Bulletin No. 2004-10March 8, 2004

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. 2004–8, page 544.Cost-share payments. The Forest Land Enhancement Pro-gram (FLEP) is a small watershed program administered bythe Secretary of Agriculture that is substantially similar to thetype of programs described in section 126(a)(1) through (8)of the Code within the meaning of section 126(a)(9). All or aportion of cost-share payments received under the FLEP is eli-gible for exclusion from gross income to the extent permittedby section 126. Rental payments and incentive payments arenot cost-share payments and are not excludable from gross in-come.

Rev. Rul. 2004–24, page 550.REITs; parking facilities. This ruling identifies circumstancesin which a real estate investment trust’s (REIT’s) income fromproviding parking facilities at its rental real properties qualifiesas rents from real property under section 856(d) of the Code.

Rev. Proc. 2004–17, page 562.This procedure provides guidance to individuals who fail tomeet the eligibility requirements of section 911(d)(1) of theCode because adverse conditions in a foreign country precludethe individual from meeting those requirements. A current listof countries and the dates those countries are subject to thesection 911(d)(4) waiver is provided. Rev. Proc. 2003–26supplemented.

EMPLOYEE PLANS

Rev. Rul. 2004–20, page 546.Section 412(i) plans; deductibility; listed transactions.This ruling gives an example where a qualified pension plancannot be a section 412(i) plan if the plan holds life insurancecontracts and annuity contracts for the benefit of a participantthat provide for benefits at normal retirement age in excess ofthe participant’s benefits at normal retirement age under theterms of the plan. The ruling also addresses when certain em-ployer contributions to purchase life insurance coverage for aparticipant in a defined benefit plan are deductible and whetherthose transactions are “listed transactions.” Rev. Rul. 55–748modified and superseded.

Rev. Rul. 2004–21, page 544.Nondiscrimination; section 412(i) plan. This ruling pro-vides an example where a plan that is funded, in whole or inpart, with life insurance contracts may not satisfy the require-ments of Code section 401(a)(4) prohibiting discrimination infavor of highly compensated employees.

Rev. Rul. 2004–22, page 553.COBRA and Medicare entitlement. The COBRA continua-tion coverage period can be expanded from 18 to 36 monthsif a second qualifying event occurs. Medicare entitlement ofa covered employee is one of the listed events that can be asecond qualifying event. This ruling holds that Medicare entitle-ment is not a second qualifying event unless (ignoring the firstqualifying event) it would result in a loss of coverage under thegroup health plan.

(Continued on the next page)

Finding Lists begin on page ii.

REG–126967–03, page 566.Proposed regulations under section 402 of the Code providerules regarding the amount includible in a participant’s incomewhen a life insurance contract is distributed from a qualifiedplan, and provide rules under sections 79 and 83 imposing sim-ilar valuation requirements for those other employer-providedlife insurance arrangements. A public hearing is scheduled forJune 9, 2004.

Rev. Proc. 2004–16, page 559.Fair market value; distributions; qualified retirementplans. This procedure provides interim guidance on how fairmarket value may be determined in the instance of distribu-tions from a qualified retirement plan.

EMPLOYMENT TAX

REG–156421–03, page 571.Proposed regulations under sections 3121(b)(10) and3306(c)(10)(B) of the Code provide guidance on the FederalInsurance Contributions Act (FICA) and Federal UnemploymentTax Act (FUTA) exceptions for student services. The proposedregulations provide guidance on whether an employer isconsidered a “school, college, or university,” and whether anemployee is considered a “student” under these provisions. Apublic hearing is scheduled for June 16, 2004.

Notice 2004–12, page 556.This notice contains a proposed revenue procedure that setsforth generally applicable standards for determining whetherservice in the employ of certain public or private nonprofitschools, colleges, universities, or affiliated organizations de-scribed in section 509(a)(3) of the Code performed by a stu-dent qualifies for the exception from Federal Insurance Con-tributions Act (FICA) tax provided under section 3121(b)(10).Rev. Proc. 98–16 suspended.

ADMINISTRATIVE

Rev. Proc. 2004–19, page 563.This procedure provides an elective safe harbor that the ownerof an oil and gas property may use in determining the property’srecoverable reserves for purposes of computing cost depletionunder section 611 of the Code.

Announcement 2004–11, page 581.This announcement provides information regarding changes tothe reporting for certain 2002 forms by certain fiscal yearpass-through entities affected by pending technical correctionsto the qualified dividend rules. Partnerships, S corporations,and estates (including revocable trusts treated as part of an es-tate) with a fiscal year beginning in 2002 that received qualifieddividends in 2003 must reflect the changes required by this an-nouncement in their reporting for the tax year. Announcement2003–56 modified.

Announcement 2004–14, page 582.This document announces the cancellation of a public hearingon proposed regulations (REG–110896–98, 2003–51 I.R.B.1226) under section 664(b) of the Code concerning the char-acterization of distributions from charitable remainder trusts.

March 8, 2004 2004-10 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. Bul-letin contents are consolidated semiannually into CumulativeBulletins, 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, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

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,Tax Conventions and Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.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 Sec-retary (Enforcement).

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

The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.*

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.

* Beginning with Internal Revenue Bulletin 2003–43, we are publishing the index at the end of the month, rather than at the beginning.

2004-10 I.R.B. March 8, 2004

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 126.—CertainCost-Sharing Payments26 CFR 16A.126–1: Certain cost sharing payments— In general (Temporary).

Cost-share payments. The ForestLand Enhancement Program (FLEP) is asmall watershed program administered bythe Secretary of Agriculture that is sub-stantially similar to the type of programsdescribed in section 126(a)(1) through (8)of the Code within the meaning of section126(a)(9). All or a portion of cost-sharepayments received under the FLEP is el-igible for exclusion from gross incometo the extent permitted by section 126.Rental payments and incentive paymentsare not cost-share payments and are notexcludable from gross income.

Rev. Rul. 2004–8

ISSUE

Is the Forest Land Enhancement Pro-gram (FLEP) substantially similar to thetype of programs described in § 126 (a)(1)through (8) of the Internal Revenue Code,so that the FLEP is within the scope of§ 126(a)(9) and, thereby, cost-share pay-ments received under the FLEP are eligi-ble for exclusion from gross income to theextent permitted by § 126?

FACTS

The FLEP, authorized under the provi-sions of Title VIII of the Farm Securityand Rural Investment Act of 2002, Pub.L. No. 107–171, 116 Stat. 134, whichamended the Cooperative Forestry Assis-tance Act of 1978, Pub. L. No. 95–313, 92Stat. 365, is a voluntary program for non-industrial private forest landowners thatprovides technical, educational, and cost-share assistance to encourage the long-term sustainability of non-industrial pri-vate forest land and related resources. TheFLEP replaces the Stewardship IncentivesProgram (SIP), which was determined inRev. Rul. 94–27, 1994–1 C.B. 26, to bewithin the scope of § 126(a)(9), and theForestry Incentives Program (FIP), whichis listed in § 126(a)(8). The SIP provided

for the cost-sharing of a wide range ofmultiple resource management practices.The FIP provided for cost-sharing of tim-ber stand improvements, site preparationfor natural regeneration, and tree plantingpractices. The FLEP encompasses all ofthe cost-share practices authorized underboth the SIP and the FIP.

A landowner who wishes to participatein the cost-share component of the FLEPmust develop and implement, in cooper-ation with the state forester, another stateofficial, or a professional resources man-ager, a management plan that addressessite specific activities and practices. Thecost-share practices are limited to the treat-ment of 1,000 acres per year and mustbe implemented for a period of at least10 years. The maximum cost-share pay-ment for any practice may be up to 75 per-cent. The aggregate payment to any onelandowner through 2007 may not exceed$100,000.

The Secretary of Agriculture has deter-mined that cost-share payments under theFLEP are primarily for the purpose of con-servation.

LAW AND ANALYSIS

Under § 126(a), gross income doesnot include the excludable portion ofpayments received under certain conser-vation programs set forth in § 126(a)(1)through (8). Under § 126(a)(9), a pro-gram affecting “small watersheds” that isadministered by the Secretary of Agricul-ture also is eligible for § 126 treatmentif the Commissioner determines that theprogram is substantially similar to thetype of programs described in § 126(a)(1)through (8). See § 16A.126–1(d)(3) of thetemporary Income Tax Regulations for thedefinition of “small watershed.”

Once the Commissioner has deter-mined that a program is substantiallysimilar to the types of programs describedin § 126(a)(1) through (8), taxpayers re-ceiving cost-share payments under thatprogram must determine what portionof the cost-share payments is excludablefrom gross income under § 126. See§ 126(b)(1), and § 16A.126–1, relating tothe partial exclusion of certain cost-share

payments, to determine what portion of thecost-share payments is excludable fromgross income under § 126.

HOLDING

The FLEP is substantially similarto the type of programs described in§ 126(a)(1) through (8) within the mean-ing of § 126(a)(9). All or a portion ofcost-share payments received under theFLEP is eligible for exclusion from grossincome to the extent permitted by § 126.See § 126(b)(1) and § 16A.126–1 to deter-mine what portion, if any, of the cost-sharepayments is excludable from gross incomeunder § 126.

DRAFTING INFORMATION

The principal author of this revenueruling is Nicole R. Cimino of the Officeof Associate Chief Counsel (Passthroughsand Special Industries). For further in-formation regarding this revenue ruling,contact Ms. Cimino at (202) 622–3120(not a toll-free call).

Section 401.—QualifiedPension, Profit-Sharing,and Stock Bonus Plans26 CFR 1.401–1: Qualified pension, profit-sharing,and stock bonus plans.

Whether the incidental death benefit rules are sat-isfied. See Rev. Rul. 2004-20, page 546.

26 CFR 1.401(a)(4)–4: Nondiscriminatory availabil-ity of benefits, rights, and features.

Nondiscrimination; section 412(i)plan. This ruling provides an examplewhere a plan that is funded, in whole or inpart, with life insurance contracts may notsatisfy the requirements of Code section401(a)(4) prohibiting discrimination infavor of highly compensated employees.

Rev. Rul. 2004–21

ISSUE

Does a plan that is funded, in whole orin part, with life insurance contracts satisfy

2004-10 I.R.B. 544 March 8, 2004

the requirements of § 401(a)(4) of the In-ternal Revenue Code prohibiting discrimi-nation in favor of highly compensated em-ployees where: (1) highly compensatedemployees are permitted, prior to distri-bution of retirement benefits, to purchaselife insurance contracts from the plan atcash surrender value; and (2) any rightsunder the plan for nonhighly compensatedemployees to purchase life insurance con-tracts from the plan prior to distributionof retirement benefits are not of inherentlyequal or greater value than the purchaserights of highly compensated employees?

FACTS

Employer M maintains Plan A, a retire-ment plan that is intended to be a qual-ified plan under § 401(a). Plan A pro-vides an incidental death benefit within themeaning of § 1.401–1(b)(1)(i) of the In-come Tax Regulations for each participant,and holds a life insurance contract on thelife of each participant to fund that inci-dental death benefit. Before distributionsto a participant under Plan A commence,each participant is offered the opportunityto purchase the life insurance contract un-der which the participant is insured fromPlan A for its cash surrender value. It isassumed for purposes of this revenue rul-ing that Prohibited Transaction Exemption92–6, 57 FR 5189 (February 12, 1992) ap-plies to the purchase of a life insurancecontract from Plan A and, thus, a partici-pant’s purchase of a life insurance contractfrom Plan A is not a prohibited transactionunder § 4975. Employer M has nonhighlycompensated employees that are not ex-cludable employees within the meaning of§ 1.410(b)–6, and the features of the lifeinsurance contracts covering the lives ofhighly compensated employees are differ-ent than the features of the life insurancecontracts covering the lives of nonhighlycompensated employees. In addition, be-cause of these differences in the features ofthe contracts, the rights that the nonhighlycompensated employees have to purchasethe life insurance contracts under whichthey are insured from Plan A are not ofinherently equal or greater value than therights that highly compensated employeeshave to purchase the life insurance con-tracts under which they are insured.

LAW AND ANALYSIS

Section 401(a)(4) provides that, under aqualified retirement plan, contributions orbenefits provided under the plan must notdiscriminate in favor of highly compen-sated employees. Section 410(b) providesminimum coverage requirements that aredesigned to ensure that a qualified planprovides sufficient benefits to a largeenough proportion of participants who arenonhighly compensated employees.

Section 1.401(a)(4)–1(b)(3) providesthat a plan satisfies the requirements of§ 401(a)(4) only if all benefits, rights andfeatures provided under the plan are madeavailable under the plan in a nondiscrimi-natory manner. Under § 1.401(a)(4)–4(a),benefits, rights and features (i.e., optionalforms of benefit, ancillary benefits, andother rights or features) are made avail-able under the plan in a nondiscriminatorymanner only if each benefit, right orfeature satisfies the current availabilityrequirement of § 1.401(a)(4)–4(b) andthe effective availability requirement of§ 1.401(a)(4)–4(c). In general, a benefit,right or feature satisfies the current avail-ability requirement of § 1.401(a)(4)–4(b)for a plan year if the group of employ-ees to whom the benefit, right or featureis currently available during the planyear satisfies § 410(b) (without regardto the average benefit percentage test of§ 1.410(b)–5).

An other right or feature is any rightor feature applicable to employees un-der the plan (other than a benefit for-mula, an optional form of benefit, oran ancillary benefit) that can be ex-pected to have meaningful value. Under§ 1.401(a)(4)–4(e)(3)(i), a distinct otherright or feature exists if a right or featureis not available on substantially the sameterms as another right or feature. Under§ 1.401(a)(4)–4(e)(3)(iii)(C), the right to aparticular form of investment, including,for example, a particular class or type ofemployer securities (taking into account,in determining whether different formsof investment exist, any differences inconversion, dividend, voting, liquidationpreference, or other rights conferred underthe security) is a distinct other right or fea-ture. Similarly, differences in insurancecontracts (e.g., differences in cash valuegrowth terms or different exchange fea-tures) that may be purchased from a plan

can create distinct other rights or featureseven if the terms under which the contractsare purchased from the plan are the same.

Under § 1.401(a)(4)–4(d)(4), an op-tional form of benefit, ancillary benefit,or other right or feature is permitted to beaggregated with another optional form ofbenefit, ancillary benefit, or other right orfeature if one of the two is, in all cases,of inherently equal or greater value thanthe other, and the optional form of benefit,ancillary benefit, or other right or featurethat is of inherently equal or greater valueseparately satisfies the current availabil-ity requirement of § 1.401(a)(4)–4(b) andthe effective availability requirement of§ 1.401(a)(4)–4(c). For this purpose, onebenefit, right, or feature is of inherentlyequal or greater value than another benefit,right, or feature only if, at any time andunder any conditions, it is impossible forany employee to receive a smaller amountor a less valuable right under the first ben-efit, right, or feature than under the secondbenefit, right, or feature.

To the extent the purchase from PlanA of a life insurance contract by a highlycompensated employee is a distribution al-ternative with respect to benefits describedin § 411(d)(6)(A), such a purchase right isan optional form of benefit under Plan A.Even in situations in which this purchaseright is not an optional form of benefit,this purchase right is an other right or fea-ture. The purchase rights for the highlycompensated employees are distinct op-tional forms of benefit or other rights orfeatures from the purchase rights for non-highly compensated employees because ofdifferences in the life insurance contracts(analogous to a conversion right applica-ble to a security). This purchase rightfor highly compensated employees doesnot satisfy the current availability require-ment of § 1.401(a)(4)–4(b) because theright to purchase the contracts of a typeavailable to the highly compensated em-ployees is not available to any nonhighlycompensated employees, and therefore isnot available to a group that satisfies therequirements of § 410(b). Moreover, un-der the facts presented, this purchase rightof highly compensated employees cannotsatisfy the requirements of § 1.401(a)(4)–4through aggregation with any other op-tional form of benefit, ancillary benefit, orother right or feature (such as the purchaseright for nonhighly compensated employ-

March 8, 2004 545 2004-10 I.R.B.

ees) because no other optional form ofbenefit, ancillary benefit, or other rightor feature under the plan that would en-able the aggregated benefits to be avail-able to a group that satisfies the require-ments of § 410(b) is of inherently equal orgreater value. Thus, Plan A fails to sat-isfy the nondiscrimination requirements of§ 401(a)(4).

HOLDING

A plan that is funded, in whole or inpart, with life insurance contracts does notsatisfy the requirements of § 401(a)(4) pro-hibiting discrimination in favor of highlycompensated employees where: (1) theplan permits highly compensated employ-ees, prior to distribution of retirement ben-efits, to purchase those life insurance con-tracts prior to distribution; and (2) anyrights under the plan for nonhighly com-pensated employees to purchase life insur-ance contracts from the plan prior to dis-tribution of retirement benefits are not ofinherently equal or greater value than thepurchase rights of highly compensated em-ployees.

DRAFTING INFORMATION

The principal authors of this revenueruling are Larry Isaacs of Employee Plans,Tax Exempt and Government Entities Di-vision, and Linda Marshall of the Officeof the Division Counsel/Associate ChiefCounsel, Tax Exempt and Government En-tities. For further information regardingthis revenue ruling, contact the EmployeePlans taxpayer assistance telephone ser-vice between the hours of 8:00 a.m. and6:30 p.m. Eastern Time, Monday throughFriday, by calling (877) 829–5500 (a toll-free number). Mr. Isaacs may be reachedat (202) 283–9710, and Ms. Marshall maybe reached at (202) 622–6090 (not toll-freenumbers).

Section 404.—Deductionfor Contributions of anEmployer to an Employees’Trust or Annuity Plan andCompensation Under aDeferred-Payment Plan(Also, §§ 401, 412, 6011, 6111, 6112; §§ 26CFR 1.401–1, 1.412(i)–1, 1.6011–4, 301.6111–2,301.6112–1.)

Section 412(i) plans; deductibility;listed transactions. This ruling gives anexample where a qualified pension plancannot be a section 412(i) plan if the planholds life insurance contracts and annuitycontracts for the benefit of a participantthat provide for benefits at normal retire-ment age in excess of the participant’sbenefits at normal retirement age underthe terms of the plan. The ruling also ad-dresses when certain employer contribu-tions to purchase life insurance coveragefor a participant in a defined benefit planare deductible and whether those transac-tions are “listed transactions.” Rev. Rul.55–748 modified and superseded.

Rev. Rul. 2004–20

ISSUES

Issue 1: Can a qualified pension plan bea plan described in § 412(i) of the Inter-nal Revenue Code if the plan holds life in-surance contracts and annuity contracts forthe benefit of a participant that provide forbenefits at normal retirement age in excessof the participant’s benefits at normal re-tirement age under the terms of the plan?Issue 2: If a qualified pension plan holdslife insurance contracts providing for lifeinsurance on a participant’s life in excessof the participant’s death benefit under theterms of the plan, are contributions forpremiums for such excess life insurancecoverage currently deductible by the em-ployer?

FACTS

Situation 1

Employer M maintains Plan A, a de-fined benefit plan that is funded solely bylife insurance contracts and annuities withlevel annual premiums for each participantcommencing with the date the individualbecomes a participant in the plan (or, inthe case of an increase in benefits, com-

mencing at the time the increase becomeseffective) and ending with the individual’sattainment of normal retirement age. PlanA is intended to be a plan described in§ 412(i). The amounts that will be accu-mulated under the insurance contracts andannuity contracts for the benefit of a partic-ipant at normal retirement age, assumingpremiums are paid and determined by ap-plying annuity purchase rates guaranteedunder the contracts, will provide for ben-efits in excess of the participant’s benefitsat normal retirement age under the termsof the plan.

Situation 2

Employer N maintains Plan B. Withrespect to Participant P, Plan B providesa death benefit that meets the defini-tion of an incidental death benefit under§ 1.401–1(b)(1)(i) of the Income Tax Reg-ulations. The assets of Plan B include lifeinsurance contracts on the life of Partic-ipant P with a face amount in excess ofParticipant P’s death benefit under PlanB. Premiums with respect to Participant Pinclude an annual premium for the waiverof the entire premium payment if Partici-pant P becomes disabled. Upon the deathof a covered employee, the portion of theproceeds of the life insurance contract thatexceeds the death benefit payable to Par-ticipant P’s beneficiary under the plan isapplied to the payment of premiums underthe plan with respect to other participants.

LAW AND ANALYSIS

Section 412 sets forth minimum fund-ing requirements for qualified pensionplans. Section 412(i) describes certaininsurance contract plans that are exemptunder § 412(h)(2) from the minimumfunding requirements of § 412 (section412(i) plans). Under § 411(b)(1)(F), aplan that is funded exclusively by the pur-chase of insurance contracts and satisfiesthe requirements of § 412(i)(2) and (3) sat-isfies the accrual requirements of § 411(b)if an employee’s accrued benefit as of anyapplicable date is not less than the cashsurrender value his life insurance contractswould have on that applicable date if therequirements of § 412(i)(4) through (6)were satisfied.

A section 412(i) plan must be fundedby the purchase of individual or group in-surance contracts. Section 412(i)(2) re-

2004-10 I.R.B. 546 March 8, 2004

quires contracts held by a section 412(i)plan to provide for level annual premiumpayments to be paid commencing with thedate the individual became a participant inthe plan (or, in the case of an increase inbenefits, commencing at the time the in-crease becomes effective) and extendingnot later than the retirement age for eachindividual participating in the plan. Sec-tion 412(i)(3) requires benefits providedunder a section 412(i) plan to be equal tothe benefits provided under each contractat normal retirement age under the plan.

Under § 1.412(i)–1(b)(2)(iii), the ben-efits for each participant provided under asection 412(i) plan that holds individual in-surance contracts must be equal to the ben-efits provided under the participant’s in-dividual contracts at the participant’s nor-mal retirement age under the plan. Fur-thermore, under § 1.412(i)–1(b)(2)(iv), thebenefits provided by the plan for each in-dividual participant must be guaranteed bythe life insurance company issuing the in-dividual contracts to the extent premiumshave been paid.

Section 404(a)(1)(A)(i) providesthat the amount necessary to satisfythe minimum funding requirement un-der § 412 is deductible even if it isgreater than the amount determined under§ 404(a)(1)(A)(ii) or (iii), whichever isapplicable with respect to the plan.

The alternative limit determined under§ 404(a)(1)(A)(ii) is the amount necessaryto provide the remaining unfunded costof all participants’ past and current ser-vice credits as a level amount, or as alevel percentage of compensation, over theremaining future service of each partici-pant. However, if the remaining unfundedcost with respect to any three individualsis more than 50 percent of all remainingunfunded cost, the amount attributable tothose individuals is distributed over a pe-riod of at least five years.

The alternative limit determined under§ 404(a)(1)(A)(iii) is the normal cost of theplan plus, if past service or other supple-mentary pension or annuity credits are pro-vided by the plan, the amount necessaryto amortize the unfunded costs attributableto those credits in equal annual paymentsover 10 years.

Under § 1.404(a)–6(a)(2) of the IncomeTax Regulations, the normal cost for anyyear is defined as the amount actuariallydetermined which would be required as a

contribution by the employer in such yearto maintain the plan if the plan had beenin effect from the beginning of service ofeach then included employee and if suchcosts for prior years had been paid and allassumptions as to interest, mortality, timeof payment, etc., had been fulfilled.

Section 1.404(a)–3(b) provides thatin no event shall the limitations under§ 404(a)(1) for pension or annuity plansexceed costs based on assumptions andmethods that are reasonable in view of thefunding medium and reasonable expecta-tions as to the effects of mortality, interest,and other pertinent factors.

Section 1.404(a)–14 provides rules fordetermining the deductible limits under§ 404(a)(1)(A)(i), (ii), and (iii). The reg-ulations provide in general that the limiton deductible amounts contributed for anemployer’s taxable year is based on theamounts determined for purposes of § 412for the applicable plan year or years.

Section 404(a)(1)(E) provides that anamount contributed to a plan that wouldotherwise be deductible, but that exceedsthe limitations of § 404(a)(1), is deductiblein future years to the extent of the differ-ence between the amount contributed andthe maximum amount deductible for eachsucceeding year under § 404(a)(1).

Section 4972 generally imposes a10-percent excise tax on nondeductiblecontributions to a qualified plan, includingnondeductible contributions carried overfrom preceding years.

Rev. Rul. 94–75, 1994–2 C.B. 59, dis-cusses the tax consequences of convertinga qualified defined benefit plan that is nota section 412(i) plan to a section 412(i)plan, and holds that the deductible limitunder § 404(a)(1)(A)(iii) applies to a sec-tion 412(i) plan.

Rev. Rul. 55–748, 1955–2 C.B. 234,discusses the deductibility of contributionsto a qualified plan that are used to pay lifeinsurance premiums attributable to the lifeinsurance benefits of retirement incomecontracts purchased with respect to em-ployees by the trust, the proceeds of which,upon the death of an employee, are payableto the trustee and are held by the trusteefor application to payment of subsequentpremiums on similar contracts on behalfof other employees. Rev. Rul. 55–748holds that the part of the employer’s con-tribution attributable to the purchase of lifeinsurance benefits, which, when they be-

come payable, are applicable to the reduc-tion of subsequent employer contributionsto the plan are not considered as a costof the pension plan for the purpose of de-termining the limitation on deductions un-der § 404(a)(1)(A), (B), and (C) of theCode (the predecessor provisions to cur-rent §§ 404(a)(1)(A)(i), (ii), and (iii)) forthe year in which such contributions arepaid, and cannot be deducted as such. Rev.Rul. 55–748 further provides that contri-butions attributable to such insurance ben-efits, not otherwise determined, may be de-termined by applying the rates provided inRev. Rul. 55–747, 1955–2 C.B. 228, to theamounts of insurance that would revert tothe trust in the event of death of the insuredemployee in the year for which the premi-ums are paid. In later years, if an employerfor any reason, such as the receipt by thetrustee of life insurance proceeds undera retirement income contract because ofthe death of an employee, which proceedswere applied to the payment of premiumson similar contracts for the benefit of otheremployees, contributes to the trust a sumless than the maximum deduction permit-ted for that year under § 404(a)(1)(A), (B),or (C), Rev. Rul. 55–748 provides thatthe employer may deduct in that year, inaddition to this current contribution, thecontributions made in prior years and notthen deductible because they were attrib-utable to that part of the retirement incomecontracts that would provide life insurancepayable to the trustee, to the extent of thedifference between his current contribu-tion and his maximum deduction permittedunder § 404(a)(1)(A), (B), or (C).

Rev. Rul. 55–747 provided a table tobe used in computing the premiums to beincluded in the income of an employee onaccount of current life insurance protectionprovided for the employee under a life orendowment insurance contract held by anemployees’ trust qualified under § 401(a).

Rev. Rul. 66–110, 1966–1 C.B. 12,provided that the current published pre-mium rates charged by an insurer for in-dividual 1-year term life insurance avail-able to all standard risks may be used fordetermining the cost of insurance in con-nection with individual policies issued bythe same insurer and held by an employ-ees’ trust qualified under § 401(a). In addi-tion, Rev. Rul. 66–110 extended the tableof premiums set forth in Rev. Rul. 55–747to cover additional ages.

March 8, 2004 547 2004-10 I.R.B.

Rev. Rul. 67–154, 1967–1 C.B. 11,amplified Rev. Rul. 66–110 and heldthat, where an insurer published one-yearterm insurance rates lower than those setforth in Rev. Rul. 55–747, but thoserates were applicable only under a divi-dend option whereby term insurance maybe purchased with dividends on existingpolicies and were lower than the insurer’spublished rates for initial insurance avail-able to all standard risks, those rates couldnot be used in place of the rates set forthin Rev. Rul. 55–747 in determining thecost of insurance under a trust described in§ 401(a).

Notice 2001–10, 2001–1 C.B. 459, re-voked Rev. Rul. 55–747, and provided anew table (Table 2001) to be used in valu-ing term life insurance coverage providedto an employee. Under Notice 2001–10,taxpayers could continue to use the ratesset forth in Rev. Rul. 55–747 for purposesof determining the value of current life in-surance protection provided under a quali-fied retirement plan for taxable years end-ing on or before December 31, 2001. In ad-dition, Notice 2001–10 provided generallythat taxpayers could continue to determinethe value of current life insurance protec-tion by using the insurer’s lower publishedrates available to standard risks as pro-vided in Rev. Rul. 66–110. However,for periods after December 31, 2003, No-tice 2001–10 sets forth certain additionalconditions on the use of the insurer’s pub-lished rates.

Notice 2002–8, 2002–1 C.B. 398, re-vokes Notice 2001–10. Under Notice2002–8, Rev. Rul. 55–747 remains re-voked; however, taxpayers can use therates set forth in Rev. Rul. 55–747 forpurposes of determining the value of cur-rent life insurance protection providedunder a qualified retirement plan for tax-able years ending on or before December31, 2001. Notice 2002–8 republishes Ta-ble 2001 and provides that Table 2001 canbe used to determine the value of currentlife insurance protection on a single lifethat is provided under a qualified planfor arrangements entered into before theeffective date of future guidance. In addi-tion, paragraph 3 of Section III of Notice2002–8 placed conditions on the use ofthe insurer’s lower published rates underRev. Rul. 66–110, as amplified by Rev.Rul. 67–154, for periods after December

31, 2003, with respect to arrangementsentered into after January 28, 2002.

Rev. Rul. 2003–105, 2003–40 I.R.B.696, obsoleted Rev. Rul. 66–110 for ar-rangements entered into after September17, 2003, except as provided in paragraph3 of Section III of Notice 2002–8. Accord-ingly, Rev. Rul. 66–110, as amplified byRev. Rul. 67–154, remains in effect untilfuture guidance is issued for life insuranceprovided under a qualified retirement plan,subject to the conditions provided by No-tice 2002–8 with respect to arrangementsentered into after January 28, 2002.

Section 1.401–1(b)(1)(i) provides thata pension plan within the meaning of§ 401(a) is a plan established and main-tained by an employer primarily to pro-vide systematically for the payment ofdefinitely determinable benefits to em-ployees over a period of years, usually forlife, after retirement. A pension plan mayalso provide for the payment of incidentaldeath benefits through insurance or other-wise.

Rev. Rul. 74–307, 1974–2 C.B. 126,holds that preretirement death benefits un-der a qualified pension plan are consideredincidental death benefits within the mean-ing of § 1.401–1(b)(1)(i) if less than 50percent of the employer contribution cred-ited to each participant’s account is usedto purchase ordinary life insurance policieson the participant’s life, or if the total deathbenefit before normal retirement date doesnot exceed the greater of (a) the proceedsof ordinary life insurance policies provid-ing a death benefit of 100 times the antic-ipated monthly normal retirement benefit,or (b) the sum of (i) the reserve under theordinary life insurance policies plus (ii) theparticipant’s account in the auxiliary fund.See also Rev. Rul. 68–453, 1968–2 C.B.163.

Rev. Rul. 81–162, 1981–1 C.B. 169,holds that a plan established by an em-ployer that provides employees only suchbenefits as are afforded through the pur-chase of ordinary life insurance contracts(other than retirement income contracts),which are converted to life annuities atnormal retirement age, does not consti-tute a pension plan within the meaning of§ 401(a). Rev. Rul. 81–162 providesthat the primary purpose of such a life in-surance contract is to provide life insur-ance protection, and the reserve accumu-lated thereon is a result of premium pay-

ments being made on a level basis. Rev.Rul. 81–162 reasons that such reserve willprovide a relatively small retirement an-nuity in comparison with the annuity thata retirement income contract of the sameface amount will provide. Therefore, Rev.Rul. 81–162 concludes that a plan provid-ing only for the purchase of ordinary lifeinsurance contracts (other than retirementincome contracts) is not primarily for thepayment of benefits to employees over aperiod of years after retirement. This anal-ysis would not apply, however, if the deathbenefit payable to the beneficiary underthe plan were limited to an incidental deathbenefit, with the remaining benefit payableto the plan.

In Situation 1, Plan A is not a plandescribed in § 412(i) because the partic-ipant’s benefit under Plan A payable atnormal retirement age is not equal to theamount provided at normal retirementage with respect to the contracts heldon behalf of the participant, and thus,Plan A fails to satisfy the requirementsof § 412(i)(3). Accordingly, Plan A issubject to the requirements of § 412, withcharges and credits to the funding standardaccount determined using the reasonablefunding method selected for the plan un-der generally applicable rules, and usingreasonable actuarial assumptions. Suchreasonable funding method and such rea-sonable actuarial assumptions are alsoused to determine the deductible amountof contributions under the generally appli-cable rules of § 404(a). In addition, theexception from the accrual rules that ap-plies to § 412(i) plans under § 411(b)(1)(F)does not apply to Plan A.

In Situation 2, the fact that the life in-surance contracts on the life of Partici-pant P provide for death benefits in ex-cess of the death benefits under the planwould not cause Plan B to fail to satisfythe requirements to be a plan described in§ 412(i), if Plan B otherwise met thoserequirements. Similarly, the fact that thelife insurance contracts on the life of Par-ticipant P provide for death benefits thatwould fail to satisfy the incidental ben-efit rule of § 1.401–1(b)(1)(i) if payableto Participant P’s beneficiary under theplan does not cause Plan B to fail to sat-isfy the incidental death benefit rule of§ 1.401–1(b)(1)(i) because those excessdeath benefits under the life insurance con-tracts are not payable to Participant P’s

2004-10 I.R.B. 548 March 8, 2004

beneficiary under the plan. However, aportion of Employer N’s contributions un-der Plan B is attributable to the purchaseof life insurance coverage held by Plan Bthat is in excess of the incidental death ben-efit payable under Plan B. Under Rev. Rul.55–748, the portion of Employer N’s con-tributions that is attributable to such ex-cess life insurance coverage does not con-stitute normal cost, and is not deductible aspart of normal cost for the taxable year inwhich contributed. Rather, that portion ofEmployer N’s contributions is used to pro-vide a source of funds to pay future premi-ums (i.e., premiums on other participants)that will come due after the death of Par-ticipant P. Accordingly, the nondeductibleportion of Employer N’s contributions un-der Plan B that is paid for life insuranceprotection for Participant P is carried overpursuant to the rules of § 404(a)(1)(E) tobe treated as contributions under the rulesof § 404(a)(1)(E) in later years and de-ductible when the employer contributionsare less than the maximum deductible limit(e.g., in years in which excess death bene-fits under Plan B are used to satisfy Em-ployer N’s obligation to pay future premi-ums on other participants). Similarly, Em-ployer N’s contributions to pay premiumsfor the disability waiver for Participant Pdo not constitute normal cost, and are notdeductible as part of normal cost for thetaxable year in which contributed. Rather,that portion of Employer N’s contributionsis used to provide a source of funds to payfuture premiums that will come due afterParticipant P becomes disabled. Accord-ingly, the nondeductible portion of Em-ployer N’s contributions under Plan B thatis paid for the disability waiver for Partici-pant P is carried over pursuant to the rulesof § 404(a)(1)(E) to be treated as contri-butions under the rules of § 404(a)(1)(E)in later years and deductible when the em-ployer contributions are less than the max-imum deductible limit (e.g., if and whenParticipant P becomes disabled).

In general, the premiums for excess lifeinsurance coverage that are not currentlypart of normal cost under § 404(a)(1)(A)are determined in a manner consistentwith total premiums under the contract(i.e., must be spread in a level mannerover the premium payment period). How-ever, if the premiums for the life insurancecontracts covering a participant are levelannual premiums payable beginning with

the participant’s participation in the planand ending at the participant’s normalretirement age, this excess amount canbe determined by applying the appropri-ate term cost factors to the excess termcoverage. Nondeductible contributionsare subject to the excise tax of § 4972 asprovided thereunder. In determining theamount of premiums for excess life insur-ance coverage, Table 2001 is applicablefor taxable years ending after December31, 2001, and the table set forth in Rev.Rul. 55–747 is used for earlier periods. Inaddition, the current published premiumrates charged by an insurer for individ-ual 1-year term life insurance availableto all standard risks as described in Rev.Rul. 66–110, as amplified by Rev. Rul.67–154, can be used for taxable years end-ing on or before December 31, 2003. Forarrangements entered into on or beforeJanuary 28, 2002, such current publishedpremium rates can continue to be used forperiods ending after December 31, 2003.However, for arrangements entered intoafter January 28, 2002, such current pub-lished premium rates can continue to beused for periods ending after December31, 2003, only if the additional require-ments of Notice 2002–8 are satisfied.

HOLDING

A qualified pension plan cannot be asection 412(i) plan if the plan holds life in-surance contracts and annuity contracts forthe benefit of a participant that provide forbenefits at normal retirement age in excessof the participant’s benefits at normal re-tirement age under the terms of the plan.

Employer contributions under a quali-fied defined benefit plan that are used topurchase life insurance coverage for a par-ticipant in excess of the participant’s deathbenefit provided under the plan are notfully deductible when contributed, but arecarried over to be treated as contributionsin future years and deductible in futureyears when other contributions to the planthat are taken into account for the taxableyear are less than the maximum amountdeductible for the year pursuant to the lim-its of § 404.

LISTED TRANSACTIONS

Transactions that are the same as,or substantially similar to, the trans-action described in Situation 2 of

this revenue ruling are identified as“listed transactions” for purposes of§ 1.6011–4(b)(2) of the Income TaxRegulations and § 301.6111–2(b)(2) and§ 301.6112–1(b)(2) of the Procedure andAdministration Regulations effective Feb-ruary 13, 2004, the date this revenue rulingwas released to the public, provided thatthe employer has deducted amounts usedto pay premiums on a life insurance con-tract for a participant with a death benefitunder the contract that exceeds the par-ticipant’s death benefit under the plan bymore than $100,000.

It should be noted that, independentof any classification as “listed transac-tions” for purposes of §§ 1.6011–4(b)(2),301.6111–2(b)(2), and 301.6112–1(b)(2)of the regulations, arrangements that arethe same as, or substantially similar to, thearrangements described in this notice mayalready be subject to the disclosure re-quirements of § 6011 of the Code, the taxshelter registration requirements of § 6111,or the list maintenance requirementsof § 6112 (§§ 1.6011–4, 301.6111–1T,301.6111–2, and 301.6112–1).

Persons who are required to satisfy theregistration requirement of § 6111 of theCode with respect to the arrangements de-scribed in this notice and who fail to doso may be subject to the penalty under§ 6707(a). Persons who are required to sat-isfy the list-keeping requirement of § 6112with respect to the arrangements and whofail to do so may be subject to the penaltyunder § 6708(a). In addition, the Servicemay impose penalties on participants inthese arrangements or substantially similararrangements, including the accuracy-re-lated penalty under § 6662.

EFFECT ON OTHER RULINGS

Rev. Rul. 55–748 is modified and su-perseded.

DRAFTING INFORMATION

The principal authors of this revenueruling are Larry Isaacs of the EmployeePlans, Tax Exempt and Government En-tities Division, and Linda Marshall ofthe Office of the Division Counsel/As-sociate Chief Counsel, Tax Exempt andGovernment Entities. For further in-formation regarding this revenue proce-dure, please contact the Employee Plans’taxpayer assistance telephone service at

March 8, 2004 549 2004-10 I.R.B.

1–877–829–5500 (a toll-free number) be-tween the hours of 8:00 a.m. and 6:30p.m. Eastern Time, Monday through Fri-day. Mr. Isaacs may be reached at (202)283–9888, and Ms. Marshall may bereached at (202) 622–6090 (not toll-freenumbers).

Section 412.—MinimumFunding Standards26 CFR 1.412(i)–1: Certain insurance contractplans.

Whether a plan is a section 412(i) plan. See Rev.Rul. 2004-20, page 546.

How for purposes of § 402 of the Code the fairmarket value of a life insurance contract may be de-termined when it is distributed from a qualified plan.See Rev. Proc. 2004-16, page 559.

Section 611.—Allowance ofDeduction for Depletion26 CFR 1.611–2: Rules applicable to mines, oil andgas wells, and other natural deposits.

If a taxpayer owns an oil and gas producing prop-erty, may the taxpayer elect to treat 105 percent ofthe property’s proved reserves as the property’s to-tal recoverable units for purposes of computing costdepletion under section 611 of the Internal RevenueCode. See Rev. Proc. 2004-19, page 563.

Section 856.—Definition ofReal Estate Investment Trust26 CFR 1.856–4: Rents from real property.

REITs; parking facilities. This rul-ing identifies circumstances in which areal estate investment trust’s (REIT’s) in-come from providing parking facilities atits rental real properties qualifies as rentsfrom real property under section 856(d) ofthe Code.

Rev. Rul. 2004–24

ISSUE

If a real estate investment trust (REIT)provides parking facilities at its rental realproperties, under what circumstances doamounts received by the REIT for provid-ing the parking facilities qualify as rentsfrom real property under § 856(d) of theInternal Revenue Code?

FACTS

Situation 1

Corporation R has elected to be a REITas defined in § 856. R owns commer-cial real properties such as office build-ings, shopping centers, and residentialapartment complexes. Each property in-cludes one or more buildings containingspace that R rents out for office, retail, ormulti-family residential use. Each prop-erty also includes parking facilities for theuse of the tenants of the buildings and theirguests, customers, and subtenants. Eachparking facility is located in or adjacent toa building occupied by tenants of R andis appropriate in size for the number oftenants and their guests, customers, andsubtenants who are expected to use thefacility.

The parking facilities do not have park-ing attendants. R maintains, repairs, andlights the parking facilities. As neededto manage the REIT itself, R also per-forms fiduciary functions, such as dealingwith taxes and insurance, as permitted by§ 1.856–4(b)(5)(ii) of the Income Tax Reg-ulations. No other activities are performedin connection with the parking facilities.

Situation 2

The facts are the same as in Situation 1except as follows. At some of R’s parkingfacilities, parking spaces are reserved foruse by particular tenants. R assigns andmarks the reserved spaces in connectionwith leasing space in the buildings to thetenants. Any recurring functions unique tothe reserved spaces (such as enforcement)are provided by an independent contrac-tor as defined in § 856(d)(3) from whomR does not derive or receive any incomewithin the meaning of §§ 856(d)(7)(C)(i)and 1.856–4(b)(5)(i).

Situation 3

The facts are the same as in Situations1 and 2 except as follows.

Although each parking facility is ap-propriate in size for the expected num-ber of tenants and their guests, customers,and subtenants, some of the parking fa-cilities are available for use not only bythose parties, but also by the general pub-lic. In addition, the parking facilities have

parking attendants. R performs the sameactivities it performs in Situations 1 and2, but corporation S manages and oper-ates the parking facilities under a manage-ment contract with R. S is an indepen-dent contractor as defined in § 856(d)(3).Although S typically remits to R parkingfees from those using the parking facilities,S receives arm’s-length compensation un-der the terms of its management contractwith R, and R does not derive or receiveany income from S within the meaning of§§ 856(d)(7)(C)(i) and 1.856–4(b)(5)(i). Semploys all of the individuals who manageand operate the parking facilities, includ-ing the parking attendants. S is directly re-sponsible for providing all salary, wages,benefits, administration, and supervisionof its employees.

In addition to collecting parking feesfrom those using the parking facilities, theparking attendants may park cars in orderto achieve the maximum capacity of theparking facility or for reasons of safety orsecurity. No separate fee is charged foran attendant to park a car. Occasionally,when necessary, an attendant may provideminor, incidental, emergency service at aparking facility, such as charging a batteryor changing a flat tire. No other servicesare provided at the parking facilities.

LAW

To qualify as a REIT, an entity mustderive at least 95 percent of its gross in-come from sources listed in § 856(c)(2)and at least 75 percent of its gross incomefrom sources listed in § 856(c)(3). “Rentsfrom real property” are among the sourceslisted in both of those sections. Section856(d)(1) defines rents from real prop-erty to include (subject to the exclusionsin § 856(d)(2)) the amounts describedin § 856(d)(1)(A), (B), and (C). Section856(d)(1)(B) refers to “charges for ser-vices customarily furnished or rendered inconnection with the rental of real property,whether or not such charges are separatelystated.” Section 856(d)(2)(C) excludes“impermissible tenant service income”from the definition of rents from realproperty. Thus, to qualify as rents fromreal property, charges for services must befor services customarily furnished or ren-dered in connection with the rental of realproperty and must not be impermissibletenant service income.

2004-10 I.R.B. 550 March 8, 2004

Section 1.856–4(b)(1) provides the fol-lowing guidance on determining whetherservices are customarily furnished or ren-dered in connection with the rental of realproperty:

... Services furnished to the tenants ofa particular building will be consideredas customary if, in the geographic mar-ket in which the building is located, ten-ants in buildings which are of a similarclass (such as luxury apartment build-ings) are customarily provided with theservice. ... To qualify as a service cus-tomarily furnished, the service must befurnished or rendered to the tenants ofthe real estate investment trust or, pri-marily for the convenience or benefit ofthe tenant, to the guests, customers, orsubtenants of the tenant. ...

Thus, to qualify as a service describedin § 856(d)(1)(B), a service furnishedat a REIT’s property must be custom-arily provided to tenants of propertiesof a similar class in that particular geo-graphic market (the geographic markettest). Section 1.856–4(b)(1) also mentionsthe furnishing of parking facilities as anexample of a service that is customarilyfurnished to the tenants of a particularclass of buildings in many geographicmarkets. Reflecting the statutory require-ment of “connection with the rental ofreal property,” § 1.856–4(b)(1) also pro-vides that to qualify as a service describedin § 856(d)(1)(B), the service must befurnished to the REIT’s tenants or theirguests, customers, or subtenants.

Section 1.856–4(b)(5)(ii) discusses thefiduciary functions of a REIT’s trustees ordirectors, as follows:

The trustees or directors of the real es-tate investment trust are not required todelegate or contract out their fiduciaryduty to manage the trust itself, as dis-tinguished from rendering or furnishingservices to the tenants of its propertyor managing or operating the property.Thus, the trustees or directors may doall those things necessary, in their fidu-ciary capacities, to manage and conductthe affairs of the trust itself. For ex-ample, the trustees or directors may es-tablish rental terms, choose tenants, en-ter into and renew leases, and deal withtaxes, interest, and insurance, relatingto the trust’s property. The trusteesor directors may also make capital ex-penditures with respect to the trust’s

property (as defined in section 263) andmay make decisions as to repairs ofthe trust’s property (of the type whichwould be deductible under section 162),the cost of which may be borne by thetrust.

Thus, § 1.856–4(b)(5)(ii) permits thetrustees or directors of a REIT to performactivities needed to manage the REITitself, as distinguished from rendering ser-vices to tenants of the REIT’s property ormanaging or operating the REIT’s prop-erty.

As noted above, § 856(d)(2)(C) ex-cludes impermissible tenant service in-come from the definition of rents from realproperty. Pursuant to § 856(d)(7)(A), im-permissible tenant service income means,with respect to any real property, anyamount received or accrued directly or in-directly by a REIT for furnishing servicesto the tenants of the property or manag-ing or operating the property. Section856(d)(7)(C)(i), however, provides thatservices rendered or management or oper-ation provided is not treated as furnishedby the REIT for this purpose if furnishedthrough an independent contractor (as de-fined in § 856(d)(3)) from whom the REITdoes not derive or receive any income.Thus, amounts received by a REIT forservices furnished to its tenants, or forproperty management or operation, do notconstitute impermissible tenant serviceincome if the services or management oroperation is furnished through an indepen-dent contractor (as defined in § 856(d)(3))from whom the REIT does not derive orreceive any income.

Moreover, pursuant to § 856(d)(7)(C)(ii), an amount is not treated as im-permissible tenant service income if theamount would be excluded from unrelatedbusiness taxable income under § 512(b)(3)if received by an organization describedin § 511(a)(2) (referred to, for purposes ofthis revenue ruling, as an exempt organi-zation). Thus, services provided directlyby a REIT do not give rise to impermis-sible tenant service income if the chargesfor those services would be excluded fromunrelated business taxable income if re-ceived by an exempt organization.

Section 512(b)(3)(A)(i) excludes rentsfrom real property from unrelated businesstaxable income. Section 1.512(b)–1(c)(5)provides, however, that payments for theuse of space where services are also ren-

dered to the occupant are not rents fromreal property. That section mentions spacein parking lots as an example of spacewhere services are also rendered to theoccupant. Thus, payments for the useof parking space are not excluded fromunrelated business taxable income under§ 512(b)(3) if received by an exempt or-ganization.

The conference report underlying the1986 revision of § 856(d) (the 1986 con-ference report) provides the followingguidance on services performed directlyby REITs:

The conferees wish to make certainclarifications regarding those servicesthat a REIT may provide under theconference agreement without usingan independent contractor, which ser-vices would not cause the rents derivedfrom the property in connection withwhich the services were rendered tofail to qualify as rents from real prop-erty (within the meaning of section856(d)). The conferees intend, forexample, that a REIT may provide cus-tomary services in connection with theoperation of parking facilities for theconvenience of tenants of an office orapartment building, or shopping cen-ter, provided that the parking facilitiesare made available on an unreservedbasis without charge to the tenants andtheir guests or customers. On the otherhand, the conferees intend that incomederived from the rental of parkingspaces on a reserved basis to tenants, orincome derived from the rental of park-ing spaces to the general public, wouldnot be considered to be rents from realproperty unless all services are per-formed by an independent contractor.Nevertheless, the conferees intend thatthe income from the rental of parkingfacilities properly would be consideredto be rents from real property (and notmerely income from services) in suchcircumstances if services are performedby an independent contractor.

2 H.R. Conf. Rep. No. 841, 99th Cong., 2dSess. II–220 (1986), 1986–3 (Vol. 4) C.B.220. Thus, the 1986 conference report in-dicates that, in some circumstances, REITsmay directly perform activities in connec-tion with parking facilities without causingcharges for providing the parking facilitiesto fail to qualify as rents from real propertyunder § 856(d).

March 8, 2004 551 2004-10 I.R.B.

The difference between this congres-sional intent and the treatment of ex-empt organizations under § 512(b)(3)reflects differences between §§ 856(d) and512(b)(3), as well as differences betweenthe regulations interpreting those sections.The definition of rents from real propertyin § 856(d), which applies to REITs, dif-fers significantly in scope and structurefrom the definition of rents from real prop-erty under § 512(b)(3), which applies toexempt organizations. For example, un-like § 512(b)(3), § 856(d)(7)(C)(i) treatsservices provided by an independent con-tractor as not provided by the REIT. Thedefinition of rents from real property under§ 512(b)(3) does not have a comparableprovision.

ANALYSIS

Situation 1

In Situation 1, R provides unattendedparking facilities at its rental real prop-erties. R maintains, repairs, and lightsthe unattended parking facilities and per-forms fiduciary functions permitted by§ 1.856–4(b)(5)(ii). These activities arecustomarily performed at parking facil-ities located at rental real properties inall geographic markets. No other activi-ties are performed in connection with R’sunattended parking facilities. Therefore,the furnishing of R’s unattended parkingfacilities will be treated as meeting thegeographic market test of § 1.856–4(b)(1).

R’s unattended parking facilities arepart of R’s rental real properties and areprovided for the use of R’s tenants andtheir guests, customers, and subtenants.Each parking facility is located in or adja-cent to a building occupied by tenants ofR and is appropriate in size for the numberof tenants and their guests, customers, andsubtenants who are expected to use thefacility. Therefore, the furnishing of R’sunattended parking facilities meets the re-quirement of § 1.856–4(b)(1) that servicesbe furnished to the REIT’s tenants or theirguests, customers, or subtenants. Becauseit meets both that requirement and thegeographic market test, the furnishing ofR’s unattended parking facilities is a ser-vice customarily furnished or rendered inconnection with the rental of real propertyunder § 856(d)(1)(B).

The 1986 conference report indicatesthat the activities performed by R at itsunattended parking facilities described inSituation 1 should not cause charges forproviding those parking facilities to fail toqualify as rents from real property under§ 856(d). Therefore, although in Situation1 payments for the use of parking spaceare not excluded from unrelated businesstaxable income under § 512(b)(3) if re-ceived by an exempt organization, the fur-nishing of R’s unattended parking facili-ties will be treated as not giving rise toimpermissible tenant service income un-der § 856(d)(2)(C) and (d)(7). Accord-ingly, because the furnishing of R’s unat-tended parking facilities qualifies as a ser-vice described in § 856(d)(1)(B) and doesnot give rise to impermissible tenant ser-vice income, amounts received by R forfurnishing these parking facilities qualifyas rents from real property under § 856(d).

Situation 2

In Situation 2, the facts are the sameas in Situation 1 except that at some ofR’s unattended parking facilities, parkingis available to tenants on a reserved ba-sis. The furnishing of these parking fa-cilities qualifies as a service described in§ 856(d)(1)(B) for the reasons discussedabove with respect to Situation 1.

The 1986 conference report indicatesthat income from reserved parking shouldqualify as rents from real property onlyif services are performed by an indepen-dent contractor. In Situation 2, any recur-ring functions unique to the reserved park-ing spaces (such as enforcement) are per-formed by an independent contractor. Rassigns and marks the reserved spaces inconnection with leasing space to its tenantsand provides maintenance, repair, light-ing, and fiduciary functions permitted by§ 1.856–4(b)(5)(ii). These basic activitiesperformed by R are not services to ten-ants that the conferees intended to preventREITs from performing directly at parkingfacilities. Section 1.856–4(b)(5)(ii) per-mits the trustees or directors of a REIT toperform activities needed to manage theREIT itself, as distinguished from render-ing services to tenants of the REIT’s prop-erty or managing or operating the prop-erty. Therefore, although in Situation 2payments for the use of parking space arenot excluded from unrelated business tax-

able income under § 512(b)(3) if receivedby an exempt organization, the furnishingof R’s unattended, reserved parking facil-ities will be treated as not giving rise toimpermissible tenant service income under§ 856(d)(2)(C) and (d)(7). Accordingly,because the furnishing of R’s unattended,reserved parking facilities qualifies as aservice described in § 856(d)(1)(B) anddoes not give rise to impermissible tenantservice income, amounts received by R forfurnishing these parking facilities qualifyas rents from real property under § 856(d).

Situation 3

In Situation 3, R provides attendedparking facilities at its rental real prop-erties. R performs the same activities itperforms in Situations 1 and 2, and S man-ages and operates the attended parkingfacilities. Attendants at these facilitiesgenerally collect parking fees. Attendantsmay also park cars in order to achieve themaximum capacity of the parking facilityor for reasons of safety or security, and noseparate fee is charged for an attendant topark a car. Occasionally, when necessary,an attendant may provide minor, inciden-tal, emergency service at a parking facility.These services typically are provided atattended parking facilities at rental realproperties in all geographic markets. Noother services are provided at R’s attendedparking facilities. Therefore, the furnish-ing of R’s attended parking facilities willbe treated as meeting the geographic mar-ket test of § 1.856–4(b)(1).

Some of R’s attended parking facili-ties are available for use not only by R’stenants and their guests, customers, andsubtenants, but also by the general pub-lic. However, the 1986 conference re-port indicates that tenant parking facilitiesalso available to the general public shouldnot be precluded from qualifying under§ 856(d)(1)(B). R’s attended parking fa-cilities are part of R’s rental real proper-ties, and each parking facility is located inor adjacent to a building occupied by ten-ants of R and is appropriate in size for thenumber of tenants and their guests, cus-tomers, and subtenants who are expectedto use the facility. Because of this prox-imity to the tenants and appropriate size,the attended parking facilities that also areavailable to the general public can rea-sonably be expected to be used predomi-

2004-10 I.R.B. 552 March 8, 2004

nantly by R’s tenants and their guests, cus-tomers, and subtenants. For these reasons,the furnishing of R’s attended parking fa-cilities will be treated as meeting the re-quirement of § 1.856–4(b)(1) that servicesbe furnished to the REIT’s tenants or theirguests, customers, or subtenants. Becauseit meets both that requirement and the ge-ographic market test, the furnishing of R’sattended parking facilities is a service cus-tomarily furnished or rendered in connec-tion with the rental of real property under§ 856(d)(1)(B).

The 1986 conference report indicatesthat income from parking that is reservedor available to the general public shouldqualify as rents from real property onlyif services are performed by an indepen-dent contractor. The only activities that Rperforms in connection with its attendedparking facilities are maintenance, repair,lighting, fiduciary functions, and assign-ing and marking reserved spaces. Asnoted above, these basic activities are notservices to tenants that the conferees in-tended to prevent REITs from performingdirectly at parking facilities. All of theother activities involved in furnishing R’sattended parking facilities are performedby S, an independent contractor as definedin § 856(d)(3). Although S typically col-lects parking fees and remits the fees to R,S receives arm’s-length compensation un-der the terms of its management contractwith R, and R does not derive or receiveany income from S within the meaning of§§ 856(d)(7)(C)(i) and 1.856–4(b)(5)(i). Semploys all of the individuals who manageand operate the attended parking facilitiesand is directly responsible for providingall their salary, wages, benefits, admin-istration, and supervision. Therefore,although in Situation 3 payments for theuse of parking space are not excluded fromunrelated business taxable income under§ 512(b)(3) if received by an exempt or-ganization, the furnishing of R’s attendedparking facilities will be treated as notgiving rise to impermissible tenant serviceincome under § 856(d)(2)(C) and (d)(7).Accordingly, because the furnishing ofR’s attended parking facilities qualifies as

a service described in § 856(d)(1)(B) anddoes not give rise to impermissible tenantservice income, amounts received by R forfurnishing these parking facilities qualifyas rents from real property under § 856(d).

HOLDING

Amounts received by R for furnishingunattended parking facilities, under the cir-cumstances described in Situations 1 and2, and for furnishing attended parking fa-cilities, under the circumstances describedin Situation 3, qualify as rents from realproperty under § 856(d).

DRAFTING INFORMATION

The principal author of this revenue rul-ing is Jonathan D. Silver of the Office ofAssociate Chief Counsel (Financial Insti-tutions and Products). For further infor-mation regarding this revenue ruling, con-tact Mr. Silver at (202) 622–3920 (not atoll-free call).

Section 3121.—Definitions26 CFR 31.3121(b)(10)–2: Services performed bycertain students in the employ of a school, college,or university, or of a nonprofit organization auxiliaryto a school, college, or university.

A notice describes a safe harbor that certain insti-tutions of higher education can use in applying theexception from Federal Insurance Contributions Acttaxes for services performed by a student under sec-tion 3121(b)(10) of the Code. See Notice 2004-12,page 556.

Section 4980B.—Failureto Satisfy ContinuationCoverage Requirements ofGroup Health Plans26 CFR 54.4980B–7: Duration of COBRA continua-tion coverage.(Also 26 CFR 54.4980B–4)

COBRA and Medicare entitlement.The COBRA continuation coverage periodcan be expanded from 18 to 36 months ifa second qualifying event occurs. Medi-care entitlement of a covered employee is

one of the listed events that can be a sec-ond qualifying event. This ruling holdsthat Medicare entitlement is not a secondqualifying event unless (ignoring the firstqualifying event) it would result in a lossof coverage under the group health plan.

Rev. Rul. 2004–22

ISSUE

For purposes of the COBRA contin-uation coverage requirements of section4980B of the Internal Revenue Code, isthe Medicare entitlement of a coveredemployee a second qualifying event for aqualified beneficiary if the Medicare enti-tlement would not have resulted in a lossof coverage for the qualified beneficiaryunder the group health plan that is provid-ing the COBRA continuation coverage?

FACTS

Employee E and E’s spouse are coveredunder a group health plan subject to theCOBRA continuation coverage require-ments of section 4980B of the InternalRevenue Code. E is not entitled to Medi-care benefits. E terminates employment(but not by reason of gross misconduct).E and E’s spouse lose coverage underthe plan as a result of E’s termination ofemployment. The plan offers them theright to elect COBRA continuation cov-erage for a period of up to 18 months.E’s spouse elects and pays for COBRAcontinuation coverage timely. Before the18-month period has expired, E becomesentitled to Medicare benefits by reason ofthe attainment of age 65. E’s spouse isstill receiving COBRA continuation cov-erage under the plan at the time E becomesentitled to Medicare benefits. E’s spousenotifies the plan of E’s becoming entitledto Medicare benefits within 60 days afterE became so entitled. Employees andtheir spouses receiving coverage under theplan by virtue of an employee’s currentemployment status are not treated differ-ently under the plan on account of theirbeing age 65 or older, nor on account of

March 8, 2004 553 2004-10 I.R.B.

their being entitled to Medicare benefitsby reason of the attainment of age 65.1

LAW AND ANALYSIS

Section 4980B of the Code requirescertain group health plans to make con-tinuation coverage available to certainindividuals who would otherwise losetheir coverage under the plan as a resultof certain occurrences (the COBRA con-tinuation coverage requirements). Section4980B imposes an excise tax if a plan sub-ject to the COBRA continuation coveragerequirements fails to comply with them.

Under section 4980B, the obligation ofa plan to make COBRA continuation cov-erage available arises in connection with aqualifying event. The individuals to whomCOBRA continuation coverage must bemade available are qualified beneficiaries.

Under Q&A–1 of § 54.4980B–3 of theMiscellaneous Excise Tax Regulations, aqualified beneficiary is any individual whois covered under a group health plan onthe day before a qualifying event by virtueof being on that day a covered employeeor the spouse or a dependent child of acovered employee. However, a coveredemployee can be a qualified beneficiaryonly in connection with a qualifying eventthat is a termination (or reduction of hours)of the covered employee’s employment orthat is the bankruptcy of the employer. Un-der Q&A–2 of § 54.4980B–3, a coveredemployee is generally any individual whois or was provided coverage under a grouphealth plan by virtue of the performanceof services for the employer maintainingthe plan or by virtue of membership in theemployee organization maintaining theplan. Under Q&A–1(f) of § 54.4980B–3,an individual ceases to be a qualified ben-eficiary if the individual does not electCOBRA continuation coverage by theend of the election period; an individualalso ceases to be a qualified beneficiarywhen the plan no longer has an obligation

to make COBRA continuation coverageavailable to the individual under the rulesprescribing how long COBRA continua-tion coverage must be made available.

Section 4980B(f)(3) of the Code listssix categories of events and defines themas qualifying events if, but for the COBRAcontinuation coverage required to be pro-vided, they would result in a loss of cov-erage of a qualified beneficiary. Thecategories of qualifying events includethe termination (other than by reason ofgross misconduct), or reduction of hours,of a covered employee’s employment andthe covered employee’s becoming entitledto Medicare benefits under title XVIII ofthe Social Security Act. Q&A–1(c) of§ 54.4980B–4 defines what is a loss ofcoverage for purposes of determining if alisted event is a qualifying event, requiringthat the listed event cause the covered em-ployee or the covered employee’s spouseor dependent child to cease to be coveredunder the same terms and conditions asin effect immediately before the event.Q&A–1(c) of § 54.4980B–4 clarifies thata loss of coverage need not occur imme-diately after the event so long as it occursbefore the end of the maximum coverageperiod.

Q&A–4 of § 54.4980B–7 describes theend of the maximum coverage period. Inthe case of a qualifying event that is a ter-mination (or reduction of hours) of em-ployment, the maximum coverage periodgenerally ends 18 months after the quali-fying event (29 months if a disability ex-tension applies). In the case of a qualify-ing event that is a covered employee’s be-coming entitled to Medicare benefits, themaximum coverage period generally ends36 months after the date of the qualifyingevent. (Nothing in the statute or regula-tions prohibits a group health plan fromproviding coverage that continues beyondthe end of the maximum coverage period.)

Q&A–6(b) of § 54.4980B–7 describesthe circumstances under which a second

qualifying event can expand the maximumcoverage period of an earlier qualifyingevent. If a qualifying event that is a ter-mination (or reduction of hours) of em-ployment is followed within the 18-monthmaximum coverage period (or within the29-month maximum coverage period in acase in which a disability extension ap-plies) by a qualifying event that gives riseto a 36-month maximum coverage period,then the 18-month (or 29-month) periodis expanded to 36 months (measured fromthe date of the first qualifying event). Theexpanded period applies only for those in-dividuals who were qualified beneficia-ries in connection with the first qualifyingevent and who are still qualified beneficia-ries at the time of the second qualifyingevent.

The expanded maximum coverageperiod of Q&A–6 of § 54.4980B–7 ap-plies only when the 36-month qualifyingevent follows the qualifying event that isa termination (or reduction of hours) ofemployment. (However, Q&A–4(d) of§ 54.4980B–7 provides a special rule forthe measurement of the maximum cov-erage period in a case where the coveredemployee’s becoming entitled to Medi-care benefits precedes the termination (orreduction of hours) of employment; thisspecial rule applies regardless of whetherthe Medicare entitlement is a qualifyingevent.) Because a covered employee is nota qualified beneficiary with respect to any36-month qualifying event, the expandedperiod that applies in connection with asecond qualifying event will not applyto a covered employee but only to thespouse or a dependent child of a coveredemployee.

Based on the statute and regulations,for a spouse or dependent child of a cov-ered employee to be entitled to the ex-panded maximum coverage period when

1 The Medicare Secondary Payer (MSP) provisions of the Social Security Act that apply with respect to individuals entitled to Medicare based on the attainment of age 65 — generally referredto as the “working aged” MSP provisions (section 1862(b)(1)(A), 42 U.S.C. 1395y(b)(1)(A)) — include two restrictions on most group health plans that are subject to the COBRA continuationcoverage requirements. (The working aged MSP provisions and the COBRA continuation coverage requirements both include an exception for plans maintained by an employer with fewerthan 20 employees. However, they differ in how the 20 employees are counted, creating the possibility that a plan exempt under one law will be subject to the other law.)

First, the working aged MSP provisions prohibit a group health plan from taking into account that an individual (or the individual’s spouse) who is covered under the plan by virtue ofthe individual’s current employment status with an employer is entitled to Medicare benefits by reason of the attainment of age 65. Second, the working aged MSP provisions also require agroup health plan to provide that any individual age 65 or older (and the spouse age 65 or older of any individual) who has current employment status with an employer is entitled to the samebenefits under the plan under the same conditions as any individual (or spouse) under age 65.

The MSP provisions also prohibit a large group health plan (a plan of an employer that employs at least 100 employees) from taking into account that an individual or a member of an indi-vidual’s family who is covered under the plan by virtue of the individual’s current employment status with an employer is entitled to Medicare based on disability. (42 U.S.C. 1395y(b)(1)(B).)In addition, the MSP provisions generally prohibit a plan from taking into account that an individual is eligible for or entitled to Medicare benefits based on end stage renal disease during acoordination period of 30 months. (42 U.S.C. 1395y(b)(1)(C).)

2004-10 I.R.B. 554 March 8, 2004

a second qualifying event occurs, the fol-lowing three conditions must be satisfied:2

(1) The spouse or dependent child mustbe a qualified beneficiary in connectionwith a termination (or reduction of hours)of employment;

(2) The spouse or dependent child muststill be a qualified beneficiary at the timethat the 36-month event occurs; and

(3) The 36-month event must be a qual-ifying event.

For a 36-month event to be a qualify-ing event, it must — but for the requiredCOBRA continuation coverage — resultin a loss of coverage for the qualified ben-eficiary under the plan within the maxi-mum coverage period. In the context ofdetermining if a 36-month event is a sec-ond qualifying event, it is necessary to ig-nore the COBRA continuation coverageprovided in connection with the qualifyingevent that is the termination (or reductionof hours) of the covered employee’s em-ployment. The inquiry is whether, in theabsence of the first qualifying event, the36-month event would result in a loss ofcoverage for the qualified beneficiary un-der the plan within the maximum coverageperiod. This determination is made by ap-plying the terms of the plan to the qualifiedbeneficiary as if the covered employee hadnot experienced the termination (or reduc-tion of hours) of employment and deter-mining if the occurrence of the 36-monthevent in this hypothetical scenario wouldresult in a loss of coverage for the quali-fied beneficiary under the plan within 36months after, generally3, the covered em-ployee’s actual termination (or reductionof hours) of employment.

In the facts described, the first two con-ditions for E’s Medicare entitlement to bea second qualifying event for E’s spouseare satisfied: E’s spouse is a qualifiedbeneficiary in connection with E’s ter-mination of employment, and E’s spouseis still a qualified beneficiary at the timethat E becomes entitled to Medicare bene-fits.4 Thus, whether E’s spouse is entitled

to a period of 36 months of COBRA con-tinuation coverage (measured from thedate of E’s termination of employment)depends on whether E’s Medicare enti-tlement is a qualifying event. The grouphealth plan described complies with theworking aged Medicare Secondary Payerprovisions of the Social Security Act bynot treating a current employee or the em-ployee’s spouse differently because eitherof them has attained age 65 or is entitled toMedicare benefits by reason of the attain-ment of age 65. Thus, applying the termsof the plan to E’s spouse as if E’s spousewere receiving coverage under the planin absence of E’s termination of employ-ment, E’s becoming entitled to Medicarebenefits in the hypothetical scenario of E’snot having experienced a termination ofemployment would not result in a loss ofcoverage for E’s spouse within 36 monthsafter the actual termination of employ-ment. Consequently, E’s spouse is notentitled to an expansion of the maximumcoverage period by reason of E’s Medicareentitlement, and the plan is not requiredto make COBRA continuation coverageavailable to E’s spouse beyond the end ofthe 18-month maximum coverage period.

HOLDING

The Medicare entitlement of a coveredemployee is not a second qualifying eventfor a qualified beneficiary unless the Medi-care entitlement would have resulted (ifCOBRA continuation coverage, includingCOBRA continuation coverage due to thefirst qualifying event, is disregarded) in aloss of coverage for the qualified benefi-ciary under the group health plan that isproviding the COBRA continuation cover-age.

DRAFTING INFORMATION

The principal author of this revenue rul-ing is Russ Weinheimer of the Office ofDivision Counsel/Associate Chief Coun-sel (Tax Exempt and Government Enti-

ties). For further information about thisrevenue ruling, contact Mr. Weinheimer at(202) 622–6080 (not a toll-free call).

Section 6011.—GeneralRequirement of Return,Statement, or List

26 CFR 1.6011–4: Requirement of statement disclos-ing participation in certain transactions by taxpay-ers.

Whether certain transactions involving a pensionplan that holds life insurance contracts and annuitycontracts for the benefit of a participant which pro-vide for benefits at normal retirement age in excessof the participant’s benefits at normal retirement ageunder the terms of the plan are “listed transactions.”See Rev. Rul. 2004-20, page 546.

Section 6111.—Registra-tion of Tax Shelters

26 CFR 301.6111–2: Confidential corporate taxshelters.

Whether transactions involving a pension plan thatholds life insurance contracts and annuity contractsfor the benefit of a participant which provide for ben-efits at normal retirement age in excess of the par-ticipant’s benefits at normal retirement age under theterms of the plan are transactions that must be regis-tered. See Rev. Rul. 2004-20, page 546.

Section 6112.—Organizersand Sellers of PotentiallyAbusive Tax Shelters MustKeep Lists of Investors

26 CFR 301.6112–1: Requirement to prepare, main-tain, and furnish lists with respect to potentially abu-sive tax shelters.

Whether a list must be maintained with respect totransactions involving a pension plan that holds lifeinsurance contracts and annuity contracts for the ben-efit of a participant which provide for benefits at nor-mal retirement age in excess of the participant’s ben-efits at normal retirement age under the terms of theplan. See Rev. Rul. 2004-20, page 546.

2 This revenue ruling does not address any COBRA notice requirement that a qualified beneficiary may have to satisfy in order to be entitled to the expanded maximum coverage period inconnection with a second qualifying event.

3 Q&A–4(b) of § 54.4980B–7 of the regulations allows a plan to elect to measure the maximum coverage period from the date of a later loss of coverage rather than from the date of thequalifying event.

4 E’s spouse also provided notice to the plan of E’s Medicare entitlement within 60 days after E became so entitled. This is relevant in determining whether E’s spouse has satisfied anyCOBRA notice requirement that may apply for E’s spouse to be entitled to the expanded maximum coverage period in connection with the occurrence of a second qualifying event.

March 8, 2004 555 2004-10 I.R.B.

Part III. Administrative, Procedural, and MiscellaneousProposed Revenue ProcedureRegarding Services ThatQualify for the Student FICAException

Notice 2004–12

I. Overview and Purpose

This notice contains a proposed rev-enue procedure providing a safe harborthat certain institutions of higher educa-tion, and certain affiliated organizationscan use in applying the exception for ser-vices performed by a student providedunder § 3121(b)(10) of the Internal Rev-enue Code (student FICA exception). Aprevious version of this safe harbor wasissued in Rev. Proc. 98–16, 1998–1C.B. 403. However, the Service hasrecently proposed amendments to the Em-ployment Tax Regulations interpreting§ 3121(b)(10) in order to clarify specificissues that have arisen with taxpayersand in litigation (see proposed regulations§ 31.3121(b)(10)–2(c), (d), and (e) pub-lished in the Federal Register on February25, 2004 (REG–156421–03, 2004–10I.R.B. 571 [69 F.R. 8604]). In order toprovide guidance that is consistent withthe proposed regulations in all respects,the Service is suspending Rev. Proc.98–16 and proposing to replace it withthe revenue procedure contained in thisnotice.

The proposed revenue procedure up-dates the safe harbor of Rev. Proc. 98–16in several respects that align it with theproposed regulations. First, the proposedrevenue procedure adds a primary func-tion requirement to the definition of aninstitution of higher education. Section3121(b)(10) applies only to services per-formed in the employ of a school, college,or university, or an affiliated § 509(a)(3)organization. Under the proposed regula-tions and the new safe harbor, an organ-ization can be a school, college, or uni-versity only if its primary function is toconduct educational activities. Thus, inorder to take advantage of the safe har-bor in the revenue procedure, an institu-tion must satisfy not only the Departmentof Education’s regulations at 34 C.F.R.§ 600.4 and satisfy the accreditation re-

quirements of 34 C.F.R. § 600.2, as was re-quired in Rev. Proc. 98–16, but also musthave education and instruction as its pri-mary function. The primary function re-quirement may make the exception under§ 3121(b)(10) unavailable to certain insti-tutions of higher education that are embed-ded within a larger organization like a hos-pital or museum.

Second, the proposed revenue proce-dure does not permit an institution to ap-ply the student FICA exception to servicesperformed by an employee who regularlyworks 40 or more hours per week. Un-der the existing regulations, services fallwithin the student FICA exception onlyif they are performed incident to and forthe purpose of pursuing a course of study.The proposed regulations clarify that anindividual who regularly works forty ormore hours per week has the status of acareer employee, and, accordingly, is notperforming services incident to and for thepurpose of pursuing a course of study. Theproposed revenue procedure follows theproposed regulations. The student FICAexception generally, and the safe harborprovided by the proposed revenue proce-dure specifically, are still available for ser-vices performed by an employee who onoccasion works 40 or more hours per weekand otherwise meets the requirements ofthe safe harbor.

Third, the proposed revenue procedureprovides that an individual has career em-ployee status if the individual is a “pro-fessional employee.” The proposed regula-tions provide that a professional employeefor purposes of the student FICA excep-tion is an employee whose primary dutyconsists of the performance of services re-quiring knowledge of an advanced type ina field of science or learning, whose workrequires the consistent exercise of discre-tion and judgment in its performance, andwhose work is predominantly intellectualand varied in character. The proposed rev-enue procedure follows the proposed reg-ulations.

Fourth, the proposed revenue procedureexpands the terms of employment that re-sult in status as a career employee. Rev.Proc. 98–16 provided that an individualwas to be considered a career employee ifthe employee was eligible to participate in

one of several types of retirement plans,eligible for reduced tuition (with certainexceptions), or otherwise classified by theinstitution of higher education as a careeremployee. The proposed regulations adoptthe same criteria for identifying individ-uals who have the status of a career em-ployee and adds to the list eligibility for anumber of other benefits. The proposedrevenue procedure follows the proposedregulations, adding the additional criteriathat cause an individual to have career em-ployee status and fall outside the scope ofthe safe harbor. Employees considered ashaving the status of a career employee perse cannot have the status of a student forpurposes of the student FICA exception.

Fifth, and finally, the proposed revenueprocedure provides that an employee hascareer employee status if the individual isrequired to be licensed under state or lo-cal law in order to perform the services theindividual provides to the school, college,or university. The proposed revenue pro-cedure follows the proposed regulation.

II. Request for Comments

Comments are requested on the pro-posed revenue procedure. Commentsmay be submitted on or before May25, 2004, to Internal Revenue Service,PO Box 7604, Washington, DC 20044,Attn: CC:PA:LPD:PR (Notice 2004–12),Room 5203. Submissions may also behand-delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to the Courier’s Desk at 1111 Consti-tution Avenue, NW, Washington, DC20224, Attn: CC:PA:LPD:PR (Notice2004–12), Room 5203. Submissionsmay also be sent electronically via theinternet to the following email address:Notice.comments@irscounsel.treas.gov.Include the notice number (Notice2004–12) in the subject line.

III. Effect on Other Documents

Rev. Proc. 98–16 is suspended effec-tive February 25, 2004.

IV. Effective Date

The Service intends to issue a final rev-enue procedure at the same time that the

2004-10 I.R.B. 556 March 8, 2004

proposed regulations under § 3121(b)(10)are finalized. Until a final version of theproposed revenue procedure is issued, tax-payers may rely on the proposed revenueprocedure with respect to services per-formed on or after February 25, 2004 (thedate prop. Reg. § 31.3121(b)(10)–2(c)–(f)(69 F.R. 8604) was published in the Fed-eral Register).

V. Proposed Revenue Procedure

SECTION 1. PURPOSE

This revenue procedure sets forth gen-erally applicable standards for determiningwhether service in the employ of certainpublic or private nonprofit schools, col-leges, universities, or affiliated organiza-tions described in § 509(a)(3) of the Inter-nal Revenue Code (the Code) performedby a student qualifies for the exceptionfrom Federal Insurance Contributions Act(FICA) tax provided under § 3121(b)(10)of the Code (Student FICA exception).These standards are intended to provideobjective and administrable guidelines fordetermining employment tax liability.

SECTION 2. SCOPE

.01 Institutions of higher education typ-ically distinguish between career employ-ees and student employees. Sections 5 and6 of this revenue procedure contain gener-ally applicable standards for determiningwhether or not services performed by em-ployees of certain institutions of higher ed-ucation are eligible for the Student FICAexception.

.02 The standards contained in thisrevenue procedure do not apply to em-ployees who are postdoctoral students,postdoctoral fellows, medical residents,or medical interns because the servicesperformed by these employees cannot beassumed to be incident to and for the pur-pose of pursuing a course of study. Theemployment activities of these individualsoverlaps with the activities comprising thecourse of study, and thus it is not appropri-ate to apply the standards of this revenueprocedure to these individuals.

.03 The standards contained in this rev-enue procedure may not constitute the ex-clusive method for determining whetherthe Student FICA exception applies. Ifthe standard for qualifying for the exclu-

sion described in section 6 of this rev-enue procedure (providing generally thatan employee enrolled at least half-timeat an institution of higher education hasthe status of student) is not met, whetheror not service in the employ of a school,college, university, or affiliated organiza-tion described in § 509(a)(3) of the Codewill qualify for the Student FICA excep-tion will depend on consideration of all thefacts and circumstances.

SECTION 3. BACKGROUND

.01 Sections 3101 and 3111 of the Codeimpose social security and Medicare taxes(FICA taxes) on employees and employ-ers, respectively, equal to a percentage ofthe wages received by an individual withrespect to employment.

.02 Section 3121(a) of the Code de-fines “wages” for purposes of FICA taxesas all remuneration for employment, withcertain exceptions. Section 3121(b) ofthe Code defines “employment” as ser-vices performed by an employee for anemployer, with certain exceptions.

.03 Section 3121(b)(10) of the Codeexcepts from the definition of employ-ment services performed in the employ ofa school, college, or university (whetheror not that organization is exempt fromincome tax), or an affiliated organizationdescribed in § 509(a)(3) of the Code, ifthe services are performed by a studentwho is enrolled and regularly attendingclasses at that school, college, or univer-sity. Remuneration for services excludedfrom the definition of employment under§ 3121(b)(10) of the Code is not subject toFICA taxes.

.04 Section 31.3121(b)(10)–2 of theEmployment Tax Regulations providesthat whether an employee has the status ofa student is determined on the basis of theemployee’s relationship with the school,college, or university for which the ser-vices are being performed. An employeewho performs services in the employ of aschool, college, or university as an inci-dent to and for the purpose of pursuing acourse of study at the school, college, oruniversity has the status of a student in theperformance of those services. Servicesthat are not incident to and for the pur-pose of pursuing a course of study do notqualify for the exception. If the employee

performs services as an incident to and forthe purpose of pursuing a course of studyand, therefore, has the status of a student,the amount of remuneration for servicesperformed by the employee, the type ofservices performed by the employee, andthe place where the services are performedare immaterial for purposes of the StudentFICA exception.

.05 Section 218 of the Social SecurityAct (the Act), 42 U.S.C. section 418, al-lows states to provide Social Security cov-erage for services performed by studentsfor the public school the student is attend-ing under agreements established with theSocial Security Administration. If a statehas exercised its option under § 218 of theAct to provide for coverage of student ser-vices, § 3121(b)(10) of the Code providesthat those services will not qualify for theStudent FICA exception.

SECTION 4. CERTAIN INSTITUTIONSOF HIGHER EDUCATION

.01 The standards contained in thisrevenue procedure apply to “institu-tions of higher education” meeting therequirements of § 31.3121(b)(10)–2(c)of the proposed Employment Tax Reg-ulations. For purposes of this revenueprocedure, the term “institution of highereducation” includes any public or pri-vate nonprofit school, college, or univer-sity within the meaning of prop. Reg.§ 31.3121(b)(10)–2(c), or affiliated or-ganization described in § 509(a)(3) ofthe Code, that meets the requirements setforth in Department of Education regu-lations at 34 C.F.R. § 600.4, as amendedfrom time to time, and that is accredited orpreaccredited by a nationally recognizedaccrediting agency as defined in the De-partment of Education regulations at 34C.F.R. § 600.2.

.02 Services for other institutions mayalso be eligible for the Student FICAexception. Thus, for example, servicesperformed by a student for a secondaryschool may be eligible for the StudentFICA exception. Whether or not servicesfor other institutions, such as secondaryschools, qualify for the Student FICA ex-ception is determined based on the factsand circumstances of each case.

March 8, 2004 557 2004-10 I.R.B.

SECTION 5. STUDENT FICAEXCEPTION NOT AVAILABLEFOR EMPLOYEES WITH CAREEREMPLOYEE STATUS

.01 Services performed by individualswith career employee status are not eli-gible for the Student FICA exception un-der the standard in section 6 of this rev-enue procedure because their services arenot incident to and for the purpose of pur-suing a course of study. See prop. Reg.§ 31.3121(b)(10)–2(d)(3)(ii).

.02 Career employee status. Servicesof an employee with career employee sta-tus are not incident to and for the purposeof pursuing a course of study. An em-ployee may be considered to have careeremployee status based on the employee’shours worked, whether the employee is a“professional employee,” the employee’sterms of employment, or whether theemployee is licensed under state or lo-cal law to work in the field in whichthe employee performs services. Thesestandards are set forth in prop. Reg.§ 31.3121(b)(10)–2(d)(3)(ii). An em-ployee has career employee status if theemployee is described in paragraph (1),(2), (3), or (4) of this section.

(1) Hours worked. An employee has thestatus of a career employee if the employeeregularly performs services 40 hours ormore per week.

(2) Professional employee. An em-ployee has the status of a career employeeif the employee is a professional em-ployee. A professional employee is anemployee—

(a) Whose primary duty consists of theperformance of work requiring knowledgeof an advanced type in a field of scienceor learning customarily acquired by a pro-longed course of specialized intellectualinstruction and study, as distinguishedfrom a general academic education, froman apprenticeship, and from training in theperformance of routine mental, manual, orphysical processes.

(b) Whose work requires the consistentexercise of discretion and judgment in itsperformance; and

(c) Whose work is predominantly intel-lectual and varied in character (as opposedto routine mental, manual, mechanical, orphysical work) and is of such character thatthe output produced or the result accom-

plished cannot be standardized in relationto a given period of time.

(3) Terms of employment. An em-ployee’s terms of employment may in-dicate that the employee has career em-ployee status. An employee with careeremployee status includes any employeewho is—

(a) Eligible to receive vacation, sickleave, or paid holiday benefits;

(b) Eligible to participate in any retire-ment plan described in § 401(a) of theCode that is established or maintained bythe employer; or would be eligible to par-ticipate if age and service requirementswere met;

(c) Eligible to participate in an arrange-ment described in § 403(b) of the Code, orwould be eligible to participate if age andservice requirements were met;

(d) Eligible to participate in a plan de-scribed under § 457(a), or would be eligi-ble to participate if age and service require-ments were met;

(e) Eligible for reduced tuition (otherthan qualified tuition reduction under§ 117(d)(5) of the Code provided to ateaching or research assistant who is agraduate student) because of the individ-ual’s employment relationship with theinstitution;

(f) Eligible to receive employee bene-fits described under § 79 (life insurance),127 (qualified educational assistance), 129(dependent care assistance programs), or137 (adoption assistance); or

(g) Classified by the employer as a ca-reer employee.

(4) Licensure. An employee is a careeremployee if the employee is required to belicensed under state or local law to work inthe field in which the employee performsservices.

.03 If an individual performs services inmultiple job positions, the individual willbe deemed to have career employee statuswith respect to all of the positions if theindividual has career employee status inany one or more of the job positions.

SECTION 6. STANDARDSAPPLICABLE TO UNDERGRADUATEAND GRADUATE STUDENTS

.01 An individual who is a half-time un-dergraduate student or a half-time graduateor professional student and who does nothave the status of a career employee will

qualify for the Student FICA exception un-der this revenue procedure with respect toservices performed at or for an institutionof higher education described in section 4of this revenue procedure in which they areenrolled or at affiliated organizations de-scribed in § 509(a)(3) of the Code. Ser-vices performed by a student for any otheremployer are not covered by the standardsof this revenue procedure.

.02 An individual is deemed to be ahalf-time undergraduate or half-time grad-uate or professional student if the indi-vidual does not have the status of a ca-reer employee status and is an undergrad-uate or graduate student who is in the lastsemester, trimester, or quarter of a courseof study requiring at least two semesters,trimesters, or quarters to complete and isenrolled in the number of credit or unithours needed to complete the requirementsfor obtaining a degree, certificate, or otherrecognized educational credential offeredby that institution of higher education evenif enrolled in less than half the number re-quired of full-time students.

.03 The determination of student statusshould be made at the end of the drop-addperiod and may be adjusted thereafter atthe institution of higher education’s op-tion. The determination of student statusfor payroll periods ending before the endof the drop-add period may be based on thenumber of semester, trimester, or quarterhours being taken at the end of the regis-tration period for that semester, trimester,or quarter.

.04 If an individual is described in sec-tion 6.01 or 6.02 of this revenue proce-dure, services performed by the individualare eligible for the Student FICA exceptionwith respect to all services performed dur-ing all payroll periods of a month or lessthat fall wholly or partially within the aca-demic term.

.05 The Student FICA exception doesnot apply to services performed by anindividual who is not enrolled in classesduring school breaks of more than fiveweeks (including summer breaks of morethan five weeks), other than services de-scribed in section 6.04. See Rev. Rul.72–142, 1972–1 C.B. 317, and Rev. Rul.74–109, 1974–1 C.B. 288. However, theStudent FICA exception applies to em-ployment which continues during normalschool breaks of 5 weeks or less duringwhich the individual is not eligible for

2004-10 I.R.B. 558 March 8, 2004

the Student FICA exception pursuant tosection 6.01 of this revenue procedureprovided that the individual qualifies forthe Student FICA exception pursuant tosection 6.01 of this revenue procedure onthe last day of classes or examinationspreceding the break and is eligible to en-roll in classes for the first academic periodfollowing the break.

.06 If the standards of this revenue pro-cedure are met (and section 8 does not ap-ply), the amount of remuneration for ser-vices performed by the employee, the typeof services performed by the employee,and the place where the services are per-formed are immaterial. If the services per-formed by a student otherwise described insection 6.01 or 6.02 are covered under anagreement pursuant to section 218 of theAct, the Student FICA exception does notapply.

.07 For provisions relating to domes-tic service performed by a student ina local college club, or local chapterof a college fraternity or sorority, see§ 31.3121(b)(2)–1.

SECTION 7. DEFINITIONS

For purposes of the standard containedin section 6 of this revenue procedure,the following definitions must be used.For purposes of the following definitions,the term “institution of higher education”means an institution of higher educationas defined in section 4 of this revenueprocedure.

.01 Undergraduate student. The term“undergraduate student” has the meaningattributed to that term in the Department ofEducation regulations at 34 C.F.R. section674.2.

.02 Half-time undergraduate student.The term “half-time undergraduate stu-dent” has the meaning attributed to thatterm in the Department of Education reg-ulations at 34 C.F.R. section 674.2.

.03 Graduate or professional student.The term “graduate or professional stu-dent” means a student who—

(1) is enrolled at an institution of highereducation for the purpose of obtaining adegree, certificate, or other recognized ed-ucational credential above the baccalaure-ate level or is enrolled in a program leadingto a professional degree;

(2) has completed the equivalent of atleast three years of full-time study at an

institution of higher education, either priorto entrance into the program or as part ofthe program itself; and

(3) is not a postdoctoral student, post-doctoral fellow, medical resident, or med-ical intern.

.04 Half-time graduate or professionalstudent. The term “half-time graduate orprofessional student” means an enrolledgraduate or professional student, as de-fined in section 7.03 of this revenue pro-cedure, who is carrying at least a half-time academic workload at an institutionof higher education as determined by thatinstitution according to its own standardsand practices.

SECTION 8. ANTI-ABUSE RULE

The standards in this revenue proceduremust be applied in a reasonable manner,consistent with the purpose of excludingfrom employment only services that areperformed as an incident to and for the pur-pose of pursuing a course of study at aninstitution of higher education as definedin section 4 of this revenue procedure. Ifthe standards are inappropriately appliedin a manner that conflicts with this under-lying purpose so as to manipulate or mis-characterize the nature of the relationshipbetween an employee and an institution ofhigher education, resulting in the improperavoidance of payment of FICA taxes, thenwhether the Student FICA exception ap-plies will be determined on the basis ofall the facts and circumstances, rather thanon the basis of the specific standards setforth in section 6 of this revenue proce-dure. For example, the standards wouldbe inappropriately applied through the ma-nipulation of the relationship between em-ployees and the institution of higher edu-cation if a university claimed that the Stu-dent FICA exception applied to researchlaboratory workers, who had been careeremployees, but were converted to non-ca-reer status and required to enroll in a cer-tificate program granting six credit hoursper semester for work experience in thelaboratory. As another example, if an in-dividual who was not a student workedfor a university on a full-time basis formany years, in a job generally performedby non-students (but nonetheless failed tomeet the literal definition of career em-ployee), and then enrolled at the univer-sity for six credit hours of course work

per semester while continuing the full-timework in the same job, it may not be appro-priate to apply the standards of this rev-enue procedure to conclude that the in-dividual’s work has become incident toand for the purpose of pursuing a courseof study solely because the individual en-rolled for this course work. In both of theseexamples, whether the work is performedincident to and for the purpose of pursuinga course of study must be determined onthe basis of all the relevant facts and cir-cumstances.

SECTION 9. EFFECTIVE DATE

This revenue procedure is effectivefor services performed on or after Feb-ruary 25, 2004 (the date prop. Reg.§ 31.3121(b)(10)–2(c)–(f) (69 FR 8604)was published in the Federal Register).

The principal author of this noticeis Stephen D. Suetterlein of the Officeof Associate Chief Counsel (Tax Ex-empt & Government Entities). However,other personnel from the Service andTreasury Department participated in thedevelopment of this notice. For furtherinformation regarding this notice, contactMr. Suetterlein at (202) 622–6040 (not atoll-free call).

26 CFR 601.201: Rulings and determination letters.(Also, Part I, § 402; § 1.402(a)–1.)

Rev. Proc. 2004–16

SECTION 1. PURPOSE

This revenue procedure is issued inconnection with the issuance of proposedregulations under § 402(a) of the InternalRevenue Code regarding the valuationof life insurance contracts upon distri-bution from a qualified retirement planand proposed regulations under §§ 79and 83 regarding the valuation of lifeinsurance contracts under those sections(REG–126967–03, 2004–10 I.R.B. 566).The preamble to the proposed regulationsstates that it is not appropriate in somecases to use either the net surrender valueof a distributed life insurance contract(i.e., the contract’s cash value after re-duction for any surrender charges) or thecontract’s reserves as the contract’s fair

March 8, 2004 559 2004-10 I.R.B.

market value upon distribution of an in-surance contract from a qualified plan butthe preamble provides limited guidance asto what value may be used instead. Simi-larly, the proposed regulations under §§ 79and 83 clarify that the amount includiblein income under those sections is basedupon the fair market value of the insur-ance contract rather than its cash value butthese proposed regulations do not provideany guidance as what constitutes fair mar-ket value. The regulations are generallyproposed to apply beginning on the datethe proposed regulations are filed in theFederal Register. The preamble to theproposed regulations also requests publiccomments regarding appropriate methodsfor valuing life insurance contracts whendistributed from qualified retirement plansand for purposes of §§ 79 and 83. Untilfurther guidance is issued, this revenueprocedure provides interim rules underwhich the cash value (without reductionfor surrender charges) of a life insurancecontract may be treated as the contract’sfair market value when the contract is dis-tributed from a qualified plan under § 402and for purposes of §§ 79 and 83.

SECTION 2. BACKGROUND

.01 Section 402(a) provides generallythat any amount actually distributed to anydistributee by any employees’ trust de-scribed in § 401(a) which is exempt fromtax under § 501(a) shall be taxable to thedistributee, in the taxable year of the dis-tributee in which distributed, under § 72.

.02 Section 1.402(a)–1(a)(1)(iii) of thecurrent regulations provides, in general,that a distribution of property by a § 401(a)plan shall be taken into account by the dis-tributee at its “fair market value.” Section1.402(a)–1(a)(2) of the current regulationsprovides, in general, that upon distribu-tion of an annuity or life insurance con-tract, the “entire cash value” must be in-cluded in the distributee’s income. Thecurrent regulations do not define “fair mar-ket value” or “entire cash value” and ques-tions have arisen regarding the interactionbetween these two provisions.

.03 The proposed regulations wouldclarify that the requirement that a distri-bution of property must be included inthe distributee’s income at fair marketvalue is controlling in those situationswhere the existing regulations provide

for the inclusion of the entire cash value.Thus, the proposed regulations providethat, in those cases where a qualifiedplan distributes a life insurance contract,retirement income contract, endowmentcontract, or other contract providing lifeinsurance protection, the fair market valueof such a contract is generally includedin the distributee’s income rather thanthe entire cash value of the contract. Forthis purpose, the policy cash value and allother rights under the contract (includingany supplemental agreements thereto andwhether or not guaranteed) are includedin determining the fair market value ofsuch a contract. The proposed regulationsprovide a similar rule for purposes of thevaluation of such contracts under §§ 79and 83.

.04 In Rev. Rul. 59–195, 1959–1 C.B.18, the Service ruled that in situations sim-ilar to those where an employer purchasesand pays the premiums on an insurancepolicy on the life of one of its employ-ees and subsequently sells such policy, onwhich further premiums must be paid, thevalue of such policy, for computing tax-able gain in the year of purchase, should bedetermined under the method of valuationprescribed in § 25.2512–6 of the Gift TaxRegulations. Under this method, the valueof such a policy is not its cash surrendervalue but the interpolated terminal reserveat the date of sale plus the proportionatepart of any premium paid by the employerprior to the date of the sale which is appli-cable to a period subsequent to the date ofthe sale. Section 25.2512–6 also providesthat if “because of the unusual nature ofthe contract such approximation is not rea-sonably close to the full value, this methodmay not be used.” Thus, this method maynot be used to determine the fair marketvalue of an insurance policy where the re-serve does not reflect the value of all of therelevant features of the policy.

.05 In Q&A–10 of Notice 89–25,1989–1 C.B. 662, the IRS addressed thequestion of what amount is includible inincome under § 402(a) when a participantreceives a distribution from a qualifiedplan that includes a life insurance policywith a value substantially higher than thecash surrender value stated in the policy.The notice noted the practice of usingcash surrender value as fair market valuefor these purposes and concluded thatthis practice is not appropriate where the

total policy reserves, including life in-surance reserves (if any) computed under§ 807(d), together with any reserves foradvance premiums, dividend accumula-tions, etc., represent a much more accurateapproximation of the policy’s fair marketvalue.

.06 Since Notice 89–25 was issued, lifeinsurance contracts have been marketedthat are structured in a manner which re-sults in a temporary period during whichneither a contract’s reserves nor its cashsurrender value represent the fair marketvalue of the contract. For example, somelife insurance contracts may provide forlarge surrender charges and other chargesthat are not expected to be paid becausethey are expected to be eliminated or re-versed in the future (under the contractor under another contract for which thefirst contract is exchanged), but this futureelimination or reversal is not always re-flected in the calculation of the contract’sreserve. If such a contract is distributedprior to the elimination or reversal of thosecharges, both the cash surrender value andthe reserve under the contract could sig-nificantly understate the fair market valueof the contract. Thus, the preamble to theproposed regulations states that, in somecases, it would not be appropriate to useeither the net surrender value (i.e. the con-tract’s cash value after reduction for anysurrender charges) or, because of the un-usual nature of the contract, the contract’sreserves to determine the fair market valueof the contract. Accordingly, Q&A–10 ofNotice 89–25 should not be interpreted toprovide that a contract’s reserves (includ-ing life insurance reserves (if any) com-puted under § 807(d), together with any re-serves for advance premiums, dividend ac-cumulations, etc.) are always an accuraterepresentation of the contract’s fair marketvalue.

.07 As stated in the preamble to the pro-posed regulations, the amount of any dis-tribution determined under § 402 also ap-plies for purposes of determining the qual-ified status of any plan. For example, thefair market value of a distributed life insur-ance contract, determined in accordancewith the proposed regulations and this rev-enue procedure, must be considered in de-termining whether the insured participanthas received benefits in excess of the lim-its imposed by § 415.

2004-10 I.R.B. 560 March 8, 2004

.08 Section 79 generally requires thatthe cost of group-term life insurance cov-erage on the life of an employee that is inexcess of $50,000 of coverage be includedin the income of the employee. Pursuantto § 1.79–1(b) of the Income Tax Reg-ulations, under specified circumstancesgroup-term life insurance may be com-bined with other benefits, referred to aspermanent benefits.

.09 Permanent benefits provided to anemployee are subject to taxation underrules described in § 1.79–1(d). Underthose rules, the cost of the permanent ben-efits, reduced by the amount paid for thosebenefits by the employee, is included inthe employee’s income. The cost of thebenefits can be no less than an amount de-termined under a formula provided in theregulations. The formula is based in parton the increase in the employee’s deemeddeath benefit during the year. One of thefactors used for determining the deemeddeath benefit is “the net level premiumreserve at the end of that policy year forall benefits provided to the employee bythe policy or, if greater, the cash value ofthe policy at the end of that policy year.”

.10 The proposed regulations wouldamend § 1.79–1(d) to delete the term cashvalue from the formula for determiningthe cost of permanent benefits and sub-stitute the term fair market value. Thepurpose of the change is to clarify that,unless specifically excepted from the def-inition of permanent benefits, the valueof all features of a life insurance policyproviding an economic benefit to an em-ployee (including, for example, the valueof a springing cash value feature) must beincluded in the employee’s income.

.11 Section 83(a) provides that whenproperty is transferred to any person inconnection with the performance of ser-vices, the service provider must include ingross income (as compensation income)the excess of the fair market value of theproperty, determined without regard tolapse restrictions (such as life insurancecontract surrender charges), and deter-mined at the first time that the transferee’srights in the property are either transfer-able or not subject to a substantial riskof forfeiture (i.e., when those rights be-come “substantially vested”), over theamount (if any) paid for the property. Sec-tion 1.83–3(e) provides that in the caseof a transfer of a life insurance contract,

retirement income contract, endowmentcontract, or other contract providing lifeinsurance protection, only the cash sur-render value of the contract is consideredto be property. The proposed regulationsgenerally would amend § 1.83–3(e) toprovide that in the case of a transfer ofan insurance contract, retirement incomecontract, endowment contract, or othercontract providing life insurance protec-tion, the policy cash value and all otherrights under the contract (including anysupplemental agreements, whether or notguaranteed), other than current insuranceprotection, are treated as property forpurposes of this section. However, inthe case of the transfer of a life insur-ance contract, retirement income contract,endowment contract, or other contractproviding life insurance protection, whichwas part of a split-dollar arrangement (asdefined in § 1.61–22(j)) entered into onor before September 17, 2003, and whichis not materially modified (as defined in§ 1.61–22(j)(2)) after September 17, 2003,only the cash surrender value of the con-tract is considered to be property.

SECTION 3. INTERIM GUIDANCEFOR DETERMINING FAIR MARKETVALUE

.01 The Service and the Treasury recog-nize that many taxpayers could have diffi-culty determining the fair market value ofan insurance contract after the issuance ofthe proposed regulations under §§ 79 and83 and the clarification in the preamble tothe proposed regulations under § 402 thatNotice 89–25 should not be interpreted toprovide that a contract’s reserves (includ-ing life insurance reserves (if any) com-puted under § 807(d), together with any re-serves for advance premiums, dividend ac-cumulations, etc.) are always an accuraterepresentation of the contract’s fair mar-ket value. Accordingly, in connection withthe proposed regulations, this revenue pro-cedure provides interim rules under whichthe cash value (without reduction for sur-render charges) of a life insurance contractdistributed from a qualified plan may betreated as the fair market value of that con-tract. These interim rules also apply forpurposes of determining the value of insur-ance contracts under §§ 79 and 83.

.02 Cash value (without reduction forsurrender charges) may be treated as the

fair market value of a contract as of a de-termination date provided such cash valueis at least as large as the aggregate of: (1)the premiums paid from the date of issuethrough the date of determination, plus(2) any amounts credited (or otherwisemade available) to the policyholder withrespect to those premiums, including inter-est, dividends, and similar income items(whether under the contract or otherwise),minus (3) reasonable mortality chargesand reasonable charges (other than mortal-ity charges), but only if those charges areactually charged on or before the date ofdetermination and are expected to be paid.

.03 In those cases where the contract isa variable contract (as defined in § 817(d))cash value (without reduction for surren-der charges) may be treated as the fair mar-ket value of the contract provided suchcash value is at least as large as the ag-gregate of: (1) the premiums paid fromthe date of issue through the date of de-termination, plus (2) all adjustments madewith respect to those premiums during thatperiod (whether under the contract or oth-erwise) that reflect investment return andthe current market value of segregated as-set accounts, minus (3) reasonable mortal-ity charges and reasonable charges (otherthan mortality charges), but only if thosecharges are actually charged on or beforethe date of determination and are expectedto be paid.

.04 The date of determination in thecase of a distribution of a contract from aqualified plan is the date of that distribu-tion. The date of determination in the caseof the provision of permanent benefits sub-ject to § 79 is the date those benefits areprovided. The date of determination in thecase of a transfer of an insurance contractsubject to § 83 is the date on which fairmarket value must be determined under therules of § 83.

SECTION 4. EFFECTIVE DATE

This revenue procedure is effective onFebruary 13, 2004.

DRAFTING INFORMATION

The principal authors of this rev-enue procedure are Robert Walsh andLarry Isaacs of the Employee Plans, TaxExempt and Government Entities Divi-sion. For further information regarding

March 8, 2004 561 2004-10 I.R.B.

this revenue procedure as it pertains to§ 402, please contact the Employee Plans’taxpayer assistance telephone service at1–877–829–5500 (a toll-free number) be-tween the hours of 8:00 a.m. and 6:30p.m. Eastern Time, Monday through Fri-day. For further information regarding thisrevenue procedure as it pertains to § 79,please contact Betty Clary of the Office ofDivision Counsel/Associate Chief Coun-sel (Tax Exempt and Government Entities)at (202) 622–6080 (not a toll-free number).For further information regarding this rev-enue procedure as it pertains to § 83, pleasecontact Robert Misner of the Office of Di-vision Counsel/Associate Chief Counsel(Tax Exempt and Government Entities) at(202) 622–6030 (not a toll-free number).Mr. Walsh and Mr. Isaacs may be reachedat (202) 283–9888 (not a toll-free num-ber).

26 CFR 601.105: Examination of returns and claimsfor refund, credit, or abatement; determination ofcorrect tax liability.(Also, Part I, § 911, 1.911–1.)

Rev. Proc. 2004–17

SECTION 1. PURPOSE

.01 This revenue procedure providesinformation to any individual who failedto meet the eligibility requirements of§ 911(d)(1) of the Internal Revenue Code

because adverse conditions in a foreigncountry precluded the individual frommeeting those requirements for taxableyear 2003.

.02 The Internal Revenue Service haspreviously listed countries for which theeligibility requirements of § 911(d)(1) ofthe Code are waived under § 911(d)(4) be-cause of adverse conditions in those coun-tries on and after the date stated. See Rev.Proc. 2003–26, 2003–1 C.B. 666, Rev.Proc. 2002–20, 2002–1 C.B. 732, and Rev.Proc. 2001–27, 2001–1 C.B. 1155. Thisrevenue procedure lists countries added tothe list in 2003, for which the eligibility re-quirements of § 911(d)(1) are waived. Rev.Proc. 2003–26, Rev. Proc. 2002–20, andRev. Proc. 2001–27 remain in full forceand effect.

SECTION 2. BACKGROUND

.01 Section 911(a) of the Code allowsa “qualified individual,” as defined in§ 911(d)(1), to exclude foreign earnedincome and housing cost amounts fromgross income. Section 911(c)(3) of theCode allows a qualified individual todeduct housing cost amounts from grossincome.

.02 Section 911(d)(1) of the Code de-fines the term “qualified individual” as anindividual whose tax home is in a foreigncountry and who is (A) a citizen of theUnited States and establishes to the satis-faction of the Secretary of the Treasury that

the individual has been a bona fide residentof a foreign country or countries for an un-interrupted period that includes an entiretaxable year, or (B) a citizen or resident ofthe United States who, during any periodof 12 consecutive months, is present in aforeign country or countries during at least330 full days.

.03 Section 911(d)(4) of the Code pro-vides an exception to the eligibility re-quirements of § 911(d)(1). An individ-ual will be treated as a qualified individ-ual with respect to a period in which theindividual was a bona fide resident of, orwas present in, a foreign country if the in-dividual left the country during a periodfor which the Secretary of the Treasury, af-ter consultation with the Secretary of State,determines that individuals were requiredto leave because of war, civil unrest, orsimilar adverse conditions that precludedthe normal conduct of business. An in-dividual must establish that but for thoseconditions the individual could reasonablyhave been expected to meet the eligibilityrequirements.

.04 For 2003, the Secretary of the Trea-sury in consultation with the Secretary ofState has determined that war, civil un-rest, or similar adverse conditions that pre-cluded the normal conduct of business ex-isted in the following countries beginningon the specified date:

Date of Departure

Country On or after

Burundi July 13, 2003Israel March 16, 2003Kuwait March 16, 2003Liberia June 6, 2003Saudi Arabia May 13, 2003Syria March 16, 2003

.05 Accordingly, for purposes of § 911of the Code, an individual who left oneof the foregoing countries on or after thespecified departure date shall be treated asa qualified individual with respect to theperiod during which that individual waspresent in, or was a bona fide resident of,such foreign country, if the individual es-tablishes a reasonable expectation of meet-

ing the requirements of § 911(d) but forthose conditions.

.06 To qualify for relief under§ 911(d)(4) of the Code, an individualmust have established residency, or havebeen physically present, in the foreigncountry on or prior to the date that theSecretary of the Treasury determines thatindividuals were required to leave the for-eign country. Individuals who establish

residency, or are first physically present, inthe foreign country after the date that theSecretary prescribes shall not be treated asqualified individuals under § 911(d)(4) ofthe Code. For example, individuals whoare first physically present in Kuwait afterMarch 16, 2003, are not eligible to qualifyfor the exception provided in § 911(d)(4)of the Code for taxable year 2003.

2004-10 I.R.B. 562 March 8, 2004

.07 In order to assist those individualswho are filing prior year or amended taxreturns, the Internal Revenue Service is re-

publishing the countries listed for tax years2000, 2001, and 2002 for which the eli-

gibility requirements of § 911(d)(1) of theCode are waived under § 911(d)(4):

Tax Year 2000—

Date of Departure

Country On or after

Eritrea May 19, 2000

Tax Year 2001—

Date of Departure

Country On or after

Macedonia July 27, 2001

Tax Year 2002—

Date of Departure

Country On or after

Central African Republic October 31, 2002Côte d’Ivoire October 18, 2002Indonesia October 13, 2002Madagascar April 13, 2002Pakistan March 22, 2002Venezuela December 20, 2002

SECTION 3. INQUIRIES

A taxpayer who needs assistance onhow to claim this exclusion, or on how tofile an amended return, should contact a lo-cal IRS Office or, for a taxpayer residingor traveling outside the United States, thenearest overseas IRS office.

SECTION 4. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 2003–26, 2003–1 C.B. 666,is supplemented.

DRAFTING INFORMATION

The principal author of this revenueprocedure is Kate Y. Hwa of the Office ofAssociate Chief Counsel (International).For further information regarding this rev-enue procedure, contact Ms. Hwa at (202)622–3840 (not a toll-free call).

26 CFR 601.105: Examination of returns and claimsfor refund, credit, or abatement; determination ofcorrect tax liability.(Also Part I, §§ 611; 1.611–2.)

Rev. Proc. 2004–19

SECTION 1. PURPOSE

This revenue procedure provides anelective safe harbor that the owner of anoil and gas property may use in determin-ing the property’s recoverable reservesfor purposes of computing cost depletionunder § 611 of the Internal Revenue Code.

SECTION 2. BACKGROUND

.01 In General. Section 611(a) and theregulations thereunder allow as a deduc-tion in computing taxable income a reason-able allowance for depletion in the case ofoil and gas wells according to the peculiarconditions in each case.

.02 Computation of Cost Depletion.Under § 1.611–2(a) of the Income TaxRegulations, a taxpayer claiming the de-duction for cost depletion computes theamount allowed with respect to each oiland gas property by reference to both thetotal number of recoverable units that theproperty is estimated to contain and thenumber of units sold from the propertyduring the taxable year.

.03 Depletion Accounts. A taxpayer isrequired under § 1.611–2(b) to keep ac-counts for the depletion of each propertyand to adjust those accounts annually forunits sold and for depletion claimed.

.04 Reserve Estimates. Section1.611–2(c)(1) contains the rules for es-timating the total recoverable units ofmineral products reasonably known, oron good evidence believed, to exist withrespect to each property. The estimate ordetermination must be made accordingto the method current in the industry and

March 8, 2004 563 2004-10 I.R.B.

in light of the most accurate and reliableinformation obtainable. Under the regu-lations, the estimate of total recoverableunits includes all reserves that are provedand, under appropriate circumstances,probable or prospective reserves in addi-tion to the reserves that are proved.

.05 Revisions of Reserve Estimates.(1) Under § 1.611–2(c)(2), if the num-

ber of recoverable units of mineral in thedeposit has been previously estimated, andif there has been no known change in thefacts upon which the prior estimate wasbased, the number of recoverable units ofmineral in the deposit as of the taxableyear will be the number remaining fromthe prior estimate. However, § 611 pro-vides that, in any case in which it is as-certained as a result of operations and de-velopment work that the recoverable unitsare greater or less than the prior estimate,then the estimate will be revised and the re-vised estimate will be used for subsequentperiods. Under § 1.611–2(c)(2), a revisionis made only when operations or develop-ment work indicates that the remaining re-coverable units as of the taxable year arematerially greater or less than the numberremaining from the prior estimate. Therevised estimate is used until a change infacts requires another revision.

(2) In Martin Marietta Corporation v.United States, 7 Cl. Ct. 586 (1985),the United States Claims Court interpreted§ 611(a) and § 1.611–2(c)(2) as intendedto remedy mistakes of geological fact: sit-uations where the actual size of the min-eral deposit in place, as originally esti-mated, is later determined on the basisof more exploratory studies, for example,to be greater or less than earlier informa-tion indicated. The court distinguishedsituations where revisions are made un-der the statute and regulations from thosein which the mineral property has experi-enced a mere diminution in value or evena retreat into worthlessness.

.06 Differences between Tax and Finan-cial Accounting for Reserves. Generally,accounting for reserves for purposes of thedepletion allowance differs from account-ing for reserves for financial purposes intwo important respects. First, while theregulations require the inclusion of prob-able or prospective reserves in additionto proved reserves for purposes of thedepletion allowance, the United States Se-curities and Exchange Commission (SEC)

generally requires the reporting of onlyproved reserves for financial purposes.Second, the revision of a reserve estimatefor purposes of the depletion allowance ispermitted under fewer circumstances thanis the revision of a reserve estimate forfinancial reporting purposes. While theSEC may require or permit the revision ofa reserve estimate in the case of changesin the price of the mineral or the cost ofits extraction, such circumstances are notsufficient basis for revision of a reserveestimate for purposes of the depletion al-lowance.

.07 Probable or Prospective Reserves.The appropriate quantity of probable orprospective reserves to be included inan oil and gas property’s total recover-able units for purposes of computing costdepletion has been a source of contro-versy between taxpayers and the Service.When present, the issue has been resolvedthrough the examinations which are costlyfor both parties in the dispute. This rev-enue procedure provides a safe harborwhich is intended to remove this sourceof controversy from the examinations oftaxpayers who elect it.

SECTION 3. SCOPE

.01 In General. A taxpayer’s estimateof an oil and gas property’s probable orprospective reserves determined under thesafe harbor provided in this revenue proce-dure may be used only for purposes of thedepletion allowance. This revenue proce-dure has no application to the determina-tion of the fair market value of any oil andgas property or for any other purpose notspecifically authorized herein.

.02 Effect of Other Statutory and Reg-ulatory Rules. Except with respect toestimated total recoverable units (withinthe meaning of § 1.611–2(c)(1)) and re-vised estimates (within the meaning of§ 1.611–2(c)(2)), this revenue procedurehas no effect on the rules provided in § 611and the regulations thereunder.

SECTION 4. TOTAL RECOVERABLEUNITS SAFE HARBOR

.01 If a taxpayer makes an election inaccordance with section 5 of this revenueprocedure, then, for purposes of comput-ing cost depletion:

(1) The total recoverable units under§ 1.611–2(c)(1) that each of the taxpayer’sdomestic oil and gas producing propertiesis estimated to contain as of a specific datewill be treated as being equal to 105 per-cent of the property’s “proved reserves”(both developed and undeveloped) as de-fined in 17 C.F.R. § 210.4–10(a) of Regu-lation S-X, as of that date;

(2) The total recoverable units under§ 1.611–2(c)(2) that each of the taxpayer’sdomestic oil and gas producing propertiesis estimated, on a revised basis, to con-tain as of a taxable year will be deemed tobe equal to 105 percent of the property’s“proved reserves” (both developed and un-developed) as defined in Regulation S-X,as of that taxable year.

.02 Nothing in this revenue procedureprecludes the examination and adjustment,if appropriate, of the estimate of proved re-serves, as defined in Regulation S-X, in or-der to ensure that this revenue procedure isproperly administered. Except as providedin section 5.02 of this revenue procedure, ataxpayer’s estimate of a property’s remain-ing recoverable units may be revised onlyunder the circumstances permitted under§ 1.611–2(c)(2).

SECTION 5. METHOD OF ELECTIONAND REVOCATION

.01 In General.(1) Election. To elect the safe harbor

provided in this revenue procedure for tax-able years ending on or after March 8,2004, a taxpayer must attach a statementto its timely filed (including extensions)original federal income tax return for thefirst taxable year for which the safe har-bor is elected. The statement must indicatethat the taxpayer is electing the safe har-bor provided by Rev. Proc. 2004–19, andinclude the taxpayer’s name, address, tax-payer identification number, and contactname and telephone number. A copy of thestatement must be sent to the Industry Di-rector, Large and Mid-Size Business, Nat-ural Resources, 1919 Smith Street, HOU1000, Houston, Texas 77002. Once a tax-payer files a first return electing the safeharbor for a taxable year, the taxpayer maynot revoke the election for the taxable year.The election is effective for the taxableyear of election and all subsequent taxableyears until revoked and applies to all of the

2004-10 I.R.B. 564 March 8, 2004

taxpayer’s domestic oil and gas producingproperties.

(2) Revocation. To revoke a safe har-bor election, a taxpayer must attach a state-ment to its timely filed (including exten-sions) original federal income tax returnfor the first taxable year for which thesafe harbor is revoked. The statementmust indicate that the taxpayer is revok-ing the safe harbor provided by Rev. Proc.2004–19, and include the taxpayer’s name,address, taxpayer identification number,and contact name and telephone number.A copy of the statement must be sent tothe Industry Director, Large and Mid-SizeBusiness, Natural Resources, 1919 SmithStreet, HOU 1000, Houston, Texas 77002.If a taxpayer revokes its election, the tax-payer may not re-elect the safe harbor forthe next five taxable years following thetaxable year of revocation.

.02 Election of Safe Harbor for TaxableYear Beginning Before January 1, 2005.If the first taxable year for which a tax-payer elects the safe harbor provided inthis revenue procedure begins before Jan-uary 1, 2005, the taxpayer may, for the tax-able year of election, revise the estimateof remaining recoverable units for any ofthe taxpayer’s domestic oil and gas pro-ducing properties whether or not there hasbeen a change in geological fact indicat-ing that the remaining recoverable units asof the taxable year for any given propertyis materially greater or less than the num-ber remaining from the prior estimate. Thetaxpayer must use the economic and oper-ating conditions (such as prices and costs)applicable to the taxable year of electionin determining the estimate of total recov-erable units.

.03 Election of Safe Harbor for Tax-able Year Beginning After December 31,2004. If the first taxable year for whicha taxpayer elects the safe harbor pro-vided in this revenue procedure beginsafter December 31, 2004, the taxpayermust determine, for each domestic oil and

gas producing property, the last taxableyear preceding the taxable year of elec-tion as of which the taxpayer revised anoil and gas property’s total recoverableunits (the year of last revision) pursuant to§ 1.611–2(c)(2). The taxpayer determinesthe property’s remaining recoverable unitsfor the year of last revision using the safeharbor rules set forth in section 4 of thisrevenue procedure. The taxpayer then ap-plies the rules set forth in § 1.611–2(b) forall subsequent taxable years to determinethe property’s remaining recoverable unitsfor the taxable year of election. Similarprocedures apply if the taxpayer’s estimateof the property’s remaining recoverableunits is based on the taxpayer’s originalestimate of its total recoverable units under§ 1.611–2(c)(1). The taxpayer may not,for the taxable year of election, revise theestimate of remaining recoverable unitsfor any of the taxpayer’s domestic oil andgas producing properties unless there hasbeen a change in geological fact indicatingthat the remaining recoverable units as ofthe taxable year for any given property ismaterially greater or less than the numberremaining from the prior estimate.

SECTION 6. EFFECTIVE DATE

This revenue procedure is effective fortaxable years ending on or after March 8,2004.

SECTION 7. PAPERWORKREDUCTION ACT

The collection of information con-tained in this revenue procedure has beenreviewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act (44U.S.C. § 3507) under control number1545–1861.

An agency may not conduct or sponsor,and a person is not required to respondto, a collection of information unless the

collection of information displays a validOMB control number.

The collection of information in thisrevenue procedure is in section 5. Theinformation in section 5 is required to besubmitted to the applicable service centerin order to elect (or revoke) the safe har-bor. This information will be used to deter-mine whether a taxpayer estimated the to-tal recoverable units for each of its domes-tic oil and gas producing properties underthe safe harbor. The likely respondents arebusinesses or other for-profit institutions.

The estimated total annual reportingburden is 50 hours.

The estimated annual burden per re-spondent varies from .25 hours to .75hours, depending on individual circum-stances, with an estimated average burdenof .5 hours to complete the statement. Theestimated number of respondents is 100.

The estimated annual frequency of re-sponses is on occasion.

Books or records relating to a collectionof information must be retained as long astheir contents may become material in theadministration of any internal revenue law.Generally, tax returns and tax return in-formation are confidential under 26 U.S.C.§ 6103.

SECTION 8. DRAFTINGINFORMATION

The principal author of this revenueprocedure is Jolene J. Shiraishi of theOffice of the Associate Chief Counsel(Passthroughs and Special Industries). Forfurther information regarding this revenueprocedure, contact Ms. Shiraishi at (202)622–3120 (not a toll-free call).

March 8, 2004 565 2004-10 I.R.B.

Part IV. Items of General InterestNotice of ProposedRulemaking and Notice ofPublic Hearing

Value of Life InsuranceContracts When DistributedFrom a Qualified RetirementPlan

REG–126967–03

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemakingand notice of public hearing.

SUMMARY: This document contains pro-posed amendments to the regulations un-der section 402(a) of the Internal RevenueCode regarding the amount includible ina distributee’s income when life insurancecontracts are distributed by a qualified re-tirement plan and the treatment of propertysold by a qualified retirement plan to a planparticipant or beneficiary for less than fairmarket value. This document also containsproposed amendments to the regulationsunder sections 79 and 83 conforming thelanguage in those regulations to the lan-guage in the proposed amendments to thesection 402(a) regulations. These regula-tions will affect administrators of, partici-pants in, and beneficiaries of qualified em-ployer plans. These regulations also pro-vide guidance to employers who providegroup-term life insurance to their employ-ees that is includible in the gross incomeof the employees and to employers whotransfer life insurance contracts to personsin connection with the performance of ser-vices. This document also provides noticeof a public hearing on these proposed reg-ulations.

DATES: Written or electronic commentsmust be received by May 13, 2004. Re-quests to speak and outlines of topics to bediscussed at the public hearing scheduledfor June 9, 2004, at 10 a.m., must be re-ceived by May 19, 2004.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–126967–03), room

5226, Internal Revenue Service, POB7604, Ben Franklin Station, Washing-ton, DC 20044. Submissions may behand-delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to: CC:PA:LPD:PR (REG–126967–03),Courier’s Desk, Internal Revenue Service,1111 Constitution Avenue, NW, Wash-ington D.C. Alternatively, taxpayers maysubmit comments electronically directly tothe IRS Internet site at www.irs.gov/regs.The public hearing will be held in the Au-ditorium, Internal Revenue Building, 1111Constitution Avenue, NW, Washington,D.C.

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedamendments to the section 79 regula-tions, Betty Clary at (202) 622–6080;concerning the proposed amendments tothe section 83 regulations, Robert Misnerat (202) 622–6030; concerning the pro-posed amendments to the 402 regula-tions, Linda Marshall at (202) 622–6090;concerning submissions and the hearingand/or to be placed on the building accesslist to attend the hearing, Robin Jones at(202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposedamendments to the Income Tax Regu-lations (26 CFR Part 1) under section402(a) of the Internal Revenue Code(Code) relating to the amount includi-ble in a distributee’s income when a lifeinsurance contract, retirement incomecontract, endowment contract, or othercontract providing life insurance protec-tion is distributed by a retirement planqualified under section 401(a) of the Codeand to the sale of property by a retirementplan to a plan participant or beneficiaryfor less than the fair market value of theproperty. This document also containsproposed amendments to the regulationsunder sections 79 and 83 relating, respec-tively, to employer-provided group-termlife insurance and life insurance contractstransferred in connection with the perfor-mance of services.

Section 402(a) provides generally thatany amount actually distributed to any dis-tributee by any employees’ trust describedin section 401(a) which is exempt from taxunder section 501(a) shall be taxable to thedistributee, in the taxable year of the dis-tributee in which distributed, under section72.

Section 1.402(a)–1(a)(1)(iii) of the cur-rent regulations provides, in general, that adistribution of property by a section 401(a)plan shall be taken into account by the dis-tributee at its “fair market value.” Section1.402(a)–1(a)(2) of the regulations pro-vides, in general, that upon the distributionof an annuity or life insurance contract, the“entire cash value” of the contract mustbe included in the distributee’s income.The current regulations do not define “fairmarket value” or “entire cash value” andquestions have arisen regarding the inter-action between these two provisions andwhether “entire cash value” includes areduction for surrender charges.

Prohibited Transaction Exemption(PTE) 77–8 (1977–2 C.B. 425), subse-quently amended and redesignated asProhibited Transaction Exemption 92–6,was jointly issued in 1977 by the Depart-ment of Labor and the Internal RevenueService. PTE 77–8 permits an employeebenefit plan to sell individual life insur-ance contracts and annuities to (1) a planparticipant insured under such policies,(2) a relative of such insured participantwho is the beneficiary under the contract,(3) an employer any of whose employeesare covered by the plan, or (4) anotheremployee benefit plan, for the cash sur-render value of the contracts, provided theconditions set forth in the exemption aremet.

The preamble to PTE 77–8 (citing Rev.Rul. 59–195; 1959–1 C.B. 18) notes that,for Federal income tax purposes, the valueof an insurance policy is not the same as,and may exceed, its cash surrender value,and that a purchase of an insurance pol-icy at its cash surrender value may there-fore be a purchase of property for less thanits fair market value. The regulations un-der section 402 do not address the conse-quences of a sale of property by a section401(a) plan to a plan participant or benefi-ciary for less than the fair market value of

2004-10 I.R.B. 566 March 8, 2004

that property. In this regard, the preambleto PTE 77–8 states that the Federal incometax consequences of such a bargain pur-chase must be determined in accordancewith generally applicable Federal incometax rules but that any income realized bya participant or relative of such partici-pant upon such a purchase under the con-ditions of PTE 77–8 will not be deemeda distribution from the plan to such par-ticipant for purposes of subchapter D ofchapter 1 of the Internal Revenue Code(i.e., sections 401 to 424 of the Code) re-lating to qualified pension, profit-sharing,and stock bonus plans.

Section 79 of the Code generally re-quires that the cost of group-term life in-surance coverage provided by an employeron the life of an employee that is in ex-cess of $50,000 of coverage be included inthe income of the employee. Pursuant to§1.79–1(b) of the regulations, under spec-ified circumstances, group-term life insur-ance may be combined with other benefits,referred to as permanent benefits. A per-manent benefit is defined in §1.79–0 of theregulations as an economic value extend-ing beyond one policy year (for example,a paid-up or cash surrender value) that isprovided under a life insurance policy. Theregulations further provide that certain fea-tures are not permanent benefits, including(a) a right to convert (or continue) life in-surance after group life insurance coverageterminates, (b) any other feature that pro-vides no economic benefit (other than cur-rent insurance protection) to the employee,and (c) a feature under which term life in-surance is provided at a level premium fora period of five years or less.

Permanent benefits provided to an em-ployee are subject to taxation under rulesdescribed in §1.79–1(d) of the regulations.Under those rules, the cost of the perma-nent benefits, reduced by the amount paidfor those benefits by the employee, is in-cluded in the employee’s income. The reg-ulations provide the cost of the permanentbenefits can be no less than an amount de-termined under a formula set forth in theregulations. One of the factors used in thisformula is “the net level premium reserveat the end of that policy year for all bene-fits provided to the employee by the policyor, if greater, the cash value of the policyat the end of that policy year.”

Section 83(a) provides that when prop-erty is transferred to any person in connec-

tion with the performance of services, theservice provider must include in gross in-come (as compensation income) the excessof the fair market value of the property,determined without regard to lapse restric-tions, and determined at the first time thatthe transferee’s rights in the property areeither transferable or not subject to a sub-stantial risk of forfeiture, over the amount(if any) paid for the property. Section1.83–3(e) of the regulations generally pro-vides that in the case of “a transfer of a lifeinsurance contract, retirement income con-tract, endowment contract, or other con-tract providing life insurance protection,only the cash surrender value of the con-tract is considered to be property.”

In T.D. 9092, 2003–46 I.R.B. 1055[68 FR 54336], published in the Fed-eral Register on September 17, 2003,relating to split-dollar life insurance ar-rangements, §1.83–3(e) was amended toadd the following sentence: “Notwith-standing the previous sentence, in the caseof a transfer of a life insurance contract,retirement income contract, endowmentcontract, or other contract providing lifeinsurance protection, or any undividedinterest therein, that is part of a split-dollarlife insurance arrangement (as defined in§1.61–22(b)(1) or (2)) that is entered into,or materially modified (within the mean-ing of §1.61–22(j)(2)), after September17, 2003, the policy cash value and allother rights under such contract (includingany supplemental agreements thereto andwhether or not guaranteed), other than cur-rent life insurance protection, are treatedas property for purposes of this section.”

Explanation of Provisions

A. Overview

These proposed amendments to theregulations under section 402(a) clarifythat the requirement that a distributionof property must be included in the dis-tributee’s income at fair market value iscontrolling in those situations where theexisting regulations provide for the inclu-sion of the entire cash value. Thus, theseproposed regulations provide that, in thosecases where a qualified plan distributesa life insurance contract, retirement in-come contract, endowment contract, orother contract providing life insuranceprotection, the fair market value of such a

contract (i.e., the value of all rights underthe contract, including any supplementalagreements thereto and whether or notguaranteed) is generally included in thedistributee’s income and not merely theentire cash value of the contracts.

These proposed regulations also pro-vide that if a qualified plan transfers prop-erty to a plan participant or beneficiary forconsideration that is less than the fair mar-ket value of the property, the transfer willbe treated as a distribution by the plan tothe participant or beneficiary to the ex-tent the fair market value of the distributedproperty exceeds the amount received inexchange. Thus, in contrast to the state-ment to the contrary in the preamble toPTE 77–8, any bargain element in the salewould be treated as a distribution undersection 402(a). It is also intended that anybargain element would be treated as a dis-tribution for other purposes of the Code,including the limitations on in-service dis-tributions from certain qualified retirementplans and the limitations of section 415.

These proposed regulations also amendthe current regulations under sections 79and 83 to clarify that fair market value isalso controlling with respect to life insur-ance contracts under those sections and,thus, that all of the rights under the con-tract (including any supplemental agree-ments thereto and whether or not guaran-teed) must be considered in determiningthat fair market value. With respect to sec-tion 79, these proposed regulations wouldamend §1.79–1(d) to remove the term cashvalue from the formula for determiningthe cost of permanent benefits and substi-tute the term fair market value. With re-spect to section 83, these proposed regu-lations would amend §1.83–3(e) generallyto apply the definition of property for newsplit-dollar life insurance arrangements toall situations involving the transfer of lifeinsurance contracts. Section 83(a) requiresthat the excess of the fair market value ofthe property over the amount paid for theproperty be included in income. The cur-rent definition of property outside the con-text of a split-dollar life insurance arrange-ment may lead taxpayers to believe thatit is appropriate upon receiving a transferof a life insurance contract to include onlyits cash surrender value on the day of thetransfer when, due to supplemental agree-ments, the fair market value of the trans-ferred property is much greater. The pur-

March 8, 2004 567 2004-10 I.R.B.

pose of the changes to these regulationsis to clarify that, unless specifically ex-cepted from the definition of permanentbenefits or fair market value, the value ofall features of a life insurance policy pro-viding an economic benefit to a serviceprovider (including, for example, the valueof a springing cash value feature) must beincluded in determining the employee’s in-come.

The proposed regulations will not af-fect the relief granted by the provisions ofSection IV, paragraph 4 of Notice 2002–8,2002–1 C.B. 398, to the parties to anyinsurance contract that is part of a pre-January 28, 2002, split-dollar life insur-ance arrangement. Also, consistent withthe effective date of the final split-dol-lar life insurance regulations, §1.61–22,these proposed regulations will not applyto the transfer of a life insurance contractwhich is part of a split-dollar life insur-ance arrangement entered into on or be-fore September 17, 2003, and not mate-rially modified after that date. However,taxpayers are reminded that, in determin-ing the fair market value of property trans-ferred under section 83, lapse restrictions(such as life insurance contract surrendercharges) are ignored.

B. Determination of Fair Market Value

As noted above, §1.402(a)–1(a)(1)(iii)does not define fair market value. In Rev.Rul. 59–195, the Service ruled that, in sit-uations similar to those in which an em-ployer purchases and pays the premiumson an insurance policy on the life of one ofits employees and subsequently sells suchpolicy, on which further premiums mustbe paid, the value of such policy for com-puting taxable gain in the year of purchaseshould be determined under the method ofvaluation prescribed in §25.2512–6 of theGift Tax Regulations. Under this method,the value of such a policy is not its cashsurrender value but the interpolated termi-nal reserve at the date of sale plus the pro-portionate part of any premium paid by theemployer prior to the date of the sale whichis applicable to a period subsequent to thedate of the sale. Section 25.2512–6 of theGift Tax Regulations also provides that if“because of the unusual nature of the con-tract such approximation is not reasonablyclose to the full value, this method may not

be used.” Thus, this method may not beused to determine the fair market value ofan insurance policy where the reserve doesnot reflect the value of all of the relevantfeatures of the policy.

In Q&A–10 of Notice 89–25, 1989–1C.B. 662, the IRS addressed the questionof what amount is includible in income un-der section 402(a) when a participant re-ceives a distribution from a qualified planthat includes a life insurance policy witha value substantially higher than the cashsurrender value stated in the policy. Thenotice noted the practice of using cash sur-render value as fair market value for thesepurposes and concluded that this practiceis not appropriate where the total policyreserves, including life insurance reserves(if any) computed under section 807(d), to-gether with any reserves for advance pre-miums, dividend accumulations, etc., rep-resent a much more accurate approxima-tion of the policy’s fair market value.

Since Notice 89–25 was issued, life in-surance contracts have been marketed thatare structured in a manner which results ina temporary period during which neithera contract’s reserves nor its cash surren-der value represent the fair market value ofthe contract. For example, some life insur-ance contracts may provide for large sur-render charges and other charges that arenot expected to be paid because they areexpected to be eliminated or reversed inthe future (under the contract or under an-other contract for which the first contract isexchanged), but this future elimination orreversal is not always reflected in the cal-culation of the contract’s reserve. If sucha contract is distributed prior to the elim-ination or reversal of those charges, boththe cash surrender value and the reserveunder the contract could significantly un-derstate the fair market value of the con-tract. Thus, in some cases, it would not beappropriate to use either the net surrendervalue (i.e., the contract’s cash value afterreduction for any surrender charges) or, be-cause of the unusual nature of the contract,the contract’s reserves to determine the fairmarket value of the contract. Accordingly,Q&A–10 of Notice 89–25 should not beinterpreted to provide that a contract’s re-serves (including life insurance reserves (ifany) computed under section 807(d), to-gether with any reserves for advance pre-miums, dividend accumulations, etc.) are

always an accurate representation of thecontract’s fair market value.

For example, it would not be appropri-ate to use a contract’s reserve or the netsurrender value of the contract as fair mar-ket value at the time of distribution if un-der that contract those amounts are sig-nificantly less than the aggregate of: (1)the premiums paid from the date of issuethrough the date of distribution, plus (2)any amounts credited (or otherwise madeavailable) to the policyholder with respectto those premiums (including interest, div-idends, and similar income items), or, inthe case of variable contracts, all adjust-ments made with respect to the premiumspaid during that period that reflect invest-ment return and the current market value ofsegregated asset accounts, minus (3) rea-sonable mortality charges and reasonablecharges (other than mortality charges) ac-tually charged from the date of issue tothe date of distribution and expected to bepaid.

The following example provides an il-lustration of a contract where it would notbe appropriate to use a contract’s reserveor its net surrender value as its fair marketvalue:

A participates in a plan intended tosatisfy the requirements of section 401(a).In Year 1, the plan acquires a life in-surance contract on A’s life that is not avariable contract and with a face amountof $1,400,000. In that year and for thenext four years, the plan pays premiumsof $100,000 per year on the contract.The contract provides for a surrendercharge that is fixed for the first five yearsof the contract and decreases ratably tozero at the end of ten years. The con-tract also imposes reasonable mortalityand other charges as defined by section7702(c)(3)(B)(i) and (ii) of the Code.

The contract provides a stated cash sur-render value for each of the first ten years(the first five years are guaranteed), as setforth in the table below. The reserves un-der the contract, including life insurancereserves and reserves for advance premi-ums, dividend accumulations, etc. (calcu-lated using the rules in section 807(d) ofthe Code) at the end of the fifth year are$150,000.

2004-10 I.R.B. 568 March 8, 2004

Year Premium Net Surrender Value

Cash ValueDetermined without

Reduction forSurrender Charges

1 $100,0002 $100,0003 $100,0004 $100,0005 $100,000 $100,000 $450,0006 $195,000 $475,0007 $290,000 $500,0008 $385,000 $525,0009 $480,000 $550,00010 $575,000 $575,000

At the end of Year 5, A retired and receiveda distribution of the insurance contract thatwas purchased on his life.

These regulations clarify that the con-tract is included in A’s income at its fairmarket value rather than the $100,000 cashsurrender value. Furthermore, A could nottreat the $150,000 reserve as of the end ofthe fifth year as the fair market value, be-cause this amount is less than the amounta willing buyer would pay a willing sellerfor such a contract, with neither party be-ing under a compulsion to buy and sell andboth having reasonable knowledge of therelevant facts.

Proposed Effective Dates

The amendments to §1.402(a)–1(a)(2)of the regulations are proposed to be ap-plicable to any distribution of a transfer-able retirement income, endowment, orother life insurance contract occurring onor after February 13, 2004. The amend-ment to §1.79–1 is proposed to be appli-cable to permanent benefits provided onor after February 13, 2004. The amend-ment to §1.83–3(e) is proposed to be ap-plicable to any transfer occurring on or af-ter February 13, 2004. The amendmentsto §1.402(a)–1(a)(1)(iii) of the regulationsare proposed to be applicable to any trans-fer of property by a plan to a plan partici-pant or beneficiary for less than fair mar-ket value where the transfer occurs on orafter the date of publication in the FederalRegister of the final regulations adoptingthese amendments. Taxpayers may relyupon these proposed regulations for guid-ance pending the issuance of final regula-tions.

Interim Guidance for Determining FairMarket Value

The IRS and the Treasury recognizethat taxpayers could have difficulty deter-mining the fair market value of a life in-surance contract after the clarification inthis preamble that Notice 89–25 should notbe interpreted to provide that a contract’sreserves (including life insurance reserves(if any) computed under section 807(d), to-gether with any reserves for advance pre-miums, dividend accumulations, etc.) arealways an accurate representation of thecontract’s fair market value. Accordingly,in connection with this guidance, the IRShas issued Rev. Proc 2004–16, 2004–10I.R.B. 559), which provides interim rulesunder which the cash value (without reduc-tion for surrender charges) of a life insur-ance contract distributed from a qualifiedplan may be treated as the fair market valueof that contract. The interim rules in Rev.Proc. 2004–16, permit the use of valuesthat should be readily available from in-surance companies, because the cash value(without reduction for surrender charges)is an amount that, in the case of a flex-ible insurance contract (including a vari-able contract), is generally reported in poli-cyholder annual statements, and in the caseof traditional insurance contracts, is fixedat issue and provided in the insurance con-tract.

Under those interim rules, a plan maytreat the cash value (without reduction forsurrender charges) as the fair market valueof a contract at the time of distribution pro-vided such cash value is at least as largeas the aggregate of: (1) the premiumspaid from the date of issue through thedate of distribution, plus (2) any amounts

credited (or otherwise made available)to the policyholder with respect to thosepremiums, including interest, dividends,and similar income items (whether underthe contract or otherwise), minus (3) rea-sonable mortality charges and reasonablecharges (other than mortality charges), butonly if those charges are actually chargedon or before the date of distribution andare expected to be paid.

In those cases where the contract is avariable contract (as defined in section807(d)) a plan may treat the cash value(without reduction for surrender charges)as the fair market value of the contractat the time of distribution provided suchcash value is at least as large as the ag-gregate of: (1) the premiums paid fromthe date of issue through the date of dis-tribution, plus (2) all adjustments madewith respect to those premiums duringthat period (whether under the contract orotherwise) that reflect investment returnand the current market value of segre-gated asset accounts, minus (3) reasonablemortality charges and reasonable charges(other than mortality charges), but onlyif those charges are actually charged onor before the date of distribution and areexpected to be paid.

Applying those interim rules to the ex-ample above, A could treat the cash value(without reduction for surrender charges)of $450,000 as the fair market value ofthe contract as of the end of the fifth year,because, in this example, that amount ex-ceeds the aggregate of the five $100,000premiums ($500,000), plus the amountscredited to A with respect to those premi-ums, minus the reasonable mortality andother charges actually imposed and ex-pected to be paid.

March 8, 2004 569 2004-10 I.R.B.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a significantregulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatory as-sessment is not required. It has also beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C. chap-ter 5) does not apply to these regulations,and, because the regulations do not im-pose a collection of information on smallentities, the Regulatory Flexibility Act (5U.S.C. chapter 6) does not apply. Pursuantto section 7805(f) of the Code, this noticeof proposed rulemaking will be submittedto the Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considera-tion will be given to any written (a signedoriginal and eight (8) copies) or electroniccomments that are submitted timely to theIRS. The IRS and Treasury Departmentspecifically request comments on the clar-ity of the proposed regulations and howthey may be made easier to understand.In addition, the Treasury Department andthe IRS specifically request comments re-garding the interim rules set forth in Rev.Proc. 2004–16 and proposals for appro-priate permanent methods for valuing lifeinsurance contracts when distributed fromqualified retirement plans and for valuingsuch contracts for purposes of sections 79and 83, including appropriate discountswhich take into account the probabilitythat contracts will be surrendered duringthe period during which surrender chargesapply. The IRS and the Treasury are alsoreviewing other types of contracts, suchas annuities, which have cash surrendervalue but where that cash surrender valuemay not reflect the fair market value of thecontracts. Accordingly, the IRS and theTreasury also request comments regard-ing the valuation of these other contracts.All comments will be available for publicinspection and copying.

A public hearing has been scheduledfor Wednesday, June 9, 2004, at 10 a.m.in the auditorium, Internal Revenue Build-ing, 1111 Constitution Avenue, NW, Wash-ington, DC. Due to building security pro-

cedures, visitors must use the main build-ing entrance on Constitution Avenue. Inaddition, all visitors must present photoidentification to enter the building. Be-cause of access restrictions, visitors willnot be admitted beyond the immediate en-trance area more than 30 minutes beforethe hearing starts. For more informationabout having your name placed on the listto attend the hearing, see the “FOR FUR-THER INFORMATION CONTACT” sec-tion of this preamble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wish topresent oral comments at the hearing mustsubmit written (signed original and eight(8) copies) or electronic comments and anoutline of the topics to be discussed andthe time to be devoted to each topic byWednesday, May 19, 2004. A period of10 minutes will be allotted to each personfor making comments. An agenda show-ing the scheduling of the speakers will beprepared after the deadline for receivingoutlines has passed. Copies of the agendawill be available free of charge at the hear-ing.

Drafting Information

The principal authors of these regu-lations are Robert M. Walsh, EmployeePlans, Tax Exempt and Government En-tities Division, and Linda Marshall, Of-fice of Division Counsel/Associate ChiefCounsel (Tax Exempt and GovernmentEntities). However, other personnel fromthe IRS and Treasury participated in thedevelopment of these regulations.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is proposedto 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 * * *Par. 2. Section 1.79–1, paragraph

(d)(3) is revised to read as follows:

§1.79–1 Group-term lifeinsurance—general rules.

* * * * *

(d) * * *(3) Formula for determining deemed

death benefit. The deemed death benefit(DDB) at the end of any policy year forany particular employee is equal to:

R/Ywhere—R is the net level premium reserve at

the end of that policy year for all benefitsprovided to the employee by the policyor, if greater, the fair market value of thepolicy at the end of that policy year; and

Y is the net single premium for insur-ance (the premium for one dollar of paid-up, whole life insurance) at the employee’sage at the end of that policy year.

* * * * *Par. 3. In §1.83–3, paragraph (e), the

last two sentences are revised to read asfollows:

§1.83–3 Meaning and use of certainterms.

* * * * *(e) * * * In the case of a transfer of a life

insurance contract, retirement income con-tract, endowment contract, or other con-tract providing life insurance protection,or any undivided interest therein, the pol-icy cash value and all other rights undersuch contract (including any supplemen-tal agreements thereto and whether or notguaranteed), other than current life insur-ance protection, are treated as property forpurposes of this section. However, in thecase of the transfer of a life insurance con-tract, retirement income contract, endow-ment contract, or other contract providinglife insurance protection, which was partof a split-dollar arrangement (as definedin §1.61–22(b)) entered into (as defined in§1.61–22(j)) on or before September 17,2003, and which is not materially mod-ified (as defined in §1.61–22(j)(2)) afterSeptember 17, 2003, only the cash surren-der value of the contract is considered tobe property.

* * * * *Par. 4. Section 1.402(a)–1 is amended

by:1. Revising paragraph (a)(1)(iii).2. Revising the last two sentences of

paragraph (a)(2).The revisions read as follows:

2004-10 I.R.B. 570 March 8, 2004

§1.402(a)–1 Taxability of beneficiaryunder a trust which meets the requirementsof section 401(a).

(a) * * * (1) * * *(iii) Except as provided in paragraph

(b) of this section, a distribution of prop-erty by a trust described in section 401(a)and exempt under section 501(a) shall betaken into account by the distributee at itsfair market value. In the case of a dis-tribution of a life insurance contract, re-tirement income contract, endowment con-tract, or other contract providing life in-surance protection, or any interest therein,the policy cash value and all other rightsunder such contract (including any supple-mental agreements thereto and whether ornot guaranteed) are included in determin-ing the fair market value of the contract. Inaddition, where a trust described in section401(a) and exempt under section 501(a)transfers property to a plan participant orbeneficiary in exchange for considerationand where the fair market value of theproperty transferred exceeds the amountreceived by the trust, then the excess ofthe fair market value of the property trans-ferred by the trust over the amount re-ceived by the trust is treated as a distribu-tion by the trust to the distributee.

* * * * *(2) * * * If, however, the contract dis-

tributed by such exempt trust is a life insur-ance contract, retirement income contract,endowment contract, or other contract pro-viding life insurance protection, the fairmarket value of such contract at the timeof distribution must be included in the dis-tributee’s income in accordance with theprovisions of section 402(a), except to theextent that, within 60 days after the distri-bution of such contract, all or any portionof such value is irrevocably converted intoa contract under which no part of any pro-ceeds payable on death at any time wouldbe excludable under section 101(a) (relat-ing to life insurance proceeds). If the con-tract distributed by such trust is a transfer-able annuity contract, a life insurance con-tract, a retirement income contract, endow-ment contract, or other contract provid-ing life insurance protection (whether ornot transferable), then notwithstanding thepreceding sentence, the fair market valueof the contract is includible in the distribu-tee’s gross income, unless within such 60

days such contract is also made nontrans-ferable.

* * * * *

Mark E. Matthews,Deputy Commissioner forServices and Enforcement.

(Filed by the Office of the Federal Register on February 13,2004, 8:45 a.m., and published in the issue of the FederalRegister for February 17, 2004, 69 F.R. 7384)

Notice of ProposedRulemaking and Notice ofPublic Hearing

Student FICA Exception

REG–156421–03

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemakingand notice of public hearing.

SUMMARY: This document contains pro-posed regulations that provide guidanceregarding the meaning of “school, college,or university” and “student” for purposesof the student FICA exception under sec-tions 3121(b)(10) and 3306(c)(10)(B) ofthe Internal Revenue Code (Code). Inaddition, this document contains proposedregulations that provide guidance on themeaning of “school, college, or univer-sity” for purposes of the FICA exceptionunder section 3121(b)(2) for domesticservice performed in a local college club,or local chapter of a college fraternity orsorority by a student. This document alsoprovides a notice of public hearing onthese proposed regulations.

DATES: Written and electronic commentsmust be received by May 25, 2004. Out-lines of topics to be discussed at the publichearing scheduled for June 16, 2004, mustbe received by May 25, 2004.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–156421–03), room5703, Internal Revenue Service, POB7604, Ben Franklin Station, Washing-ton, DC 20044. Submissions may behand delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to: CC:PA:LPD:PR (REG–156421–03),

Courier’s Desk, Internal Revenue Service,1111 Constitution Avenue, NW, Wash-ington, DC. Alternatively, taxpayers maysubmit comments electronically, via theIRS Internet site at: www.irs.gov/regs.

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, John Richards of the Office ofAssociate Chief Counsel (Tax Exempt andGovernment Entities), (202) 622–6040;concerning submissions of comments,the hearing and/or to be placed on thebuilding access list to attend the hear-ing, Treena Garret, (202) 622–7180 (nottoll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposedamendments to 26 CFR part 31 under sec-tions 3121(b)(10) and 3306(c)(10)(B) ofthe Internal Revenue Code. These sectionsexcept from “employment” for Federal In-surance Contributions Act (FICA) taxpurposes and Federal Unemployment TaxAct (FUTA) purposes, respectively, ser-vice performed in the employ of a school,college, or university if such service isperformed by a student who is enrolledand regularly attending classes at suchschool, college, or university. In addition,this document contains proposed amend-ments to 26 CFR part 31 under section3121(b)(2). This section excepts fromemployment for FICA purposes domesticservice performed in a local college club,or local chapter of a college fraternity orsorority, by a student who is enrolled andis regularly attending cases at a school,college, or university.

Explanation of Provisions

A. Current Law

Section 3121(b)(10) of the Code (thestudent FICA exception) excepts from thedefinition of employment for FICA pur-poses services performed in the employof a school, college, or university (SCU)(whether or not that organization is ex-empt from income tax), or an affiliated or-ganization that satisfies section 509(a)(3)of the Code in relation to the SCU (“re-lated section 509(a)(3) organization”), ifthe service is performed by a student who

March 8, 2004 571 2004-10 I.R.B.

is enrolled and regularly attending classesat that SCU. Section 3306(c)(10)(B) con-tains a similar student exception. Thus, thestudent FICA exception applies to servicesonly if both the “SCU status” and “studentstatus” requirements are met. This regu-lation deals with both the SCU status andstudent status requirements.

To satisfy the SCU status requirement,the employer for whom the employeeperforms services (the common law em-ployer) must be either a SCU or a relatedsection 509(a)(3) organization. If a stu-dent is not employed by a SCU or a relatedsection 509(a)(3) organization, then thestudent FICA exception is not available.See e.g., Rev. Rul. 69–519, 1969–2 C.B.185 (holding that students attending an ap-prenticeship school established pursuantto an agreement between a union and acontractors’ association were employeesof the participating contractors to whomthe students were assigned.) Section31.3121(b)(10)–2(d) of the EmploymentTax Regulations provides that the term“SCU” for purposes of the student FICAexception is to be construed in its “com-monly or generally accepted sense.”

To satisfy the student status require-ment, the employee must meet threerequirements. First, under section3121(b)(10), the employee must be astudent enrolled and regularly attendingclasses at the SCU employing the student.Second, the employee must be pursuinga course of study at the SCU employingthe student. Third, the employee must be“[a]n employee who performs services inthe employ of a [SCU] as an incident toand for the purpose of pursuing a courseof study at such [SCU] . . . .” Reg.§31.3121(b)(10)–2(c). The IRS’s positionhas been that whether services are inci-dent to and for the purpose of pursuing acourse of study depends on two factors:the employee’s course workload and thenature of the employee’s employment re-lationship with the employer. See e.g.,Rev. Proc. 98–16, 1998–1 C.B. 403; Rev.Rul. 78–17, 1978–1 C.B. 306.

B. Need for Regulations

Treasury and IRS have determined thatit is necessary to provide additional clar-ification of the terms “SCU” and “stu-

dent who is enrolled and regularly attend-ing classes” as they are used in section3121(b)(10). In recent years the ques-tion has arisen whether the performanceof certain services that are in the natureof on the job training are excepted fromemployment under the student FICA ex-ception. This issue was presented with re-spect to medical residents and interns inState of Minnesota v. Apfel, 151 F.3d 742(8th Cir. 1998), which concluded that ser-vices performed by medical residents andinterns are not employment for social secu-rity purposes. The question also applies toservices performed by employees in otherfields, particularly regulated fields, whereon the job training is often required to gainlicensure. Guidance is needed to addresssituations where the performance of ser-vices and pursuit of the course of study arenot separate and distinct activities, but in-stead are to some extent intermingled.

Section 3121(a) defines “wages” as“all remuneration for employment . . . .”Under section 3121(b), “employment”means “any service . . . performed. . . by an employee for the person em-ploying him.” The Social Security Actprovides nearly identical definitions of“wages” and “employment.” 42 U.S.C.sections 409(a)(1)(I); 410(a). “The verywords ‘any service . . . performed . . .for his employer,’ with the purpose ofthe Social Security Act in mind, importa breadth of coverage.” Social SecurityBoard v. Nierotko, 327 U.S. 358, 365(1946). The courts have generally foundthat the terms “wages” and “employment”as used in both the social security benefitsand FICA tax provisions are to be inter-preted broadly. State of New Mexico v.Weinberger, 517 F.2d 989, 993 (10th Cir.1995); Mayberry v. United States, 151F.3d 855, 860 (8th Cir. 1998); Moorheadv. United States, 774 F.2d 936, 941 (9th

Cir. 1985); Abrahamsen v. United States,228 F.3d 1360, 1364 (Fed. Cir. 2000).The broad interpretation of these termsresults from the underlying purpose of theSocial Security Act, namely, “to providefunds through contributions by employerand employee for the decent support of el-derly workmen who have ceased to labor.”Nierotko, 327 U.S. at 364. See also St.Luke’s Hospital v. United States, 333 F.2d157, 164 (6th Cir. 1964) (“[I]n dealing

with the beneficent purposes of the SocialSecurity Act, this court generally favorsthat interpretation of statutory provisionswhich calls for coverage rather than ex-clusion.”).

Wage and employment questions affectboth social security benefits entitlementand FICA taxes which fund the socialsecurity trust fund. Except in unusual cir-cumstances, the Social Security Act, andthe Internal Revenue FICA provisions, areto be read in pari materia. United Statesv. Cleveland Indians Baseball Co., 532U.S. 200, 213 (2001). Thus, whether cer-tain service is employment affects not justFICA taxation, but also social securitybenefits eligibility and level of benefits.Moreover, the integrity of the social se-curity system requires symmetry betweenservice that is considered employmentfor social security benefits purposes andemployment for FICA taxation purposes.

Resolution of this issue has significantsocial security benefits and FICA tax im-plications. The case of medical residentsillustrates the possible effect on individ-uals and the social security system as awhole of excepting service in the nature ofon the job training from employment forsocial security benefits and FICA tax pur-poses. The Social Security Administration(SSA) reported to the General AccountingOffice (GAO) that “[b]ecause many resi-dents are married and have children andwork as residents for up to 8 years, anexemption from Social Security coveragecould have a very significant effect on theirpotential disability benefits or their fam-ily’s survivor benefits.” Moreover, SSAreported that if medical residents were de-termined to be students for purposes of thestudent FICA exception, 270,000 medicalresidents would lose some coverage overthe next ten years (2001 through 2010).1

This regulation addresses two issues:(1) whether an organization carrying oneducational activities in connection withthe performance of services is a SCUwithin the meaning of section 3121(b)(10),and (2) whether certain employees per-forming services in the nature of on the jobtraining have the status of a student whois enrolled and regularly attending classesfor purposes of section 3121(b)(10).

1 GAO Report B–284947, Health, Education, and Human Services Division, Social Security: Coverage For Medical Residents (August 31, 2000).

2004-10 I.R.B. 572 March 8, 2004

C. Whether an Organization Carrying OnEducational Activities Is a SCU

Organizations providing on the jobtraining typically carry on both nonedu-cational and educational activities. Theissue is whether organizations carryingon both noneducational and educationalactivities are SCUs within the meaning ofsection 3121(b)(10). For example, orga-nizations such as hospitals typically carryon both educational and noneducationalactivities. In United States v. Mayo Foun-dation, 282 F. Supp. 2d 997 (D. Minn.2003), the United States argued, consis-tent with the position it has maintainedadministratively, that the primary purposeof an organization determines whetherthe organization is a SCU for purposes ofthe student FICA exception. The courtrejected this argument, finding it inconsis-tent with the common sense standard. Thecourt stated, “If the [IRS] had intended theterm ‘SCU’ in §3121(b)(10) to have thesame scope and meaning as ‘educationalinstitution’ (found in §170(b)(1)(A)(ii). . . ), it could have clearly and explicitlygiven the phrase such scope and meaningby cross-referencing those Code provi-sions and their implementing regulations.”Although Treasury and IRS disagree withthe interpretation of the district court, theSecretary understands and is respondingto the court’s view by more clearly incor-porating the primary purpose standard inregulations.

This regulation provides that the char-acter of an organization as a SCU or notas a SCU is determined by its primaryfunction. The primary function standardis consistent with the language of section3121(b)(10) and the existing regulationsthereunder, and is consistent with the in-tended scope of the student FICA excep-tion as reflected in the legislative historyaccompanying the Social Security Amend-ments of 1939 and 1950.

Section 170(b)(1)(A) of the Code de-fines various classes of organizations forcharitable deduction purposes. All of theorganizations have some combination ofcharitable, educational, religious and/orcultural purposes. The definitions dis-tinguish them into categories based onvarious criteria. One such class definedin section 170(b)(1)(A)(ii) is for any “ed-ucational organization which normallymaintains a regular faculty and curriculum

and normally has a regularly enrolled bodyof pupils or students in attendance at theplace where its educational activities areregularly carried on.”

Section 1.170A–9(b)(1) of the IncomeTax Regulations provides:

An educational organization is de-scribed in section 170(b)(1)(A)(ii) ifits primary function is the presentationof formal instruction and it normallymaintains a regular faculty and cur-riculum and normally has a regularlyenrolled body of pupils or students inattendance at the place where its edu-cational activities are regularly carriedon. The term includes institutions suchas primary, secondary, preparatory, orhigh schools, and colleges and univer-sities. It includes Federal, State, andother public-supported schools whichotherwise come within the definition. Itdoes not include organizations engagedin both educational and noneducationalactivities unless the latter are merelyincidental to the educational activities.A recognized university which inciden-tally operates a museum or sponsorsconcerts is an educational organiza-tion within the meaning of section170(b)(1)(A)(ii). However, the oper-ation of a school by a museum doesnot necessarily qualify the museum asan educational organization within themeaning of this subparagraph.

Thus, in order to qualify as an ed-ucational organization under section170(b)(1)(A)(ii), it is not enough that theorganization carries on educational activ-ities; instead, the organization’s primaryfunction must be to carry on educationalactivities.

The section 170(b)(1)(A)(ii) stan-dard applies to the organization as awhole, an approach that is consistent with§31.3121(b)(10)–2(b) of the regulations,which provides that one of “[t]he statutorytests [is] the character of the organizationin the employ of which the services areperformed as a [SCU] . . . .” Thus, thecharacter of the organization determineswhether it is a SCU, not merely whetherthe organization carries on some educa-tional activities. Further, section 3121(b)provides that “the term ‘employment’means any service . . . performed . . .by an employee for the person employinghim,” and §31.3121(d)–2 of the regula-tions provides that “every person is an

employer if he employs one or more em-ployees.” Under section 7701(a)(1), theterm “person” means any individual, trust,estate, association, or corporation. Thus,the character of the person employing theemployee—the legal entity recognized forfederal tax purposes—determines whetherthe SCU status requirement is met, notmerely the character of a division or func-tion of the employer.

In addition, the primary function stan-dard reaches a result consistent withthe “commonly or generally acceptedsense” standard of the existing regula-tion (§31.3121(b)(10)–2(d)). In commonparlance, the term “hospital” is used todescribe an organization with the pri-mary function of caring for patients. Theterm “museum” is used to describe anorganization with the primary functionof maintaining a collection and display-ing it to the public in a way that willeducate them about the collection and re-lated concepts. A hospital or a museummay conduct educational activities, evenclasses or possibly even certificate or de-gree programs, but the activities whichdefine them in the public mind are patientcare and maintenance and display of acollection. An organization bears the label“school” when its primary function is theconduct of classes for an identified setof students leading to the awarding of acredential demonstrating mastery of somesubject matter.

Finally, defining the term “SCU” to in-clude institutions whose primary functionis other than to carry on educational ac-tivities could lead to expansion of the stu-dent FICA exception beyond what Con-gress intended. When Congress enactedthe student FICA exception in 1939, andamended it in 1950, it contemplated thatthe exception would be limited in scope.The House Report to the Social SecurityAmendments of 1939 states the followingin describing the purpose of the studentFICA and other exceptions:

In order to eliminate the nuisance ofinconsequential tax payments, the billexcludes certain services performedfor fraternal benefit societies and othernonprofit institutions exempt from in-come tax, and certain other groups.While the earnings of a substantialnumber of persons are excluded bythis recommendation, the total amountof earnings involved is undoubtedly

March 8, 2004 573 2004-10 I.R.B.

very small. . . . The intent of thisamendment is to exclude those personsand those organizations in which theemployment is part-time or intermit-tent and the total amount of earningsis only nominal, and the payment oftax is inconsequential and a nuisance.The benefit rights built up are also in-consequential. Many of those affected,such as students and the secretaries oflodges, will have other employmentwhich will enable them to develop in-surance benefits. This amendment,therefore, should simplify the admin-istration for the worker, the employer,and the Government.

H. R. Rep. No. 728, 76th Cong. 1st Sess.(1939), 1939–2 C.B. 538, 543. The Sen-ate Report uses similar language. S. Rep.No. 734, 76th Cong. 1st Sess. 19 (1939),1939–2 C.B. 565, 570.

The House Report to the Social Secu-rity Amendments of 1950 continued to de-scribe the exception as a matter of admin-istrative convenience not meaningfully af-fecting social security benefits:

The bill would continue to exclude ser-vice performed for nominal amountsin the employ of tax-exempt nonprofitorganizations,2 service performed bystudent nurses and internes [sic],3 andservice performed by students in theemploy of colleges and universities.These exclusions simplify administra-tion without depriving any significantnumber of people of needed protection.

H. R. Rep. No. 1300, 81st Cong. 1st

Sess. 12 (1949). The Senate Report con-tains similar language. S. Rep. No. 1669,81st Cong. 2d Sess. 15 (1950). Defining“SCU” to include organizations whose pri-mary purpose is not to carry on educationalactivities would create a broad exceptioncontrary to what Congress intended. Ac-cordingly, the term “SCU” should not beinterpreted so broadly as to include orga-nizations whose primary function is otherthan to carry on educational activities.

D. Whether Certain Employees AreStudents

This regulation clarifies who is astudent enrolled and regularly attend-ing classes for purposes of section

3121(b)(10). The existing regulationsat §31.3121(b)(10)–2(c) provide that anemployee will have the status of studentonly if the services are performed “as anincident to and for the purpose of pursuinga course of study” at the SCU. Thus, toqualify for the exception, the individual’spredominant relationship with the SCUmust be as a student, and only secondarilyor incidentally as an employee.

Where an individual’s employment andeducational activities are separate and dis-tinct, the extent and nature of the respec-tive activities determine whether the em-ployment or student aspect of the relation-ship with the SCU is predominant. SeeRev. Proc. 98–16. In the vast major-ity of cases the service and the course ofstudy are separate and distinct activities;for example, the biology major’s servicein the cafeteria is unrelated to his course ofstudy. By contrast, some employees’ ser-vices are arguably part of a course of study;for example, the services of a medical res-ident are necessary to receive a certificatein a medical specialty. The standards inRev. Proc. 98–16—whether the employeehas at least a half-time course workload,and whether the employee is eligible to re-ceive certain employee benefits—are inad-equate to determine student status in suchcircumstances. Where the services per-formed by the individual for the SCU arealso earning the individual credit towardan educational credential, the determina-tion of whether the employment relation-ship is the predominant relationship withthe SCU must be based on other factors.This regulation is intended to provide stan-dards to determine student status in suchcases.

This regulation is intended to furtherCongress’s intent regarding those eligiblefor the student FICA exception as reflectedby the legislative history to the Social Se-curity Amendments of 1939. Consistentwith Congress’s intent, the student FICAexception covers individuals earning smallamounts who are expected to accumulatesocial security benefits through future em-ployment that will follow the completionof their education. Thus, in the typicalcase, a student will earn a modest amountwhile devoting his primary time and atten-tion to classes and study.

This regulation provides clarification inthree respects. First, it describes whatthe individual must be doing to be con-sidered enrolled and regularly attendingclasses. In order to be a class, the ac-tivity must be more than an activity thatgives the individual an opportunity to ac-quire new skills and knowledge. It mustinvolve instructional activities, and be ledby a knowledgeable faculty member fol-lowing an established curriculum for iden-tified students. Classes can include muchmore than traditional classroom-based in-struction, but the faculty leadership, the setcurriculum, and the prescribed time frameare essential.

Second, this regulation provides stan-dards for determining whether an em-ployee is pursuing a course of study.The regulation provides that one or morecourses conducted by a SCU the comple-tion of which fulfills the requirements toreceive an educational credential grantedby the SCU is a course of study.

Third, this regulation provides stan-dards for determining whether an em-ployee’s services are incident to and forthe purpose of pursuing a course of study.The regulation provides in general thatwhether the employee’s services are inci-dent to and for the purpose of pursuing acourse of study depends on all the factsand circumstances. This determination ismade by comparing the educational aspectof the relationship between the employerand the employee with the service aspectof the relationship. The regulation pro-vides that the employee’s course workloadis used to measure the scope of the ed-ucational aspect of the relationship. Arelevant factor is the employee’s courseworkload relative to a full-time courseworkload. The regulation further providesthat where an employee has the status ofa career employee, the services performedby the employee are not incident to and forthe purpose of pursuing a course of study.

This regulation specifies various as-pects of an individual’s employmentrelationship with the SCU which causeconclusively the individual to have thestatus of a “career employee.”

This regulation provides that the crite-ria used to identify an employee as havingthe status of a career employee are (1) the

2 The general exception from employment for services performed for non-profit organizations was repealed in 1983 by Public Law 98–21, section 102(b).

3 The Social Security Amendments of 1965 repealed the student intern exception under §3121(b)(13). See discussion infra.

2004-10 I.R.B. 574 March 8, 2004

employee’s hours worked, (2) whether theemployee is a “professional employee,”(3) the employee’s terms of employment,and (4) whether the employee is requiredto be licensed in the field in which the em-ployee is performing services. The hoursworked criteria reflects Congressional in-tent to limit the student FICA exceptionto services performed by those individualswho are predominantly students. Em-ployees who are working enough hoursto be considered full-time employees (40hours or more per week) have filled theconventional measure of available timewith work, and not study. Even if they arecapable of balancing a full-time job with aheavy course load, they are earning wagesat a level that exceeds Congress’s intendedscope for the student FICA exception. TheIRS’s long-standing position is that hoursworked is a relevant factor in determiningwhether an employee has student status.Rev. Rul. 78–17, 1978–1 C.B. 306 (hold-ing that whether an employee has studentstatus is determined by hours worked rel-ative to credits taken); Rev. Rul. 66–285,1966–2 C.B. 455 (holding that services ofan employee employed full-time are notincident to and for the purpose of pursu-ing a course of study). Rev. Rul. 85–74,1985–1 C.B. 331, dealing with the studentnurse exception, uses an hours workedstandard. The student nurse exception andthe student FICA exception share the samelegislative history. The IRS’s use of anhours worked standard was found to be areasonable interpretation of the legislativehistory in Johnson City Medical Centerv. United States, 999 F.2d 973 (6th Cir.1993).

The regulation provides that a “pro-fessional employee” has the status of acareer employee, and thus his servicesare not incident to a course of study. Thestandards defining a professional em-ployee for purposes of this regulationclosely follow existing Department of La-bor standards defining certain professionalemployees. See 29 U.S.C. 213(a); and 29CFR 541.3(a)(1), (b), (c), (d). Section213(a) and the regulations thereunder pro-vide that certain employees are exemptfrom the minimum wage and overtimelaws. This regulation provides that a pro-fessional employee for purposes of thestudent FICA exception is an employeewhose primary duty consists of the perfor-mance of services requiring knowledge of

an advanced type in a field of science orlearning, whose work requires the consis-tent exercise of discretion and judgmentin its performance, and whose work ispredominantly intellectual and varied incharacter. The services of employeesexhibiting these characteristics are notincident to a course of study.

This regulation provides that an em-ployee’s terms of employment may alsocause an employee to have the status of acareer employee. A list of terms is pro-vided, any one of which causes the em-ployee to have the status of a career em-ployee. On the list are terms of employ-ment that provide for eligibility to receivecertain employee benefits typically associ-ated with career employment, such as eli-gibility to participate in certain types of re-tirement plans or tuition reduction arrange-ments. The notion of a career employeestandard based on eligibility to receive cer-tain fringe benefits was recommended bythe higher education community for pur-poses of guidance that was issued in Rev.Proc. 98–16, and Treasury and IRS believeit is an appropriate standard to use for pur-poses of identifying employees whose ser-vices are not incident to and for the pur-pose of pursuing a course of study. Rev.Proc. 98–16 provides that career employeestatus precludes application of the safe har-bor standard, but leaves the possibility thatthe employee could have the status of astudent based on all the facts and circum-stances. In contrast, this regulation pro-vides that an employee considered as hav-ing the status of a career employee basedon eligibility to receive certain employeebenefits does not have the status of a stu-dent for purposes of the student FICA ex-ception.

Finally, this regulation provides thatan employee who must be licensed by agovernment entity in order to perform acertain function has the status of a careeremployee. An employee who is requiredto be licensed to perform the services musthave received sufficient prior instructionand demonstrated sufficient mastery ofthe activity to receive the license. Fur-thermore, licensed workers typically earnmore than a modest amount for their workto reflect their expertise. As discussed,the legislative history indicates that thestudent FICA exception is intended tocover individuals earning a small amountof wages prior to entry into meaningful

post-education employment. The excep-tion is not intended to cover an individualwho has developed enough expertise tobe working in a field where he or she isalready licensed and has the capacity toearn substantial wages.

The IRS requests comments on the cri-teria used to identify an employee as hav-ing the status of a career employee. In par-ticular, the IRS requests comments on thelicensure criterion and whether this crite-rion should be further refined or clarified.

IRS and Treasury believe that Congresshas shown the specific intent to provide so-cial security coverage to individuals whowork long hours, serve as highly skilledprofessionals, and typically share some orall of the terms of employment of careeremployees, particularly medical residentsand interns. The Social Security Amend-ments of 1939 added section 1426(b)(13)to the Code (later redesignated section3121(b)(13)), which provided an excep-tion from social security coverage for“service performed as an intern in the em-ploy of a hospital by an individual who hascompleted a 4 years’ course in a medicalschool chartered or approved pursuant toState law.” The House Report accompa-nying the legislation provides:

Paragraph 13 excepts service per-formed as a student nurse in the employof a hospital or a nurse’s training schoolby an individual who is enrolled and isregularly attending classes . . . ; andservice performed as an interne [sic] (asdistinguished from a resident doctor)in the employ of a hospital by an indi-vidual who has completed a four years’course in a medical school chartered orapproved pursuant to State law.

H. R. Rep. No. 728, 76th Cong. 1st Sess.49 (1939), 1939–2 C.B. 538, 550–51 (em-phasis added); see also S. Rep. No. 734,76th Cong. 1st Sess. 58, 1939–2 C.B. 565,578. Thus, the services of medical internswere excepted from FICA, but the servicesof resident doctors were not.

Twenty-five years later, in St. Luke’sHospital v. United States, 333 F.2d 157(6th Cir. 1964), the Sixth Circuit con-firmed that section 3121(b)(13) of theCode applied to medical interns, but thatmedical residents were not specificallyexcepted from social security coverage.St. Luke’s claimed a refund of FICA taxesfor the years 1953 through 1958 based onthe student intern exception under sec-

March 8, 2004 575 2004-10 I.R.B.

tion 3121(b)(13). The refund claims werecomputed based upon the remunerationpaid to medical school graduates in theirsecond or subsequent year of clinical train-ing. The court held that the services ofmedical residents were not excluded underthe medical intern exception.

In 1965, one year after the St. Luke’sdecision, Congress amended the Code torepeal the special exemption for medicalinterns. The legislative history underlyingthe Social Security Amendments of 1965(Public Law 89–97) suggests that Con-gress intended that medical interns be cov-ered by FICA just as medical residents al-ready were. The House Report states:

Coverage would also be extended toservices performed by medical and den-tal interns. The coverage of services asan intern would give young doctors anearlier start in building up social secu-rity protection and would help many ofthem to become insured under the pro-gram at the time when they need thefamily survivor and disability protec-tion it provides. This protection is im-portant for doctors of medicine who,like members of other professions, inthe early years of their practice, may nototherwise have the means to provide ad-equate survivorship and disability pro-tection for themselves and their fami-lies. Interns would be covered on thesame basis as other employees workingfor the same employers, beginning onJanuary 1, 1966.

H. R. Rep. No. 213, 89th Cong. 1st Sess.95 (1965).

The Senate Report states:Section 3121(b)(13) of the InternalRevenue Code of 1954 excludes fromthe term ‘employment,’ and thus fromcoverage under the [FICA], servicesperformed as an intern in the employof a hospital by an individual who hascompleted a 4-year course in a medicalschool . . . . Section 311(b)(5) of thebill amends section 3121(b)(13) so asto remove this exclusion. The effect ofthis amendment is to extend coverageunder the [FICA] to such interns unlesstheir services are excluded under pro-visions other than section 3121(b)(13).Thus, the services of an intern are cov-ered if he is employed by a hospitalwhich is not exempt from income tax

as an organization described in section501(c)(3) of the Code.

S. Rep. No. 404, 89th Cong. 1st Sess.237–38 (1965). The last sentence makesindirect reference to the exclusion fromFICA for services performed for exemptorganizations under section 3121(b)(8)(B)of the 1954 Code. That exclusion was re-pealed by the Social Security Amendmentsof 1983 (Public Law 98–21). Nothing inthe legislative history indicates that Con-gress believed interns (or residents, whowere even further along in their medicalcareers than interns) were eligible for thestudent FICA exception.

In addition to revoking the medicalintern exception, section 311 of the SocialSecurity Amendments of 1965, entitled,“Coverage for Doctors of Medicine,”changed the law in two other ways af-fecting medical doctors. First, section1402(c)(5) of the 1954 Code was amendedto eliminate the exception for physicianservices from the definition of “trade orbusiness,” thus subjecting these servicesto self-employment tax. Second, section3121(b)(6)(C)(iv) of the 1954 Code, whichprovided an exception from the definitionof employment for “service performedin the employ of the United States if theservice is performed by any individual asan employee included under § 5351(2)of title 5, [U.S.C.], (relating to certaininterns, student nurses, and other studentemployees of hospitals of the FederalGovernment),” was amended by adding,“other than as a medical or dental intern ora medical or dental resident in training.”These provisions, taken together, indicateCongress’s intent to create a scheme un-der which all medical doctors are coveredunder the social security system, whetheror not they are still in training, whether ornot they are self-employed, or whether ornot they work for the federal government.

E. Effect on Rev. Proc. 98–16

Several years ago, representatives ofhigher education asked the IRS and Trea-sury for guidance on the application ofthe student FICA exception. Colleges anduniversities were particularly interestedin guidance relating to students who hadon-campus jobs that were completely sep-arate and distinct from their course work.In response, the IRS issued Rev. Proc.

98–16, which sets forth standards for de-termining whether services performed bystudents in the employ of certain insti-tutions of higher education qualify forthe exception from FICA tax providedunder section 3121(b)(10). The revenueprocedure provided answers to many long-standing questions.

The revenue procedure addresses dif-ferent circumstances than those prompt-ing the need for the clarifications providedin this proposed regulation. It provides asafe harbor that applies where the student’scourse work and the student’s employmentare separate activities, and are not inter-mingled. In clarifying the regulations in-terpreting section 3121(b)(10), the IRS andTreasury fully intend to retain the safe har-bor in the revenue procedure. However,several discrete aspects of the safe harborneed to be updated to align with the pro-posed regulations. Thus, in conjunctionwith this notice of proposed rulemaking,the IRS is suspending Rev. Proc. 98–16and proposing to replace it with a new rev-enue procedure that is revised in limitedways to align with the proposed regula-tions. See Notice 2004–12, to be publishedin I.R.B. 2004–10 (March 8, 2004). Tax-payers may rely on the proposed revenueprocedure until final regulations and a fi-nal revenue procedure are issued. Also, thepublic is invited to comment on the pro-posed revenue procedure.

F. Related Proposed Amendments

Section 3306(c)(10)(B) of the Code ex-cepts from “employment” for FUTA taxpurposes services performed by a studentwho is enrolled and regularly attendingclasses at a SCU. This regulation providesthat the standards that apply in determin-ing whether an employer is a SCU andwhether an employee is a student for pur-poses of section 3121(b)(10) also applyfor purposes of section 3306(c)(10)(B). Inaddition, this regulation provides that thestandards that apply for purposes of deter-mining whether an employer is a SCU forpurposes of section 3121(b)(10) also ap-ply for purposes of section 3121(b)(2) (ex-cluding from employment for FICA pur-poses domestic services performed for lo-cal college clubs, fraternities, and sorori-ties by students who are enrolled and reg-ularly attending classes).

2004-10 I.R.B. 576 March 8, 2004

G. Proposed Effective Date

It is proposed that these regulations ap-ply to services performed on or after Feb-ruary 25, 2004.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in Exec-utive Order 12866. Therefore, a regula-tory assessment is not required. It has alsobeen determined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these regula-tions. In addition, because no collectionof information is imposed on small enti-ties, the provisions of the Regulatory Flex-ibility Act (5 U.S.C. chapter 6) do not ap-ply, and, therefore, a Regulatory Flexibil-ity Analysis is not required. Pursuant tosection 7805(f) of the Code, this noticeof proposed rulemaking will be submittedto the Chief Counsel for Advocacy of theSmall Business Administration for com-ment on the impact on small business.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written or electroniccomments that are submitted timely to theIRS. The IRS and Treasury Department re-quest comments on all aspects of the pro-posed regulations and how they can bemade easier to understand. All commentswill be available for public inspection andcopying.

A public hearing is scheduled for June16, 2004, beginning at 10 a.m. in room2615 of the Internal Revenue Building,1111 Constitution Avenue, NW, Wash-ington, DC. Due to building securityprocedures, visitors must enter at the Con-stitution Avenue entrance. All visitorsmust present photo identification to enterthe building. Because of access restric-tions, visitors will not be admitted beyondthe immediate entrance area more than 30minutes before the hearing starts. For in-formation about having your name placedon the building access list to attend thehearing, see the “FOR FURTHER IN-FORMATION CONTACT” section of thispreamble.

The rules of 26 CFR 601.601(a)(3) ap-ply to the hearing. Persons who wish to

present oral comments at the hearing mustsubmit electronic or written comments byMay 25, 2004, and submit an outline of thetopics to be discussed and the time to bedevoted to each topic (signed original andeight (8) copies). A period of 10 minuteswill be allotted to each person for makingcomments. An agenda showing the sched-uling of the speakers will be prepared af-ter the deadline for receiving outlines haspassed. Copies of the agenda will be avail-able free of charge at the hearing.

Drafting Information

The principal author of these proposedregulations is John Richards of the Of-fice of Division Counsel/Associate ChiefCounsel (Tax Exempt and GovernmentEntities). However, other personnel fromthe IRS and Treasury Department partici-pated in their development.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 31 is pro-posed to be amended as follows:

PART 31—EMPLOYMENT TAXES

Paragraph 1. The authority citation forpart 31 continues to read in part, as fol-lows:

Authority 26 U.S.C. 7805 * * *Par. 2. In §31.3121(b)(2)–1, paragraph

(d) is revised to read as follows:

§31.3121(b)(2)–1 Domestic serviceperformed by students for certain collegeorganizations.

* * * * *(d) A school, college, or university is

described in section 3121(b)(2) if its pri-mary function is the presentation of formalinstruction, it normally maintains a regu-lar faculty and curriculum, and it normallyhas a regularly enrolled body of studentsin attendance at the place where its edu-cational activities are regularly carried on.See section 170(b)(1)(A)(ii) and the regu-lations thereunder.

* * * * *Par. 3. Section 31.3121(b)(10)–2 is

amended by:1. Adding headings for paragraphs (a),

(b).

2. Revising paragraphs (c) and (d).3. Redesignating paragraph (e) as (g).4. Adding paragraphs (e) and (f).The revisions and additions read as fol-

lows:

§31.3121(b)(10)–2 Services performedby certain students in the employ of aschool, college, or university, or of anonprofit organization auxiliary to aschool, college, or university.

(a) General rule. (1)* * *(b) Statutory tests. * * *(c) School, College, or University. A

school, college, or university is describedin section 3121(b)(10) if its primary func-tion is the presentation of formal instruc-tion, it normally maintains a regular fac-ulty and curriculum, and it normally has aregularly enrolled body of students in at-tendance at the place where its educationalactivities are regularly carried on. See sec-tion 170(b)(1)(A)(ii) and the regulationsthereunder.

(d) Student Status—general rule.Whether an employee has the status ofa student performing the services shall bedetermined based on the relationship of theemployee with the organization for whichthe services are performed. In order tohave the status of a student, the employeemust perform services in the employ ofa school, college, or university describedin paragraph (c) of this section at whichthe employee is enrolled and regularlyattending classes in pursuit of a course ofstudy within the meaning of paragraphs(d)(1) and (2) of this section. In addition,the employee’s services must be incidentto and for the purpose of pursuing a courseof study within the meaning of para-graph (d)(3) of this section at such school,college, or university. An employee whoperforms services in the employ of an affil-iated organization described in paragraph(a)(2) of this section must be enrolled andregularly attending classes at the affiliatedschool, college, or university within themeaning of paragraph (c) of this sectionin pursuit of a course of study within themeaning of paragraphs (d)(1) and (2) ofthis section. In addition, the employee’sservices must be incident to and for thepurpose of pursuing a course of studywithin the meaning of paragraph (d)(3)of this section at such school, college, oruniversity.

March 8, 2004 577 2004-10 I.R.B.

(1) Enrolled and regularly attendingclasses. An employee must be enrolledand regularly attending classes at a school,college, or university within the meaningof paragraph (c) of this section at which theemployee is employed to have the statusof a student within the meaning of section3121(b)(10). An employee is enrolledwithin the meaning of section 3121(b)(10)if the employee is registered for a course orcourses creditable toward an educationalcredential described in paragraph (d)(2)of this section. In addition, the employeemust be regularly attending classes to havethe status of a student. For purposes ofthis paragraph (d)(1), a class is an instruc-tional activity led by a knowledgeablefaculty member for identified studentsfollowing an established curriculum. Tra-ditional classroom activities are not thesole means of satisfying this requirement.For example, research activities under thesupervision of a faculty advisor necessaryto complete the requirements for a Ph.D.degree may constitute classes within themeaning of section 3121(b)(10). The fre-quency of events such as these determineswhether the employee may be consideredto be regularly attending classes.

(2) Course of study. An employee mustbe pursuing a course of study in order tohave the status of a student. A course ofstudy is one or more courses the comple-tion of which fulfills the requirements nec-essary to receive an educational credentialgranted by a school, college, or univer-sity within the meaning of paragraph (c)of this section. For purposes of this para-graph, an educational credential is a de-gree, certificate, or other recognized ed-ucational credential granted by an organ-ization described in paragraph (c) of thissection. In addition, a course of study isone or more courses at a school, collegeor university within the meaning of para-graph (c) of this section the completion ofwhich fulfills the requirements necessaryfor the employee to sit for an examinationrequired to receive certification by a rec-ognized organization in a field.

(3) Incident to and for the purpose ofpursuing a course of study. An employee’sservices must be incident to and for thepurpose of pursuing a course of study inorder for the employee to have the sta-tus of a student. Whether an employee’sservices are incident to and for the pur-pose of pursuing a course of study shall

be determined on the basis of the relation-ship of such employee with the organiza-tion for which such services are performed.The educational aspect of the relationship,as compared to the service aspect of therelationship, must be predominant in or-der for the employee’s services to be in-cident to and for the purpose of pursuinga course of study. The educational aspectof the relationship between the employerand the employee is established by the em-ployee’s course workload. The service as-pect of relationship is established by thefacts and circumstances related to the em-ployee’s employment. In the case of anemployee with the status of a career em-ployee within the meaning of paragraph(d)(3)(ii) of this section, the service aspectof the relationship with the employer ispredominant. Standards applicable in de-termining whether an employee’s servicesare considered to be incident to and for thepurpose of pursuing a course of study areprovided in paragraphs (d)(3)(i) and (ii) ofthis section.

(i) Course workload. The educationalaspect of an employee’s relationship withthe employer is evaluated based on the em-ployee’s course workload. Whether anemployee’s course workload is sufficientin order for the employee’s employmentto be incident to and for the purpose ofpursuing a course of study generally de-pends on the particular facts and circum-stances. A relevant factor in evaluatingan employee’s course workload is the em-ployee’s course workload relative to a full-time course workload at the school, collegeor university within the meaning of para-graph (c) of this section at which the em-ployee is enrolled and regularly attendingclasses.

(ii) Career employee status. Services ofan employee with the status of a career em-ployee are not incident to and for the pur-pose of pursuing a course of study. An em-ployee has the status of a career employeeif the employee is described in paragraph(d)(3)(ii)(A), (B), (C) or (D) of this section.

(A) Hours worked. An employee hasthe status of a career employee if theemployee regularly performs services 40hours or more per week.

(B) Professional employee. An em-ployee has the status of a career employeeif the employee is a professional employee.A professional employee is an employee—

(1) Whose primary duty consists of theperformance of work requiring knowledgeof an advanced type in a field of scienceor learning customarily acquired by a pro-longed course of specialized intellectualinstruction and study, as distinguishedfrom a general academic education, froman apprenticeship, and from training in theperformance of routine mental, manual, orphysical processes.

(2) Whose work requires the consistentexercise of discretion and judgment in itsperformance; and

(3) Whose work is predominantly intel-lectual and varied in character (as opposedto routine mental, manual, mechanical, orphysical work) and is of such character thatthe output produced or the result accom-plished cannot be standardized in relationto a given period of time.

(C) Terms of employment. An em-ployee with the status of a career employeeincludes any employee who is—

(1) Eligible to receive vacation, sickleave, or paid holiday benefits;

(2) Eligible to participate in any retire-ment plan described in section 401(a) thatis established or maintained by the em-ployer, or would be eligible to participateif age and service requirements were met;

(3) Eligible to participate in an arrange-ment described in section 403(b), or wouldbe eligible to participate if age and servicerequirements were met;

(4) Eligible to participate in a plan de-scribed under section 457(a), or would beeligible to participate if age and service re-quirements were met;

(5) Eligible for reduced tuition (otherthan qualified tuition reduction under sec-tion 117(d)(5) provided to a teaching orresearch assistant who is a graduate stu-dent) because of the individual’s employ-ment relationship with the institution;

(6) Eligible to receive employee ben-efits described under sections 79 (life in-surance), 127 (qualified educational assis-tance), 129 (dependent care assistance pro-grams), or 137 (adoption assistance); or

(7) Classified by the employer as a ca-reer employee.

(D) Licensure status. An employee isa career employee if the employee is re-quired to be licensed under state or locallaw to work in the field in which the em-ployee performs services.

2004-10 I.R.B. 578 March 8, 2004

(e) Examples. The following examplesillustrate the principles of paragraphs (c)and (d) of this section:

Example 1. (i) Employee C is employed by StateUniversity T to provide services as a clerk in T’s ad-ministrative offices, and is enrolled and regularly at-tending classes at T in pursuit of a B.S. degree in bi-ology. C has a course workload which constitutes afull-time course workload at T. C performs serviceson average 20 hours per week, but from time to timeworks 40 hours or more during a week. C receivesonly hourly wages and no other pay or benefits. C isnot required under state or local law to be licensed toperform the services for T.

(ii) In this example, C is employed by T, a school,college, or university within the meaning of para-graph (c) of this section. C is enrolled and regularlyattending classes at T in pursuit of a course of study.C’s hours worked do not cause C to have the status ofa career employee, even though C may occasionallywork 40 hours or more during a week. C’s part-timeemployment relative to C’s full-time course workloadindicates that C’s services are incident to and for thepurpose of pursuing a course of study. C is not aprofessional employee, and C’s terms of employmentand licensure status do not cause C to have the statusof a career employee within the meaning of paragraph(d)(3)(ii) of this section. Thus, C has the status of astudent. Accordingly, C’s services are excepted fromemployment under section 3121(b)(10).

Example 2. (i) Employee D is employed in the ac-counting department of University U, and is enrolledand regularly attending classes at U in pursuit of anM.B.A. degree. D has a course workload which con-stitutes a half-time course workload at U. D’s workdoes not require the consistent exercise of discretionand judgment, and is not predominantly intellectualand varied in character. D regularly performs servicesfull-time (40 hours per week), and is eligible to partic-ipate in a retirement plan described in section 401(a)maintained by U.

(ii) In this example, D is employed by U, a school,college, or university within the meaning of para-graph (c) of this section. In addition, D is enrolledand regularly attending classes at U in pursuit of acourse of study. However, D has the status of a ca-reer employee because D regularly works 40 hoursper week, and is eligible to participate in U’s section401(a) retirement plan. Because D has the status ofa career employee within the meaning of paragraph(d)(3)(ii) of this section, D’s services are not incidentto and for the purpose of pursuing a course of study.Accordingly, D’s services are not excepted from em-ployment under section 3121(b)(10).

Example 3. (i) Employee E is employed by Uni-versity V to provide patient care services at a teachinghospital that is an unincorporated division of V. Theseservices are performed as part of a medical residencyprogram in a medical specialty sponsored by V. Theresidency program in which E participates is accred-ited by the Accreditation Counsel for Graduate Med-ical Education. Upon completion of the program, Ewill receive a certificate of completion, and be eligi-ble to sit for an examination required to be certifiedby a recognized organization in the medical specialty.E regularly performs services more than 40 hours perweek. E’s patient care services require knowledge ofan advanced type in the field of medicine, and are pre-

dominantly intellectual and varied in character. Fur-ther, although E is subject to supervision, E’s servicesrequire the consistent exercise of discretion and judg-ment regarding the treatment of patients. In addition,E receives vacation, sick leave, and paid holiday ben-efits; and salary deferral benefits under an arrange-ment described in section 403(b). E is a first-year res-ident, and thus is not eligible to be licensed to practicemedicine under the laws of the state in which E per-forms services.

(ii) In this example, E is employed by V, a school,college, or university within the meaning of para-graph (c) of this section. However, because of E’shours worked, professional employee status, and em-ployee benefits, E has the status of a career employeewithin the meaning of paragraph (d)(3)(ii) of this sec-tion. Thus, E’s services are not incident to and for thepurpose of pursuing a course of study. Accordingly,E’s services are not excepted from employment un-der section 3121(b)(10).

Example 4. (i) Employee F is employed in thefacilities management department of University W. Fhas a B.S. degree in engineering, and is completingthe work experience required to sit for an examina-tion to become a professional engineer eligible for li-censure under state or local law. F is not attendingclasses at W in pursuit of a course of study leading toan educational credential. F regularly performs ser-vices 40 hours or more per week. F receives certainemployee benefits including vacation, sick leave, andpaid holiday benefits. F also receives retirement ben-efits under an arrangement described in section 457.

(ii) In this example, F is employed by W, a school,college, or university within the meaning of para-graph (c) of this section. However, F is not enrolledand regularly attending classes at W in pursuit of acourse of study. F’s work experience is not a courseof study for purposes of paragraph (d)(2) of this sec-tion. In addition, because of F’s hours worked andemployment benefits, F has the status of a career em-ployee within the meaning of paragraph (d)(3)(ii) ofthis section. Thus, F’s services are not incident to andfor the purpose of pursuing a course of study. Accord-ingly, F’s services are not excepted from employmentunder section 3121(b)(10).

Example 5. (i) Employee G is employed by Em-ployer X as an apprentice in a skilled trade. X is a sub-contractor providing services in the field in which Gwishes to specialize. G is pursuing a certificate in theskilled trade from Community College C. G is per-forming services for X pursuant to an internship pro-gram sponsored by C under which its students gainexperience, and receive credit toward a certificate inthe trade.

(ii) In this example, G is employed by X. X isnot a school, college or university within the meaningof paragraph (c) of this section. Thus, the exceptionfrom employment under section 3121(b)(10) is notavailable with respect to G’s services for X.

