Lease stripping transaction. This ruling discusses whether section 482 of the Code may apply to allow allocations of the income and deductions arising from a lease stripping transaction entered into by parties that were unrelated at the time the income is stripped from the lease, solely on the basis that the parties were acting in concert or with a common goal or purpose, to arbitrarily shift income or deductions among themselves.

Deductibility of interest. This ruling provides guidance on whether interest accruing on a note is deductible under section 163(a) of the Code, and whether the deduction is disallowed under section 163(1), when a corporation issues units, each consisting of instruments in the form of a note and a forward contract to purchase a quantity of the corporation's common stock. The holding of this ruling is modified for units issued on or before August 22, 2003. This ruling also requests comments concerning possible regulations under section 163(1).

Deduction rules; compensatory stock options. This ruling addresses the application of the deduction rules under section 83(h) of the Code with regard to the exercise or disposition of compensatory stock options following certain corporate transactions.

Obsolete revenue rulings. This ruling publishes a list of previously published rulings that have been identified as no longer determinative with respect to future transactions.

LIFO; price indexes; department stores. The June 2003 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, June 30, 2003.

Proposed regulations under section 141 of the Code revise the definition of nonqualified bonds contained in regulations section 1.141-12 by reducing the amount of outstanding bonds that are nonqualified bonds. Second, the proposed regulations simplify the rules for determining which bonds will be treated as the nonqualified bonds for purposes of the remedial action rules under sections 1.141-12 and 1.142-2. Finally, they clarify the remedial action rules applicable to bonds issued prior to May 16, 1997 (the effective date of the current private activity bond regulations). A public hearing is scheduled for November 4, 2003. Rev. Proc. 93-17 obsolete for actions that occur on or after May 16, 1997.

Proposed regulations under section 6724 of the Code provide rules designed to determine whether the correction of a failure to file a correct information return is considered prompt for purposes of waiving information reporting penalties. A public hearing is scheduled for October 21, 2003.

This notice concerns the federal tax treatment of lease strips. Notice 95-53 modified and superseded.

Equity investment prior to allocation. The Treasury Department and the Service announce that they will amend section 1.45D-1T(c)(3)(ii) of the temporary regulations to provide an exception permitting certain equity investments made on or after the date the Community Development Financial Institutions Fund publishes a Notice of Allocation Availability in the Federal Register, and before the receipt of a new markets tax credit allocation under section 45D(f)(2), to be designated as qualified equity investments under section 45D(b)(1)(C) of the Code.

This procedure restates and modifies Rev. Procs. 2002-13 and 2002-45. The modifications include permitting the use of expected term in connection with the safe harbor valuation method and the ability to recalculate the option value under certain circumstances. Rev. Procs. 2002-13 and 2002-45 revoked.

This procedure provides the domestic asset/liability percentages and domestic investment yields needed by foreign insurance companies to compute their minimum effectively connected net investment income for taxable years beginning after December 31, 2001.

This procedure restates and modifies Rev. Procs. 2002-13 and 2002-45. The modifications include permitting the use of expected term in connection with the safe harbor valuation method and the ability to recalculate the option value under certain circumstances. Rev. Procs. 2002-13 and 2002-45 revoked.

This notice provides circumstances under which no Form 3520 or Form 3520-A with respect to certain Canadian retirement plans is required with respect to the 2002 taxable year, and guidance concerning compliance with Forms 3520 and 3520-A when required.

Proposed regulations under section 6724 of the Code provide rules designed to determine whether the correction of a failure to file a correct information return is considered prompt for purposes of waiving information reporting penalties. A public hearing is scheduled for October 21, 2003.

Low-income housing tax credit. This procedure publishes the amounts of unused housing credit carryovers allocated to qualified states under section 42(h)(3)(D) of the Code for calendar year 2003.

This procedure provides the requirements for completing and submitting Form 8655, Reporting Agent Authorization for Magnetic Tape/Electronic Filers. Rev. Proc. 96-17 modified and superseded.

Under § 83 of the Internal Revenue Code, in the situations described below, which corporation is entitled to deduct the compensation income includible in Employee's gross income as a result of Employee's exercise or disposition of a nonstatutory option?

Situation 1. On January 1, 2003, Employee begins employment with Company M and is granted a nonstatutory option to purchase a number of shares of M common stock (“the M Option”). The M Option has no readily ascertainable fair market value when it is granted and is not exercisable until January 1, 2006.

On November 15, 2006, Company N acquires all of the outstanding shares of M for cash. N does not make an election under § 338(g) to treat its acquisition of M as a deemed acquisition of the assets of M, thus treating it instead as an acquisition of the stock of M. Thereafter, M conducts its business as a wholly owned subsidiary of N. M and N are accrual basis taxpayers, and each has a taxable year ending on September 30.

On the acquisition date, either pursuant to the terms of the M Option or in response to an offer from N, Employee surrenders the M Option to N, and, in exchange, N grants an exercisable nonstatutory option to acquire a number of shares of N common stock (“the N Option”) to Employee. The N Option has no readily ascertainable fair market value. On January 15, 2007, while still employed by M, Employee exercises the N Option and receives substantially vested N shares from N.

Situation 2. The facts are the same as in Situation 1, except that, under the terms of the N Option, N has the ability to cancel the option at any time in exchange for a payment in cash or in value-equivalent substantially vested N shares. On January 15, 2007, N cancels the N Option in exchange for a payment (in cash or shares) to Employee.

Situation 3. The facts are the same as in Situation 1, except that the M Option is not exchanged for the N Option on the acquisition date. Instead, the M Option remains outstanding after the acquisition date until January 15, 2007, when either pursuant to the terms of the M Option or with Employee's agreement, N cancels the M Option and pays the excess of the fair market value of the stock purchasable under the option over the option's exercise price in cash or in value-equivalent substantially vested N shares to Employee.

Situation 4. The facts are the same as in Situation 1, except that on November 15, 2006, M and N merge under state law, with N as the surviving corporation. The merger qualifies as a complete liquidation within the meaning of § 332.

Under § 83(a), when property is transferred to any person in connection with the performance of services, the service provider must include in gross income (as compensation income) the excess of the fair market value of the property, determined at the first time that the transferee's rights in the property are either transferrable or not subject to a substantial risk of forfeiture (“substantially vested”), over the amount (if any) paid for the property.

Section 83(e)(3) provides that § 83 does not apply to the transfer of an option without a readily ascertainable fair market value on the date of grant. Under § 1.83-7 of the Income Tax Regulations, § 83 applies at the time such an option is exercised, or otherwise disposed of. If the option is exercised, § 83(a) applies to the transfer of property pursuant to the exercise. Under § 1.83-7(a), if the option is sold or otherwise disposed of in an arm's length transaction, §§ 83(a) and 83(b) apply to the transfer of money or other property received in the same manner as §§ 83(a) and 83(b) would have applied to the transfer of property pursuant to an exercise of the option. Under § 1.83-7T, the preceding sentence does not apply to a sale or other disposition of the option to a person related to the service provider that occurs on or after July 2, 2003. For this purpose, a person is not related to the service provider if the person is the service recipient with respect to the option or the grantor of the option.

Thus, in each of the above Situations, because the M Option has no readily ascertainable fair market value when granted, § 83 does not apply to the option at that time. Rather, § 83(a) applies to the consideration received by Employee upon the disposition of the M Option in the case of Situation 3 and the exercise or disposition of the N Option in the case of Situations 1, 2, and 4.

Under § 83(h) and § 1.83-6(a)(1), the service recipient is allowed a compensation expense deduction, under § 162, for the amount included in the service provider's gross income under § 83(a). Under the general timing rule of § 83(h), the deduction is allowed for the service recipient's taxable year in which or with which ends the service provider's taxable year in which the amount is included in gross income. Section 1.83-6(a)(3) provides an exception to that rule: in cases where the property transferred is substantially vested upon transfer, the deduction is allowed to the service recipient under its method of accounting.

Section 1.83-6(d)(1) generally provides that, if a shareholder of a corporation transfers property to an employee (or independent contractor) of the corporation in consideration for services performed by the employee for the corporation, the transaction is considered a contribution of the property by the shareholder to the corporation and, immediately thereafter, a transfer of the property by the corporation to the employee. The transfer of property to the employee is considered to be in consideration for services performed by the employee for the corporation if either the property is substantially nonvested at the time of transfer or if an amount is includible in the gross income of the employee at the time of transfer under the rules of § 83. See § 1.1032-3 for special rules that may apply to a corporation's transfer of its own stock to any person in consideration of services performed for another corporation or partnership.

Section 332(a) provides that no gain or loss is recognized on the receipt by a corporation (the acquiring corporation) of property distributed in complete liquidation of another corporation (the liquidating corporation).

Section 381(a)(1) provides, in part, that, where the assets of a liquidating corporation are distributed to the acquiring corporation in a transaction to which § 332 applies, the acquiring corporation succeeds to and takes into account, as of the close of the day of distribution, the items described in § 381(c) of the liquidating corporation, subject to the conditions and limitations described in §§ 381(b) and (c).

In a transaction to which § 381(a) applies, § 381(c)(16) permits the acquiring corporation to deduct an assumed obligation of the liquidating corporation, as if it were the liquidating corporation, when that obligation is paid or accrued (1) if such obligation gives rise to a liability after the date of distribution and (2) if the liquidating corporation would have been entitled to deduct that liability in computing taxable income were that liability paid or accrued by the liquidating corporation. See § 1.381(c)(16)-1(a)(1).

Section 1.381(c)(16)-1(a)(4) provides that an obligation of a liquidating corporation gives rise to a liability when the liability would be accruable by a taxpayer using the accrual method of accounting, notwithstanding the fact that the liquidating corporation is not using the accrual method of accounting. See § 1.461-1(a)(2).

Section 1.461-1(a)(2)(i) provides that, under an accrual method of accounting, a liability is incurred, and generally is taken into account for federal income tax purposes, in the taxable year in which: (1) all the events have occurred that establish the fact of the liability, (2) the amount of the liability can be determined with reasonable accuracy, and (3) economic performance has occurred with respect the liability. A liability with respect to an option generally is incurred and taken into account in the year in which the employee exercises the option because that is when the liability becomes fixed and determinable with reasonable accuracy. Therefore, for purposes of § 381(c)(16), an option generally gives rise to a liability when it is exercised.

In Situations 1, 2, and 4, the substitution of the M Option for the N Option does not cause Employee to recognize compensation income under § 83(a). In Situations 1 and 4, Employee recognizes compensation income under § 83(a) in 2007, which is Employee's taxable year in which the N Option is exercised. In Situations 2 and 3, Employee also recognizes compensation income under § 83(a) in 2007, which is Employee's taxable year in which N cancels the substituted N Option or cancels the M Option.

Applying § 83(h) and § 1.83-6 to Situations 1, 2, and 3, because M is the service recipient with respect to either the M Option or the N Option, M, and only M, is permitted to deduct the compensation includible in Employee's gross income as a result of the disposition of the M Option or the exercise or disposition of the N Option. Although N actually pays the cash or transfers its stock directly to Employee, such payment (or transfer) is treated as a cash capital contribution by N to M (and M is treated as purchasing the stock from N in the case of a stock transfer to the Employee) and as a payment of cash (or transfer of stock) by M to the Employee. See §§ 1.83-6(d)(1), 1.1032-3(b)(1), and 1.1032-3(e), Example 8. Because the consideration received by Employee upon the disposition of the M Option or the exercise or disposition of the N Option is either cash or substantially vested N shares, the § 1.83-6(a)(3) exception to the general timing rule for deductions in § 83(h) applies. Accordingly, to the extent that the compensation is otherwise deductible, M, and only M, is entitled to deduct the compensation, using its method of accounting, for its taxable year ending September 30, 2007.

In Situation 4, because the merger of M into N qualifies as a liquidation within the meaning of § 332, under § 381, N succeeds to and takes into account those tax items of M described in § 381(c). Because (1) N assumed the obligation of M pursuant to the N Option, (2) after the date of the merger, the N Option gives rise to a liability under § 1.461-1(a)(2) by reason of its exercise, and (3) the liability, if paid or accrued by M would have been deductible in computing M's taxable income, N is entitled to deduct that item when paid or accrued as if it were M. See § 381(c)(16).

Under § 83(h) and § 1.83-6(a), N is entitled to a deduction for the amount of compensation income (if any) included in the gross income of Employee under § 83(a). The amount of compensation income (if any) included in the gross income of Employee is determined on January 15, 2007, when the option is exercised and the stock transferred to Employee. Because the stock is substantially vested when transferred to Employee, to the extent that the compensation recognized by Employee in Situation 4 is otherwise deductible, the deduction is allowed in accordance with N's method of accounting. Thus, the deduction is allowed for N's taxable year ending September 30, 2007.

In Situations 1, 2, and 3, the compensation attributable to Employee's disposition of the M Option or exercise or disposition of the N Option, if it is otherwise deductible, is deductible by M. In Situation 4, the compensation, if it is otherwise deductible, is deductible by N, as if it were M.

The principal author of this revenue ruling is Norm Paul of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this revenue ruling, contact Norm Paul or Robert Misner at (202) 622-6030 (not a toll-free number).

Under the facts presented below, if a corporation issues units, each consisting of instruments in the form of a 5-year note and a 3-year forward contract to purchase a quantity of the corporation's common stock, is the “interest” accruing on the note deductible under § 163(a) of the Internal Revenue Code and not disallowed under § 163(l)?

On August 18, 2003 (“Issue Date”), X, a corporation, issues units, each consisting of instruments in the form of a 3-year forward contract to purchase a quantity of X's common stock (“Purchase Contract”) and a 5-year note issued by X (“Note”) (together, a “Purchase-Contract/Note unit”). The Purchase Contract requires the holder to purchase, and X to sell, on August 18, 2006 (“Settlement Date”), a quantity of X's common stock that is determined by reference to the market price of the stock on the Settlement Date. The Note has a stated maturity date of August 18, 2008 (“Maturity Date").

Under the Purchase Contract, on the Settlement Date the holder must pay an amount (“Settlement Price”) that is equal to the stated principal amount of the Note. If the market price of X's common stock on the Settlement Date falls within a specific range of market prices (bounded by a “lower limit” based on the market price on the Issue Date and an “upper limit” equal to approximately 120 percent of the lower limit), the quantity of stock deliverable under the Purchase Contract will have a market value equal to the Settlement Price. If the market price on the Settlement Date is less than the lower limit or greater than the upper limit, the quantity of stock that is deliverable under the Purchase Contract is the quantity that would be deliverable if the market price on that date were equal to the lower limit or the upper limit, respectively.

X allocates the purchase price of a Purchase-Contract/Note unit between the Purchase Contract and the Note according to their respective fair market values, as if the Purchase Contract and the Note were separate instruments. The amount allocated to the Note is equal to the Note's stated principal amount.

The Note contained in a Purchase-Contract/Note unit is pledged to secure the holder's obligation to pay the Settlement Price under the Purchase Contract. As described below, the holder, however, has the legal right to separate the Note from the Purchase-Contract/Note unit in either of two ways (producing a “Separated Note”). The holder is not economically compelled to keep a unit unseparated.

The holder may separate the Note from the Purchase-Contract/Note unit before the Settlement Date without paying the Settlement Price. To do so, the holder must transfer the unit to X's agent (“Purchase Contract Agent”) together with a specific zero-coupon Treasury security (“Strip”), and then the holder will receive a “Purchase-Contract/Strip unit” together with the Separated Note (a “conversion”). The Strip contained in the Purchase-Contract/Strip unit replaces the Note as collateral. Once a holder has effected a conversion, the holder may transfer the Note and retain the Purchase-Contract/Strip unit or transfer the Purchase-Contract/Strip unit and retain the Note. The Strips mature shortly before the Settlement Date and pay an amount equal to the Settlement Price. On the Settlement Date, X will apply the proceeds from the Strip contained in any Purchase-Contract/Strip unit to satisfy the holder's obligation to pay the Settlement Price under the associated Purchase Contract.

In addition, before the completion of a successful remarketing (described below), the holder of a Purchase-Contract/Note unit or a Purchase-Contract/Strip unit may transfer the unit to the Purchase Contract Agent together with cash in an amount equal to the Settlement Price and receive a quantity of shares of X's common stock together with the Separated Note or the Strip (a “settlement with separate cash”).

The Note provides for quarterly payments of amounts denominated as interest, including a payment on the Settlement Date. This interest is payable at a single fixed rate (“Initial Rate”). The Notes are required to be remarketed on specific dates before the Settlement Date, including May 15, 2006, and August 15, 2006 (“Final Remarketing Date”). A successful remarketing of the Notes generally will result in the sale of the Notes to new holders effective on the next quarterly interest payment date (for example, May 18, 2006, and August 18, 2006) and will establish a new interest rate (“Reset Rate”), which will be effective after the remarketing for the remaining term of the Notes.

The Note is not subject to optional redemption by X at any time. Neither the written terms of the Note nor any other understanding or agreement requires the Note to be paid in, or converted into, X's stock. Similarly, neither the written terms of the Note nor any other understanding or agreement grants X an option to pay the Note in, or convert the Note into, X's stock.

X enters into a contract with an investment bank, Y, to serve as remarketing agent. Y will attempt to remarket the Notes with a Reset Rate that will permit the Notes to be sold for an amount equal to at least 100 percent of, and up to a target of 100 percent of, a specific price (“Minimum Required Price”). There is no upper limit on the Reset Rate. For a remarketing on the Final Remarketing Date, the Minimum Required Price is the aggregate stated principal amount of the remarketed Notes. For remarketings before the Final Remarketing Date, the Minimum Required Price is the amount that could be invested in then-available zero-coupon Treasury securities (“Treasury Zeros”) that mature shortly before the Settlement Date and pay an amount equal to the sum of the aggregate stated principal amount of the remarketed Notes, plus the aggregate interest at the Initial Rate that would have been payable on the Notes on the Settlement Date if the Notes had not been remarketed.

The remarketings will include all of the Notes contained in Purchase-Contract/Note units on the remarketing dates. In addition, holders of Separated Notes may elect to include those Notes in the remarketings. If a remarketing succeeds, the interest rate on all the Notes will be changed from the Initial Rate to the Reset Rate for the remaining term of the Notes, whether or not they were included in the remarketing.

A remarketing will not occur if a condition precedent to the remarketing (for example, the existence of an effective registration statement for the Notes) is not fulfilled. Moreover, even if all conditions are satisfied and a remarketing does occur, the remarketing will not succeed if Y is unable to obtain the Minimum Required Price. (In either case, the remarketing is said to “fail.”) On the Issue Date, it is substantially certain that a remarketing of the Notes will succeed.

In the case of a Separated Note, if all of the remarketings fail, then, on the Settlement Date, the holder of the Note will have the right to put the Note to X in exchange for cash equal to the Note's stated principal amount plus any accrued but unpaid interest. If such a Note is not put to X, the Initial Rate will remain in effect for that Note until the Maturity Date.

In the case of a Note contained in a Purchase-Contract/Note unit, if all of the remarketings fail, X will exercise its rights as a secured party to dispose of the Notes in accordance with applicable law and satisfy in full the holder's obligation to purchase X's common stock under the Purchase Contract. As a result, the holder will receive the interest payment due on the Settlement Date and the amount of X's common stock deliverable under the Purchase Contract.

If a remarketing succeeds, the remarketing proceeds (or the proceeds of the Treasury Zeros in the case of a successful remarketing before the Final Remarketing Date) must be used by X in the following manner. If a Note was part of a Purchase-Contract/Note unit on the date of the successful remarketing, X must apply an amount equal to the stated principal amount of the Note to satisfy the former holder's obligation to pay the Settlement Price under the associated Purchase Contract.

In addition, X must pay the former holder cash in an amount equal to the interest (at the Initial Rate) that would have been payable to the holder on the Settlement Date had the Notes not been remarketed. If the successful remarketing occurs before the Final Remarketing Date, this amount will be paid out of the proceeds of the Treasury Zeros. If the successful remarketing occurs on the Final Remarketing Date, the amount will be paid out of X's own funds. X will make similar payments to the former holders of any participating Separated Notes.

Y will receive a remarketing fee of one quarter of one percent of the Minimum Required Price. This remarketing fee will be paid first from the excess, if any, of the remarketing proceeds over the Minimum Required Price and then, if necessary, by X from its own funds. If any proceeds in excess of the Minimum Required Price are not applied to the remarketing fee (that is, if the proceeds are between 100 percent and 100 percent of the Minimum Required Price), these excess proceeds will be distributed to the former holders of the remarketed Notes (including any participating Separated Notes).

Purchase-Contract/Note units are listed on a national securities exchange. Purchase-Contract/Strip units and Separated Notes are not so listed but are freely assignable without restrictions on their transferability.

The Purchase Contract provides that, in the event of X's bankruptcy, the Purchase Contract will terminate and the associated Note or Strip will be released to the holder. On the Issue Date, X reasonably believes, based on advice from counsel, that this provision will be enforceable in bankruptcy and will result in the holder of a Purchase-Contract/Note unit being treated as a creditor in any bankruptcy proceeding.

Based on the terms of the Note and other facts and circumstances, if the Note were issued independently of the Purchase Contract in a transaction that did not link the rights and obligations under the Note with the rights and obligations under the Purchase Contract, then the Note would qualify as debt for federal income tax purposes, interest accruing on the Note would be deductible unless § 163(l) applies, and, under § 1.1001-3 of the Income Tax Regulations, the Note in existence before a successful remarketing would continue to exist after the remarketing. That is, the Note would not be treated as having been retired in conjunction with the issuance of a new debt instrument that bears an interest rate equal to the Reset Rate.

As stated above, the Note would qualify as debt for federal income tax purposes if it were issued independently of the Purchase Contract in a transaction that did not link the rights and obligations under the Note with the rights and obligations under the Purchase Contract. Upon the earlier of a conversion, a settlement with separate cash, or a successful remarketing of the Note, the Note will no longer be linked with the Purchase Contract. At that time, the Note will qualify as debt for federal income tax purposes. Interest accruing on the Note after that time will be deductible under § 163(a).

On the other hand, during the time that the Note is contained in a Purchase-Contract/Note unit, there is an issue of whether the bundle of rights and obligations resulting from the unit should be treated for federal income tax purposes as consisting of a debt instrument and a stock purchase contract. An important initial inquiry bearing on whether the Note may be separately analyzed for federal income tax purposes is whether the Note is separable from the Purchase-Contract/Note unit. Even if the Note is separable, however, various features of the Note and Purchase Contract raise the possibility that, for federal income tax purposes, the Purchase-Contract/Note unit nevertheless is treated as some other combination of instruments. For example, a Purchase-Contract/Note unit could be treated as a prepaid forward contract to purchase a variable quantity of X's stock together with options (1) to acquire a Note by tendering a Strip to be combined into a Purchase-Contract/Strip unit or (2) to purchase a Note for cash by settling the forward contract early, together with a commitment by X to issue new Notes in the context of a “remarketing.”

The correct characterization for federal income tax purposes of a transaction creating multiple rights and obligations depends on the facts and circumstances of the particular transaction. In deciding among multiple potential characterizations, the tax law seeks to find the best match between the bundle of rights and obligations and one or more categories of widely recognized instruments. In the instant case, the form chosen for the components of the unit reflects one reasonable division of the bundle of rights and obligations in the unit. Consequently, it is appropriate to begin the analysis of the issuer's tax consequences with respect to the unit by treating the unit as comprising these two components—namely, the Note and the Purchase Contract.

After the Note has been identified as one of the components of the Purchase-Contract/Note unit, determining whether X may deduct the amounts identified as interest on the Note contained in the Purchase-Contract/Note unit involves a multi-step analysis:

Under the facts presented, the interest accruing on a Note contained in a Purchase-Contract/Note unit is deductible under § 163(a), and the deduction is not disallowed under § 163(l).

Under the authority of § 7805(b)(8), the holding of this revenue ruling will not be applied adversely with respect to a unit that was issued on or before August 22, 2003, provided that interest accruing on the unit would be deductible under this revenue ruling if—

(1) Critical Factor II required only that, under the transaction documents, in the event of the issuer's bankruptcy, the Purchase Contract will terminate and the associated Note or Treasury security will be released to the holder; and

(2) Critical Factor IV required only that the issuer of the unit undertook a legal obligation to attempt to cause a remarketing to succeed and reasonably believed that a remarketing would succeed.

The Internal Revenue Service and the Treasury Department are considering whether to issue regulations under § 163(l) to address the policy issues raised by the transaction described in this ruling. The Internal Revenue Service and the Treasury Department request comments as to whether regulations should be promulgated and, if so, what these regulations should provide.

Comments should be submitted by October 22, 2003. Comments may be submitted to CC:PA:RU (Rev. Rul. 2003-97), room 5203, Internal Revenue Service, POB 7604 Ben Franklin Station, Washington, DC 20044. Comments may be hand delivered between the hours of 8:00 a.m. and 4 p.m. Monday to Friday to CC:PA:RU (Rev. Rul. 2003-97), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, comments may be submitted via the Internet at Notice.Comments@irscounsel.treas.gov. All comments will be available for public inspection and copying.

The principal author of this revenue ruling is Charles Culmer of the Office of Associate Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling, contact Mr. Culmer at (202) 622-3960 (not a toll-free call).

The following Department Store Inventory Price Indexes for June 2003 were issued by the Bureau of Labor Statistics. The indexes are accepted by the Internal Revenue Service, under § 1.472-1(k) of the Income Tax Regulations and Rev. Proc. 86-46, 1986-2 C.B. 739, for appropriate application to inventories of department stores employing the retail inventory and last-in, first-out inventory methods for tax years ended on, or with reference to, June 30, 2003.

The Department Store Inventory Price Indexes are prepared on a national basis and include (a) 23 major groups of departments, (b) three special combinations of the major groups — soft goods, durable goods, and miscellaneous goods, and (c) a store total, which covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.

The principal author of this revenue ruling is Michael Burkom Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Burkom at (202) 622-7924 (not a toll-free call).

Whether section 482 may apply to allow allocations of the income and deductions arising from the property that is the subject of a lease stripping transaction entered into and effected among parties that were unrelated up to and including the time income is stripped from the lease pursuant to a plan promoted to realize tax benefits for one or more of the parties, solely on the basis that at such time the parties were acting in concert or with a common goal or purpose to arbitrarily shift income or deductions among themselves.

A, a foreign corporation, purchases property from B, an equipment leasing company. At the time of the purchase, the property was subject to pre-existing end user leases with varying terms extending over future years. A is not engaged in a trade or business within the United States and is exempt from U.S. taxation on U.S. source income, if any, from the end user leases under an applicable income tax treaty. A sells the right to all future rental income attributable to the end user leases to C.

D, a domestic corporation, is the parent of an affiliated group of corporations that files a U.S. consolidated income tax return. After the rights to the future rental income have been sold to C, A transfers the leased property subject to the end user leases to E, a domestic corporation, in a purported section 351 transaction entered into with D where immediately after the transaction, A has non-voting preferred stock in E and D has 100% of the voting stock of E. E is a member of the D consolidated group (the “D group”) after the purported section 351 transaction. Subsequent depreciation deductions from the leased property are reflected on the consolidated return for the D group.

The foregoing steps were undertaken pursuant to a plan promoted by P to A, B, C, and the D group to achieve U.S. income tax benefits for one or more of the parties. A, B, C, the D group, and P were unrelated to one another at all times up to and including the time the income is stripped from the leases in the transaction between A and C, and A and D also were unrelated to one another throughout the period in which tax benefits are claimed with respect to the lease stripping transaction.

Section 482 provides, in part:

In determining whether or not two or more organizations, trades, or businesses are controlled directly or indirectly by the same interests, control is defined to include any kind of control, direct or indirect, whether legally enforceable or not, and however exercisable or exercised, including control resulting from the actions of two or more taxpayers acting in concert or with a common goal or purpose. Treas. Reg. § 1.482-1(i)(4). It is the reality of control that is decisive, not its form or the mode of its exercise. Id.; Ach v. Commissioner, 42 T.C. 114 (1964), aff'd, 358 F.2d 342 (6th Cir.), cert. denied, 385 U.S. 899 (1966). A presumption of control arises if income or deductions have been arbitrarily shifted. Treas. Reg. § 1.482-1(i)(4).

The issue under section 482 is whether an allocation between or among organizations, trades, or businesses owned or controlled by the same interests is necessary to prevent the evasion of taxes or clearly to reflect the income of any of such organizations, trades or businesses. Therefore, situations in which two or more taxpayers act in concert to control another organization, trade or business with a common goal or purpose to arbitrarily shift income or deductions between one or more of such taxpayers and the controlled organization, trade or business are brought within the application of section 482 by the reference in section 1.482-1(i)(4) to “control resulting from the actions of two or more taxpayers acting in concert or with a common goal or purpose.”

An example would be three equal and otherwise unrelated shareholders in a corporation that, acting in concert, individually purchase from or sell items to the corporation at prices that differ from those that would be charged by unrelated parties in similar circumstances. Even though none of the shareholders individually has actual or effective control of the corporation, where the shareholders act in concert with a common goal of shifting income or deductions from or to the corporation, section 1.482-1(i)(4) provides that each shareholder is considered to control the corporation for purposes of the application of section 482. See, e.g., B. Forman Co., Inc. v. Commissioner, 453 F.2d 1144 (2d Cir. 1972), cert. denied, 407 U.S. 934, rehearing denied, 409 U.S. 899 (1972), aff'g in part, and rev'g in part, 54 T.C. 912 (1970); South Texas Rice Warehouse Co. v. Commissioner, 366 F.2d 890 (5th Cir. 1966), aff'g 43 T.C. 540 (1965), cert. denied, 386 U.S. 1016 (1967).

By contrast, the fact that unrelated parties engage in a transaction does not by itself evidence the type of control necessary to satisfy the “acting in concert or with a common goal or purpose” requirement of section 1.482-1(i)(4), regardless of whether such transaction may be viewed as having arbitrarily shifted income between the otherwise unrelated parties. An application of section 1.482-1(i)(4) to this type of situation would be inconsistent with the policies underlying section 482, which provides for allocations between or among organizations, trades or businesses “owned or controlled directly or indirectly by the same interests.”

Under the facts, the lease stripping transaction occurred among parties that themselves were unrelated to one another up to and including the time the income is stripped from the leases. Up to and including the time the income is stripped from the leases, there were not two or more of such parties and another organization, trade or business which such parties acted in concert to control. Accordingly, at that time, the parties did not “act in concert or with a common goal or purpose” within the meaning of section 1.482-1(i)(4).

The facts described up to and including the time the income is stripped from the leases do not support the application of section 482 to allow the allocation among the parties of the income and deductions arising from the property that is the subject of the lease stripping transaction. The fact that parties that were unrelated up to and including the time of a transaction engage in that transaction in an attempt to arbitrarily shift income or deductions among themselves does not by itself evidence the type of control necessary to satisfy the “acting in concert or with a common goal or purpose” requirement of section 1.482-1(i)(4). This ruling does not address whether A is considered to control E for purposes of the application of section 482 by reason of A and D entering into the purported section 351 transaction with E.

No inference is intended concerning the treatment of lease stripping transactions for federal income tax purposes. The Internal Revenue Service will challenge lease stripping transactions on other legal grounds. See Notice 2003-55, 2003-34 I.R.B. , August 25, 2003.

The principal authors of this revenue ruling are Sheila Ramaswamy and J. Peter Luedtke of the Office of Associate Chief Counsel (International). For further information regarding this revenue ruling, contact Sheila Ramaswamy at 202-622-3870 or J. Peter Luedtke at 202-435-5265 (not toll-free calls).

The Internal Revenue Service is continuing its program of reviewing rulings (including revenue rulings, revenue procedures, and notices) published in the Internal Revenue Bulletin to identify and publish lists of those rulings that, although not specifically revoked or superseded, are no longer considered determinative because (1) the applicable statutory provisions or regulations have been changed or repealed; (2) the ruling position is specifically covered by statute, regulations, or subsequent published position; or (3) the facts set forth no longer exist or are not sufficiently described to permit clear application of the current statute and regulations.

This revenue ruling publishes a list of rulings that have been identified under the Service's review program as no longer being determinative. The rulings are categorized by the Associate Chief Counsel offices that have primary jurisdiction over the subject matter of the rulings being obsoleted.

Accordingly, the rulings listed below are hereby declared obsolete.

The Service will continue to review other rulings to ascertain those that, for the reasons stated above, are inapplicable to future transactions. Therefore, failure to include any particular ruling in the above list should not be construed as an indication that the ruling necessarily is determinative with respect to future transactions.

The principal author of this revenue ruling is Marnette Myers of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding the rulings obsoleted in this revenue ruling, contact the following persons from the appropriate Associate Chief Counsel offices (not a toll-free call):

NameAssociate Chief CounselTelephone No.Marnette MyersIncome Tax and Accounting(202) 622-4920Louis SolomonPassthroughs and Special Industries(202) 622-3010Wayne MurrayCorporate(202) 622-7700Kelly Myers KoganInternational(202) 622-3810

Notice 95-53, 1995-2 C.B. 334, addresses certain tax consequences of lease strips or stripping transactions. Lease strips are transactions in which one participant claims to realize rental or other income from property and another participant claims the deductions related to that income (for example, depreciation or rental expenses). Lease strips may take a variety of forms, including, but not limited to, those in the following examples.

(a) A lease strip effected through a transferred basis transaction. In exchange for consideration, one participant sells, assigns, or otherwise transfers (“assigns”) the right to receive future payments under a lease of tangible property, and treats the amount realized from the assignment as its current income. The participant later transfers the property (subject to the lease) in a transaction intended to qualify as a transferred basis transaction, such as a transaction described in § 351 of the Internal Revenue Code. The transferee often is not identified until after the transferor has assigned the future payments. Typically, the transferor (or a partner in a partnership that is a transferor) is generally not subject to U.S. federal income tax or has available net operating losses, and the equity of the transferee is owned predominantly by persons other than the transferor.

(b) A lease strip effected through a transfer of an interest in a partnership (or other pass-through entity). In exchange for consideration, the partnership assigns its right to receive future payments under a lease of tangible property and allocates the amount realized from the assignment to its current partners (many of whom are generally not subject to federal income tax or have available net operating losses). The partnership retains the underlying property, and thereafter, there is a transfer or redemption of a partnership interest by one or more partners to whom the partnership allocated the income that it reported from the assignment. The transfer or redemption is structured to avoid a reduction in the basis of partnership property.

(c) A lease strip effected by a single participant. A participant assigns its right to receive future payments under a lease of tangible property at a time when that participant is not subject to U.S. federal income tax or in a manner in which the realized amount is not includible in computing the participant's U.S. federal income tax and that same participant or a successor claims deductions related to that income for purposes of U.S. federal income tax.

In addition to transactions described above, this notice applies to lease strips involving licenses of intangible property, service contracts, leaseholds or other non-fee interests in property, and the prepayment, front-loading, or retention (rather than assignment) of rights to receive future payments.

The Internal Revenue Service has concluded that lease strips improperly separate income from related deductions and generally do not produce the tax consequences desired by the participants. Depending on the facts of a particular case, the Service may apply one or more Code sections or theories to challenge a lease strip. For example, the Service may apply §§ 165, 269, 382, 446(b), 701, or 704. The Service also may challenge certain assignments or accelerations of future payments as financings. Finally, the Service, as appropriate, may assert that there is no valid partnership or may apply various judicial doctrines, such as the doctrines of assignment-of-income, business purpose, substance-over-form, step transaction, or sham.

Recently, the Court of Appeals for the District of Columbia Circuit held that the partnership used in a lease strip was not a valid partnership because the participants did not join together for a non-tax business purpose. Andantech L.L.C. v. Commissioner, Nos. 02-1213; 02-1215, (D.C. Cir. June 17, 2003), 2003 U.S. App. LEXIS 11908, aff'g in part and remanding for reconsideration of other issues T.C. Memo 2002-97 (2002). Also, in Nicole Rose v. Commissioner, 320 F.3d 282 (2d Cir. 2002), aff’g per curiam 117 T.C. 328 (2001), the United States Court of Appeals for the Second Circuit upheld the Tax Court’s determination that a lease transfer did not have economic substance.

Transactions that are the same as, or substantially similar to, the lease strips described in this notice are identified as “listed transactions” for purposes of § 1.6011-4(b)(2) of the Income Tax Regulations and §§ 301.6111-2(b)(2) and 301.6112-1(b)(2) of the Procedure and Administration Regulations. Independent of their classification as “listed transactions” for purposes of §§ 1.6011-4(b)(2), 301.6111-2(b)(2), and 301.6112-1(b)(2), transactions that are the same as, or substantially similar to, the transaction described in this notice may already be subject to the disclosure requirements of § 6011, the tax shelter registration requirements of § 6111, or the list maintenance requirements of § 6112 (§§ 1.6011-4, 301.6111-1T, 301.6111-2, and 301.6112-1). Persons required to register these tax shelters who have failed to register the shelters may be subject to the penalty under § 6707(a). Persons required to maintain a list of investors under § 6112 may be subject to the penalty under § 6708(a) if the requirements of § 6112 are not satisfied.

Finally, the Service may impose penalties on participants in lease strip transactions or, as applicable, on persons who participate in the promotion or reporting of lease strips, including the accuracy-related penalty under § 6662 and the return preparer penalty under § 6694.

In addition, the Service is currently evaluating other situations in which tax benefits are claimed as a result of transactions in which the ownership of property has been separated from the right to income from the property. For example, the Service is evaluating situations in which, in exchange for consideration, one participant assigns its interest in property but retains the right to income from the property, and, by allocating all of its basis to the transferred property and none to the retained future payments, the transferor claims a loss on the transfer.

This Notice 2003-55 modifies and supersedes Notice 95-53.

The principal author of this notice is Pamela Lew of the Office of Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this notice, contact Ms. Lew at (202) 622-3950 (not a toll-free call).

The purpose of this notice is to announce that the Treasury Department and the Internal Revenue Service will amend § 1.45D-1T(c)(3)(ii) of the temporary Income Tax Regulations to provide an additional exception permitting certain equity investments made before the receipt of a new markets tax credit allocation under § 45D(f)(2) of the Internal Revenue Code to be designated as qualified equity investments under § 45D(b)(1)(C).

Section 45D(a)(1) provides a new markets tax credit on certain credit allowance dates described in § 45D(a)(3) with respect to a qualified equity investment in a qualified community development entity (CDE).

Section 45D(b)(1)(C) provides that an equity investment in a CDE is a qualified equity investment only if the CDE designates the investment as a qualified equity investment.

Section 45D(c)(1) provides that an entity is a CDE only if, among other requirements, the entity is certified by the Secretary of the Treasury Department as a CDE.

Section 45D(b)(2) provides that the maximum amount of equity investments issued by a CDE that may be designated by the CDE as qualified equity investments shall not exceed the portion of the new markets tax credit limitation set forth in § 45D(f)(1) that is allocated to the CDE by the Secretary under § 45D(f)(2).

Section 1.45D-1T(c)(3)(i) provides that, except as provided in § 1.45D-1T(c)(3)(ii), an equity investment in an entity is not eligible to be designated as a qualified equity investment if it is made before the entity enters into an allocation agreement with the Secretary. An “allocation agreement” is an agreement between the Secretary and a CDE relating to a new markets tax credit allocation under § 45D(f)(2).

Section 1.45D-1T(c)(3)(ii) provides that, notwithstanding § 1.45D-1T(c)(3)(i), an equity investment in an entity is eligible to be designated as a qualified equity investment if — (A) the equity investment is made on or after April 20, 2001; (B) the entity in which the equity investment is made is certified by the Secretary as a CDE under § 45D(c) before January 1, 2003; (C) the entity in which the equity investment is made receives notification of the credit allocation (with the actual receipt of such credit allocation contingent upon subsequently entering into an allocation agreement) from the Secretary before January 1, 2003; and (D) the equity investment otherwise satisfies the requirements of § 45D and § 1.45D-1T.

The Secretary has delegated certain administrative functions relating to the new markets tax credit program to the Under Secretary (Domestic Finance), who in turn has delegated those functions to the Community Development Financial Institutions Fund (CDFI Fund). The delegated administrative functions include CDE certifications and new markets tax credit allocations.

Notice 2003-9, 2003-5 I.R.B. 369, announces that the Treasury Department and the Service will amend § 1.45D-1T(c)(3)(ii) to provide that, notwithstanding § 1.45D-1T(c)(3)(i), an equity investment in an entity is eligible to be designated as a qualified equity investment under § 1.45D-1T(c)(1)(iii) if— (1) the equity investment is made on or after April 20, 2001; (2) the designation of the equity investment as a qualified equity investment is made for a credit allocation received pursuant to an allocation application submitted to the CDFI Fund no later than August 29, 2002; and (3) the equity investment otherwise satisfies the requirements of § 45D and § 1.45D-1T.

In order to encourage equity investments in CDEs, the Treasury Department and the Service will amend § 1.45D-1T(c)(3)(ii) to provide an additional exception permitting an equity investment made on or after the date the CDFI Fund publishes a Notice of Allocation of Availability (NOAA) in the Federal Register to be designated as a qualified equity investment. Accordingly, § 1.45D-1T(c)(3)(ii) will be revised to provide that, notwithstanding § 1.45D-1T(c)(3)(i), an equity investment in an entity is eligible to be designated as a qualified equity investment under § 1.45D-1T(c)(1)(iii) if:

1. The equity investment is made on or after the date the CDFI Fund publishes a NOAA in the Federal Register;

2. The designation of the equity investment as a qualified equity investment is made for a credit allocation received pursuant to an allocation application submitted to the CDFI Fund under that NOAA; and

3. The equity investment otherwise satisfies the requirements of § 45D and § 1.45D-1T.

If the entity in which the equity investment is made does not receive an allocation under that NOAA, the equity investment will not be eligible to be designated as a qualified equity investment under future NOAAs.

The temporary regulations will be revised to incorporate the guidance set forth in this notice and Notice 2003-9. The revision to the temporary regulations reflecting the additional exception under this notice will be effective for equity investments made on or after July 18, 2003.

The principal author of this notice is Paul Handleman of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, contact Mr. Handleman at (202) 622-3040 (not a toll-free call)

Internal Revenue Code section 6048 requires information reporting with respect to certain foreign trusts. Persons subject to these information reporting rules must file Form 3520 (Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) or Form 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner), as applicable.

In Notice 2003-25, 2003-18 I.R.B. 855, Treasury and the Internal Revenue Service recognized that some taxpayers with interests in certain Canadian retirement savings plans, as well as the custodians of such plans, were unfamiliar with the requirements for filing Forms 3520 and 3520-A. Accordingly, Notice 2003-25 provides an automatic extension until August 15, 2003, for any person who is required to file a 2002 Form 3520 or Form 3520-A with respect to a Registered Retirement Savings Plan (“RRSP”), Registered Retirement Income Fund (“RRIF”) or other eligible plan within the meaning of section 3 of Revenue Procedure 2002-23, 2002-1 C.B. 744. Notice 2003-25 further provides that Treasury and the IRS are considering establishing for future taxable years a simplified reporting regime for RRSPs and persons with interests in RRSPs and coordinating the reporting requirements with the election described in section 4 of Revenue Procedure 2002-23.

Treasury and the IRS are continuing to work toward implementation of an alternative, simplified reporting regime for Canadian retirement plans for future taxable years. Treasury and the IRS have concluded, however, that additional relief with respect to 2002 Form 3520 and Form 3520-A reporting requirements should be provided to RRSPs and RRIFs and their beneficiaries.

First, with respect to the 2002 taxable year, if the beneficiary of an RRSP or RRIF (a) makes or has made an election with respect to the plan in accordance with section 4 of Revenue Procedure 2002-23 or section 3 of this notice, (b) complies or has complied with the annual reporting requirements of Revenue Procedure 2002-23 for the taxable year, and (c) received no distributions from the plan during his or her 2002 taxable year, then no Form 3520 or Form 3520-A with respect to the plan is required.

Second, an individual, RRSP or RRIF that has filed or files a Form 3520 or Form 3520-A for the 2002 taxable year that does not provide all appropriate information may be requested by the IRS to provide such information. Unless the IRS requests such information and the individual or plan fails to provide the IRS with the information identified in such request, no individual or plan that has filed or files a Form 3520 or Form 3520-A with respect to the 2002 taxable year will be subject to failure to file penalties. The individual or plan should write the following on the top of the first page of the Form 3520 or Form 3520-A: “CANADIAN RRSP” OR “CANADIAN RRIF” as the case may be.

Section 4 of Revenue Procedure 2002-23 provides procedures under which a beneficiary of an RRSP or RRIF may elect to defer U.S. income tax on the beneficiary's share of income accrued in the plan until that income is distributed to the beneficiary. A beneficiary makes this election by attaching to his or her timely filed (including extensions) United States federal income tax return for the current year the statement described in section 4.01. The election applies to the beneficiary’s current taxable year and all subsequent taxable years. Pursuant to section 301.9100-2(b) through (d) of the Procedure and Administration Regulations, an individual who timely filed his or her United States federal income tax return for the 2002 taxable year without making the election described in section 4 of Revenue Procedure 2002-23 with respect to an RRSP or RRIF, and who would like to make the election for the 2002 taxable year, may make the election by filing an amended 2002 federal income tax return by the date that is 6 months after the due date of the return, excluding extensions, and attaching to the amended return the statement described in section 4.01 of Revenue Procedure 2002-23. The individual must provide the following statement at the top of the amended return: “FILED PURSUANT TO SECTION 301.9100-2.”

The principal author of this notice is Amanda A. Ehrlich of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact Amanda A. Ehrlich or Willard W. Yates at (202) 622-3880 (not a toll-free call).

This revenue procedure publishes the amounts of unused housing credit carryovers allocated to qualified states under § 42(h)(3)(D) of the Internal Revenue Code for calendar year 2003.

Rev. Proc. 92-31, 1992-1 C.B. 775, provides guidance to state housing credit agencies of qualified states on the procedure for requesting an allocation of unused housing credit carryovers under § 42(h)(3)(D). Section 4.06 of Rev. Proc. 92-31 provides that the Internal Revenue Service will publish in the Internal Revenue Bulletin the amount of unused housing credit carryovers allocated to qualified states for a calendar year from a national pool of unused credit authority (the National Pool). This revenue procedure publishes these amounts for calendar year 2003.

The unused housing credit carryover amount allocated from the National Pool by the Secretary to each qualified state for calendar year 2003 is as follows:

This revenue procedure is effective for allocations of housing credit dollar amounts attributable to the National Pool component of a qualified state's housing credit ceiling for calendar year 2003.

The principal author of this procedure is Christopher J. Wilson of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue procedure, contact Mr. Wilson at (808) 539-2874 or Susan Reaman at (202) 622-3040 (not toll-free calls).

This revenue procedure provides guidance on the valuation of stock options solely for purposes of §§ 280G and 4999 of the Internal Revenue Code. This revenue procedure restates and modifies Revenue Procedure 2002-13, 2002-1 C.B. 549, as modified by Revenue Procedure, 2002-45, 2002-27 I.R.B 40.

Section 280G denies a deduction for any excess parachute payment. Section 4999 imposes a nondeductible 20-percent excise tax on the recipient of any excess parachute payment, within the meaning of § 280G(b).

An excess parachute payment is defined in § 280G(b)(1) as an amount equal to the excess of any parachute payment over the portion of the disqualified individual's base amount that is allocated to such payment.

Section 280G(b)(2)(A) defines a parachute payment as any payment in the nature of compensation to (or for the benefit of) a disqualified individual if (i) such payment is contingent on a change in the ownership of a corporation, the effective control of a corporation, or the ownership of a substantial portion of the assets of a corporation (a change in ownership or control), and (ii) the aggregate present value of the payments in the nature of compensation which are contingent on such change equals or exceeds an amount equal to 3 times the base amount. A parachute payment also includes any payment in the nature of compensation to, or for the benefit of, a disqualified individual if the payment is pursuant to an agreement that violates any generally enforced securities laws or regulations.

A payment in the nature of compensation for purposes of § 280G includes the transfer of an option (including an option to which § 421 applies), without regard to whether the option has a readily ascertainable fair market value within the meaning of § 83. An option is considered transferred when the option becomes substantially vested (within the meaning of § 1.83-3(b) and (j) of the Income Tax Regulations). Thus, for purposes of § 280G, stock options must be valued when a payment in the nature of compensation includes the transfer of a stock option, such as the grant or vesting of a stock option, in connection with a change in ownership or control. This revenue procedure provides guidance on the valuation of a stock option for this purpose. However, this revenue procedure does not apply for purposes of valuing a payment in cash (or property), even though the amount of the payment is determined by reference to the cancellation of a stock option.

Pursuant to §1.280G-1, Q/A-13, the value of an option is determined under all the facts and circumstances in the particular case. Factors relevant to such a determination include, but are not limited to: the difference between the option's exercise price and the value of the property subject to the option at the time of vesting; the probability of the value of such property increasing or decreasing; and the length of the period during which the option can be exercised. For purposes of Q/A-13, valuation may be determined by any method prescribed by the Commissioner in published guidance of general applicability.

The determination of when there has been a change in ownership or control for purposes of section 280G is made under § 1.280G-1, Q/A-27 through Q/A-29.

Section 1.280G-1, Q/A-33, provides that, to the extent provided in published guidance of general applicability, an initial estimate of the value of an option is permitted to be made, with the valuation subsequently re-determined, and the base amount reallocated.

Rev. Proc. 98-34, 1998-1 C.B. 983, provides a methodology for the valuation of certain stock options for purposes of gift, estate, and generation-skipping transfer taxes. The methodology described in Rev. Proc. 98-34 is an option pricing model that takes into account factors similar to those established by the Financial Accounting Standards Board in Accounting for Stock-Based Compensation, Statement of Financial Accounting Standards No. 123 (Fin. Accounting Standards Bd. 1995) (FAS 123). The methodology in Rev. Proc. 98-34 applies only to the valuation of a nonpublicly traded stock option for stock that, on the valuation date, is publicly traded on an established securities market.

Concurrently with the issuance of proposed regulations under section 280G (see § 1.280G-1 of the Proposed Income Tax Regulations at 67 Fed. Reg. 7630), Rev. Proc. 2002-13 was issued concerning the valuation of stock options (including a safe harbor valuation method) for purposes of §§ 280G and 4999. Rev. Proc. 2002-45 modified various portions of Rev. Proc. 2002-13.

This revenue procedure restates and further modifies Rev. Proc. 2002-13 and Rev. Proc. 2002-45 to address additional issues regarding the valuation of stock options in connection with a change in ownership or control under §§ 280G and 4999.

.01 General rule. A taxpayer may value a stock option, without regard to whether the option is on publicly or nonpublicly traded stock, using any valuation method that (i) is consistent with generally accepted accounting principles (such as FAS 123 or a successor standard) and (ii) takes into account the factors provided in § 1.280G-1, Q/A 13. The safe harbor method provided in section 4 of this revenue procedure and Rev. Proc. 98-34 are considered consistent with generally accepted accounting principles and take into account the factors provided in § 1.280G-1, Q/A 13. For purposes of §§ 280G and 4999 and this revenue procedure, the value of a stock option will not be considered properly determined if the option is valued solely by reference to the spread between the exercise price of the option and the value of the stock at the time of the change in ownership or control.

.02 Payment date. For purposes of this revenue procedure, the valuation date is the payment date as determined in accordance with § 280G. Thus, the valuation of a stock option is determined based on the spread, the volatility of the underlying stock, the option term, and any other relevant factors as of that date.

.03 Substitution of an option. If, in addition to vesting, there is, contingent on the change in ownership or control, a substitution of an option on different stock for the option, the valuation is based on the substituted option.

.04 Recalculation. Pursuant to § 1.280G-1, Q/A-33, for purposes of §§ 280G and 4999, the payor is permitted to re-determine the value of an option, during the 18-month period beginning on the date of the change in ownership or control (the re-determination period), in accordance with this revenue procedure. Recalculation is permitted if, during the re-determination period, either of the following occurs: (1) there is a change in the term of the option due to a termination of employment, or (2) there is a change in the volatility of the stock.

Without regard to whether the value of the option will be re-determined, an initial determination of the value of the option must be made in accordance with this revenue procedure. This initial valuation is the amount of the payment, subject to adjustment as otherwise applicable (e.g., pursuant to § 1.280G-1, Q/A-24). This amount is used both to determine whether there are parachute payments and to calculate excess parachute payments and any excise tax liability associated with the transfer of the option.

A recalculation under this revenue procedure must be determined as of the date of payment used in the initial calculation (i.e., the valuation date). Thus, while the term assumption and the volatility assumption are permitted to be re-determined, the spread and the interest rate assumptions continue to be determined as of the valuation date.

For purposes of re-determining the value of the option, an employer is permitted to use a method other than the method used in making the initial determination, provided that both methods are otherwise permitted under this revenue procedure.

If the value of an option is recalculated under this revenue procedure, parachute payments and excess parachute payments must be recalculated using the re-determined valuation. However, the base amount does not have to be re-apportioned; instead, the base amount allocated to the parachute payment is permitted to remain the same, with any adjustment to the excise tax made with respect to the option. This adjustment may be claimed only by filing an amended return for the taxable year that includes the payment date.

.01 In general. The safe harbor valuation method provided by this revenue procedure is based on the Black-Scholes model and takes into account, as of the valuation date, the following factors: (1) the volatility of the underlying stock, (2) the exercise price of the option, (3) the value of the stock at the time of the valuation (the “spot price”), and (4) the term of the option on the valuation date. The safe harbor value of the option equals (i) the number of shares covered by the options multiplied by (ii) the spot price of the stock, and then multiplied by (iii) a valuation factor determined using the factors described above and reflected in the Table at the end of this revenue procedure. Other relevant factors, including risk-free rate of interest and assumptions related to dividend yields, are included in the Table. To determine the valuation factor, the taxpayer must determine the volatility, spread, and option term factors, as described below. To rely on this revenue procedure, assumptions made for purposes of this revenue procedure and the determination of each factor must be reasonable and consistent with assumptions made with respect to other options that may be valued in connection with the change in ownership or control.

.02 Volatility. The taxpayer must determine whether the volatility of the underlying stock is low, medium, or high. If the valuation is based on a substituted option pursuant to section 3.03, volatility is determined based on the stock under the substituted option. For this purpose, a low volatility stock has an annual standard deviation of 30 percent or less. A medium volatility stock has an annual standard deviation greater than 30 percent but less than 70 percent. A high volatility stock has an annual standard deviation of 70 percent or greater. If the stock is publicly traded on an established securities market (or otherwise), the expected volatility of the underlying stock used for purposes of volatility under this revenue procedure must be the volatility for the most recent year disclosed in the most recent financial statements of the corporation. If the stock is not publicly traded on an established securities market or otherwise, but the stock is required to be registered under the Securities Exchange Act of 1934, the volatility for such stock is assumed to be the same as the volatility for a comparable corporation that is publicly traded. For this purpose, whether a corporation is considered comparable is determined by comparing relevant characteristics such as industry, corporate size, earnings, market capitalization, and debt-equity structure. If the stock is not publicly traded and the corporation is not required to register under the Securities Exchange Act of 1934, the taxpayer must assume medium volatility. If the stock is not required to be registered under the Securities Exchange Act of 1934, but the corporation voluntarily registers its stock and its stock is publicly traded, the corporation must use the volatility of the underlying stock.

.03 Spread between exercise price and spot price. The factor based on the spread between the exercise price and the spot price is calculated by dividing the spot price by the exercise price and subtracting 1. If the stock is not publicly traded, the determination of the spot price for this purpose must be reasonable and consistent with the price, if any, otherwise determined for the stock in connection with the transaction giving rise to the change in ownership or control under § 280G(b)(2)(A). For purposes of determining the factor based on the spread between the exercise price and the spot price under the Table, the resulting percentage may be rounded down to the next lowest interval. If this factor exceeds 220%, this safe harbor valuation method cannot be used to value the stock option.

.04 Term of the option. The term of the option is the number of full months between the valuation date and the latest date on which the option will expire. For purposes of determining the term factor under the table, the number of full months may be rounded down to the next lowest 12-month interval. If the term of the option exceeds 10 years (120 months), then this safe harbor valuation method cannot be used to value the stock option. If the remaining term of the option is less than 12 months, the taxpayer may round down to the 3-month interval. For purposes of this paragraph, the taxpayer is permitted to use the expected term of the option calculated in accordance with Rev. Proc. 98-34.

E is an employee of Corporation A, a publicly traded corporation. On September 1, 2004, in connection with E’s performance of services, A grants E options to purchase 100,000 shares of A stock at $10 per share. The options are exercisable for 10 years. The options will vest on September 1, 2007, if E continues to be employed by A through that date, or on a change in ownership or control, if earlier. Under the terms of the option, if E’s employment is terminated after the option is vested, the option must be exercised on or before the date that is 3 months after the termination of employment.

On September 15, 2005, Corporation B acquires all of the stock of A, and A is merged into B. Contingent on the change in ownership, E’s options become fully vested and are converted into B options with the same aggregate spread and the same ratio between the exercise price and the value of the stock (determined immediately before the conversion). At the time of the vesting, A stock has a fair market value of $20, and B stock has a fair market value of $50. Thus, in connection with the change in ownership, E receives fully vested options for 40,000 shares of B stock with an exercise price of $25. The date of the vesting and substitution is the payment date and, therefore, the valuation date.

Using a valuation method that complies with this revenue procedure, B determines that, as of the valuation date, it is reasonable to assume that the volatility of B stock is .25, that the remaining expected term of the option is 36 months, and that the risk-free interest rate is 5%. B determines that the value of the option is $1,096,000 (or $27.40 per share).

Without regard to the change in ownership, this payment was contingent only on continued performance of services for Corporation A for a specified period of time and the payment is attributable, in part, to the performance of services before the date the payment was made. Therefore, the portion of the payment that is contingent on the change in ownership is determined under § 1.280G-1, Q/A-24(c). The acceleration of the vesting of a stock option is considered to significantly increase the value of the payment. Therefore, the future value of the payment is assumed to be equal to the payment. Under § 1.280G-1, Q/A-31 and 32, the present value of the option is determined to be $975,000. The vesting of the option has been accelerated by 23 full months. Therefore, the portion of the payment that is contingent on the change in ownership is $373,080, the sum of (1) $121,000 (the amount by which $1,096,000, exceeds $975,000), and (2) $252,080 (23 months times 1% times $1,096,000).

The value of the payment related to the options, $373,080, is taken into account for purposes of determining whether A has received parachute payments and, if so, the portion of the parachute payments that are excess parachute payments. For purposes of this example, assume E is receiving parachute payments and that $50,000 in base amount is allocated to this payment. In that case, $323,080 of the payment is an excess parachute payment, and the excise tax under section 4999 is $64,616. B must satisfy its obligations under section 4999(c) with respect to this amount, and E is responsible for the excise tax related to this payment for E’s 2005 taxable year. B cannot claim the amount of the excess parachute payment as a deduction.

On July 1, 2006, E’s employment is terminated, shortening the term of the option. As a result, the actual term of the option, measured from the date of the change in ownership, is 12 months (the 9 full months that E was employed following the change in ownership plus the 3 months following a termination of employment during which E can exercise the option). B decides to recalculate the value of the options as of the valuation date in accordance with section 3.04 of this revenue procedure, using the value of B stock at the change of ownership, $50, and the exercise price of $25 a share. In addition, B uses the same 5% risk-free assumption rate used in the initial valuation. Finally, B determines that .25 continues to be a reasonable assumption for volatility. The value of the option, as recalculated, is $1,030,000 (or $25.75 a share).

This value is then used to re-determine the portion of the payment that is contingent on the change in ownership under § 1.280G-1, Q/A-24(c). This amount is $350,800, the sum of (1) $113,900 (the amount by which the value of the payment, $1,030,000, exceeds the present value of the payment, determined to be $916,100), and (2) $236,900 (23 times 1% times $1,030,000). Using the base amount initially allocated to this payment, $50,000, the portion of the payment that is an excess parachute payment is $300,800, and the excise tax is $60,160. E is permitted to file an amended return for 2005 using the revised calculations as a basis for claiming a refund of $4,456.

Rev. Proc. 2002-13, 2002-1 C.B. 549, and Rev. Proc. 2002-45, 2002-27 I.R.B. 40, are revoked as of January 1, 2004.

This revenue procedure is effective January 1, 2004. Taxpayers are permitted to apply this revenue procedure with respect to a change in ownership or control occurring prior to such date.

.01 This revenue procedure provides the requirements for completing and submitting Form 8655, Reporting Agent Authorization for Magnetic Tape/Electronic Filers (“Authorization”). An Authorization allows a taxpayer to designate a Reporting Agent (“Agent”) to perform the following acts on behalf of the taxpayer:

.02 The technical specifications for filing Authorization information are published separately in Publication 1474, Technical Specifications Guide For Reporting Agent Authorization For Magnetic Tape/Electronic Filers And Federal Tax Depositors.

.01 Section 1.6011-1 of the Income Tax Regulations and section 31.6011(a)-7 of the Employment Taxes and Collection of Income Tax at Source Regulations (“Employment Tax Regulations”) provide that each return required under the regulations, together with any prescribed copies or supporting data, must be filled in and disposed of in accordance with the applicable forms, instructions, and regulations. Section 31.6011(a)-7 provides that the return may be made by an agent authorized by the person required to make the return.

.02 Section 31.6061-1 of the Employment Tax Regulations provides that a return may be signed for the taxpayer by an agent who is duly authorized in accordance with section 31.6011(a)-7 to make the return. Section 1.6061-1 provides that a return may be signed by an agent who is duly authorized under section 1.6012-1(a)(5) or (b) to make the return.

.03 Section 31.6302-1 of the Employment Tax Regulations provides the rules for depositing employment taxes. Section 31.6302-1(h) implements section 6302(h) of the Internal Revenue Code, which requires the use of an electronic fund transfer system for the collection of federal depository taxes. The Electronic Federal Tax Payment System (“EFTPS”) is the electronic fund transfer system developed to collect these taxes. Rev. Proc. 97-33, 1997-2 C.B. 371, provides general information about EFTPS, and Rev. Proc. 98-32, 1998-1 C.B. 935, provides information about EFTPS programs for Agents making FTDs and FTPs on behalf of multiple taxpayers.

.04 The Service has prescribed Form 8655 as the appropriate authorization form for a taxpayer to use to designate an Agent to perform the following acts on behalf of the taxpayer:

.01 This revenue procedure modifies and supersedes Rev. Proc. 96-17, 1996-1 C.B. 633, by making the following changes to Rev. Proc. 96-17:

.01 Reporting Agent. A Reporting Agent (“Agent”) is an accounting service, franchiser, bank, service bureau, or other entity authorized to perform one or more of the following acts on behalf of a taxpayer:

.02 Reporting Agent Authorization. A Reporting Agent Authorization (“Authorization”) allows a taxpayer to designate an Agent to sign and to file on magnetic tape or electronically Form 940 and Form 941; to sign and file on paper Form 940-PR, Form 941-PR, Form 941-SS, Form 943, Form 943-PR, Form 945, Form 1042, and Form CT-1; and to make FTDs and FTPs and submit FTD information and FTP information electronically for the taxes deposited and reported on the forms listed in section 1.01 of this revenue procedure. The Authorization may also permit the Agent to receive duplicate copies of official notices, correspondence, deposit requirements, tax rates, transcripts, or other information with respect to these tax returns. In addition, an Authorization may permit the Agent to receive duplicate copies of official notices, correspondence, deposit requirements, tax rates, transcripts, or other information with respect to FTDs and FTPs. The Service has prescribed Form 8655 as the appropriate authorization form for a taxpayer to use to designate an Agent.

.03 Reporting Agent’s List. A Reporting Agent’s List (“Agent’s List”) identifies all taxpayers for whom an Agent will file tax returns, make FTDs and FTPs, or submit FTD information and FTP information electronically. A separate Authorization must be submitted for each taxpayer on the Agent’s List.

.01 The scope of an Authorization for the filing of forms listed on Form 8655 is as follows:

.02 The scope of an Authorization for making FTDs and FTPs and submitting FTD information and FTP information electronically is as follows:

.03 An Authorization becomes effective for the tax period designated by the Agent and taxpayer and remains in effect for subsequent periods until revoked by the taxpayer, terminated by the Agent, or terminated by the Service, subject to the following:

.04 A new Authorization must be submitted for any increase or decrease in the scope of the authority of an Agent to act on behalf of the taxpayer, or if the taxpayer appoints a new Agent. Receipt by the Service of a new Authorization terminates the authority of the prior Agent to file tax returns and make FTDs or FTPs for tax periods beginning on or after the effective date of the new Authorization. A new Authorization also terminates the authority of the prior Agent to receive duplicate copies of notices. The prior Agent, however, may present information regarding taxpayer accounts for the tax periods beginning before the effective date of the new Authorization, and the Service may disclose otherwise confidential tax information relating to the returns filed by the Agent or relating to FTDs and FTPs made by the Agent, unless the taxpayer specifically revokes the prior Agent's authorization to present information and receive otherwise confidential tax information relating to the returns filed by the Agent or relating to the FTDs and FTPs made by the Agent.

.05 An Authorization filed under this revenue procedure does not constitute the appointment of a recognized representative as described in section 601.502 of the Statement of Procedural Rules.

.06 An Authorization does not relieve the taxpayer of the responsibility to ensure that all tax returns are filed timely; all FTPs are made timely; and any taxes, required to be deposited, are deposited timely.

.07 An Agent may use an Authorization to file paper forms listed on Form 8655 on behalf of a taxpayer only if—

.08 An Agent covered by Form 8655 may prepare a paper tax return for the taxpayer's signature. A taxpayer's authorized representative that is not an Agent covered by Form 8655 must have a valid power of attorney in accordance with section 601.504(6) of the Statement of Procedural Rules (usually Form 2848, Power of Attorney and Declaration of Representative) to sign and file a paper tax return on behalf of the taxpayer.

.09 Each paper tax return must be signed by the taxpayer, by the taxpayer's authorized representative, or by an Agent permitted in section 5.07 of this revenue procedure to file returns on behalf of the taxpayer.

.10 The Agent must keep a copy of each Authorization at the Agent's principal place of business for examination by the Service until the period of limitations for assessment for the last return filed under that Authorization expires.

.01 An Authorization may be submitted on Form 8655 or any other document that clearly contains the same information required to be provided on Form 8655. The taxpayer may strike out the nonapplicable portions of the Form 8655. An Agent may fax the Authorization to the Service.

.02 An Authorization must be signed by the taxpayer, an authorized representative holding a power of attorney that specifically authorizes the representative to sign returns on behalf of the taxpayer, or a person who is duly authorized in accordance with section 31.6011(a)-7 of the Employment Tax Regulations. If the Authorization provides that the Agent is authorized to receive tax return notices, correspondence, deposit requirements, tax rates and transcripts from the Service, or discuss taxpayer account information with Service representatives and is signed by a person other than the taxpayer, the authorized representative or other duly authorized person signing the Authorization must be authorized both to receive, and to designate others to receive, tax return information (as defined in section 6103(b)(2)) of the taxpayer.

.03 An Authorization executed after December 31, 2001, must be made on Form 8655 (with a revision date of July 2000 or later) or its equivalent.

.04 Except to the extent provided in section 6.05 of this revenue procedure, an Authorization will remain in effect until the Service receives a new Authorization.

.05 A revised Authorization is not required to replace an Authorization made on Form 8655 with a revision date before October 1995 (or its equivalent) that was previously submitted to the Service by an Agent if the Authorization places no restriction on the medium for filing Forms 941 and 940, and the Agent advises the taxpayer/client that its Forms 941 and/or 940 may be filed electronically and that the taxpayer/client has the option to reject electronic filing for Forms 941 and 940. An Agent may use the most efficient and timely method of clearly providing this notification to the taxpayer/client. A taxpayer/client’s rejection of electronic filing for Form 941 or 940 must be submitted in writing to the Agent, and the Agent must immediately remove any taxpayer/client that rejects electronic filing for Form 941 or 940 from its electronic filing taxpayer/client base.

.01 An Agent that wishes to use an Authorization to file on magnetic tape or electronically Form 940 and Form 941, or make FTDs or FTPs, and submit FTD information or FTP information electronically, must formally apply to the Service for these privileges. Currently, the required information for the applications for magnetic tape or electronic filing of Form 940 and Form 941 and participation in EFTPS are contained in the documents listed in section 9 of this revenue procedure. The applications covered in these documents must be accompanied by the individual Authorizations, signed as provided in section 6.02 of this revenue procedure, and an Agent's List (if required by the applicable revenue procedure).

.02 The Agent’s List must contain each taxpayer's employer identification number. Agent’s Lists may be filed on magnetic tape or electronically, if appropriate, but if the number of taxpayer/clients exceeds 100, the Agent’s List must be filed on magnetic tape. For specific information concerning the requirements for submitting and updating Agent’s Lists, see Publication 1474, the Service contacts listed in section 8 of this revenue procedure, and the documents listed in section 9 of this revenue procedure.

.01 Publication 1474 may be obtained electronically via the Internal Revenue Service Internet web site (IRS web site) at http://www.irs.gov. In addition, requests for Publication 1474 and questions regarding this revenue procedure may be addressed to the Service at the following address:

.02 The principal author of this revenue procedure is Michael Hara of the Office of Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division. Mr. Hara may be contacted at (202) 622-4910 (not a toll-free number).

The programs requiring an Authorization as a prerequisite to participation are described in the following documents:

This revenue procedure modifies and supersedes Rev. Proc. 96-17, 1996-1 C.B. 633.

This revenue procedure is effective August 25, 2003.

This revenue procedure provides the domestic asset/liability percentages and domestic investment yields needed by foreign life insurance companies and foreign property and liability insurance companies to compute their minimum effectively connected net investment income under section 842(b) of the Internal Revenue Code for taxable years beginning after December 31, 2001. Instructions are provided for computing foreign insurance companies' liabilities for the estimated tax and installment payments of estimated tax for taxable years beginning after December 31, 2001. For more specific guidance regarding the computation of the amount of net investment income to be included by a foreign insurance company on its U.S. income tax return, see Notice 89-96, 1989-2 C.B. 417. For the domestic asset/liability percentage and domestic investment yield, as well as instructions for computing foreign insurance companies' liabilities for estimated tax and installment payments of estimated tax for taxable years beginning after December 31, 2000, see Rev. Proc. 2002-58, 2002-40 I.R.B. 644.

.01 DOMESTIC ASSET/LIABILITY PERCENTAGES FOR 2002. The Secretary determines the domestic asset/liability percentage separately for life insurance companies and property and liability insurance companies. For the first taxable year beginning after December 31, 2001, the relevant domestic asset/liability percentages are:

123.3 percent for foreign life insurance companies, and

171.9 percent for foreign property and liability insurance companies.

.02 DOMESTIC INVESTMENT YIELDS FOR 2002. The Secretary is required to prescribe separate domestic investment yields for foreign life insurance companies and for foreign property and liability insurance companies. For the first taxable year beginning after December 31, 2001, the relevant domestic investment yields are:

7.0 percent for foreign life insurance companies, and

5.7 percent for foreign property and liability insurance companies.

.03 SOURCE OF DATA FOR 2002. The section 842(b) percentages to be used for the 2002 tax year are based on tax return data following the same methodology used for the 2001 year.

To compute estimated tax and the installment payments of estimated tax due for taxable years beginning after December 31, 2001, a foreign insurance company must compute its estimated tax payments by adding to its income other than net investment income the greater of (i) its net investment income as determined under section 842(b)(5), that is actually effectively connected with the conduct of a trade or business within the United States for the relevant period, or (ii) the minimum effectively connected net investment income under section 842(b) that would result from using the most recently available domestic asset/liability percentage and domestic investment yield. Thus, for installment payments due after the publication of this revenue procedure, the domestic asset/liability percentages and the domestic investment yields provided in this revenue procedure must be used to compute the minimum effectively connected net investment income. However, if the due date of an installment is less than 20 days after the date this revenue procedure is published in the Internal Revenue Bulletin, the asset/liability percentages and domestic investment yields provided in Rev. Proc. 2002-58 may be used to compute the minimum effectively connected net investment income for such installment. For further guidance in computing estimated tax, see Notice 89-96.

This revenue procedure is effective for taxable years beginning after December 31, 2001.

The principal author of this revenue procedure is Garrett D. Gregory of the Office of the Associate Chief Counsel (International). For further information regarding this revenue procedure, please contact Mr. Gregory at (202) 622-4461 (not a toll-free call), or write to the Internal Revenue Service, Office of the Associate Chief Counsel (International), 1111 Constitution Avenue, NW, Washington, DC 20224, Attention: CC:INTL:Br5, Room 4554.

Internal Revenue Service (IRS), Treasury.

Notice of proposed rulemaking and notice of public hearing.

This document contains proposed regulations relating to waiver under section 6724 of the Internal Revenue Code (Code) of a penalty imposed by section 6721 for failure to file a correct information return. The proposed regulations provide guidance on the requirement of prompt correction of the failure to file or file correctly. The proposed regulations provide that the IRS will deem information returns promptly corrected if corrected within 30 days of the required filing date, or by August 1 following that required filing date. After August 1, a correction is prompt if made by the time announced by the IRS in published guidance. The proposed regulations do not change the rules for determining reasonable cause for waiving the penalty for failure to furnish correct payee statements under section 6722 or the time to comply with other information reporting requirements under section 6723.

Written and electronic comments are due by October 7, 2003. Requests to speak (with outlines of topics to be discussed) at the public hearing scheduled for October 21, 2003, are due by September 30, 2003.

Send submissions to: CC:PA:RU (REG-141669-02), Room 5526, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Commenters may hand deliver submissions Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:RU (REG-141669-02), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, commenters may submit comments electronically to the IRS Internet site at www.irs.gov/regs. The public hearing will be held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.

Concerning the proposed regulations, contact Robert A. Desilets, Jr. at (202) 622-4910; concerning submissions of comments, the hearing, and/or to be placed on the building access list to attend the hearing, Treena Garrett at (202) 622-7180 (not toll-free numbers).

The principal author of these proposed regulations is Robert A. Desilets, Jr., Office of the Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division. However, other personnel from the IRS and the Treasury Department participated in their development.

* * * * *

Internal Revenue Service (IRS), Treasury.

Notice of proposed rulemaking and notice of public hearing.

This document contains proposed regulations that amend the final regulations that provide certain permitted remedial actions for tax-exempt bonds issued by state and local governments. This document also contains a notice of public hearing on these proposed regulations.

Written or electronic comments must be received by October 14, 2003. Outlines of topics to be discussed at the public hearing scheduled for November 4, 2003, at 10 a.m., must be received by October 14, 2003.

Send submissions to CC:PA:RU (REG-132483-03), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:RU (REG-132483-03), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically to the IRS Internet site at www.irs.gov/regs. The public hearing will be held in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.

Concerning the regulations, Gary W. Bornholdt, (202) 622-3980; concerning submissions of comments, the hearing, and requests to be placed on the building access list to attend the meeting, Sonya M. Cruse, (202) 622-7180 (not toll-free numbers).

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

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

Par. 2. Section 1.141-0 is amended by adding an entry to the table for §1.141-16(d) to read as follows:

The principal authors of these regulations are Rebecca L. Harrigal and Gary W. Bornholdt, Office of Associate Chief Counsel (Tax-Exempt and Government Entities), IRS, and Bruce M. Serchuk, Office of Tax Policy, Treasury Department. However, other personnel from the IRS and Treasury Department participated in their development.

* * * * *

Under Title 31, Code of Federal Regulations, Part 10, after notice and an opportunity for a proceeding before an administrative law judge, the following individuals have been placed under suspension from practice before the Internal Revenue Service:

Under Title 31, Code of Federal Regulations, Part 10, after notice and an opportunity for a proceeding before an administrative law judge, the following individuals have been disbarred from practice before the Internal Revenue Service:

Under Title 31, Code of Federal Regulations, Part 10, an attorney, certified public accountant, enrolled agent, or enrolled actuary, in order to avoid institution or conclusion of a proceeding for his or her disbarment or suspension from practice before the Internal Revenue Service, may offer his or her consent to suspension from such practice. The Director, Office of Professional Responsibility, in his discretion, may suspend an attorney, certified public accountant, enrolled agent or enrolled actuary in accordance with the consent offered.

The following individuals have been placed under consent suspension from practice before the Internal Revenue Service:

Under Title 31, Code of Federal Regulations, Part 10, the Director, Office of Professional Responsibility, is authorized to immediately suspend from practice before the Internal Revenue Service any practitioner who, within five years from the date the expedited proceeding is instituted (1) has had a license to practice as an attorney, certified public accountant, or actuary suspended or revoked for cause or (2) has been convicted of certain crimes.

The following individuals have been placed under suspension from practice before the Internal Revenue Service by virtue of the expedited proceeding provisions:

Under Title 31, Code of Federal Regulations, Part 10, an enrolled agent, in order to avoid the institution or conclusion of a proceeding for his or her disbarment or suspension from practice before the Internal Revenue Service, may offer his or her resignation as an enrolled agent. The Director, Office of Professional Responsibility, in his discretion, may accept the offered resignation.

The Director, Office of Professional Responsibility, has accepted offers of resignation as an enrolled agent from the following individuals:

Under Title 31, Code of Federal Regulations, Part 10, in lieu of a proceeding being instituted or continued, an attorney, certified public accountant, enrolled agent, or enrolled actuary, may offer his or her consent to the issuance of a censure. Censure is a public reprimand.

The following individuals have consented to the issuance of a Censure: