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

This notice describes the transition period for purposes of sections 7702 and 7702A of the Code from the 1980 Commissioners Standard Ordinary mortality tables (CSO tables) to the 2001 CSO tables that are to be used by issuers of life insurance products. Notice 88-128 supplemented.

This notice announces that the Service will not assert penalties for failure to report, under section 6050S of the Code, payments of loan origination fees and capitalized interest received in calendar year 2004 on qualified education loans made on or after September 1, 2004.

This document modifies Notice 2002-70, 2002-2 C.B. 765, and Notice 2003-76, 2003-49 I.R.B. 1181, to remove certain reinsurance arrangements, which involve producer owned reinsurance companies (PORCs) from those identified as a “listed transaction,” and notifies taxpayers that the Service will continue to scrutinize such arrangements. Notices 2002-70 and 2003-76 modified.

Nonbank trustees; section 1.408-2(e) of the regulations. This announcement contains a list of entities previously approved to act as nonbank trustees and nonbank custodians within the meaning of section 1.408-2(e) of the regulations. In addition, the announcement contains instructions on how errors in the list may be corrected. Announcement 2003-54 updated and superseded.

Form 5500; Schedule B; actuarial data. This announcement clarifies the instructions to line 8c of the 2003 Schedule B of Form 5500.

This notice alerts taxpayers to recent amendments to section 501(c)(15) of the Code that may affect the qualification of entities as tax-exempt property and casualty insurance companies described in section 501(c)(15). The notice advises taxpayers that the Service will continue to scrutinize the eligibility of entities claiming to be tax-exempt property and casualty insurance companies.

This document states that relief from the section 6715 penalty for highway use of dyed diesel fuel in Florida is extended until October 5, 2004. Announcement 2004-70 amended.

This notice sets out transactions that have been identified by the Department of the Treasury and the IRS as “listed transactions” for purposes of the regulations under sections 6011 and 6111 of the Code. Notice 2003-76 supplemented and superseded.

General rules and specifications for private printing of substitute forms. This procedure provides requirements for reproducing paper substitutes and for furnishing substitute recipient statements for Forms 1096, 1098, 1099, 5498, W-2G, and 1042-S. It will be reproduced as the next revision of Publication 1179. Rev. Proc. 2003-28 superseded.

This announcement states that Publication 1187, Specifications for Filing Forms 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, Electronically or Magnetically, will not be revised by the beginning of the testing season November 1 through December 15, 2004, and details changes to the publication so filers may submit a test file.

It is the policy of the Internal Revenue Service to announce at an early date whether it will follow the holdings in certain cases. An Action on Decision is the document making such an announcement. An Action on Decision will be issued at the discretion of the Service only on unappealed issues decided adverse to the government. Generally, an Action on Decision is issued where its guidance would be helpful to Service personnel working with the same or similar issues. Unlike a Treasury Regulation or a Revenue Ruling, an Action on Decision is not an affirmative statement of Service position. It is not intended to serve as public guidance and may not be cited as precedent.

Actions on Decisions shall be relied upon within the Service only as conclusions applying the law to the facts in the particular case at the time the Action on Decision was issued. Caution should be exercised in extending the recommendation of the Action on Decision to similar cases where the facts are different. Moreover, the recommendation in the Action on Decision may be superseded by new legislation, regulations, rulings, cases, or Actions on Decisions.

Prior to 1991, the Service published acquiescence or nonacquiescence only in certain regular Tax Court opinions. The Service has expanded its acquiescence program to include other civil tax cases where guidance is determined to be helpful. Accordingly, the Service now may acquiesce or nonacquiesce in the holdings of memorandum Tax Court opinions, as well as those of the United States District Courts, Claims Court, and Circuit Courts of Appeal. Regardless of the court deciding the case, the recommendation of any Action on Decision will be published in the Internal Revenue Bulletin.

The recommendation in every Action on Decision will be summarized as acquiescence, acquiescence in result only, or nonacquiescence. Both “acquiescence” and “acquiescence in result only” mean that the Service accepts the holding of the court in a case and that the Service will follow it in disposing of cases with the same controlling facts. However, “acquiescence” indicates neither approval nor disapproval of the reasons assigned by the court for its conclusions; whereas, “acquiescence in result only” indicates disagreement or concern with some or all of those reasons. “Nonacquiescence” signifies that, although no further review was sought, the Service does not agree with the holding of the court and, generally, will not follow the decision in disposing of cases involving other taxpayers. In reference to an opinion of a circuit court of appeals, a “nonacquiescence” indicates that the Service will not follow the holding on a nationwide basis. However, the Service will recognize the precedential impact of the opinion on cases arising within the venue of the deciding circuit.

The Actions on Decisions published in the weekly Internal Revenue Bulletin are consolidated semiannually and appear in the first Bulletin for July and the Cumulative Bulletin for the first half of the year. A semiannual consolidation also appears in the first Bulletin for the following January and in the Cumulative Bulletin for the last half of the year.

The Commissioner ACQUIESCES in the following decision:

United States Internal Revenue
Service v. Donald Snyder,^[1]

343 F.3d 1171 (9th Cir. 2003)

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

This notice provides rules interpreting the reasonable mortality charge requirement contained in § 7702(c)(3)(B)(i) of the Internal Revenue Code.Specifically, this notice supplements Notice 88-128, 1988-2 C.B. 540, by providing safe harbors regarding the use of either the 1980 Commissioners’ Standard Ordinary mortality and morbidity tables (1980 CSO tables) or the 2001 Commissioners’ Standard Ordinary mortality and morbidity tables (2001 CSO tables) by taxpayers to determine whether mortality charges are reasonable. These safe harbors are designed to assist taxpayers in complying with the requirements of § 7702(c)(3)(B)(i).

Section 7702 of the Code defines the term “life insurance contract” for purposes of the Code. Section 7702(a) provides that a “life insurance contract” is any contract that is a life insurance contract under the applicable law, but only if such contract either (1) meets the cash value accumulation test of § 7702(b), or (2) both meets the guideline premium requirements of § 7702(c) and falls within the cash value corridor of § 7702(d).

Section 7702(c)(3)(B)(i) provides that the guideline single premium under § 7702(c) is determined on the basis of reasonable mortality charges that meet the requirements (if any) prescribed in regulations and that (except as provided in regulations) do not exceed the mortality charges specified in the prevailing commissioners’ standard tables (as defined in § 807(d)(5)) as of the time the contract is issued. The mortality charges specified in § 7702(c)(3)(B)(i) are also used for determining the “net single premium” (see § 7702(b)(2)(B)), and the “guideline level premium” (see § 7702(c)(4)). The same reasonable mortality charge standard applies for purposes of determining whether a life insurance contract is a modified endowment contract under 7702A (see § 7702A(c)(1)(B)).

Section 807(d)(5)(A) provides that the term “prevailing commissioners’ standard tables” means, with respect to any contract, the most recent commissioners’ standard tables prescribed by the National Association of Insurance Commissioners (NAIC) that are permitted to be used in computing reserves for that type of contract under the insurance laws of at least 26 states when the contract was issued. Section 807(d)(5)(B) provides a 3-year transition period during which an insurer may use either the newly prevailing CSO tables or those that were previously prevailing.

The 2001 CSO tables prescribed by the NAIC became the prevailing commissioners’ standard tables within the meaning of section 807(d)(5) during calendar year 2004.In each of the states that have adopted the 2001 CSO tables, the 1980 CSO tables may be used for contracts issued in calendar years through 2008. After 2008, use of the 2001 CSO tables will be mandatory in these states. In states that have not yet adopted the 2001 CSO tables, use of the 1980 CSO tables is still required.

Pending publication of additional guidance, the following safe harbors will apply for purposes of § 7702:

.01 Notice 88-128. The interim rules described in Notice 88-128 remain in effect, except as otherwise modified by this notice.

.02 1980 CSO tables. A mortality charge with respect to a life insurance contract will satisfy the requirements of § 7702(c)(3)(B)(i) so long as (1) the mortality charge does not exceed 100 percent of the applicable mortality charge set forth in the 1980 CSO tables; (2) the mortality charge does not exceed the mortality charge specified in the contract at issuance; (3) the contract is issued in a state that permits or requires the use of the 1980 CSO tables at the time the contract is issued; and (4) the contract is issued before January 1, 2009.

.03 2001 CSO tables. A mortality charge with respect to a life insurance contract will satisfy the requirements of § 7702(c)(3)(B)(i) so long as (1) the mortality charge does not exceed 100 percent of the applicable mortality charge set forth in the 2001 CSO tables; (2) the mortality charge does not exceed the mortality charge specified in the contract at issuance; and (3) either the contract is issued after December 31, 2008, or the contract is issued before January 1, 2009, in a state that permits or requires the use of the 2001 CSO tables at the time the contract is issued.

Mortality charges that do not exceed the applicable charges in gender- or smoker-based variations of the 1980 CSO tables or 2001 CSO tables (as applicable) will be treated as reasonable mortality charges, provided the following requirements are satisfied:

.01 Unisex tables. If a state permits minimum nonforfeiture values for all contracts issued under a plan of insurance to be determined using the 1980 or 2001 CSO Gender-Blended Mortality tables (“unisex tables”), then the applicable mortality charges in those tables are treated as reasonable mortality charges for female insureds provided the same tables are used to determine mortality charges for male insureds.

.02 Smoker/nonsmoker tables. If a state permits minimum nonforfeiture values for all contracts issued under a plan of insurance to be determined using the 1980 or 2001 CSO Smoker and Nonsmoker Mortality tables (“smoker/nonsmoker tables”), then the applicable mortality charges in those tables for smoker insureds are treated as reasonable mortality charges provided nonsmoker tables are used to determine nonsmoker mortality charges.

.01 For purposes of this notice, the date on which a contract was issued generally is to be determined according to the standards that applied for purposes of the original effective date of section 7702. See H.R. Conf. Rep. No. 861, 98th Cong., 2d Sess. 1076 (1984), 1984-3 (Vol. 2) C.B. 330; see also 1 Staff of Senate Comm. on Finance, 98th Cong., 2d Sess., Deficit Reduction Act of 1984, Explanation of Provisions Approved by the Committee on March 21, 1984, at 579 (Comm. Print 1984). Thus, contracts received in exchange for existing contracts are to be considered new contracts issued on the date of the exchange. For these purposes, a change in an existing contract is not considered to result in an exchange if the terms of the resulting contract (that is, the amount and pattern of death benefit, the premium pattern, the rate or rates guaranteed on issuance of the contract, and mortality and expense charges) are the same as the terms of the contract prior to the change.

.02 Notwithstanding Section 5.01, if a life insurance contract satisfied Section 3.01 or Section 3.02 when originally issued, a change from previous tables to the 2001 CSO tables is not required if:

(a) The change, modification, or exercise of a right to modify, add or delete benefits is pursuant to the terms of the contract;

(b) The state in which the contract is issued does not require use of the 2001 CSO tables for that contract under its standard valuation and minimum nonforfeiture laws; and

(c) The contract continues upon the same policy form or blank.

The changes, modifications, or exercises of contractual provisions referred to in this subsection include addition or removal of a rider, an increase or decrease in death benefit (if the change is not underwritten), and a change from an option 1 to option 2 contract or vice versa.

This notice supplements Notice 88-128.

The Internal Revenue Service and the Treasury Department recognize that additional guidance may be needed regarding the application of § 7702(c)(3)(B)(i). Therefore, the Treasury Department and the IRS request comments from taxpayers regarding guidance needed to address issues not specifically addressed by this notice or by Notice 88-128, including issues addressed by § 1.7702-1 of the proposed Income Tax Regulations, published in the Federal Register on July 5, 1991 (56 Fed. Reg. 30718).

Comments should be submitted by January 10, 2005. Comments may be submitted to CC:PA:RU (Notice 2004-61), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Comments may be hand delivered between the hours of 8:00 a.m. and 4 p.m. Monday to Friday to CC:PA:RU (Notice 2004-61), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224. Alternatively, comments may be submitted via the internet at Notice.Comments@irscounsel.treas.gov. All comments will be available for public inspection and copying.

This notice serves as an “administrative pronouncement” as that term is described in § 1.6661-3(b)(2) of the regulations and may be relied upon to the same extent as a revenue ruling or a revenue procedure.

The principal author of this notice is Ann H. Logan of the Office of Associate Chief Counsel (Financial Institutions & Products).For further information regarding this notice, contact Ann H. Logan at (202) 622-3970 (not a toll-free call).

This notice announces that the Internal Revenue Service will not assert penalties under section 6721 (failure to file correct information returns) or section 6722 (failure to furnish correct information statements) of the Internal Revenue Code for the failure to report under section 6050S payments attributable to loan origination fees and capitalized interest received in calendar year 2004 on qualified education loans made on or after September 1, 2004, if a person receiving payments satisfies the requirements set forth below. This notice also announces that a borrower who receives an information statement indicating that it does not include payments of loan origination fees may use any reasonable method to allocate the loan origination fees over the term of the loan for purposes of the deduction allowable under section 221.

Section 6050S requires certain persons (payees) who receive payments of interest on one or more qualified education loans, as defined in section 221(d)(1), to file information returns with the Service and to furnish a corresponding information statement to the individual named on the information return (borrower) showing the information that is reported to the Service. The return and statement are required to include information concerning the aggregate amount of interest received from the individual during the calendar year to assist taxpayers and the Service in determining the amount of qualified education loan interest that taxpayers may deduct under section 221. The specific information reporting requirements applicable to payees for the calendar years 1998 through 2001 are described in Notice 98-7, 1998-1 C.B. 339 (as modified by Notice 98-54, 1998-2 C.B. 641; Notice 99-37, 1999-2 C.B. 124; and Notice 2000-62, 2000-2 C.B. 587).

On April 29, 2002, the Treasury Department and the Service issued final regulations under section 6050S. See 67 Fed. Reg. 20901. The final regulations extended the reporting requirements described in Notice 98-7 (as modified) for calendar year 2002. The final regulations apply to information returns required to be filed, and information statements required to be furnished, for payments received during calendar year 2003 and later years. Section 1.6050S-3(e)(1) of the Income Tax Regulations contained a special transitional rule under which payees were not required to report payments of loan origination fees or capitalized interest received on qualified education loans made before January 1, 2004.

On May 7, 2004, the Treasury Department and the Service finalized the section 221 regulations and amended section 1.6050S-3(e) by extending the special transitional rule. See 69 Fed. Reg. 25489. Amended section 1.6050S-3(e)(1) provides that payees are not required to report payments of loan origination fees and capitalized interest for qualified education loans made before September 1, 2004. For qualified education loans made on or after September 1, 2004, however, payees are required to report payments of interest (including loan origination fees and capitalized interest) received on qualified education loans on Form 1098-E, “Student Loan Interest Statement.”

Payees have advised the Treasury Department and the Service that the period of time between May 7, 2004, the publication date of the section 221 regulations and the amended section 6050S regulations, and September 1, 2004, the date as of which payees must begin to capture information on payments of loan origination fees and capitalized interest, does not provide sufficient lead time for some payees to make the necessary programming changes to comply with the reporting requirements.

In light of these comments, the Service will not assert penalties under section 6721 or section 6722 for failure to report payments attributable to loan origination fees and capitalized interest received in calendar year 2004 on a qualified education loan made on or after September 1, 2004, if the payee:

(1) files and furnishes in a timely manner a Form 1098-E (or other appropriate information statement) that (i) includes the amount of interest (except for any loan origination fees or capitalized interest) received in 2004 in box 1, (ii) does not include a check in box 2, and (iii) includes all other required information; and

(2) furnishes a statement to the borrower indicating that the amount of interest reported in box 1 of Form 1098-E for calendar year 2004 does not include payments attributable to either loan origination fees or capitalized interest received on qualified education loans made on or after September 1, 2004, and that the borrower may be able to deduct amounts in addition to the amount reported in box 1.

The penalty relief under this notice will allow additional time for payees to make the necessary programming changes to enable them to capture information on and report payments of loan origination fees and capitalized interest received in 2005 and future calendar years consistent with the reporting requirements of the amended section 6050S regulations for qualified education loans made on or after September 1, 2004.

Forms 1098-E for calendar year 2004 must be filed with the Service by February 28, 2005, if filed on paper or by magnetic media, or by March 31, 2005, if filed electronically. In addition, payees must furnish information statements to the borrower on or before January 31, 2005.

Notwithstanding sections 1.163-7(a) and 1.1275-2(a), a borrower who receives a Form 1098-E (or other appropriate information statement) indicating that it does not include payments of loan origination fees may use any reasonable method to allocate the loan origination fees over the term of the loan for purposes of the deduction allowable under section 221. A method that results in the double deduction of the same portion of a loan origination fee would not be reasonable.

This notice is effective as of September 1, 2004.

The principal author of this notice is Tonya L. Christianson of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this notice, contact Ms. Christianson at (202) 622-4910 (not a toll-free call).

This notice alerts taxpayers to recent amendments to § 501(c)(15) of the Internal Revenue Code. These amendments may affect the qualification of entities as tax-exempt property and casualty insurance companies described in § 501(c)(15). This notice advises taxpayers that the Service will continue to scrutinize the eligibility of entities claiming to be tax-exempt property and casualty insurance companies. See Notice 2003-35, 2003-1 C.B. 992.

Section 501(a) provides that an organization described in § 501(c) is exempt from federal income tax. Prior to the recent amendments, former § 501(c)(15)(A) provided that an insurance company, other than a life insurance company, was tax-exempt if its net written premiums (or, if greater, its direct written premiums) did not exceed $350,000. For purposes of determining whether the insurance company met the $350,000 premium test for the taxable year, the premiums received in that taxable year by all companies or associations in the same controlled group (as defined in § 831(b)(2)(B)(ii) of the Code) as the insurance company were treated as though received by the insurance company.

The Pension Funding Equity Act, P.L. 108-218, (the “Act”) was enacted on April 10, 2004. Section 206 of the Act made several changes to § 501(c)(15) that, in general, are effective for taxable years beginning after December 31, 2003. Specifically, the Act amended § 501(c)(15) to provide that a property and casualty insurance company is eligible to be exempt from federal income tax if (a) its gross receipts for the taxable year do not exceed $600,000, and (b) more than 50 percent of its gross receipts for the taxable year consist of premiums. See § 501(c)(15)(A)(i). For purposes of these tests, amounts received by all members of the insurance company’s controlled group (including foreign and tax-exempt companies) are taken into account. See § 501(c)(15)(C). Alternative gross receipts and premium tests apply to small mutual insurance companies. See § 501(c)(15)(A)(ii).

The Act clarifies that, for purposes of § 501(c)(15), the term “insurance company” has the same meaning as in § 816(a) of the Code, which provides that a company is an insurance company if more than half of its business during the taxable year is the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies.

The recent amendments to § 501(c)(15) may affect the qualification of some insurance companies under § 501(c)(15) for taxable years beginning after December 31, 2003.

For example, a non-life stock insurance company with $650,000 of gross receipts in a taxable year would have been eligible to be exempt from federal income tax before the recent amendments to § 501(c)(15) if the company’s written premiums for the year were $350,000 or less. However, for taxable years beginning after December 31, 2003, an insurance company with $650,000 of gross receipts in a taxable year will not be eligible for exemption from tax under § 501(c)(15), as amended by the Act, because the $600,000 gross receipts test will not be met.

Conversely, a non-life stock insurance company with $500,000 of gross receipts in a taxable year would not have been eligible to be exempt from federal income tax under former § 501(c)(15) if the company’s written premiums for the year were $375,000. However, for taxable years beginning after December 31, 2003, an insurance company with $500,000 of gross receipts in a taxable year, including $375,000 from premiums, will be eligible for exemption from tax under § 501(c)(15), as amended by the Act. Nonetheless, if the same company is a member of a controlled group (as defined in § 501(c)(15)(C)), it will not qualify if other members of the group have gross receipts in the taxable year in excess of $100,000 because the $600,000 gross receipts test will not be met.

As previously described in Notice 2003-35, 2003-1 C.B. 992, the Service will continue to challenge the exemption of any entity that claims to be described in § 501(c)(15), but that does not meet the requirements of that section, regardless of whether the exemption is claimed pursuant to an existing determination letter or on a return filed with the Service. The Service will challenge the qualification of an entity under former § 501(c)(15) for any open taxable year beginning prior to January 1, 2004. The Service will challenge the qualification of an entity under § 501(c)(15), as amended by the Act, for taxable years beginning after December 31, 2003.

The amendments to § 501(c)(15) of the Code generally are effective for taxable years beginning after December 31, 2003. A special transition rule applies with respect to certain insurance companies in receivership or liquidation.

The principal author of this notice is Lee T. Phaup, TE/GE Division, Exempt Organizations. For further information regarding this notice, contact Ms. Phaup at (202) 283-8935 (not a toll-free call).

This notice modifies Notice 2002-70, 2002-2 C.B. 765, and Notice 2003-76, 2003-49 I.R.B. 1181, by removing the identification of transactions that are the same as, or substantially similar to, transactions described in Notice 2002-70 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. The Service will, however, continue to scrutinize transactions described in Notice 2002-70 that are being used to shift income from taxpayers to related companies purported to be insurance companies that are subject to little or no U.S federal income tax.

Notice 2002-70 describes a reinsurance arrangement involving a taxpayer (“Taxpayer”) (typically a service provider, automobile dealer, lender, or retailer) that offers its customers the opportunity to purchase an insurance contract through Taxpayer in connection with the products or services being sold. The insurance provides coverage for repair or replacement costs if the product breaks down or is lost, stolen, or damaged, or coverage for the customer’s payment obligations in case the customer dies, or becomes disabled or unemployed. Taxpayer offers the insurance to its customers by acting as an insurance agent for an unrelated insurance company (“Company X”). Taxpayer receives a sales commission from Company X equal to a percentage of the premiums paid by Taxpayer’s customers. Taxpayer forms a wholly owned corporation (“Company Y”), typically in a foreign country, to reinsure the policies sold by Taxpayer. Promoters sometimes refer to these companies as producer owned reinsurance companies or “PORCs.” If Company Y is a foreign corporation, it typically elects to be treated as a domestic insurance company under § 953(d) of the Internal Revenue Code. Company Y takes the position that it is entitled to the benefits of § 501(c)(15) (providing that certain small non-life insurance companies are tax exempt), § 806 (providing a deduction for certain life insurance companies with life insurance company taxable income not in excess of $15,000,000), or § 831(b) (allowing qualifying non-life insurance companies whose net written premiums do not exceed $1,200,000 to elect to be taxed solely on investment income). Taxpayer receives premiums from its customers and remits those premiums (typically net of its sales commission) to Company X. Company X pays any claims and state premium taxes due and retains an amount from the premiums received from Taxpayer. Under Company Y’s reinsurance agreement with Company X, Company Y reinsures all insurance policies that Taxpayer sells to its customers. Company X transfers the remainder of the premiums to Company Y as reinsurance premiums.

Notice 2002-70 alerts taxpayers that, in appropriate cases, the Service intends to challenge the purported tax benefits from these transactions on a number of grounds. Notice 2002-70 also identifies transactions that are the same as, or substantially similar to, the transaction described in the Notice 2002-70 as “listed transactions” for purposes of § 1.6011-4T(b)(2) of the temporary Income Tax Regulations (now § 1.6011-4(b)(2) of the Income Tax Regulations) and §§ 301.6111-2T(b)(2) of the temporary Procedure and Administration Regulations (now §§ 301.6111-2(b)(2) of the Procedure and Administration Regulations).

Section 206 of the Pension Funding Equity Act, P.L. 108-218, amended § 501(c)(15) effective for taxable years beginning after December 31, 2003. Notice 2004-64, 2004-41 I.R.B. (October 12, 2004), describes the amendments and notifies taxpayers that the Service will continue to scrutinize the tax-exempt status of entities claiming to be described in § 501(c)(15).

The Treasury Department and the Service have concluded that these transactions no longer should be identified as “listed transactions” for purposes of the disclosure, registration, and list maintenance requirements. Since issuing Notice 2002-70, the Service has examined various types of these arrangements. These examinations have revealed fewer abusive transactions than anticipated. Further, the Treasury Department and the Service anticipate that the recent amendments to § 501(c)(15) will curtail the use of this provision by a number of these arrangements. Accordingly, transactions will no longer be identified as “listed transactions” for purposes of §§ 1.6011-4(b)(2), 301.6111-2(b)(2) and 301.6112-1(b)(2) solely because they are the same as, or substantially similar to, the transaction described in Notice 2002-70. However, the Service will continue to scrutinize transactions described in Notice 2002-70 that are being used to shift income from taxpayers to related companies purported to be insurance companies that are subject to little or no U.S federal income tax. Although a transaction is no longer a “listed transaction” solely because the transaction is described in Notice 2002-70, the transaction may still otherwise be subject to the disclosure requirement of § 6011, the registration requirement of § 6111, or the list maintenance requirement of § 6112.

Notice 2002-70 and Notice 2003-76 are modified by removing the identification of transactions that are the same as, or substantially similar to, transactions described in Notice 2002-70 as “listed transactions” effective for taxable years for which the due date of the return (including extensions, whether or not actually requested) is after September 24, 2004.

For further information regarding this notice, contact Nancy Vozar Knapp at (202) 283-8622, John E. Glover (202) 622-3970, or Theodore Setzer at (202) 622-3870 (not a toll-free call).

This notice updates the list of transactions that have been determined by the Internal Revenue Service to be “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. This notice restates the list of “listed transactions” in Notice 2003-76, 2003-49 I.R.B. 1181, and updates the list by adding transactions identified as “listed transactions” in notices and other guidance released subsequent to November 7, 2003, and by eliminating transactions described in Part II of Notice 98-5, 1998-1 C.B. 334, and Notice 2002-70, 2002-2 C.B. 765.

Transactions that are the same as or substantially similar to transactions described in the list below have been determined by the Service to be tax avoidance transactions and are “listed transactions” for purposes of §§ 1.6011-4(b)(2), 301.6111-2(b)(2) and 301.6112-1(b)(2). As a result, taxpayers may need to disclose their participation in these listed transactions as prescribed in § 1.6011-4, and promoters (or other persons responsible for registering tax shelter transactions) may need to register these transactions under § 301.6111-2. In addition, material advisors must maintain lists of investors and other information with respect to these listed transactions pursuant to § 301.6112-1.

(1) Rev. Rul. 90-105, 1990-2 C.B. 69 (transactions in which taxpayers claim deductions for contributions to a qualified cash or deferred arrangement or matching contributions to a defined contribution plan where the contributions are attributable to compensation earned by plan participants after the end of the taxable year (identified as “listed transactions” on February 28, 2000)). See also Rev. Rul. 2002-46, 2002-2 C.B. 117 (result is the same, and transactions are substantially similar, even though the contributions are designated as satisfying a liability established before the end of the taxable year), modified by Rev. Rul. 2002-73, 2002-2 C.B. 805;

(2) Notice 95-34, 1995-1 C.B. 309 (certain trust arrangements purported to qualify as multiple employer welfare benefit funds exempt from the limits of §§ 419 and 419A of the Internal Revenue Code (identified as “listed transactions” on February 28, 2000)). See also § 1.419A(f)(6)-1 of the Income Tax Regulations (10 or more employer plans);

(3) Transactions substantially similar to those at issue in ASA Investerings Partnership v. Commissioner, 201 F.3d 505 (D.C. Cir. 2000), and ACM Partnership v. Commissioner, 157 F.3d 231 (3d Cir. 1998) (transactions involving contingent installment sales of securities by partnerships in order to accelerate and allocate income to a tax-indifferent partner, such as a tax-exempt entity or foreign person, and to allocate later losses to another partner (identified as “listed transactions” on February 28, 2000));

(4) Section 1.643(a)-8 of the Income Tax Regulations (transactions involving distributions described in § 1.643(a)-8 from charitable remainder trusts (identified as “listed transactions” on February 28, 2000));

(5) Notice 99-59, 1999-2 C.B. 761 (transactions involving the distribution of encumbered property in which taxpayers claim tax losses for capital outlays that they have in fact recovered (identified as “listed transactions” on February 28, 2000)). See also § 1.301-1(g) of the Income Tax Regulations;

(6) Section 1.7701(l)-3 of the Income Tax Regulations (transactions involving fast-pay arrangements as defined in § 1.7701(l)-3(b) (identified as “listed transactions” on February 28, 2000));

(7) Rev. Rul. 2000-12, 2000-1 C.B. 744 (certain transactions involving the acquisition of two debt instruments the values of which are expected to change significantly at about the same time in opposite directions (identified as “listed transactions” on February 28, 2000));

(8) Notice 2000-44, 2000-2 C.B. 255 (transactions generating losses resulting from artificially inflating the basis of partnership interests (identified as “listed transactions” on August 11, 2000)). See also § 1.752-6T of the temporary Income Tax Regulations and §§ 1.752-1(a) and 1.752-7 of the proposed Income Tax Regulations;

(9) Notice 2000-60, 2000-2 C.B. 568 (transactions involving the purchase of a parent corporation’s stock by a subsidiary, a subsequent transfer of the purchased parent stock from the subsidiary to the parent’s employees, and the eventual liquidation or sale of the subsidiary (identified as “listed transactions” on November 16, 2000));

(10) Notice 2000-61, 2000-2 C.B. 569 (transactions purporting to apply § 935 to Guamanian trusts (identified as “listed transactions” on November 21, 2000));

(11) Notice 2001-16, 2001-1 C.B. 730 (transactions involving the use of an intermediary to sell the assets of a corporation (identified as “listed transactions” on January 18, 2001));

(12) Notice 2001-17, 2001-1 C.B. 730 (transactions involving a loss on the sale of stock acquired in a purported § 351 transfer of a high basis asset to a corporation and the corporation’s assumption of a liability that the transferor has not yet taken into account for federal income tax purposes (identified as “listed transactions” on January 18, 2001));

(13) Notice 2001-45, 2001-2 C.B. 129 (certain redemptions of stock in transactions not subject to U.S. tax in which the basis of the redeemed stock is purported to shift to a U.S. taxpayer (identified as “listed transactions” on July 26, 2001));

(14) Notice 2002-21, 2002-1 C.B. 730 (transactions involving the use of a loan assumption agreement to inflate basis in assets acquired from another party to claim losses (identified as “listed transactions” on March 18, 2002));

(15) Notice 2002-35, 2002-1 C.B. 992 (transactions involving the use of a notional principal contract to claim current deductions for periodic payments made by a taxpayer while disregarding the accrual of a right to receive offsetting payments in the future (identified as “listed transactions” on May 6, 2002));

(16) Notice 2002-50, 2002-2 C.B. 98 (transactions involving the use of a straddle, a tiered partnership structure, a transitory partner, and the absence of a § 754 election to claim a permanent noneconomic loss (identified as “listed transactions” on June 25, 2002)); Notice 2002-65, 2002-2 C.B. 690 (transactions involving the use of a straddle, an S corporation or a partnership, and one or more transitory shareholders or partners to claim a loss while deferring an offsetting gain are substantially similar to transactions described in Notice 2002-50); and Notice 2003-54, 2003-33 I.R.B. 363 (transactions involving the use of economically offsetting positions, one or more tax indifferent parties, and the common trust fund accounting rules of § 584 to allow a taxpayer to claim a noneconomic loss are substantially similar to transactions described in Notice 2002-50 and Notice 2002-65);

(17) Rev. Rul. 2002-69, 2002-2 C.B. 760, modifying and superseding Rev. Rul. 99-14, 1999-1 C.B. 835 (transactions in which a taxpayer purports to lease property and then purports to immediately sublease it back to the lessor (often referred to as “lease-in/lease-out” or “LILO” transactions) (identified as “listed transactions” on February 28, 2000));

(18) Rev. Rul. 2003-6, 2003-1 C.B. 286 (certain arrangements involving the transfer of employee stock ownership plans (ESOPs) that hold stock in an S corporation for the purpose of claiming eligibility for the delayed effective date of § 409(p) (identified as “listed transactions” on December 17, 2002));

(19) Notice 2003-22, 2003-1 C.B. 851 (certain arrangements involving leasing companies that have been used to avoid or evade federal income and employment taxes (identified as “listed transactions” on April 4, 2003));

(20) Notice 2003-24, 2003-1 C.B. 853 (certain arrangements that purportedly qualify as collectively-bargained welfare benefit funds excepted from the account limits of §§ 419 and 419A (identified as “listed transactions” on April 11, 2003));

(21) Notice 2003-47, 2003-30 I.R.B. 132 (transactions involving compensatory stock options and related persons to avoid or evade federal income and employment taxes (identified as “listed transactions” on July 1, 2003));

(22) Notice 2003-55, 2003-34 I.R.B. 395 (transactions in which one participant claims to realize rental or other income from property or service contracts and another participant claims the deductions related to that income (often referred to as “lease strips”)), modifying and superseding Notice 95-53, 1995-2 C.B. 334 (identified as “listed transactions” on February 28, 2000);

(23) Notice 2003-77, 2003-49 I.R.B. 1182 (certain transactions that use contested liability trusts improperly to accelerate deductions for contested liabilities under § 461(f) (identified as “listed transactions” on November 19, 2003)). See also § 1.461-2 of the Income Tax Regulations. See Rev. Proc. 2004-31, 2004-22 I.R.B. 986, for procedures which taxpayers must use to change their methods of accounting for deducting under § 461(f) amounts transferred to trusts in transactions described in Notice 2003-77.

(24) Notice 2003-81, 2003-51 I.R.B. 1223 (certain transactions in which a taxpayer claims a loss upon the assignment of a § 1256 contract to a charity but fails to report the recognition of gain when the taxpayer’s obligation under an offsetting non-section 1256 contract terminates (identified as “listed transactions” on December 4, 2003));

(25) Notice 2004-8, 2004-4 I.R.B. 333 (certain transactions designed to avoid the limitations on contributions to Roth IRAs described in § 408A (identified as “listed transactions” on December 31, 2003));

(26) Rev. Rul. 2004-4, 2004-6 I.R.B. 414 (transactions that involve segregating the business profits of an ESOP-owned S corporation in a qualified subchapter S subsidiary, so that rank-and-file employees do not benefit from participation in the ESOP (identified as “listed transactions” on January 23, 2004));

(27) Transactions that are the same as, or substantially similar to, those described in Situation 2 of Rev. Rul. 2004-20, 2004-10 I.R.B. 546, modifying and superseding Rev. Rul. 55-748, 1955-2 C.B. 234 (certain arrangements in which an employer deducts contributions to a qualified pension plan for premiums on life insurance contracts that provide for death benefits in excess of the participant’s death benefit, where under the terms of the plan, the balance of the death benefit proceeds revert to the plan as a return on investment) (identified as “listed transactions” on February 13, 2004)). See also Rev. Rul. 2004-21, 2004-10 I.R.B. 544, §§ 1.79-1(d)(3), 1.83-3(e) and 1.402(a)-1(a)(1) and (2) of the proposed Income Tax Regulations, and Rev. Proc. 2004-16, 2004-10 I.R.B. 559;

(28) Notice 2004-20, 2004-11 I.R.B. 608 (transactions in which, pursuant to a prearranged plan, a domestic corporation purports to acquire stock in a foreign target corporation and to make an election under § 338 before selling all or substantially all of the target corporation’s assets in a preplanned transaction that generates a taxable gain for foreign tax purposes (but not for U.S. tax purposes) (identified as “listed transactions” on February 17, 2004));

(29) Notice 2004-30, 2004-17 I.R.B. 828 (transactions in which S corporation shareholders attempt to transfer the incidence of taxation on S corporation income by purportedly donating S corporation nonvoting stock to an exempt organization while retaining the economic benefits associated with that stock (identified as “listed transactions” on April 1, 2004)); and

(30) Notice 2004-31, 2004-17 I.R.B. 830 (transactions in which corporations claim inappropriate deductions for payments made through a partnership (identified as “listed transactions” on April 1, 2004)).

Transactions that are the same as, or substantially similar to, transactions described in the list below will no longer be considered listed transactions for purposes of §§ 1.6011-4(b)(2), 301.6111-2(b)(2) and 301.6112-1(b)(2). No inference is intended, however, as to whether such transactions are otherwise subject to the disclosure requirements of § 6011, the registration requirements of § 6111, or the list maintenance requirements of § 6112.

(1) Transactions described in Part II of Notice 98-5, 1998-1 C.B. 334 (transactions in which the reasonably expected economic profit is insubstantial in comparison to the value of the expected foreign tax credits (identified as “listed transactions” on February 28, 2000)). Notice 2004-19, 2004-11 I.R.B. 606, withdrew Notice 98-5. Effective for taxable years for which the due date of the return (including extensions, whether or not actually requested) is after February 17, 2004, transactions will not be considered listed transactions for purposes of §§ 1.6011-4(b)(2) and 301.6112-1(b)(2) solely because they are the same as or substantially similar to the transactions or arrangements described in Part II of Notice 98-5. In addition, for offers made after February 17, 2004, transactions will not be considered listed transactions for purposes of § 301.6111-2(b)(2) solely because they are the same as or substantially similar to the transactions or arrangements described in Part II of Notice 98-5.

(2) Transactions described in Notice 2002-70, 2002-2 C.B. 765 (transactions involving reinsurance arrangements between a taxpayer and the taxpayer’s own reinsurance company that is subject to little or no federal income tax (identified as “listed transactions” on October 15, 2002)). Notice 2004-65, 2004-41 I.R.B. , modified Notice 2002-70 by removing the identification of transactions that are the same as, or substantially similar to, transactions described in Notice 2002-70 as listed transactions effective for taxable years for which the due date of the return (including extensions, whether or not actually requested) is after September 24, 2004.

Notice 2003-76, as modified by Notice 2004-19 and Notice 2004-65, is supplemented and superseded. For updates to this list, go to the IRS web page at www.irs.gov/businesses/corporations and click on Abusive Tax Shelters and Transactions. Notices and other published guidance will still be used to identify transactions that have been determined by the Service to be “listed transactions.”

The principal authors of this notice are Michael J. Goldman and David A. Shulman of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this notice, contact the authors at (202) 622-3070 (not a toll-free call).

The following is a list of entities that have been approved by the Commissioner of the Internal Revenue Service, pursuant to §1.408-2(e) of the Income Tax Regulations, to serve as a nonbank trustee or custodian. This list updates and supercedes the list published with Announcement 2003-54, 2003-40 I.R.B. 761.

Archer medical savings accounts (Archer MSAs) established under § 220 of the Internal Revenue Code, health savings accounts described in §223, custodial accounts of retirement plans qualified under § 401, custodial accounts described in § 403(b)(7), trust or custodial accounts of individual retirement accounts (IRAs) established under §§ 408 and 408A (Roth IRAs), Coverdell education savings accounts described in §530, and custodial accounts of eligible deferred compensation plans described in § 457(b) will not be tax exempt if the trustee or custodian of such accounts is not a bank (as defined in § 408(n)) (and in the case of Archer MSAs and health savings accounts, a bank within the meaning of § 408(n) or an insurance company within the meaning of § 816) or an approved nonbank trustee or custodian.

An entity that is not a bank (as defined in § 408(n)) (and in the case of Archer MSAs and health savings accounts a bank within the meaning of § 408(n) or an insurance company within the meaning of § 816) must receive approval from the Service to serve as a nonbank trustee or nonbank custodian. A prospective nonbank trustee or custodian must file a written application with the Commissioner of Internal Revenue demonstrating that the requirements of § 1.408-2(e)(2) through § 1.408-2(e)(7) of the regulations will be met. If the application is approved, a written notice of approval will be issued to the applicant. The notice of approval will state the day on which it becomes effective, and (except as otherwise provided therein) will remain effective until revoked by the Service or withdrawn by the applicant. Entities that have received such approval from the Service may also sponsor certain retirement plans, custodial accounts under § 403(b)(7) and individual retirement arrangements established under §§ 408 and 408A. (See Rev. Proc. 2000-20, 2000-1 C.B. 553, and Rev. Proc. 87-50, 1987-2 C.B. 647, as modified.)

A prospective nonbank trustee or custodian may not accept any fiduciary account before such notice of approval becomes effective. In addition, a nonbank trustee or custodian may not accept a fiduciary account until after the plan administrator or the person for whose benefit the account is to be established is furnished with a copy of the written notice of approval issued to the applicant.

The continued reliance on a notice of approval is dependent upon the continued satisfaction of the nonbank trustee requirements set forth in the regulations. The notice of approval issued to an applicant will be revoked if the Commissioner determines that the applicant is unwilling or unable to administer fiduciary accounts in a manner consistent with the requirements of the regulations. Generally, the notice will not be revoked unless the Commissioner determines that the applicant has knowingly, willfully, or repeatedly failed to administer fiduciary accounts in a manner consistent with the requirements of the regulations, or has administered a fiduciary account in a grossly negligent manner.

The written notice of approval to serve as a nonbank trustee or nonbank custodian is not an endorsement of any investment made with respect to any retirement plan or arrangement handled by the approved nonbank trustee or custodian. The Internal Revenue Service does not review or approve investments.

If the trustee or custodian of an account described above is not a bank (and in the case of Archer MSAs and health savings accounts, a bank or an insurance company) or an approved nonbank trustee or nonbank custodian, the amounts held in such account (including earned interest) will be deemed distributed and includible in gross income in the year(s) the account’s trustee or custodian was not a bank or, if applicable, an insurance company, or an approved nonbank trustee or nonbank custodian. Contributions made to such account are not deductible from gross income and will be disallowed if claimed on an income tax return.

This list of approved nonbank trustees and nonbank custodians includes their names, addresses, and the date each application was approved.

If an approved nonbank trustee or custodian believes that the information about it is incorrect, incomplete, or that it has been incorrectly omitted from this list, it may, on or before December 11, 2004, which is 60 days from the date of the publication of this list in the Internal Revenue Bulletin, notify the Service in writing of any changes it proposes to the list. This notification should include a copy of the notice of approval.

The notification should be addressed to:

The principal author of this announcement is Calvin Thompson of the Employee Plans, Tax Exempt and Government Entities Division. Please contact Mr. Thompson at 1-202-283-9596 (not a toll-free number), if there are any questions regarding the publication of this list. Written inquiries concerning this announcement should be addressed to the Internal Revenue Service at the above address.

Announcement 2004-70 is amended to extend, through October 5, 2004, the relief from the penalty under section 6715 of the Internal Revenue Code for the highway use of dyed diesel fuel in the State of Florida.

The principal author of this announcement is Barbara B. Franklin of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this announcement, contact Barbara B. Franklin at (202) 622-3291 (not a toll-free call).

Publication 1187, Specification for Filing Forms 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, Electronically or Magnetically, is being revised for Tax Year 2004. The Publication will not be available prior to the start of the testing season, November 1, 2004, through December 15, 2004. Since the Publication is unavailable, the Nature of Changes Section is printed here to assist those who wish to submit test files. For additional information, contact the Information Reporting Program Customer Service Section toll-free at 866-455-7438.

.01 Part B, Electronic Filing Specifications, was completely revised. Please read carefully. We now offer an internet connection at http://fire.irs.gov.

.02 The following changes were made to the Transmitter ‘T’ Record:

(a) In position 199 a new field, Prior Year Data Indicator, was added.

(b) In positions 771-778 a new field, Record Sequence Number, was added.

.03 The following changes were made to Withholding Agent ‘W’ Record:

(a) In position 13, Withholding Agent’s EIN Indicator, the indicators were renumbered and a new indicator for NQI-EIN was added. Acceptable values are: 0, (zero) = EIN, 1, (one) = QI-EIN and 2 (two) = NQI-EIN

(b) In positions 771-778 a new field, Record Sequence Number, was added.

.04 The following change was made to the Recipient ‘Q’ Record:

(a) In positions 771-778 a new field, Record Sequence Number, was added.

.05 The following change was made to Reconciliation ‘C’ Record:

(a) In positions 771-778 a new field, Record Sequence Number, was added.

.06 The following change was made to the End of Transmission ‘F’ Record:

(a) In positions 771-778 a new field, Record Sequence Number, was added.

.07 Additional editorial changes of a clarifying nature have been made throughout Publication 1187. Please read the entire publication carefully.

.08 The dates for sending test data are November 1, 2004, through December 15, 2004.

This announcement provides additional instructions for Line 8c on the 2003 Schedule B (Form 5500). In order to provide government agencies and plan participants with contribution information on defined benefit plans, plan sponsors must annually file the Schedule B as an attachment to the Form 5500 Series (Annual Return/Report of Employee Benefit Plans). Because many plan sponsors have had difficulty reporting the data required by line 8c of the 2003 Schedule B, this announcement is intended to provide flexible options to comply with existing reporting requirements. This announcement merely replaces certain instructions in order to clarify and simplify the method for reporting data. Because this announcement is not a request for new data, and does not contain a new reporting requirement, if plans have already filed under published instructions prior to the issuance of this announcement, do not file again.

The 2003 instructions for Line 8c regarding cash balance plans require that “such plans reporting 1,000 or more active participants on line 2b(3) must also provide average cash balance account data.” The 2003 instructions did not provide a specific method for reporting the required data.

The following replaces paragraph 5 of line 8c of the 2003 Schedule B instructions:

“Cash balance plans (or any plans using plan characteristic code 1C on line 8a of Form 5500), reporting 1,000 or more active participants on line 2b(3) must also provide average cash balance account data, regardless of whether all active participants have cash balance accounts. For each age/service bin, enter the average cash balance account of the active participants in that bin. Do not enter the average cash balance account in any age/service bin that contains fewer than 20 active participants.

General Rule. In general, data to be shown in each age/service bin includes: (1) the number of active participants in the age/service bin, (2) the average compensation of the active participants in the age/service bin, and (3) the average cash balance account of the active participant in the age/service bin, using $0 for anyone who has no cash balance account-based benefit. If the accrued benefit is the greater of a cash balance benefit or some other benefit, average in only the cash balance account. If the accrued benefit is the sum of a cash balance account benefit and some other benefit, average in only the cash balance account. For both the average compensation and the average cash balance account, do not enter an amount for age/service bins with fewer than 20 participants.

In lieu of the above, two alternatives are provided for showing compensation and cash balance accounts. Each alternative provides for two age/service scatters (one showing compensation and one showing cash balance accounts) as follows: