Cost-share payments. The Forest Land Enhancement Program (FLEP) is a small watershed program administered by the Secretary of Agriculture that is substantially similar to the type of programs described in section 126(a)(1) through (8) of the Code within the meaning of section 126(a)(9). All or a portion of cost-share payments received under the FLEP is eligible for exclusion from gross income to the extent permitted by section 126. Rental payments and incentive payments are not cost-share payments and are not excludable from gross income.

REITs; parking facilities. This ruling identifies circumstances in which a real estate investment trust’s (REIT’s) income from providing parking facilities at its rental real properties qualifies as rents from real property under section 856(d) of the Code.

This procedure provides guidance to individuals who fail to meet the eligibility requirements of section 911(d)(1) of the Code because adverse conditions in a foreign country preclude the individual from meeting those requirements. A current list of countries and the dates those countries are subject to the section 911(d)(4) waiver is provided. Rev. Proc. 2003-26 supplemented.

Section 412(i) plans; deductibility; listed transactions. This ruling gives an example where a qualified pension plan cannot be a section 412(i) plan if the plan holds life insurance contracts and annuity contracts for the benefit of a participant that provide for benefits at normal retirement age in excess of the participant’s benefits at normal retirement age under the terms of the plan. The ruling also addresses when certain employer contributions to purchase life insurance coverage for a participant in a defined benefit plan are deductible and whether those transactions are “listed transactions.” Rev. Rul. 55-748 modified and superseded.

Nondiscrimination; section 412(i) plan. This ruling provides an example where a plan that is funded, in whole or in part, with life insurance contracts may not satisfy the requirements of Code section 401(a)(4) prohibiting discrimination in favor of highly compensated employees.

COBRA and Medicare entitlement. The COBRA continuation coverage period can be expanded from 18 to 36 months if a second qualifying event occurs. Medicare entitlement of a covered employee is one of the listed events that can be a second qualifying event. This ruling holds that Medicare entitlement is not a second qualifying event unless (ignoring the first qualifying event) it would result in a loss of coverage under the group health plan.

Proposed regulations under section 402 of the Code provide rules regarding the amount includible in a participant's income when a life insurance contract is distributed from a qualified plan, and provide rules under sections 79 and 83 imposing similar valuation requirements for those other employer-provided life insurance arrangements. A public hearing is scheduled for June 9, 2004.

Fair market value; distributions; qualified retirement plans. This procedure provides interim guidance on how fair market value may be determined in the instance of distributions from a qualified retirement plan.

Proposed regulations under sections 3121(b)(10) and 3306(c)(10)(B) of the Code provide guidance on the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) exceptions for student services. The proposed regulations provide guidance on whether an employer is considered a “school, college, or university,” and whether an employee is considered a “student” under these provisions. A public hearing is scheduled for June 16, 2004.

This notice contains a proposed revenue procedure that sets forth generally applicable standards for determining whether service in the employ of certain public or private nonprofit schools, colleges, universities, or affiliated organizations described in section 509(a)(3) of the Code performed by a student qualifies for the exception from Federal Insurance Contributions Act (FICA) tax provided under section 3121(b)(10). Rev. Proc. 98-16 suspended.

This procedure provides an elective safe harbor that the owner of an oil and gas property may use in determining the property’s recoverable reserves for purposes of computing cost depletion under section 611 of the Code.

This announcement provides information regarding changes to the reporting for certain 2002 forms by certain fiscal year pass-through entities affected by pending technical corrections to the qualified dividend rules. Partnerships, S corporations, and estates (including revocable trusts treated as part of an estate) with a fiscal year beginning in 2002 that received qualified dividends in 2003 must reflect the changes required by this announcement in their reporting for the tax year. Announcement 2003-56 modified.

This document announces the cancellation of a public hearing on proposed regulations (REG-110896-98, 2003-51 I.R.B. 1226) under section 664(b) of the Code concerning the characterization of distributions from charitable remainder trusts.

Is the Forest Land Enhancement Program (FLEP) substantially similar to the type of programs described in § 126 (a)(1) through (8) of the Internal Revenue Code, so that the FLEP is within the scope of § 126(a)(9) and, thereby, cost-share payments received under the FLEP are eligible for exclusion from gross income to the extent permitted by § 126?

The FLEP, authorized under the provisions of Title VIII of the Farm Security and Rural Investment Act of 2002, Pub. L. No. 107-171, 116 Stat. 134, which amended the Cooperative Forestry Assistance Act of 1978, Pub. L. No. 95-313, 92 Stat. 365, is a voluntary program for non-industrial private forest landowners that provides technical, educational, and cost-share assistance to encourage the long-term sustainability of non-industrial private forest land and related resources. The FLEP replaces the Stewardship Incentives Program (SIP), which was determined in Rev. Rul. 94-27, 1994-1 C.B. 26, to be within the scope of § 126(a)(9), and the Forestry Incentives Program (FIP), which is listed in § 126(a)(8). The SIP provided for the cost-sharing of a wide range of multiple resource management practices. The FIP provided for cost-sharing of timber stand improvements, site preparation for natural regeneration, and tree planting practices. The FLEP encompasses all of the cost-share practices authorized under both the SIP and the FIP.

A landowner who wishes to participate in the cost-share component of the FLEP must develop and implement, in cooperation with the state forester, another state official, or a professional resources manager, a management plan that addresses site specific activities and practices. The cost-share practices are limited to the treatment of 1,000 acres per year and must be implemented for a period of at least 10 years. The maximum cost-share payment for any practice may be up to 75 percent. The aggregate payment to any one landowner through 2007 may not exceed $100,000.

The Secretary of Agriculture has determined that cost-share payments under the FLEP are primarily for the purpose of conservation.

Under § 126(a), gross income does not include the excludable portion of payments received under certain conservation programs set forth in § 126(a)(1) through (8). Under § 126(a)(9), a program affecting “small watersheds” that is administered by the Secretary of Agriculture also is eligible for § 126 treatment if the Commissioner determines that the program is substantially similar to the type of programs described in § 126(a)(1) through (8). See § 16A.126-1(d)(3) of the temporary Income Tax Regulations for the definition of “small watershed.”

Once the Commissioner has determined that a program is substantially similar to the types of programs described in § 126(a)(1) through (8), taxpayers receiving cost-share payments under that program must determine what portion of the cost-share payments is excludable from gross income under § 126. See § 126(b)(1), and § 16A.126-1, relating to the partial exclusion of certain cost-share payments, to determine what portion of the cost-share payments is excludable from gross income under § 126.

The FLEP is substantially similar to the type of programs described in § 126(a)(1) through (8) within the meaning of § 126(a)(9). All or a portion ofcost-share payments received under the FLEP is eligible for exclusion from gross income to the extent permitted by § 126. See § 126(b)(1) and § 16A.126-1 to determine what portion, if any, of the cost-share payments is excludable from gross income under § 126.

The principal author of this revenue ruling is Nicole R. Cimino of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Ms. Cimino at (202) 622-3120 (not a toll-free call).

Does a plan that is funded, in whole or in part, with life insurance contracts satisfy the requirements of § 401(a)(4) of the Internal Revenue Code prohibiting discrimination in favor of highly compensated employees where: (1) highly compensated employees are permitted, prior to distribution of retirement benefits, to purchase life insurance contracts from the plan at cash surrender value; and (2) any rights under the plan for nonhighly compensated employees to purchase life insurance contracts from the plan prior to distribution of retirement benefits are not of inherently equal or greater value than the purchase rights of highly compensated employees?

Employer M maintains Plan A, a retirement plan that is intended to be a qualified plan under § 401(a). Plan A provides an incidental death benefit within the meaning of § 1.401-1(b)(1)(i) of the Income Tax Regulations for each participant, and holds a life insurance contract on the life of each participant to fund that incidental death benefit. Before distributions to a participant under Plan A commence, each participant is offered the opportunity to purchase the life insurance contract under which the participant is insured from Plan A for its cash surrender value. It is assumed for purposes of this revenue ruling that Prohibited Transaction Exemption 92-6, 57 FR 5189 (February 12, 1992) applies to the purchase of a life insurance contract from Plan A and, thus, a participant’s purchase of a life insurance contract from Plan A is not a prohibited transaction under § 4975. Employer M has nonhighly compensated employees that are not excludable employees within the meaning of § 1.410(b)-6, and the features of the life insurance contracts covering the lives of highly compensated employees are different than the features of the life insurance contracts covering the lives of nonhighly compensated employees. In addition, because of these differences in the features of the contracts, the rights that the nonhighly compensated employees have to purchase the life insurance contracts under which they are insured from Plan A are not of inherently equal or greater value than the rights that highly compensated employees have to purchase the life insurance contracts under which they are insured.

Section 401(a)(4) provides that, under a qualified retirement plan, contributions or benefits provided under the plan must not discriminate in favor of highly compensated employees. Section 410(b) provides minimum coverage requirements that are designed to ensure that a qualified plan provides sufficient benefits to a large enough proportion of participants who are nonhighly compensated employees.

Section 1.401(a)(4)-1(b)(3) provides that a plan satisfies the requirements of § 401(a)(4) only if all benefits, rights and features provided under the plan are made available under the plan in a nondiscriminatory manner. Under § 1.401(a)(4)-4(a), benefits, rights and features (i.e., optional forms of benefit, ancillary benefits, and other rights or features) are made available under the plan in a nondiscriminatory manner only if each benefit, right or feature satisfies the current availability requirement of § 1.401(a)(4)-4(b) and the effective availability requirement of § 1.401(a)(4)-4(c). In general, a benefit, right or feature satisfies the current availability requirement of § 1.401(a)(4)-4(b) for a plan year if the group of employees to whom the benefit, right or feature is currently available during the plan year satisfies § 410(b) (without regard to the average benefit percentage test of § 1.410(b)-5).

An other right or feature is any right or feature applicable to employees under the plan (other than a benefit formula, an optional form of benefit, or an ancillary benefit) that can be expected to have meaningful value. Under § 1.401(a)(4)-4(e)(3)(i), a distinct other right or feature exists if a right or feature is not available on substantially the same terms as another right or feature. Under § 1.401(a)(4)-4(e)(3)(iii)(C), the right to a particular form of investment, including, for example, a particular class or type of employer securities (taking into account, in determining whether different forms of investment exist, any differences in conversion, dividend, voting, liquidation preference, or other rights conferred under the security) is a distinct other right or feature. Similarly, differences in insurance contracts (e.g., differences in cash value growth terms or different exchange features) that may be purchased from a plan can create distinct other rights or features even if the terms under which the contracts are purchased from the plan are the same.

Under § 1.401(a)(4)-4(d)(4), an optional form of benefit, ancillary benefit, or other right or feature is permitted to be aggregated with another optional form of benefit, ancillary benefit, or other right or feature if one of the two is, in all cases, of inherently equal or greater value than the other, and the optional form of benefit, ancillary benefit, or other right or feature that is of inherently equal or greater value separately satisfies the current availability requirement of § 1.401(a)(4)-4(b) and the effective availability requirement of § 1.401(a)(4)-4(c). For this purpose, one benefit, right, or feature is of inherently equal or greater value than another benefit, right, or feature only if, at any time and under any conditions, it is impossible for any employee to receive a smaller amount or a less valuable right under the first benefit, right, or feature than under the second benefit, right, or feature.

To the extent the purchase from Plan A of a life insurance contract by a highly compensated employee is a distribution alternative with respect to benefits described in § 411(d)(6)(A), such a purchase right is an optional form of benefit under Plan A. Even in situations in which this purchase right is not an optional form of benefit, this purchase right is an other right or feature. The purchase rights for the highly compensated employees are distinct optional forms of benefit or other rights or features from the purchase rights for nonhighly compensated employees because of differences in the life insurance contracts (analogous to a conversion right applicable to a security). This purchase right for highly compensated employees does not satisfy the current availability requirement of § 1.401(a)(4)-4(b) because the right to purchase the contracts of a type available to the highly compensated employees is not available to any nonhighly compensated employees, and therefore is not available to a group that satisfies the requirements of § 410(b). Moreover, under the facts presented, this purchase right of highly compensated employees cannot satisfy the requirements of § 1.401(a)(4)-4 through aggregation with any other optional form of benefit, ancillary benefit, or other right or feature (such as the purchase right for nonhighly compensated employees) because no other optional form of benefit, ancillary benefit, or other right or feature under the plan that would enable the aggregated benefits to be available to a group that satisfies the requirements of § 410(b) is of inherently equal or greater value. Thus, Plan A fails to satisfy the nondiscrimination requirements of § 401(a)(4).

A plan that is funded, in whole or in part, with life insurance contracts does not satisfy the requirements of § 401(a)(4) prohibiting discrimination in favor of highly compensated employees where: (1) the plan permits highly compensated employees, prior to distribution of retirement benefits, to purchase those life insurance contracts prior to distribution; and (2) any rights under the plan for nonhighly compensated employees to purchase life insurance contracts from the plan prior to distribution of retirement benefits are not of inherently equal or greater value than the purchase rights of highly compensated employees.

The principal authors of this revenue ruling are Larry Isaacs of Employee Plans, Tax Exempt and Government Entities Division, and Linda Marshall of the Office of the Division Counsel/Associate Chief Counsel, Tax Exempt and Government Entities. For further information regarding this revenue ruling, contact the Employee Plans taxpayer assistance telephone service between the hours of 8:00 a.m. and 6:30 p.m. Eastern Time, Monday through Friday, by calling (877) 829-5500 (a toll-free number). Mr. Isaacs may be reached at (202) 283-9710, and Ms. Marshall may be reached at (202) 622-6090 (not toll-free numbers).

Issue 1: Can a qualified pension plan be a plan described in § 412(i) of the Internal Revenue Code if the plan holds life insurance contracts and annuity contracts for the benefit of a participant that provide for benefits at normal retirement age in excess of the participant’s benefits at normal retirement age under the terms of the plan?

Issue 2: If a qualified pension plan holds life insurance contracts providing for life insurance on a participant’s life in excess of the participant’s death benefit under the terms of the plan, are contributions for premiums for such excess life insurance coverage currently deductible by the employer?

Section 412 sets forth minimum funding requirements for qualified pension plans. Section 412(i) describes certain insurance contract plans that are exempt under § 412(h)(2) from the minimum funding requirements of § 412 (section 412(i) plans). Under § 411(b)(1)(F), a plan that is funded exclusively by the purchase of insurance contracts and satisfies the requirements of § 412(i)(2) and (3) satisfies the accrual requirements of § 411(b) if an employee’s accrued benefit as of any applicable date is not less than the cash surrender value his life insurance contracts would have on that applicable date if the requirements of § 412(i)(4) through (6) were satisfied.

A section 412(i) plan must be funded by the purchase of individual or group insurance contracts. Section 412(i)(2) requires contracts held by a section 412(i) plan to provide for level annual premium payments to be paid commencing with the date the individual became a participant in the plan (or, in the case of an increase in benefits, commencing at the time the increase becomes effective) and extending not later than the retirement age for each individual participating in the plan. Section 412(i)(3) requires benefits provided under a section 412(i) plan to be equal to the benefits provided under each contract at normal retirement age under the plan.

Under § 1.412(i)-1(b)(2)(iii), the benefits for each participant provided under a section 412(i) plan that holds individual insurance contracts must be equal to the benefits provided under the participant’s individual contracts at the participant’s normal retirement age under the plan. Furthermore, under § 1.412(i)-1(b)(2)(iv), the benefits provided by the plan for each individual participant must be guaranteed by the life insurance company issuing the individual contracts to the extent premiums have been paid.

Section 404(a)(1)(A)(i) provides that the amount necessary to satisfy the minimum funding requirement under § 412 is deductible even if it is greater than the amount determined under § 404(a)(1)(A)(ii) or (iii), whichever is applicable with respect to the plan.

The alternative limit determined under § 404(a)(1)(A)(ii) is the amount necessary to provide the remaining unfunded cost of all participants’ past and current service credits as a level amount, or as a level percentage of compensation, over the remaining future service of each participant. However, if the remaining unfunded cost with respect to any three individuals is more than 50 percent of all remaining unfunded cost, the amount attributable to those individuals is distributed over a period of at least five years.

The alternative limit determined under § 404(a)(1)(A)(iii) is the normal cost of the plan plus, if past service or other supplementary pension or annuity credits are provided by the plan, the amount necessary to amortize the unfunded costs attributable to those credits in equal annual payments over 10 years.

Under § 1.404(a)-6(a)(2) of the Income Tax Regulations, the normal cost for any year is defined as the amount actuarially determined which would be required as a contribution by the employer in such year to maintain the plan if the plan had been in effect from the beginning of service of each then included employee and if such costs for prior years had been paid and all assumptions as to interest, mortality, time of payment, etc., had been fulfilled.

Section 1.404(a)-3(b) provides that in no event shall the limitations under § 404(a)(1) for pension or annuity plans exceed costs based on assumptions and methods that are reasonable in view of the funding medium and reasonable expectations as to the effects of mortality, interest, and other pertinent factors.

Section 1.404(a)-14 provides rules for determining the deductible limits under § 404(a)(1)(A)(i), (ii), and (iii). The regulations provide in general that the limit on deductible amounts contributed for an employer’s taxable year is based on the amounts determined for purposes of § 412 for the applicable plan year or years.

Section 404(a)(1)(E) provides that an amount contributed to a plan that would otherwise be deductible, but that exceeds the limitations of § 404(a)(1), is deductible in future years to the extent of the difference between the amount contributed and the maximum amount deductible for each succeeding year under § 404(a)(1).

Section 4972 generally imposes a 10-percent excise tax on nondeductible contributions to a qualified plan, including nondeductible contributions carried over from preceding years.

Rev. Rul. 94-75, 1994-2 C.B. 59, discusses the tax consequences of converting a qualified defined benefit plan that is not a section 412(i) plan to a section 412(i) plan, and holds that the deductible limit under § 404(a)(1)(A)(iii) applies to a section 412(i) plan.

Rev. Rul. 55-748, 1955-2 C.B. 234, discusses the deductibility of contributions to a qualified plan that are used to pay life insurance premiums attributable to the life insurance benefits of retirement income contracts purchased with respect to employees by the trust, the proceeds of which, upon the death of an employee, are payable to the trustee and are held by the trustee for application to payment of subsequent premiums on similar contracts on behalf of other employees. Rev. Rul. 55-748 holds that the part of the employer’s contribution attributable to the purchase of life insurance benefits, which, when they become payable, are applicable to the reduction of subsequent employer contributions to the plan are not considered as a cost of the pension plan for the purpose of determining the limitation on deductions under § 404(a)(1)(A), (B), and (C) of the Code (the predecessor provisions to current §§ 404(a)(1)(A)(i), (ii), and (iii)) for the year in which such contributions are paid, and cannot be deducted as such. Rev. Rul. 55-748 further provides that contributions attributable to such insurance benefits, not otherwise determined, may be determined by applying the rates provided in Rev. Rul. 55-747, 1955-2 C.B. 228, to the amounts of insurance that would revert to the trust in the event of death of the insured employee in the year for which the premiums are paid. In later years, if an employer for any reason, such as the receipt by the trustee of life insurance proceeds under a retirement income contract because of the death of an employee, which proceeds were applied to the payment of premiums on similar contracts for the benefit of other employees, contributes to the trust a sum less than the maximum deduction permitted for that year under § 404(a)(1)(A), (B), or (C), Rev. Rul. 55-748 provides that the employer may deduct in that year, in addition to this current contribution, the contributions made in prior years and not then deductible because they were attributable to that part of the retirement income contracts that would provide life insurance payable to the trustee, to the extent of the difference between his current contribution and his maximum deduction permitted under § 404(a)(1)(A), (B), or (C).

Rev. Rul. 55-747 provided a table to be used in computing the premiums to be included in the income of an employee on account of current life insurance protection provided for the employee under a life or endowment insurance contract held by an employees’ trust qualified under § 401(a).

Rev. Rul. 66-110, 1966-1 C.B. 12, provided that the current published premium rates charged by an insurer for individual 1-year term life insurance available to all standard risks may be used for determining the cost of insurance in connection with individual policies issued by the same insurer and held by an employees’ trust qualified under § 401(a). In addition, Rev. Rul. 66-110 extended the table of premiums set forth in Rev. Rul. 55-747 to cover additional ages.

Rev. Rul. 67-154, 1967-1 C.B. 11, amplified Rev. Rul. 66-110 and held that, where an insurer published one-year term insurance rates lower than those set forth in Rev. Rul. 55-747, but those rates were applicable only under a dividend option whereby term insurance may be purchased with dividends on existing policies and were lower than the insurer’s published rates for initial insurance available to all standard risks, those rates could not be used in place of the rates set forth in Rev. Rul. 55-747 in determining the cost of insurance under a trust described in § 401(a).

Notice 2001-10, 2001-1 C.B. 459, revoked Rev. Rul. 55-747, and provided a new table (Table 2001) to be used in valuing term life insurance coverage provided to an employee. Under Notice 2001-10, taxpayers could continue to use the rates set forth in Rev. Rul. 55-747 for purposes of determining the value of current life insurance protection provided under a qualified retirement plan for taxable years ending on or before December 31, 2001. In addition, Notice 2001-10 provided generally that taxpayers could continue to determine the value of current life insurance protection by using the insurer’s lower published rates available to standard risks as provided in Rev. Rul. 66-110. However, for periods after December 31, 2003, Notice 2001-10 sets forth certain additional conditions on the use of the insurer’s published rates.

Notice 2002-8, 2002-1 C.B. 398, revokes Notice 2001-10. Under Notice 2002-8, Rev. Rul. 55-747 remains revoked; however, taxpayers can use the rates set forth in Rev. Rul. 55-747 for purposes of determining the value of current life insurance protection provided under a qualified retirement plan for taxable years ending on or before December 31, 2001. Notice 2002-8 republishes Table 2001 and provides that Table 2001 can be used to determine the value of current life insurance protection on a single life that is provided under a qualified plan for arrangements entered into before the effective date of future guidance. In addition, paragraph 3 of Section III of Notice 2002-8 placed conditions on the use of the insurer’s lower published rates under Rev. Rul. 66-110, as amplified by Rev. Rul. 67-154, for periods after December 31, 2003, with respect to arrangements entered into after January 28, 2002.

Rev. Rul. 2003-105, 2003-40 I.R.B. 696, obsoleted Rev. Rul. 66-110 for arrangements entered into after September 17, 2003, except as provided in paragraph 3 of Section III of Notice 2002-8. Accordingly, Rev. Rul. 66-110, as amplified by Rev. Rul. 67-154, remains in effect until future guidance is issued for life insurance provided under a qualified retirement plan, subject to the conditions provided by Notice 2002-8 with respect to arrangements entered into after January 28, 2002.

Section 1.401-1(b)(1)(i) provides that a pension plan within the meaning of § 401(a) is a plan established and maintained by an employer primarily to provide systematically for the payment of definitely determinable benefits to employees over a period of years, usually for life, after retirement. A pension plan may also provide for the payment of incidental death benefits through insurance or otherwise.

Rev. Rul. 74-307, 1974-2 C.B. 126, holds that preretirement death benefits under a qualified pension plan are considered incidental death benefits within the meaning of § 1.401-1(b)(1)(i) if less than 50 percent of the employer contribution credited to each participant’s account is used to purchase ordinary life insurance policies on the participant’s life, or if the total death benefit before normal retirement date does not exceed the greater of (a) the proceeds of ordinary life insurance policies providing a death benefit of 100 times the anticipated monthly normal retirement benefit, or (b) the sum of (i) the reserve under the ordinary life insurance policies plus (ii) the participant’s account in the auxiliary fund. See also Rev. Rul. 68-453, 1968-2 C.B. 163.

Rev. Rul. 81-162, 1981-1 C.B. 169, holds that a plan established by an employer that provides employees only such benefits as are afforded through the purchase of ordinary life insurance contracts (other than retirement income contracts), which are converted to life annuities at normal retirement age, does not constitute a pension plan within the meaning of § 401(a). Rev. Rul. 81-162 provides that the primary purpose of such a life insurance contract is to provide life insurance protection, and the reserve accumulated thereon is a result of premium payments being made on a level basis. Rev. Rul. 81-162 reasons that such reserve will provide a relatively small retirement annuity in comparison with the annuity that a retirement income contract of the same face amount will provide. Therefore, Rev. Rul. 81-162 concludes that a plan providing only for the purchase of ordinary life insurance contracts (other than retirement income contracts) is not primarily for the payment of benefits to employees over a period of years after retirement. This analysis would not apply, however, if the death benefit payable to the beneficiary under the plan were limited to an incidental death benefit, with the remaining benefit payable to the plan.

In Situation 1, Plan A is not a plan described in § 412(i) because the participant’s benefit under Plan A payable at normal retirement age is not equal to the amount provided at normal retirement age with respect to the contracts held on behalf of the participant, and thus, Plan A fails to satisfy the requirements of § 412(i)(3). Accordingly, Plan A is subject to the requirements of § 412, with charges and credits to the funding standard account determined using the reasonable funding method selected for the plan under generally applicable rules, and using reasonable actuarial assumptions. Such reasonable funding method and such reasonable actuarial assumptions are also used to determine the deductible amount of contributions under the generally applicable rules of § 404(a). In addition, the exception from the accrual rules that applies to § 412(i) plans under § 411(b)(1)(F) does not apply to Plan A.

In Situation 2, the fact that the life insurance contracts on the life of Participant P provide for death benefits in excess of the death benefits under the plan would not cause Plan B to fail to satisfy the requirements to be a plan described in § 412(i), if Plan B otherwise met those requirements. Similarly, the fact that the life insurance contracts on the life of Participant P provide for death benefits that would fail to satisfy the incidental benefit rule of § 1.401-1(b)(1)(i) if payable to Participant P’s beneficiary under the plan does not cause Plan B to fail to satisfy the incidental death benefit rule of § 1.401-1(b)(1)(i) because those excess death benefits under the life insurance contracts are not payable to Participant P’s beneficiary under the plan. However, a portion of Employer N’s contributions under Plan B is attributable to the purchase of life insurance coverage held by Plan B that is in excess of the incidental death benefit payable under Plan B. Under Rev. Rul. 55-748, the portion of Employer N’s contributions that is attributable to such excess life insurance coverage does not constitute normal cost, and is not deductible as part of normal cost for the taxable year in which contributed. Rather, that portion of Employer N’s contributions is used to provide a source of funds to pay future premiums (i.e., premiums on other participants) that will come due after the death of Participant P. Accordingly, the nondeductible portion of Employer N’s contributions under Plan B that is paid for life insurance protection for Participant P is carried over pursuant to the rules of § 404(a)(1)(E) to be treated as contributions under the rules of § 404(a)(1)(E) in later years and deductible when the employer contributions are less than the maximum deductible limit (e.g., in years in which excess death benefits under Plan B are used to satisfy Employer N’s obligation to pay future premiums on other participants). Similarly, Employer N’s contributions to pay premiums for the disability waiver for Participant P do not constitute normal cost, and are not deductible as part of normal cost for the taxable year in which contributed. Rather, that portion of Employer N’s contributions is used to provide a source of funds to pay future premiums that will come due after Participant P becomes disabled. Accordingly, the nondeductible portion of Employer N’s contributions under Plan B that is paid for the disability waiver for Participant P is carried over pursuant to the rules of § 404(a)(1)(E) to be treated as contributions under the rules of § 404(a)(1)(E) in later years and deductible when the employer contributions are less than the maximum deductible limit (e.g., if and when Participant P becomes disabled).

In general, the premiums for excess life insurance coverage that are not currently part of normal cost under § 404(a)(1)(A) are determined in a manner consistent with total premiums under the contract (i.e., must be spread in a level manner over the premium payment period). However, if the premiums for the life insurance contracts covering a participant are level annual premiums payable beginning with the participant’s participation in the plan and ending at the participant’s normal retirement age, this excess amount can be determined by applying the appropriate term cost factors to the excess term coverage. Nondeductible contributions are subject to the excise tax of § 4972 as provided thereunder. In determining the amount of premiums for excess life insurance coverage, Table 2001 is applicable for taxable years ending after December 31, 2001, and the table set forth in Rev. Rul. 55-747 is used for earlier periods. In addition, the current published premium rates charged by an insurer for individual 1-year term life insurance available to all standard risks as described in Rev. Rul. 66-110, as amplified by Rev. Rul. 67-154, can be used for taxable years ending on or before December 31, 2003. For arrangements entered into on or before January 28, 2002, such current published premium rates can continue to be used for periods ending after December 31, 2003. However, for arrangements entered into after January 28, 2002, such current published premium rates can continue to be used for periods ending after December 31, 2003, only if the additional requirements of Notice 2002-8 are satisfied.

A qualified pension plan cannot be a section 412(i) plan if the plan holds life insurance contracts and annuity contracts for the benefit of a participant that provide for benefits at normal retirement age in excess of the participant’s benefits at normal retirement age under the terms of the plan.

Employer contributions under a qualified defined benefit plan that are used to purchase life insurance coverage for a participant in excess of the participant’s death benefit provided under the plan are not fully deductible when contributed, but are carried over to be treated as contributions in future years and deductible in future years when other contributions to the plan that are taken into account for the taxable year are less than the maximum amount deductible for the year pursuant to the limits of § 404.

Transactions that are the same as, or substantially similar to, the transaction described in Situation 2 of this revenue ruling 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 effective February 13, 2004, the date this revenue ruling was released to the public, provided that the employer has deducted amounts used to pay premiums on a life insurance contract for a participant with a death benefit under the contract that exceeds the participant’s death benefit under the plan by more than $100,000.

It should be noted that, independent of any classification as “listed transactions” for purposes of §§ 1.6011-4(b)(2), 301.6111-2(b)(2), and 301.6112-1(b)(2) of the regulations, arrangements that are the same as, or substantially similar to, the arrangements described in this notice may already be subject to the disclosure requirements of § 6011 of the Code, 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 who are required to satisfy the registration requirement of § 6111 of the Code with respect to the arrangements described in this notice and who fail to do so may be subject to the penalty under § 6707(a). Persons who are required to satisfy the list-keeping requirement of § 6112 with respect to the arrangements and who fail to do so may be subject to the penalty under § 6708(a). In addition, the Service may impose penalties on participants in these arrangements or substantially similar arrangements, including the accuracy-related penalty under § 6662.

Rev. Rul. 55-748 is modified and superseded.

The principal authors of this revenue ruling are Larry Isaacs of the Employee Plans, Tax Exempt and Government Entities Division, and Linda Marshall of the Office of the Division Counsel/Associate Chief Counsel, Tax Exempt and Government Entities. For further information regarding this revenue procedure, please contact the Employee Plans’ taxpayer assistance telephone service at 1-877-829-5500 (a toll-free number) between the hours of 8:00 a.m. and 6:30 p.m. Eastern Time, Monday through Friday. Mr. Isaacs may be reached at (202) 283-9888, and Ms. Marshall may be reached at (202) 622-6090 (not toll-free numbers).

If a real estate investment trust (REIT) provides parking facilities at its rental real properties, under what circumstances do amounts received by the REIT for providing the parking facilities qualify as rents from real property under § 856(d) of the Internal Revenue Code?

To qualify as a REIT, an entity must derive at least 95 percent of its gross income from sources listed in § 856(c)(2) and at least 75 percent of its gross income from sources listed in § 856(c)(3). “Rents from real property” are among the sources listed in both of those sections. Section 856(d)(1) defines rents from real property to include (subject to the exclusions in § 856(d)(2)) the amounts described in § 856(d)(1)(A), (B), and (C). Section 856(d)(1)(B) refers to “charges for services customarily furnished or rendered in connection with the rental of real property, whether or not such charges are separately stated.” Section 856(d)(2)(C) excludes “impermissible tenant service income” from the definition of rents from real property. Thus, to qualify as rents from real property, charges for services must be for services customarily furnished or rendered in connection with the rental of real property and must not be impermissible tenant service income.

Section 1.856-4(b)(1) provides the following guidance on determining whether services are customarily furnished or rendered in connection with the rental of real property:

Thus, to qualify as a service described in § 856(d)(1)(B), a service furnished at a REIT’s property must be customarily provided to tenants of properties of a similar class in that particular geographic market (the geographic market test). Section 1.856-4(b)(1) also mentions the furnishing of parking facilities as an example of a service that is customarily furnished to the tenants of a particular class of buildings in many geographic markets. Reflecting the statutory requirement of “connection with the rental of real property,” § 1.856-4(b)(1) also provides that to qualify as a service described in § 856(d)(1)(B), the service must be furnished to the REIT’s tenants or their guests, customers, or subtenants.

Section 1.856-4(b)(5)(ii) discusses the fiduciary functions of a REIT’s trustees or directors, as follows:

Thus, § 1.856-4(b)(5)(ii) permits the trustees or directors of a REIT to perform activities needed to manage the REIT itself, as distinguished from rendering services to tenants of the REIT’s property or managing or operating the REIT’s property.

As noted above, § 856(d)(2)(C) excludes impermissible tenant service income from the definition of rents from real property. Pursuant to § 856(d)(7)(A), impermissible tenant service income means, with respect to any real property, any amount received or accrued directly or indirectly by a REIT for furnishing services to the tenants of the property or managing or operating the property. Section 856(d)(7)(C)(i), however, provides that services rendered or management or operation provided is not treated as furnished by the REIT for this purpose if furnished through an independent contractor (as defined in § 856(d)(3)) from whom the REIT does not derive or receive any income. Thus, amounts received by a REIT for services furnished to its tenants, or for property management or operation, do not constitute impermissible tenant service income if the services or management or operation is furnished through an independent contractor (as defined in § 856(d)(3)) from whom the REIT does not derive or receive any income.

Moreover, pursuant to § 856(d)(7) (C)(ii), an amount is not treated as impermissible tenant service income if the amount would be excluded from unrelated business taxable income under § 512(b)(3) if received by an organization described in § 511(a)(2) (referred to, for purposes of this revenue ruling, as an exempt organization). Thus, services provided directly by a REIT do not give rise to impermissible tenant service income if the charges for those services would be excluded from unrelated business taxable income if received by an exempt organization.

Section 512(b)(3)(A)(i) excludes rents from real property from unrelated business taxable income. Section 1.512(b)-1(c)(5) provides, however, that payments for the use of space where services are also rendered to the occupant are not rents from real property. That section mentions space in parking lots as an example of space where services are also rendered to the occupant. Thus, payments for the use of parking space are not excluded from unrelated business taxable income under § 512(b)(3) if received by an exempt organization.

The conference report underlying the 1986 revision of § 856(d) (the 1986 conference report) provides the following guidance on services performed directly by REITs:

2 H.R. Conf. Rep. No. 841, 99^th Cong., 2d Sess. II-220 (1986), 1986-3 (Vol. 4) C.B. 220. Thus, the 1986 conference report indicates that, in some circumstances, REITs may directly perform activities in connection with parking facilities without causing charges for providing the parking facilities to fail to qualify as rents from real property under § 856(d).

The difference between this congressional intent and the treatment of exempt organizations under § 512(b)(3) reflects differences between §§ 856(d) and 512(b)(3), as well as differences between the regulations interpreting those sections. The definition of rents from real property in § 856(d), which applies to REITs, differs significantly in scope and structure from the definition of rents from real property under § 512(b)(3), which applies to exempt organizations. For example, unlike § 512(b)(3), § 856(d)(7)(C)(i) treats services provided by an independent contractor as not provided by the REIT. The definition of rents from real property under § 512(b)(3) does not have a comparable provision.

Amounts received by R for furnishing unattended parking facilities, under the circumstances described in Situations 1 and 2, and for furnishing attended parking facilities, under the circumstances described in Situation 3, qualify as rents from real property under § 856(d).

The principal author of this revenue ruling is Jonathan D. Silver of the Office of Associate Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling, contact Mr. Silver at (202) 622-3920 (not a toll-free call).

For purposes of the COBRA continuation coverage requirements of section 4980B of the Internal Revenue Code, is the Medicare entitlement of a covered employee a second qualifying event for a qualified beneficiary if the Medicare entitlement would not have resulted in a loss of coverage for the qualified beneficiary under the group health plan that is providing the COBRA continuation coverage?

Employee E and E’s spouse are covered under a group health plan subject to the COBRA continuation coverage requirements of section 4980B of the Internal Revenue Code. E is not entitled to Medicare benefits. E terminates employment (but not by reason of gross misconduct). E and E’s spouse lose coverage under the plan as a result of E’s termination of employment. The plan offers them the right to elect COBRA continuation coverage for a period of up to 18 months. E’s spouse elects and pays for COBRA continuation coverage timely. Before the 18-month period has expired, E becomes entitled to Medicare benefits by reason of the attainment of age 65. E’s spouse is still receiving COBRA continuation coverage under the plan at the time E becomes entitled to Medicare benefits. E’s spouse notifies the plan of E’s becoming entitled to Medicare benefits within 60 days after E became so entitled. Employees and their spouses receiving coverage under the plan by virtue of an employee’s current employment status are not treated differently under the plan on account of their being age 65 or older, nor on account of their being entitled to Medicare benefits by reason of the attainment of age 65.^[1]

Section 4980B of the Code requires certain group health plans to make continuation coverage available to certain individuals who would otherwise lose their coverage under the plan as a result of certain occurrences (the COBRA continuation coverage requirements). Section 4980B imposes an excise tax if a plan subject to the COBRA continuation coverage requirements fails to comply with them.

Under section 4980B, the obligation of a plan to make COBRA continuation coverage available arises in connection with a qualifying event. The individuals to whom COBRA continuation coverage must be made available are qualified beneficiaries.

Under Q&A-1 of § 54.4980B-3 of the Miscellaneous Excise Tax Regulations, a qualified beneficiary is any individual who is covered under a group health plan on the day before a qualifying event by virtue of being on that day a covered employee or the spouse or a dependent child of a covered employee. However, a covered employee can be a qualified beneficiary only in connection with a qualifying event that is a termination (or reduction of hours) of the covered employee’s employment or that is the bankruptcy of the employer. Under Q&A-2 of § 54.4980B-3, a covered employee is generally any individual who is or was provided coverage under a group health plan by virtue of the performance of services for the employer maintaining the plan or by virtue of membership in the employee organization maintaining the plan. Under Q&A-1(f) of § 54.4980B-3, an individual ceases to be a qualified beneficiary if the individual does not elect COBRA continuation coverage by the end of the election period; an individual also ceases to be a qualified beneficiary when the plan no longer has an obligation to make COBRA continuation coverage available to the individual under the rules prescribing how long COBRA continuation coverage must be made available.

Section 4980B(f)(3) of the Code lists six categories of events and defines them as qualifying events if, but for the COBRA continuation coverage required to be provided, they would result in a loss of coverage of a qualified beneficiary. The categories of qualifying events include the termination (other than by reason of gross misconduct), or reduction of hours, of a covered employee’s employment and the covered employee’s becoming entitled to Medicare benefits under title XVIII of the Social Security Act. Q&A-1(c) of § 54.4980B-4 defines what is a loss of coverage for purposes of determining if a listed event is a qualifying event, requiring that the listed event cause the covered employee or the covered employee’s spouse or dependent child to cease to be covered under the same terms and conditions as in effect immediately before the event. Q&A-1(c) of § 54.4980B-4 clarifies that a loss of coverage need not occur immediately after the event so long as it occurs before the end of the maximum coverage period.

Q&A-4 of § 54.4980B-7 describes the end of the maximum coverage period. In the case of a qualifying event that is a termination (or reduction of hours) of employment, the maximum coverage period generally ends 18 months after the qualifying event (29 months if a disability extension applies). In the case of a qualifying event that is a covered employee’s becoming entitled to Medicare benefits, the maximum coverage period generally ends 36 months after the date of the qualifying event. (Nothing in the statute or regulations prohibits a group health plan from providing coverage that continues beyond the end of the maximum coverage period.)

Q&A-6(b) of § 54.4980B-7 describes the circumstances under which a second qualifying event can expand the maximum coverage period of an earlier qualifying event. If a qualifying event that is a termination (or reduction of hours) of employment is followed within the 18-month maximum coverage period (or within the 29-month maximum coverage period in a case in which a disability extension applies) by a qualifying event that gives rise to a 36-month maximum coverage period, then the 18-month (or 29-month) period is expanded to 36 months (measured from the date of the first qualifying event). The expanded period applies only for those individuals who were qualified beneficiaries in connection with the first qualifying event and who are still qualified beneficiaries at the time of the second qualifying event.

The expanded maximum coverage period of Q&A-6 of § 54.4980B-7 applies only when the 36-month qualifying event follows the qualifying event that is a termination (or reduction of hours) of employment. (However, Q&A-4(d) of § 54.4980B-7 provides a special rule for the measurement of the maximum coverage period in a case where the covered employee’s becoming entitled to Medicare benefits precedes the termination (or reduction of hours) of employment; this special rule applies regardless of whether the Medicare entitlement is a qualifying event.) Because a covered employee is not a qualified beneficiary with respect to any 36-month qualifying event, the expanded period that applies in connection with a second qualifying event will not apply to a covered employee but only to the spouse or a dependent child of a covered employee.

Based on the statute and regulations, for a spouse or dependent child of a covered employee to be entitled to the expanded maximum coverage period when a second qualifying event occurs, the following three conditions must be satisfied:^[2]

(1) The spouse or dependent child must be a qualified beneficiary in connection with a termination (or reduction of hours) of employment;

(2) The spouse or dependent child must still be a qualified beneficiary at the time that the 36-month event occurs; and

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

For a 36-month event to be a qualifying event, it must — but for the required COBRA continuation coverage — result in a loss of coverage for the qualified beneficiary under the plan within the maximum coverage period. In the context of determining if a 36-month event is a second qualifying event, it is necessary to ignore the COBRA continuation coverage provided in connection with the qualifying event that is the termination (or reduction of hours) of the covered employee’s employment. The inquiry is whether, in the absence of the first qualifying event, the 36-month event would result in a loss of coverage for the qualified beneficiary under the plan within the maximum coverage period. This determination is made by applying the terms of the plan to the qualified beneficiary as if the covered employee had not experienced the termination (or reduction of hours) of employment and determining if the occurrence of the 36-month event in this hypothetical scenario would result in a loss of coverage for the qualified beneficiary under the plan within 36 months after, generally^[3], the covered employee’s actual termination (or reduction of hours) of employment.

In the facts described, the first two conditions for E’s Medicare entitlement to be a second qualifying event for E’s spouse are satisfied: E’s spouse is a qualified beneficiary in connection with E’s termination of employment, and E’s spouse is still a qualified beneficiary at the time that E becomes entitled to Medicare benefits.^[4]Thus, whether E’s spouse is entitled to a period of 36 months of COBRA continuation coverage (measured from the date of E’s termination of employment) depends on whether E’s Medicare entitlement is a qualifying event. The group health plan described complies with the working aged Medicare Secondary Payer provisions of the Social Security Act by not treating a current employee or the employee’s spouse differently because either of them has attained age 65 or is entitled to Medicare benefits by reason of the attainment of age 65. Thus, applying the terms of the plan to E’s spouse as if E’s spouse were receiving coverage under the plan in absence of E’s termination of employment, E’s becoming entitled to Medicare benefits in the hypothetical scenario of E’s not having experienced a termination of employment would not result in a loss of coverage for E’s spouse within 36 months after the actual termination of employment. Consequently, E’s spouse is not entitled to an expansion of the maximum coverage period by reason of E’s Medicare entitlement, and the plan is not required to make COBRA continuation coverage available to E’s spouse beyond the end of the 18-month maximum coverage period.

The Medicare entitlement of a covered employee is not a second qualifying event for a qualified beneficiary unless the Medicare entitlement would have resulted (if COBRA continuation coverage, including COBRA continuation coverage due to the first qualifying event, is disregarded) in a loss of coverage for the qualified beneficiary under the group health plan that is providing the COBRA continuation coverage.

The principal author of this revenue ruling is Russ Weinheimer of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information about this revenue ruling, contact Mr. Weinheimer at (202) 622-6080 (not a toll-free call).

This notice contains a proposed revenue procedure providing a safe harbor that certain institutions of higher education, and certain affiliated organizations can use in applying the exception for services performed by a student provided under § 3121(b)(10) of the Internal Revenue Code (student FICA exception). A previous version of this safe harbor was issued in Rev. Proc. 98-16, 1998-1 C.B. 403. However, the Service has recently proposed amendments to the Employment Tax Regulations interpreting § 3121(b)(10) in order to clarify specific issues that have arisen with taxpayers and in litigation (see proposed regulations § 31.3121(b)(10)-2(c), (d), and (e) published in the Federal Register on February 25, 2004 (REG-156421-03, 2004-10 I.R.B. [69 F.R. 8604]). In order to provide guidance that is consistent with the proposed regulations in all respects, the Service is suspending Rev. Proc. 98-16 and proposing to replace it with the revenue procedure contained in this notice.

The proposed revenue procedure updates the safe harbor of Rev. Proc. 98-16 in several respects that align it with the proposed regulations. First, the proposed revenue procedure adds a primary function requirement to the definition of an institution of higher education. Section 3121(b)(10) applies only to services performed in the employ of a school, college, or university, or an affiliated § 509(a)(3) organization. Under the proposed regulations and the new safe harbor, an organization can be a school, college, or university only if its primary function is to conduct educational activities. Thus, in order to take advantage of the safe harbor in the revenue procedure, an institution must satisfy not only the Department of Education’s regulations at 34 C.F.R. § 600.4 and satisfy the accreditation requirements of 34 C.F.R. § 600.2, as was required in Rev. Proc. 98-16, but also must have education and instruction as its primary function. The primary function requirement may make the exception under § 3121(b)(10) unavailable to certain institutions of higher education that are embedded within a larger organization like a hospital or museum.

Second, the proposed revenue procedure does not permit an institution to apply the student FICA exception to services performed by an employee who regularly works 40 or more hours per week. Under the existing regulations, services fall within the student FICA exception only if they are performed incident to and for the purpose of pursuing a course of study. The proposed regulations clarify that an individual who regularly works forty or more hours per week has the status of a career employee, and, accordingly, is not performing services incident to and for the purpose of pursuing a course of study. The proposed revenue procedure follows the proposed regulations. The student FICA exception generally, and the safe harbor provided by the proposed revenue procedure specifically, are still available for services performed by an employee who on occasion works 40 or more hours per week and otherwise meets the requirements of the safe harbor.

Third, the proposed revenue procedure provides that an individual has career employee status if the individual is a “professional employee.” The proposed regulations provide that a professional employee for purposes of the student FICA exception is an employee whose primary duty consists of the performance of services requiring knowledge of an advanced type in a field of science or learning, whose work requires the consistent exercise of discretion and judgment in its performance, and whose work is predominantly intellectual and varied in character. The proposed revenue procedure follows the proposed regulations.

Fourth, the proposed revenue procedure expands the terms of employment that result in status as a career employee. Rev. Proc. 98-16 provided that an individual was to be considered a career employee if the employee was eligible to participate in one of several types of retirement plans, eligible for reduced tuition (with certain exceptions), or otherwise classified by the institution of higher education as a career employee. The proposed regulations adopt the same criteria for identifying individuals who have the status of a career employee and adds to the list eligibility for a number of other benefits. The proposed revenue procedure follows the proposed regulations, adding the additional criteria that cause an individual to have career employee status and fall outside the scope of the safe harbor. Employees considered as having the status of a career employee per se cannot have the status of a student for purposes of the student FICA exception.

Fifth, and finally, the proposed revenue procedure provides that an employee has career employee status if the individual is required to be licensed under state or local law in order to perform the services the individual provides to the school, college, or university. The proposed revenue procedure follows the proposed regulation.

Comments are requested on the proposed revenue procedure. Comments may be submitted on or before May 25, 2004, to Internal Revenue Service, PO Box 7604, Washington, DC 20044, Attn: CC:PA:LPD:PR (Notice 2004-12), Room 5203. Submissions may also be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to the Courier’s Desk at 1111 Constitution Avenue, NW, Washington, DC 20224, Attn: CC:PA:LPD:PR (Notice 2004-12), Room 5203. Submissions may also be sent electronically via the internet to the following email address: Notice.comments@irscounsel.treas.gov. Include the notice number (Notice 2004-12) in the subject line.

Rev. Proc. 98-16 is suspended effective February 25, 2004.

The Service intends to issue a final revenue procedure at the same time that the proposed regulations under § 3121(b)(10) are finalized. Until a final version of the proposed revenue procedure is issued, taxpayers may rely on the proposed revenue procedure with respect to services performed on or after February 25, 2004 (the date prop. Reg. § 31.3121(b)(10)-2(c)-(f) (69 F.R. 8604) was published in the Federal Register).

This revenue procedure is issued in connection with the issuance of proposed regulations under § 402(a) of the Internal Revenue Code regarding the valuation of life insurance contracts upon distribution from a qualified retirement plan and proposed regulations under §§ 79 and 83 regarding the valuation of life insurance contracts under those sections (REG-126967-03, 2004-10 I.R.B. ). The preamble to the proposed regulations states that it is not appropriate in some cases to use either the net surrender value of a distributed life insurance contract (i.e., the contract’s cash value after reduction for any surrender charges) or the contract’s reserves as the contract’s fair market value upon distribution of an insurance contract from a qualified plan but the preamble provides limited guidance as to what value may be used instead.Similarly, the proposed regulations under §§ 79 and 83 clarify that the amount includible in income under those sections is based upon the fair market value of the insurance contract rather than its cash value but these proposed regulations do not provide any guidance as what constitutes fair market value. The regulations are generally proposed to apply beginning on the date the proposed regulations are filed in the Federal Register. The preamble to the proposed regulations also requests public comments regarding appropriate methods for valuing life insurance contracts when distributed from qualified retirement plans and for purposes of §§ 79 and 83. Until further guidance is issued, this revenue procedure provides interim rules under which the cash value (without reduction for surrender charges) of a life insurance contract may be treated as the contract’s fair market value when the contract is distributed from a qualified plan under § 402 and for purposes of §§ 79 and 83.

.01 Section 402(a) provides generally that any amount actually distributed to any distributee by any employees’ trust described in § 401(a) which is exempt from tax under § 501(a) shall be taxable to the distributee, in the taxable year of the distributee in which distributed, under § 72.

.02 Section 1.402(a)-1(a)(1)(iii) of the current regulations provides, in general, that a distribution of property by a § 401(a) plan shall be taken into account by the distributee at its “fair market value.” Section 1.402(a)-1(a)(2) of the current regulations provides, in general, that upon distribution of an annuity or life insurance contract, the “entire cash value” must be included in the distributee’s income. The current regulations do not define “fair market value” or “entire cash value” and questions have arisen regarding the interaction between these two provisions.

.03 The proposed regulations would clarify that the requirement that a distribution of property must be included in the distributee’s income at fair market value is controlling in those situations where the existing regulations provide for the inclusion of the entire cash value. Thus, the proposed regulations provide that, in those cases where a qualified plan distributes a life insurance contract, retirement income contract, endowment contract, or other contract providing life insurance protection, the fair market value of such a contract is generally included in the distributee’s income rather than the entire cash value of the contract. For this purpose, the policy cash value and all other rights under the contract (including any supplemental agreements thereto and whether or not guaranteed) are included in determining the fair market value of such a contract. The proposed regulations provide a similar rule for purposes of the valuation of such contracts under §§ 79 and 83.

.04 In Rev. Rul. 59-195, 1959-1 C.B. 18, the Service ruled that in situations similar to those where an employer purchases and pays the premiums on an insurance policy on the life of one of its employees and subsequently sells such policy, on which further premiums must be paid, the value of such policy, for computing taxable gain in the year of purchase, should be determined under the method of valuation prescribed in § 25.2512-6 of the Gift Tax Regulations. Under this method, the value of such a policy is not its cash surrender value but the interpolated terminal reserve at the date of sale plus the proportionate part of any premium paid by the employer prior to the date of the sale which is applicable to a period subsequent to the date of the sale. Section 25.2512-6 also provides that if “because of the unusual nature of the contract such approximation is not reasonably close to the full value, this method may not be used.” Thus, this method may not be used to determine the fair market value of an insurance policy where the reserve does not reflect the value of all of the relevant features of the policy.

.05 In Q&A-10 of Notice 89-25, 1989-1 C.B. 662, the IRS addressed the question of what amount is includible in income under § 402(a) when a participant receives a distribution from a qualified plan that includes a life insurance policy with a value substantially higher than the cash surrender value stated in the policy. The notice noted the practice of using cash surrender value as fair market value for these purposes and concluded that this practice is not appropriate where the total policy reserves, including life insurance reserves (if any) computed under § 807(d), together with any reserves for advance premiums, dividend accumulations, etc., represent a much more accurate approximation of the policy’s fair market value.

.06 Since Notice 89-25 was issued, life insurance contracts have been marketed that are structured in a manner which results in a temporary period during which neither a contract’s reserves nor its cash surrender value represent the fair market value of the contract. For example, some life insurance contracts may provide for large surrender charges and other charges that are not expected to be paid because they are expected to be eliminated or reversed in the future (under the contract or under another contract for which the first contract is exchanged), but this future elimination or reversal is not always reflected in the calculation of the contract’s reserve. If such a contract is distributed prior to the elimination or reversal of those charges, both the cash surrender value and the reserve under the contract could significantly understate the fair market value of the contract. Thus, the preamble to the proposed regulations states that, in some cases, it would not be appropriate to use either the net surrender value (i.e. the contract’s cash value after reduction for any surrender charges) or, because of the unusual nature of the contract, the contract’s reserves to determine the fair market value of the contract. Accordingly, Q&A-10 of Notice 89-25 should not be interpreted to provide that a contract’s reserves (including life insurance reserves (if any) computed under § 807(d), together with any reserves for advance premiums, dividend accumulations, etc.) are always an accurate representation of the contract’s fair market value.

.07 As stated in the preamble to the proposed regulations, the amount of any distribution determined under § 402 also applies for purposes of determining the qualified status of any plan. For example, the fair market value of a distributed life insurance contract, determined in accordance with the proposed regulations and this revenue procedure, must be considered in determining whether the insured participant has received benefits in excess of the limits imposed by § 415.

.08 Section 79 generally requires that the cost of group-term life insurance coverage on the life of an employee that is in excess of $50,000 of coverage be included in the income of the employee. Pursuant to § 1.79-1(b) of the Income Tax Regulations, under specified circumstances group-term life insurance may be combined with other benefits, referred to as permanent benefits.

.09 Permanent benefits provided to an employee are subject to taxation under rules described in § 1.79-1(d). Under those rules, the cost of the permanent benefits, reduced by the amount paid for those benefits by the employee, is included in the employee’s income. The cost of the benefits can be no less than an amount determined under a formula provided in the regulations. The formula is based in part on the increase in the employee’s deemed death benefit during the year. One of the factors used for determining the deemed death benefit is “the net level premium reserve at the end of that policy year for all benefits provided to the employee by the policy or, if greater, the cash value of the policy at the end of that policy year.”

.10 The proposed regulations would amend § 1.79-1(d) to delete the term cash value from the formula for determining the cost of permanent benefits and substitute the term fair market value. The purpose of the change is to clarify that, unless specifically excepted from the definition of permanent benefits, the value of all features of a life insurance policy providing an economic benefit to an employee (including, for example, the value of a springing cash value feature) must be included in the employee’s income.

.11 Section 83(a) provides that 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 without regard to lapse restrictions (such as life insurance contract surrender charges), and determined at the first time that the transferee’s rights in the property are either transferable or not subject to a substantial risk of forfeiture (i.e., when those rights become “substantially vested”), over the amount (if any) paid for the property. Section 1.83-3(e) provides that in the case of a transfer of a life insurance contract, retirement income contract, endowment contract, or other contract providing life insurance protection, only the cash surrender value of the contract is considered to be property. The proposed regulations generally would amend § 1.83-3(e) to provide that in the case of a transfer of an insurance contract, retirement income contract, endowment contract, or other contract providing life insurance protection, the policy cash value and all other rights under the contract (including any supplemental agreements, whether or not guaranteed), other than current insurance protection, are treated as property for purposes of this section. However, in the case of the transfer of a life insurance contract, retirement income contract, endowment contract, or other contract providing life insurance protection, which was part of a split-dollar arrangement (as defined in § 1.61-22(j)) entered into on or before September 17, 2003, and which is not materially modified (as defined in § 1.61-22(j)(2)) after September 17, 2003, only the cash surrender value of the contract is considered to be property.

.01 The Service and the Treasury recognize that many taxpayers could have difficulty determining the fair market value of an insurance contract after the issuance of the proposed regulations under §§ 79 and 83 and the clarification in the preamble to the proposed regulations under § 402 that Notice 89-25 should not be interpreted to provide that a contract’s reserves (including life insurance reserves (if any) computed under § 807(d), together with any reserves for advance premiums, dividend accumulations, etc.) are always an accurate representation of the contract’s fair market value. Accordingly, in connection with the proposed regulations, this revenue procedure provides interim rules under which the cash value (without reduction for surrender charges) of a life insurance contract distributed from a qualified plan may be treated as the fair market value of that contract. These interim rules also apply for purposes of determining the value of insurance contracts under §§ 79 and 83.

.02 Cash value (without reduction for surrender charges) may be treated as the fair market value of a contract as of a determination date provided such cash value is at least as large as the aggregate of: (1) the premiums paid from the date of issue through the date of determination, plus (2) any amounts credited (or otherwise made available) to the policyholder with respect to those premiums, including interest, dividends, and similar income items (whether under the contract or otherwise), minus (3) reasonable mortality charges and reasonable charges (other than mortality charges), but only if those charges are actually charged on or before the date of determination and are expected to be paid.

.03 In those cases where the contract is a variable contract (as defined in § 817(d)) cash value (without reduction for surrender charges) may be treated as the fair market value of the contract provided such cash value is at least as large as the aggregate of: (1) the premiums paid from the date of issue through the date of determination, plus (2) all adjustments made with respect to those premiums during that period (whether under the contract or otherwise) that reflect investment return and the current market value of segregated asset accounts, minus (3) reasonable mortality charges and reasonable charges (other than mortality charges), but only if those charges are actually charged on or before the date of determination and are expected to be paid.

.04 The date of determination in the case of a distribution of a contract from a qualified plan is the date of that distribution. The date of determination in the case of the provision of permanent benefits subject to § 79 is the date those benefits are provided. The date of determination in the case of a transfer of an insurance contract subject to § 83 is the date on which fair market value must be determined under the rules of § 83.

This revenue procedure is effective on February 13, 2004.

The principal authors of this revenue procedure are Robert Walsh and Larry Isaacs of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this revenue procedure as it pertains to § 402, please contact the Employee Plans’ taxpayer assistance telephone service at 1-877-829-5500 (a toll-free number) between the hours of 8:00 a.m. and 6:30 p.m. Eastern Time, Monday through Friday. For further information regarding this revenue procedure as it pertains to § 79, please contact Betty Clary of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities) at (202) 622-6080 (not a toll-free number). For further information regarding this revenue procedure as it pertains to § 83, please contact Robert Misner of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities) at (202) 622-6030 (not a toll-free number). Mr. Walsh and Mr. Isaacs may be reached at (202) 283-9888 (not a toll-free number).

.01 This revenue procedure provides information to any individual who failed to meet the eligibility requirements of § 911(d)(1) of the Internal Revenue Code because adverse conditions in a foreign country precluded the individual from meeting those requirements for taxable year 2003.

.02 The Internal Revenue Service has previously listed countries for which the eligibility requirements of § 911(d)(1) of the Code are waived under § 911(d)(4) because of adverse conditions in those countries on and after the date stated. See Rev. Proc. 2003-26, 2003-1 C.B. 666, Rev. Proc. 2002-20, 2002-1 C.B. 732, and Rev. Proc. 2001-27, 2001-1 C.B. 1155. This revenue procedure lists countries added to the list in 2003, for which the eligibility requirements of § 911(d)(1) are waived. Rev. Proc. 2003-26, Rev. Proc. 2002-20, and Rev. Proc. 2001-27 remain in full force and effect.

.01 Section 911(a) of the Code allows a “qualified individual,” as defined in § 911(d)(1), to exclude foreign earned income and housing cost amounts from gross income. Section 911(c)(3) of the Code allows a qualified individual to deduct housing cost amounts from gross income.

.02 Section 911(d)(1) of the Code defines the term “qualified individual” as an individual whose tax home is in a foreign country and who is (A) a citizen of the United States and establishes to the satisfaction of the Secretary of the Treasury that the individual has been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire taxable year, or (B) a citizen or resident of the United States who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days.

.03 Section 911(d)(4) of the Code provides an exception to the eligibility requirements of § 911(d)(1). An individual will be treated as a qualified individual with respect to a period in which the individual was a bona fide resident of, or was present in, a foreign country if the individual left the country during a period for which the Secretary of the Treasury, after consultation with the Secretary of State, determines that individuals were required to leave because of war, civil unrest, or similar adverse conditions that precluded the normal conduct of business. An individual must establish that but for those conditions the individual could reasonably have been expected to meet the eligibility requirements.

.04 For 2003, the Secretary of the Treasury in consultation with the Secretary of State has determined that war, civil unrest, or similar adverse conditions that precluded the normal conduct of business existed in the following countries beginning on the specified date:

.05 Accordingly, for purposes of § 911 of the Code, an individual who left one of the foregoing countries on or after the specified departure date shall be treated as a qualified individual with respect to the period during which that individual was present in, or was a bona fide resident of, such foreign country, if the individual establishes a reasonable expectation of meeting the requirements of § 911(d) but for those conditions.

.06 To qualify for relief under § 911(d)(4) of the Code, an individual must have established residency, or have been physically present, in the foreign country on or prior to the date that the Secretary of the Treasury determines that individuals were required to leave the foreign country. Individuals who establish residency, or are first physically present, in the foreign country after the date that the Secretary prescribes shall not be treated as qualified individuals under § 911(d)(4) of the Code. For example, individuals who are first physically present in Kuwait after March 16, 2003, are not eligible to qualify for the exception provided in § 911(d)(4) of the Code for taxable year 2003.

.07 In order to assist those individuals who are filing prior year or amended tax returns, the Internal Revenue Service is republishing the countries listed for tax years 2000, 2001, and 2002 for which the eligibility requirements of § 911(d)(1) of the Code are waived under § 911(d)(4):

A taxpayer who needs assistance on how to claim this exclusion, or on how to file an amended return, should contact a local IRS Office or, for a taxpayer residing or traveling outside the United States, the nearest overseas IRS office.

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

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

This revenue procedure provides an elective safe harbor that the owner of an oil and gas property may use in determining the property’s recoverable reserves for purposes of computing cost depletion under § 611 of the Internal Revenue Code.

.01 In General. Section 611(a) and the regulations thereunder allow as a deduction in computing taxable income a reasonable allowance for depletion in the case of oil and gas wells according to the peculiar conditions in each case.

.02 Computation of Cost Depletion. Under § 1.611-2(a) of the Income Tax Regulations, a taxpayer claiming the deduction for cost depletion computes the amount allowed with respect to each oil and gas property by reference to both the total number of recoverable units that the property is estimated to contain and the number of units sold from the property during the taxable year.

.03 Depletion Accounts. A taxpayer is required under § 1.611-2(b) to keep accounts for the depletion of each property and to adjust those accounts annually for units sold and for depletion claimed.

.04 Reserve Estimates. Section 1.611-2(c)(1) contains the rules for estimating the total recoverable units of mineral products reasonably known, or on good evidence believed, to exist with respect to each property. The estimate or determination must be made according to the method current in the industry and in light of the most accurate and reliable information obtainable. Under the regulations, the estimate of total recoverable units includes all reserves that are proved and, under appropriate circumstances, probable or prospective reserves in addition to the reserves that are proved.

.05 Revisions of Reserve Estimates.

(1) Under § 1.611-2(c)(2), if the number of recoverable units of mineral in the deposit has been previously estimated, and if there has been no known change in the facts upon which the prior estimate was based, the number of recoverable units of mineral in the deposit as of the taxable year will be the number remaining from the prior estimate. However, § 611 provides that, in any case in which it is ascertained as a result of operations and development work that the recoverable units are greater or less than the prior estimate, then the estimate will be revised and the revised estimate will be used for subsequent periods. Under § 1.611-2(c)(2), a revision is made only when operations or development work indicates that the remaining recoverable units as of the taxable year are materially greater or less than the number remaining from the prior estimate. The revised estimate is used until a change in facts requires another revision.

(2) In Martin Marietta Corporation v. United States, 7 Cl. Ct. 586 (1985), the United States Claims Court interpreted § 611(a) and § 1.611-2(c)(2) as intended to remedy mistakes of geological fact: situations where the actual size of the mineral deposit in place, as originally estimated, is later determined on the basis of more exploratory studies, for example, to be greater or less than earlier information indicated. The court distinguished situations where revisions are made under the statute and regulations from those in which the mineral property has experienced a mere diminution in value or even a retreat into worthlessness.

.06 Differences between Tax and Financial Accounting for Reserves. Generally, accounting for reserves for purposes of the depletion allowance differs from accounting for reserves for financial purposes in two important respects. First, while the regulations require the inclusion of probable or prospective reserves in addition to proved reserves for purposes of the depletion allowance, the United States Securities and Exchange Commission (SEC) generally requires the reporting of only proved reserves for financial purposes. Second, the revision of a reserve estimate for purposes of the depletion allowance is permitted under fewer circumstances than is the revision of a reserve estimate for financial reporting purposes. While the SEC may require or permit the revision of a reserve estimate in the case of changes in the price of the mineral or the cost of its extraction, such circumstances are not sufficient basis for revision of a reserve estimate for purposes of the depletion allowance.

.07 Probable or Prospective Reserves. The appropriate quantity of probable or prospective reserves to be included in an oil and gas property’s total recoverable units for purposes of computing cost depletion has been a source of controversy between taxpayers and the Service. When present, the issue has been resolved through the examinations which are costly for both parties in the dispute. This revenue procedure provides a safe harbor which is intended to remove this source of controversy from the examinations of taxpayers who elect it.

.01 In General. A taxpayer’s estimate of an oil and gas property’s probable or prospective reserves determined under the safe harbor provided in this revenue procedure may be used only for purposes of the depletion allowance. This revenue procedure has no application to the determination of the fair market value of any oil and gas property or for any other purpose not specifically authorized herein.

.02 Effect of Other Statutory and Regulatory Rules. Except with respect to estimated total recoverable units (within the meaning of § 1.611-2(c)(1)) and revised estimates (within the meaning of § 1.611-2(c)(2)), this revenue procedure has no effect on the rules provided in § 611 and the regulations thereunder.

.01 If a taxpayer makes an election in accordance with section 5 of this revenue procedure, then, for purposes of computing cost depletion:

(1) The total recoverable units under § 1.611-2(c)(1) that each of the taxpayer’s domestic oil and gas producing properties is estimated to contain as of a specific date will be treated as being equal to 105 percent of the property’s “proved reserves” (both developed and undeveloped) as defined in 17 C.F.R. § 210.4-10(a) of Regulation S-X, as of that date;

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

.02 Nothing in this revenue procedure precludes the examination and adjustment, if appropriate, of the estimate of proved reserves, as defined in Regulation S-X, in order to ensure that this revenue procedure is properly administered. Except as provided in section 5.02 of this revenue procedure, a taxpayer’s estimate of a property’s remaining recoverable units may be revised only under the circumstances permitted under § 1.611-2(c)(2).

.01 In General.

(1) Election. To elect the safe harbor provided in this revenue procedure for taxable years ending on or after March 8, 2004, a taxpayer must attach a statement to its timely filed (including extensions) original federal income tax return for the first taxable year for which the safe harbor is elected. The statement must indicate that the taxpayer is electing the safe harbor provided by Rev. Proc. 2004-19, and include the taxpayer’s name, address, taxpayer identification number, and contact name and telephone number. A copy of the statement must be sent to the Industry Director, Large and Mid-Size Business, Natural Resources, 1919 Smith Street, HOU 1000, Houston, Texas 77002. Once a taxpayer files a first return electing the safe harbor for a taxable year, the taxpayer may not revoke the election for the taxable year. The election is effective for the taxable year of election and all subsequent taxable years until revoked and applies to all of the taxpayer’s domestic oil and gas producing properties.

(2) Revocation. To revoke a safe harbor election, a taxpayer must attach a statement to its timely filed (including extensions) original federal income tax return for the first taxable year for which the safe harbor is revoked. The statement must indicate that the taxpayer is revoking the safe harbor provided by Rev. Proc. 2004-19, and include the taxpayer’s name, address, taxpayer identification number, and contact name and telephone number. A copy of the statement must be sent to the Industry Director, Large and Mid-Size Business, Natural Resources, 1919 Smith Street, HOU 1000, Houston, Texas 77002. If a taxpayer revokes its election, the taxpayer may not re-elect the safe harbor for the next five taxable years following the taxable year of revocation.

.02 Election of Safe Harbor for Taxable Year Beginning Before January 1, 2005. If the first taxable year for which a taxpayer elects the safe harbor provided in this revenue procedure begins before January 1, 2005, the taxpayer may, for the taxable year of election, revise the estimate of remaining recoverable units for any of the taxpayer’s domestic oil and gas producing properties whether or not there has been a change in geological fact indicating that the remaining recoverable units as of the taxable year for any given property is materially greater or less than the number remaining from the prior estimate. The taxpayer must use the economic and operating conditions (such as prices and costs) applicable to the taxable year of election in determining the estimate of total recoverable units.

.03 Election of Safe Harbor for Taxable Year Beginning After December 31, 2004. If the first taxable year for which a taxpayer elects the safe harbor provided in this revenue procedure begins after December 31, 2004, the taxpayer must determine, for each domestic oil and gas producing property, the last taxable year preceding the taxable year of election as of which the taxpayer revised an oil and gas property’s total recoverable units (the year of last revision) pursuant to § 1.611-2(c)(2). The taxpayer determines the property’s remaining recoverable units for the year of last revision using the safe harbor rules set forth in section 4 of this revenue procedure. The taxpayer then applies the rules set forth in § 1.611-2(b) for all subsequent taxable years to determine the property’s remaining recoverable units for the taxable year of election. Similar procedures apply if the taxpayer’s estimate of the property’s remaining recoverable units is based on the taxpayer’s original estimate of its total recoverable units under § 1.611-2(c)(1). The taxpayer may not, for the taxable year of election, revise the estimate of remaining recoverable units for any of the taxpayer’s domestic oil and gas producing properties unless there has been a change in geological fact indicating that the remaining recoverable units as of the taxable year for any given property is materially greater or less than the number remaining from the prior estimate.

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

The collection of information contained in this revenue procedure has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. § 3507) under control number 1545-1861.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

The collection of information in this revenue procedure is in section 5. The information in section 5 is required to be submitted to the applicable service center in order to elect (or revoke) the safe harbor. This information will be used to determine whether a taxpayer estimated the total recoverable units for each of its domestic oil and gas producing properties under the safe harbor. The likely respondents are businesses or other for-profit institutions.

The estimated total annual reporting burden is 50 hours.

The estimated annual burden per respondent varies from .25 hours to .75 hours, depending on individual circumstances, with an estimated average burden of .5 hours to complete the statement. The estimated number of respondents is 100.

The estimated annual frequency of responses is on occasion.

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

The principal author of this revenue procedure is Jolene J. Shiraishi of the Office of the Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue procedure, contact Ms. Shiraishi at (202) 622-3120 (not a toll-free call).

Internal Revenue Service (IRS), Treasury.

Notice of proposed rulemaking and notice of public hearing.

This document contains proposed amendments to the regulations under section 402(a) of the Internal Revenue Code regarding the amount includible in a distributee’s income when life insurance contracts are distributed by a qualified retirement plan and the treatment of property sold by a qualified retirement plan to a plan participant or beneficiary for less than fair market value. This document also contains proposed amendments to the regulations under sections 79 and 83 conforming the language in those regulations to the language in the proposed amendments to the section 402(a) regulations. These regulations will affect administrators of, participants in, and beneficiaries of qualified employer plans. These regulations also provide guidance to employers who provide group-term life insurance to their employees that is includible in the gross income of the employees and to employers who transfer life insurance contracts to persons in connection with the performance of services. This document also provides notice of a public hearing on these proposed regulations.

Written or electronic comments must be received by May 13, 2004. Requests to speak and outlines of topics to be discussed at the public hearing scheduled for June 9, 2004, at 10 a.m., must be received by May 19, 2004.

Send submissions to: CC:PA:LPD:PR (REG-126967-03), 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:LPD:PR (REG-126967-03), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington D.C. Alternatively, taxpayers may submit comments electronically directly 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, D.C.

Concerning the proposed amendments to the section 79 regulations, Betty Clary at (202) 622-6080; concerning the proposed amendments to the section 83 regulations, Robert Misner at (202) 622-6030; concerning the proposed amendments to the 402 regulations, Linda Marshall at (202) 622-6090; concerning submissions and the hearing and/or to be placed on the building access list to attend the hearing, Robin Jones at (202) 622-7180 (not toll-free numbers).

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

The principal authors of these regulations are Robert M. Walsh, Employee Plans, Tax Exempt and Government Entities Division, and Linda Marshall, Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and Treasury participated in the development of these regulations.

* * * * *

Internal Revenue Service (IRS), Treasury.

Notice of proposed rulemaking and notice of public hearing.

This document contains proposed regulations that provide guidance regarding the meaning of “school, college, or university” and “student” for purposes of the student FICA exception under sections 3121(b)(10) and 3306(c)(10)(B) of the Internal Revenue Code (Code). In addition, this document contains proposed regulations that provide guidance on the meaning of “school, college, or university” for purposes of the FICA exception under section 3121(b)(2) for domestic service performed in a local college club, or local chapter of a college fraternity or sorority by a student. This document also provides a notice of public hearing on these proposed regulations.

Written and electronic comments must be received by May 25, 2004. Outlines of topics to be discussed at the public hearing scheduled for June 16, 2004, must be received by May 25, 2004.

Send submissions to: CC:PA:LPD:PR (REG-156421-03), room 5703, 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:LPD:PR (REG-156421-03), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively, taxpayers may submit comments electronically, via the IRS Internet site at: www.irs.gov/regs.

Concerning the proposed regulations, John Richards of the Office of Associate Chief Counsel (Tax Exempt and Government Entities), (202) 622-6040; concerning submissions of comments, the hearing and/or to be placed on the building access list to attend the hearing, Treena Garret, (202) 622-7180 (not toll-free numbers).

Accordingly, 26 CFR part 31 is proposed to be amended as follows:

The principal author of these proposed regulations is John Richards of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS and Treasury Department participated in their development.

* * * * *

Under current law, qualified dividends received after 2002 are taxed to individuals, estates, and trusts at the new lower capital gain tax rates (5% or 15%). The new rates do not apply to dividends passed through from fiscal year partnerships, S corporations, or estates for their fiscal year beginning in 2002, even if the dividends were received in 2003.

Also, to qualify for the lower rates under current law, you must hold a stock for at least 61 days of a 120-day period. That period begins 60 days before the day a stock trades without its dividend (the “ex-dividend date”), and ends 59 days after the ex-dividend date. In the case of dividends attributable to periods of more than 366 days that were received on preferred stock, you must hold the stock for at least 91 days of a 180-day period. That period begins 90 days before the ex-dividend date, and ends 89 days after the ex-dividend date.

Section 2 of the Tax Technical Corrections Act of 2003 (H.R. 3654, S. 1984), which has not yet been enacted, would amend current law to allow partnerships, S corporations, and estates (including revocable trusts treated as part of an estate) with fiscal years beginning in 2002 to pass through dividends received in 2003 from domestic corporations and qualified foreign corporations as qualified dividends to their partners, shareholders, and beneficiaries (to the extent otherwise permitted by law). In addition, the legislation would amend the holding period rules for qualified dividends by changing the 120-day period to a 121-day period and the 180-day period to a 181-day period. These periods would end one day later than under current law. Both amendments would be treated as if included in section 302 of the Jobs and Growth Tax Relief Reconciliation Act of 2003. The Commissioner of Internal Revenue has agreed to allow taxpayers to apply section 2 of the Tax Technical Corrections Act of 2003 as if the legislation were presently enacted.

As a result, there are changes in the reporting requirements for the following 2002 forms (these forms and their instructions do not reflect this legislation) filed by entities with 2002-2003 fiscal years:

Also, the tax computation (for both the regular tax and the alternative minimum tax) for estates with 2002-2003 fiscal years and qualified dividends received in 2003 is affected by this change.

Note: Dividends received in a tax year beginning in 2002 and ending in 2003 are not qualified dividends for individuals with 2002-2003 fiscal years, even if the dividends are received during 2003.

The necessary changes are described in the following sections.

Estates with 2002-2003 fiscal years and qualified dividends received in 2003 must attach to their 2002 Form 1041 a computation similar to that shown in Part V of the 2003 Schedule D (Form 1041) or the Qualified Dividends Tax Worksheet on page 22 of the 2003 Instructions for Form 1041 and Schedules A, B, D, G, I, J, and K-1. These estates may use the 2003 Schedule D (Form 1041) or the Qualified Dividends Tax Worksheet to figure their 2002 tax. To do so, these filers must:

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

Estates must continue to report each beneficiary’s share of ordinary dividends for the entire tax year on line 2 of the 2002 Schedule K-1. In addition, the estate must report each beneficiary’s share of qualified dividends received in 2003 on line 14 of the 2002 Schedule K-1.

Estates should advise beneficiaries filing Form 1040 to report qualified dividends on line 9b of the 2003 Form 1040.

Partnerships and S corporations with 2002-2003 fiscal years must continue to report ordinary dividends for the entire tax year on the applicable lines shown below:

In addition, partnerships and S corporations with 2002-2003 fiscal years must report qualified dividends received in 2003 as an item of information on the applicable lines (or attachment) shown below:

Partnerships and S corporations should advise partners and shareholders filing Form 1040 to report qualified dividends on line 9b of the 2003 Form 1040.

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

Internal Revenue Service (IRS), Treasury.

Cancellation of notice of public hearing on proposed rulemaking.

This document provides notice of cancellation of a public hearing on the ordering of rules of section 664(b) for characterizing distributions from charitable remainder trusts.

The public hearing originally scheduled for March 9, 2004, at 10 a.m., is cancelled.

Robin R. Jones of the Publications and Regulations Branch, Legal Processing Division at (202) 622-7180 (not a toll-free number).

A notice of proposed rulemaking and notice of public hearing (REG-110896-98, 2003-51 I.R.B. 1226) that appeared in the Federal Register on Thursday, November 20, 2003 (68 FR 65419), announced that a public hearing was scheduled for March 9, 2004, at 10 a.m., in the auditorium. The subject of the public hearing is proposed regulations under section 664 of the Internal Revenue Code. The public comment period for these regulations expired on February 17, 2004.

The notice of proposed rulemaking and notice of public hearing, instructedthose interested in testifying at the public hearing to submit an outline of the topics to beaddressed. As of Wednesday, February 18, 2004, no one has requested to speak.Therefore, the public hearing scheduled for March 9, 2004, is cancelled.