Interest rates; underpayments and overpayments. The rates for interest determined under section 6621 of the Code for the calendar quarter beginning October 1, 2010, will be 4 percent for overpayments (3 percent in the case of a corporation), 4 percent for underpayments, and 6 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 1.5 percent.

Fringe benefits aircraft valuation formula. The Standard Industry Fare Level (SIFL) cents-per-mile rates and terminal charge in effect for the second half of 2010 are set forth for purposes of determining the value of noncommercial flights on employer-provided aircraft under section 1.61-2(g) of the regulations.

Revenue ruling obsoleted. This ruling obsoletes Rev. Rul. 2003-102, 2003-2 C.B. 559, which provides guidance on employer reimbursements of amounts paid by an employee to purchase nonprescription medicines or drugs.

This notice provides guidance on new section 106(f) of the Code, which requires that an over-the-counter medicine or drug be prescribed to be a medical expense for purposes of section 105. Notices 96-53, 2004-2, 2004-50, 2008-51, 2008-52 modified. Notice 2006-69 amplified.

The results of the 2009-10 allocation round of the qualifying advanced coal project program and the qualifying gasification project program provide the identity of the applicants that have been awarded credits and the amount of credits awarded to each applicant. This announcement also serves notice to applicants that the 2010-11 allocation round is currently open for the Code section 48A program pursuant to Notice 2009-24. The Service will not conduct a 2010-11 allocation round for the Code section 48B program because the total amount of available credits were allocated during the 2009-10 round.

This document contains a correction to Notice 2009-80, 2009-51 I.R.B. 859, which contained an incorrect name.

For purposes of the taxation of fringe benefits under section 61 of the Internal Revenue Code, section 1.61-21(g) of the Income Tax Regulations provides a rule for valuing noncommercial flights on employer-provided aircraft. Section 1.61-21(g)(5) provides an aircraft valuation formula to determine the value of such flights. The value of a flight is determined under the base aircraft valuation formula (also known as the Standard Industry Fare Level formula or SIFL) by multiplying the SIFL cents-per-mile rates applicable for the period during which the flight was taken by the appropriate aircraft multiple provided in section 1.61-21(g)(7) and then adding the applicable terminal charge. The SIFL cents-per-mile rates in the formula and the terminal charge are calculated by the Department of Transportation and are reviewed semi-annually.

The following chart sets forth the terminal charge and SIFL mileage rates:

The principal author of this revenue ruling is Kathleen Edmondson of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt/Government Entities). For further information regarding this revenue ruling, contact Ms. Edmondson at (202) 622-0047 (not a toll-free call).

Rev. Rul. 2003-102, 2003-2 C.B. 559, holds that reimbursements by the employer of amounts expended for medicines or drugs available without a prescription are excludable from gross income under §105(b).

Section 9003 of the Patient Protection and Affordable Care Act (Affordable Care Act), Pub. L. No. 111-148 (March 23, 2010), adds § 106(f) and amends §§ 223(d)(2)(A) and 220(d)(2)(A). These sections revise the definition of medical expenses after December 31, 2010, and apply to health flexible spending arrangements, health reimbursement arrangements, Health Savings Accounts, and Archer Medical Savings Accounts. These sections provide that a medicine or a drug shall be treated as medical expenses only if such medicine or drug is prescribed (regardless of whether the medicine or drug requires a prescription). Because the definition of medical expenses has been changed, the Internal Revenue Service has concluded that the ruling position stated in Rev. Rul. 2003-102 is no longer determinative. Accordingly, Rev. Rul. 2003-102 is declared obsolete as of the effective date of section 9003 of the Affordable Care Act.

The principal author of this revenue ruling is Robin Ehrenberg of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this revenue ruling, contact Ms. Ehrenberg at (202) 622-6080 (not a toll-free call).

Section 6621 of the Internal Revenue Code establishes the rates for interest on tax overpayments and tax underpayments. Under section 6621(a)(1), the overpayment rate is the sum of the federal short-term rate plus 3 percentage points (2 percentage points in the case of a corporation), except the rate for the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point. Under section 6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points.

Section 6621(c) provides that for purposes of interest payable under section 6601 on any large corporate underpayment, the underpayment rate under section 6621(a)(2) is determined by substituting “5 percentage points” for “3 percentage points.” See section 6621(c) and section 301.6621-3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date. Section 6621(c) and section 301.6621-3 are generally effective for periods after December 31, 1990.

Section 6621(b)(1) provides that the Secretary will determine the federal short-term rate for the first month in each calendar quarter. Section 6621(b)(2)(A) provides that the federal short-term rate determined under section 6621(b)(1) for any month applies during the first calendar quarter beginning after that month. Section 6621(b)(3) provides that the federal short-term rate for any month is the federal short-term rate determined during that month by the Secretary in accordance with section 1274(d), rounded to the nearest full percent (or, if a multiple of ¹/₂ of 1 percent, the rate is increased to the next highest full percent).

Notice 88-59, 1988-1 C.B. 546, announced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under section 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with section 6621 which, pursuant to section 6622, is subject to daily compounding.

The federal short-term rate determined in accordance with section 1274(d) during July 2010 is the rate published in Revenue Ruling 2010-19, 2010-31 I.R.B. 174 to take effect beginning August 1, 2010. The federal short-term rate, rounded to the nearest full percent, based on daily compounding determined during the month of July 2010 is 1 percent. Accordingly, an overpayment rate of 4 percent (3 percent in the case of a corporation) and an underpayment rate of 4 percent are established for the calendar quarter beginning October 1, 2010. The overpayment rate for the portion of a corporate overpayment exceeding $10,000 for the calendar quarter beginning October 1, 2010, is 1.5 percent. The underpayment rate for large corporate underpayments for the calendar quarter beginning October 1, 2010, is 6 percent. These rates apply to amounts bearing interest during that calendar quarter.

Interest factors for daily compound interest for annual rates of 1.5 percent, 3 percent, 4 percent, and 6 percent are published in Tables 8, 11, 13, and 17 of Rev. Proc. 95-17, 1995-1 C.B. 556, 562, 565, 567, and 571.

Annual interest rates to be compounded daily pursuant to section 6622 that apply for prior periods are set forth in the tables accompanying this revenue ruling.

The principal author of this revenue ruling is Deborah Colbert-James of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue ruling, contact Ms. Colbert-James at (202) 622-8143 (not a toll-free call).

This notice provides guidance on § 9003 of the Patient Protection and Affordable Care Act (Affordable Care Act), Pub. L. No. 111-148, enacted March 23, 2010, which revises the definition of medical expenses as it relates to over-the-counter drugs. Section 9003 generally applies after December 31, 2010.

Section 9003 of the Affordable Care Act adds new § 106(f) of the Internal Revenue Code, which revises the definition of medical expenses for employer-provided accident and health plans, including health flexible spending arrangements (health FSAs) and health reimbursement arrangements (HRAs). Section 9003 also revises the definition of qualified medical expenses for Health Savings Accounts (HSAs) and Archer Medical Savings Accounts (Archer MSAs).

Section 106 provides that the gross income of an employee does not include employer-provided coverage under an accident or health plan. Section 105(b) generally provides that the gross income of an employee does not include amounts paid as reimbursements for medical care under an employer-provided accident or health plan. New § 106(f), as added by the Affordable Care Act, provides that, for purposes of §§ 106 and 105, beginning after December 31, 2010, expenses incurred for a medicine or a drug shall be treated as a reimbursement for medical expenses only if such medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin. Thus, under new § 106(f), expenses incurred for medicines or drugs may be paid or reimbursed by an employer-provided plan, including a health FSA or HRA, only if (1) the medicine or drug requires a prescription, (2) is available without a prescription (an over-the-counter medicine or drug) and the individual obtains a prescription, or (3) is insulin. Expenses incurred for over-the-counter medicines or drugs purchased without a prescription before January 1, 2011 may be reimbursed tax-free at any time, pursuant to the terms of the employer’s plan.

The Affordable Care Act also amends § 223(d)(2)(A) with respect to HSAs and § 220(d)(2)(A) with respect to Archer MSAs, to provide that for amounts paid after December 31, 2010, a distribution from an HSA or Archer MSA for a medicine or drug is a tax-free qualified medical expense only if the medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin. Thus, under new § 223(d)(2)(A) and new § 220(d)(2)(A), a distribution from an HSA or an Archer MSA for a medicine or drug is a tax-free qualified medical expense only if (1) the medicine or drug requires a prescription, (2) is an over-the-counter medicine or drug and the individual obtains a prescription, or (3) is insulin. If amounts are distributed from an HSA or Archer MSA for any medicine or drug which does not satisfy this requirement, the amounts will be distributions for nonqualified medical expenses, which are includable in gross income and generally subject to a 20 percent additional tax. This change does not affect HSA or Archer MSA distributions for medicines or drugs made before January 1, 2011, nor does it affect distributions made after December 31, 2010, for medicines or drugs purchased on or before that date. See Revenue Ruling 2003-102, 2003-2 C.B. 559.

Section 213(d)(3) defines a prescribed drug as a drug or biological that requires a prescription of a physician for its use by an individual. In contrast, under §§ 106(f), 223(d)(2)(A) and 220(d)(2)(A), an individual may be reimbursed for over-the-counter medicines or drugs, so long as the individual obtains a prescription for the medicines or drugs. For purposes of §§ 106(f), 223(d)(2)(A) and 220(d)(2)(A) only, a “prescription” means a written or electronic order for a medicine or drug that meets the legal requirements of a prescription in the state in which the medical expense is incurred and that is issued by an individual who is legally authorized to issue a prescription in that state.

The rules in §§ 106(f), 223(d)(2)(A) and 220(d)(2)(A) do not apply to items that are not medicines or drugs, including equipment such as crutches, supplies such as bandages, and diagnostic devices such as blood sugar test kits. Such items may qualify as medical care if they otherwise meet the definition of medical care in § 213(d)(1), which includes expenses for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. However, expenses for items that are merely beneficial to the general health of an individual, such as an expenditure for a vacation, are not expenses for medical care. Treas. Reg. § 1.213-1(e)(1)(ii).

The current rules for use of health FSA or HRA debit cards are set forth in Prop. Treas. Reg. § 1.125-6 and in Rev. Rul. 2003-43, 2003-1 C.B. 935; Notice 2006-69, 2006-2 C.B. 107; Notice 2007-2, 2007-1 C.B. 254; and Notice 2008-104, 2008-2 C.B. 1298. Current debit card systems are not capable of substantiating compliance with new § 106(f), which is effective for expenses incurred after December 31, 2010, with respect to over-the-counter medicines or drugs because the systems are incapable of recognizing and substantiating that the medicines or drugs were prescribed. Therefore, except as provided below, for expenses incurred on and after January 1, 2011, health FSA and HRA debit cards may not be used to purchase over-the-counter medicines or drugs. Notwithstanding the preceding sentence, in order to facilitate the significant changes to existing systems necessary to reflect the statutory change, the IRS will not challenge the use of health FSA and HRA debit cards for expenses incurred through January 15, 2011 if the use of the debit cards complies with the guidance specified in the first sentence of this paragraph. However, on and after January 16, 2011, over-the-counter medicine or drug purchases at all providers and merchants (whether or not they have an inventory information approval system (IIAS)) must be substantiated before reimbursement may be made. Substantiation is accomplished by submitting the prescription (or a copy of the prescription or other documentation that a prescription has been issued) for the over-the-counter medicine or drug, and other information from an independent third party that satisfies the requirements under Prop. Treas. Reg. § 1.125-6(b)(3)(i). Thus, for example, a customer receipt issued by a pharmacy which identifies the name of the purchaser (or the name of the person for whom the prescription applies), the date and amount of the purchase and an Rx number satisfies the substantiation requirements for over-the-counter medicines or drugs, as does a receipt without an Rx number accompanied by a copy of the related prescription. Debit cards may continue to be used for medical expenses other than over-the-counter medicines or drugs.

Notice 2007-2 provides that health FSA and HRA debit cards may be used at a pharmacy that does not have an IIAS if 90 percent of the store’s gross receipts during the prior taxable year consists of items which qualify as expenses for medical care under § 213(d). Until further guidance is issued, debit cards may be used at a pharmacy that satisfies the 90-percent test to purchase over-the-counter medicines or drugs that have been prescribed, provided that substantiation is properly submitted, in accordance with the terms of the plan, including the prescription (or a copy of the prescription or other documentation that a prescription has been issued) and other information from an independent third party that satisfies the requirements under Prop. Treas. Reg. § 1.125-6(b)(3)(i). Solely for the purpose of determining whether a pharmacy meets this 90-percent test, sales of over-the-counter medicines and drugs at the pharmacy may continue to be taken into account after December 31, 2010.

For expenses incurred after December 31, 2010, payments or reimbursements for medicines or drugs from an employer-provided accident and health plan, including a health FSA or an HRA, are restricted to prescribed drugs, insulin, and over-the-counter medicines or drugs that are prescribed. This effective date applies regardless of whether the plan year for the employer’s plan is a fiscal or calendar year or whether there is no plan year (or other coverage period in the case of an HRA), and regardless of any applicable grace period for a health FSA (as provided in Prop. Treas. Reg. § 1.125-1(e)).

Tax-free distributions for qualified medical expenses from an HSA or Archer MSA for medicines or drugs purchased after December 31, 2010, are restricted to prescribed drugs, insulin, and over-the-counter medicines or drugs that are prescribed.

Cafeteria plans may need to be amended to conform to the new over-the-counter drug requirements. Pursuant to Prop. Treas. Reg. § 1.125-1(c), cafeteria plan amendments may be effective only prospectively. Notwithstanding the rule against retroactive amendments, an amendment to conform a cafeteria plan to the requirements set forth in this notice that is adopted no later than June 30, 2011, may be made effective retroactively for expenses incurred after December 31, 2010 (or after January 15, 2011 for health FSA and HRA debit card purchases).

The IRS intends to amend the regulations under §§ 1.105-1, 1.105-2, 1.106-1, 1.125-1 and 1.125-5 to provide for the new definition of medical expenses. Taxpayers may rely on this notice pending the issuance of the amended regulations. See also Revenue Ruling 2010-23 in this issue of the Internal Revenue Bulletin, which states that Revenue Ruling 2003-102, 2003-2 C.B. 559, is obsoleted. Also, the following guidance concerning the definition of qualified medical expenses under § 220(d)(2) (Archer MSAs) and § 223(d)(2) (HSAs) is modified: Notice 96-53, Q&A 22, 1996-2 C.B. 219; Notice 2004-2, Q&A 26, 2004-1 C.B. 269; Notice 2004-50, Q&A 38, 2004-1 C.B. 196; Notice 2008-51, 2008-1 C.B. 1163; and Notice 2008-52, 2008-1 C.B. 1166. Notice 2006-69, 2006-2 C.B. 107, is amplified.

The IRS and Treasury invite comments on further guidance that may be needed on § 9003 of the Affordable Care Act (for example, on new designs for debit card systems that could provide substantiation that an over-the-counter medicine or drug was prescribed). Comments should be submitted on or before December 27, 2010, and should include a reference to Notice 2010-59. Send submissions to CC:PA:LPD:PR (Notice 2010-59), Room 5203, Internal Revenue Service, P.O. Box 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 (Notice 2010-59), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20044, or sent electronically, via the following e-mail address: Notice.comments@irscounsel.treas.gov. Please include “Notice 2010-59” in the subject line of any electronic communication. All material submitted will be available for public inspection and copying.

The principal author of this notice is Robin Ehrenberg of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this notice, contact Ms. Ehrenberg at (202) 622-6080 (not a toll-free call).

This announcement discloses the results of the 2009-10 allocation round under the qualifying advanced coal project program of § 48A and the qualifying gasification project program of § 48B of the Internal Revenue Code. This announcement also serves notice to applicants that a 2010-11 allocation round under the qualifying advanced coal project program is currently open pursuant to Notice 2009-24, 2009-16 I.R.B. 817. No allocation round will be conducted under the qualifying gasification project program.

Section 48A provides a qualifying advanced coal project credit in an amount equal to (1) 20 percent of the qualified investment (as defined in § 48A(b)) for that taxable year in qualifying advanced coal projects (as defined in § 48A(c)(1) and (e)) described in § 48A(d)(3)(B)(i), (2) 15 percent of the qualified investment for that taxable year in qualified advanced coal projects described in § 48A(d)(3)(B)(ii), and (3) 30 percent of the qualified investment for that taxable year in qualifying advanced coal projects described in § 48A(d)(3)(B)(iii).

On April 20, 2009, the Internal Revenue Service (“Service”) issued Notice 2009-24 to announce an allocation round for the qualifying advanced coal projects described in § 48A(d)(3)(B)(iii) (“the Phase II advanced coal program”). The Service will certify $1.25 billion of credits to qualifying projects under the Phase II advanced coal program.

Section 48A(d)(5) provides that the Secretary shall, upon making a certification under § 48A(d) or § 48B(d), publicly disclose the identity of the applicant and the amount of the credit certified with respect to such applicant.

Section 10.01 of Notice 2009-24 provides that the Service intends to publish the results of the allocation process, and disclose the following information in the event a qualifying advanced coal project credit under § 48A is allocated to the taxpayer’s project: (a) the name of the taxpayer and (b) the amount of the qualifying advanced coal project credit allocated to the project.

Accordingly, the results of the 2009-10 allocation round under the Phase II advanced coal program are as follows:

Based on the results shown above, the available credit amount for 2010-11 allocation round under the Phase II advanced coal program is $240,564,000, out of which $103,564,000 is available for advanced coal projects that use sub-bituminous coal as a primary feedstock, and $138,000,000 is available for advanced coal projects that use lignite as a primary feedstock. No credit amount is available for advanced coal projects that use bituminous coal as a primary feedstock. The allocation round for 2010-11 will be conducted in the manner and under the procedures as provided under Notice 2009-24. Under the notice, the application period for the 2010-11 allocation round begins on March 2, 2010, and ends on March 1, 2011, and the applications must be submitted to the Department of Energy (DOE) on or before October 31, 2010, and to the Service on or before March 2, 2011.

Section 48B provides that the qualifying gasification project credit for a taxable year is an amount equal to (1) 20 percent of the qualified investment (as defined in § 48B(b)) for that taxable year in qualifying gasification projects (as defined in § 48B(c)(1)) for which the credit is allocated under § 48B(d)(1)(A), and (2) 30 percent of the qualified investment for that taxable year in qualifying gasification projects for which the credit is allocated under § 48B(d)(1)(B).

On April 20, 2009, the Service issued Notice 2009-23, 2009-16 I.R.B. 802, to announce an allocation round for the qualifying gasification project program described in § 48B(d)(1)(B) (“the Phase II gasification program”). The Service will certify $250 million of credits to qualifying projects under the Phase II gasification program.

Section 48B(d)(5) provides that the Secretary shall, upon making a certification under § 48B(d), publicly disclose the identity of the applicant and the amount of the credit certified with respect to such applicant.

Section 10.01 of Notice 2009-23 provides that the Service intends to publish the results of the allocation process, and disclose the following return information in the event a qualifying gasification project credit under § 48B is allocated to the taxpayer’s project: (a) the name of the taxpayer and (b) the amount of the qualifying gasification project credit allocated to the project.

Accordingly, the results of the 2009-10 allocation round under the Phase II gasification program are as follows:

Because the total credit amount of $250 million was allocated, the Service will not conduct an allocation round in 2010-11 under the Phase II gasification program.

The principal author of this announcement is Jennifer C. Bernardini of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this announcement, contact Jennifer C. Bernardini at (202) 622-3110 (not a toll-free call).

This document contains a correction to Notice 2009-80, 2009-51 I.R.B. 859, which contained an incorrect name. The taxpayer name incorrectly read: “Thorek Hospital & Medical Center in Chicago, IL”.

The taxpayer name should have read: “Thorek Hospital & Medical Center Self Insurance Trust Fund in Chicago, IL”.

FOR FURTHER INFORMATION CONTACT: