Section 355; stock distribution. This ruling examines whether a distribution that is expected to increase aggregate stock value satisfies the business purpose requirement of section 355 of the Code when the increased value is expected to serve both a corporate business purpose and a shareholder purpose.

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 March 2004.

Interest rates; underpayments and overpayments. The rate of interest determined under section 6621 of the Code for the calendar quarter beginning April 1, 2004, will be 5 percent for overpayments (4 percent in the case of a corporation), 5 percent for underpayments, and 7 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 2.5 percent.

Reduction in stated principal amount of a recourse note issued by employee to employer to acquire employer stock. This ruling provides guidance in cases where an employer and employee reduce the stated principal amount of a recourse note issued by an employee to the employer to acquire employer stock. This ruling holds that the employee recognizes compensation income equal to the amount of the reduction.

Final regulations provide for the voluntary electronic furnishing of statements on Forms W-2, Wage and Tax Statement, under sections 6041 and 6051 of the Code, and statements on Forms 1098-T, Tuition Statement, and Forms 1098-E, Student Loan Interest Statement, under section 6050S.

This notice provides that benefits received under the Smallpox Emergency Personnel Protection Act of 2003 (SEPPA) are exempt from income and employment taxes.

This notice withdraws Notice 98-5, but announces that the IRS will continue to scrutinize abusive transactions that are designed to generate foreign tax credits and will challenge the claimed tax consequences of such transactions under principles of existing law. The notice also describes the approach that Treasury and the IRS are using to address transactions involving inappropriate foreign tax credit results. Notice 98-5 withdrawn and Notice 2003-76 modified.

This notice describes a transaction involving the purported acquisition of stock of a foreign target corporation, an election under section 338, and a prearranged plan to sell the target corporation's assets in a transaction that gives rise to foreign tax without corresponding income for U.S. tax purposes. The notice identifies this transaction, and substantially similar transactions, as listed transactions that are subject to reporting, registration, and list maintenance requirements.

Low-income housing tax credit; private activity bonds. Resident populations of the 50 states, the District of Columbia, Puerto Rico, and the insular areas are provided for purposes of determining the 2004 calendar year (1) state housing credit ceiling under section 42(h) of the Code, (2) private activity bond volume cap under section 146, and (3) private activity bond volume limit under section 142(k)(5).

A list is provided of organizations now classified as private foundations.

Reduction in stated principal amount of a recourse note issued by employee to employer to acquire employer stock. This ruling provides guidance in cases where an employer and employee reduce the stated principal amount of a recourse note issued by an employee to the employer to acquire employer stock. This ruling holds that the employee recognizes compensation income equal to the amount of the reduction.

This notice provides that benefits received under the Smallpox Emergency Personnel Protection Act of 2003 (SEPPA) are exempt from income and employment taxes.

This notice requests public comment regarding the proper treatment of capitalized amounts that facilitate an acquisition of a trade or business, change in the capital structure of a business entity, and certain other transactions.

If an employee issued a recourse note to his or her employer in satisfaction of the exercise price of an option to acquire the employer’s stock and the employer and employee subsequently agree to reduce the stated principal amount of the note, does the employee recognize compensation income under § 83 of the Internal Revenue Code?

In Year 1, Employer, a corporation, grants a nontransferable, nonstatutory option to its Employee to purchase 1,000 shares of Employer common stock at an exercise price of $75 per share, the fair market value of a share of Employer stock at the time the option is granted. Employee may exercise the option only during employment with Employer or within 90 days after cessation of employment.

On January 1 of Year 2, when the fair market value of 1,000 shares of Employer stock is $100,000, Employee exercises the option and purchases 1,000 shares of Employer stock in exchange for a nontransferable recourse note (“Note”) secured by the stock Employee receives on the exercise of the option. The Note has a stated principal amount of $75,000, which is payable at maturity on December 31 of Year 11. The Note also provides for payments of interest on December 31 of each year the Note is outstanding. The interest rate is one-year LIBOR (determined as of January 1 of each year the Note is outstanding) plus 25 basis points. The interest rate on the Note is not less than the appropriate applicable Federal rate (AFR) on the date the Note is issued. The stock is not subject to a substantial risk of forfeiture within the meaning of § 83(c).

In Year 2, Employee includes $25,000 as compensation income under § 83(a). Employer reports $25,000 of compensation income on the Form W-2 issued to Employee for Year 2 and claims a corresponding deduction in Year 2 under § 83(h).

In Years 2 and 3, Employee makes the required interest payments under the Note. On January 1 of Year 4, the fair market value of the Employer stock has declined to $50,000 and Employer and Employee agree to reduce the stated principal amount of the Note from $75,000 to $50,000. The interest rate on the Note is not less than the appropriate AFR on the date the Note is modified.

Section 83(a) provides that if, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of the fair market value of the property at the first time that the rights to the property are either transferable or not subject to a substantial risk of forfeiture (“substantially vested”), whichever occurs earlier, over the amount paid for the property is included in the gross income of the service provider in the first taxable year in which the rights to the property are substantially vested.

Section 83(e)(3) provides that § 83 does not apply to the transfer of an option without a readily ascertainable fair market value.

Section 83(h) provides that, in the case of a transfer of property to which § 83 applies, the person for whom were performed the services in connection with which the property was transferred is allowed a deduction in an amount equal to the amount included under § 83(a), (b), or (d)(2) in the gross income of the person who performed the services. Such deduction is allowed for the taxable year of such person in which or with which ends the taxable year in which such amount is included in the gross income of the person who performed such services.

Section 1.83-3(a)(1) of the Income Tax Regulations provides that a “transfer” of property occurs when a person acquires a beneficial ownership interest in the property. A person acquires a beneficial ownership interest in property when he or she has been transferred both the right to share in an increase in the value of the property and the obligation to share in the risk of loss in its value. Whether a transfer has in fact occurred is based on all the facts and circumstances.

Section 1.83-3(g) provides that the term “amount paid” refers to the value of any money or property paid for the transfer of property to which § 83 applies. For this purpose, value does not include any stated or unstated interest.

Section 1.83-4(c) provides that, if an indebtedness that has been treated as an “amount paid” for purposes of § 83 is subsequently cancelled, forgiven, or satisfied for an amount less than the amount of such indebtedness, the amount that is not, in fact, paid is includible in the gross income of the service provider for the taxable year in which such cancellation, forgiveness, or satisfaction occurs.

Section 1.83-7(a) provides that the grant of a nonqualified stock option is taxable to the extent that the option has a readily ascertainable fair market value, determined in accordance with § 1.83-7(b). Under § 1.83-7(b), an option that is not traded on an established market does not have a readily ascertainable value at the time of grant unless certain specific conditions are all satisfied (including the option being transferable, the option not being subject to a condition that has a significant effect on the fair market value of the option, and the fair market value of the option privilege being readily ascertainable). Under § 1.83-7(a), if the option does not have a readily ascertainable value at the time of grant, §§ 83(a) and 83(b) apply at such time as the option is exercised or otherwise disposed of, even though the fair market value of such option may have become readily ascertainable before such time.

Section 61(a)(12) provides that, in general, gross income includes income from the discharge of indebtedness.

Section 108(a)(1)(B) provides an exclusion from gross income for any amount that would be includible in gross income by reason of the discharge of indebtedness of the taxpayer if the discharge occurs when the taxpayer is insolvent.

Under § 108(e)(5), for solvent and non-bankrupt taxpayers, if debt owed by a purchaser to a seller is reduced, the reduction is a purchase price adjustment and not income from discharge of indebtedness. Under § 108(e)(5)(C), § 108(e)(5) only applies to reductions that, but for the application of § 108(e)(5), would be treated as income to the purchaser from the discharge of indebtedness.

Not every indebtedness that is cancelled results in the debtor realizing gross income by reason of discharge of indebtedness within the meaning of §§ 61(a)(12) and 108(a). “Debt discharge that is only a medium for some other form of payment, such as a gift or salary, is treated as that form of payment, rather than under the debt discharge rules.” S. Rep. No. 1035, 96th Cong., 2d Sess. 8 n.6 (1980), 1980-2 C.B. 620, 624 n.6.

Section 1.1001-3 provides rules to determine whether a modification of the terms of a debt instrument results in an exchange of the original debt instrument for a modified instrument that differs materially either in kind or in extent. If the modification results in an exchange, the adequacy of the interest rate on the modified debt instrument generally is retested under the applicable Code section, such as § 483.

Under § 1.1001-3(b), a modification of a debt instrument results in an exchange for purposes of § 1.1001-1(a) if the modification is significant. Under § 1.1001-3(c), a modification means any alteration, including any deletion or addition, in whole or in part, of a legal right or obligation of the issuer or a holder of a debt instrument, whether the alteration is evidenced by an express agreement (oral or written), conduct of the parties, or otherwise.

Section 1.1001-3(e) provides rules for determining whether a modification is “significant.” Under § 1.1001-3(e)(2), a change in the yield of a debt instrument is a significant modification if the yield computed under § 1.1001-3(e)(2)(iii) varies from the annual yield on the unmodified debt instrument (determined as of the date of the modification) by more than the greater of of one percent (25 basis points) or 5 percent of the annual yield of the unmodified debt instrument (.05 x annual yield).

Sections 3101 and 3111 impose Federal Insurance Contributions Act (FICA) taxes on “wages,” as that term is defined in § 3121(a). FICA taxes consist of the Old-Age, Survivors and Disability Insurance tax (social security tax) and the Hospital Insurance tax (Medicare tax). These taxes are imposed both on the employer under § 3111(a) and (b) and on the employee under § 3101(a) and (b). Section 3102(a) provides that the employee portion of FICA tax must be collected by the employer of the taxpayer by deducting the amount of the tax from the wages as and when paid. Section 31.3102(a)-1(a) of the Employment Tax Regulations provides that the employer is required to collect the tax, notwithstanding that wages are paid in something other than money. The term “wages” is defined in § 3121(a) for FICA purposes as all remuneration for employment including the cash value of all remuneration (including benefits) paid in any medium other than cash, with certain specific exceptions. Section 3121(b) defines “employment” for FICA purposes as any service, of whatever nature, performed by an employee for the person employing him, with certain specific exceptions.

Rules similar to the FICA rules apply with respect to Federal Unemployment Tax Act (FUTA) tax under §§ 3301, 3306(b), and 3306(c).

Section 3402(a), relating to income tax withholding, generally requires every employer making a payment of wages to deduct and withhold upon these wages a tax determined in accordance with prescribed tables or computational procedures. Section 3401(a) provides that “wages” for income tax withholding purposes means all remuneration for services performed by an employee for his employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash, with certain specific exceptions. Under § 31.3402(a)-1(c), an employer is required to deduct and withhold income tax notwithstanding that the wages are paid in something other than money (for example, wages paid in stock or bonds) and to pay over the tax in money. If the wages are paid in property other than money, the employer should make necessary arrangements to insure that the amount of the tax required to be withheld is available for payment in money.

Sections 31.3121(a)-1(e), 31.3306(b)- 1(e), and 31.3401(a)-1(a)(4) provide that in general the medium in which the remuneration is paid is immaterial. It may be paid in cash or other than in cash. Remuneration paid in any medium other than cash is computed on the basis of the fair market value of such items at the time of payment. Sections 31.3121(a)-1(i), 31.3306(b)-1(i), and 31.3401(a)-1(a)(5) provide that, unless specifically excepted, remuneration for employment constitutes wages even though at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed the services.

In Rev. Rul. 79-305, 1979-2 C.B. 350, a corporation transferred common stock to an employee subject to a substantial risk of forfeiture. The ruling holds that, under § 83, the fair market value of the stock at the time the risk lapses is includible in the employee’s gross income for the year in which risk lapses. The ruling also holds that the fair market value of the stock at the time the risk lapses is wages for purposes of §§ 3121(a), 3306(b), and 3401(a).

Under § 1.83-7(b), the option granted to Employee did not have a readily ascertainable fair market value at the time of grant. Therefore, § 83 applies when the option is exercised and stock is transferred to Employee.

Employee acquired beneficial ownership of the shares of Employer stock in Year 2 because, at that time, Employee acquired both the right to enjoy any increase in the value of the shares and the risk of a decline in the value of the shares. Accordingly, for purposes of § 83, the shares were transferred to Employee in Year 2. Employee’s Note, with an issue price of $75,000, constituted the amount paid by Employee for the shares under § 1.83-3(g) in Year 2. Employee included $25,000 in gross income under § 83(a) in Year 2, the excess of the fair market value of Employer stock at the time of transfer over the amount paid.

Under § 1.83-4(c), if an indebtedness that has been treated as an “amount paid” for purposes of § 83 is subsequently cancelled, forgiven, or satisfied for an amount less than the amount of such indebtedness, the amount that is not, in fact, paid is includible in the gross income of the service provider for the taxable year in which such cancellation, forgiveness, or satisfaction occurs. Thus, if the reduction of the stated principal amount of the Note is a cancellation, forgiveness, or satisfaction of the indebtedness for an amount less than the amount of such indebtedness, the reduction of the stated principal amount is a medium for payment of compensation by Employer to Employee, and any income resulting from the reduction is not income to Employee from the discharge of indebtedness subject to the provisions of section 108. Accordingly, the tax consequences of the reduction are governed by § 83 and § 1.83-4(c), and not by § 108(a)(1)(B) or § 108(e)(5).

Whether the reduction of the stated principal amount of the Note is a cancellation, forgiveness, or satisfaction for an amount less than the amount of the Note, and, thus, whether an amount is includible in income under § 1.83-4(c), is determined in accordance with § 1.1001-3. Under § 1.1001-3(e)(2), if a modification to the stated principal amount of a note produces a significant change in the note’s yield, the modification is significant. A significant modification results in an exchange of the unmodified note for the modified note, which, depending on the issue price of the modified note and the adjusted issue price of the unmodified note, may have tax consequences for both the issuer and holder of the note.

In this case, the reduction in the stated principal amount of the Note is a significant modification under § 1.1001-3(e)(2). As a result, there is an exchange of the unmodified Note for the modified Note between Employee and Employer and a satisfaction of the original indebtedness. Under § 1.83-4(c), the amount that is not, in fact, paid, and thus the amount includible as compensation by Employee, is the excess of the adjusted issue price of the unmodified Note over the issue price of the modified Note.

The modified Note has adequate stated interest under § 483. Under § 1273(b)(4), the modified Note has an issue price of $50,000. The adjusted issue price of the unmodified Note is $75,000. See § 1.1275-1(b). As a result, under § 1.83-4(c), Employee recognizes compensation income of $25,000 (the excess of the adjusted issue price of the unmodified Note ($75,000) over the issue price of the modified Note ($50,000)). This amount is recognized in Year 4, the taxable year in which the modification occurred.

If an employee issued a recourse note to his or her employer in satisfaction of the exercise price of an option to acquire the employer’s stock and the employer and employee subsequently agree to reduce the stated principal amount of the note, the employee generally recognizes compensation income under § 83 at the time of the reduction. Thus, under the facts described above, Employee recognizes $25,000 of compensation income on January 1 of Year 4 under § 1.83-4(c). If Employer and Employee instead were, for example, to reduce the interest rate on the Note or change the Note from recourse to nonrecourse, that modification also generally would result in compensation income for Employee.

In addition, the compensation is wages for purposes of FICA, FUTA, and income tax withholding.

The principal authors of this revenue ruling are Jean M. Casey of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities) and Rebecca Asta of the Associate Chief Counsel (Financial Institutions and Products). For further information regarding § 83, contact Ms. Casey at (202) 622-6030 and for further information regarding § 1.1001-3, contact Ms. Asta at (202) 622-3930 (not toll-free calls).

Whether a distribution that is expected to cause the aggregate value of the stock of a distributing corporation and the stock of a controlled corporation to exceed the pre-distribution value of the distributing corporation’s stock satisfies the corporate business purpose requirement of § 355 of the Internal Revenue Code and § 1.355-2(b) of the Income Tax Regulations when the increased value is expected to serve a corporate business purpose of either the distributing corporation or the controlled corporation (or both), even if it benefits the shareholders of the distributing corporation.

D is a corporation that indirectly conducts Business 1 and Business 2 through its subsidiaries. Some subsidiaries engage only in Business 1 and others only in Business 2. D’s common stock is widely held and publicly traded.

The two businesses attract different investors, some of which are averse to investing in D because of the presence of the other business. Therefore, D believes, and D’s investment banker has advised D, that if each business were conducted in a separate and independent corporation, the stock of the two corporations likely would trade publicly for a higher price, in the aggregate, than the stock of D if it continued to represent an interest in both businesses. The expected increase in the aggregate trading price of the stock of D and C over the pre-distribution trading price of D would not, however, derive in any significant respect from any Federal tax advantage made available to either D or C by the transaction.

With the intent and expectation of increasing the aggregate trading price of the common stock representing Business 1 and Business 2, D transfers the subsidiaries that engage in Business 2 to a newly formed corporation, C, in exchange for all of the C stock and distributes the C stock to its common shareholders, pro rata. D’s remaining subsidiaries will continue to conduct Business 1.

Increasing the aggregate trading price of the D and C common stock over the trading price of the pre-distribution D common stock is expected to confer a benefit to existing shareholders. In deciding whether to undertake the distribution, D’s directors consider this expected benefit to the shareholders, as well as the expected benefits to the corporation described below. However, D’s directors do not effect the distribution to facilitate any particular shareholder’s disposition of the stock of either D or C.

Apart from the issue of whether the business purpose requirement of § 1.355-2(b) is satisfied, the distribution meets the requirements of §§ 368(a)(1)(D) and 355.

Situation 1. D uses equity-based incentives as a significant part of its program to compensate a significant number of employees of both Business 1 and Business 2. D’s directors wish to enhance the value of employee compensation and have considered either granting additional equity-based incentives or making cash payments in lieu of additional equity incentives. However, granting additional equity-based incentives would unacceptably dilute D’s existing shareholders’ interests, and making cash payments would be unduly expensive. Therefore, D undertakes the separation of Business 2 from Business 1 with the expectation that its stock value will increase and such increase will enhance the value of its equity-based compensation, providing D with a real and substantial benefit.

Situation 2. As part of its overall strategic planning, D has expanded both Business 1 and Business 2 through acquisitions of assets and the stock of other corporations. In some of these acquisitions, D has used its stock, either in whole or in part, as consideration. D’s directors expect to continue expanding Business 1 as appropriate acquisition opportunities are identified in the future. D expects to offer its common stock as consideration, either in whole or in part, in connection with future acquisitions. Therefore D undertakes the separation of Business 2 from Business 1 with the expectation that its stock value will increase and such increase may permit D to effect such acquisitions in a manner that preserves capital with significantly less dilution of the existing shareholders’ interests, providing D with a real and substantial benefit.

Section 355 provides that if certain requirements are met, a corporation may distribute stock and securities in a controlled corporation to its shareholders and security holders without causing the distributees to recognize gain or loss.

In addition to the statutory requirements, the regulations provide that § 355 will apply to a transaction only if it is carried out for one or more corporate business purposes. Section 1.355-2(b)(1). A transaction is carried out for a corporate business purpose if it is motivated, in whole or substantial part, by one or more corporate business purposes. Id. A corporate business purpose is a real and substantial non-Federal tax purpose germane to the business of the distributing corporation, the controlled corporation, or the affiliated group (as defined in § 1.355-3(b)(4)(iv)) to which the distributing corporation belongs. Section 1.355-2(b)(2). The principal reason for the business purpose requirement is to provide nonrecognition treatment only to distributions that are incident to readjustments of corporate structures required by business exigencies and that effect only readjustments of continuing interests in property under modified corporate forms. Section 1.355-2(b)(1). If a corporate business purpose can be achieved through a nontaxable transaction that does not involve the distribution of stock of a controlled corporation and that is neither impractical nor unduly expensive, then the separation is not carried out for that corporate business purpose. Section 1.355-2(b)(3).

A shareholder purpose (for example, the personal planning purposes of a shareholder) is not a corporate business purpose. Section 1.355-2(b)(2). Depending upon the facts of a particular case, however, a shareholder purpose for a transaction may be so nearly coextensive with a corporate business purpose as to preclude any distinction between them. Id. In such a case, the transaction is carried out for one or more corporate business purposes. Id. A transaction motivated in substantial part by a corporate business purpose does not fail the business purpose requirement merely because it is motivated in part by non-Federal tax shareholder purposes. See § 1.355-2(b)(5), Example (2).

Situation 1. Because D believes that the increased value of its stock expected to result from the separation will enhance the value of its employee compensation, providing a real and substantial benefit to D, the distribution is motivated by a real and substantial non-Federal tax purpose germane to the business of D. Section 1.355-2(b)(1) and (2). Further, because this purpose cannot be achieved through another nontaxable transaction that is neither impractical nor unduly expensive, the distribution is carried out for a corporate business purpose. Section 1.355-2(b)(2) and (3). Although the increase in stock value is expected to benefit the shareholders by increasing the amount they would realize on a sale of their shares, this shareholder purpose is so nearly coextensive with the corporate business purpose as to preclude any distinction between them. Section 1.355-2(b)(2). Therefore, the distribution is treated as carried out for a corporate business purpose. Id.

Situation 2. Because D expects that the increased value of its stock expected to result from the separation may permit D to effect future acquisitions in a manner that preserves capital with significantly less dilution of the existing shareholders’ interests, providing D with a real and substantial benefit, the distribution is motivated by a real and substantial non-Federal tax purpose germane to the business of D. Section 1.355-2(b)(1) and (2). Further, because this purpose cannot be achieved through another nontaxable transaction that is neither impractical nor unduly expensive, the distribution is carried out for a corporate business purpose. Section 1.355-2(b)(2) and (3). Although the increase in stock value is expected to benefit the shareholders by increasing the amount they would realize on a sale of their shares, this shareholder purpose is so nearly coextensive with the corporate business purpose as to preclude any distinction between them. Section 1.355-2(b)(2). Therefore, the distribution is treated as carried out for a corporate business purpose. Id.

A distribution that is expected to cause the aggregate value of the stock of a distributing corporation and the stock of a controlled corporation to exceed the pre-distribution value of the distributing corporation’s stock satisfies the corporate business purpose requirement of § 355 and § 1.355-2(b) when the increased value is expected to serve a corporate business purpose of either the distributing corporation or the controlled corporation (or both), even if it benefits the shareholders of the distributing corporation.

The principal author of this revenue ruling is Jeffrey B. Fienberg of the Office of Associate Chief Counsel (Corporate). For further information regarding this revenue ruling, contact Mr. Fienberg at (202) 622-7930 (not a toll-free call).

This revenue ruling provides various prescribed rates for federal income tax purposes for March 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 annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.

Internal Revenue Service (IRS), Treasury.

Final regulations and removal of temporary regulations.

This document contains final regulations relating to the voluntary electronic furnishing of statements on Forms W-2, Wage and Tax Statement, under sections 6041 and 6051, and statements on Forms 1098-T, Tuition Statement, and Forms 1098-E, Student Loan Interest Statement, under section 6050S. These final regulations affect businesses, other for-profit institutions, and eligible educational institutions that wish to furnish these required statements electronically. The regulations will also affect individuals (recipients), principally employees, students, and borrowers, who consent to receive these statements electronically.

Effective Date: These regulations are effective February 18, 2004.

Applicability Date: These regulations apply to statements and reports required to be furnished after February 13, 2004. The rules relating to maintenance of access to website statements also apply to statements and reports required to be furnished after December 31, 2003.

Michael E. Hara at (202) 622-4910 (not a toll-free number).

Accordingly, 26 CFR parts 1, 31, 301, and 602 are amended as follows:

The principal author of these final regulations is Michael E. Hara, of the Office of Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division. However, other personnel from the IRS and Treasury Department participated in their development.

* * * * *

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 beginning April 1, 2004, 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 for interest computations made after December 31, 1994. 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 such month.

Section 6621(b)(2)(B) provides that in determining the addition to tax under section 6654 for failure to pay estimated tax for any taxable year, the federal short-term rate that applies during the third month following such taxable year also applies during the first 15 days of the fourth month following such taxable year.

Section 6621(b)(3) provides that the federal short-term rate for any month is the federal short-term rate determined during such month by the Secretary in accordance with § 1274(d), rounded to the nearest full percent (or, if a multiple of 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.

Rounded to the nearest full percent, the federal short-term rate based on daily compounding determined during the month of January 2004 is 2 percent. Accordingly, an overpayment rate of 5 percent (4 percent in the case of a corporation) and an underpayment rate of 5 percent are established for the calendar quarter beginning April 1, 2004. The overpayment rate for the portion of a corporate overpayment exceeding $10,000 for the calendar quarter beginning April 1, 2004, is 2.5 percent. The underpayment rate for large corporate underpayments for the calendar quarter beginning April 1, 2004, is 7 percent. These rates apply to amounts bearing interest during that calendar quarter.

Under section 6621(b)(2)(B), the 4 percent rate that applies to estimated tax underpayments for the first calendar quarter in 2004, as provided in Rev. Rul. 2003-126, 2003-52 I.R.B. 1249, also applies to such underpayments for the first 15 days in April 2004.

Interest factors for daily compound interest for annual rates of 2.5 percent, 4 percent, 5 percent, and 7 percent are published in Tables 58, 61, 63, and 67 of Rev. Proc. 95-17, 1995-1 C.B. 556, 612, 615, 617, and 621.

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 Crystal Foster of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue ruling, contact Ms. Foster at (202) 622-7326 (not a toll-free call).

This notice provides guidance regarding the Federal income and employment tax treatment of benefits received under the Smallpox Emergency Personnel Protection Act of 2003 (SEPPA).

On December 13, 2002, the President announced that, in light of the threat of bioterrorism, a smallpox vaccine would be made available on a voluntary basis to medical professionals, emergency personnel, and others who may be first responders in a smallpox emergency. To implement that decision, the Secretary of Health and Human Services (the Secretary), on January 24, 2003, issued a Declaration Regarding Administration of Smallpox Countermeasures. The Declaration provides that certain countermeasures should be taken for the prevention or treatment of smallpox, or to control or treat the adverse effects of smallpox vaccination. The Declaration recommends the administration of the smallpox vaccine, on a voluntary basis, to specified categories of individuals.

The Smallpox Emergency Personnel Protection Act of 2003 (SEPPA), Pub. L. No. 108-20, 117 Stat. 638, authorizes the Secretary, through the Smallpox Vaccination Injury Compensation Program, to provide benefits to eligible individuals who sustain covered injuries as a result of the administration of covered countermeasures (including the smallpox vaccine) or as a result of accidental contact with such persons. In general, SEPPA authorizes the payment of or a reimbursement for medical items and services as reasonable and necessary to treat a covered injury, the payment of employment income lost as a result of a covered injury, and the payment of a death benefit with respect to an eligible individual whose death results from a covered injury.

Payments received under SEPPA by eligible individuals for covered injuries are excluded from gross income for Federal income tax purposes (except for amounts attributable to, and not in excess of, deductions allowed under § 213 (relating to medical, etc. expenses) for any prior taxable year). Additionally, such payments do not constitute wages and are not subject to withholding for FICA, FUTA, and Federal income tax withholding purposes, and do not constitute net earnings from self-employment for SECA purposes.

In addition, a payor is not required to issue Forms 1099 and Forms W-2 under §§ 6041 and 6051 for SEPPA payments it makes to eligible individuals (or their survivors, in the case of death benefits).

The principal author of this notice is Barbara E. Pie of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this notice, contact Barbara Pie at (202) 622-6080 or Sheldon Iskow at (202) 622-4920 (not toll-free calls).

On December 22, 2003, the Treasury Department and Internal Revenue Service issued final regulations (T.D. 9107, 2004-7 I.R.B. 447 [69 FR 436]) under § 263(a) of the Internal Revenue Code requiring capitalization of certain amounts that facilitate the creation or acquisition of an intangible asset and under § 167 providing a 15-year safe harbor amortization period for certain intangible assets described in § 263(a). The final regulations under § 263(a) also provide guidance on the treatment of amounts required to be capitalized under § 263(a) in certain acquisitions of a trade or business. For example, § 1.263(a)-5(g)(2) provides that amounts required to be capitalized by an acquirer in an acquisition, merger, or consolidation that is not described in § 368 are added to the basis of the acquired assets (in the case of a transaction that is treated as an acquisition of the assets of the target for federal income tax purposes) or the acquired stock (in the case of a transaction that is treated as an acquisition of the stock of the target for federal income tax purposes).

The final regulations under § 263(a) do not address the treatment of amounts required to be capitalized in certain other transactions to which the regulations apply (for example, amounts required to be capitalized in tax-free transactions, costs of a target in a taxable stock acquisition, and stock issuance costs). The preamble to the final regulations states that the Service and Treasury Department intend to issue separate guidance to address the treatment of these amounts and will consider at that time whether such amounts should be eligible for the 15-year safe harbor amortization period described in § 1.167(a)-3(b).

The Service and Treasury Department are aware that there is continuing controversy as to the proper treatment of certain costs that facilitate certain tax-free and taxable transactions and other restructurings and that are required to be capitalized under § 263(a) and § 1.263(a)-5. The Service and Treasury Department also are aware that, under current law, capitalized costs that facilitate tax-free and taxable transactions that are similar may be treated differently. For example, § 1.263(a)-5(g)(2) provides that the acquirer’s capitalized transaction costs that facilitate a taxable asset acquisition increase the basis of the acquired assets. Some commentators, however, have expressed differing views as to how an acquirer’s capitalized transaction costs that facilitate a tax-free asset acquisition are treated. In addition, the Service and Treasury Department are aware that, under current law, similar costs may be treated differently depending on which party incurs the costs. Commentators have suggested that capitalized transaction costs incurred by an acquirer and target to facilitate a tax-free stock acquisition may be treated differently.

To reduce the prospect of future controversy, the Service and Treasury Department intend to propose regulations to address the treatment of amounts that facilitate certain tax-free and taxable transactions and other restructurings and that are required to be capitalized under § 263(a) and § 1.263(a)-5. The Service and Treasury Department intend to develop a set of rules that are clear and administrable.

The Service and Treasury Department are considering the treatment of capitalized costs that facilitate the following transactions:

(1) Tax-free asset acquisitions and dispositions (for example, reorganizations under § 368(a)(1)(A), (C), (D), (G));

(2) Taxable asset acquisitions and dispositions (see § 1.263(a)-5(g) for the treatment of certain transaction costs in taxable asset acquisitions);

(3) Tax-free stock acquisitions and dispositions (for example, reorganizations under § 368(a)(1)(B));

(4) Taxable stock acquisitions and dispositions (see § 1.263(a)-5(g) for the treatment of certain transaction costs in taxable stock acquisitions);

(5) Tax-free distributions of stock (for example, distributions of stock to which § 305(a) or § 355(a) applies);

(6) Tax-free distributions of property (for example, distributions to which §§ 332 and 337 apply);

(7) Taxable distributions of property (for example, distributions to which §§ 331 and 336 apply and distributions of stock to which § 311 applies);

(8) Organizations of corporations, partnerships, and entities that are disregarded as separate from their owner (for example, transfers described in § 351 or § 721);

(9) Corporate recapitalizations (for example, reorganizations under § 368(a)(1)(E));

(10) Reincorporations of corporations in a different state (for example, in a reorganization under § 368(a)(1)(F)); and

(11) Issuances of stock.

There are specific issues raised by each of these types of transactions. The Service and Treasury Department previously have requested comments more generally on the treatment of capitalized costs that facilitate certain of these transactions. In this notice, the Service and Treasury Department request additional comments, including comments focusing on the following issues.

(1) Treatment of capitalized costs. Section 263(a) and the regulations thereunder require that certain amounts that facilitate the transactions listed above be capitalized. The Service and Treasury Department request comments regarding whether the particular capitalized costs that facilitate transactions for which the Service and Treasury Department are considering guidance should (a) increase the basis of a particular asset or assets (and, if the basis of multiple assets should be increased, the methodology for allocating the costs among the assets), (b) be treated as giving rise to a new asset the basis of which may not be amortized, (c) be treated as giving rise to a new asset the basis of which may be amortizable, (d) reduce an amount realized, or (e) be treated as an adjustment to equity. To the extent that capitalized costs should be treated as giving rise to a new asset the basis of which may be amortizable, the Service and Treasury Department request comments regarding the appropriate amortizable useful life. For example, an appropriate amortizable useful life might be 15 years, a useful life consistent with that afforded to certain intangibles under § 1.167(a)-3(b) and § 197. Additionally, if such costs are treated as giving rise to a new, amortizable asset, the Service and Treasury Department also request comments as to the treatment of such costs if a specific event (e.g., a liquidation) occurs prior to the expiration of the amortization period.

(2) Consistent treatment of capitalized costs that facilitate similar taxable and tax-free transactions. The regulations promulgated under § 263(a) provide rules regarding the treatment of amounts that facilitate a taxable acquisition of stock and assets and a taxable disposition of assets. The Service and Treasury Department request comments regarding whether, as a policy matter, capitalized costs that facilitate a tax-free transaction should be treated in the same manner as the capitalized costs that facilitate a similar taxable transaction.

(3) Consistent treatment of all capitalized costs that facilitate a transaction. The Service and Treasury Department request comments regarding whether, as a policy matter, capitalized costs that facilitate a transaction, regardless of the type of cost and the party to the transaction that incurs such cost, should be treated similarly.

Written and electronic comments must be submitted by April 19, 2004.

Send submissions to: CC:PA:LPD:PR (Notice 2004-18), 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 2004-18), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, DC. Alternatively, taxpayers may send submissions electronically directly to the Service at: Notice.comments@irscounsel.treas.gov All materials submitted will be available for public inspection and copying.

Concerning submissions, Guy Traynor (202) 622-7180; concerning this notice, Andrew J. Keyso, (202) 622-4800 (not toll-free numbers).

The purpose of this notice is to describe the approach that the Treasury Department and the Internal Revenue Service (IRS) are using to address transactions involving inappropriate foreign tax credit results and to withdraw Notice 98-5, 1998-1 C.B. 334, because Treasury and the IRS do not intend to issue regulations in the form described in that notice.

Notice 98-5 announced that Treasury and IRS intended to issue regulations that would apply an economic profit test to address abusive tax-motivated transactions that generate foreign tax credits that can be used to reduce residual U.S. tax on other foreign source income. Part II of Notice 98-5 describes two classes of transactions that create the potential for foreign tax credit abuse. The first class includes transactions that effectively transfer a foreign tax liability through the acquisition of an asset that generates an income stream subject to foreign gross basis taxes such as withholding taxes. The second class includes cross-border tax arbitrage transactions that effectively permit the duplication of tax benefits. Notice 98-5 contemplated that regulations would apply an economic profit test to disallow credits for foreign taxes generated in an arrangement such as those described above if the reasonably expected economic profit were determined to be insubstantial compared to the value of the foreign tax credits expected to be obtained as a result of the arrangement. Notice 2003-76, 2003-49 I.R.B. 1181, and its predecessors identified transactions that are the same as or substantially similar to transactions described in Part II of Notice 98-5 as listed transactions for purposes of the tax shelter disclosure, registration, and list maintenance requirements of § 1.6011-4 of the Income Tax Regulations and §§ 301.6111-2 and 301.6112-1 of the Procedure and Administration Regulations.

Treasury and the IRS do not intend to issue regulations in the form described in Notice 98-5. Accordingly, Notice 98-5 is withdrawn. Consistent with this withdrawal, Notice 2003-76 is modified by eliminating the reference to Notice 98-5 in the identification of listed transactions. Accordingly, transactions will not be considered 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 transactions or arrangements described in Part II of Notice 98-5. No inference is intended, however, as to whether such transactions are otherwise subject to the disclosure requirements of section 6011, the registration requirements of section 6111, or the list maintenance requirements of section 6112 .

Treasury and the IRS remain concerned about transactions that involve inappropriate foreign tax credit results. The tax benefits claimed in these transactions are inconsistent with the purposes of the foreign tax credit provisions, including the foreign tax credit limitation of section 904, which are intended to reduce or eliminate double taxation of income.

The IRS will continue to scrutinize abusive transactions that are designed to generate foreign tax credits. In appropriate circumstances, the IRS will challenge the claimed tax consequences of such transactions under the following principles of existing law: the substance over form doctrine, the step transaction doctrine, debt-equity principles, section 269, the partnership anti-abuse rules of § 1.701-2, and the substantial economic effect rules of § 1.704-1.

Treasury also has proposed legislative changes to address transactions involving inappropriate foreign tax credit results. Section 901(k), which was enacted in 1997, disallows a credit for certain foreign taxes paid with respect to a dividend if the recipient of the dividend does not meet certain holding period requirements or is under an obligation to make related payments with respect to substantially similar or related property. The Administration’s FY 2005 Budget includes a proposal to expand section 901(k) to apply to foreign taxes with respect to income or gain other than dividends (such as interest, rents, and royalties), disallowing a credit for foreign withholding taxes if the recipient of the income or gain does not meet certain holding period requirements with respect to the asset generating the income or is under an obligation to make related payments with respect to substantially similar or related property. See Department of the Treasury, General Explanation of the Administration’s Fiscal Year 2005 Revenue Proposals at 113 (Feb. 2004). This proposed expansion of section 901(k) addresses the first class of transactions described in Notice 98-5. This proposal was also included in the Administration’s FY 2004 Budget and has been incorporated in pending proposed legislation. See Department of the Treasury, General Explanation of the Administration’s Fiscal Year 2004 Revenue Proposals, at 103 (Feb. 2003); American Jobs Creation Act, H.R. 2896, 108^th Cong. § 3022 (2003); Jumpstart Our Business Strength Act, S. 1637, 108^th Cong. § 456 (2003).

The Administration’s FY 2005 Budget also includes a proposal for broad regulatory authority to address transactions that involve inappropriate separation of foreign taxes from the related foreign income in cases where foreign taxes are imposed on any person with respect to income of an entity. The regulations that would be issued under this proposed authority may provide for the disallowance of a credit for all or a portion of the foreign taxes or for the allocation of the foreign taxes among the participants in the transaction in a manner that is more consistent with the underlying economics of the transaction. The Administration’s FY 2005 Budget proposal to expand existing regulatory authority is intended to provide additional mechanisms for Treasury and the IRS to address the second class of transactions described in Notice 98-5 as well as other abusive transactions involving foreign tax credits.

Treasury and the IRS will use existing authority under section 901 and other provisions of the Code to address transactions or structures that produce inappropriate foreign tax credit results. The 2004 business plan for published guidance includes regulations addressing the allocation of foreign taxes by a partnership under section 704. In particular, the regulations will address situations involving special allocations of foreign taxes among the partners that are inconsistent with the allocation of the related foreign income. Treasury and the IRS expect to issue these regulations shortly. Treasury and the IRS also are working on guidance under section 901 concerning the application of the legal liability rule of § 1.901-2(f) in certain circumstances, including, for example, in the case of consolidated tax reporting systems in foreign countries. These regulations are intended to provide rules that make the allocation of foreign taxes imposed on the combined income of two or more persons more consistent with each person’s respective share of the foreign income to which the tax relates.

Notice 2004-20, issued concurrently with this notice, identifies as a listed transaction for purposes of the tax shelter disclosure, registration, and list maintenance regulations a purported stock acquisition that is intended to generate credits for foreign taxes paid on gain that is not subject to tax in the United States. That notice provides that the IRS will challenge the purported foreign tax credit results where a domestic corporation purportedly acquires the stock of a foreign target corporation, makes a 338 election, and then, pursuant to a prearranged plan, sells all or substantially all of the target corporation’s assets in a transaction that generates a taxable gain for foreign tax purposes (but not for U.S. tax purposes). Treasury and the IRS also are considering amending § 1.338-9(d) (concerning the allocation of foreign taxes of a target that accrue after the stock acquisition and section 338 election) to address cases in which the target is liquidated (either in a liquidation under local law or by making an election under § 301.7701-3 to treat the target as a disregarded entity) before the end of its foreign taxable year and to address the allocation of foreign taxes imposed on post-acquisition sales in order to prevent inappropriate foreign tax credit results. Treasury and the IRS anticipate that such amendments only would apply prospectively.

In addition, Treasury and the IRS are working on modifications to the tax shelter disclosure regulations of § 1.6011-4(b) (identifying transactions subject to the disclosure requirements) to ensure that the regulations require appropriate reporting of potentially abusive transactions involving foreign tax credits. In particular, Treasury and the IRS are considering revisions to the tax shelter disclosure regulations to require reporting of transactions that effectively separate foreign taxes from the related foreign income, including transactions that create a mismatch in the timing of recognition for U.S. tax purposes of foreign taxes and the related foreign income.

Notice 98-5 is withdrawn. Notice 2003-76 is modified by eliminating the reference to Notice 98-5 in the identification of listed transactions. 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. Effective 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. No inference is intended, however, as to whether such transactions are otherwise subject to the disclosure requirements of section 6011, the registration requirements of section 6111, or the list maintenance requirements of section 6112.

The principal author of this notice is Ginny Chung of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact Ms. Chung at (202) 622-3850 (not a toll-free call).

The Internal Revenue Service and the Treasury Department are aware of a type of transaction, described below, in which, pursuant to a prearranged plan, a domestic corporation purports to acquire stock in a foreign target corporation and make an election under section 338 of the Internal Revenue Code before selling all or substantially all of the target corporation’s assets in a transaction that is subject to foreign income tax. This notice alerts taxpayers and their representatives that these transactions are tax avoidance transactions and identifies these transactions, and substantially similar transactions, 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. This notice also alerts parties involved with these transactions to certain responsibilities that may arise from their involvement with these transactions.

The transaction generally involves four parties: a person or persons (X) that plans to sell the stock or assets of a foreign corporation or group of foreign corporations (Target) that is not engaged in a U.S. trade or business, a domestic corporation that acts as an intermediary (Midco), and a person or persons (Y) that plans to purchase the assets of Target. Pursuant to a prearranged plan, the parties undertake the following steps. X purports to sell the stock of Target to Midco. Midco then makes an election under section 338 to treat the stock purchase as resulting in a deemed sale by Target (Old Target) of its assets and an acquisition of those assets by a deemed new corporation, New Target, providing New Target with a stepped-up basis in the assets. Midco then may cause New Target to liquidate, either in a liquidation under local law or by making an election under § 301.7701-3 to treat New Target as a disregarded entity. As a result of the liquidation (or deemed liquidation), Midco inherits New Target’s assets with a stepped-up basis. Shortly thereafter, pursuant to the prearranged plan, Y purchases all or substantially all of New Target’s assets. Alternatively, if Midco does not liquidate New Target (or elect to treat New Target as a disregarded entity), New Target pays a dividend to Midco after the asset sale.

The asset sale generates a taxable gain for foreign tax purposes (but not for U.S. tax purposes), and Midco claims a credit under section 901 with respect to the foreign income tax imposed on the asset sale. If Midco does not liquidate New Target (or elect to treat New Target as a disregarded entity), Midco claims a credit under section 902 for the foreign income tax imposed on the asset sale when New Target pays a dividend.

The transaction described above does not produce the tax benefits claimed by Midco. The transaction is intended to shift the foreign tax credits to Midco through the purported acquisition of assets that, when sold pursuant to a prearranged plan, triggers a foreign tax on built-in gain that is not subject to U.S. tax. The tax benefits purportedly derived from the transaction by Midco are inconsistent with the purposes of the foreign tax credit provisions, including the foreign tax credit limitation of section 904, which are intended to reduce or eliminate double taxation of income.

The Service will challenge the purported tax results to Midco of the transaction described in this notice by applying principles of existing law. See Notice 2001-16, 2001-1 C.B. 730 (announcing that the Service may challenge the purported tax consequences of a purported sale of stock to a tax-indifferent intermediary corporation that then purports to sell the target’s assets). For example, the Service may challenge the purported tax results to Midco under the step transaction doctrine or the substance over form doctrine. “A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title. To permit the true nature of a transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.” Commissioner v. Court Holding Co., 324 U.S. 331, 334 (1945) (citations omitted). Cf. Aiken Industries, Inc. v. Commissioner, 56 T.C. 925 (1971) (treating interest payments to a conduit entity as paid directly to the beneficial owner). Accordingly, Midco would not be treated for U.S. tax purposes as having purchased the stock of Target. The Service also may challenge the purported tax results to Midco of this transaction under the provisions of section 269 applicable to acquisitions made with the principal purpose of evading or avoiding income tax, or by applying agency principles to disregard Midco’s ownership of Target.

Transactions that are the same as, or substantially similar to, the transaction described in this notice are identified as “listed transactions” for purposes of § 1.6011-4(b)(2), § 301.6111-2(b)(2), and § 301.6112-1(b)(2) effective February 17, 2004, the date this notice was released to the public. In addition, independent of their classification as “listed transactions” for purposes of §§ 1.6011-4(b)(2), 301.6111-2(b)(2), and 301.6112-1(b)(2), transactions that are the same as, or substantially similar to, the transaction described in this notice may already be subject to the disclosure requirements of section 6011 (§ 1.6011-4), the tax shelter registration requirements of section 6111 (§ 301.6111-1T and § 301.6111-2), or the list maintenance requirements of section 6112 (§ 301.6112-1). For purposes of the disclosure requirements of section 6011, only a taxpayer that acted as an intermediary (i.e., Midco) in the listed transaction described in this notice will be considered to have participated in the transaction within the meaning of § 1.6011-4(c)(3). No inference is intended, however, as to whether the other parties to such a transaction have participated in a transaction that is the same as or substantially similar to the transactions described in Notice 2001-16. Persons who are required to register these tax shelters under section 6111 but have failed to do so may be subject to the penalty under section 6707(a). Persons who are required to maintain lists of investors under section 6112 but have failed to do so (or who fail to provide those lists when requested by the Service) may be subject to the penalty under section 6708(a). In addition, the Service may impose penalties on parties involved in these transactions or substantially similar transactions, including the accuracy-related penalty under section 6662.

The principal author of this notice is Ginny Chung of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact Ms. Chung at (202) 622-3850 (not a toll-free call).

This notice informs (1) state and local housing credit agencies that allocate low-income housing tax credits under § 42 of the Internal Revenue Code and (2) states and other issuers of tax-exempt private activity bonds under § 141, of the proper population figures to be used for calculating the 2004 calendar year population-based component of the state housing credit ceiling (Credit Ceiling) under § 42(h)(3)(C)(ii), the 2004 calendar year volume cap (Volume Cap) under § 146, and the 2004 volume limit (Volume Limit) under § 142(k)(5).

The population figures both for the population-based component of the Credit Ceiling and for the Volume Cap are determined by reference to § 146(j). That section provides generally that determinations of population for any calendar year are made on the basis of the most recent census estimate of the resident population of a state (or issuing authority) released by the Bureau of the Census before the beginning of such calendar year. Section 142(k)(5) provides that the Volume Limit is based on the State population.

The population-based component of the Credit Ceiling and the Volume Cap are adjusted for inflation pursuant to §§ 42(h)(3)(H) and 146(d)(2), respectively. The adjustments for the 2004 calendar year were published in Rev. Proc. 2003-85, 2003-49 I.R.B. 1184. Section 3.07 of Rev. Proc. 2003-85 provides that, for calendar years beginning in 2004, the amounts used under § 42(h)(3)(C)(ii) to calculate the Credit Ceiling is the greater of $1.80 multiplied by the State population (see the resident population figures provided below) or $2,075,000. Further, section 3.15 of Rev. Proc. 2003-85 provides that the amounts used under § 146(d)(1) to calculate the Volume Cap for calendar year 2004 is the greater of $80 multiplied by the State population (see the resident population figures provided below) or $233,795,000.

The proper population figures for calculating the Credit Ceiling, the Volume Cap, and the Volume Limit for the 2004 calendar year are the estimates of the resident population of the 50 states, the District of Columbia, and Puerto Rico released by the Bureau of the Census on December 18, 2003, in Press Release CB03-197. The proper population figures for calculating the Credit Ceiling, the Volume Cap, and the Volume Limit for the 2004 calendar year for the insular areas (American Samoa, Guam, Northern Mariana Islands, and U.S. Virgin Islands) are the figures released electronically by the Bureau of the Census on July 17, 2003, and referenced in Census Bureau Tip Sheet TP03-14, dated July 11, 2003. For convenience, these estimates are reprinted below.

The principal authors of this notice are Christopher J. Wilson, Office of the Associate Chief Counsel (Passthroughs and Special Industries) and Timothy L. Jones, Office of the Division Counsel/Associate Chief Counsel (Tax-Exempt and Government Entities). For further information regarding this notice, contact Mr. Wilson at (808) 539-2874 or Susan Reaman at (202) 622-3040 (not toll-free calls).

The following organizations have failed to establish or have been unable to maintain their status as public charities or as operating foundations. Accordingly, grantors and contributors may not, after this date, rely on previous rulings or designations in the Cumulative List of Organizations (Publication 78), or on the presumption arising from the filing of notices under section 508(b) of the Code. This listing does not indicate that the organizations have lost their status as organizations described in section 501(c)(3), eligible to receive deductible contributions.

Former Public Charities. The following organizations (which have been treated as organizations that are not private foundations described in section 509(a) of the Code) are now classified as private foundations:

If an organization listed above submits information that warrants the renewal of its classification as a public charity or as a private operating foundation, the Internal Revenue Service will issue a ruling or determination letter with the revised classification as to foundation status. Grantors and contributors may thereafter rely upon such ruling or determination letter as provided in section 1.509(a)-7 of the Income Tax Regulations. It is not the practice of the Service to announce such revised classification of foundation status in the Internal Revenue Bulletin.