thissection, payment means the payment ofmoney, transfer of property, or perfor-mance of services.

(2) Substantial return benefit—(i) Ingeneral. For purposes of this section, asubstantial return benefit means any ben-efit other than a use or acknowledgmentdescribed in paragraph (c)(2)(iv) of this

section, or disregarded benefits describedin paragraph (c)(2)(ii) of this section.

(ii) Certain benefits disregarded. Forpurposes of paragraph (c)(2)(i) of thissection, benefits are disregarded if theaggregate fair market value of all the ben-efits provided to the payor or persons des-ignated by the payor in connection withthe payment during the organization’staxable year is not more than 2% of theamount of the payment. If the aggregatefair market value of the benefits exceeds2% of the amount of the payment, then(except as provided in paragraph(c)(2)(iv) of this section) the entire fairmarket value of such benefits, not merelythe excess amount, is a substantial returnbenefit. Fair market value is determinedas provided in paragraph (d)(1) of thissection.

(iii) Benefits defined. For purposes ofthis section, benefits provided to thepayor or persons designated by the payormay include:

(A) Advertising as defined in para-graph (c)(2)(v) of this section.

(B) Exclusive provider arrangementsas defined in paragraph (c)(2)(vi)(B) ofthis section.

(C) Goods, facilities, services or otherprivileges.

(D) Exclusive or nonexclusive rightsto use an intangible asset (e.g., trademark,patent, logo, or designation) of theexempt organization.

(iv) Use or acknowledgment. For pur-poses of this section, a substantial return

May 28, 2002 978 2002–21 I.R.B.

benefit does not include the use oracknowledgment of the name or logo (orproduct lines) of the payor’s trade orbusiness in connection with the activitiesof the exempt organization. Use oracknowledgment does not include adver-tising as described in paragraph (c)(2)(v)of this section, but may include the fol-lowing: exclusive sponsorship arrange-ments; logos and slogans that do not con-tain qual i ta t ive or comparat ivedescriptions of the payor’s products, ser-vices, facilities or company; a list of thepayor’s locations, telephone numbers, orInternet address; value-neutral descrip-tions, including displays or visual depic-tions, of the payor’s product-line or ser-vices; and the payor’s brand or tradenames and product or service listings.Logos or slogans that are an establishedpart of a payor’s identity are not consid-ered to contain qualitative or comparativedescriptions. Mere display or distribution,whether for free or remuneration, of apayor’s product by the payor or theexempt organization to the general publicat the sponsored activity is not consideredan inducement to purchase, sell or use thepayor’s product for purposes of this sec-tion and, thus, will not affect the determi-nation of whether a payment is a qualifiedsponsorship payment.

(v) Advertising. For purposes of thissection, the term advertising means anymessage or other programming materialwhich is broadcast or otherwise transmit-ted, published, displayed or distributed,and which promotes or markets any tradeor business, or any service, facility orproduct. Advertising includes messagescontaining qualitative or comparative lan-guage, price information or other indica-tions of savings or value, an endorsement,or an inducement to purchase, sell, or useany company, service, facility or product.A single message that contains bothadvertising and an acknowledgment isadvertising. This section does not applyto activities conducted by a payor on itsown. For example, if a payor purchasesbroadcast time from a television station toadvertise its product during commercialbreaks in a sponsored program, theexempt organization’s activities are notthereby converted to advertising.

(vi) Exclusivity arrangements—(A)Exclusive sponsor. An arrangement thatacknowledges the payor as the exclusive

sponsor of an exempt organization’sactivity, or the exclusive sponsor repre-senting a particular trade, business orindustry, generally does not, by itself,result in a substantial return benefit. Forexample, if in exchange for a payment, anorganization announces that its event issponsored exclusively by the payor (anddoes not provide any advertising or othersubstantial return benefit to the payor),the payor has not received a substantialreturn benefit.

(B) Exclusive provider. An arrange-ment that limits the sale, distribution,availability, or use of competing products,services, or facilities in connection withan exempt organization’s activity gener-ally results in a substantial return benefit.For example, if in exchange for a pay-ment, the exempt organization agrees toallow only the payor’s products to be soldin connection with an activity, the payorhas received a substantial return benefit.

(d) Allocation of payment—(1) In gen-eral. If there is an arrangement or expec-tation that the payor will receive a sub-stantial return benefit with respect to anypayment, then only the portion, if any, ofthe payment that exceeds the fair marketvalue of the substantial return benefit is aqualified sponsorship payment. However,if the exempt organization does not estab-lish that the payment exceeds the fairmarket value of any substantial returnbenefit, then no portion of the paymentconstitutes a qualified sponsorship pay-ment.

(i) Treatment of payments other thanqualified sponsorship payments. Theunrelated business income tax (UBIT)treatment of any payment (or portionthereof) that is not a qualified sponsorshippayment is determined by application ofsections 512, 513, and 514. For example,payments related to an exempt organiza-tion’s providing facilities, services, orother privileges to the payor or personsdesignated by the payor, advertising,exclusive provider arrangementsdescribed in paragraph (c)(2)(vi)(B) ofthis section, a license to use intangibleassets of the exempt organization, orother substantial return benefits, areevaluated separately in determiningwhether the exempt organization realizesunrelated business taxable income.

(ii) Fair market value. The fair marketvalue of any substantial return benefit

provided as part of a sponsorship arrange-ment is the price at which the benefitwould be provided between a willingrecipient and a willing provider of thebenefit, neither being under any compul-sion to enter into the arrangement andboth having reasonable knowledge of rel-evant facts, and without regard to anyother aspect of the sponsorship arrange-ment.

(iii) Valuation date. In general, the fairmarket value of the substantial returnbenefit is determined when the benefit isprovided. However, if the parties enterinto a binding, written sponsorship con-tract, the fair market value of any sub-stantial return benefit provided pursuantto that contract is determined on the datethe parties enter into the sponsorship con-tract. If the parties make a materialchange to a sponsorship contract, it istreated as a new sponsorship contract asof the date the material change is effec-tive. A material change includes an exten-sion or renewal of the contract, or a morethan incidental change to any amountpayable (or other consideration) pursuantto the contract.

( iv) Examples . The fol lowingexamples illustrate the provisions of thissection:

Example 1. On June 30, 2001, a national corpo-ration and Z, a charitable organization, enter into afive-year binding, written contract effective foryears 2002 through 2007. The contract provides thatthe corporation will make an annual payment of$5,000 to Z, and in return the corporation willreceive no benefit other than advertising. On June30, 2001, the fair market value of the advertising tobe provided to the corporation in each year of theagreement is $75, which is less than the disregardedbenefit amount provided for in paragraph (c)(2)(ii)of this section (2% of $5,000 is $100). In 2002, pur-suant to the sponsorship contract, the corporationmakes a payment to Z of $5,000, and receives thespecified benefit (advertising). As of January 1,2002, the fair market value of the advertising to beprovided by Z each year has increased to $110.However, for purposes of this section, the fair mar-ket value of the advertising benefit is determined onJune 30, 2001, the date the parties entered into thesponsorship contract. Therefore, the entire $5,000payment received in 2002 is a qualified sponsorshippayment.

Example 2. The facts are the same as Example 1,except that the contract provides for an initial pay-ment by the corporation to Z of $5,000 in 2002, fol-lowed by annual payments of $1,000 during each ofyears 2003–2007. In 2003, pursuant to the sponsor-ship contract, the corporation makes a payment to Zof $1,000, and receives the specified advertisingbenefit. In 2003, the fair market value of the benefitprovided ($75, as determined on June 30, 2001)exceeds 2% of the total payment received (2% of

2002–21 I.R.B. 979 May 28, 2002

$1,000 is $20). Therefore, only $925 of the $1,000payment received in 2003 is a qualified sponsorshippayment.

(2) Anti-abuse provision. To the extentnecessary to prevent avoidance of the rulestated in paragraphs (d)(1) and (c)(2) ofthis section, where the exempt organiza-tion fails to make a reasonable and goodfaith valuation of any substantial returnbenefit, the Commissioner (or the Com-missioner’s delegate) may determine theportion of a payment allocable to suchsubstantial return benefit and may treattwo or more related payments as a singlepayment.

(e) Special rules—(1) Written agree-ments. The existence of a written sponsor-ship agreement does not, in itself, cause apayment to fail to be a qualified sponsor-ship payment. The terms of the agree-ment, not its existence or degree of detail,are relevant to the determination ofwhether a payment is a qualified sponsor-ship payment. Similarly, the terms of theagreement and not the title or responsi-bilities of the individuals negotiating theagreement determine whether a payment(or any portion thereof) made pursuant tothe agreement is a qualified sponsorshippayment.

(2) Contingent payments. The termqualified sponsorship payment does notinclude any payment the amount of whichis contingent, by contract or otherwise,upon the level of attendance at one ormore events, broadcast ratings, or otherfactors indicating the degree of publicexposure to the sponsored activity. Thefact that a payment is contingent uponsponsored events or activities actuallybeing conducted does not, by itself, causethe payment to fail to be a qualified spon-sorship payment.

(3) Determining public support. Quali-fied sponsorship payments in the form ofmoney or property (but not services) aretreated as contributions received by theexempt organization for purposes ofdetermining public support to the organi-zation under section 170(b)(1)(A)(vi) or509(a)(2). See §§ 1.509(a)–3(f)(1) and1.170A–9(e)(6)(i). The fact that a pay-ment is a qualified sponsorship paymentthat is treated as a contribution to thepayee organization does not determinewhether the payment is deductible by thepayor under section 162 or 170.

(f) Examples. The provisions of thissection are illustrated by the following

examples. The tax treatment of any pay-ment (or portion of a payment) that doesnot constitute a qualified sponsorshippayment is governed by general UBITprinciples. In these examples, the recipi-ents of the payments at issue are section501(c) organizations. The expectations orarrangements of the parties are those spe-cifically indicated in the example. Theexamples are as follows:

Example 1. M, a local charity, organizes a mara-thon and walkathon at which it serves to participantsdrinks and other refreshments provided free ofcharge by a national corporation. The corporationalso gives M prizes to be awarded to winners of theevent. M recognizes the assistance of the corpora-tion by listing the corporation’s name in promo-tional fliers, in newspaper advertisements of theevent and on T-shirts worn by participants. Mchanges the name of its event to include the name ofthe corporation. M’s activities constitute acknowl-edgment of the sponsorship. The drinks, refresh-ments and prizes provided by the corporation are aqualified sponsorship payment, which is not incomefrom an unrelated trade or business.

Example 2. N, an art museum, organizes anexhibition and receives a large payment from a cor-poration to help fund the exhibition. N recognizesthe corporation’s support by using the corporatename and established logo in materials publicizingthe exhibition, which include banners, posters, bro-chures and public service announcements. N alsohosts a dinner for the corporation’s executives. Thefair market value of the dinner exceeds 2% of thetotal payment. N’s use of the corporate name andlogo in connection with the exhibition constitutesacknowledgment of the sponsorship. However,because the fair market value of the dinner exceeds2% of the total payment, the dinner is a substantialreturn benefit. Only that portion of the payment, ifany, that N can demonstrate exceeds the fair marketvalue of the dinner is a qualified sponsorship pay-ment.

Example 3. O coordinates sports tournaments forlocal charities. An auto manufacturer agrees tounderwrite the expenses of the tournaments. O rec-ognizes the auto manufacturer by including themanufacturer’s name and established logo in thetitle of each tournament as well as on signs, score-boards and other printed material. The auto manu-facturer receives complimentary admission passesand pro-am playing spots for each tournament thathave a combined fair market value in excess of 2%of the total payment. Additionally, O displays thelatest models of the manufacturer’s premier luxurycars at each tournament. O’s use of the manufactur-er’s name and logo and display of cars in the tour-nament area constitute acknowledgment of the spon-sorship. However, the admission passes and pro-amplaying spots are a substantial return benefit. Onlythat portion of the payment, if any, that O can dem-onstrate exceeds the fair market value of the admis-sion passes and pro-am playing spots is a qualifiedsponsorship payment.

Example 4. P conducts an annual college foot-ball bowl game. P sells to commercial broadcastersthe right to broadcast the bowl game on televisionand radio. A major corporation agrees to be the

exclusive sponsor of the bowl game. The detailedcontract between P and the corporation provides thatin exchange for a $1,000,000 payment, the name ofthe bowl game will include the name of the corpo-ration. In addition, the contract provides that thecorporation’s name and established logo will appearon player’s helmets and uniforms, on the scoreboardand stadium signs, on the playing field, on cupsused to serve drinks at the game, and on all relatedprinted material distributed in connection with thegame. P also agrees to give the corporation a blockof game passes for its employees and to provideadvertising in the bowl game program book. Thefair market value of the passes is $6,000, and thefair market value of the program advertising is$10,000. The agreement is contingent upon thegame being broadcast on television and radio, butthe amount of the payment is not contingent uponthe number of people attending the game or the tele-vision ratings. The contract provides that televisioncameras will focus on the corporation’s name andlogo on the field at certain intervals during thegame. P’s use of the corporation’s name and logo inconnection with the bowl game constitutes acknowl-edgment of the sponsorship. The exclusive sponsor-ship arrangement is not a substantial return benefit.Because the fair market value of the game passesand program advertising ($16,000) does not exceed2% of the total payment (2% of $1,000,000 is$20,000), these benefits are disregarded and theentire payment is a qualified sponsorship payment,which is not income from an unrelated trade or busi-ness.

Example 5. Q organizes an amateur sports team.A major pizza chain gives uniforms to players onQ’s team, and also pays some of the team’s opera-tional expenses. The uniforms bear the name andestablished logo of the pizza chain. During the finaltournament series, Q distributes free of charge sou-venir flags bearing Q’s name to employees of thepizza chain who come out to support the team. Theflags are valued at less than 2% of the combined fairmarket value of the uniforms and operationalexpenses paid. Q’s use of the name and logo of thepizza chain in connection with the tournament con-stitutes acknowledgment of the sponsorship.Because the fair market value of the flags does notexceed 2% of the total payment, the entire amountof the funding and supplied uniforms are a qualifiedsponsorship payment, which is not income from anunrelated trade or business.

Example 6. R is a liberal arts college. A softdrink manufacturer enters into a binding, writtencontract with R that provides for a large payment tobe made to the college’s English department inexchange for R agreeing to name a writing compe-tition after the soft drink manufacturer. The contractalso provides that R will allow the soft drink manu-facturer to be the exclusive provider of all soft drinksales on campus. The fair market value of the exclu-sive provider component of the contract exceeds 2%of the total payment. R’s use of the manufacturer’sname in the writing competition constitutesacknowledgment of the sponsorship. However, theexclusive provider arrangement is a substantialreturn benefit. Only that portion of the payment, ifany, that R can demonstrate exceeds the fair marketvalue of the exclusive provider arrangement is aqualified sponsorship payment.

May 28, 2002 980 2002–21 I.R.B.

Example 7. S is a noncommercial broadcast sta-tion that airs a program funded by a local musicstore. In exchange for the funding, S broadcasts thefollowing message: “This program has been broughtto you by the Music Shop, located at 123 MainStreet. For your music needs, give them a call todayat 555–1234. This station is proud to have the MusicShop as a sponsor.” Because this single broadcastmessage contains both advertising and an acknowl-edgment, the entire message is advertising. The fairmarket value of the advertising exceeds 2% of thetotal payment. Thus, the advertising is a substantialreturn benefit. Unless S establishes that the amountof the payment exceeds the fair market value of theadvertising, none of the payment is a qualified spon-sorship payment.

Example 8. T, a symphony orchestra, performs aseries of concerts. A program guide that containsnotes on guest conductors and other informationconcerning the evening’s program is distributed byT at each concert. The Music Shop makes a $1,000payment to T in support of the concert series. As asupporter of the event, the Music Shop receivescomplimentary concert tickets with a fair marketvalue of $85, and is recognized in the programguide and on a poster in the lobby of the concerthall. The lobby poster states that, “The T concert issponsored by the Music Shop, located at 123 MainStreet, telephone number 555–1234.” The programguide contains the same information and also states,“Visit the Music Shop today for the finest selectionof music CDs and cassette tapes.” The fair marketvalue of the advertisement in the program guide is$15. T’s use of the Music Shop’s name, address, andtelephone number in the lobby poster constitutesacknowledgment of the sponsorship. However, thecombined fair market value of the advertisement inthe program guide and complimentary tickets is$100 ($15 + $85), which exceeds 2% of the totalpayment (2% of $1,000 is $20). The fair marketvalue of the advertising and complimentary tickets,therefore, constitutes a substantial return benefit andonly that portion of the payment, or $900, thatexceeds the fair market value of the substantialreturn benefit is a qualified sponsorship payment.

Example 9. U, a national charity dedicated topromoting health, organizes a campaign to informthe public about potential cures to fight a seriousdisease. As part of the campaign, U sends represen-tatives to community health fairs around the countryto answer questions about the disease and inform thepublic about recent developments in the search for acure. A pharmaceutical company makes a paymentto U to fund U’s booth at a health fair. U places asign in the booth displaying the pharmaceuticalcompany’s name and slogan, “Better Research, Bet-ter Health,” which is an established part of the com-pany’s identity. In addition, U grants the pharmaceu-tical company a license to use U’s logo in marketingits products to health care providers around thecountry. The fair market value of the license exceeds2% of the total payment received from the company.U’s display of the pharmaceutical company’s nameand slogan constitutes acknowledgment of the spon-sorship. However, the license granted to the pharma-ceutical company to use U’s logo is a substantialreturn benefit. Only that portion of the payment, ifany, that U can demonstrate exceeds the fair marketvalue of the license granted to the pharmaceuticalcompany is a qualified sponsorship payment.

Example 10. V, a trade association, publishes amonthly scientific magazine for its members con-taining information about current issues and devel-opments in the field. A textbook publisher makes alarge payment to V to have its name displayed onthe inside cover of the magazine each month.Because the monthly magazine is a periodicalwithin the meaning of paragraph (b) of this section,the section 513(i) safe harbor does not apply. See§ 1.512(a)–1(f).

Example 11. W, a symphony orchestra, main-tains a website containing pertinent information andits performance schedule. The Music Shop makes apayment to W to fund a concert series, and W postsa list of its sponsors on its website, including theMusic Shop’s name and Internet address. W’s web-site does not promote the Music Shop or advertiseits merchandise. The Music Shop’s Internet addressappears as a hyperlink from W’s website to theMusic Shop’s website. W’s posting of the MusicShop’s name and Internet address on its websiteconstitutes acknowledgment of the sponsorship. Theentire payment is a qualified sponsorship payment,which is not income from an unrelated trade or busi-ness.

Example 12. X, a health-based charity, sponsorsa year-long initiative to educate the public about aparticular medical condition. A large pharmaceuticalcompany manufactures a drug that is used in treat-ing the medical condition, and provides funding forthe initiative that helps X produce educational mate-rials for distribution and post information on X’swebsite. X’s website contains a hyperlink to thepharmaceutical company’s website. On the pharma-ceutical company’s website, the statement appears,“X endorses the use of our drug, and suggests thatyou ask your doctor for a prescription if you havethis medical condition.” X reviewed the endorse-ment before it was posted on the pharmaceuticalcompany’s website and gave permission for theendorsement to appear. The endorsement is advertis-ing. The fair market value of the advertising exceeds2% of the total payment received from the pharma-ceutical company. Therefore, only the portion of thepayment, if any, that X can demonstrate exceeds thefair market value of the advertising on the pharma-ceutical company’s website is a qualified sponsor-ship payment.

Robert E. Wenzel,Deputy Commissioner of

Internal Revenue.

Approved April 12, 2002.

Mark Weinberger,Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on April24, 2002, 8:45 a.m., and published in the issue ofthe Federal Register for April 25, 2002, 67 F.R.20433)

Section 1012.—Basis ofProperty—Cost

26 CFR 1.1012–1: Basis of property.


Section 6050S.— ReturnsRelating to Higher EducationTuition and Related Expenses

26 CFR 1.6050S–2T: Electronic furnishing of infor-mation statements for qualified tuition and relatedexpenses (temporary).

T.D. 8992

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Parts 1, 301, and602

Information Reporting forPayments of Interest onQualified Education Loans;Magnetic Media FilingRequirements for InformationReturns

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final and temporary regula-tions.

SUMMARY: This document containsregulations relating to the informationreporting requirements under section6050S for payments of interest on quali-fied education loans, including the filingof information returns on magneticmedia. The final regulations reflectchanges to the law made by the TaxpayerRelief Act of 1997. The regulations pro-vide guidance to payees receiving interestpayments on qualified education loans.

DATES: Effective date: These regulationsare effective April 29, 2002.

Applicability date: For date of applica-bility, see § 1.6050S–3(g).

2002–21 I.R.B. 981 May 28, 2002

FOR FURTHER INFORMATION CON-TACT: Concerning the regulations,Donna Welch, (202) 622–4910; and con-cerning the magnetic media filing specifi-cations, waivers for filing on magneticmedia, and extensions of time, contact theInternal Revenue Service, MartinsburgComputing Center, (304) 263–8700 (nottoll-free numbers).


Paperwork Reduction Act

The collection of information con-tained in these final regulations has beenreviewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act of1995 (44 U.S.C. 3507(d)) under controlnumber 1545–1678. Responses to thiscollection of information are mandatory.

An agency may not conduct or spon-sor, and a person is not required torespond to, a collection of informationunless it displays a valid control numberassigned by the Office of Budget andManagement.

The estimated burden for the reportingin these regulations is reflected in the bur-den for Form 1098–E.

Estimated total annual reporting bur-den for 2000 for Form 1098–E: 483,098hours.

Estimated number of responses for2000 for Form 1098–E: 9,661,965.

Estimated average annual burdenhours per response for Form 1098–E: 3minutes.

Comments concerning the accuracy ofthis burden and suggestions for reducingthis burden should be sent to the InternalRevenue Service, Attn: IRS ReportsClearance Officer, W:CAR:MP:FP:S,Washington, DC 20224, and to the Officeof Management and Budget, Attn: DeskOfficer for the Department of the Trea-sury, Office of Information and Regula-tory Affairs, Washington, DC 20503.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mate-rial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

Background

This document contains amendmentsto the Income Tax Regulations (26 CFRpart 1) relating to information reportingrequirements under section 6050S. TheTaxpayer Relief Act of 1997 (Public Law105–34 (111 Stat. 788) (TRA ’97)) addedsection 221 of the Internal Revenue Code(Code) to allow certain taxpayers whopay interest on qualified education loansto claim a Federal income tax deductionfor their interest payments. In general, asenacted by TRA ’97, a deduction isallowed for interest payments made dur-ing the first 60 months in which interestpayments are required on a qualified edu-cation loan. However, no interest deduc-tion is allowed for any interest paidbefore January 1, 1998. On January 21,1999, the IRS issued proposed regulations(REG–116826–97, 1999–1 C.B. 701)under section 221. See 64 FR 3257(1999). Section 221 was amended by theEconomic Growth and Tax Relief Recon-ciliation Act of 2001 (Public Law 107–16(115 Stat. 38)) to eliminate the limitationon the number of months during whichinterest paid on a qualified education loanis deductible, effective for interest paidafter December 31, 2001, and to allow adeduction for voluntary payments ofinterest.

TRA ’97 also added section 25A of theCode to provide the Hope ScholarshipCredit and the Lifetime Learning Credit(education tax credit). In general, the edu-cation tax credit allows certain taxpayerswho pay qualified tuition and relatedexpenses to an eligible educational insti-tution to claim a nonrefundable creditagainst their Federal income tax liability.On January 6, 1999, the IRS issued pro-posed regulations (REG–106388–98,1999–1 C.B. 756) under section 25A. See64 FR 794 (1999).

In addition, TRA ’97 added section6050S of the Code. Section 6050S wasamended by the Internal Revenue ServiceRestructuring and Reform Act of 1998(Public Law 105–206 (112 Stat. 685)(RRA ’98)) and Public Law 107–131(115 Stat. 2410). In general, section6050S requires certain payees whoreceive payments of interest on one ormore qualified education loans to fileinformation returns and to furnish writteninformation statements to assist taxpayers

and the IRS in determining any interestdeduction allowable under section 221. Inaddition, section 6050S requires eligibleeducational institutions to file informationreturns and to furnish written informationstatements to assist taxpayers and the IRSin determining any education tax creditallowable under section 25A (as well asother tax benefits for higher educationexpenses). See H.R. Conf. Rept. No. 599,105th Cong., 2d Sess., pp. 319–320(1998). Similarly, section 6050S requiresany person engaged in a trade or businessof making payments to any individualunder an insurance agreement as reim-bursements or refunds of qualified tuitionand related expenses to file informationreturns and to furnish written informationstatements.

Section 6050S(b) provides that theinformation return filed by payees whoreceive payments of interest on qualifiededucation loans must contain: (1) thename, address, and taxpayer identificationnumber (TIN) of the individual withrespect to whom payments of interest onqualified education loans were received;(2) the aggregate amount of interestreceived for the calendar year from suchindividual; and (3) such other informationas the Secretary may prescribe.

The IRS has published several noticesdescribing the information reportingrequirements for payees who receiveinterest on qualified education loans dur-ing the years 1998, 1999, 2000, and 2001.See Notice 98–7 (1998–1 C.B. 339),Notice 98–54 (1998–2 C.B. 641), Notice99–37 (1999–2 C.B. 124), and Notice2000–62 (2000–2 C.B. 587).

A notice of proposed rulemaking undersection 6050S (REG–105316–98, 2000–2C.B. 98) was published in the FederalRegister (65 FR 37728) on June 16,2000, addressing the information report-ing requirements for eligible educationalinstitutions and insurers and payees whoreceive interest on qualified educationloans. A public hearing was held on theproposed regulations on February 13,2001. The IRS received written and elec-tronic comments responding to the noticeof proposed rulemaking.

The IRS and the Treasury Departmenthave determined that the proposed regula-tions in § 1.6050S–1 addressing the infor-mation reporting requirements for eligibleeducational institutions and insurers

May 28, 2002 982 2002–21 I.R.B.

should be withdrawn and that new pro-posed regulations should be issued. TheIRS will issue proposed regulations in§ 1.6050S–1 in a separate document. Theproposed regulations in § 1.6050S–2addressing the information reportingrequirements for payees who receive pay-ments of interest on qualified educationloans are adopted as amended by thisTreasury decision and redesignated as§ 1.6050S–3. The comments received inconnection with these regulations and therevisions are discussed in the “Explana-tion of Provisions and Summary of Com-ments” of this preamble.

Temporary regulations (66 FR 10191)and a notice of proposed rulemaking bycross reference (REG–107186–00,2001–1 C.B. 973) (66 FR 10247) undersection 6050S were published in the Fed-eral Register on February 14, 2001.Those regulations allow eligible educa-tional institutions and payees who receiveinterest on qualified education loans tofurnish information statements electroni-cally to students and borrowers, respec-tively, if certain requirements are met.The temporary regulations for eligibleeducational institutions were designatedas § 1.6050S–1T, and the temporary regu-lations for payees were designated as§ 1.6050S–2T. The IRS and the TreasuryDepartment have determined that thoseregulations should be finalized in a sepa-rate document. However, this Treasurydecision redesignates § 1.6050S–1T and§ 1.6050S–2T as § 1.6050S–2T and§ 1.6050S–4T, respectively.

Explanation of Provisions andSummary of Comments

1. Information Reporting for Paymentsof Interest on Qualified Education Loans

The proposed regulations require anyperson engaged in a trade or business thatreceives from any payor interest of $600or more for any calendar year on one ormore qualified education loans (asdefined in section 221(e)(1) and the regu-lations thereunder) (a payee) to file aForm 1098–E, Student Loan InterestStatement, with the IRS. Under the pro-posed regulations, a payee must report thename, address, and taxpayer identificationnumber (TIN) of the payee; the name,address, and TIN of the payor; and theaggregate amount of interest received

during the calendar year from the payor.The final regulations retain these rules.As explained in the preamble to the pro-posed regulations, a payee may be thelender, the holder of the loan, or the loanservicer.

Consistent with TRA ’97, the proposedregulations provide that a payee isrequired to report interest paymentsreceived on a qualified education loanduring only the first 60 months in whichinterest payments are required on theloan. The Economic Growth and TaxRelief Reconciliation Act of 2001repealed the limitation on the number ofmonths during which interest paid on aqualified education loan is deductible,effective for interest paid after December31, 2001. Therefore, the final regulationseliminate the 60-month reporting period,so that payees must continue to reportannually interest payments on qualifiededucation loans.

A. Section 221 comments

The proposed regulations provide that,in determining the aggregate amount ofinterest payments to be reported by apayee, the term interest includes statedinterest, loan origination fees (other thanany fees for services), and capitalizedinterest as described in the regulationsunder section 221. Several commentatorsrequested that other fees, such as insur-ance, be treated as deductible interest forpurposes of section 221. In addition, sev-eral commentators requested clarificationof, or changes to, the manner in whichpayments are allocated to interest, thedefinition of qualified education loans,and the ability to estimate capitalizedinterest. These comments were not con-sidered in these regulations, whichaddress only the information reportingrequirements for interest payments onqualified education loans under section221, but the comments will be consideredin finalizing the regulations under section221.

B. Reporting of interest received orcollected by one or more persons

Section 6050S(f) requires that, in thecase of any person who receives anyamount on behalf of another person, onlythe first person receiving the amount isrequired to comply with the information

reporting requirements. Based on section6050S(f), the proposed regulations pro-vide that if a payee contracts with anotherperson to receive or collect interest pay-ments on a qualified education loan on itsbehalf, the other person must complywith the information reporting require-ments. Commentators requested clarifica-tion of how this rule would apply if apayee contracts with multiple parties,such as a billing service and a collectionagent. Other commentators requestedclarification of the rule for noncontractualarrangements and how the rule wouldapply if the person receiving the pay-ments does not ordinarily possess thepayor information required to file infor-mation returns (e.g., a lock-box agent, abankruptcy trustee, or a collectionagency). The commentators suggestedthat the regulations provide that if a per-son collects or receives payments on aqualified loan on behalf of another person(whether or not a formal contract exists),the person collecting or receiving the pay-ments must satisfy the reporting require-ments, unless the other person does notpossess the information needed to complywith the reporting requirements. This rec-ommendation is consistent with the provi-sions of section 6050H and the regula-tions thereunder; therefore, the finalregulations adopt this recommendation.

C. Forms 1098–E filed by third-party

Several commentators requested thatthe final regulations permit a payee tocontract with a third party to file Forms1098–E, Student Loan Interest Statement,and to furnish the information statements.The general instructions to Form 1099and Form 1098 allow a filing agent if cer-tain requirements are met. Therefore, thefinal regulations do not need to adopt thisrecommendation.

D. Information statement

Several commentators requested thatthe final regulations eliminate the require-ment that a payee furnish certain instruc-tions to a payor with the informationstatement. The commentators explainedthat the instructional language impliesthat the payee is able to provide tax assis-tance. The instructions that a payee isrequired to furnish with the informationstatement alert the payor to the limitations

2002–21 I.R.B. 983 May 28, 2002

on the deductibility of reported interest.In addition, the instructions clearly statethat the payor should refer to the IRSforms and publications for informationregarding the deductibility of reportedinterest. Therefore, the final regulationsdo not eliminate the required instructions;however, the regulations clarify that thepayor should refer to the IRS forms andpublications, and not the payee, for taxinformation.

The proposed regulations provide thatthe information statement must includethe name, address, and phone number ofthe individual who is the information con-tact for the payee that filed the Form1098–E. It is often not feasible for payeesto identify a specific individual as theinformation contact. Therefore, the finalregulations provide that the informationstatement must include the name, address,and phone number of an office or depart-ment of the payee as the information con-tact.

E. Payment adjustments after returnsfiled

Other commentators requested that thefinal regulations provide specific rules forreporting interest payment adjustmentsmade after information returns have beenfiled with the IRS. The commentatorsstated that requiring reporting of adjust-ments to interest previously reportedwould be overly burdensome. The finalregulations do not need to include spe-cific rules because additional interest pay-ments received in a subsequent year thatrelate to interest payments reported in aprior year are reportable in the year ofreceipt. Further, a payee is not required toreport reimbursements or refunds of inter-est payments previously reported. How-ever, a payee should file corrected infor-mation returns to report interest paymentsthat were incorrectly reported in a prioryear.

F. Effective date of regulations andcontinuation of Notice 98–7 for thecalendar year 2002

The proposed regulations provide thatthe regulations will apply to informationreturns required to be filed, and informa-tion statements required to be furnished,after December 31, 2001. Several com-ments were received on the proposed

effective date. Several commentators rec-ommended that the final regulationsapply to new loans made on or after Janu-ary 1 of the year that is 24 months afterpublication of the final regulations andthat loans made before that date remainsubject to the requirements in Notice98–7, as modified. Other commentsrequested a period of at least 12 monthsafter publication of final regulations tomake programming changes to implementrequired reporting with respect to loanorigination fees and capitalized interest.

Further comments requested that thereporting requirements in Notice 98–7, asmodified, continue for informationreturns required to be filed, and informa-tion statements required to be furnished,for interest payments received during cal-endar year 2002 (for which the returnsand statements are required to be filedand furnished in 2003). In general, thefinal regulations do not impose any sig-nificant reporting requirement beyond thereporting currently required by Notice98–7, as modified, and Form 1098–E.However, in response to comments, theIRS and the Treasury Department extendNotice 98–7, as modified, for the calendaryear 2002. Therefore, the final regulationsapply to information returns required tobe filed, and information statementsrequired to be furnished, after December31, 2003 (for interest payments receivedduring calendar year 2003). In addition,in order to provide additional time forpayees to implement reporting of loanorigination fees and capitalized interest,the final regulations provide that a payeeis not required to report payments of suchamounts as interest for qualified educa-tion loans made before January 1, 2004.

2. Requirement to File InformationReturns on Magnetic Media

The final regulations amend the regu-lations under section 6011(e) to requirepayees who are required to file 250 ormore Forms 1098–E to file on magneticmedia.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assess-ment is not required. It has also been

determined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions. A final regulatory flexibility analy-sis has been prepared for the collection ofinformation in this Treasury decision.This analysis is set forth in this preambleunder the heading “Final RegulatoryFlexibility Analysis.” Pursuant to section7805(f), the proposed regulations preced-ing these regulations were submitted tothe Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small business.

Final Regulatory Flexibility Analysis

The collection of information con-tained in § 1.6050S–3 is needed to assistthe IRS and taxpayers in determining theamount of any interest deduction allow-able under section 221. The objectives ofthese regulations are to provide uniform,practicable, and administrable rules undersection 6050S. The types of small entitiesto which the regulations may apply arecertain payees (e.g., a lender, a holder ofthe loan, or a loan servicer) who receiveinterest payments of $600 or more onqualified education loans.

There are no known Federal rules thatduplicate, overlap, or conflict with theseregulations. The regulations are consid-ered to have the least economic impact onsmall entities of all alternatives consid-ered.

Moreover, the regulations requiring fil-ing Forms 1098–E on magnetic mediaimpose no additional reporting or record-keeping and only prescribe the method offiling information returns that are alreadyrequired to be filed. Further, these regula-tions are consistent with the statutoryrequirement that a payee is not requiredto file Forms 1098–E on magnetic mediaunless required to file at least 250 ormore returns during the year. Finally, theeconomic impact caused by requiringForms 1098–E on magnetic media shouldbe minimal because most payee’s opera-tions are computerized. Even if theiroperations are not computerized, theincremental cost of magnetic mediareporting should be minimal in mostcases because of the availability of com-puter service bureaus. In addition, theexisting regulations under section 6011(e)provide that the IRS may waive the mag-netic media filing requirements on a

May 28, 2002 984 2002–21 I.R.B.

showing of hardship. The waiver author-ity will be exercised so as not to undulyburden payees lacking both the necessarydata processing facilities and access at areasonable cost to computer servicebureaus.


The principal author of the regulationsis Donna Welch, Office of AssociateChief Counsel (Procedure and Adminis-tration), Administrative Provisions andJudicial Practice Division. However,other personnel from the IRS and theTreasury Department participated in thedevelopment of the regulations.

* * * * *


Accordingly, 26 CFR parts 1, 301, and602 are amended as follows:

PART 1—INCOME TAX

Paragraph 1. The authority citation forpart 1 is amended by removing the entryfor “Section 1.6050S–1T” and by addingentries in numerical order to read in partas follows:

Authority: 26 U.S.C. 7805 * * *Section 1.6050S–3 also issued under

26 U.S.C. 6050S(g).Section 1.6050S–4T also issued under

26 U.S.C. 6050S(g). * * *Par. 2. Sections 1.6050–1T and

1.6050S–2T are redesignated as§§ 1.6050S–2T and 1.6050S–4T, respec-tively, and amended by revising the sec-tion headings to read as follows:

§ 1.6050S–2T Electronic furnishing ofinformation statements for qualifiedtuition and related expenses (temporary).

* * * * *

§ 1.6050S–4T Electronic furnishing ofinformation statements for payments ofinterest on qualified education loans(temporary).

* * * * *

Par. 3. Sections 1.6050S–0 and1.6050S–3 are added to read as follows:

§ 1.6050S–0 Table of contents

This section lists captions contained insection 6050S.

§ 1.6050S–2T Electronic furnishing ofinformation statements for qualifiedtuition and related expenses.

(a) Electronic furnishing of statements.(1) In general.(2) Consent.(i) In general.(ii) Change in hardware or softwarerequirements.(iii) Example.(3) Required disclosures.(i) In general.(ii) Paper statement.(iii) Scope and duration of consent.(iv) Post-consent request for a paperstatement.(v) Withdrawal of consent.(vi) Notice of termination.(vii) Updating information.(viii) Hardware and software require-ments.(4) Format.(5) Posting.(6) Notice.(i) In general.(ii) Undeliverable electronic address.(iii) Corrected statements.(7) Retention.(b) Effective date.

§ 1.6050S–3 Information reporting forpayments of interest on qualifiededucation loans.

(a) Information reporting requirement ingeneral.(b) Definitions.(1) Interest.(2) Payor.(c) Requirement to file return.(1) Form of return.(2) Information included on return.(3) Time and place for filing return.(i) In general.(ii) Extensions of time.(4) Use of magnetic media.(d) Requirement to furnish statement.(1) In general.(2) Time and manner for furnishing state-ment.(i) In general.(ii) Extensions of time.(3) Copy of Form 1098–E.

(e) Special rules.(1) Transitional rule for reporting of loanorigination fees and capitalized interest.(2) Qualified education loan certification.(3) Payments of interest received or col-lected by one or more persons.(i) In general.(ii) Exception.(4) Reporting by foreign persons.(5) Governmental units.(f) Penalty provisions.(1) Failure to file correct returns.(2) Failure to furnish correct informationstatements.(3) Waiver of penalties for failures toinclude a correct TIN.(i) In general.(ii) Acting in a responsible manner.(iii) Manner of soliciting TIN.(4) Failure to furnish TIN.(g) Effective date.

§ 1.6050S–4T Electronic furnishing ofinformation statements for payments ofinterest on qualified education loans.

(a) Electronic furnishing of statements.(1) In general.(2) Consent.(i) In general.(ii) Change in hardware or softwarerequirements.(iii) Example.(3) Required disclosures.(i) In general.(ii) Paper statement.(iii) Scope and duration of consent.(iv) Post-consent request for a paperstatement.(v) Withdrawal of consent.(vi) Notice of termination.(vii) Updating information.(viii) Hardware and software require-ments.(4) Format.(5) Posting.(6) Notice.(i) In general.(ii) Undeliverable electronic address.(iii) Corrected statements.(7) Retention.(b) Effective date.

§ 1.6050S–3 Information reporting forpayments of interest on qualifiededucation loans.

(a) Information reporting requirementin general. Except as otherwise provided

2002–21 I.R.B. 985 May 28, 2002

in this section, any person engaged in atrade or business that, in the course ofthat trade or business, receives from anypayor (as defined in paragraph (b)(2) ofthis section) interest payments that aggre-gate $600 or more for any calendar yearon one or more qualified education loans(as defined in section 221(e)(1) and theregulations thereunder)(a payee) must—

(1) File an information return, asdescribed in paragraph (c) of this section,with the Internal Revenue Service withrespect to the payor; and

(2) Furnish a statement, as described inparagraph (d) of this section, to the payor.

(b) Definitions. The following defini-tions apply for purposes of this section:

(1) Interest. Interest includes statedinterest, loan origination fees (other thanfees for services), and capitalized interestas described in the regulations under sec-tion 221. See paragraph (e)(1) of this sec-tion for a special transitional rule relatingto reporting of loan origination fees andcapitalized interest.

(2) Payor. Payor means the individualwho is carried on the books and recordsof the payee as the borrower on a quali-fied education loan. If there are multipleborrowers, the principal borrower on thepayee’s books and records is treated asthe payor for purposes of section 6050Sand this section.

(c) Requirement to file return—(1)Form of return. A payee must file aninformation return for the payor on Form1098–E, Student Loan Interest Statement.A payee may use a substitute for Form1098–E if the substitute form complieswith the applicable revenue proceduresrelating to substitute forms.

(2) Information included on return. Apayee must include on Form 1098–E—

(i) The name, address, and taxpayeridentification number (TIN)(as defined insection 7701(a)(41)) of the payee;

(ii) The name, address, and TIN of thepayor;

(iii) The aggregate amount of interestpayments received during the calendaryear from the payor; and

(iv) Any other information required byForm 1098–E and its instructions.

(3) Time and place for filing return—(i) In general. Except as provided in para-graph (c)(3)(ii) of this section, the Form1098–E must be filed on or before Febru-ary 28 (March 31 if filed electronically)

of the year following the calendar year inwhich interest payments were received. Apayee must file Form 1098–E with theInternal Revenue Service according to theinstructions to Form 1098–E.

(ii) Extensions of time. The InternalRevenue Service may grant a payee anextension of time to file returns requiredin this section upon a showing of goodcause. See the instructions to Form1098–E and applicable revenue proce-dures for rules relating to extensions oftime to file.

(4) Use of magnetic media. See section6011(e) and § 301.6011–2 of this chapterfor rules relating to the requirement to fileForms 1098–E on magnetic media.

(d) Requirement to furnish statement—(1) In general. A payee must furnish astatement to each payor for whom it isrequired to file a Form 1098–E. The state-ment must include—

(i) The information required underparagraph (c)(2) of this section;

(ii) A legend that identifies the state-ment as important tax information that isbeing furnished to the Internal RevenueService;

(iii) Instructions that—(A) State that, under section 221 and

the regulations thereunder, the payor maynot be able to deduct the full amount ofinterest reported on the statement;

(B) In the case of qualified educationloans made before January 1, 2004, forwhich the payee does not report paymentsof interest other than stated interest, statethat the payor may be able to deduct addi-tional amounts (such as certain loan origi-nation fees and capitalized interest) notreported on the statement;

(C) State that the payor should refer torelevant Internal Revenue Service formsand publications, and should not refer tothe payee, for explanations relating to theeligibility requirements for, and calcula-tion of, any allowable deduction for inter-est paid on a qualified education loan;and

(D) Include the name, address, andphone number of the office or departmentof the payee that is the information con-tact for the payee that filed the Form1098–E.

(2) Time and manner for furnishingstatement—(i) In general. Except as pro-vided in paragraph (d)(2)(ii) of this sec-tion, a payee must furnish the statement

described in paragraph (d)(1) of this sec-tion to the payor on or before January 31of the year following the calendar year inwhich payments of interest on a qualifiededucation loan were received. If mailed,the statement must be sent to the payor’slast known address. If furnished electroni-cally, the statement must be furnished inaccordance with the applicable regula-tions.

(ii) Extensions of time. The InternalRevenue Service may grant a payee anextension of time to furnish statementsrequired in this section upon a showing ofgood cause. See the instructions to Form1098–E and applicable revenue proce-dures for rules relating to extensions oftime to furnish statements.

(3) Copy of Form 1098–E. A payeemay satisfy the requirement of this para-graph (d) by furnishing either a copy ofForm 1098–E and its instructions oranother document that contains all theinformation filed with the Internal Rev-enue Service and the information requiredby paragraph (d)(1) of this section if thedocument complies with applicable rev-enue procedures relating to substitutestatements.

(e) Special rules—(1) Transitionalrule for reporting of loan origination feesand capitalized interest. For qualifiededucation loans made before January 1,2004, a payee is not required to reportpayments of loan origination fees andcapitalized interest as interest under sec-tion 6050S and this section.

(2) Qualified education loan certifica-tion. If a loan is not subsidized, guaran-teed, financed, or is not otherwise treatedas a student loan under a program of theFederal, state, or local government or aneligible educational institution, a payeemust request a certification from thepayor that the loan will be used solely topay for qualified higher educationexpenses. A payee may use Form W–9S,Request for Student’s or Borrower’sSocial Security Number and Certification,to obtain the certification. A payee mayestablish an electronic system for payorsto submit Forms W–9S electronically asdescribed in applicable forms and instruc-tions. A payee may also develop a sepa-rate form to obtain the payor certificationor may incorporate the certification intoother forms customarily used by thepayee, such as loan applications, provided

May 28, 2002 986 2002–21 I.R.B.

the certification is clearly set forth. If thecertification is not received, the loan isnot a qualified education loan for pur-poses of section 6050S and this section.

(3) Payments of interest received orcollected by one or more persons—(i) Ingeneral. Except as otherwise provided inparagraph (e)(3)(ii) of this section, if aperson collects or receives payments ofinterest on a qualified education loan onbehalf of another person (e.g., a lender),the person collecting or receiving theinterest must satisfy the informationreporting requirements of this section. Inthis case, the reporting requirements donot apply to the transfer of interest to theother person.

(ii) Exception. If the person collectingor receiving payments of interest on aqualified education loan on behalf ofanother person (e.g., a lender) does notpossess the information needed to complywith the information reporting require-ments of this section, the other personmust satisfy the information reportingrequirements of this section.

(4) Reporting by foreign persons. Apayee that is not a United States person(as defined in section 7701(a)(30)) mustreport payments of interest it receives ona qualified education loan only if itreceives the payment—

(i) At a location in the United States;or

(ii) At a location outside the UnitedStates if the payee is—

(A) A controlled foreign corporation(within the meaning of section 957(a)); or

(B) A person 50 percent or more of thegross income of which, from all sourcesfor the three-year period ending with theclose of the taxable year preceding thetaxable year in which interest paymentswere received (or for such part of theperiod as the person was in existence),was effectively connected with the con-duct of a trade or business within theUnited States.

(5) Governmental units. A governmen-tal unit, or an agency or instrumentalityof a governmental unit, that receives fromany payor interest payments that aggre-gate $600 or more for any calendar yearon one or more qualified education loansis a payee, without regard to the require-ment of paragraph (a) of this section thatthe interest be received in the course of atrade or business.

(f) Penalty provisions—(1) Failure tofile correct returns. The section 6721 pen-alty may apply to a payee that fails to fileinformation returns required by section6050S and this section on or before therequired filing date; that fails to includeall of the required information on thereturn; or that includes incorrect informa-tion on the return. See section 6721, andthe regulations thereunder, for rules relat-ing to penalties for failure to file correctreturns. See section 6724, and the regula-tions thereunder, for rules relating towaivers of penalties for certain failuresdue to reasonable cause.

(2) Failure to furnish correct informa-tion statements. The section 6722 penaltymay apply to a payee that fails to furnishstatements required by section 6050S andthis section on or before the prescribeddate; that fails to include all the requiredinformation on the statement; or thatincludes incorrect information on thestatement. See section 6722, and the regu-lations thereunder, for rules relating topenalties for failure to furnish correctstatements. See section 6724, and theregulations thereunder, for rules relatingto waivers of penalties for certain failuresdue to reasonable cause.

(3) Waiver of penalties for failures toinclude a correct TIN—(i) In general. Inthe case of a failure to include a correctTIN on Form 1098–E or a related infor-mation statement, penalties may bewaived if the failure is due to reasonablecause. Reasonable cause may be estab-lished if the failure arose from eventsbeyond the payee’s control, such as a fail-ure of the payor to furnish a correct TIN.However, the payee must establish that itacted in a responsible manner both beforeand after the failure.

(ii) Acting in a responsible manner. Apayee must request the TIN of each payorif it does not already have a record of thepayor’s correct TIN. If the payee does nothave a record of the payor’s correct TIN,then it must solicit the TIN in the mannerdescribed in paragraph (f)(3)(iii) of thissection on or before December 31 of eachyear during which it receives payments ofinterest. If a payor refuses to provide hisor her TIN upon request, the payee mustfile the return and furnish the statementrequired by this section without the pay-or’s TIN, but with all other requiredinformation. The specific solicitation

requirements of paragraph (f)(3)(iii) ofthis section apply in lieu of the solicita-tion requirements of § 301.6724–1(e) and(f) of this chapter for the purpose ofdetermining whether a payee acted in aresponsible manner in attempting toobtain a correct TIN. A payee that com-plies with the requirements of this para-graph (f)(3) will be considered to haveacted in a responsible manner within themeaning of § 301.6724–1(d) of this chap-ter with respect to any failure to includethe correct TIN of a payor on a return orstatement required by section 6050S andthis section.

(iii) Manner of soliciting TIN. A payeemust request the payor’s TIN in writingand must clearly notify the payor that thelaw requires the payor to furnish a TIN sothat it may be included on an informationreturn filed by the payee. A request for aTIN made on Form W–9S, Request forStudent’s or Borrower’s Social SecurityNumber and Certification, satisfies therequirements of this paragraph (f)(3)(iii).A payee may establish a system for pay-ors to submit Forms W–9S electronicallyas described in applicable forms andinstructions. A payee may also develop aseparate form to request the payor’s TINor incorporate the request into otherforms customarily used by the payee,such as loan applications.

(4) Failure to furnish TIN. The section6723 penalty may apply to any payor whois required (but fails) to furnish his or herTIN to a payee. See section 6723, and theregulations thereunder, for rules relatingto the penalty for failure to furnish a TIN.

(g) Effective date. The rules in thissection apply to information returnsrequired to be filed, and informationstatements required to be furnished, afterDecember 31, 2003.

PART 301—PROCEDURE ANDADMINISTRATION

Par. 4. The authority citation for part301 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 5. Section 301.6011–2 is amended

by:1. Revising the first sentence of para-

graph (b)(1).2. Revising paragraph (g)(1).3. Adding paragraph (g)(3).The revisions and additions read as

follows:

2002–21 I.R.B. 987 May 28, 2002

§ 301.6011–2 Required use of magneticmedia.

* * * * *

(b) Returns required on magneticmedia. (1) If the use of Forms 1042–S,1098, 1098–E, 1099 series, 5498, 8027,W–2G, or other form treated as a formspecified in this paragraph (b)(1) isrequired by the applicable regulations orrevenue procedures for the purpose ofmaking an information return, the infor-mation required by the form must be sub-mitted on magnetic media, except as oth-erwise provided in paragraph (c) of thissection. * * *

* * * * *

(g) Effective dates. (1) Except as oth-erwise provided in paragraph (g)(2) or (3)of this section, this section applies toreturns required to be filed after Decem-ber 31, 1986.

* * * * *

(3) This section applies to returns onForm 1098–E required to be filed afterDecember 31, 2003.

PART 602—OMB CONTROL NUM-BERS UNDER THE PAPERWORKREDUCTION ACT

Par. 6. The authority citation for part602 continues to read as follows:

Authority: 26 U.S.C. 7805.Par. 7. In § 602.101, paragraph (b) is

amended by removing the entry for“1.6050S–1T”, and adding two newentries in numerical order to the table toread as follows:

§ 602.101 OMB Control numbers.

* * * * *

(b) * * *

CFR part or section whereidentified and described

Current OMBcontrol No.

* * * * *

1.6050S–3................................................................................................................................................................. 1545–1678

1.6050S–4T .............................................................................................................................................................. 1545–1729

* * * * *


Internal Revenue.

Approved April 8, 2002.

Mark Weinberger,Assistant Secretary of the Treasury.


May 28, 2002 988 2002–21 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous

Weighted Average InterestRate Update

Notice 2002–32

Sections 412(b)(5)(B) and 412(l)(7)(C)(i) of the Internal Revenue Codeprovide that the interest rates used to cal-culate current liability for purposes ofdetermining the full funding limitationunder § 412(c)(7) and the required contri-bution under § 412(l) must be within apermissible range around the weightedaverage of the rates of interest on 30-yearTreasury securities during the four-yearperiod ending on the last day before thebeginning of the plan year.

Notice 88–73 (1988–2 C.B. 383) pro-vides guidelines for determining the

weighted average interest rate and theresulting permissible range of interestrates used to calculate current liability forthe purpose of the full funding limitationof § 412(c)(7) of the Code.

Section 417(e)(3)(A)(ii)(II) of theCode defines the applicable interest rate,which must be used for purposes of deter-mining the minimum present value of aparticipant’s benefit under § 417(e)(1)and (2), as the annual rate of interest on30-year Treasury securities for the monthbefore the date of distribution or suchother time as the Secretary may by regu-lations prescribe. Section 1.417(e)–1(d)(3) of the Income Tax Regulationsprovides that the applicable interest ratefor a month is the annual interest rate on30-year Treasury securities as specifiedby the Commissioner for that month in

revenue rulings, notices or other guidancepublished in the Internal Revenue Bulle-tin.

The rate of interest on 30-year Trea-sury Securities for April 2002 is 5.68 per-cent. Pursuant to Notice 2002–26(2002–15 I.R.B. 743), the Service hasdetermined this rate as the monthly aver-age of the daily determination of yield onthe 30-year Treasury bond maturing inFebruary 2031.

Section 405 of the Job Creation andWorker Assistance Act of 2002 amended§ 412(l)(7)(C) of the Code to provide thatfor plan years beginning in 2002 and2003 the permissible range is extended to120 percent.

The following rates were determinedfor the plan years beginning in the monthshown below.

Month YearWeightedAverage

90% to 110%Permissible

Range

90% to 120%Permissible

Range

May 2002 5.69 5.12 to 6.25 5.12 to 6.82


The principal author of this notice isTodd Newman of the Employee Plans,Tax Exempt and Government EntitiesDivision. For further information regard-ing this notice, please contact theEmployee Plans’ taxpayer assistance tele-phone service at 1–877–829–5500 (a toll-free number), between the hours of 8:00a.m. and 6:30 p.m. Eastern time, Mondaythrough Friday. Mr. Newman may bereached at 1–202–283–9888 (not a toll-free number).

Suspension of Requirement toFile Form 8390 (InformationReturn for Determination ofLife Insurance CompanyEarnings Rate Under Section809)

Notice 2002–33

Section 809 of the Internal RevenueCode reduces the policyholder dividendsthat a mutual life insurance company ispermitted to deduct under section 808.Each year, the Internal Revenue Servicepublishes the differential earnings rate(DER) and the recomputed differentialearnings rate (RDER) to be used in com-puting the amount of the reduction. TheDER and RDER are determined by theService on the basis of informationreported by mutual life insurance compa-nies and the 50 largest stock life insur-ance companies (as determined by theService) on Form 8390, InformationReturn for Determination of Life Insur-ance Company Earnings Rate Under Sec-tion 809.

The Job Creation and Worker Assis-tance Act of 2002, Pub. L. No. 107–147,

§ 611, amended section 809 of the Codeby adding new paragraph (j) . Asamended, section 809(j) provides that theDER shall be treated as zero for purposesof computing both the differential earn-ings amount and the recomputed differen-tial earnings amount for a mutual lifeinsurance company’s taxable years begin-ning in 2001, 2002, or 2003.

As a result of this amendment to sec-tion 809, the Service will not be comput-ing the DER and RDER for 2001, 2002,or 2003.* The determination of the 50largest stock companies, however, will bemade for those years.

The suspension of section 809 by sec-tion 809(j) expires in 2004. Accordingly,life insurance companies will not berequired to file Form 8390 in either 2002or 2003.

*Notice 2002–19 (2002–10 I.R.B. 619) provided that the tentative DER for 2001 and RDER for 2000 are zero.

2002–21 I.R.B. 989 May 28, 2002

The Service will be required to com-pute a 2004 DER and RDER using prioryear income information from both stockand mutual life insurance companies.Therefore, it is expected that the require-ment that companies file Form 8390 willbe reinstated in 2004. Mutual life insur-ance companies will be required to file aForm 8390 with respect to calendar years2002 and 2003. Any stock life insurancecompany that is determined to be one ofthe 50 largest stock life insurance compa-nies during 2001, 2002, or 2003 will berequired to file a Form 8390 with respectto that year. All life insurance companiesthat may be required to report 2001,2002, or 2003 information are obligatedto retain the records necessary to reportthe appropriate information in 2004.

Life insurance companies that will berequired to file a Form 8390 with respectto calendar years 2001 or 2002 will berequired to file such form no later thanJuly 1, 2004. Life insurance companiesthat will be required to file a Form 8390with respect to calendar year 2003 will berequired to file such form no later thanOctober 1, 2004.

When filing Form 1120–L (U.S. LifeInsurance Company Income Tax Return)for 2001, mutual life insurance companiesshould treat the DER as zero for purposesof computing the differential earningsamount in Schedule C (Differential Earn-ings Amount). Appropriate changes willbe made to Form 1120–L for 2002.

For 2004 and years thereafter, the Ser-vice will issue additional guidanceregarding the filing of Form 8390 by lifeinsurance companies as needed.

Comments are requested on the imple-mentation of section 809(j), the require-ment that information with respect to2001 and 2002 and information withrespect to 2003 be filed separately, andany required changes to Form 1120–L(such as temporarily eliminating ScheduleC). Comments should be sent to CC:ITA:RU (Notice 2002–33), room 5226,Internal Revenue Service, POB 7604,Ben Franklin Station, Washington, DC20044. Comments may be hand deliveredbetween the hours of 8 a.m. and 5 p.m.to: CC:ITA:RU (Notice 2002–33), Couri-er’s Desk, Internal Revenue Service, 1111Constitution Avenue, NW, Washington,DC. In the alternative, e-mail commentsto [email protected].


The principal author of this notice isKatherine A. Hossofsky of the Office ofthe Associate Chief Counsel (FinancialInstitutions and Products). For furtherinformation regarding this notice, contactMs. Hossofsky at 202–622–3477 (not atoll-free call).

IRS Announces VoluntaryCompliance Program toPromote Disclosure byPolitical Organizations

Notice 2002–34

The Internal Revenue Service (IRS)announces a voluntary compliance pro-gram to promote disclosure by politicalorganizations described in § 527 of theInternal Revenue Code (political organi-zations) that file certain forms by July15, 2002.

BACKGROUND

On July 1, 2000, Pub. L. 106–230 wasenacted, imposing new reporting and dis-closure requirements on political organi-zations in connection with their tax-exempt status. The IRS is aware that thereis a great deal of confusion concerningthe new filing requirements. Because ofthis confusion, many political organiza-tions have either failed to file or need tocorrect previously filed forms. The IRSbelieves that implementing this voluntarycompliance program for these politicalorganizations is most likely to achieve thecongressional goal of maximum disclo-sure and is in the best interest of soundtax administration.

FILING REQUIREMENTS

The law generally requires a tax-exempt political organization to file:• an initial notice of status on Form

8871,• periodic reports of contributions and

expenditures on Form 8872,• annual information returns on Form

990 or Form 990–EZ, and• annual income tax returns on Form

1120–POL.

See Rev. Rul. 2000–49 (2000–2 C.B.430), and the attachment below for moreinformation on the basic filing require-ments. Forms may be downloaded fromthe IRS Web site at www.irs.gov. The IRSWeb site also describes filing require-ments at www.irs.gov/polorgs. To obtainassistance from the IRS, please call 877–829–5500 (a toll-free call).

VOLUNTARY COMPLIANCEPROGRAM

The IRS will not assert any tax, pen-alty or interest that arises solely because apolitical organization failed to file a formor filed an incorrect form, if the form isfiled or corrected by July 15, 2002. Thisvoluntary compliance program applieswith respect to the following forms:• Any Form 8871, Political Organization

Notice of 527 Status, due on or beforeJuly 15, 2002,

• Any Form 8872, Report of Contribu-tions and Expenditures, due on orbefore July 15, 2002,

• Any Form 1120–POL, U.S. Income TaxReturn for Certain Political Organiza-tions, due on or before July 15, 2002,including any applicable extensions,

• Any Form 990, Return of OrganizationExempt from Income Tax, or Form990–EZ, Short Form Return of Organi-zation Exempt from Income Tax, due onor before July 15, 2002, including anyapplicable extensions.If a political organization does not

completely report its contributions andexpenditures on all applicable Forms8872 filed by July 15, 2002, it remainsliable for the amount due under§ 527(j)(1) on the unreported amounts.For any form described above that is filedor corrected after July 15, 2002, anyapplicable taxes, penalties and interestwill be due from the original due date. Inaddition, this voluntary compliance pro-gram does not apply to any Form 1120–POL required to be filed under rules ineffect before July 1, 2000, so a politicalorganization remains liable for the tax onits investment income due under§ 527(b).

FILING INFORMATION

Any paper forms and correspondencefiled in accordance with this notice

May 28, 2002 990 2002–21 I.R.B.

should contain the following informationat the top of the form and on the enve-lope.

This is filed in accordance with Notice2002–34.

Electronic versions of Forms 8871 and8872 are not required to include thisinformation.


The principal author of this notice isJudith E. Kindell of the Exempt Organi-zations Rulings and Agreements Division.For further information regarding thisnotice, please call TE/GE Customer Ser-vice at 877–829–5500 (a toll-free call).

ATTACHMENT — POLITICALORGANIZATION FILINGREQUIREMENTS

Tax-exempt political organizations, asdefined in § 527 of the Internal RevenueCode (political organizations), must filesome or all of four forms as a conditionof tax-exempt status. This attachment dis-cusses the filing requirements for politicalorganizations without regard to the volun-tary compliance program announced inthis notice.

Political organizations include parties,committees, associations, funds or otherentities organized and operated “primarilyfor the purpose of directly or indirectlyaccepting contributions or making expen-ditures.” Political organizations acceptcontributions and make expenditures for

the purpose of influencing the “selection,nomination, election, or appointment ofany individual to Federal, State, or localpublic office or office in a political orga-nization, or the election of Presidentialelectors.” Political organizations includepolitical party committees, Federal, Stateand local candidate committees and otherpolitical committees such as politicalaction committees (PACs).

Who Has to File

The filing requirements in the chartbelow apply to those political organiza-tions that:• wish to be exempt from federal income

tax provisions, and• receive or expect to receive $25,000 or

more in gross receipts in any taxableyear

If You Are A You File

Federal candidate committee, political party committee, or PACrequired to report to the Federal Election Commission (FEC)

➢ Form 1120–POL; and➢ Form 990 or Form 990–EZ

State or local candidate committee or state or local committee of apolitical party

➢ Form 8871;➢ Form 1120–POL; and➢ Form 990 or Form 990–EZ

Any other political organization, including state or local PACs and fed-eral political organizations that are not required to report to the FEC

➢ Form 8871;➢ Form 8872;➢ Form 1120–POL; and➢ Form 990 or Form 990–EZ

NOTE: You still file a Form 1120–POL ifyou are:• A political organization that does not

seek tax-exemption, or• A tax-exempt political organization that

does not have gross receipts of at least$25,000, but does receive in excess of$100 in taxable income in any taxableyear.

Form Filing Requirements

1. Form 8871 — Notice of 527 StatusTo be tax-exempt, a political organiza-

tion that expects to receive $25,000 ormore in gross receipts in any taxable yearmust file Form 8871 with the IRS, unlessit is required to report as a political com-mittee to the FEC. Form 8871, PoliticalOrganization Notice of 527 Status, mustbe filed both electronically and in writing,within 24 hours of the political organiza-

tion’s establishment. Until the politicalorganization files the form, its income(including contributions) is subject totaxation and is reported on Form 1120–POL.

2. Form 8872 — Report of Contri-butions and ExpendituresPolitical organizations file Form 8872,

Political Organization Report of Contri-butions and Expenditures, to discloseinformation concerning:• persons receiving expenditures that

aggregate $500 or more per person, percalendar year; and

• persons making contributions thataggregate $200 or more per person, percalendar year.A political organization that does not

disclose this information must pay anamount equal to the highest corporate taxrate (35 percent) multiplied by theamount of contributions and expenditures

not disclosed and report this on the Form1120–POL. If a political organizationdoes not file Form 8871 and is subject totax on its income, it is not required to fileForm 8872.

For filing dates, see Q&A–28 throughQ&A–33 of Rev. Rul. 2000–49.

3. Form 1120–POL — U.S. IncomeTax Return for Certain PoliticalOrganizationsForm 1120–POL, U.S. Income Tax

Return for Certain Political Organiza-tions, is due by the 15th day of the 3rdmonth after the end of the organization’staxable year. Political organizations mayrequest a six-month extension of the fil-ing deadline by filing Form 7004, Appli-cation for Automatic Extension of Time toFile Corporate Income Tax Return. Thisextension must be filed by the due date of

2002–21 I.R.B. 991 May 28, 2002

Form 1120–POL. There is a penalty forfailure to file Form 1120–POL.

4. Form 990 or 990–EZ — Return ofOrganization Exempt from IncomeTaxExempt political organizations with

gross receipts of less than $100,000 andassets of less than $250,000 at the end ofthe year may file a Form 990–EZ, Short

Form Return of Organization ExemptFrom Income Tax. All other exemptpolitical organizations should file a Form990, Return of Organization ExemptFrom Income Tax.

Forms 990 or 990–EZ are due on the15th day of the 5th month after the end ofthe organization’s taxable year. There is apenalty for failure to file this return.

Organizations may request a three-month extension, without showing cause,by filing Form 8868, Application forExtension of Time to File an ExemptOrganization Return, by the due date. Asecond three-month extension, withcause, may also be requested throughForm 8868.

Form When filed Exceptions to filing requirement

8871 Within 24 hours of establishment ➢ Political committee required to report to the FEC;➢ Organization that reasonably expects annual gross receipts to

always be less than $25,000

8872 At organizat ion ’s opt ion,quar ter ly /semiannual ly ormonthly, on same basis for entirecalendar year (see form instruc-tions for detailed information)

➢ Political committees required to report to the FEC;➢ State and local committees of political parties;➢ Campaign committees of state and local candidates;➢ Organizations that reasonably expect gross receipts to always be

less than $25,000

1120–POL Due the 15th day of the 3rdmonth after the close of the tax-able year

➢ Political organizations whose annual gross receipts are less than$25,000, and who have taxable income less than $100

990 or 990–EZ Due the 15th day of the 5thmonth after the close of the tax-able year

➢ Political organizations whose annual gross receipts are less than$25,000

Tax Avoidance Using NotionalPrincipal Contracts

Notice 2002–35

The Internal Revenue Service and theTreasury Department have become awareof a type of transaction, described below,that is used by taxpayers to generate taxlosses. This Notice alerts taxpayers andtheir representatives that the tax benefitspurportedly generated by these transac-tions are not allowable for federal incometax purposes. This Notice also alerts tax-payers, their representatives, and promot-ers of these transactions of certain respon-sibilities that may arise from participatingin these transactions.

FACTS

In general, the transaction involves theuse of a notional principal contract(“NPC”) to claim current deductions forperiodic payments made by a taxpayer(“T”) while disregarding the accrual of aright to receive offsetting payments in thefuture. The NPC has a term of more than

one year. Under the NPC, T is required tomake periodic payments to CP at regularintervals of one year or less based on afixed or floating rate index. In return, CPis required to make a single payment atthe end of the term of the NPC that con-sists of a noncontingent component and acontingent component. The noncontingentcomponent, which is relatively large incomparison to the contingent component,may be based upon a fixed or floatinginterest rate. The contingent componentmay reflect changes in the value of astock index or currency.

T may fund its obligation to makeperiodic payments in whole or in part byborrowing funds from a lender, who maybe CP. In addition, T may engage in othertransactions, such as interest rate collars,for purposes of limiting risk with respectto the NPC transaction. T may engage inshort-term trading activity in securitieswith a view to establishing a trade orbusiness. T may also engage in the trans-action through a partnership, in whichcase instead of T, the partnership mayengage in some or all of the activitiesdescribed above. T will likely enter intoan agreement with CP to terminate the

NPC prior to the scheduled payment dateof CP’s payment.

T deducts the ratable daily portion ofeach periodic payment for the taxableyear to which that portion relates. How-ever, T does not accrue income withrespect to the nonperiodic payment untilthe year the payment is received. Tintends to report as capital any gain itrealizes upon the termination of the NPC.

ANALYSIS

The requirement of § 1.446–3(f)(2)(i)that a nonperiodic payment must be rec-ognized over the term of a NPC in a man-ner that reflects the economic substanceof the contract must be applied separatelyto the noncontingent component of thecontract, whether that component is basedon a fixed or a floating interest rate.

For a discussion of the proper treat-ment of the periodic and nonperiodic pay-ments made pursuant to the interest rateswap if the noncontingent component isbased on a fixed interest rate, see Rev.Rul. 2002–30 (2002–21 I.R.B. 971), May28, 2002 (holding that the nonperiodicpayment must be accrued ratably over the

May 28, 2002 992 2002–21 I.R.B.

term of the NPC). In addition, dependingon the facts of the particular case, the Ser-vice may challenge the purported taxresults of these transactions on othergrounds, including by: (i) recharacterizingone or more of the transactions under§§ 1.446–3(g)(2) or 1.446–3(i); (ii) deter-mining that the swap expense, if any, wasnot incurred in the course of a trade orbusiness and was therefore subject to the2-percent floor limitation in section 67 ofthe Internal Revenue Code; (iii) disre-garding the combination of the loans andthe periodic payments as circular flows ofcash; or (iv) applying other variations ofthe doctrine of substance-over-form.

The Service may impose penalties onparticipants in these transactions or, asapplicable, on persons who participate inthe promotion or reporting of these trans-actions, including the accuracy-relatedpenalty under section 6662, the returnpreparer penalty under section 6694, thepromoter penalty under section 6700, andthe aiding and abetting penalty under sec-tion 6701.

Transactions that are the same as, orsubstantially similar to, the transactiondescribed in this Notice 2002–35 areidentified as “listed transactions” for pur-poses of § 1.6011–4T(b)(2) of the Tempo-rary Income Tax Regulations and§ 301.6111–2T(b)(2) of the TemporaryProcedure and Administrative Regula-tions. See also § 301.6112–1T, A–4. Itshould be noted that, independent of theirclassification as “listed transactions” forpurposes of §§ 1.6011–4T(b)(2) and301.6111–2T(b)(2), such transactionsmay already be subject to the tax shelterregistration and list maintenance require-ments of §§ 6111 and 6112 under theregulations issued in February 2000(§§ 301.6111–2T and 301.6112–1T, A–4),as well as the regulations issued in 1984and amended in 1986 (§§ 301.6111–1Tand 301.6112–1T, A–3). Persons requiredto register these tax shelters who havefailed to register the shelters may be sub-ject to the penalty under section 6707(a),and to the penalty under section 6708(a)if the requirements of section 6112 arenot satisfied.

The Service and the Treasury recog-nize that some taxpayers may have filedtax returns taking the position that theywere entitled to the purported tax benefitsof the type of transaction described in this

Notice. These taxpayers are advised totake prompt action to file amendedreturns.

The principal author of this Notice isElizabeth Handler of the Office of Asso-ciate Chief Counsel (Financial Institu-tions and Products). For further informa-tion regarding this Notice, contact Ms.Handler at (202) 622–3930 (not a toll-freecall).

26 CFR 601.204: Changes in accounting periodsand methods of accounting.(Also Part I, §§ 61, 446, 451, 481, 1012; 1.61–1,1.446–1, 1.451–1, 1.481–1, 1.1012–1.)

Rev. Proc. 2002–36

SECTION 1. PURPOSE

This revenue procedure provides tax-payers that purchase vehicles subject toleases and assume the associated leasesfrom motor vehicle dealers with a safeharbor method of accounting for capitalcost reduction payments (“CCR pay-ments”) made by vehicle lessees. Thisrevenue procedure also provides a proce-dure for taxpayers to obtain automaticconsent of the Commissioner to change tothe safe harbor method of accounting.

SECTION 2. BACKGROUND

.01 Section 61(a) of the Internal Rev-enue Code provides that, except as other-wise provided, gross income means allincome from whatever source derived.

.02 Section 451(a) and § 1.451–1(a) ofthe Income Tax Regulations provide thatthe amount of any item of gross incomeshould be included in a taxpayer’s grossincome for the taxable year in whichactually or constructively received by thetaxpayer, unless, under the taxpayer’smethod of accounting, such amount isproperly includible for a different year.

.03 Section 1012 provides that thebasis of property is the cost of the prop-erty. In general, section 1.1012–1(a) pro-vides that the cost is the amount paid forthe property in cash or other property.

.04 Under § 446(e) and § 1.446–1(e)(2)(i), a taxpayer generally mustsecure the consent of the Commissionerbefore changing a method of accountingfor federal income tax purposes. Section1.446–1(e)(3)(ii) authorizes the Commis-

sioner to prescribe administrative proce-dures setting forth the terms and condi-tions necessary to obtain consent tochange a method of accounting.

.05 The Treasury Department and theInternal Revenue Service are aware thatthe proper tax treatment of CCR pay-ments by purchasers of leased vehicleshas become a source of significant con-troversy. For reasons of administrativeconvenience and to avoid further contro-versy in this area, Treasury and the Ser-vice have determined that it is appropriateto provide purchasers with a safe harbormethod of accounting for CCR payments,under which a CCR payment is excludedfrom the purchaser’s basis in the pur-chased vehicle (and is excluded from thepurchaser’s gross income). Treasury andthe Service believe the scope of the safeharbor method provided in this revenueprocedure is appropriate given the currentvehicle lease market and lease financingmarket. However, Treasury and the Ser-vice may modify the scope of this safeharbor method as necessary to respond tochanges in leasing market conditions.

SECTION 3. SCOPE

This revenue procedure applies to tax-payers who purchase motor vehicles sub-ject to leases in connection with which alessee has made a CCR payment, asdefined in section 4.01 of this revenueprocedure, to the dealer/lessor of thevehicle at the inception of the lease.

SECTION 4. DEFINITIONS

.01 CCR Payment. A CCR payment isany payment made at the inception of amotor vehicle lease by the lessee to thedealer from which the vehicle is leasedthat has the effect of reducing the totalamount of rent the lessee will pay afterinception of the lease. A CCR paymentmay consist of a cash down payment, thetrade-in value of a lessee’s used vehicle, arebate or incentive supplied by the manu-facturer to the lessee, credits earned undera credit card reward program, or the firstor last monthly rental payment. A CCRpayment does not include refundablesecurity deposits; extended service planfees; insurance premiums; title, registra-tion, or license fees; sales, lease, excise,use, or ad valorem taxes paid in advance

2002–21 I.R.B. 993 May 28, 2002

or collected by the dealer; or administra-tive fees; made by a lessee in connectionwith a motor vehicle lease.

.02 Taxpayer. A “taxpayer” for pur-poses of this revenue procedure is a pur-chaser of a motor vehicle that is subjectto a lease in connection with which a les-see has made a CCR payment to thedealer from which the lessee originallyleased the vehicle.

SECTION 5. CCR METHOD

Under the CCR method, the amount ofa CCR payment is not includible in thetaxpayer’s gross income and may not beincluded in the taxpayer’s basis in thepurchased vehicle.

SECTION 6. AUDIT PROTECTIONFOR TAXPAYERS CURRENTLYUSING THE CCR METHOD

A taxpayer within the scope of thisrevenue procedure that is using the CCRmethod provided in section 5 of this rev-enue procedure on May 3, 2002, maycontinue to use this safe harbor methodfor taxable years ending on or after May3, 2002, without filing a Form 3115,Application to Change a Method ofAccounting. Such taxpayer’s method ofexcluding CCR payments from both itsgross income and its basis in the pur-chased vehicle will not be raised as anissue in a taxable year that ends beforeMay 3, 2002. Moreover, if such taxpay-er’s method of excluding CCR paymentsfrom both its gross income and its basisin the purchased vehicle is already anissue under consideration (within themeaning of section 3.09 of Rev. Proc.2002–9 (2002–3 I.R.B. 327)) in a taxable

year that ends before May 3, 2002, theissue will not be further pursued.

SECTION 7. CHANGE IN METHODOF ACCOUNTING

.01 Limitations, Terms, and Condi-tions. A change to the CCR method pro-vided by this revenue procedure will betreated as a change in method of account-ing to which the provisions of §§ 446 and481 and the regulations thereunder apply.Therefore, a taxpayer within the scope ofthis revenue procedure that does not usethe CCR method provided in section 5 ofthis revenue procedure on May 3, 2002,but wants to use this safe harbor methodfor taxable years ending on or afterDecember 31, 2001, must file a Form3115.

.02 Automatic Change to CCRMethod. A taxpayer within the scope ofthis revenue procedure that wants tochange to the CCR method provided bysection 5 of this revenue procedure mustfollow the automatic change in method ofaccounting provisions of Rev. Proc.2002–9 (or its successor), as modified byRev. Proc. 2002–19 (2002–13 I.R.B. 696)with the following modifications:

(1) The scope limitations in section4.02 of Rev. Proc. 2002–9 do not apply toa taxpayer that wants to make the changefor its first or second taxable year endingon or after December 31, 2001;

(2) When filing the Form 3115, tax-payers must complete all applicable partsof the form and, in lieu of the labelrequired by section 6.02(4) of Rev. Proc.2002–9, are instructed to write “Filedunder Rev. Proc. 2002–36” at the top ofthe form.

.03 Section 481(a) Adjustment. As pro-vided in section 2 of Rev. Proc. 2002–19,the period for negative § 481(a) adjust-ments is one year, and the period for posi-tive § 481(a) adjustments is four years.

.04 Audit Protection. If a taxpayercomplies with the requirements of thisrevenue procedure and changes itsmethod of accounting for CCR paymentsto the CCR method provided in section 5of this revenue procedure, the treatmentof CCR payments will not be raised as anissue in any taxable year before the yearof change and, if the treatment of CCRpayments is already an issue under con-sideration (within the meaning of section3.09 of Rev. Proc. 2002–9) in a taxableyear before the year of change, that issuewill not be further pursued.

SECTION 8. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 2002–9 is modified andamplified to include this automaticchange in section 5A of the APPENDIX.

SECTION 9. EFFECTIVE DATE

This revenue procedure is effective fortaxable years ending on or after Decem-ber 31, 2001.


The principal author of this revenueprocedure is Joy Ruff of the Office ofAssociate Chief Counsel (Income Tax andAccounting). For further informationregarding this revenue procedure, contactMs. Ruff at (202) 622–5020 (not a toll-free call).

May 28, 2002 994 2002–21 I.R.B.

Part IV. Items of General Interest

Notice of ProposedRulemaking and Notice ofPublic Hearing

Notice of SignificantReduction in the Rate ofFuture Benefit Accrual

REG–136193–01


ACTION: Notice of proposed rulemakingand notice of public hearing.

SUMMARY: This document containsproposed regulations relating to therequirements of section 4980F of theInternal Revenue Code (Code) and sec-tion 204(h) of the Employee RetirementIncome Security Act of 1974 (ERISA), asamended, which apply to defined benefitplans and to individual account plans thatare subject to the funding standards ofsection 412 of the Code and section 302of ERISA. These regulations provideguidance on the requirements for planadministrators to give notice of planamendments to adversely affected planparticipants and other parties when thoseamendments provide for a significantreduction in the rate of future benefitaccrual or the elimination or significantreduction in an early retirement benefit orretirement-type subsidy. These regula-tions will affect retirement plan sponsorsand administrators, participants in andbeneficiaries of retirement plans, andemployee organizations representingretirement plan participants. This docu-ment also provides a notice of publichearing on these proposed regulations.

DATES: Written or electronic commentsmust be received by July 22, 2002.Requests to speak (with outlines of oralcomments to be discussed) at the publichearing scheduled for August 15, 2002, at10 a.m., must be received by July 22,2002.

ADDRESSES: Send submissions to:CC:ITA:RU (REG–136193–01), room5226, Internal Revenue Service, POB7604, Ben Franklin Station, Washington,

DC 20044. Submissions may be handdelivered Monday through Fridaybetween the hours of 8 a.m. and 5 p.m.to: CC:ITA:RU (REG–136193–01), Cou-rier’s Desk, Internal Revenue Service,1111 Constitution Avenue, NW, Washing-ton, DC. Alternatively, taxpayers maysubmit comments electronically directlyto the IRS Internet site at www.irs.gov/regs. The public hearing will be held inthe IRS Auditorium, Seventh Floor, Inter-nal Revenue Service, 1111 ConstitutionAve., NW, Washington, DC.

FOR FURTHER INFORMATION CON-TACT: Concerning the regulations, JanetA. Laufer at (202) 622–6090 or Diane S.Bloom at (202) 283–9888; concerningsubmissions, Donna Poindexter at (202)622–7180 (not toll-free numbers).



The collections of information con-tained in this notice of proposed rulemak-ing have been submitted to the Office ofManagement and Budget for review inaccordance with the Paperwork Reduc-tion Act of 1995 (44 U.S.C. 3507(d)).Comments on the collections of informa-tion should be sent to the Office of Man-agement and Budget, Attn: Desk Officerfor the Department of the Treasury, Officeof Information and Regulatory Affairs,Washington, DC 20503, with copies tothe Internal Revenue Service, Attn: IRSReports Clearance Officer, W:CAR:MP:FP:S Washington, DC 20224. Com-ments on the collection of informationshould be received by June 24, 2002.Comments are specifically requested con-cerning:

Whether the proposed collections ofinformation are necessary for the properperformance of the functions of the Inter-nal Revenue Service, including whetherthe information will have practical utility;

The accuracy of the estimated burdenassociated with the proposed collection ofinformation (see below);

How the quality, utility, and clarity ofthe information to be collected may beenhanced;

How the burden of complying with theproposed collections of information maybe minimized, including through theapplication of automated collection tech-niques or other forms of information tech-nology; and

Estimates of capital or start-up costsand costs of operation, maintenance, andpurchase of service to provide informa-tion.

The collections of information in thisproposed regulation are in § 54.4980F–1.Responses to this collection of informa-tion are required in order to obtain a ben-efit. Specifically, this information isrequired for a taxpayer who wants toamend a plan that is subject to therequirements of section 204(h) or section4980F to significantly reduce the rate offuture benefit accrual or significantlyreduce an early retirement benefit orretirement-type subsidy. This informationwill be used to notify participants, alter-nate payees, and employee organizationsof the amendment.

Estimated total annual reporting bur-den: 40,000 hours

The estimated annual burden perrespondent varies from one hour to 80hours, depending on individual circum-stances, with an estimated average of 10hours.

Estimated number of respondents:4,000

Estimated annual frequency ofresponses: Once

An agency may not conduct or spon-sor, and a person is not required torespond to, a collection of informationunless it displays a valid control numberassigned by the Office of Managementand Budget.


Background

Section 204(h) was added to ERISAby section 11006(a) of the Single-Employer Pension Plan Amendments Actof 1986, Title XI of Public Law 99–272

2002–21 I.R.B. 995 May 28, 2002

(100 Stat. 237) and was amended by sec-tion 1879(u)(1) of the Tax Reform Act of1986, Public Law 99–514 (100 Stat.2913) (TRA ’86). As amended by TRA’86, section 204(h) of ERISA (section204(h)) required a plan administrator toprovide notice to participants and otherinterested persons after the date of adop-tion and at least 15 days before the effec-tive date of a plan amendment providingfor a significant reduction in the rate offuture benefit accrual.

Pursuant to section 101(a) of Reorga-nization Plan No. 4 of 1978, 29 U.S.C.1001nt, the Secretary of the Treasury gen-erally has authority to issue regulationsunder parts 2 and 3 of subtitle B of title Iof ERISA, including section 204 ofERISA. Under section 104 of Reorgani-zation Plan No. 4, the Secretary of Laborretains enforcement authority with respectto parts 2 and 3 of subtitle B of title I ofERISA, but, in exercising such authority,is bound by the regulations issued by theSecretary of the Treasury. On December15, 1995, temporary regulations (T.D.8631, 1996–1 C.B. 54), under section 411of the Internal Revenue Code (Code), 26U.S.C. 411, were published in the Fed-eral Register (60 FR 64320), along witha notice of proposed rulemaking (EE–34–95, 1996–1 C.B. 761) cross-referencingthe temporary regulations (60 FR 64401).Those temporary regulations addressedthe notice requirements of section 204(h).On December 14, 1998, final regulations(T.D. 8795, 1999–1 C.B. 459) addressingthe notice requirements of section 204(h)were published in the Federal Register.See § 1.411(d)–6.

Section 659 of the Economic Growthand Tax Relief Reconciliation Act of2001, Public Law 107–16 (115 Stat. 38)(EGTRRA) added section 4980F of theCode, which imposes an excise tax whena plan administrator fails to providetimely notice of plan amendments thatprovide for a significant reduction in therate of future benefit accrual, and, for thispurpose, treats the elimination or reduc-tion of an early retirement benefit orretirement-type subsidy as a reduction inthe rate of future benefit accrual.EGTRRA also amended section 204(h) totreat the elimination or reduction of anearly retirement benefit or retirement-typesubsidy as a reduction in the rate of futurebenefit accrual. The requirement in sec-

tion 204(h)(1) that notice be given afterthe date of adoption and at least 15 daysin advance of the amendment’s effectivedate was replaced by a requirement con-tained in both section 4980F(e)(3) andsection 204(h)(3) that, except as providedin regulations, the notice be providedwithin a “reasonable time” before theeffective date of the amendment. Thenotice requirements in section 4980F ofthe Code are essentially identical to thenotice requirements in section 204(h), asamended by EGTRRA. In addition, sec-tion 204(h) has been amended byEGTRRA to provide that, in the case ofan egregious failure to meet the noticerequirements, the provisions of the planare applied as if the amendment entitledapplicable individuals to the greater of thebenefits to which they would have beenentitled without regard to the amendmentor the benefits under the plan asamended.

The Job Creation and Worker Assis-tance Act of 2002, Public Law 107–147(116 Stat. 21) included certain technicalcorrections to section 659 of EGTRRA.

These proposed regulations, whenfinalized, would replace the Treasuryregulations currently at § 1.411(d)–6 toreflect the EGTRRA changes outlinedabove. Since the notice requirements ofsection 204(h) are now also requiredunder section 4980F of the Code, theseproposed regulations are issued undersection 4980F, but apply for purposes ofsection 204(h), as well as for purposes ofsection 4980F.

Explanation of Provisions

Statutory Requirements After EGTRRA

Section 4980F(e) of the Code and sec-tion 204(h) of ERISA require notice to beprovided when a defined benefit plan or amoney purchase pension or other indi-vidual account plan that is subject to thefunding standards of section 412 of theCode is amended to significantly reducethe rate of future benefit accrual. Thisnotice must be provided to participantsand alternate payees for whom theamendment is reasonably expected to sig-nificantly reduce the rate of future benefitaccrual, and to employee organizationsrepresenting such participants. For pur-poses of these rules, an amendment that

eliminates or reduces an early retirementbenefit or retirement-type subsidy istreated as an amendment that reduces therate of future benefit accrual. The noticemust contain sufficient information (asdetermined in accordance with regula-tions) to enable such individuals to under-stand the effect of the amendment and,except to the extent provided in regula-tions, must be provided within a reason-able time before the effective date of theamendment. Addit ionally, sect ion4980F(e)(2) of the Code and section204(h)(2) of ERISA authorize the Secre-tary to provide special rules for planscovering fewer than 100 participants andfor plans that offer participants the optionto choose between the new benefit for-mula and the old benefit formula.

A plan amendment that is subject tothe notice requirements of section 4980Fof the Code and section 204(h) of ERISA(section 204(h) amendment) may be sub-ject to additional reporting and disclosurerequirements under title I of ERISA, suchas the requirement to provide a summaryof material modifications (SMM) describ-ing the amendment. Notice under section4980F of the Code and section 204(h) ofERISA (referred to in the proposed regu-lations as section 204(h) notice) must beprovided in accordance with the provi-sions of these regulations even thoughsections 102(a) and 104(b) of ERISA alsomay require that an SMM describing theplan amendment be furnished to partici-pants covered under the plan and benefi-ciaries receiving benefits under the plan.The Department of Labor has advised theIRS that, at least until the effective dateof final regulations under section 4980Fof the Code, a plan administrator that pro-vides a section 204(h) notice to applicableindividuals in accordance with these pro-posed regulations will be treated as hav-ing furnished those individuals with anSMM regarding the section 204(h)amendment. The plan administrator isrequired to satisfy any other requirementsregarding the furnishing of SMMs orupdated summary plan descriptions,including, for example, satisfaction of therequirement to furnish an SMM to anyother participants covered under the plan,and to beneficiaries receiving benefitsunder the plan, who are entitled to anSMM regarding the amendment.

May 28, 2002 996 2002–21 I.R.B.

Time for Providing Section 204(h) NoticeUnder Proposed Regulations

The proposed regulations aim to strikea balance between giving participants andother affected parties section 204(h)notice long enough in advance to enablethem to understand and consider theinformation before the amendment goesinto effect, and allowing employers theability to effect changes to their plans forbusiness reasons (such as to facilitatebusiness reorganizations or to permitsmall businesses the flexibility to reducecosts promptly) within a reasonable time.The Treasury Department and IRS haveconcluded, based on the history of thelegislation, that the reason why the15-day advance notice required undersection 204(h) as it existed prior toEGTRRA was replaced by the “reason-able time” standard is because the 15-daystandard was perceived as often beinginsufficient. Accordingly, these proposedregulations would provide that a reason-able time generally means at least 45 daysbefore the effective date of the planamendment.

However, the proposed regulationsinclude certain special timing rules,including rules that would allow section204(h) notice to be provided as late as 15days before the effective date of theamendment in two types of cases. First,the proposed regulations would generallypermit section 204(h) notice to be pro-vided 15 days in advance for amendmentsadopted in connection with businessmergers and acquisitions. Second, theproposed regulations include a 15-dayadvance notice requirement with respectto amendments of small plans. Thus, the15-day standard that was in section204(h) before EGTRRA would generallycontinue to apply for small plans and foramendments adopted in connection withbusiness mergers and acquisitions forwhich notice would have been requiredunder section 204(h) as in effect beforeEGTRRA. The proposed regulations pro-vide an additional special timing rule thatapplies in the case of an amendment thatis adopted in connection with a businessmerger or acquisition involving a plan-to-plan transfer or merger and that affectsonly an early retirement benefit orretirement-type subsidy (but does notreduce the rate of future benefit accrual).

In the case of such an amendment, thenotice must be provided no later than 30days after the effective date of the amend-ment.

In the case of a plan amendment whichoffers participants the option to choosebetween the new benefit formula and theold benefit formula, the general timingrules would apply, except that the pro-posed regulations would allow certainadditional information to be provided at alater date, as described in Content of Sec-tion 204(h)Notice of this preamble.

Content of Section 204(h) Notice

Section 4980F(e)(2) of the Code andsection 204(h)(2) of ERISA require sec-tion 204(h) notice to be written in a man-ner calculated to be understood by theaverage plan participant and to providesufficient information (as determined inaccordance with regulations) to allowapplicable individuals to understand “theeffect of” the amendment.

The Conference report for EGTRRAstates that the changes to the section204(h) of ERISA notice requirementswere expected to “provide for alternativedisclosures rather than a single disclosuremethodology that may not fit all situa-tions,” and also notes “the need to con-sider the complex actuarial calculationsand assumptions involved in providingnecessary disclosures.” H.R. Rep. 107–84, at 266. In addition, particular concernwas expressed about the effects of con-version of traditional defined benefitplans to cash balance or hybrid formulaplans and the effects of “wear-away” pro-visions under which participants earn noadditional benefits for a period of timeafter conversion. H.R. Rep. 107–84, at266.

The content requirements in these pro-posed regulations take into account thisbackground and generally seek to ensurethat adversely affected participantsreceive sufficient information to enablethem to understand the impact and mag-nitude of the changes being made to theirpension plan, without imposing undulyburdensome requirements on employersand while permitting latitude to employ-ers in diverse businesses with varyingemployee demographics to determinehow to communicate plan changes in anappropriately effective manner. Accord-ingly, the proposed regulations provide

general standards for the content of a sec-tion 204(h) notice, rather than containingspecific requirements for each type ofnotice.

The proposed regulations require asection 204(h) notice to include sufficientinformation to allow applicable individu-als to understand the effect of the planamendment, including the approximatemagnitude of the expected reduction. Thetype and amount of information necessaryto satisfy this standard varies dependingon the nature of the change resulting fromthe amendment. The information must bewritten in a manner calculated to beunderstood by the average plan partici-pant. The notice must describe theaffected provisions prior to plan amend-ment, describe these provisions asamended, and state the effective date ofthe amendment. This description of planprovisions might be similar to thedescription of a plan’s benefit accrual for-mula in a summary plan description thatsatisfies the requirements under§ 2520.102–3 of the Department of Laborregulations. If the amendment applies byits terms differently to various classes ofemployees (such as where the amendmentapplies differently depending on whatdivision an employee is in), the explana-tion must include sufficient informationto allow an affected participant to under-stand the general class or classes of par-ticipants to whom the reduction applies.Also, these proposed regulations clarifythat, in cases in which a plan amendmentaffects different classes of applicableindividuals differently, the plan adminis-trator may provide different section204(h) notices. A section 204(h) noticecannot include materially false or mis-leading information (or omit informationso as to cause the information provided tobe misleading).

If a section 204(h) amendment reducesan early retirement benefit or retirement-type subsidy merely as a result of reduc-ing the rate of future benefit accrual, thesection 204(h) notice need not contain aseparate description of that reduction inthe early retirement benefit or retirement-type subsidy.

Additional information may be neces-sary to make the approximate magnitudeof the reduction apparent. In cases inwhich it is not reasonable to expect that

2002–21 I.R.B. 997 May 28, 2002

the approximate magnitude of the reduc-tion will be reasonably apparent from anarrative description, one or more illus-trative examples are required to beincluded in the notice. Thus, for example,illustrative examples would be requiredfor a change from a traditional definedbenefit formula to a cash balance formulaor a change that results in a period oftime during which there are no accrualswith regard to normal retirement benefitsor an early retirement subsidy (a wear-away period). However, examples are notrequired to illustrate circumstances underwhich a participant’s benefit may increaseas a result of the section 204(h) amend-ment.

Where an amendment may result inreductions that vary in their impact onapplicable individuals, the examples mustshow the approximate range of the reduc-tions. However, the range of reductionsneed not include reductions that are likelyto occur in only a de minimis number ofcases if a narrative statement is includedto that effect (for example, such a narra-tive might state that larger or smallerreductions may occur in some othercases) and examples are provided thatshow the approximate range of the reduc-tions in cases other than this de minimisnumber. For amendments for which themaximum reduction occurs under identi-fiable circumstances with proportionatelysmaller reductions in other cases, therange of reductions can be illustrated byone example illustrating the maximumreduction, with a statement that smallerreductions also occur. Further, assumingthat the reduction varies from small tolarge depending on service or other fac-tors, as might occur for an amendmentthat results in a wear-away, two illustra-tive examples may be provided showingthe smallest likely reduction and the larg-est likely reduction.

Examples are not required to be basedon any particular form of payment (suchas a life annuity or a single sum), but maybe based on whatever form appropriatelyillustrates the reduction. The examplesmay be based on any reasonable assump-tions, such as assumptions relating to age,service, and compensation (and salaryscale assumptions for amendments thatalter the compensation taken into accountunder the plan, such as a change from a

final pay plan to a career average payplan), but the section 204(h) notice mustidentify those assumptions. The proposedregulations include special rules for deter-mining whether an amendment is reason-ably expected to result in a wear-awayperiod.

The proposed regulations include spe-cial rules for any case in which an appli-cable individual can choose between thenew formula and the old formula. Underthese rules, the individual must be pro-vided sufficient information to enable theindividual to make an informed choicebetween the new and old benefit formu-las. The information to enable the indi-vidual to make an informed choice is notrequired to be provided at the same timeas section 204(h) notice is otherwiserequired to be provided, as long as it isprovided within a period that is reason-ably contemporaneous with the individu-al’s choice and that allows sufficientadvance notice to enable the individual tounderstand and consider the additionalinformation before making the choice.

A section 204(h) notice may includemore information than is required, butcannot include any false or misleadinginformation and cannot include so muchadditional information that the requiredinformation fails to be provided in a man-ner calculated to come to the attention ofapplicable individuals. While a notice foran amendment converting a traditionalfinal pay plan to a cash balance plan mustinclude an estimate of the future normalretirement benefit of the participant in theillustration even if that requires an esti-mate of future wage increases, a section204(h) notice could also include alterna-tive estimates. For example, an alterna-tive estimate could be based on anassumption that there are no future wageincreases.

The proposed regulations include sev-eral examples, including examples thatare intended to show the illustrations thatare required for a cash balance conversionamendment that is based on a very sim-plified form of conversion. For morecomplex conversion amendments, it isexpected that more illustrations may beappropriate. However, these regulationsdo not require section 204(h) notice toinclude different illustrative examples toaddress the amount of the reduction for

every demographic variation (e.g., differ-ences in compensation or years of ser-vice).

Excise Tax Under Internal Revenue CodeSection 4980F(c)(1)

Section 4980F(c)(1) of the Code pro-vides that no excise tax is imposed on afailure for any period during which it isestablished to the satisfaction of the Sec-retary that the employer (or other personresponsible for the tax) did not know thatthe failure existed and exercised reason-able diligence to meet the notice require-ments. The proposed regulations providethat the requirements of sect ion4980F(c)(1) of the Code are satisfied ifand only if the person that would beresponsible for the tax exercised reason-able diligence in attempting to delivertimely section 204(h) notice to applicableindividuals (by the latest date permittedunder the regulations) and believed thatsection 204(h) notice was actually andtimely delivered to each applicable indi-vidual. An example of this illustrates thatsection 4980F(c)(1) of the Code wouldapply to a situation in which a planadministrator relies on an overnight deliv-ery service to send materials to the per-sons who are expected to hand deliversection 204(h) notice to participants, andthe overnight delivery service is late inmaking that delivery.

ERISA Provisions Regarding EgregiousFailures

Section 204(h)(6)(A) of ERISA, asamended by EGTRRA, provides that inthe case of an egregious failure to meetthe notice requirements, the provisions ofthe plan are applied as if the plan amend-ment entitled applicable individuals to thegreater of the benefits to which theywould have been entitled without regardto the amendment or the benefits underthe plan as amended. Section204(h)(6)(B) of ERISA provides that, forthis purpose, there is an egregious failureto meet the section 204(h) notice require-ments if such failure is within the controlof the plan sponsor and is an intentionalfailure (including any failure to promptlyprovide the required notice or informationafter the plan administrator discovers an

May 28, 2002 998 2002–21 I.R.B.

unintentional failure to meet noticerequirements) or a failure to provide mostof the individuals with most of the infor-mation they are entitled to receive. Theproposed regulations provide that a fail-ure is not egregious if the plan adminis-trator reasonably determines, taking intoaccount the statute, administrative guid-ance, and relevant facts and circum-stances, that the reduction is not signifi-cant. The proposed regulations clarifythat, in the case of a failure that is notegregious, the failure will not precludethe amendment from becoming effective.However, where there is a failure,whether or not egregious, recourse maybe available under ERISA section 502 to,among other things, recover benefits dueunder the plan, enforce rights under theterms of the plan, clarify rights to futurebenefits under the plan, obtain equitablerelief, or otherwise redress such violation.This might occur, for example, if a par-ticipant receives and thus uses materiallyinadequate or misleading information inmaking a choice between the new and theold benefit formula.

Method of Delivery of Section 204(h)Notice

As a general standard, the section204(h) notice either must be providedthrough a method that results in actualreceipt of the notice or the plan adminis-trator must take appropriate and neces-sary measures reasonably calculated toensure that the method for providing thenotice results in actual receipt. Therefore,section 204(h) notice may not be pro-vided by “posting.”

Section 4980F(g) of the Code and sec-tion 204(h)(7) of ERISA, as amended byEGTRRA, state that the Secretary ofTreasury may by regulation allow 204(h)notice to be provided using new technolo-gies. Because those provisions specifi-cally relate to electronic delivery andwere enacted after enactment of the Elec-tronic Signatures in Global and NationalCommerce Act (114 Stat. 464) (2000)(E-SIGN Act), the authority conferred bythose provisions on the Secretary todecide whether to permit, and under whatconditions to permit, electronic deliveryof section 204(h) notice is not constrainedby the provisions of the E-SIGN Act.

Section 4980F(g) of the Code and sec-tion 204(h)(7) of ERISA give the Secre-

tary of the Treasury authority to imposeappropriate criteria for the provision ofsection 204(h) notice through electronicmethods to ensure that applicable indi-viduals will receive section 204(h) noticeelectronically and are able to access ittimely. As noted above, section 204(h)notice either must be provided through amethod that results in actual receipt of thenotice or the plan administrator must takeappropriate and necessary measures rea-sonably calculated to ensure that themethod for providing the notice results inactual receipt. These proposed regulationswould apply the same standard to theelectronic delivery of section 204(h)notice by requiring that the method usedresult in actual receipt or that the planadministrator take appropriate and neces-sary measures to ensure that any provi-sion of the notice in electronic formatresults in actual receipt of the transmittedinformation. Additionally, the planadministrator must offer to provide eachapplicable individual a paper version ofthe notice free of charge. Of course, therequirements of these regulations mustotherwise be satisfied when section204(h) notice is provided in electronicformat. The proposed regulations includea number of examples illustrating therules applicable to the electronic provi-sion of a section 204(h) notice and alsoinclude a safe harbor, which has condi-tions similar to the consumer protectionprovisions of section 101(c) of theE-SIGN Act.

Under the proposed regulations, per-mitted electronic means for furnishingsection 204(h) notice would includee-mail, a site on the Internet, or otherelectronic communications site, and aDVD or CD that could generally beaccessed using a computer at an employ-ee’s worksite. However, section 204(h)notice information is not considered pro-vided merely because it is availablethrough a computer kiosk, even when thekiosk is at the individual’s workplace andthe individual is otherwise providednotice of the availability of information atthe kiosk, because, like posting, providingsuch information through a kiosk places aburden on participants to seek out theinformation. Nevertheless, informationmade available through a kiosk is consid-ered provided to those applicable indi-

viduals who actually access the informa-tion through the kiosk.

Proposed Effective Date

These proposed regulations wouldapply to amendments that go into effecton or after the date that is 120 days afterpublication of final regulations in theFederal Register. The proposed regula-tions also restate the general statutoryeffective date and special effective daterules that are in section 659(c) ofEGTRRA. Thus, the proposed regulationsinclude the transition rule of section659(c)(2) of EGTRRA that provides that,for amendments taking effect on or afterthe date of enactment of EGTRRA (June7, 2001) and prior to the effective date ofthe final regulations, the notice require-ments of section 4980F(e)(2) and (3) ofthe Code, and of section 204(h) of ERISAas amended by EGTRRA, are treated assatisfied if the plan administrator makes areasonable, good faith effort to complywith those requirements.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assess-ment is not required. It also has beendetermined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions.

It is hereby certified that the collectionof information in these proposed regula-tions will not have a significant economicimpact on a substantial number of smallentities. This certification is based uponthe fact that small entities generally donot have very complex benefit structuresin their plans, or many different classes ofparticipants who will be differentlyaffected by an amendment reducing therate of future benefit accrual. Small enti-ties also have fewer employees, and sothose small entities that are required toprovide section 204(h) notice need to pro-vide it to fewer individuals. Accordingly,the time required for them to prepare andprovide section 204(h) notice will usuallybe modest. Furthermore, because mostsmall entities will only be affected whenthey amend the retirement plans theysponsor to reduce or eliminate benefits,

2002–21 I.R.B. 999 May 28, 2002

and most small entities will not so amendthe retirement plans frequently, it is gen-erally expected that most small entitieswould be required to provide section204(h) notice only once over the courseof several years. Therefore, a RegulatoryFlexibility Analysis under the RegulatoryFlexibility Act (5 U.S.C. chapter 6) is notrequired. Pursuant to section 7805(f) ofthe Code, this notice of proposed rule-making will be submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written comments (asigned original and eight (8) copies) orelectronic comments that are submittedtimely to the IRS. The Treasury Depart-ment and IRS specifically request com-ments on the clarity of the proposed rulesand how they may be made easier tounderstand. All comments will be avail-able for public inspection and copying.

A public hearing has been scheduledfor August 15, 2002, beginning at 10a.m., in the IRS Auditorium, SeventhFloor, Internal Revenue Service, 1111Constitution Avenue, NW, Washington,DC. Due to building security procedures,visitors must enter at the main entrance,located at 1111 Constitution Avenue, NW.All visitors must present photo identifica-tion to enter the building. Because ofaccess restrictions, visitors will not beadmitted beyond the immediate entrancearea more than 15 minutes before thehearing starts. For information about hav-ing your name placed on the buildingaccess list to attend the hearing, see the“For Further Information Contact” por-tion of this preamble.

The rules of 26 CFR 601.601(a)(3)apply to the hearing. Persons who wish topresent oral comments must submit writ-ten or electronic comments and an outlineof the topics to be discussed and time tobe devoted to each topic (preferably asigned original and eight (8) copies) byJuly 22, 2002. A period of 10 minuteswill be allotted to each person for makingcomments. An agenda showing the sched-uling of the speakers will be preparedafter the deadline for receiving outlines

has passed. Copies of the agenda will beavailable free of charge at the hearing.


The principal author of these regula-tions is Janet A. Laufer, Office of Divi-sion Counsel/Associate Chief Counsel(Tax Exempt and Government Entities).However, other personnel from the IRSand Treasury Department participated intheir development.

* * * * *


Accordingly, 26 CFR parts 1 and 54are proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read in part as follows:Authority: 26 U.S.C. 7805 * * *

§ 1.411(d)(6) [Removed]

Par. 2. Section 1.411(d)–6 is removed.

PART 54—PENSION EXCISE TAXES

Par. 3. The authority citation for part54 is amended by adding the followingcitation in numerical order to read as fol-lows:

Authority: 26 U.S.C. 7805 * * *§ 54.4980F–1 is also issued under 26U.S.C. 4980.* * *

Par. 4 Section 54.4980F–1 is added toread as follows:

§ 54.4980F–1 Notice requirements forcertain pension plan amendmentssignificantly reducing benefit accruals.

(a) Table of contents. This paragraphcontains a list of the questions in § 54.4980F–1(b).Q–1. What are the notice requirements ofsection 4980F(e) of the Internal RevenueCode and section 204(h) of ERISA?Q–2. What are the differences betweensection 4980F and section 204(h)?Q–3. What is an “applicable pensionplan” to which section 4980F of the Inter-nal Revenue Code and section 204(h)apply?Q–4. What is “section 204(h) notice” andwhat is a “section 204(h) amendment”?

Q–5. For which amendments is section204(h) notice required?Q–6. What is an amendment that reducesthe rate of future benefit accrual orreduces an early retirement benefit orretirement-type subsidy for purposes ofdetermining whether section 204(h)notice is required?Q–7. What plan provisions are taken intoaccount in determining whether anamendment is a section 204(h) amend-ment?Q–8. What is the basic principle used indetermining whether a reduction in therate of future benefit accrual or an earlyretirement benefit or retirement-type sub-sidy is significant for purposes of section204(h)?Q–9. When must section 204(h) notice beprovided?Q–10. To whom must section 204(h)notice be provided?Q–11. What information is required to beprovided in a section 204(h) notice?Q–12. What special rules apply if partici-pants can choose between the old andnew benefit formulas?Q–13. How may section 204(h) notice beprovided?Q–14. What are the consequences if aplan administrator fails to provide section204(h) notice?Q–15. What are some of the rules thatapply with respect to the excise tax undersection 4980F?Q–16. How do section 4980F and section204(h) apply when a business is sold?Q–17. How are amendments to ceaseaccruals and terminate a plan treatedunder section 4980F and section 204(h)?Q–18. What is the effective date of sec-tion 4980F of the Internal Revenue Code,section 204(h) of ERISA, as amended byEGTRRA, and these regulations?

(b) Questions and answers. The ques-tions and answers are as follows:

Q–1. What are the notice requirementsof section 4980F(e) of the Internal Rev-enue Code and section 204(h) of ERISA?

A–1. (a) Requirements of Internal Rev-enue Code section 4980F(e) and ERISAsection 204(h). Section 4980F of theInternal Revenue Code (section 4980F)and section 204(h) of the EmployeeRetirement Income Security Act of 1974,as amended (ERISA), 29 U.S.C. 1054(h)

May 28, 2002 1000 2002–21 I.R.B.

(section 204(h)) each generally requiresnotice of an amendment to an applicablepension plan that either provides for asignificant reduction in the rate of futurebenefit accrual or that eliminates or sig-nificantly reduces an early retirementbenefit or retirement-type subsidy. Thenotice is required to be provided to planparticipants or alternate payees who areapplicable individuals (as defined inQ&A–10 of this section) and to certainemployee organizations. The plan admin-istrator must generally provide the noticebefore the effective date of the planamendment. Q&A–9 of this section setsforth the time frames for providingnotice, Q&A–11 of this section sets forththe content requirements for the notice,and Q&A–12 of this section contains spe-cial rules for cases in which participantscan choose between the old and new ben-efit formulas.

(b) Other notice requirements. Otherprovisions of law may require that certainparties be notified of a plan amendment.See, for example, sections 102 and 104 ofERISA, and the regulations thereunder,for requirements relating to summaryplan descriptions and summaries of mate-rial modifications.

Q–2. What are the differences betweensection 4980F and section 204(h)?

A–2. Section 4980F was added to theInternal Revenue Code by the EconomicGrowth and Tax Relief Reconciliation Actof 2001, Public Law 107–16 (115 Stat.38) (2001) (EGTRRA). EGTRRA alsoamended section 204(h) to, among otherthings, extend the notice requirement to aplan amendment that eliminates or sig-nificantly reduces an early retirementbenefit or retirement-type subsidy, even ifit does not significantly reduce the rate offuture benefit accrual. The notice require-ments of section 4980F generally are par-allel to the notice requirements of section204(h), as amended by EGTRRA. How-ever, the consequences of the two provi-sions differ: section 4980F imposes anexcise tax on a failure to satisfy the noticerequirements, while section 204(h)(6), asamended by EGTRRA, contains a specialrule with respect to egregious failures.See Q&A–14 and Q&A–15 of this sec-tion. Except to the extent specificallyindicated, these regulations apply both tosection 4980F and to section 204(h).

Q–3. What is an “applicable pensionplan” to which section 4980F and section204(h) apply?

A–3. (a) In general. Section 4980Fand section 204(h) apply to an applicablepension plan. For purposes of section4980F, an applicable pension plan meansa defined benefit plan qualifying undersection 401(a) or 403(a) of the InternalRevenue Code, or an individual accountplan that is subject to the funding stan-dards of section 412 of the Internal Rev-enue Code. For purposes of section204(h), an applicable pension plan meansa defined benefit plan that is subject topart 2 of subtitle B of title I of ERISA, oran individual account plan that is subjectto such part 2 and to the funding stan-dards of section 412 of the Internal Rev-enue Code. Accordingly, individualaccount plans that are not subject to thefunding standards of section 412 of theInternal Revenue Code, such as profit-sharing and stock bonus plans, are notapplicable pension plans to which section4980F or section 204(h) apply . Similarly,a defined benefit plan that neither quali-fies under section 401(a) or 403(a) of theInternal Revenue Code nor is subject topart 2 of subtitle B of title I of ERISA isnot an applicable pension plan. Further,neither a governmental plan (within themeaning of section 414(d) of the InternalRevenue Code), nor a church plan (withinthe meaning of section 414(e) of theInternal Revenue Code) with respect towhich no election has been made undersection 410(d) of the Internal RevenueCode is an applicable pension plan.

(b) Section 204(h) notice not requiredfor small plans covering no employees.Section 204(h) notice is not required for aplan under which no employees are par-ticipants covered under the plan, asdescribed in § 2510.3–3(b) of the Depart-ment of Labor regulations, and which hasfewer than 100 participants.

Q–4. What is “section 204(h) notice”and what is a “section 204(h) amend-ment”?

A–4. Section 204(h) notice is noticethat complies with section 4980F(e), sec-tion 204(h)(1), and this section. A section204(h) amendment is an amendment forwhich section 204(h) notice is requiredunder this section.

Q–5. For which amendments is section204(h) notice required?

A–5. (a) Significant reduction in therate of future benefit accrual. Section204(h) notice is required for an amend-ment to an applicable pension plan thatprovides for a significant reduction in therate of future benefit accrual, including acessation of benefit accrual.

(b) Early retirement benefits andretirement-type subsidies. Section 204(h)notice is required for an amendment to anapplicable pension plan that provides forthe significant reduction of an earlyretirement benefit or retirement-type sub-sidy. For purposes of this section, earlyretirement benefit and retirement-typesubsidy mean early retirement benefitsand retirement-type subsidies within themeaning of section 411(d)(6)(B)(i).

(c) Elimination or cessation of ben-efits. For purposes of this section, theterms reduce or reduction include elimi-nate or cease or elimination or cessation.

(d) Delegation of authority to Commis-sioner. The Commissioner may providein revenue rulings, notices, or other guid-ance published in the Internal RevenueBulletin (see § 601.601(d)(2) of thischapter) that section 204(h) notice neednot be provided for plan amendments oth-erwise described in paragraph (a) or (b)of this Q&A–5 that the Commissionerdetermines to be necessary or appropriate,as a result of changes in the law, to main-tain compliance with the requirements ofthe Internal Revenue Code (includingrequirements for tax qualification),ERISA, or other applicable federal law.

Q–6. What is an amendment thatreduces the rate of future benefit accrualor reduces an early retirement benefit orretirement-type subsidy for purposes ofdetermining whether section 204(h)notice is required?

A–6. (a) In general. For purposes ofdetermining whether section 204(h)notice is required, an amendment reducesthe rate of future benefit accrual orreduces an early retirement benefit orretirement-type subsidy only as providedin paragraph (b) or (c) of this Q&A–6.

(b) Reduction in rate of future benefitaccrual—(1) Defined benefit plans. Forpurposes of section 4980F and section204(h), an amendment to a defined ben-efit plan reduces the rate of future benefitaccrual only if it is reasonably expectedto reduce the amount of the future annualbenefit commencing at normal retirement

2002–21 I.R.B. 1001 May 28, 2002

age for benefits accruing for a year. Forthis purpose, the annual benefit com-mencing at normal retirement age is thebenefit payable in the form in which theterms of the plan express the accrued ben-efit (or, in the case of a plan in which theaccrued benefit is not expressed in theform of an annual benefit commencing atnormal retirement age, the benefit pay-able in the form of a single life annuitycommencing at normal retirement agethat is the actuarial equivalent of theaccrued benefit expressed under the termsof the plan, as determined in accordancewith section 411(c)(3) of the InternalRevenue Code).

(2) Individual account plans. For pur-poses of section 4980F and section204(h), an amendment to an individualaccount plan reduces the rate of futurebenefit accrual only if it is reasonablyexpected to reduce the amounts allocatedin the future to participants’ accounts fora year. Changes in the investments orinvestment options under an individualaccount plan are not taken into accountfor this purpose.

(3) Determination of rate of futurebenefit accrual. The rate of future benefitaccrual for purposes of this paragraph (b)is determined without regard to optionalforms of benefit within the meaning of§ 1.411(d)–4, Q&A–1(b) of this chapter(other than the annual benefit described inparagraph (b)(1) of this Q&A–6). Therate of future benefit accrual is also deter-mined without regard to ancillary benefitsand other rights or features as defined in§ 1.401(a)(4)–4(e) of this chapter.

(c) Reduction of early retirement ben-efits or retirement-type subsidies. For pur-poses of section 4980F and section204(h), an amendment reduces an earlyretirement benefit or retirement-type sub-sidy only if it is reasonably expected toeliminate or reduce an early retirementbenefit or retirement-type subsidy.

Q–7. What plan provisions are takeninto account in determining whether anamendment is a section 204(h) amend-ment?

A–7. (a) Plan provisions taken intoaccount. All plan provisions that mayaffect the rate of future benefit accrual,early retirement benefits, or retirement-type subsidies of participants or alternatepayees must be taken into account indetermining whether an amendment is a

section 204(h) amendment. For example,plan provisions that may affect the rate offuture benefit accrual include the dollaramount or percentage of compensation onwhich benefit accruals are based; the defi-nition of service or compensation takeninto account in determining an employ-ee’s benefit accrual; the method of deter-mining average compensation for calcu-lating benefit accruals; the definition ofnormal retirement age in a defined benefitplan; the exclusion of current participantsfrom future participation; benefit offsetprovisions; minimum benefit provisions;the formula for determining the amountof contributions and forfeitures allocatedto participants’ accounts in an individualaccount plan; in the case of a plan usingpermitted disparity under section 401(l)of the Internal Revenue Code, the amountof disparity between the excess benefitpercentage or excess contribution per-centage and the base benefit percentageor base contribution percentage (all asdefined in section 401(l) of the InternalRevenue Code); and the actuarialassumptions used to determine contribu-tions under a target benefit plan (asdefined in § 1.401(a)(4)–8(b)(3)(i) of thischapter). Plan provisions that may affectearly retirement benefits or retirement-type subsidies include the right to receivepayment of benefits after severance fromemployment and before normal retire-ment age and actuarial factors used indetermining optional forms for distribu-tion of retirement benefits.

(b) Plan provisions not taken intoaccount. Plan provisions that do notaffect the rate of future benefit accrual ofparticipants or alternate payees are nottaken into account in determiningwhether there has been a reduction in therate of future benefit accrual. Further, anybenefit that is not a section 411(d)(6) pro-tected benefit as described in § 1.411(d)–4, Q&A–1(d) of this chapter, orthat is a section 411(d)(6) protected ben-efit that may be eliminated or reduced aspermitted under § 1.411(d)–4, Q&A–2(a)or (b) of this chapter, is not taken intoaccount in determining whether anamendment is a section 204(h) amend-ment. Thus, for example, provisions relat-ing to vesting schedules or the right tomake after-tax contributions or electivedeferrals are not taken into account.

(c) Example. The following exampleillustrates the rules in this Q&A–7:

Example. (i) Facts. A defined benefit plan pro-vides a normal retirement benefit equal to 50% offinal average compensation times a fraction (not inexcess of one), the numerator of which equals thenumber of years of participation in the plan and thedenominator of which is 20. A plan amendment isadopted that changes the numerator or denominatorof that fraction.

(ii) Conclusion. The plan amendment must betaken into account in determining whether there hasbeen a reduction in the rate of future benefit accrual.

Q–8. What is the basic principle usedin determining whether a reduction in therate of future benefit accrual or a reduc-tion in an early retirement benefit orretirement-type subsidy is significant forpurposes of section 204(h)?

A–8. (a) General rule. Whether anamendment reducing the rate of futurebenefit accrual or reducing an early retire-ment benefit or retirement-type subsidyprovides for a reduction that is significantfor purposes of section 204(h) is deter-mined based on reasonable expectationstaking into account the relevant facts andcircumstances at the time the amendmentis adopted.

(b) Application for determining signifi-cant reduction in the rate of future benefitaccrual. For a defined benefit plan, thedetermination of whether an amendmentprovides for a significant reduction in therate of future benefit accrual is made bycomparing the amount of the annual ben-efit commencing at normal retirementage, as determined under Q&A–6(b)(1) ofthis section, under the terms of the plan asamended with the amount of the annualbenefit commencing at normal retirementage, as determined under Q&A–6(b)(1) ofthis section, under the terms of the planprior to amendment. For an individualaccount plan, the determination ofwhether an amendment provides for a sig-nificant reduction in the rate of futurebenefit accrual is made in accordancewith Q&A–6(b)(2) of this section bycomparing the amounts to be allocated inthe future to participants’ accounts underthe terms of the plan as amended with theamounts to be allocated in the future toparticipants’ accounts under the terms ofthe plan prior to amendment.

(c) Application to certain amendmentsreducing early retirement benefits orretirement-type subsidies. Because section204(h) notice is required only for reduc-tions that are significant, section 204(h)

May 28, 2002 1002 2002–21 I.R.B.

notice is not required for an amendmentthat reduces an early retirement benefit orretirement-type subsidy if the amendmentis permitted under the third sentence ofsection 411(d)(6)(B) of the Internal Rev-enue Code and regulations thereunder(relating to the elimination or reduction ofbenefits or subsidies which create signifi-cant burdens or complexities for the planand plan participants unless the amend-ment adversely affects the rights of anyparticipant in a more than de minimismanner).

Q–9. When must section 204(h) noticebe provided?

A–9. (a) 45-day general rule. Exceptas described in paragraphs (b) and (c) ofthis Q&A–9, section 204(h) notice mustbe provided at least 45 days before theeffective date of any section 204(h)amendment. See paragraph (d) of thisQ&A–9 for special rules for amendmentspermitting participant choice.

(b) 15-day rule for small plans. Exceptfor amendments described in paragraph(c)(2) of this Q&A–9, in the case of asmall plan, section 204(h) notice must beat least 15 days before the effective dateof any section 204(h) amendment. Forpurposes of this section, a small plan is aplan that the plan administrator reason-ably expects to have, on the effective dateof the section 204(h) amendment, fewerthan 100 participants who have anaccrued benefit under the plan.

(c) Special timing rule for businesstransactions—(1) 15-day rule for section204(h) amendment in connection with anacquisition or disposition. Except foramendments described in paragraph(c)(2) of this Q&A–9, if a section 204(h)amendment is adopted in connection withan acquisition or disposition, section204(h) notice must be provided at least 15days before the effective date of the sec-tion 204(h) amendment.

(2) Later notice permitted for section204(h) amendment significantly reducingearly retirement benefit or retirement-typesubsidies in connection with certain plantransfers, mergers, or consolidations. If asection 204(h) amendment is adoptedwith respect to liabilities that are trans-ferred to another plan in connection witha transfer, merger, or consolidation ofassets or liabilities as described in section414(l) of the Internal Revenue Code and§ 1.414(l)–1 of this chapter, the amend-

ment is adopted in connection with anacquisition or disposition, and the amend-ment significantly reduces an early retire-ment benefit or retirement-type subsidy,but does not significantly reduce the rateof future benefit accrual, then section204(h) notice must be provided no laterthan 30 days after the effective date of thesection 204(h) amendment.

(3) Definition of acquisition or dispo-sition. For purposes of this paragraph (c),see § 1.410(b)–2(f) of this chapter for thedefinition of acquisition or disposition.

(d) Timing rule for amendments per-mitting participant choice. In general,section 204(h) notice of a section 204(h)amendment that provides applicable indi-viduals with a choice between the old andthe new benefit formulas (as described inQ&A–12 of this section) must be pro-vided in accordance with the time periodapplicable under paragraphs (a) through(c) of this Q&A–9. See Q&A–12 of thissection for additional guidance regardingsection 204(h) notice in connection withparticipant choice.

Q–10. To whom must section 204(h)notice be provided?

A–10. (a) In general. Section 204(h)notice must be provided to each appli-cable individual and to each employeeorganization representing participantswho are applicable individuals. A specialrule is provided in paragraph (d) of thisQ&A–10.

(b) Applicable individual. Applicableindividual means each participant in theplan, and any alternate payee, whose rateof future benefit accrual under the planmay reasonably be expected to be signifi-cantly reduced, or for whom an earlyretirement benefit or retirement-type sub-sidy under the plan may reasonably beexpected to be significantly reduced, bythe section 204(h) amendment.

(c) Alternate payee. Alternate payeemeans a beneficiary who is an alternatepayee (within the meaning of section414(p)(8) of the Internal Revenue Code)under an applicable qualified domesticrelations order (within the meaning ofsection 414(p)(1)(A) of the Internal Rev-enue Code).

(d) Designees. Section 204(h) noticemay be provided to a person designatedin writing by an applicable individual orby an employee organization representingparticipants who are applicable individu-

als, instead of being provided to thatapplicable individual or employee organi-zation. Any designation of a representa-tive made through an electronic methodthat satisfies standards similar to those ofQ&A–13(c)(1) of this section satisfies therequirement that a designation be in writ-ing.

(e) Facts and circumstances test.Whether a participant or alternate payeeis an applicable individual is determinedbased on all relevant facts and circum-stances at the time the section 204(h)notice must be provided (or is provided,if earlier).

(f) Examples. The following examplesillustrate the rules in this Q&A–10:

Example 1. (i) Facts. A defined benefit planrequires an individual to complete 1 year of serviceto become a participant who can accrue benefits,and participants cease to accrue benefits under theplan at severance from employment with theemployer. There are no alternate payees andemployees are not represented by an employee orga-nization. The plan is amended effective as of Janu-ary 1, 2005, to significantly reduce the rate of futurebenefit accrual.

(ii) Conclusion. Section 204(h) notice is onlyrequired to be provided to individuals who, on Janu-ary 1, 2005, have completed at least 1 year of ser-vice and are employed by the employer.

Example 2. (i) Facts. The facts are the same asin Example 1, except that the sole effect of the planamendment is to alter the pre-amendment plan pro-visions under which benefits payable to anemployee who retires after 20 or more years of ser-vice are unreduced for commencement before nor-mal retirement age. The amendment requires 30 ormore years of service in order for benefits com-mencing before normal retirement age to be unre-duced, but the amendment only applies for futurebenefit accruals.

(ii) Conclusion. Section 204(h) notice is onlyrequired to be provided to individuals who, on Janu-ary 1, 2005, have completed at least 1 year of ser-vice but less than 30 years of service, are employedby the employer, have not attained normal retire-ment age, and will have completed 20 or more yearsof service before normal retirement age if theiremployment continues to normal retirement age.

Example 3. (i) Facts. A plan is amended toreduce significantly the rate of future benefit accrualfor all current employees who are participants.Based on the facts and circumstances, it is reason-able to expect that the amendment will not reducethe rate of future benefit accrual of former employ-ees who are currently receiving benefits or of formeremployees who are entitled to deferred vested ben-efits.

(ii) Conclusion. The plan administrator is notrequired to provide section 204(h) notice to anyformer employees.

Example 4. (i) Facts. The facts are the same asin Example 3, except that the plan covers twogroups of alternate payees. The alternate payees inthe first group are entitled to a certain percentage orportion of the former spouse’s accrued benefit and,

2002–21 I.R.B. 1003 May 28, 2002

for this purpose, the accrued benefit is determined atthe time the former spouse begins receiving retire-ment benefits under the plan. The alternate payeesin the second group are entitled to a certain percent-age or portion of the former spouse’s accrued ben-efit and, for this purpose, the accrued benefit wasdetermined at the time the qualified domestic rela-tions order was issued by the court.

(ii) Conclusion. It is reasonable to expect thatthe benefits to be received by the second group ofalternate payees will not be affected by any reduc-tion in a former spouse’s rate of future benefitaccrual. Accordingly, the plan administrator is notrequired to provide section 204(h) notice to thealternate payees in the second group.

Example 5. (i) Facts. A plan covers hourlyemployees and salaried employees. The plan pro-vides the same rate of benefit accrual for bothgroups. The employer amends the plan to reducesignificantly the rate of future benefit accrual of thesalaried employees only. At that time, it is reason-able to expect that only a small percentage of hourlyemployees will become salaried in the future.

(ii) Conclusion. The plan administrator is notrequired to provide section 204(h) notice to the par-ticipants who are currently hourly employees.

Example 6. (i) Facts. A plan covers employeesin Division M and employees in Division N. Theplan provides the same rate of benefit accrual forboth groups. The employer amends the plan toreduce significantly the rate of future benefit accrualof employees in Division M. At that time, it is rea-sonable to expect that in the future only a small per-centage of employees in Division N will be trans-ferred to Division M.

(ii) Conclusion. The plan administrator is notrequired to provide section 204(h) notice to the par-ticipants who are employees in Division N.

Example 7. (i) Facts. The facts are the samefacts as in Example 6, except that at the time theamendment is adopted, it is expected that thereafterDivision N will be merged into Division M in con-nection with a corporate reorganization (and theemployees in Division N will become subject to theplan’s amended benefit formula applicable to theemployees in Division M).

(ii) Conclusion. In this case, the plan administra-tor must provide section 204(h) notice to the partici-pants who are employees in Division M and to theparticipants who are employees in Division N.

Q–11. What information is required tobe provided in section 204(h) notice?

A–11. (a) Explanation of amendment—(1) In general. Section 204(h) noticemust include sufficient information toallow applicable individuals to under-stand the effect of the plan amendment,including the approximate magnitude ofthe expected reduction. To the extent anyexpected reduction is not uniformly appli-cable to all participants, the notice musteither identify the general classes of par-ticipants to whom the reduction isexpected to apply, or by some othermethod include sufficient information toallow each applicable individual receiv-ing the notice to determine which reduc-

tions are expected to apply to that indi-vidual. The information must be writtenin a manner calculated to be understoodby the average plan participant and toapprise the applicable individual of thesignificance of the notice. The type andamount of information necessary to sat-isfy these standards will vary dependingon the nature of the change resulting fromthe amendment, as described further inparagraphs (a)(2) and (3) of this Q&A–11.

(2) Required narrative—(i) Reductionin rate of future benefit accrual. In thecase of an amendment reducing the rateof future benefit accrual, the notice mustinclude a description of the benefit orallocation formula prior to the amend-ment, a description of the benefit or allo-cation formula under the plan asamended, and the effective date of theamendment.

(ii) Reduction in early retirement ben-efit or retirement-type subsidy. In the caseof an amendment that reduces an earlyretirement benefit or retirement-type sub-sidy (other than as a result of an amend-ment reducing the rate of future benefitaccrual), the notice must describe how theearly retirement benefit or retirement-typesubsidy is calculated from the accruedbenefit before the amendment, how theearly retirement benefit or retirement-typesubsidy is calculated from the accruedbenefit after the amendment, and theeffective date of the amendment. Forexample, if, for a plan with a normalretirement age of 65, the change is froman unreduced normal retirement benefit atage 55 to an unreduced normal retirementbenefit at age 60 for benefits accrued inthe future, with an actuarial reduction toapply for benefits accrued in the future tothe extent that the early retirement benefitbegins before age 60, the notice muststate that and specify the factors thatapply in calculating the actuarial reduc-tion (e.g., a 5% per year reduction appliesfor early retirement before age 60).

(3) Additional required information—(i) Standard for additional information.In cases in which it is not reasonable toexpect that the approximate magnitude ofthe reduction will be reasonably apparentfrom the description provided in accor-dance with in paragraph (a)(2) of thisQ&A–11, further information is required.This requirement can be satisfied by fur-

nishing additional narrative information,as described in paragraph (a)(3)(ii) of thisQ&A–11; by furnishing illustrativeexamples, as described in paragraph(a)(3)(iii) of this Q&A–11; or through acombination of these.

(ii) Additional narrative information.Further narrative explanation of the effectof the difference between the old and newformulas or benefit calculation may beprovided to make the approximate magni-tude of the reduction apparent.

(iii) Illustrative examples—(A)Requirement generally. In cases in whichit is not reasonable to expect that theapproximate magnitude of the reductionwill be reasonably apparent from thedescription provided in accordance within paragraph (a)(2) of this Q&A–11 (plusany additional narrative information pro-vided in accordance with paragraph(a)(3)(ii) of this Q&A–11), the noticemust include one or more illustrativeexamples showing the approximate mag-nitude of the reduction in the example.Thus, illustrative examples are requiredfor a change from a traditional definedbenefit formula to a cash balance formulaor a change that results in a period oftime during which there are no accruals(or minimal accruals) with regard to nor-mal retirement benefits or an early retire-ment subsidy (a wear-away period).

(B) Examples must bound the range ofreductions. Where an amendment resultsin reductions that vary (as would occurfor an amendment converting a traditionaldefined benefit formula to a cash balanceformula or an amendment that results in awear-away period), the illustrativeexample(s) provided in accordance withthis paragraph (a)(3)(iii) must show theapproximate range of the reductions.However, any reductions that are likely tooccur in only a de minimis number ofcases are not required to be taken intoaccount in determining the range of thereductions if a narrative statement isincluded to that effect and examples areprovided that show the approximate rangeof the reductions in other cases. Amend-ments for which the maximum reductionoccurs under identifiable circumstances,with proportionately smaller reductions inother cases, may be illustrated by oneexample illustrating the maximum reduc-tion, with a statement that smaller reduc-tions also occur. Further, assuming that

May 28, 2002 1004 2002–21 I.R.B.

the reduction varies from small to largedepending on service or other factors, twoillustrative examples may be providedshowing the smallest likely reduction andthe largest likely reduction.

(C) Assumptions used in examples.The examples required under this para-graph (a)(3)(iii) are not required to bebased on any particular form of payment(such as a life annuity or a single sum),but may be based on whatever formappropriately illustrates the reduction.The examples generally may be based onany reasonable assumptions (e.g. ,assumptions relating to the representativeparticipant’s age, years of service, andcompensation, along with any interestrate and mortality table used in the illus-trations, as well as salary scale assump-tions used in the illustrations for amend-ments that alter the compensation takeninto account under the plan), but the sec-tion 204(h) notice must identify thoseassumptions. However, if a plan’s benefitprovisions include a factor that variesover time (such as a variable interestrate), the determination of whether anamendment is reasonably expected toresult in a wear-away period must bebased on the value of the factor appli-cable under the plan at a time that is rea-sonably close to the date section 204(h)notice is provided, and any wear-awayperiod that is solely a result of a futurechange in the variable factor may be dis-regarded. For example, to determinewhether a wear-away occurs as a result ofa section 204(h) amendment that convertsa defined benefit plan to a cash balancepension plan that will credit interest basedon a variable interest factor specified inthe plan, the future interest credits mustbe projected based on the interest rateapplicable under the variable factor at thetime section 204(h) notice is provided.

(4) No false or misleading informa-tion. A notice that includes materiallyfalse or misleading information (or omitsinformation so as to cause the informationprovided to be misleading) does not con-stitute section 204(h) notice.

(b) Additional information whenreduction not uniform—(1) In general. Ifan amendment by its terms affects differ-ent classes of participants differently(e.g., one new benefit formula will applyto Division A and another to Division B),then the requirements of paragraph (a) of

this Q&A–11 apply separately withrespect to each such general class of par-ticipants. In addition, the notice mustinclude sufficient information to enablean applicable individual who is a partici-pant to understand which class he or sheis a member of.

(2) Option for different section 204(h)notices. If a section 204(h) amendmentaffects different classes of applicableindividuals differently, the plan adminis-trator may provide to differently affectedclasses of applicable individuals a section204(h) notice appropriate to those indi-viduals. Such section 204(h) notice mayomit information that does not apply tothe applicable individuals to whom it isfurnished, but must identify the class orclasses of applicable individuals to whomit is provided.

(c) Examples. The following examplesillustrate the requirements of paragraph(a) of this Q&A–11. In each example it isassumed that the notice is written in amanner calculated to be understood bythe average plan participant and toapprise the applicable individual of thesignificance of the notice.

Example 1. (i) Facts. Plan A provides that a par-ticipant is entitled to a normal retirement benefit of2% of the participant’s average pay over the 3 con-secutive years for which the average is the highest(highest average pay) multiplied by years of service.Plan A is amended to provide that, effective January1, 2004, the normal retirement benefit will be 2% ofthe participant’s highest average pay multiplied byyears of service before the effective date, plus 1% ofthe participant’s highest average pay multiplied byyears of service after the effective date. The planadministrator provides notice that states: “Under thePlan’s current benefit formula, a participant’s nor-mal retirement benefit is 2% of the participant’saverage pay over the 3 consecutive years for whichthe average is the highest multiplied by the partici-pant’s years of service. This formula is beingchanged by a plan amendment. Under the Plan asamended, a participant’s normal retirement benefitwill be the sum of 2% of the participant’s averagepay over the 3 consecutive years for which the aver-age is the highest multiplied by years of servicebefore the effective date, plus 1% of the partici-pant’s average pay over the 3 consecutive years forwhich the average is the highest multiplied by theparticipant’s years of service after the effective date.This change is effective on January 1, 2004.” Thenotice does not contain any additional information.

(ii) Conclusion. The notice satisfies the require-ments of paragraph (a) of this Q&A–11.

Example 2. (i) Facts. Plan B provides that a par-ticipant is entitled to a normal retirement benefit atage 64 of 2.2% of the participant’s career averagepay times years of service. Plan B is amended tocease all accruals, effective January 1, 2004. Theplan administrator provides notice that includes a

description of the old benefit formula, a statementthat after December 31, 2003, no participant willearn any further accruals, and the effective date ofthe amendment.


Example 3. (i) Facts. Plan C provides that a par-ticipant is entitled to a normal retirement benefit atage 65 of 2% of career average compensation timesyears of service. Plan C is amended to provide thatthe normal retirement benefit will be 1% of averagepay over the 3 consecutive years for which the aver-age is the highest times years of service. Theamendment only applies to accruals for years of ser-vice after the amendment, so that each employee’saccrued benefit is equal to the sum of the benefitaccrued as of the effective date of the amendmentplus the accrued benefit equal to the new formulaapplied to years of service beginning on or after theeffective date. The plan administrator providesnotice that describes the old and new benefit formu-las and also explains that for an individual whosecompensation increases over the individual’s careersuch that the individual’s highest 3-year averageexceeds the individual’s career average, the reduc-tion will be less or there may be no reduction.


Example 4. (i) Facts. (A) Plan D is a definedbenefit pension plan under which each participantaccrues a normal retirement benefit, as a life annu-ity beginning at the normal retirement age of 65,equal to the participant’s number of years of servicetimes 1.5 percent times the participant’s average payover the 3 consecutive years for which the averageis the highest. Plan D provides early retirement ben-efits for former employees beginning at or after age55 in the form of an early retirement annuity that isactuarially equivalent to the normal retirement ben-efit, with the reduction for early commencementbased on reasonable actuarial assumptions that arespecified in Plan D. Plan D provides for the suspen-sion of benefits of participants who continue inemployment beyond normal retirement age, inaccordance with section 203(a)(3)(B) of ERISA andregulations thereunder issued by the Department ofLabor. The pension of a participant who retires afterage 65 is calculated under the same normal retire-ment benefit formula, but is based on the partici-pant’s service credit and highest 3-year pay at thetime of late retirement with any appropriate actu-arial increases.

(B) Plan D is amended, effective July 1, 2005, tochange the formula for all future accruals to a cashbalance formula under which the opening accountbalance for each participant on July 1, 2005, is zero,hypothetical pay credits equal to 5 percent of payare credited to the account thereafter, and hypotheti-cal interest is credited monthly based on the appli-cable interest rate under section 417(e)(3) of theInternal Revenue Code at the beginning of the quar-ter. Any participant who terminates employmentwith vested benefits can receive an actuariallyequivalent annuity (based on the same reasonableactuarial assumptions that are specified in Plan D)commencing at any time after termination ofemployment and before the plan’s normal retirementage of 65. The benefit resulting from the hypotheti-cal account balance is in addition to the benefitaccrued on June 30, 2005 (taking into account only

2002–21 I.R.B. 1005 May 28, 2002

service and highest 3-year pay before July 30,2005), so that it is reasonably expected that no wear-away period will result from the amendment. Theplan administrator expects that, as a general rule,depending on future pay increases and future inter-est rates, the rate of future benefit accrual after theconversion is higher for participants who accruebenefits before approximately age 50 and afterapproximately age 70, but is lower for participantswho accrue benefits between approximately age 50and age 70.

(C) The plan administrator of Plan D announcesthe conversion to a cash balance formula on May16, 2005. The announcement is delivered to all par-ticipants and includes a written notice that describesthe old formula, the new formula, and the effectivedate.

(D) In addition, the notice states that the Plan Dformula before the conversion provided a normalretirement benefit equal to the product of a partici-pant’s number of years of service times 1.5 percenttimes the participant’s average pay over the 3 yearsfor which the average is the highest (highest 3-yearpay). The notice includes an example showing thenormal retirement benefit that will be accrued afterJune 30, 2005, for a participant who is age 49 with10 years of service at the time of the conversion.The plan administrator believes that such a partici-pant is representative of the participants whose rateof future benefit accrual will be reduced as a resultof the amendment. The example estimates that, ifthe participant continues employment to age 65, theparticipant’s normal retirement benefit for servicefrom age 49 to age 65 will be $657 per month forlife. The example assumes that the participant’s payis $50,000 at age 49. The example states that theestimated $657 monthly pension accrues over the16-year period from age 49 to age 65 and that, basedon assumed future pay increases, this amount annu-ally would be 9.1 percent of the participant’s high-est 3-year pay at age 65, which over the 16 yearsfrom age 49 to age 65 averages 0.57 percent peryear times the participant’s highest 3-year pay. Theexample also states that the sum of the monthlyannuity accrued before the conversion in the 10-yearperiod from age 39 to age 49 plus the $657 monthlyannuity estimated to be accrued over the 16-yearperiod from age 49 to age 65 is $1,235 and that,based on assumed future increases in pay, thiswould be 17.1 percent of the participant’s highest3-year pay at age 65, which over the employee’scareer from age 39 to age 65 averages 0.66 percentper year times the participant’s highest 3-year pay.The notice also includes two other examples withsimilar information, one of which is intended toshow the circumstances in which a small reductionmay occur and the other of which shows the largestreduction that the plan administrator thinks is likelyto occur. The notice states that the estimates arebased on the assumption that pay increases annuallyafter June 30, 2005, at a 4 percent rate. The noticealso specifies that the applicable interest rate undersection 417(e) for hypothetical interest credits afterJune 30, 2005, is assumed to be 6 percent, which isthe section 417(e) of the Internal Revenue Codeapplicable interest rate under the plan for 2005.

(ii) Conclusion. The information in the notice, asdescribed in paragraph (i)(C) of this Example 4, sat-isfies the requirements of paragraph (a)(2) of thisQ&A–11 with respect to applicable individuals who

are participants. The additional requirements ofparagraph (a)(3) of this Q&A–11 are satisfiedbecause, as noted in paragraph (i)(D) of thisExample 4, the notice describes the old formula anddescribes the estimated future accruals under thenew formula in terms that can be readily comparedto the old formula, i.e., the notice states that theestimated $657 monthly pension accrued over the16-year period from age 49 to age 65 averages 0.57percent of the participant’s highest 3-year pay at age65. The requirement that the examples include suf-ficient information to be able to determine theapproximate magnitude of the reduction would alsobe satisfied if the notice instead directly stated theamount of the monthly pension that would haveaccrued over the 16-year period from age 49 to age65 under the old formula.

Example 5. (i) Facts. The facts are the same asin Example 4, except that, under the plan as in effectbefore the amendment, the early retirement pensionfor a participant who terminates employment afterage 55 with at least 20 years of service is equal tothe normal retirement benefit without reductionfrom age 65 to age 62 and reduced by only 5 per-cent per year for each year before age 62. As aresult, early retirement benefits for such a partici-pant constitute a retirement-type subsidy. The planas in effect after the amendment provides an earlyretirement benefit equal to the sum of the earlyretirement benefit payable under the plan as in effectbefore the amendment taking into account only ser-vice and highest 3-year pay before July 1, 2005,plus an early retirement annuity that is actuariallyequivalent to the account balance for service afterJune 30, 2005. The notice provided by the planadministrator describes the old early retirementannuity, the new early retirement annuity, and theeffective date. The notice includes an estimate of theearly retirement annuity payable to the illustratedparticipant for service after the conversion if theparticipant were to retire at age 59 (which the planadministrator believes is a typical early retirementage) and elect to begin receiving an immediate earlyretirement annuity. The example states that the nor-mal retirement benefit expected to be payable at age65 as a result of service from age 49 to age 59 is$434 per month for life beginning at age 65 and thatthe early retirement annuity expected to be payableas a result of service from age 49 to age 59 is $270per month for life beginning at age 59. The examplestates that the monthly early retirement annuity of$270 is 38 percent less than the monthly normalretirement benefit of $434, whereas a 15 percentreduction would have applied under the plan as ineffect before the amendment. The notice alsoincludes similar information for examples that showthe smallest and largest reduction that the planadministrator thinks is likely to occur in the earlyretirement benefit. The notice also specifies theapplicable interest rate, mortality table, and salaryscale used in the example to calculate the earlyretirement reductions.

(ii) Conclusion. The information in the notice, asdescribed in paragraphs (i)(C) and (i)(D) ofExample 4 and paragraph (i) of this Example 5, sat-isfies the requirements of paragraph (a) of thisQ&A–11 with respect to applicable individuals whoare participants. The requirements of paragraph(a)(3) of this Q&A–11 are satisfied because, asnoted in paragraph (i) of this Example 5, the notice

describes the early retirement subsidy under the oldformula and describes the estimated early retirementpension under the new formula in terms that can bereadily compared to the old formula, i.e., the noticestates that the monthly early retirement pension of$270 is 38 percent less than the monthly normalretirement benefit of $434, whereas a 15 percentreduction would have applied under the plan as ineffect before the amendment. The requirements ofparagraph (a)(1) of this Q&A–11 would also be sat-isfied if the notice instead directly stated the amountof the monthly early retirement pension that wouldbe payable at age 59 under the old formula.

Q–12. What special rules apply if par-ticipants can choose between the old andnew benefit formulas?

A–12. In any case in which an appli-cable individual can choose between thebenefit formula (including any earlyretirement benefit or retirement-type sub-sidy) in effect before the section 204(h)amendment (old formula) or the benefitformula in effect after the section 204(h)amendment (new formula), section 204(h)notice has not been provided unless theapplicable individual has been providedthe information required under Q&A–11of this section, and has also been pro-vided sufficient information to enable theindividual to make an informed choicebetween the old and new benefit formu-las. The information required underQ&A–11 of this section must be providedby the date otherwise required underQ&A–9 of this section. The informationsufficient to enable the individual to makean informed choice must be providedwithin a period that is reasonably contem-poraneous with the date by which theindividual is required to make his or herchoice and that allows sufficient advancenotice to enable the individual to under-stand and consider the additional infor-mation before making that choice.

Q–13. How may section 204(h) noticebe provided?

A–13. (a) A plan administrator (includ-ing a person acting on behalf of the planadministrator, such as the employer orplan trustee) must provide section 204(h)notice through a method that results inactual receipt of the notice or the planadministrator must take appropriate andnecessary measures reasonably calculatedto ensure that the method for providingsection 204(h) notice results in actualreceipt of the notice. Section 204(h)notice must be provided either in the formof a paper document or in an electronicform that satisfies the requirements ofparagraph (c) of this Q&A–13. First class

May 28, 2002 1006 2002–21 I.R.B.

mail to the last known address of theparty is an acceptable delivery method.Likewise, hand delivery is acceptable.However, the posting of notice is not con-sidered provision of section 204(h)notice. Section 204(h) notice may beenclosed with or combined with othernotice provided by the employer or planadministrator (for example, a notice ofintent to terminate under title IV ofERISA). Except as provided in paragraph(c) of this Q&A–13, a section 204(h)notice is deemed to have been providedon a date if it has been provided by theend of that day. When notice is deliveredby first class mail, the notice is consid-ered provided as of the date of the UnitedStates postmark stamped on the cover inwhich the document is mailed.

(b) Example. The following exampleillustrates the provisions of paragraph (a)of this Q&A–13:

Example. (i) Facts. Plan A is amended to reducesignificantly the rate of future benefit accrual effec-tive January 1, 2005. Under Q&A–9 of this section,section 204(h) notice is required to be provided atleast 45 days before the effective date of the amend-ment. The plan administrator causes section 204(h)notice to be mailed to all affected participants. Themailing is postmarked November 16, 2004.

(ii) Conclusion. Because section 204(h) notice isgiven 45 days before the effective date of the planamendment, it satisfies the timing requirement ofQ&A–9 of this section.

(c) New technologies—(1) General rule. A sec-tion 204(h) notice may be provided to an applicableindividual through an electronic method (other thanan oral communication or a recording of an oralcommunication), provided that all of the followingrequirements are satisfied:

(i) Either the notice is actually received by theapplicable individual or the plan administrator takesappropriate and necessary measures reasonably cal-culated to ensure that the method for providing sec-tion 204(h) notice results in actual receipt of thenotice by the applicable individual.

(ii) The plan administrator provides the appli-cable individual with a clear and conspicuous state-ment, in electronic or non-electronic form, that theapplicable individual has a right to request andobtain a paper version of the section 204(h) noticewithout charge and, if such request is made, theapplicable individual is furnished with the paperversion without charge.

(iii) The requirements of this section must other-wise be satisfied. Thus, for example, a section204(h) notice provided through an electronicmethod must be delivered on or before the daterequired under Q&A–9 of this section and must sat-isfy the requirements set forth in Q&A–11 of thissection, including the content requirements and therequirements that it be written in a manner calcu-lated to be understood by the average plan partici-pant and to apprise the applicable individual of thesignificance of the notice. Accordingly, when it isnot otherwise reasonably evident, the recipient

should be apprised (either in electronic or non-electronic form), at the time the notice is furnishedelectronically, of the significance of the notice.

(2) Examples. The following examplesillustrate the requirement in paragraph(c)(1)(i) of this Q&A–13. In theseexamples, it is assumed that the noticesatisfies the requirements in paragraph(c)(1)(ii) and (iii) of this section. Theexamples are as follows:

Example 1. (i) Facts. On July 1, 2003, M, a planadministrator of Company N’s plan, sends noticeintended to satisfy section 204(h) of ERISA to A, anemployee of Company N and a participant in theplan. The notice is sent through e-mail to A’s e-mailaddress on Company N’s electronic information sys-tem. Accessing Company N’s electronic informationsystem is not an integral part of A’s duties. M sendsthe e-mail with a request for a computer-generatednotification that the message was received andopened. M receives notification indicating that thee-mail was received and opened by A on July 9,2003.

(ii) Conclusion. With respect to A, although Mhas failed to take appropriate and necessary mea-sures reasonably calculated to ensure that themethod for providing section 204(h) notice resultsin actual receipt of the notice, M satisfies therequirement of paragraph (c)(1)(i) of this Q&A–13on July 9, 2003, which is when A actually receivesthe notice.

Example 2. (i) Facts. On August 1, 2003, O, aplan administrator of Company P’s plan, sends anotice intended to satisfy section 204(h) of ERISAto B, who is an employee of Company P and a par-ticipant in Company P’s plan. The notice is sentthrough e-mail to B’s e-mail address on CompanyP’s electronic information system. B has the abilityto effectively access electronic documents from B’se-mail address on Company P’s electronic informa-tion system and accessing the system is an integralpart of B’s duties.

(ii) Conclusion. Because access to the system isan integral part of B’s duties, O has taken appropri-ate and necessary measures reasonably calculated toensure that the method for providing section 204(h)notice results in actual receipt of the notice. Thus,regardless of whether B actually accesses B’s emailon that date, O satisfies the requirement of para-graph (c)(1)(i) of this Q&A–13 on August 1, 2003,with respect to B.

(3) Safe harbor in case of consent. Therequirement of paragraph (c)(1)(i) of thisQ&A–13 is deemed to be satisfied withrespect to an applicable individual if thesection 204(h) notice is provided elec-tronically to an applicable individual,and—

(i) The applicable individual has affir-matively consented electronically, or con-firmed consent electronically, in a mannerthat reasonably demonstrates the appli-cable individual’s ability to access theinformation in the electronic form inwhich the notice will be provided, to

receiving section 204(h) notice electroni-cally and has not withdrawn such con-sent;

(ii) The applicable individual has pro-vided, if applicable, in electronic or non-electronic form, an address for the receiptof electronically furnished documents;

(iii) Prior to consenting, the applicableindividual has been provided, in elec-tronic or non-electronic form, a clear andconspicuous statement indicating—

(A) That the consent can be withdrawnat any time without charge;

(B) The procedures for withdrawingconsent and for updating the address orother information needed to contact theapplicable individual;

(C) Any hardware and softwarerequirements for accessing and retainingthe documents; and

(D) The information required by para-graph (c)(1)(ii) of this Q&A–13; and

(iv) After consenting, if a change inhardware or software requirementsneeded to access or retain electronicrecords creates a material risk that theapplicable individual will be unable toaccess or retain the section 204(h)notice—

(A) The applicable individual is pro-vided with a statement of the revisedhardware and software requirements foraccess to and retention of the section204(h) notice and is given the right towithdraw consent without the impositionof any fees for such withdrawal and with-out the imposition of any condition orconsequence that was not disclosed at thetime of the initial consent; and

(B) The requirement of paragraph(c)(3)(i) of this Q&A–13 is again com-plied with.

Q–14. What are the consequences if aplan administrator fails to provide section204(h) notice?

A–14. (a) Egregious failures—(1)Effect of egregious failure to provide sec-tion 204(h) notice. Section 204(h)(6)(A)of ERISA provides that, in the case of anyegregious failure to meet the noticerequirements with respect to any planamendment, the plan provisions areapplied so that all applicable individualsare entitled to the greater of the benefit towhich they would have been entitledwithout regard to the amendment, or thebenefit under the plan with regard to theamendment. For a special rule applicable

2002–21 I.R.B. 1007 May 28, 2002

in the case of a plan termination, seeQ&A–17(b) of this section.

(2) Definition of egregious failure. Forpurposes of section 204(h) of ERISA andthis Q&A–14, there is an egregious fail-ure to meet the notice requirements if afailure to provide required notice iswithin the control of the plan sponsor andis either an intentional failure or a failure,whether or not intentional, to providemost of the individuals with most of theinformation they are entitled to receive.For this purpose, an intentional failureincludes any failure to promptly providethe required notice or information afterthe plan administrator discovers an unin-tentional failure to meet the requirements.A failure to give section 204(h) notice isdeemed not to be egregious if the planadministrator reasonably determines, tak-ing into account section 204(h) ofERISA, section 4980F of the InternalRevenue Code, these regulations, otheradministrative pronouncements, and rel-evant facts and circumstances, that thereduction in the rate of future benefitaccrual resulting from an amendment isnot significant (as described in Q&A–8 ofthis section), or that an amendment doesnot significantly reduce an early retire-ment benefit or retirement-type subsidy.

(3) Example. The following exampleillustrates the provisions of this paragraph(a):

Example. (i) Facts. Plan A is amended to reducesignificantly the rate of future benefit accrual effec-tive January 1, 2003. Section 204(h) notice isrequired to be provided 45 days before January 1,2003. Timely section 204(h) notice is provided to allapplicable individuals (and to each employee orga-nization representing participants who are applicableindividuals), except that the employer intentionallyfails to provide section 204(h) notice to certain par-ticipants until May 16, 2003.

(ii) Conclusion. The failure to provide section204(h) notice is egregious. Accordingly, for theperiod from January 1, 2003, through June 30, 2003(which is the date that is 45 days after May 16,2003), all participants and alternate payees areentitled to the greater of the benefit to which theywould have been entitled under Plan A as in effectbefore the amendment or the benefit under the planas amended.

(b) Effect of non-egregious failure toprovide section 204(h) notice. If an egre-gious failure has not occurred, the amend-ment with respect to which section 204(h)notice is required may become effectivewith respect to all applicable individuals.However, see section 502 of ERISA forcivil enforcement remedies. Thus, wherethere is a failure, whether or not egre-

gious, to provide section 204(h) notice inaccordance with this section, individualsmay have recourse under section 502 ofERISA.

(c) Excise taxes. See section 4980F ofthe Internal Revenue Code and Q&A–15of this section for excise taxes that mayapply to a failure to notify applicableindividuals of a pension plan amendmentthat provides for a significant reduction inthe rate of future benefit accrual or elimi-nates or significantly reduces an earlyretirement benefit or retirement-type sub-sidy, regardless of whether or not the fail-ure is egregious.

Q–15. What are some of the rules thatapply with respect to the excise tax undersection 4980F?

A–15. (a) Person responsible forexcise tax. In the case of a plan other thana multiemployer plan, the employer isresponsible for reporting and paying theexcise tax. In the case of a multiemployerplan, the plan is responsible for reportingand paying the excise tax.

(b) Excise tax inapplicable in certaincases. Under section 4980F(c)(1) of theInternal Revenue Code, no excise tax isimposed on a failure for any period dur-ing which it is established to the satisfac-tion of the Commissioner that theemployer (or other person responsible forthe tax) exercised reasonable diligence,but did not know that the failure existed.Under section 4980F(c)(2) of the InternalRevenue Code, no excise tax applies to afailure to provide section 204(h) notice ifthe employer (or other person responsiblefor the tax) exercised reasonable dili-gence and corrects the failure within 30days after the employer (or other personresponsible for the tax) first knew, orexercising reasonable diligence wouldhave known, that such failure existed. Forpurposes of section 4980F(c)(1) of theInternal Revenue Code, a person hasexercised reasonable diligence, but didnot know that the failure existed if andonly if—

(1) The person exercised reasonablediligence in attempting to deliver section204(h) notice to applicable individuals bythe latest date permitted under this sec-tion; and

(2) At the latest date permitted fordelivery of section 204(h) notice, the per-son reasonably believes that section

204(h) notice was actually delivered toeach applicable individual by that date.

(c) Example. The following exampleillustrates the provisions of paragraph (b)of this Q&A–15:

Example. (i) Facts. Plan A is amended to reducesignificantly the rate of future benefit accrual. Theemployer sends out a section 204(h) notice to allaffected participants and other applicable individu-als and to any employee organization representingapplicable individuals, including actual delivery byhand to employees at worksites. However, althoughthe employer exercises reasonable diligence in seek-ing to deliver the notice, the notice is not deliveredto any participants at one worksite due to a failureof an overnight delivery service to provide thenotice to appropriate personnel at that site for themto timely hand deliver the notice to affected employ-ees. The error is discovered when the employer sub-sequently calls to confirm delivery. Appropriate sec-tion 204(h) notice is then promptly delivered to allaffected participants at the worksite.

(ii) Conclusion. Because the employer exercisedreasonable diligence, but did not know that a failureexisted, no excise tax applies, assuming that partici-pants at the worksite receive section 204(h) noticewithin 30 days after the employer first knew, orexercising reasonable diligence would have known,that the failure occurred.

Q–16. How do section 4980F and sec-tion 204(h) apply when a business issold?

A–16. (a) Generally. Whether section204(h) notice is required in connectionwith the sale of a business depends onwhether a plan amendment is adopted thatsignificantly reduces the rate of futurebenefit accrual or significantly reduces anearly retirement benefit or retirement-typesubsidy.

(b) Examples. The following examplesillustrate the rules of this Q&A–16:

Example 1. (i) Facts. Corporation Q maintainsPlan A, a defined benefit plan that covers allemployees of Corporation Q, including employeesin its Division M. Plan A provides that participatingemployees cease to accrue benefits when they ceaseto be employees of Corporation Q. On January 1,2006, Corporation Q sells all of the assets of Divi-sion M to Corporation R. Corporation R maintainsPlan B, which covers all of the employees of Cor-poration R. Under the sale agreement, employees ofDivision M become employees of Corporation R onthe date of the sale (and cease to be employees ofCorporation Q), Corporation Q continues to main-tain Plan A following the sale, and the employees ofDivision M become participants in Plan B.

(ii) Conclusion. No section 204(h) notice isrequired because no plan amendment was adoptedthat reduced the rate of future benefit accrual. Theemployees of Division M who become employeesof Corporation R ceased to accrue benefits underPlan A because their employment with CorporationQ terminated.

Example 2. (i) Facts. Subsidiary Y is a whollyowned subsidiary of Corporation S. Subsidiary Y

May 28, 2002 1008 2002–21 I.R.B.

maintains Plan C, a defined benefit plan that coversemployees of Subsidiary Y. Corporation S sells allof the stock of Subsidiary Y to Corporation T. At theeffective date of the sale of the stock of SubsidiaryY, in accordance with the sale agreement betweenCorporation S and Corporation T, Subsidiary Yamends Plan C so that all benefit accruals cease.

(ii) Conclusion. Section 204(h) notice isrequired to be provided because Subsidiary Yadopted a plan amendment that significantlyreduced the rate of future benefit accrual in Plan C.

Example 3. (i) Facts. As a result of an acquisi-tion, Corporation U maintains two plans: Plan Dcovers employees of Division N and Plan E coversthe rest of the employees of Corporation U. Plan Eprovides a significantly lower rate of future benefitaccrual than Plan D. Plan D is merged with Plan E,and all of the employees of Corporation U willaccrue benefits under the merged plan in accordancewith the benefit formula of former Plan E.

(ii) Conclusion. Section 204(h) notice isrequired.

Example 4.— (i) Facts. The facts are the sameas in Example 3, except that the rate of future ben-efit accrual in Plan E is not significantly lower. Inaddition, Plan D has a retirement-type subsidy thatPlan E does not have and the Plan D employees’rights to the subsidy under the merged plan are lim-ited to benefits accrued before the merger.

(ii) Conclusion. Section 204(h) notice isrequired for any participants or beneficiaries forwhom the reduction in the retirement-type subsidyis significant (and for any employee organizationrepresenting such participants).

Example 5. (i) Facts. Corporation V maintainsseveral plans, including Plan F, which coversemployees of Division P. Plan F provides that par-ticipating employees cease to accrue further benefitsunder the plan when they cease to be employees ofCorporation V. Corporation V sells all of the assetsof Division P to Corporation W, which maintainsPlan G for its employees. Plan G provides a signifi-cantly lower rate of future benefit accrual than PlanF. Plan F is merged with Plan G as part of the sale,and employees of Division P who become employ-ees of Corporation W will accrue benefits under themerged plan in accordance with the benefit formulaof former Plan G.

(ii) Conclusion. No section 204(h) notice isrequired because no plan amendment was adoptedthat reduces the rate of future benefit accrual oreliminates or significantly reduces an early retire-ment benefit or retirement-type subsidy. Under theterms of Plan F as in effect prior to the merger,employees of Division P cease to accrue any furtherbenefits (including benefits with respect to earlyretirement benefits and any retirement-type subsidy)under Plan F after the date of the sale because theiremployment with Corporation V terminated.

Q–17. How are amendments to ceaseaccruals and terminate a plan treatedunder section 4980F of the Internal Rev-enue Code and section 204(h) of ERISA?

A–17. (a) General rule—(1) Rule. Anamendment providing for the cessation ofbenefit accruals on a specified future dateand for the termination of a plan is sub-

ject to section 4980F of the Internal Rev-enue Code and section 204(h) of ERISA.

(2) Example. The following exampleillustrates the rule of paragraph (a)(1) ofthis Q&A–17:

Example. (i) Facts. An employer adopts anamendment that provides for the cessation of benefitaccruals under a defined benefit plan on December31, 2003, and for the termination of the plan pursu-ant to title IV of ERISA as of a proposed termina-tion date that is also December 31, 2003. As part ofthe notice of intent to terminate required under titleIV in order to terminate the plan, the plan adminis-trator gives section 204(h) notice of the amendmentceasing accruals, which states that benefit accrualswill cease “on December 31, 2003.” However,because all the requirements of title IV for a plantermination are not satisfied, the plan cannot be ter-minated until a date that is later than December 31,2003.

(ii) Conclusion. Nonetheless, because section204(h) notice was given stating that the plan wasamended to cease accruals on December 31, 2003,section 204(h) does not prevent the amendment tocease accruals from being effective on December31, 2003. The result would be the same had the sec-tion 204(h) notice informed the participants that theplan was amended to provide for a proposed termi-nation date of December 31, 2003, and to providethat “benefit accruals will cease on the proposedtermination date whether or not the plan is termi-nated on that date.” However, neither section 4980Fof the Internal Revenue Code nor section 204(h) ofERISA would be satisfied with respect to theDecember 31, 2003, effective date if the section204(h) notice had merely stated that benefit accrualswould cease “on the termination date” or “on theproposed termination date.”

(3) Additional requirements under titleIV of ERISA. See 29 CFR 4041.23(b)(4)and 4041.43(b)(5) for special rules appli-cable to plans terminating under title IVof ERISA.

(b) Terminations in accordance withtitle IV of ERISA. A plan that is termi-nated in accordance with title IV ofERISA is deemed to have satisfied sec-tion 4980F of the Internal Revenue Codeand section 204(h) of ERISA not laterthan the termination date (or date of ter-mination, as applicable) established undersection 4048 of ERISA. Accordingly, nei-ther section 4980F of the Internal Rev-enue Code nor section 204(h) of ERISAwould in any event require that any addi-tional benefits accrue after the effectivedate of the termination.

(c) Amendment effective before termi-nation date of a plan subject to title IV ofERISA. To the extent that an amendmentproviding for a significant reduction inthe rate of future benefit accrual or a sig-nificant reduction in an early retirementbenefit or retirement-type subsidy has an

effective date that is earlier than the ter-mination date (or date of termination, asapplicable) established under section4048 of ERISA, that amendment is sub-ject to section 4980F of the Internal Rev-enue Code and section 204(h) of ERISA.Accordingly, the plan administrator mustprovide section 204(h) notice (eitherseparately, with, or as part of the notice ofintent to terminate) with respect to suchan amendment.

Q–18. What is the effective date ofsection 4980F of the Internal RevenueCode, section 204(h) of ERISA, asamended by EGTRRA, and these regula-tions?

A–18. (a) Statutory effective date—(1) General rule. Section 4980F of theInternal Revenue Code and section204(h) of ERISA, as amended byEGTRRA, apply to plan amendments tak-ing effect on or after June 7, 2001 (statu-tory effective date), which is the date ofenactment of EGTRRA.

(2) Transition rule. For amendmentsapplying after the statutory effective datein paragraph (a)(1) of this Q&A–18 andprior to the regulatory effective date inparagraph (c) of this Q&A–18, therequirements of section 4980F(e)(2) and(3) of the Internal Revenue Code and sec-tion 204(h) of ERISA, as amended byEGTRRA, are treated as satisfied if theplan administrator makes a reasonable,good faith effort to comply with thoserequirements.

(3) Special notice rule—(i) In general.Notwithstanding Q&A–9 of this section,section 204(h) notice is not required bysection 4980F(e) of the Internal RevenueCode or section 204(h) of ERISA, asamended by EGTRRA, to be providedprior to September 7, 2001 (the date thatis three months after the date of enact-ment of EGTRRA).

(ii) Reasonable notice. The require-ments of section 4980F of the InternalRevenue Code and section 204(h) ofERISA, as amended by EGTRRA, do notapply to any plan amendment that takeseffect on or after June 7, 2001, if, beforeApril 25, 2001, notice was provided toparticipants and beneficiaries adverselyaffected by the plan amendment (andtheir representatives) which was reason-ably expected to notify them of the natureand effective date of the plan amendment.For purposes of this paragraph (a)(3)(ii),

2002–21 I.R.B. 1009 May 28, 2002

notice that complies with § 1.411(d)–6 ofthis chapter, as it appeared in the April 1,2001, edition of 26 CFR part 1, is deemedto be notice which was reasonablyexpected to notify participants and ben-eficiaries adversely affected by the planamendment (and their representatives) ofthe nature and effective date of the planamendment.

(b) Amendments taking effect prior toJune 7, 2001. For rules applicable toamendments taking effect prior to June 7,2001, see § 1.411(d)–6 of this chapter, asit appeared in the April 1, 2001, edition of26 CFR part 1.

(c) Regulatory effective date. Q&A–1through Q&A–18 of this section apply toamendments taking effect on or after thedate that is 120 days after publication offinal regulations under this section (regu-latory effective date).


Internal Revenue.


Partial Withdrawal of PreviousProposed Rules; Notice ofProposed Rulemaking andNotice of Public Hearing

Information Reporting forQualified Tuition and RelatedExpenses; Magnetic MediaFiling Requirements forInformation Returns

REG–161424–01


ACTION: Partial withdrawal of previousproposed rules; notice of proposed rule-making and notice of public hearing.

SUMMARY: This document withdrawsin part proposed regulations relating tothe information reporting requirementsunder section 6050S. This document alsocontains new proposed regulations relat-ing to the information reporting require-ments under section 6050S for qualifiedtuition and related expenses. These pro-

posed regulations reflect changes to thelaw made by the Taxpayer Relief Act of1997 and the amendments made by theInternal Revenue Service Restructuringand Reform Act of 1998 and Public Law107–131. The regulations provide guid-ance to eligible educational institutionsthat enroll any individual for any aca-demic period. The regulations also pro-vide guidance to insurers that make reim-bursements or refunds of qualified tuitionand related expenses. This document pro-vides notice of a public hearing on theseproposed regulations.

DATES: Written or electronic commentsmust be received by July 29, 2002.Requests to speak and outlines of topicsto be discussed at the public hearingscheduled for August 13, 2002, at 10 a.m.must be received by July 23, 2002.

ADDRESSES: Send submissions to:CC:ITA:RU (REG–161424–01), room5226, Internal Revenue Service, POB7604, Ben Franklin Station, Washington,DC 20044. Submissions may be handdelivered Monday through Fridaybetween the hours of 8 a.m. and 5 p.m.to: CC:ITA:RU (REG–161424–01), Cou-rier’s Desk, Internal Revenue Service,1111 Constitution Avenue, NW, Washing-ton, DC. Taxpayers may also submit com-ments electronically via the internet byselecting the “Tax Regs” option on theIRS Home Page, or by submitting com-ments directly to the IRS internet site atwww.irs.gov/regs.

FOR FURTHER INFORMATION CON-TACT: Concerning the regulations,Donna Welch, (202) 622–4910; concern-ing submissions of comments, the hearingand/or to be placed on the building accesslist to attend the hearing, Donna Poindex-ter, (202) 622–7180, and concerning themagnetic media filing specifications,waivers for filing on magnetic media, andextensions of time, contact the InternalRevenue Service, Martinsburg ComputingCenter, (304) 263–8700 (not toll-freenumbers).



The collection of information con-tained in this notice of proposed rulemak-ing has been previously reviewed and

approved by the Office of Managementand Budget in accordance with the Paper-work Reduction Act of 1995 (44 U.S.C.3507(d)) under control number 1545–1678.

An agency may not conduct or spon-sor, and a person is not required torespond to, a collection of informationunless it displays a valid control numberassigned by the Office of Managementand Budget.


Background

1. Summary

This document withdraws § 1.6050S–1of the notice of proposed rulemaking(REG–105316–98, 2000–2 C.B. 98) relat-ing to the information reporting require-ments under section 6050S that was pub-lished in the Federal Register (65 FR37728) on June 16, 2000 (the 2000 pro-posed regulations). This document alsocontains new proposed amendments to 26CFR part 1 in § 1.6050S–1 relating toinformation reporting requirements undersection 6050S for eligible educationalinstitutions and insurers (these proposedregulations). The IRS and the TreasuryDepartment have determined that the2000 proposed regulations addressing theinformation reporting requirements forpayees who receive payments of intereston qualified education loans will be final-ized in a separate Treasury decision.

2. Effective Date of These ProposedRegulations and Reporting Requirementsfor the Calendar Year 2002

The information reporting require-ments in these proposed regulations areproposed to apply to information returnsrequired to be filed, and informationstatements required to be furnished, afterDecember 31, 2003, for amounts report-able for the calendar year 2003 and sub-sequent years. These proposed regulationswill not be effective until they are final-ized. Therefore, the information reportingrequirements in Notice 97–73 (1997–2

May 28, 2002 1010 2002–21 I.R.B.

C.B. 335), as modified, continue forinformation returns required to be filed,and information statements required to befurnished, for amounts reportable for thecalendar year 2002 (for which the returnsand statements are required to be filedand furnished in 2003). However, taxpay-ers may rely on these proposed regula-tions for guidance pending issuance offinal regulations. If, and to the extent,future guidance is more restrictive thanthe guidance in these proposed regula-tions, the future guidance will be appliedwithout retroactive effect.

3. Current Statutory Provisions

The Taxpayer Relief Act of 1997 (Pub-lic Law 105–34 (111 Stat. 788) (TRA’97)) added section 25A of the InternalRevenue Code (Code) to provide theHope Scholarship Credit and the LifetimeLearning Credit (education tax credit). Ingeneral, the education tax credit allowscertain taxpayers who pay qualifiedtuition and related expenses (qualifiedexpenses) to an eligible educational insti-tution (an institution) to claim a nonre-fundable credit against their Federalincome tax liability. On January 6, 1999,the IRS issued proposed regulationsunder section 25A. See 64 FR 794(1999).

In addition, TRA ’97 added section6050S of the Code. Section 6050S wasamended by the Internal Revenue ServiceRestructuring and Reform Act of 1998(Public Law 105–206 (112 Stat. 685)(RRA ’98)). In general, section 6050Srequires eligible educational institutionswho receive payments of qualified tuitionand related expenses to file informationreturns and to furnish written informationstatements to assist taxpayers and the IRSin determining any education tax creditallowable under section 25A (as well asother tax benefits for higher educationexpenses). See H.R. Conf. Rept. No. 599,105th Cong., 2d Sess., pp. 319–320(1998).

In addition, section 6050S requires anyperson engaged in a trade or business ofmaking payments to any individual underan insurance agreement as reimburse-ments or refunds of qualified tuition andrelated expenses (an insurer) to file infor-mation returns and to furnish writteninformation statements. Lastly, section

6050S requires certain payees whoreceive payments of interest on one ormore qualified education loans to fileinformation returns and to furnish writteninformation statements to assist taxpayersand the IRS in determining any interestdeduction allowable under section 221.

As currently in effect , sect ion6050S(b) provides that the informationreturn filed by an eligible educationalinstitution or insurer must contain: (1) thename, address, and taxpayer identificationnumber (TIN) of the individual withrespect to whom payments were received,or the reimbursements or refunds weremade, of qualified tuition and relatedexpenses; (2) the name, address, and TINof any individual certified by the indi-vidual as the taxpayer who will claim thatindividual as a dependent for purposes ofthe deduction allowable under section151 for any taxable year ending with orwithin the year for which the informationreturn is filed; (3) the aggregate amountof payments of qualified tuition andrelated expenses received by the eligibleeducational institution during the calendaryear with respect to the individual; (4) theaggregate amount of reimbursements orrefunds of qualified tuition and relatedexpenses paid by an institution or aninsurer during the calendar year withrespect to the individual; (5) the aggre-gate amount of any scholarships or grantsthat the eligible educational institutionprocessed during the calendar year for theindividual’s costs of attendance; and (6)such other information as the Secretarymay prescribe.

4. Previous Guidance Under Section6050S

The IRS has published several noticesprescribing limited information reportingfor eligible educational institutions for theyears 1998, 1999, 2000, and 2001. SeeNotice 97–73 (1997–2 C.B. 335), Notice98–46 (1998–2 C.B. 290), Notice 98–59(1998–49 I.R.B. 16), Notice 99–37(1999–2 C.B. 124), and Notice 2000–62(2000–2 C.B. 587).

A notice of proposed rulemaking undersection 6050S (REG–105316–98) waspublished in the Federal Register (65 FR37728) on June 16, 2000. A public hear-ing was held on the proposed regulationson February 13, 2001. The IRS received

written and electronic comments respond-ing to the 2000 notice of proposed rule-making.

5. Recent Amendments to Section 6050S

Section 6050S was further amended byPublic Law 107–131 (115 Stat. 2410),effective for qualified expenses paid orbilled after December 31, 2002, for aca-demic periods beginning after December31, 2002. For calendar years beginningafter December 31, 2002, eligible educa-tional institutions may elect to reporteither the aggregate amount of paymentsreceived, or the aggregate amount billed,for qualified tuition and related expensesduring the calendar year with respect toindividuals enrolled for any academicperiod. Institutions will no longer berequired to report separately any refundsor reimbursements of qualified expensesmade during the calendar year that relateto payments received for qualifiedexpenses during the current calendar year.Rather, institutions will be required toreport separately only adjustments madeduring the calendar year to paymentsreceived, or amounts billed, for qualifiedexpenses that were reported in a prior cal-endar year. Institutions will be required toreport scholarships or grants received forthe individual’s costs of attendance thatthe institution administered and processedduring the calendar year. In addition,institutions will be required to reportseparately adjustments made during thecalendar year to scholarships that werereported in a prior calendar year. Section6050S will no longer require institutionsto report the name, address, and TIN ofany individual certified by the individualas the taxpayer who will claim that indi-vidual as a dependent for purposes of thededuction allowable under section 151 forany taxable year ending with or withinthe year for which the information returnis filed.

These proposed regulations reflect theamendments to section 6050S by PublicLaw 107–131 and address many of theconcerns raised by the educational com-munity in their comments to the 2000proposed regulations. These proposedregulations for eligible educational insti-tutions and insurers are discussed below.

2002–21 I.R.B. 1011 May 28, 2002

Explanation of Provisions

1. Information Reporting Relating toQualified Tuition and Related Expenses

A. Required reporting and exceptions toreporting

Consistent with the amendments tosection 6050S by Public Law 107–131,these proposed regulations require an eli-gible educational institution (as defined insection 25A(f)(2) and the regulationsthereunder) (an institution) to file a Form1098–T, Tuition Payment Statement, withrespect to each individual who is or hasbeen enrolled for any academic period (asdefined in the regulations under section25A) and for whom reportable transac-tions are made during the calendar year.In addition, these proposed regulationsrequire any person engaged in a trade orbusiness of making payments under aninsurance arrangement as reimbursementsor refunds (or other similar amounts) ofqualified tuition and related expenses (asdefined in section 25A(f)(1) and the regu-lations thereunder) (an insurer) to file aForm 1098–T with the IRS with respectto each individual for whom it makesreimbursements or refunds of qualifiedexpenses.

(i) Reporting Based on Academic Yearvs. Calendar Year

The commentators to the 2000 pro-posed regulations requested that an insti-tution be allowed to report financial databased on an academic year, and not basedon a calendar year. Section 6050Srequires institutions to report on a calen-dar year in order to assist taxpayers incalculating the education tax credit that isallowable for qualified expenses paid dur-ing a calendar year. Therefore, these pro-posed regulations do not adopt this rec-ommendation.

(ii) Eligible Educational Institution forPortion of Calendar Year

The commentators to the 2000 pro-posed regulations requested clarificationof the rules for determining which institu-tions are required to report under section6050S and the exceptions to reporting.One commentator asked whether an insti-

tution that is not an eligible educationalinstitution within the meaning of section25A(f)(2) at the beginning of the calendaryear, but becomes an eligible educationalinstitution during the calendar year, isrequired to report under section 6050S,and, if so, whether the institution mustreport for the entire calendar year or onlythe portion of the year in which it is aneligible educational institution. An institu-tion that is an eligible educational institu-tion for any portion of a calendar yearmust report under section 6050S. Further,because the education tax credit is allow-able only for payments made to an eli-gible educational institution, the institu-tion must report for only the portion ofthe year in which it is an eligible educa-tional institution.

(iii) Exception for Nonresident Aliens

Several commentators to the 2000 pro-posed regulations requested clarificationof the exception to reporting for an indi-vidual who is a nonresident alien. The2000 proposed regulations provide that aninstitution or insurer must report for theyear that the institution or insurer receivesa request from a nonresident alien indi-vidual to report and all subsequent years.The commentators recommended thatreporting be limited to the calendar yearfor which the institution or insurerreceives the request. The commentatorsexplained that institutions would need tocreate a new database to report automati-cally for subsequent years. These pro-posed regulations provide that any report-ing for a nonresident alien individual islimited to the calendar year for which theinstitution or insurer receives a request.

(iv) Exception for Noncredit Courses

Several commentators to the 2000 pro-posed regulations requested clarificationof the exception to reporting for an indi-vidual who is enrolled during the calendaryear only in noncredit courses. The com-mentators noted that the exception isintended to cover students enrolled incourses for which no academic credit isoffered, not students who do not receiveacademic credit in a particular course.Therefore, these proposed regulationsclarify that the exception applies to stu-dents enrolled only in courses for whichacademic credit is not offered. In addi-

tion, several commentators suggested thatthe word “only” should be removed andthat the exception should apply to stu-dents who are enrolled both in courses forwhich no academic credit is offered andin courses offered for credit that may leadtoward a postsecondary degree. Theexception is intended to cover nondegreestudents enrolled in courses for which noacademic credit is offered, consistent withthe legislative history to section 6050S.See H.R. Conf. Rep. No. 599, 105thCong., 2d Sess., p. 322 (1998). Therefore,these proposed regulations do not adoptthis recommendation.

Several commentators to the 2000 pro-posed regulations recommended thatinstitutions should have discretion todefine what constitutes academic credit.The 2000 proposed regulations defineacademic credit as credit awarded by aninstitution for the completion of course-work leading toward a postsecondarydegree, certificate, or other recognizedpostsecondary educational credential.This definition provides a uniform test todetermine academic credit for informa-tion reporting purposes. These proposedregulations retain the definition of aca-demic credit and do not adopt this recom-mendation.

(v) No Exception for Small Institutionsor Small Amounts of Qualified Tuitionand Related Expenses

One commentator to the 2000 pro-posed regulations suggested that the regu-lations should provide an exception toreporting for institutions with 500 orfewer students, and another commentatorsuggested that the regulations should pro-vide an exception for qualified expensesof $250 or less. The limited exceptions torequired reporting are based on the factthat certain categories of students may notbe eligible to claim the education taxcredit (e.g., nondegree students enrolledin noncredit courses cannot claim theHope Scholarship Credit and nonresidentalien students are generally not eligible toclaim the education tax credit). See H.R.Conf. Rep. No. 599, 105th Cong., 2dSess., p. 322 (1998). Exceptions to report-ing for small institutions or smallamounts of qualified expenses have norelationship to a student’s eligibility toclaim the education tax credit. Therefore,

May 28, 2002 1012 2002–21 I.R.B.

these proposed regulations do not adoptthese recommendations.

(vi) Exception for Students WhoseQualified Expenses Are Paid withScholarships

Several commentators to the 2000 pro-posed regulations suggested that the regu-lations should include an exception toreporting for students whose qualifiedexpenses are waived in their entirety orare paid entirely with scholarships. Notice97–73 provides that institutions are notrequired to report for such studentsbecause the institutions will not havereceived any payment of qualifiedexpenses on behalf of such students forwhich the student could, in general, claimthe education tax credit. These proposedregulations follow the rule in Notice97–73 and provide that an institution isnot required to report on students whosequalified expenses for the calendar yearare waived in their entirety or are paidentirely with scholarships.

(vii) Exception for Students WhoseQualified Expenses Are Covered byFormal Billing Arrangement betweenInstitution and Student’s Employer

Several commentators to the 2000 pro-posed regulations suggested that the regu-lations should provide an exception toreporting for students whose qualifiedexpenses are paid by a third party (suchas an employer) to the institution througha formal billing arrangement. The com-mentators explained that often anemployer and an institution enter into anagreement in which employees attend theinstitution, and the institution bills onlythe employer. In this situation, the institu-tion does not maintain a separate accountfor each employee/student. Thesearrangements often constitute employer-provided educational assistance exclud-able from the employee’s gross incomeunder section 127. Under section 25A andthe regulations thereunder, taxpayers can-not claim the education tax credit for edu-cation expenses paid by an employerwhich are tax-free to the employee.Therefore, these proposed regulationsprovide an exception to reporting withrespect to any individual whose qualifiedexpenses are covered by a formal billing

arrangement between an institution andthe individual’s employer.

(viii) Family Educational Rights andPrivacy Act and Optional Reporting

Several commentators to the 2000 pro-posed regulations requested clarificationas to whether an institution that choosesto report on students otherwise coveredby an exception to required reportingwould violate the Family EducationalRights and Privacy Act (FERPA) (20U.S.C. section 1232g). The Departmentof Education has previously determinedthat reporting under section 6050S doesnot violate FERPA. We have asked theDepartment of Education to considerwhether this determination extends toinstitutions that choose to report on stu-dents otherwise covered by an exceptionto required reporting in these proposedregulations.

B. Required information for institutions

(i) Reporting of Payments Received vs.Amounts Billed

Based on the provisions of section6050S prior to the amendments by PublicLaw 107–131, the 2000 proposed regula-tions provide that an institution mustreport the aggregate amount of paymentsreceived for qualified expenses, and theaggregate amount of reimbursements orrefunds made of qualified expenses, withrespect to any individual during the calen-dar year. Numerous commentatorsexplained that their institutions cannotreport payments for, and reimbursementsor refunds of, qualified expenses, becausetheir financial systems do not apply pay-ments and reimbursements or refunds tospecific charges. According to these insti-tutions, a student’s account is a runningbalance of undesignated payments andreimbursements or refunds. These com-mentators suggested that the regulationsshould allow institutions that are unableto report payments received for, and reim-bursements or refunds made of, qualifiedexpenses, to report instead: (1) theamount billed with respect to any indi-vidual for qualified expenses during thecalendar year; and (2) the amount of anyreductions to the amounts billed withrespect to the individual.

Consistent with section 6050S asamended by Public Law 107–131, theseproposed regulations provide that institu-tions may elect to report either the pay-ments received, or the amounts billed,during the calendar year for qualifiedtuition and related expenses with respectto individuals enrolled for an academicperiod beginning during the calendar yearor during a prior calendar year.

(ii) Reporting Adjustments to PaymentsReceived (or Amounts Billed) for a PriorCalendar Year

The commentators to the 2000 pro-posed regulations suggested that the regu-lations should distinguish between reim-bursements or refunds that relate topayments received during the current cal-endar year and those that relate to pay-ments for prior calendar years. The com-mentators suggested that, rather thanreporting separately aggregate paymentsand aggregate reimbursements or refunds,institutions should be permitted to netcurrent year payments of qualifiedexpenses against any refunds of such cur-rent year payments, and to report only thenet payments received for qualifiedexpenses during the current calendar year.These commentators suggested that insti-tutions should be required to report sepa-rately only the amount of any reimburse-ments or refunds made in the current yearthat relate to qualified expenses paid thatwere reported in a prior calendar year.

Consistent with this approach, thecommentators also suggested that institu-tions reporting amounts billed should bepermitted to net amounts billed for quali-fied expenses for the current year againstany reductions in amounts billed forqualified expenses for the current year,and to report only the net amount billedfor qualified expenses during the currentcalendar year. Similarly, the commenta-tors suggested that these institutionsshould be required to report separatelyonly those reductions made in the currentyear that relate to amounts billed forqualified expenses that were reported in aprior calendar year.

Congress adopted this approach in theamendments to section 6050S by PublicLaw 107–131. As amended, section6050S will require institutions to reportseparately only adjustments made duringthe calendar year to payments received,

2002–21 I.R.B. 1013 May 28, 2002

or amounts billed, that relate to amountsthat were reported for a prior calendaryear. For example, for institutions thatreport based on payments received, sepa-rate reporting will be required only forrefunds or reimbursements of qualifiedexpenses made during the calendar yearthat relate to payments of qualifiedexpenses that were reported for a priorcalendar year. For institutions that reportbased on amounts billed, separate report-ing will be required only for reductions incharges made during the calendar yearthat relate to amounts billed for qualifiedexpenses that were reported for a priorcalendar year.

Therefore, for institutions that reportbased on payments received, these pro-posed regulations provide that, in deter-mining the amounts to be reported undersection 6050S for a calendar year, pay-ments received for qualified expensesduring the calendar year must be nettedagainst any reimbursements or refunds ofqualified expenses made during the calen-dar year that relate to payments receivedfor qualified expenses during the samecalendar year. These regulations also pro-vide that reimbursements or refunds madeduring the calendar year that relate topayments of qualified expenses that werereported for a prior calendar year must bereported separately.

Similarly, for institutions that reportbased on amounts billed, these proposedregulations provide that, in determiningthe amounts to be reported under section6050S for a calendar year, the amountbilled for qualified expenses during thecalendar year must be netted against anyreductions in charges for qualifiedexpenses made during the calendar yearthat relate to amounts billed for qualifiedexpenses during the same calendar year.These regulations also provide that anyreductions in charges made during thecalendar year that relate to amountsreported as billed for a prior calendar yearmust be reported separately.

These regulations are proposed toapply to payments received, and amountsbilled, for qualified expenses beginning in2003. Therefore, the first year for whichinstitutions may be required to collectinformation regarding any reimburse-ments or refunds of prior year reportablepayments (or any reductions in reportableamounts billed for a prior year) is 2004.

The amount of any reimbursements orrefunds (or reductions) made in 2004 foramounts paid (or billed) in 2003 would bereported on the 2004 Forms 1098–T filedin early 2005.

(iii) Reporting Adjustments toScholarships for a Prior Calendar Year

Consistent with section 6050S asamended by Public Law 107–131, theseproposed regulations provide that allinstitutions must report separately anyreductions in the amount of scholarshipsor grant aid reported for a prior calendaryear.

(iv) Name, Address, and TIN ofTaxpayer

The 2000 proposed regulations reservethe requirement in section 6050S(b)(2)(B)that an institution or insurer obtain andreport the name, address, and TIN of anytaxpayer who will claim the individual asa dependent for purposes of the deductionallowable under section 151 for the tax-able year. This statutory requirement willbe eliminated by the amendments to sec-tion 6050S by Public Law 107–131.Therefore, consistent with section 6050Sas amended, these proposed regulationsremove this requirement.

(v) Half-time Indicator

Several commentators to the 2000 pro-posed regulations suggested that institu-tions should not be required to indicatewhether a student was enrolled at leasthalf time. Another commentator sug-gested that institutions should be requiredto provide the half-time indicator only forstudents enrolled in undergraduate stud-ies. An indication as to whether a studentwas enrolled at least half time for oneacademic period is useful information forthe IRS to verify whether the student maybe eligible to claim the Hope ScholarshipCredit and certain other education taxbenefits, and this information is readilyavailable to institutions. Therefore, theseproposed regulations do not adopt theserecommendations.

(vi) Information Statement

The 2000 proposed regulations pro-vide that an institution or insurer mustfurnish an information statement to each

individual for whom it is required to filea Form 1098–T. The statement mustinclude specific instructions to the tax-payer. These proposed regulations pro-vide that the instructions must state that ataxpayer may claim an education taxcredit only for amounts actually paid dur-ing the calendar year. These proposedregulations also provide that the instruc-tions must state that the amount of anyrefunds or reimbursements of paymentsreceived, or reductions in charges, forqualified expenses or any reductions ingrant aid reported for a prior calendaryear may affect the amount of any educa-tion tax credit allowable for the prior cal-endar year.

The 2000 proposed regulations pro-vide that the statement must include thename, address, and phone number of theindividual who is the information contactfor the institution or insurer that filed theForm 1098–T. Several commentators tothe 2000 proposed regulations requestedthat the regulations should not require thename of an individual. The commentatorsexplained that it is not feasible for institu-tions to provide an individual as the infor-mation contact and requested that institu-tions be allowed to provide an office ordepartment of the institution as the infor-mation contact. These proposed regula-tions adopt this recommendation.

The 2000 proposed regulations reservethe requirement in section 6050S(d) thatan institution or insurer furnish a state-ment to any taxpayer who will claim theindividual as a dependent for purposes ofthe deduction allowable under section151 for the taxable year. This statutoryrequirement will be eliminated by theamendments to section 6050S by PublicLaw 107–131. Therefore, consistent withsection 6050S as amended, these regula-tions remove this requirement.

C. Required information for insurers

The information reporting require-ments for insurers is not changed by theamendments to section 6050S by PublicLaw 107–131. Therefore, these proposedregulations continue to provide that aninsurer must file an information return foreach individual with respect to whomreimbursements or refunds of qualifiedtuition and related expenses are madeduring the calendar year. An insurer mustinclude: (1) the name, address, and TIN

May 28, 2002 1014 2002–21 I.R.B.

of the insurer; (2) the name, address, andTIN of the individual with respect towhom reimbursements or refunds ofqualified tuition and related expenseswere made; and (3) the aggregate amountof reimbursements or refunds of qualifiedtuition and related expenses that theinsurer made with respect to the indi-vidual during the calendar year.

D. Information reporting penalties

(i) Penalty Notification

These proposed regulations, as well asthe 2000 proposed regulations, providethat an institution or insurer may be sub-ject to a penalty under section 6721 forfailure to file correct Forms 1098–T and apenalty under section 6722 for failure tofurnish correct information statements.The 2000 proposed regulations providethat an institution or insurer must notifythe individual that the IRS may impose a$50 penalty for failure to provide a TIN.Several commentators to the 2000 pro-posed regulations requested that the pen-alty notification be removed. Section6723 and the regulations thereunderauthorize the IRS to impose a $50 penaltyif an individual fails to provide his or herTIN as required but do not require aninstitution or insurer to give prior notifi-cation of the penalty. Therefore, theseproposed regulations adopt this recom-mendation.

(ii) Annual TIN Solicitation Requirement

Several commentators to the 2000 pro-posed regulations recommended thatinstitutions not be required to request anindividual’s TIN annually if the institu-tion does not have the individual’s TIN.These proposed regulations continue toprovide that, in order to establish awaiver of the information reporting pen-alties for reasonable cause, an institutionor insurer must request an individual’sTIN annually if it does not have the TIN.The annual solicitation rule in these regu-lations is consistent with the generalsolicitation requirements in section301.6724–1(e) and (f) that a filer mustmeet in order to establish reasonablecause. These proposed regulations clarifythat a separate solicitation is not neces-sary if an institution requests an individu-

al’s TIN through admission or enrollmentforms or financial aid applications.

(iii) Filing Information Returns withMissing TINs

Several commentators to the 2000 pro-posed regulations requested that institu-tions not be required to file informationreturns and to furnish information state-ments for individuals who refuse to pro-vide their TINs. Information returns andinformation statements with missing TINsare useful to both the IRS and the indi-vidual in verifying the amount of anyallowable education tax credit (as well asother tax benefits for higher educationexpenses). Therefore, these proposedregulations do not adopt this recommen-dation.

2. Requirement to File InformationReturns on Magnetic Media

These regulations propose to amendthe regulations under section 6011(e) torequire institutions and insurers who arerequired to file 250 or more Forms1098–T to file on magnetic media.

Special Analyses

It has been determined that these pro-posed regulations are not a significantregulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatoryassessment is not required. It has alsobeen determined that section 553(b) ofthe Administrative Procedure Act (5U.S.C. chapter 5) does not apply to theseregulations. An initial regulatory flexibil-ity analysis has been prepared for thisnotice of proposed rulemaking under sec-tion 5 U.S.C. 603 and is set forth underthe heading “Initial Regulatory FlexibilityAnalysis” in this preamble. Pursuant tosection 7805(f) of the Code, this notice ofproposed rulemaking will be submitted tothe Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small business.

Initial Regulatory Flexibility Analysis

The collection of information con-tained in § 1.6050S–1 is needed to assistthe IRS and taxpayers in determining theamount of any education tax credit allow-able under section 25A. The objectives ofthese regulations are to provide uniform,

practicable, and administrable rules undersection 6050S. The types of small entitiesto which the regulations may apply aresmall eligible educational institutions(such as colleges and universities) andcertain insurers who reimburse educa-tional expenses. As of the end of 2001, atotal of 19,817,563 Forms 1098–T werefiled with the IRS for 2000. The esti-mated reporting burden for 2001 is 9 min-utes per Form 1098–T. No special profes-sional skills are necessary for preparationof the reports or records. There are noknown Federal rules that duplicate, over-lap, or conflict with these proposed regu-lations. The regulations proposed are con-sidered to have the least economic impacton small entities of all alternatives con-sidered.

Moreover, the proposed regulationsrequiring filing Forms 1098–T on mag-netic media impose no additional report-ing or recordkeeping and only prescribethe method of filing information returnsthat are already required to be filed. Fur-ther, these regulations are consistent withthe statutory requirement that an institu-tion or insurer is not required to fileForms 1098–T on magnetic media unlessrequired to file at least 250 or morereturns during the year. Finally, the eco-nomic impact caused by requiring Forms1098–T on magnetic media should beminimal because most institution’s orinsurer’s operations are computerized.Even if their operations are not computer-ized, the incremental cost of magneticmedia reporting should be minimal inmost cases because of the availability ofcomputer service bureaus. In addition, theexisting regulations under section 6011(e)provide that the IRS may waive the mag-netic media filing requirements on ashowing of hardship. The waiver author-ity will be exercised so as not to undulyburden institutions and insurers lackingboth the necessary data processing facili-ties and access at a reasonable cost tocomputer service bureaus.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written (a signedoriginal and eight (8) copies) or electroniccomments that are submitted timely to theIRS. The IRS and Treasury Departmentrequest comments on the clarity of the

2002–21 I.R.B. 1015 May 28, 2002

proposed rules and how they can be madeeasier to understand. All comments willbe available for public inspection andcopying.

A public hearing has been scheduledfor August 13, 2002, beginning at 10 a.m.in the auditorium of the Internal RevenueBuilding, 1111 Constitution Avenue, NW,Washington, DC. All visitors must presentphoto identification to enter the building.Because of access restrictions, visitorswill not be admitted beyond the immedi-ate entrance area more than 30 minutesbefore the hearing starts. For informationabout having your name placed on thebuilding access list to attend the hearing,see the “FOR FURTHER INFORMA-TION CONTACT” section of this pre-amble.

The rules of 26 CFR 601.601(a)(3)apply to the hearing. Persons who wish topresent oral comments at the hearingmust submit written or electronic com-ments and an outline of the topics to bediscussed and the time to be devoted toeach topic (signed original and eight (8)copies) by July 23, 2002. A period of 10minutes will be allotted to each person formaking comments. An agenda showingthe scheduling of the speakers will beprepared after the deadline for receivingoutlines has passed. Copies of the agendawill be available free of charge at thehearing.


The principal author of the regulationsis Donna Welch, Office of AssociateChief Counsel (Procedure and Adminis-tration), Administrative Provisions andJudicial Practice Division. However,other personnel from the IRS and theTreasury Department participated in thedevelopment of the regulations.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR parts 1 and 301are proposed to be amended as follows:

PART 1—INCOME TAX

Paragraph 1. The authority citation forpart 1 is amended by adding an entry innumerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.6050S–1 also issued under sec-tion 26 U.S.C. 6050S(g). * * *

Par. 2. Sections 1.6050S–0 is amendedby revising the introductory language andadding new entries for § 1.6050S–1 toread as follows:

§ 1.6050S–0 Table of contents

This section lists captions contained in§§ 1.6050S–1, 1.6050S–2T, 1.6050S–3,and 1.6050S–4T.

§ 1.6050S–1 Information reporting forqualified tuition and related expenses.

(a) Information reporting requirement.(1) In general.(2) Exceptions.(i) No reporting by institutions or insurersfor nonresident alien individuals.(ii) No reporting by institutions for indi-viduals enrolled only in noncreditcourses.(A) In general.(B) Academic credit defined.(C) Example.(iii) No reporting by institutions for indi-viduals whose qualified tuition andrelated expenses are waived or are paidwith scholarships.(iv) No reporting by institutions for indi-viduals whose qualified tuition andrelated expenses are covered by a formalbilling arrangement.(A) In general.(B) Formal billing arrangement defined.(b) Requirement to file return.(1) In general.(2) Information reporting requirementsfor institutions that elect to report pay-ments received for qualified tuition andrelated expenses.(i) In general.(ii) Information included on return.(iii) Reportable amount of paymentsreceived for qualified tuition and relatedexpenses during calendar year deter-mined.(iv) Separate reporting of reimbursementsor refunds of payments of qualifiedtuition and related expenses that werereported for a prior calendar year.(v) Payments received for qualifiedtuition and related expenses determined.(vi) Reimbursements or refunds of pay-ments for qualified tuition and relatedexpenses determined.

(vii) Examples.(3) Information reporting requirementsfor institutions that elect to reportamounts billed for qualified tuition andrelated expenses.(i) In general.(ii) Information included on return.(iii) Reportable amounts billed for quali-fied tuition and related expenses duringcalendar year determined.(iv) Separate reporting of reductionsmade to amounts billed for qualifiedtuition and related expenses that werereported for a prior calendar year.(v) Examples.(4) Requirements for insurers.(i) In general.(ii) Information included on return.(5) Time and place for filing return.(i) In general.(ii) Return for nonresident alien indi-vidual.(iii) Extensions of time.(6) Use of magnetic media.(c) Requirement to furnish statement.(1) In general.(2) Time and manner for furnishing state-ment.(i) In general.(ii) Statement to nonresident alien indi-vidual.(iii) Extensions of time.(3) Copy of Form 1098–T.(d) Special rules.(1) Enrollment determined.(2) Payments of qualified tuition andrelated expenses received or collected byone or more persons.(i) In general.(ii) Exception.(3) Governmental units.(e) Penalty provisions.(1) Failure to file correct returns.(2) Failure to furnish correct informationstatements.(3) Waiver of penalties for failures toinclude a correct TIN.(i) In general.(ii) Acting in a responsible manner.(iii) Manner of soliciting TIN.(4) Failure to furnish TIN.(f) Effective date.

* * * * *

Par. 3. Section 1.6050S–1 is added toread as follows:

May 28, 2002 1016 2002–21 I.R.B.

§ 1.6050S–1 Information reporting forqualified tuition and related expenses.

(a) Information reporting require-ment—(1) In general. Except as providedin paragraph (a)(2) of this section, anyeligible educational institution (as definedin section 25A(f)(2) and the regulationsthereunder) (an institution) that enrolls(as determined under paragraph (d)(1) ofthis section) any individual for any aca-demic period (as defined in the regula-tions under section 25A), and any personthat is engaged in a trade or business ofmaking payments under an insurancearrangement as reimbursements orrefunds (or other similar amounts) ofqualified tuition and related expenses (asdefined in section 25A(f)(1) and the regu-lations thereunder) (an insurer) must—

(i) File an information return, asdescribed in paragraph (b) of this section,with the Internal Revenue Service (IRS)with respect to each individual describedin paragraph (b) of this section; and

(ii) Furnish a statement, as describedin paragraph (c) of this section, to eachindividual described in paragraph (c) ofthis section.

(2) Exceptions—(i) No reporting byinstitution or insurer for nonresident alienindividuals. The information reportingrequirements of this section do not applywith respect to any individual who is anonresident alien (as defined in section7701(b) and § 301.7701(b)–3 of thischapter) during the calendar year, unlessthe individual requests the institution orinsurer to report. If a nonresident alienindividual requests an institution orinsurer to report, the institution or insurermust comply with the requirements ofthis section for the calendar year withrespect to which the request is made.

(ii) No reporting by institutions forindividuals enrolled only in noncreditcourses—(A) In general. The informationreporting requirements of this section donot apply with respect to any individualwho is enrolled during the calendar yearonly in courses for which no academiccredit is offered by the institution.

(B) Academic credit defined. Academiccredit means credit offered by an institu-tion for the completion of courseworkleading toward a post-secondary degree,certificate, or other recognized post-secondary educational credential.

(C) Example. The following exampleillustrates the rules of this paragraph(a)(2)(ii):

Example. Student A, a medical doctor, takes acourse at University X’s medical school. Student Atakes the course to fulfill State Y’s licensing require-ment that medical doctors attend continuing medicaleducation courses each year. Student A is notenrolled in a degree program at University X andtakes the medical course through University X’scontinuing professional education division. Univer-sity X does not offer Student A credit toward a post-secondary degree on an academic transcript for thecompletion of the course but gives Student A a cer-tificate of attendance upon completion. Under thisparagraph (a)(2)(ii), University X is not subject tothe information reporting requirements of section6050S and this section for the medical educationcourse taken by Student A.

(iii) No reporting by institutions forindividuals whose qualified tuition andrelated expenses are waived or are paidwith scholarships. The informationreporting requirements of this section donot apply with respect to any individualwhose qualified tuition and relatedexpenses are waived in their entirety orare paid entirely with scholarships.

(iv) No reporting by institutions forindividuals whose qualified tuition andrelated expenses are covered by a formalbilling arrangement—(A) In general. Theinformation reporting requirements of thissection do not apply with respect to anyindividual whose qualified tuition andrelated expenses are covered by a formalbilling arrangement between an institu-tion and the individual’s employer.

(B) Formal billing arrangementdefined. A formal billing arrangementmeans an arrangement in which the insti-tution bills only the employer for educa-tion furnished by the institution to anindividual who is the employer ’semployee and the institution does notmaintain a separate financial account forthat individual.

(b) Requirement to file return—(1) Ingeneral. Institutions may elect to reporteither the information described in para-graph (b)(2) of this section, or the infor-mation described in paragraph (b)(3) ofthis section. Once an institution elects toreport under either paragraph (b)(2) or (3)of this section, the institution must usethe same reporting method for all calen-dar years in which it is required to filereturns, unless permission is granted tochange reporting methods. Paragraph(b)(2) requires institutions to report,among other information, the amount of

payments received during the calendaryear for qualified tuition and relatedexpenses. Institutions must report sepa-rately adjustments made during the calen-dar year that relate to payments receivedfor qualified tuition and related expensesthat were reported for a prior calendaryear. For purposes of paragraph (b)(2), anadjustment made to payments receivedmeans a reimbursement or refund. Para-graph (b)(3) requires institutions toreport, among other information, theamounts billed during the calendar yearfor qualified tuition and related expenses.Institutions must report separately adjust-ments made during the calendar year thatrelate to amounts billed for qualifiedtuition and related expenses that werereported for a prior calendar year. Forpurposes of paragraph (b)(3), an adjust-ment made to amounts billed means areduction in charges. Insurers must reportthe information described in paragraph(b)(4) of this section.

(2) Information reporting requirementsfor institutions that elect to report pay-ments received for qualified tuition andrelated expenses—(i) In general. Exceptas provided in paragraph (a)(2) of thissection, an institution reporting paymentsreceived for qualified tuition and relatedexpenses must file an information returnwith the IRS on Form 1098–T, TuitionPayments Statement, with respect to eachindividual enrolled (as determined inparagraph (d)(1) of this section) for anacademic period beginning during thecalendar year or during a prior calendaryear and for whom a reportable transac-tion described in paragraph (b)(2)(ii) ofthis section is made during the calendaryear. An institution may use a substituteForm 1098–T if the substitute form com-plies with applicable revenue proceduresrelating to substitute forms (see§ 601.601(d)(2) of this chapter).

(ii) Information included on return. Aninstitution reporting payments receivedfor qualified tuition and related expensesmust include on Form 1098–T—

(A) The name, address, and taxpayeridentification number (TIN) (as definedin section 7701(a)(41)) of the institution;

(B) The name, address, and TIN of theindividual who is, or has been, enrolledby the institution;

(C) The amount of payments of quali-fied tuition and related expenses from any

2002–21 I.R.B. 1017 May 28, 2002

source that the institution received withrespect to the individual during the calen-dar year;

(D) An indication by the institutionwhether any payments received for quali-fied tuition and related expenses reportedfor the calendar year relate to an aca-demic period that begins during the firstthree months of the next calendar year;

(E) The amount of any scholarships orgrants for the payment of the individual’scosts of attendance that the institutionadministered and processed during thecalendar year;

(F) The amount of any reimbursementsor refunds of qualified tuition and relatedexpenses made during the calendar yearwith respect to the individual that relateto payments of qualified tuition andrelated expenses that were reported by theinstitution for a prior calendar year;

(G) The amount of any reductions tothe amount of scholarships or grants forthe payment of the individual’s costs ofattendance that were reported by the insti-tution with respect to the individual for aprior calendar year;

(H) An indication by the institutionwhether the individual was enrolled for atleast half of the normal full-time workload for the course of study the individualis pursuing for at least one academicperiod that begins during the calendaryear (see section 25A and the regulationsthereunder);

(I) An indication by the institutionwhether the individual was enrolled in aprogram leading to a graduate-leveldegree, graduate-level certificate, or otherrecognized graduate-level educationalcredential; and

(J) Any other information required byForm 1098–T and its instructions.

(iii) Reportable amount of paymentsreceived for qualified tuition and relatedexpenses during calendar year deter-mined. The amount of payments receivedfor qualified tuition and related expenseswith respect to an individual during thecalendar year that is reportable on Form1098–T is determined by netting theamount of payments received (as definedin paragraph (b)(2)(v) of this section) forqualified tuition and related expenses dur-ing the calendar year against any reim-bursements or refunds (as defined in para-graph (b)(2)(vi) of this section) madeduring the calendar year that relate to

payments received for qualified tuitionand related expenses during the same cal-endar year.

(iv) Separate reporting of reimburse-ments or refunds of payments of qualifiedtuition and related expenses that werereported for a prior calendar year. Aninstitution must separately report on Form1098–T any reimbursements or refunds(as defined in paragraph (b)(2)(vi) of thissection) made during the current calendaryear that relate to payments of qualifiedtuition and related expenses that werereported by the institution for a prior cal-endar year. Such reimbursements orrefunds shall not be netted against thepayments received for qualified tuitionand related expenses during the currentcalendar year.

(v) Payments received for qualifiedtuition and related expenses determined.For purposes of determining the amountof payments received for qualified tuitionand related expenses during a calendaryear, payments received with respect toan individual during the calendar yearfrom any source (except for any scholar-ship or grant that, by its terms, must beapplied to expenses other than qualifiedtuition and related expenses, such asroom and board) are treated as paymentsof qualified tuition and related expensesup to the total amount billed by the insti-tution for such expenses. For purposes ofthis section, a payment includes any posi-tive account balance (such as any reim-bursement or refund credited to an indi-vidual’s account) that an institutionapplies toward current charges.

(vi) Reimbursements or refunds ofpayments for qualified tuition and relatedexpenses determined. For purposes ofdetermining the amount of reimburse-ments or refunds made of paymentsreceived for qualified tuition and relatedexpenses, any reimbursement or refundmade with respect to an individual duringa calendar year (except for any refund ofscholarship or grant that, by its terms,was required to be applied to expensesother than qualified tuition and relatedexpenses, such as room and board), istreated as a reimbursement or refund ofpayments for qualified tuition and relatedexpenses up to the amount of any reduc-tion in charges for such expenses. Forpurposes of this section, a reimbursementor refund includes amounts that an insti-

tution credits to an individual’s account,as well as amounts disbursed to, or onbehalf of, the individual.

(vi i ) Examples . The fol lowingexamples illustrate the rules in this para-graph (b)(2):

Example 1. (i) In early August 2003, UniversityX bills enrolled Student A $10,000 for tuition and$6,000 for room and board for the 2003 Fall semes-ter. In late August 2003, Student A pays $11,000 toUniversity X. In early September 2003, Student Adrops to half-time enrollment for the 2003 Fallsemester. In late September 2003, University Xcredits $5,000 to Student A’s account, reflecting a$5,000 reduction in charges for qualified tuition andrelated expenses. In late September 2003, UniversityX applies the $5,000 positive account balancetoward current charges.

(ii) Under paragraph (b)(2)(v) of this section, the$11,000 payment is treated as a payment of quali-fied tuition and related expenses up to the $10,000billed for qualified tuition and related expenses.Under paragraph (b)(2)(vi) of this section, the$5,000 credited to the student’s account is treated asa reimbursement or refund of payments for qualifiedtuition and related expenses, because the currentyear charges for qualified tuition and relatedexpenses were reduced by $5,000. Under paragraph(b)(2)(iii) of this section, University X is required tonet the $10,000 tuition payment received during2003 against the $5,000 reimbursement or refund ofpayments received for qualified tuition and relatedexpenses during 2003. Therefore, Institution X isrequired to report $5,000 of payments received forqualified tuition and related expenses during 2003.

Example 2. (i) The facts are the same as inExample 1, except that Student A pays the full$16,000 in late August 2003. In late September2003, University X reduces the tuition charges by$5,000 and issues a $5,000 refund to Student A.

(ii) Under paragraph (b)(2)(v) of this section, the$16,000 payment is treated as a payment of quali-fied tuition and related expenses up to the $10,000billed for qualified tuition and related expenses.Under paragraph (b)(2)(vi) of this section, the$5,000 refund is treated as reimbursement or refundof payments for qualified tuition and relatedexpenses, because the current year charges for quali-fied tuition and related expenses were reduced by$5,000. Under paragraph (b)(2)(iii) of this section,University X is required to net the $10,000 tuitionpayment received during 2003 against the $5,000reimbursement or refund of payments received forqualified tuition and related expenses during 2003.Therefore, Institution X is required to report $5,000of payments received for qualified tuition andrelated expenses during 2003.

Example 3. (i) The facts are the same as inExample 1, except that Student A is enrolled full-time, and, in early September 2003, Student Adecides to live at home with her parents. In lateSeptember 2003, University X adjusts Student A’saccount to eliminate room and board charges andissues a $1,000 refund to Student A.

(ii) Under paragraph (b)(2)(v) of this section, the$11,000 payment is treated as a payment of quali-fied tuition and related expenses up to the $10,000billed for qualified tuition and related expenses.Under paragraph (b)(2)(vi) of this section, the

May 28, 2002 1018 2002–21 I.R.B.

$1,000 refund is not treated as reimbursement orrefund of payments for qualified tuition and relatedexpenses, because there is no reduction in chargesfor qualified tuition and related expenses. Therefore,under paragraph (b)(2)(iii) of this section, Univer-sity X is required to report $10,000 of paymentsreceived for qualified tuition and related expensesduring 2003.

Example 4. (i) In early December 2003, CollegeY bills enrolled Student B $10,000 for tuition and$6,000 for room and board for the 2004 Springsemester. In late December 2003, Student B pays$16,000. In mid-January 2004, after the 2004 Springsemester classes begin, Student B drops to half-timeenrollment. In mid-January 2004, College Y creditsStudent B’s account with $5,000, reflecting a $5,000reduction in charges for qualified tuition and relatedexpenses, but does not issue a refund to Student B.In early August 2004, College Y bills Student B$10,000 for tuition and $6,000 for room and boardfor the 2004 Fall semester. In early September 2004,College Y applies the $5,000 positive account bal-ance toward Student B’s $16,000 bill for the 2004Fall semester. In late September 2004, Student Bpays $6,000 towards the charges.

(ii) Reporting for calendar year 2003. Underparagraph (b)(2)(v) of this section, the $16,000 pay-ment in December 2003 is treated as a payment ofqualified tuition and related expenses up to the$10,000 billed for qualified tuition and relatedexpenses. Under paragraph (b)(2)(iii) of this section,College Y is required to report $10,000 of paymentsreceived for qualified tuition and related expensesduring 2003. In addition, College Y is required toindicate that the payments reported for 2003 relateto an academic period that begins during the firstthree months of the next calendar year.

(iii) Reporting for calendar year 2004. Underparagraph (b)(2)(vi) of this section, the $5,000 cred-ited to Student B’s account is treated as a reimburse-ment or refund of qualified tuition and relatedexpenses, because the charges for qualified tuitionand related expenses were reduced by $5,000.Under paragraph (b)(2)(iv) of this section, the$5,000 reimbursement or refund of qualified tuitionand related expenses must be separately reported onForm 1098–T because it relates to payments ofqualified tuition and related expenses reported byCollege Y for 2003. Under paragraph (b)(2)(v) ofthis section, the $5,000 positive account balance thatis applied toward charges for the 2004 Fall semesteris treated as a payment. Therefore, College Yreceived total payments of $11,000 during 2004 (the$5,000 credit plus the $6,000 payment). Under para-graph (b)(2)(v) of this section, the $11,000 of totalpayments are treated as a payment of qualifiedtuition and related expenses up to the $10,000 billedfor such expenses. Therefore, for 2004, College Y isrequired to report $10,000 of payments received forqualified tuition and related expenses during 2004and a $5,000 refund of payments of qualified tuitionand related expenses reported for 2003.

(3) Information reporting requirementsfor institutions that elect to reportamounts billed for qualified tuition andrelated expenses—(i) In general. Exceptas provided in paragraph (a)(2) of thissection, an institution reporting amountsbilled for qualified tuition and related

expenses must file an information returnon Form 1098–T with respect to eachindividual enrolled (as determined inparagraph (d)(1) of this section) for anacademic period beginning during thecalendar year or during a prior calendaryear and for whom a reportable transac-tion described in paragraph (b)(3)(ii) ofthis section is made during the calendaryear. An institution may use a substituteForm 1098–T if the substitute form com-plies with applicable revenue proceduresrelating to substitute forms.

(ii) Information included on return. Aninstitution reporting amounts billed forqualified tuition and related expensesmust include on Form 1098–T—

(A) The name, address, and taxpayeridentification number (TIN) (as definedin section 7701(a)(41)) of the institution;

(B) The name, address, and TIN of theindividual who is, or has been, enrolledby the institution;

(C) The amount billed for qualifiedtuition and related expenses with respectto the individual during the calendar year;

(D) An indication by the institutionwhether any amounts billed for qualifiedtuition and related expenses reported forthe calendar year relate to an academicperiod that begins during the first threemonths of the next calendar year;

(E) The amount of any scholarships orgrants for the payment of the individual’scosts of attendance that the institutionadministered and processed during thecalendar year;

(F) The amount of any reductions incharges made during the calendar yearwith respect to the individual that relateto amounts billed for qualified tuition andrelated expenses that were reported by theinstitution for a prior calendar year;

(G) The amount of any reductions tothe amount of scholarships or grants forthe payment of the individual’s costs ofattendance that were reported by the insti-tution with respect to the individual for aprior calendar year;

(H) An indication by the institutionwhether the individual was enrolled for atleast half of the normal full-time workload for the course of study the individualis pursuing for at least one academicperiod that begins during the calendaryear (see section 25A and the regulationsthereunder);

(I) An indication by the institutionwhether the individual was enrolled in aprogram leading to a graduate-leveldegree, graduate-level certificate, or otherrecognized graduate-level educationalcredential; and

(J) Any other information required byForm 1098–T and its instructions.

(iii) Reportable amounts billed forqualified tuition and related expensesduring calendar year determined. Theamount billed for qualified tuition andrelated expenses with respect to an indi-vidual during the calendar year that isreportable on Form 1098–T is determinedby netting the amounts billed for qualifiedtuition and related expenses during thecalendar year against any reductions incharges for qualified tuition and relatedexpenses made during the calendar yearthat relate to amounts billed for qualifiedtuition and related expenses during thesame calendar year.

(iv) Separate reporting of reductionsmade to amounts billed for qualifiedtuition and related expenses that werereported for a prior calendar year. Aninstitution must separately report on Form1098–T any reductions in charges madeduring the current calendar year thatrelate to amounts billed for qualifiedtuition and related expenses that werereported by the institution for a prior cal-endar year. Such reductions shall not benetted against amounts billed for quali-fied tuition and related expenses duringthe current calendar year.

(v) Examples. The following examplesillustrate the rules in this paragraph(b)(3):

Example 1. (i) In early August 2003, UniversityX bills enrolled Student A $10,000 for tuition and$6,000 for room and board for the 2003 Fall semes-ter. In late August 2003, Student A pays $11,000 toUniversity X. In early September 2003, Student Adrops to half-time enrollment for the 2003 Fallsemester. In late September 2003, University Xadjusts Student A’s account and reduces the tuitioncharges by $5,000 to reflect half-time enrollment. Inlate September 2003, University X applies the$5,000 account balance toward current charges.

(ii) Under paragraph (b)(3)(iii) of this section,University X is required to net the $10,000 amountof tuition billed during 2003 against the $5,000reduction in charges for qualified tuition and relatedexpenses during 2003. Therefore, Institution X isrequired to report $5,000 in amounts billed forqualified tuition and related expenses during 2003.

Example 2. (i) The facts are the same as inExample 1, except that, in addition, in early Decem-ber 2003, College X bills Student A $10,000 fortuition and $6,000 for room and board for the 2004

2002–21 I.R.B. 1019 May 28, 2002

Spring semester. In late December 2003, Student Apays $16,000. In mid-January 2004, after the 2004Spring semester classes begin, Student A drops tohalf-time enrollment. In mid-January 2004, CollegeX credits $5,000 to Student A’s account, reflecting a$5,000 reduction in charges for qualified tuition andrelated expenses, but does not issue a refund checkto Student A. In early August 2004, College X billsStudent A $10,000 for tuition and $6,000 for roomand board for the 2004 Fall semester. In early Sep-tember 2004, College X applies the $5,000 positiveaccount balance toward Student A’s $16,000 bill forthe 2004 Fall semester. In late September 2004, Stu-dent A pays $6,000 toward the charges.

(ii) Reporting for calendar year 2003. Underparagraph (b)(3)(iii) of this section, College X isrequired to report $15,000 amounts billed for quali-fied tuition and related expenses during 2003($5,000 for the 2003 Fall semester and $10,000 forthe 2004 Spring semester). In addition, College X isrequired to indicate that some of the amounts billedfor qualified tuition and related expenses reportedfor 2003 relate to an academic period that beginsduring the first three months of the next calendaryear.

(iii) Reporting for calendar year 2004. Underparagraph (b)(3)(iv) of this section, the $5,000reduction in charges for qualified tuition and relatedexpenses must be separately reported on Form1098–T because it relates to amounts billed forqualified tuition and related expenses that werereported by College X for 2003. Under paragraph(b)(3)(iii) of this section, College X is required toreport $10,000 in amounts billed for qualifiedtuition and related expenses during 2004.

(4) Requirements for insurers—(i) Ingeneral. Except as otherwise provided inthis section, an insurer must file an infor-mation return for each individual withrespect to whom reimbursements orrefunds of qualified tuition and relatedexpenses are made during the calendaryear on Form 1098–T. An insurer mayuse a substitute Form 1098–T if the sub-stitute form complies with applicable rev-enue procedures relating to substituteforms (see § 601.601(d)(2) of this chap-ter).

(ii) Information included on return. Aninsurer must include on Form 1098–T—

(A) The name, address, and taxpayeridentification number (TIN) (as definedin section 7701(a)(41)) of the insurer;

(B) The name, address, and TIN of theindividual with respect to whom reim-bursements or refunds of qualified tuitionand related expenses were made;

(C) The aggregate amount of reim-bursements or refunds of qualified tuitionand related expenses that the insurermade with respect to the individual dur-ing the calendar year; and

(D) Any other information required byForm 1098–T and its instructions.

(5) Time and place for filing return—(i) In general. Except as provided in para-graphs (b)(5)(ii) and (iii) of this section,Form 1098–T must be filed on or beforeFebruary 28 (March 31 if filed electroni-cally) of the year following the calendaryear in which payments were received, oramounts were billed, for qualified tuitionor related expenses, or reimbursements,refunds, or reductions of such amountswere made. An institution or insurer mustfile Form 1098–T with the IRS accordingto the instructions to Form 1098–T.

(ii) Return for nonresident alien indi-vidual. In general, an institution or insureris not required to file a return on behalf ofa nonresident alien individual. However,if a nonresident alien individual requestsan institution or insurer to report, theinstitution or insurer must file a returndescribed in paragraph (b) of this sectionwith the IRS on or before the date pre-scribed in paragraph (b)(5)(i) of this sec-tion, or on or before the thirtieth day afterthe request, whichever is later.

(iii) Extensions of time. The IRS maygrant an institution or insurer an exten-sion of time to file returns required in thissection upon a showing of good cause.See the instructions to Form 1098–T andapplicable revenue procedures for rulesrelating to extensions of time to file (see§ 601.601(d)(2) of this chapter).

(6) Use of magnetic media. See section6011(e) and § 301.6011–2 of this chapterfor rules relating to the requirement to fileForms 1098–T on magnetic media.

(c) Requirement to furnish statement—(1) In general. An institution or insurermust furnish a statement to each indi-vidual for whom it is required to file aForm 1098–T. The statement mustinclude—

(i) The information required underparagraph (b) of this section;

(ii) A legend that identifies the state-ment as important tax information that isbeing furnished to the IRS;

(iii) Instructions that—(A) State that the statement reports

either total payments received by theinstitution for qualified tuition and relatedexpenses during the calendar year, or totalamounts billed by the institution forqualified tuition and related expenses dur-ing the calendar year, or the total reim-bursements or refunds made by theinsurer;

(B) State that, under section 25A andthe regulations thereunder, the taxpayermay claim an education tax credit onlywith respect to qualified tuition andrelated expenses actually paid during thecalendar year; and that the taxpayer maynot be able to claim an education taxcredit with respect to the entire amount ofpayments received, or amounts billed, forqualified tuition and related expensesreported for the calendar year;

(C) State that the amount of any schol-arships or grants reported for the calendaryear and other similar amounts notreported (because they are not adminis-tered and processed by the institution)may reduce the amount of any allowableeducation tax credit for the taxable year;

(D) State that the amount of any reim-bursements or refunds of paymentsreceived, or reductions in charges, forqualified tuition and related expenses, orany reductions to the amount of scholar-ships or grants, reported by the institutionwith respect to the individual for a priorcalendar year may affect the amount ofany allowable education tax credit for theprior calendar year;

(E) State that the amount of any reim-bursements or refunds of qualified tuitionand related expenses reported by aninsurer may reduce the amount of anallowable education tax credit for a tax-able year;

(F) State that the taxpayer should referto relevant IRS forms and publications,and should not refer to the institution orthe insurer, for explanations relating tothe eligibility requirements for, and calcu-lation of, any allowable education taxcredit; and

(G) Include the name, address, andphone number of the office or departmentwithin the institution or insurer that is theinformation contact for the institution orinsurer that filed the Form 1098–T.

(2) Time and manner for furnishingstatement—(i) In general. Except as pro-vided in paragraphs (c)(2)(ii) and (iii) ofthis section, an institution or insurer mustfurnish the statement described in para-graph (c)(1) of this section to each indi-vidual for whom it is required to file areturn, on or before January 31 of theyear following the calendar year in whichpayments were received, or amounts werebilled, for qualified tuition and relatedexpenses, or reimbursements, refunds, or

May 28, 2002 1020 2002–21 I.R.B.

reductions of such amounts were made. Ifmailed, the statement must be sent to theindividual’s permanent address, or theindividual’s temporary address if theinstitution or insurer does not know theindividual’s permanent address. If fur-nished electronically, the statement mustbe furnished in accordance with the appli-cable regulations.

(ii) Statement to nonresident alienindividual. If an information return isfiled for a nonresident alien individual,the institution or insurer must furnish astatement described in paragraph (c)(1) ofthis section to the individual in the man-ner and on or before the date prescribedin paragraph (c)(2)(i) of this section, oron or before the thirtieth day after thenonresident alien’s request to report,whichever is later.

(iii) Extensions of time. The IRS maygrant an institution or insurer an exten-sion of time to furnish the statementsrequired in this section upon a showing ofgood cause. See the instructions to Form1098–T and applicable revenue proce-dures for rules relating to extensions oftime to furnish statements (see § 601.601(d)(2) of this chapter).

(3) Copy of Form 1098–T. An institu-tion or insurer may satisfy the require-ment of this paragraph (c) by furnishingeither a copy of Form 1098–T and itsinstructions or another document thatcontains all of the information filed withthe IRS and the information required byparagraph (c)(1) of this section if thedocument complies with applicable rev-enue procedures relating to substitutestatements (see § 601.601(d)(2) of thischapter).

(d) Special rules—(1) Enrollment de-termined. An institution may determineits enrollment for each academic periodunder its own rules and policies for deter-mining enrollment or as of any of the fol-lowing dates—

(i) 30 days after the first day of theacademic period;

(ii) A date during the academic periodon which enrollment data must be col-lected for purposes of the Integrated PostSecondary Education Data Systemadministered by the Department of Edu-cation; or

(iii) A date during the academic periodon which the institution must reportenrollment data to the State, the institu-

tion’s governing body, or some otherexternal governing body.

(2) Payments of qualified tuition andrelated expenses received or collected byone or more persons—(i) In general.Except as otherwise provided in para-graph (d)(2)(ii) of this section, if a personcollects or receives payments of qualifiedtuition and related expenses on behalf ofanother person (e.g., an institution), theperson collecting or receiving paymentsmust satisfy the information reportingrequirements of this section. In this case,the reporting requirements do not apply tothe transfer of the payments to the institu-tion.

(ii) Exception. If the person collectingor receiving payments of qualified tuitionand related expenses on behalf of anotherperson (e.g., an institution) does not pos-sess the information needed to complywith the information reporting require-ments of this section, the other personmust satisfy the information reportingrequirements of this section.

(3) Governmental units. An institutionor insurer that is a governmental unit, oran agency or instrumentality of a govern-mental unit, is subject to the informationreporting requirements of this section andan appropriately designated officer oremployee of the governmental entitymust satisfy the information reportingrequirements of this section.

(e) Penalty provisions—(1) Failure tofile correct returns. The section 6721 pen-alty may apply to an institution or insurerthat fails to file information returnsrequired by section 6050S and this sec-tion on or before the required filing date;that fails to include all of the requiredinformation on the return; or that includesincorrect information on the return. Seesection 6721, and the regulations thereun-der, for rules relating to penalties for fail-ure to file correct returns. See section6724, and the regulations thereunder, forrules relating to waivers of penalties forcertain failures due to reasonable cause.

(2) Failure to furnish correct informa-tion statements. The section 6722 penaltymay apply to an institution or insurer thatfails to furnish statements required bysection 6050S and this section on orbefore the prescribed date; that fails toinclude all the required information onthe statement; or that includes incorrectinformation on the statement. See section

6722, and the regulations thereunder, forrules relating to penalties for failure tofurnish correct statements. See section6724, and the regulations thereunder, forrules relating to waivers of penalties forcertain failures due to reasonable cause.

(3) Waiver of penalties for failures toinclude a correct TIN—(i) In general. Inthe case of a failure to include a correctTIN on Form 1098–T or a related infor-mation statement, penalties may bewaived if the failure is due to reasonablecause. Reasonable cause may be estab-lished if the failure arose from eventsbeyond the institution’s or insurer’s con-trol, such as a failure of the individual tofurnish a correct TIN. However, the insti-tution or insurer must establish that itacted in a responsible manner both beforeand after the failure.

(ii) Acting in a responsible manner. Aninstitution or insurer must request the TINof each individual for whom it is requiredto file a return if it does not already havea record of the individual’s correct TIN. Ifthe institution or insurer does not have arecord of the individual’s correct TIN,then it must solicit the TIN in the mannerdescribed in paragraph (e)(3)(iii) of thissection on or before December 31 of eachyear during which it receives payments,or bills amounts, for qualified tuition andrelated expenses or makes reimburse-ments, refunds, or reductions of suchamounts with respect to the individual. Ifan individual refuses to provide his or herTIN upon request, the institution orinsurer must file the return and furnishthe statement required by this sectionwithout the individual’s TIN, but with allother required information. The specificsolicitation requirements of paragraph(e)(3)(iii) of this section apply in lieu ofthe solicitation requirements of § 301.6724–1(e) and (f) of this chapter for thepurpose of determining whether an insti-tution or insurer acted in a responsiblemanner in attempting to obtain a correctTIN. An institution or insurer that com-plies with the requirements of this para-graph (e)(3) will be considered to haveacted in a responsible manner within themeaning of § 301.6724–1(d) of this chap-ter with respect to any failure to includethe correct TIN of an individual on areturn or statement required by section6050S and this section.

2002–21 I.R.B. 1021 May 28, 2002

(iii) Manner of soliciting TIN. Aninstitution or insurer must request theindividual’s TIN in writing and mustclearly notify the individual that the lawrequires the individual to furnish a TIN sothat it may be included on an informationreturn filed by the institution or insurer. Arequest for a TIN made on Form W–9S,Request for Student’s or Borrower’sSocial Security Number and Certification,satisfies the requirements of this para-graph (e)(3)(iii). An institution or insurermay establish a system for individuals tosubmit Forms W–9S electronically asdescribed in applicable forms and instruc-tions. An institution or insurer may alsodevelop a separate form to request theindividual’s TIN or incorporate therequest into other forms customarily usedby the institution or insurer, such asadmission or enrollment forms or finan-cial aid applications.

(4) Failure to furnish TIN. The section6723 penalty may apply to any individualwho is required (but fails) to furnish hisor her TIN to an institution or insurer. Seesection 6723, and the regulations thereun-der, for rules relating to the penalty forfailure to furnish a TIN.

(f) Effective date. The rules in this sec-tion apply to information returns requiredto be filed, and information statementsrequired to be furnished, after December31, 2003.

PART 301—PROCEDURE ANDADMINISTRATION

Par. 4. The authority citation for part301 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 5. Section 301.6011–2 is amended

by:1. In paragraph (b)(1), first sentence,

add the language “1098–T,” immediatelyafter the language “1098–E,”.

2. Revising paragraph (g)(3).The revision reads as follows:

§ 301.6011–2 Required use of magneticmedia.

* * * * *

(g) * * *(3) This section applies to returns on

Forms 1098–E and 1098–T filed afterDecember 31, 2003.


Internal Revenue.


May 28, 2002 1022 2002–21 I.R.B.

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as“rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe theeffect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus, ifan earlier ruling held that a principleapplied to A, and the new ruling holdsthat the same principle also applies to B,the earlier ruling is amplified. (Comparewith modified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previouslypublished ruling and points out an essen-tial difference between them.

Modified is used where the substanceof a previously published position isbeing changed. Thus, if a prior rulingheld that a principle applied to A but notto B, and the new ruling holds that it

applies to both A and B, the prior rulingis modified because it corrects a pub-lished position. (Compare with amplifiedand clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly usedin a ruling that lists previously publishedrulings that are obsoleted because ofchanges in law or regulations. A rulingmay also be obsoleted because the sub-stance has been included in regulationssubsequently adopted.

Revoked describes situations where theposition in the previously published rul-ing is not correct and the correct positionis being stated in the new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over aperiod of time in separate rulings. If the

new ruling does more than restate thesubstance of a prior ruling, a combinationof terms is used. For example, modifiedand superseded describes a situationwhere the substance of a previously pub-lished ruling is being changed in part andis continued without change in part and itis desired to restate the valid portion ofthe previously published ruling in a newruling that is self contained. In this case,the previously published ruling is firstmodified and then, as modified, is super-seded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further namesin subsequent rulings. After the originalruling has been supplemented severaltimes, a new ruling may be published thatincludes the list in the original ruling andthe additions, and supersedes all prior rul-ings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in currentuse and formerly used will appear inmaterial published in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.

E.O.—Executive Order.ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign Corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Intemal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.

PO—Possession of the U.S.PR—Partner.PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statements of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D.—Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z—Corporation.

2002–21 I.R.B. i May 28, 2002

Numerical Finding List1

Bulletins 2002–1 through 2002–20

Announcements:

2002–1, 2002–2 I.R.B. 3042002–2, 2002–2 I.R.B. 3042002–3, 2002–2 I.R.B. 3052002–4, 2002–2 I.R.B. 3062002–5, 2002–4 I.R.B. 4202002–6, 2002–5 I.R.B. 4582002–7, 2002–5 I.R.B. 4592002–8, 2002–6 I.R.B. 4942002–9, 2002–7 I.R.B. 5362002–10, 2002–7 I.R.B. 5392002–11, 2002–6 I.R.B. 4942002–12, 2002–8 I.R.B. 5532002–13, 2002–7 I.R.B. 5402002–14, 2002–7 I.R.B. 5402002–15, 2002–7 I.R.B. 5402002–16, 2002–7 I.R.B. 5412002–17, 2002–8 I.R.B. 5612002–18, 2002–10 I.R.B. 6212002–19, 2002–8 I.R.B. 5612002–20, 2002–8 I.R.B. 5612002–21, 2002–8 I.R.B. 5622002–22, 2002–8 I.R.B. 5622002–23, 2002–8 I.R.B. 5632002–24, 2002–9 I.R.B. 6062002–25, 2002–10 I.R.B. 6212002–26, 2002–11 I.R.B. 6292002–27, 2002–11 I.R.B. 6292002–28, 2002–11 I.R.B. 6302002–29, 2002–11 I.R.B. 6312002–30, 2002–11 I.R.B. 6322002–31, 2002–15 I.R.B. 7472002–32, 2002–12 I.R.B. 6642002–33, 2002–12 I.R.B. 6662002–34, 2002–13 I.R.B. 7022002–35, 2002–12 I.R.B. 6672002–36, 2002–13 I.R.B. 7032002–37, 2002–13 I.R.B. 7032002–38, 2002–14 I.R.B. 7382002–39, 2002–14 I.R.B. 7382002–40, 2002–15 I.R.B. 7472002–41, 2002–14 I.R.B. 7392002–42, 2002–14 I.R.B. 7392002–43, 2002–16 I.R.B. 7922002–44, 2002–17 I.R.B. 8092002–45, 2002–18 I.R.B. 8332002–46, 2002–18 I.R.B. 8342002–47, 2002–18 I.R.B. 8442002–48, 2002–17 I.R.B. 8092002–49, 2002–19 I.R.B. 9192002–50, 2002–18 I.R.B. 8452002–52, 2002–19 I.R.B. 919

Court Decisions:

2073, 2002–14 I.R.B. 7182074, 2002–20 I.R.B. 954

Notices:

2002–1, 2002–2 I.R.B. 2832002–2, 2002–2 I.R.B. 2852002–3, 2002–2 I.R.B. 2892002–4, 2002–2 I.R.B. 2982002–5, 2002–3 I.R.B. 3202002–6, 2002–3 I.R.B. 3262002–7, 2002–6 I.R.B. 4892002–8, 2002–4 I.R.B. 3982002–9, 2002–5 I.R.B. 4502002–10, 2002–6 I.R.B. 4902002–11, 2002–7 I.R.B. 5262002–12, 2002–7 I.R.B. 5262002–13, 2002–8 I.R.B. 5472002–14, 2002–8 I.R.B. 5482002–15, 2002–8 I.R.B. 5482002–16, 2002–9 I.R.B. 5672002–17, 2002–9 I.R.B. 5672002–18, 2002–12 I.R.B. 6442002–19, 2002–10 I.R.B. 6192002–20, 2002–17 I.R.B. 7962002–21, 2002–14 I.R.B. 7302002–22, 2002–14 I.R.B. 7312002–23, 2002–15 I.R.B. 7422002–24, 2002–16 I.R.B. 7852002–25, 2002–15 I.R.B. 7432002–26, 2002–15 I.R.B. 7432002–27, 2002–18 I.R.B. 8142002–28, 2002–16 I.R.B. 7852002–29, 2002–17 I.R.B. 7972002–30, 2002–17 I.R.B. 7972002–31, 2002–19 I.R.B. 908

Proposed Regulations:

REG–209135–88, 2002–4 I.R.B. 418REG–209114–90, 2002–9 I.R.B. 576REG–104762–00, 2002–18 I.R.B. 825REG–105369–00, 2002–18 I.R.B. 828REG–107100–00, 2002–7 I.R.B. 529REG–107184–00, 2002–20 I.R.B. 967REG–107366–00, 2002–12 I.R.B. 645REG–118861–00, 2002–12 I.R.B. 651REG–105344–01, 2002–2 I.R.B. 302REG–112991–01, 2002–4 I.R.B. 404REG–115054–01, 2002–7 I.R.B. 530REG–119436–01, 2002–3 I.R.B. 377REG–120135–01, 2002–8 I.R.B. 552REG–125450–01, 2002–5 I.R.B. 457REG–125626–01, 2002–9 I.R.B. 604REG–142299–01, 2002–4 I.R.B. 418REG–159079–01, 2002–6 I.R.B. 493REG–163892–01, 2002–20 I.R.B. 968REG–165706–01, 2002–16 I.R.B. 787REG–167648–01, 2002–16 I.R.B. 790REG–102740–02, 2002–13 I.R.B. 701REG–108697–02, 2002–19 I.R.B. 918

Revenue Procedures:

2002–1, 2002–1 I.R.B. 12002–2, 2002–1 I.R.B. 822002–3, 2002–1 I.R.B. 117

Revenue Procedures—Continued:

2002–4, 2002–1 I.R.B. 1272002–5, 2002–1 I.R.B. 1732002–6, 2002–1 I.R.B. 2032002–7, 2002–1 I.R.B. 2492002–8, 2002–1 I.R.B. 2522002–9, 2002–3 I.R.B. 3272002–10, 2002–4 I.R.B. 4012002–11, 2002–7 I.R.B. 5262002–12, 2002–3 I.R.B. 3742002–13, 2002–8 I.R.B. 5492002–14, 2002–5 I.R.B. 4502002–15, 2002–6 I.R.B. 4902002–16, 2002–9 I.R.B. 5722002–17, 2002–13 I.R.B. 6762002–18, 2002–13 I.R.B. 6782002–19, 2002–13 I.R.B. 6962002–20, 2002–14 I.R.B. 7322002–21, 2002–19 I.R.B. 9112002–22, 2002–14 I.R.B. 7332002–23, 2002–15 I.R.B. 7442002–24, 2002–17 I.R.B. 7982002–25, 2002–17 I.R.B. 8002002–26, 2002–15 I.R.B. 7462002–27, 2002–17 I.R.B. 8022002–28, 2002–18 I.R.B. 8152002–31, 2002–19 I.R.B. 9162002–32, 2002–20 I.R.B. 9592002–33, 2002–20 I.R.B. 963

Revenue Rulings:

2002–1, 2002–2 I.R.B. 2682002–2, 2002–2 I.R.B. 2712002–3, 2002–3 I.R.B. 3162002–4, 2002–4 I.R.B. 3892002–5, 2002–6 I.R.B. 4612002–6, 2002–6 I.R.B. 4602002–7, 2002–8 I.R.B. 5432002–8, 2002–9 I.R.B. 5642002–9, 2002–10 I.R.B. 6142002–10, 2002–10 I.R.B. 6162002–11, 2002–10 I.R.B. 6082002–12, 2002–11 I.R.B. 6242002–13, 2002–12 I.R.B. 6372002–14, 2002–12 I.R.B. 6362002–15, 2002–13 I.R.B. 6682002–16, 2002–15 I.R.B. 7402002–17, 2002–14 I.R.B. 7162002–18, 2002–16 I.R.B. 7792002–19, 2002–16 I.R.B. 7782002–20, 2002–17 I.R.B. 7942002–21, 2002–17 I.R.B. 7932002–22, 2002–19 I.R.B. 8492002–23, 2002–18 I.R.B. 8112002–24, 2002–19 I.R.B. 8482002–25, 2002–19 I.R.B. 9042002–26, 2002–19 I.R.B. 9062002–27, 2002–20 I.R.B. 9252002–28, 2002–20 I.R.B. 9412002–29, 2002–20 I.R.B. 940

1 A cumulative list of all revenue rulings, revenue

procedures, Treasury decisions, etc., published in

Internal Revenue Bulletins 2001–27 through 2001–53 is

in Internal Revenue Bulletin 2002–1, dated January 7, 2002.

May 28, 2002 ii 2002–21 I.R.B.

Tax Conventions:

2002–14 I.R.B. 725

Treasury Decisions:

8968, 2002–2 I.R.B. 2748969, 2002–2 I.R.B. 2768970, 2002–2 I.R.B. 2818971, 2002–3 I.R.B. 3088972, 2002–5 I.R.B. 4438973, 2002–4 I.R.B. 3918974, 2002–3 I.R.B. 3188975, 2002–4 I.R.B. 3798976, 2002–5 I.R.B. 4218977, 2002–6 I.R.B. 4638978, 2002–7 I.R.B. 5008979, 2002–6 I.R.B. 4668980, 2002–6 I.R.B. 4778981, 2002–7 I.R.B. 4968982, 2002–8 I.R.B. 5448983, 2002–9 I.R.B. 5658984, 2002–13 I.R.B. 6688985, 2002–14 I.R.B. 7078986, 2002–16 I.R.B. 7808987, 2002–19 I.R.B. 8528988, 2002–20 I.R.B. 9298989, 2002–20 I.R.B. 9208990, 2002–20 I.R.B. 947

2002–21 I.R.B. iii May 28, 2002

Finding List of Current Actionson Previously Published Items2

Bulletins 2002–1 through 2002–20

Announcements:

2001–83Modified byAnn. 2002–36, 2002–13 I.R.B. 703

2002–9Corrected byAnn. 2002–30, 2002–11 I.R.B. 632Ann. 2002–35, 2002–12 I.R.B. 667

Notices:

90–24Modified and superseded byNotice 2002–24, 2002–16 I.R.B. 785

98–31Supplemented byAnn. 2002–37, 2002–13 I.R.B. 703

98–43Modified and superseded byNotice 2002–5, 2002–3 I.R.B. 320

2000–11Obsoleted byNotice 2002–3, 2002–2 I.R.B. 289

2001–10Revoked byNotice 2002–8, 2002–4 I.R.B. 398

2001–61Supplemented byNotice 2002–15, 2002–8 I.R.B. 548

2001–68Supplemented byNotice 2002–15, 2002–8 I.R.B. 548

2002–14Modified and superseded byRev. Proc. 2002–28, 2002–18 I.R.B. 815

Proposed Regulations:

REG–209135–88Corrected byAnn. 2002–15, 2002–7 I.R.B. 540Ann. 2002–30, 2002–11 I.R.B. 632

REG–251502–96Withdrawn byAnn. 2002–33, 2002–12 I.R.B. 666

REG–113526–98Withdrawn byREG–105369–00, 2002–18 I.R.B. 828

Proposed Regulations:—Continued

REG–107100–00Corrected byAnn. 2002–30, 2002–11 I.R.B. 632

REG–107566–00Withdrawn byREG–163892–01, 2002–20 I.R.B. 968













Revenue Procedures:

84–37Modified byRev. Proc. 2002–1, 2002–1 I.R.B. 1

Revenue Procedures:—Continued

84–57Obsoleted byT.D. 8976, 2002–5 I.R.B. 421


89–45Superseded byRev. Proc. 2002–23, 2002–15 I.R.B. 744

91–71Clarified and superseded byRev. Proc. 2002–32, 2002–20 I.R.B. 959


97–27Modified and amplified byRev. Proc. 2002–19, 2002–13 I.R.B. 696


99–49Modified and superseded byRev. Proc. 2002–9, 2002–3 I.R.B. 327









2 A cumulative list of current actions on previously published

items in Internal Revenue Bulletins 2001–27 through 2001–53 is

in Internal Revenue Bulletin 2002–1, dated January 7, 2002.

May 28, 2002 iv 2002–21 I.R.B.

Revenue Procedures:—Continued



2001–13Corrected byAnn. 2002–5, 2002–4 I.R.B. 420


2001–27Supplemented byRev. Proc. 2002–20, 2002–14 I.R.B. 732

2001–35Obsoleted, except as provided in section 5.02 byRev. Proc. 2002–24, 2002–17 I.R.B. 798





2002–6Modified byNotice 2002–1, 2002–2 I.R.B. 283Rev. Proc. 2002–21, 2002–19 I.R.B. 911

2002–8Modified byNotice 2002–1, 2002–2 I.R.B. 283

2002–9Modified and clarified byAnn. 2002–17, 2002–8 I.R.B. 561Modified and amplified byRev. Rul. 2002–9, 2002–10 I.R.B. 614Rev. Proc. 2002–17, 2002–13 I.R.B. 676Rev. Proc. 2002–19, 2002–13 I.R.B. 696Rev. Proc. 2002–27, 2002–17 I.R.B. 802Rev. Proc. 2002–28, 2002–18 I.R.B. 815Rev. Proc. 2002–33, 2002–20 I.R.B. 963


Revenue Rulings:

55–261Distinguished byRev. Rul. 2002–19, 2002–16 I.R.B. 778

Revenue Rulings:—Continued

55–747Revoked byNotice 2002–8, 2002–4 I.R.B. 398






76–270Amplified and superseded byRev. Rul. 2002–20, 2002–17 I.R.B. 794



80–218Superseded byRev. Rul. 2002–23, 2002–18 I.R.B. 811

87–112Clarified byRev. Rul. 2002–22, 2002–19 I.R.B. 849


92–19Supplemented in part byRev. Rul. 2002–12, 2002–11 I.R.B. 624

2002–7Corrected byAnn. 2002–13, 2002–7 I.R.B. 540

Treasury Decisions:

8971Corrected byAnn. 2002–20, 2002–8 I.R.B. 561


Treasury Decisions:—Continued





2002–21 I.R.B. v May 28, 2002

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May 28, 2002 2002–21 I.R.B.

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