Example 6. (i) Employee H is employed by a cos-metology school Y at which H is enrolled and reg-ularly attending classes in pursuit of a certificate ofcompletion. Y’s primary function is to carry on ed-ucational activities to prepare its students to work inthe field of cosmetology. Prior to issuing a certifi-cate, Y requires that its students gain experience incosmetology services by performing services for thegeneral public on Y’s premises. H performs services

less than 40 hours per week. H’s work does not re-quire knowledge of an advanced type in a field of sci-ence or learning, nor is it predominantly intellectualand varied in character. H receives remuneration inthe form of hourly compensation from Y for provid-ing cosmetology services to clients of Y, and does notreceive any other compensation or benefits. H is notrequired to be a licensed cosmetologist in the state inwhich H performs services while participating in thetraining program.

(ii) In this example, H is employed by Y, a school,college or university within the meaning of paragraph(c) of this section, and is enrolled and regularly at-tending classes at Y in pursuit of a course of study.In addition, because H works less than 40 hours perweek, H is not a professional employee, and H’sterms of employment, and licensure status do notindicate that H has the status of a career employee, His not a career employee within the meaning of para-graph (d)(3)(ii) of this section. Thus, H’s services areincident to and for the purpose of pursuing a courseof study. Accordingly, H’s services are exceptedfrom employment under section 3121(b)(10).

Example 7. (i) Employee J is a teaching assistantat University Z. J is enrolled and regularly attendingclasses in pursuit of a graduate degree at Z. J has acourse workload which constitutes a full-time courseworkload at Z. J performs services less than 40 hoursper week. J’s duties include grading quizzes, provid-ing class and laboratory instruction pursuant to a les-son plan developed by the professor, and preparinglaboratory equipment for demonstrations. J receivesno employee benefits. J receives a cash stipend and aqualified tuition reduction within the meaning of sec-tion 117(d)(5) for the credits earned for being a teach-ing assistant. J is not required under state or local lawto be licensed to perform the activities of a teachingassistant.

(ii) In this example, J is employed as a teachingassistant by Z, a school, college, or university withinthe meaning of paragraph (c), and is enrolled and reg-ularly attending classes at Z in pursuit of a course ofstudy. J’s full-time course workload relative to J’semployment workload indicates that J’s services areincident to and for the purpose of pursuing a courseof study. J is not a professional employee becauseJ’s work does not require the consistent exercise ofdiscretion and judgment in its performance. In ad-dition, J’s terms of employment and licensure statusdo not cause J to have the status of a career employeewithin the meaning of paragraph (d)(3)(ii) of this sec-tion. Thus, J has the status of a student. Accordingly,J services are excepted from employment under sec-tion 3121(b)(10).

(f) Effective date. Paragraphs (c), (d),and (e) of this section apply to servicesperformed on or after February 25, 2004.

* * * * *Par. 4. In §31.3306(c)(10)–2 is revised

as follows:1. Paragraph (c) is revised.2. Paragraph (d) and (e) are added.The revision and addition read as fol-

lows:

March 8, 2004 579 2004-10 I.R.B.

§31.3306(c)(10)–2 Services of student inemploy of a school, college, or university.

* * * * *(c) General rule. (1) For purposes of

this section, the tests are the character ofthe organization in the employ of which theservices are performed and the status of theemployee as a student enrolled and regu-larly attending classes at the school, col-lege, or university described in paragraph(c)(2) of this section, in the employ ofwhich he performs the services. The typeof services performed by the employee, theplace where the services are performed,and the amount of remuneration for ser-vices performed by the employee are notmaterial.

(2) School, college, or university. Aschool, college, or university is describedin section 3306(c)(10)(B) if its primaryfunction is the presentation of formal in-struction, and it normally maintains a regu-lar faculty and curriculum, and it normallyhas a regularly enrolled body of studentsin attendance at the place where its edu-cational activities are regularly carried on.See section 170(b)(1)(A)(ii) and the regu-lations thereunder.

(d) Student Status—general rule.Whether an employee has the status ofa student within the meaning of section3306(c)(10)(B) performing the servicesshall be determined based on the relation-ship of the employee with the organizationfor which the services are performed. Inorder to have the status of a student, theemployee must perform services in theemploy of a school, college, or univer-sity described in paragraph (c)(2) of thissection at which the employee is enrolledand regularly attending classes in pursuitof a course of study within the meaningof paragraphs (d)(1) and (2) of this sec-tion. In addition, the employee’s servicesmust be incident to and for the purpose ofpursuing a course of study at such school,college, or university within the meaningof paragraph (d)(3) of this section.

(1) Enrolled and regularly attendingclasses. An employee must be enrolledand regularly attending classes at a school,college, or university within the mean-ing of paragraph (c)(2) of this section atwhich the employee is employed to havethe status of a student within the meaningof section 3306(c)(10)(B). An employeeis enrolled within the meaning of sec-

tion 3306(c)(10)(B) if the employee isregistered for a course or courses cred-itable toward an educational credentialdescribed in paragraph (d)(2) of this sec-tion. In addition, the employee must beregularly attending classes to have thestatus of a student. For purposes of thisparagraph (d)(1), a class is a didactic ac-tivity in which a faculty member plays aleadership role in furthering the objectivesof an established curriculum. Traditionalclassroom activities are not the sole meansof satisfying this requirement. The fre-quency of events such as these determineswhether the employee may be consideredto be regularly attending classes.

(2) Course of study. An employee mustbe pursuing a course of study in orderto have the status of a student within themeaning of section 3306(c)(10)(B). Acourse of study is one or more courses thecompletion of which fulfills the require-ments necessary to receive an educationalcredential granted by a school, college,or university within the meaning of para-graph (c)(2) of this section. For purposesof this paragraph, an educational cre-dential is a degree, certificate, or otherrecognized educational credential grantedby an organization described in paragraph(c)(2) of this section. In addition, a courseof study is one or more courses at a school,college, or university within the meaningof paragraph (c)(2) of this section the com-pletion of which fulfills the requirementsnecessary for the employee to sit for an ex-amination required to receive certificationby a recognized organization in a field.

(3) Incident to and for the purpose ofpursuing a course of study. An employee’sservices must be incident to and for thepurpose of pursuing a course of study inorder for the employee to have the sta-tus of a student within the meaning ofsection 3306(c)(10)(B). Whether an em-ployee’s services are incident to and forthe purpose of pursuing a course of studyshall be determined on the basis of the re-lationship of such employee with the or-ganization for which such services are per-formed. The educational aspect of the re-lationship, as compared to the service as-pect of the relationship, must be predomi-nant in order for the employee’s services tobe incident to and for the purpose of pur-suing a course of study. The educationalaspect of the relationship between the em-ployer and the employee is established by

the employee’s course workload. The ser-vice aspect of relationship is establishedby the facts and circumstances related tothe employee’s employment. In the caseof an employee with the status of a ca-reer employee, the service aspect of the re-lationship with the employer is predomi-nant. Standards applicable in determiningwhether an employee’s services are con-sidered to be incident to and for the pur-pose of pursuing a course of study are pro-vided in paragraphs (d)(3)(i) and (ii) of thissection.

(i) Course workload. The educationalaspect of an employee’s relationship withthe employer is evaluated based on theemployee’s course workload. Whether anemployee’s course workload is sufficientfor the employee’s employment to be in-cident to and for the purpose of pursuing acourse of study generally depends on theparticular facts and circumstances. A rel-evant factor in evaluating the employee’scourse workload is the employee’s courseworkload relative to a full-time courseworkload at the school, college or univer-sity within the meaning of paragraph (c)(2)of this section at which the employee isenrolled and regularly attending classes.

(ii) Career employee status. Services ofan employee with the status of a career em-ployee are not incident to and for the pur-pose of pursuing a course of study. An em-ployee has the status of a career employeeif the employee is described in paragraph(d)(3)(ii)(A), (B), (C), or (D) of this sec-tion.

(A) Hours worked. An employee hasthe status of a career employee if theemployee regularly performs services 40hours or more per week.

(B) Professional employee. An em-ployee has the status of a career employeeif the employee is a professional employee.A professional employee is an employee—

(1) Whose primary duty consists of theperformance of work requiring knowledgeof an advanced type in a field of scienceor learning customarily acquired by a pro-longed course of specialized intellectualinstruction and study, as distinguishedfrom a general academic education, froman apprenticeship, and from training in theperformance of routine mental, manual, orphysical processes.

(2) Whose work requires the consistentexercise of discretion and judgment in itsperformance; and

2004-10 I.R.B. 580 March 8, 2004

(3) Whose work is predominantly intel-lectual and varied in character (as opposedto routine mental, manual, mechanical, orphysical work) and is of such character thatthe output produced or the result accom-plished cannot be standardized in relationto a given period of time.

(C) Terms of employment. An em-ployee with the status of a career employeeincludes any employee who is—

(1) Eligible to receive vacation, sickleave, or paid holiday benefits;

(2) Eligible to participate in any retire-ment plan described in section 401(a) thatis established or maintained by the em-ployer, or would be eligible to participateif age and service requirements were met;

(3) Eligible to participate in an arrange-ment described in section 403(b), or wouldbe eligible to participate if age and servicerequirements were met;

(4) Eligible to participate in a plan de-scribed under section 457(a), or would beeligible to participate if age and service re-quirements were met;

(5) Eligible for reduced tuition (otherthan qualified tuition reduction under sec-tion 117(d)(5) provided to a teaching orresearch assistant who is a graduate stu-dent) because of the individual’s employ-ment relationship with the institution;

(6) Eligible to receive employee ben-efits described under sections 79 (life in-surance), 127 (qualified educational assis-tance), 129 (dependent care assistance pro-grams), or 137 (adoption assistance); or

(7) Classified by the employer as a ca-reer employee.

(D) Licensure status. An employee isa career employee if the employee is re-quired to be licensed under state or locallaw to work in the field in which the em-ployee performs services.

(e) Effective date. Paragraphs (c) and(d) of this section apply to services per-formed on or after February 25, 2004.

Mark E. Matthews,Deputy Commissioner forServices and Enforcement.

(Filed by the Office of the Federal Register on February 24,2004, 8:45 a.m., and published in the issue of the FederalRegister for February 25, 2004, 69 F.R. 8604)

Changes to ReportingRequirements for Certain2002 Forms Because ofChanges in the Tax Ratesand Holding Period Rules forQualified Dividends

Announcement 2004–11

BACKGROUND

Under current law, qualified dividendsreceived after 2002 are taxed to individ-uals, estates, and trusts at the new lowercapital gain tax rates (5% or 15%). Thenew rates do not apply to dividends passedthrough from fiscal year partnerships, Scorporations, or estates for their fiscal yearbeginning in 2002, even if the dividendswere received in 2003.

Also, to qualify for the lower rates un-der current law, you must hold a stockfor at least 61 days of a 120-day period.That period begins 60 days before the daya stock trades without its dividend (the“ex-dividend date”), and ends 59 days af-ter the ex-dividend date. In the case ofdividends attributable to periods of morethan 366 days that were received on pre-ferred stock, you must hold the stock for atleast 91 days of a 180-day period. That pe-riod begins 90 days before the ex-dividenddate, and ends 89 days after the ex-divi-dend date.

TECHNICAL CORRECTION

Section 2 of the Tax Technical Correc-tions Act of 2003 (H.R. 3654, S. 1984),which has not yet been enacted, wouldamend current law to allow partnerships,S corporations, and estates (including re-vocable trusts treated as part of an estate)with fiscal years beginning in 2002 to passthrough dividends received in 2003 fromdomestic corporations and qualified for-eign corporations as qualified dividends totheir partners, shareholders, and beneficia-ries (to the extent otherwise permitted bylaw). In addition, the legislation wouldamend the holding period rules for qual-ified dividends by changing the 120-dayperiod to a 121-day period and the 180-dayperiod to a 181-day period. These periodswould end one day later than under currentlaw. Both amendments would be treated asif included in section 302 of the Jobs and

Growth Tax Relief Reconciliation Act of2003. The Commissioner of Internal Rev-enue has agreed to allow taxpayers to ap-ply section 2 of the Tax Technical Correc-tions Act of 2003 as if the legislation werepresently enacted.

As a result, there are changes in thereporting requirements for the following2002 forms (these forms and their instruc-tions do not reflect this legislation) filed byentities with 2002–2003 fiscal years:

• Schedules K and K–1 for partnershipsand S corporations and

• Schedule K–1 for estates.

Also, the tax computation (for both theregular tax and the alternative minimumtax) for estates with 2002–2003 fiscalyears and qualified dividends received in2003 is affected by this change.

Note: Dividends received in a tax yearbeginning in 2002 and ending in 2003 arenot qualified dividends for individuals with2002–2003 fiscal years, even if the divi-dends are received during 2003.

The necessary changes are described inthe following sections.

FISCAL YEAR ESTATES: REPORTINGQUALIFIED DIVIDENDS ANDFIGURING TAX FOR 2002–2003

Estates with 2002–2003 fiscal years andqualified dividends received in 2003 mustattach to their 2002 Form 1041 a computa-tion similar to that shown in Part V of the2003 Schedule D (Form 1041) or the Qual-ified Dividends Tax Worksheet on page 22of the 2003 Instructions for Form 1041and Schedules A, B, D, G, I, J, and K–1.These estates may use the 2003 ScheduleD (Form 1041) or the Qualified DividendsTax Worksheet to figure their 2002 tax. Todo so, these filers must:

• Enter qualified dividends received in2003 on line 20 of the 2003 Schedule D(Form 1041) or line 2 of the QualifiedDividends Tax Worksheet (whicheverapplies).

• Modify the computation in Part V ofSchedule D (Form 1041) or the Qual-ified Dividends Tax Worksheet by us-ing the 2002 Tax Rate Schedule insteadof the 2003 Tax Rate Schedule.

March 8, 2004 581 2004-10 I.R.B.

• Substitute $1,850 for $1,900 on line 25of the 2003 Schedule D (Form 1041) orline 6 of the Qualified Dividends TaxWorksheet.

Note: This change also affects the com-putation of the alternative minimum tax.Estates should attach a computation sim-ilar to that shown in Part IV, Schedule I, ofthe 2003 Form 1041.

Estates must continue to report eachbeneficiary’s share of ordinary dividendsfor the entire tax year on line 2 of the 2002Schedule K–1. In addition, the estate mustreport each beneficiary’s share of qualifieddividends received in 2003 on line 14 ofthe 2002 Schedule K–1.

Estates should advise beneficiaries fil-ing Form 1040 to report qualified divi-dends on line 9b of the 2003 Form 1040.

FISCAL YEAR PARTNERSHIPS ANDS CORPORATIONS: REPORTINGQUALIFIED DIVIDENDS FOR2002–2003

Partnerships and S corporations with2002–2003 fiscal years must continue toreport ordinary dividends for the entire taxyear on the applicable lines shown below:

• Form 1065 (or 8865) filers: Sched-ule K, line 4b of the 2002 Form 1065(or 8865) and each partner’s share online 4b of Schedule K–1 (Form 1065or 8865).

• Form 1065–B filers: Part II, line 2 ofthe 2002 Form 1065–B.

• Form 1120S filers: Schedule K, line4b of the 2002 Form 1120S and eachshareholder’s share on line 4b ofSchedule K–1 (Form 1120S).

In addition, partnerships and S corpora-tions with 2002–2003 fiscal years must re-

port qualified dividends received in 2003as an item of information on the applica-ble lines (or attachment) shown below:

• Form 1065 (or 8865) filers: Sched-ule K, line 24 of the 2002 Form 1065(or 8865) and each partner’s share online 25 of Schedule K–1 (Form 1065or 8865).

• Form 1065–B filers: Schedule K, line16 of the 2002 Form 1065–B and eachpartner’s share on an attachment toSchedule K–1 (Form 1065–B).

• Form 1120S filers: Schedule K, line21 of the 2002 Form 1120S and eachshareholder’s share on line 23 ofSchedule K–1 (Form 1065 or 8865).

Partnerships and S corporations shouldadvise partners and shareholders filingForm 1040 to report qualified dividendson line 9b of the 2003 Form 1040.

EFFECT ON OTHER DOCUMENTS

Announcement 2003–56, 2003–39I.R.B. 694, is modified.

Charitable Remainder Trusts;Application of Ordering Rule;Hearing Cancellation

Announcement 2004–14

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Cancellation of notice of publichearing on proposed rulemaking.

SUMMARY: This document provides no-tice of cancellation of a public hearing onthe ordering of rules of section 664(b) forcharacterizing distributions from charita-ble remainder trusts.

DATES: The public hearing originallyscheduled for March 9, 2004, at 10 a.m.,is cancelled.

FOR FURTHER INFORMATIONCONTACT: Robin R. Jones of the Pub-lications and Regulations Branch, LegalProcessing Division at (202) 622–7180(not a toll-free number).

SUPPLEMENTARY INFORMATION:A notice of proposed rulemaking and no-tice of public hearing (REG–110896–98,2003–51 I.R.B. 1226) that appeared in theFederal Register on Thursday, November20, 2003 (68 FR 65419), announced thata public hearing was scheduled for March9, 2004, at 10 a.m., in the auditorium. Thesubject of the public hearing is proposedregulations under section 664 of the Inter-nal Revenue Code. The public commentperiod for these regulations expired onFebruary 17, 2004.

The notice of proposed rulemaking andnotice of public hearing, instructed thoseinterested in testifying at the public hear-ing to submit an outline of the topics tobe addressed. As of Wednesday, February18, 2004, no one has requested to speak.Therefore, the public hearing scheduledfor March 9, 2004, is cancelled.

Cynthia E. Grigsby,Acting Chief, Publications

and Regulations Branch,Legal Processing Division,

Associate Chief Counsel(Procedure and Administration).

(Filed by the Office of the Federal Register on February 25,2004, 8:45 a.m., and published in the issue of the FederalRegister for February 26, 2004, 69 F.R. 8885)

2004-10 I.R.B. 582 March 8, 2004

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe the ef-fect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position is be-ing extended to apply to a variation of thefact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds that thesame principle also applies to B, the earlierruling is amplified. (Compare with modi-fied, below).

Clarified is used in those instanceswhere the language in a prior ruling is be-ing made clear because the language hascaused, or may cause, some confusion.It is not used where a position in a priorruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and 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 used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more than re-state the substance and situation of a previ-ously published ruling (or rulings). Thus,the term is used to republish under the1986 Code and regulations the same po-sition published under the 1939 Code andregulations. The term is also used whenit is desired to republish in a single rul-ing a series of situations, names, etc., thatwere previously published over a period oftime in separate rulings. If the new rul-ing does more than restate the substance

of a prior ruling, a combination of termsis used. For example, modified and su-perseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that is selfcontained. In this case, the previously pub-lished ruling is first modified and then, asmodified, is superseded.

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 names insubsequent rulings. After the original rul-ing has been supplemented several times, anew ruling may be published that includesthe list in the original ruling and the ad-ditions, and supersedes all prior rulings inthe series.

Suspended is used in rare situationsto show that the previous published rul-ings will not be applied pending somefuture action such as the issuance of newor amended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in current useand formerly used will appear in materialpublished 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.—Internal 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.—Statement 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.

March 8, 2004 i 2004-10 I.R.B.

Numerical Finding List1

Bulletins 2004–1 through 2004–10

Announcements:

2004-1, 2004-1 I.R.B. 254

2004-2, 2004-3 I.R.B. 322

2004-3, 2004-2 I.R.B. 294

2004-4, 2004-4 I.R.B. 357

2004-5, 2004-4 I.R.B. 362

2004-6, 2004-3 I.R.B. 322

2004-7, 2004-4 I.R.B. 365

2004-8, 2004-6 I.R.B. 441

2004-9, 2004-6 I.R.B. 441

2004-10, 2004-7 I.R.B. 501

2004-11, 2004-10 I.R.B. 581

2004-12, 2004-9 I.R.B. 541

2004-13, 2004-9 I.R.B. 543

2004-14, 2004-10 I.R.B. 582

Notices:

2004-1, 2004-2 I.R.B. 268

2004-2, 2004-2 I.R.B. 269

2004-3, 2004-5 I.R.B. 391

2004-4, 2004-2 I.R.B. 273

2004-5, 2004-7 I.R.B. 489

2004-6, 2004-3 I.R.B. 308

2004-7, 2004-3 I.R.B. 310

2004-8, 2004-4 I.R.B. 333

2004-9, 2004-4 I.R.B. 334

2004-10, 2004-6 I.R.B. 433

2004-11, 2004-6 I.R.B. 434

2004-12, 2004-10 I.R.B. 556

2004-14, 2004-9 I.R.B. 526

2004-15, 2004-9 I.R.B. 526

2004-16, 2004-9 I.R.B. 527

Proposed Regulations:

REG-116664-01, 2004-3 I.R.B. 319

REG-122379-02, 2004-5 I.R.B. 392

REG-139845-02, 2004-5 I.R.B. 397

REG-126459-03, 2004-6 I.R.B. 437

REG-126967-03, 2004-10 I.R.B. 566

REG-156232-03, 2004-5 I.R.B. 399

REG-156421-03, 2004-10 I.R.B. 571

REG-167217-03, 2004-9 I.R.B. 540

Revenue Procedures:

2004-1, 2004-1 I.R.B. 1

2004-2, 2004-1 I.R.B. 83

2004-3, 2004-1 I.R.B. 114

2004-4, 2004-1 I.R.B. 125

2004-5, 2004-1 I.R.B. 167

2004-6, 2004-1 I.R.B. 197

2004-7, 2004-1 I.R.B. 237

2004-8, 2004-1 I.R.B. 240

Revenue Procedures— Continued:

2004-9, 2004-2 I.R.B. 275

2004-10, 2004-2 I.R.B. 288

2004-11, 2004-3 I.R.B. 311

2004-12, 2004-9 I.R.B. 528

2004-13, 2004-4 I.R.B. 335

2004-14, 2004-7 I.R.B. 489

2004-15, 2004-7 I.R.B. 490

2004-16, 2004-10 I.R.B. 559

2004-17, 2004-10 I.R.B. 562

2004-18, 2004-9 I.R.B. 529

2004-19, 2004-10 I.R.B. 563

Revenue Rulings:

2004-1, 2004-4 I.R.B. 325

2004-2, 2004-2 I.R.B. 265

2004-3, 2004-7 I.R.B. 486

2004-4, 2004-6 I.R.B. 414

2004-5, 2004-3 I.R.B. 295

2004-6, 2004-4 I.R.B. 328

2004-7, 2004-4 I.R.B. 327

2004-8, 2004-10 I.R.B. 544

2004-9, 2004-6 I.R.B. 428

2004-10, 2004-7 I.R.B. 484

2004-11, 2004-7 I.R.B. 480

2004-12, 2004-7 I.R.B. 478

2004-13, 2004-7 I.R.B. 485

2004-14, 2004-8 I.R.B. 511

2004-15, 2004-8 I.R.B. 515

2004-16, 2004-8 I.R.B. 503

2004-17, 2004-8 I.R.B. 516

2004-18, 2004-8 I.R.B. 509

2004-19, 2004-8 I.R.B. 510

2004-20, 2004-10 I.R.B. 546

2004-21, 2004-10 I.R.B. 544

2004-22, 2004-10 I.R.B. 553

2004-24, 2004-10 I.R.B. 550

Tax Conventions:

2004-3, 2004-7 I.R.B. 486

Treasury Decisions:

9099, 2004-2 I.R.B. 255

9100, 2004-3 I.R.B. 297

9101, 2004-5 I.R.B. 376

9102, 2004-5 I.R.B. 366

9103, 2004-3 I.R.B. 306

9104, 2004-6 I.R.B. 406

9105, 2004-6 I.R.B. 419

9106, 2004-5 I.R.B. 384

9107, 2004-7 I.R.B. 447

9108, 2004-6 I.R.B. 429

9109, 2004-8 I.R.B. 519

9110, 2004-8 I.R.B. 504

9111, 2004-8 I.R.B. 518

9112, 2004-9 I.R.B. 523

Treasury Decisions— Continued:

9113, 2004-9 I.R.B. 524

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2003–27 through 2003–52 is in Internal Revenue Bulletin2003–52, dated December 29, 2003.

2004-10 I.R.B. ii March 8, 2004

Findings List of Current Actions onPreviously Published Items1

Bulletins 2004–1 through 2004–10

Announcements:

2003-56

Modified by

Ann. 2004-11, 2004-10 I.R.B. 581

Proposed Regulations:

REG-110896-98

Corrected by

Ann. 2004-14, 2004-10 I.R.B. 582

REG-115037-00

Corrected by

Ann. 2004-7, 2004-4 I.R.B. 365

REG-143321-02

Withdrawn by

REG-156232-03, 2004-5 I.R.B. 399

REG-146893-02

Corrected by

Ann. 2004-7, 2004-4 I.R.B. 365

REG-163974-02

Corrected by

Ann. 2004-13, 2004-9 I.R.B. 543

Revenue Procedures:

87-19

Obsoleted in part by

Rev. Proc. 2004-18, 2004-9 I.R.B. 529

93-15

Obsoleted in part by

Rev. Proc. 2004-18, 2004-9 I.R.B. 529

94-41

Superseded by

Rev. Proc. 2004-15, 2004-7 I.R.B. 490

94-55

Obsoleted in part by

Rev. Proc. 2004-18, 2004-9 I.R.B. 529

98-16

Suspended by

Notice 2004-12, 2004-10 I.R.B. 556

2000-38

Modified by

Rev. Proc. 2004-11, 2004-3 I.R.B. 311

2000-50

Modified by

Rev. Proc. 2004-11, 2004-3 I.R.B. 311

2002-9

Modified and amplified by

Rev. Rul. 2004-18, 2004-8 I.R.B. 509

Revenue Procedures— Continued:

Modified by

Rev. Proc. 2004-11, 2004-3 I.R.B. 311

2002-71

Superseded by

Rev. Proc. 2004-13, 2004-4 I.R.B. 335

2003-1

Superseded by

Rev. Proc. 2004-1, 2004-1 I.R.B. 1

2003-2

Superseded by

Rev. Proc. 2004-2, 2004-1 I.R.B. 83

2003-3

As amplified by Rev. Proc. 2003-14, and as

modified by Rev. Proc. 2003-48 superseded by

Rev. Proc. 2004-3, 2004-1 I.R.B. 114

2003-4

Superseded by

Rev. Proc. 2004-4, 2004-1 I.R.B. 125

2003-5

Superseded by

Rev. Proc. 2004-5, 2004-1 I.R.B. 167

2003-6

Superseded by

Rev. Proc. 2004-6, 2004-1 I.R.B. 197

2003-7

Superseded by

Rev. Proc. 2004-7, 2004-1 I.R.B. 237

2003-8

Superseded by

Rev. Proc. 2004-8, 2004-1 I.R.B. 240

2003-23

Modified and superseded by

Rev. Proc. 2004-14, 2004-7 I.R.B. 489

2003-26

Supplemented by

Rev. Proc. 2004-17, 2004-10 I.R.B. 562

2004-1

Corrected by

Ann. 2004-8, 2004-6 I.R.B. 441

2004-4

Modified by

Rev. Proc. 2004-15, 2004-7 I.R.B. 490

2004-5

Modified by

Rev. Proc. 2004-15, 2004-7 I.R.B. 490

2004-6

Modified by

Rev. Proc. 2004-15, 2004-7 I.R.B. 490

Revenue Rulings:

55-748

Modified and superseded by

Rev. Rul. 2004-20, 2004-10 I.R.B. 546

92-19

Supplemented in part by

Rev. Rul. 2004-14, 2004-8 I.R.B. 511

94-38

Clarified by

Rev. Rul. 2004-18, 2004-8 I.R.B. 509

98-25

Clarified by

Rev. Rul. 2004-18, 2004-8 I.R.B. 509

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2003–27 through 2003–52 is in Internal Revenue Bulletin 2003–52, dated December 29,2003.

March 8, 2004 iii 2004-10 I.R.B.*U.S. Government Printing Office: 2004—304–774/60125