The Sixteenth Annual Institute on Current Issues in International Taxation jointly sponsored by the Internal Revenue Service and the George Washington University Law School, will be held on December 11 and 12, 2003, at the J. W. Marriott Hotel in Washington, DC.

This announcement delays the implementation of rolling renewals applicable to enrolled agents, whose social security numbers end with 0, 1, 2, or 3, under section 10.6(d)(1) of the Regulations Governing Practice Before the Internal Revenue Service, Treasury Department Circular No. 230, 31 CFR part 10.

2003 base period T-bill rate. The “base period T-bill rate” for the period ending September 30, 2003, is published as required by section 995(f) of the Code.

Work Opportunity Tax Credit (WOTC). This ruling concerns the eligibility criteria for the Work Opportunity Tax Credit. The ruling clarifies that an individual whose family receives assistance for the requisite period meets the requirements to be certified as a qualified IV-A recipient under section 51(d)(2)(A) of the Code if the individual is included on the grant (and thus receives assistance) for some portion of the specified period.

Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 1274, 1288, and other sections of the Code, tables set forth the rates for November 2003.

Retirement plans; year 2004 section 415(d) limitations. This notice sets forth certain cost-of-living adjustments effective January 1, 2004, applicable to the dollar limits on benefits under qualified defined benefit pension plans and to other provisions affecting (1) certain plans of deferred compensation and (2) “control employees.”

This procedure provides instructions for establishing exemption from the section 4371 foreign insurance excise tax under certain United States income tax treaties. Rev. Proc. 92-39 superseded in part.

Dutch agreement on MAP Administrative Arrangements. A copy of the news release issued by the Director, International (U.S. Competent Authority), on October 7, 2003 (IR-2003-116), is set forth.

Automobile owners and lessees. This procedure provides owners and lessees of passenger automobiles (including trucks, vans, and electric automobiles) with tables detailing the limitations on depreciation deductions for passenger automobiles first placed in service during calendar year 2003 and the amounts to be included in income for passenger automobiles first leased during calendar year 2003. Separate tables are provided for passenger automobiles qualifying for additional first-year bonus depreciation under section 168(k). In addition, this procedure provides the maximum allowable value of employer-provided automobiles first made available to employees for personal use in calendar year 2003 for which the vehicle cents-per-mile valuation rule provided under section 1.61-21(e) of the regulations may be applicable. Rev. Procs. 2001-19 and 2002-14 amplified.

Annual accounting periods; partnerships; S corporations. Procedures are provided under which partners or shareholders of S corporations may elect, under certain circumstances, to take into account ratably over four taxable years the partner's or S corporation shareholder's share of income from the partnership or S corporation that is attributable to a short taxable year ending on or after May 10, 2002, but before June 1, 2004. Rev. Procs. 2002-38 and 2002-39 modified.

Per diem allowances. This procedure provides rules for deeming substantiated the amount of certain reimbursed traveling expenses of an employee as well as optional rules for determining the amount of deductible meals and incidental expenses while traveling away from home. Rev. Proc. 2002-63 superseded.

This procedure provides issuers of qualified mortgage bonds, as defined in section 143(a) of the Code, and issuers of mortgage credit certificates, as defined in section 25(c), with a list of qualified census tracts for the Northern Mariana Islands, American Samoa, and Guam. The qualified census tracts are based on data from the 2000 census. Rev. Proc. 2003-49 supplemented.

This document contains corrections to final regulations (T.D. 9083, 2003-40 I.R.B. 700) that relate to the treatment of golden parachute payments under section 280G of the Code.

Does an individual whose family receives assistance for the requisite period meet the requirements to be certified as a qualified IV-A recipient under section 51(d)(2)(A) of the Internal Revenue Code (Code) if the individual is included on the grant (and receives assistance) for less than the specified period?

Situation 1. H and W, a married couple, lived together with their children until March 1, 2002, when H moved away and established a new residence for himself. On March 25, 2002, W applied for Temporary Assistance for Needy Families (TANF) payments for herself and her children, and TANF payments began on April 1, 2002. On January 1, 2003, H returned to live with W and their children. H obtained employment on January 10, 2003 (the hiring date). H was not included on the grant at any time prior to the hiring date.

Situation 2. The facts are the same as in Situation 1, except that H was included on W's TANF grant effective February 1, 2003, and did not obtain employment until February 10, 2003 (the hiring date).

Situation 3. H and W, a married couple, lived together with their children. On August 25, 2001, H and W applied for TANF payments for themselves and their children, and TANF payments began on September 1, 2001. In November 2001, H moved away and established a new residence for himself. H was removed from the grant effective December 1, 2001. W and the children continued to receive TANF payments through December 2002. H obtained employment on August 1, 2002 (the hiring date).

Situation 4. H and W, a married couple, lived together with their children, S and D. On January 10, 2002, H and W applied for TANF payments for themselves, S, and D. TANF payments began on February 1, 2002. S's 18^th birthday was on March 15, 2002. S was removed from the grant effective April 1, 2002. H, W, and D continued to receive TANF payments through December 2002. S obtained employment on December 15, 2002 (the hiring date).

In each of the situations, the state makes monthly TANF payments prospectively on the first day of the month.

Under section 51 of the Code, an employer who hires an individual belonging to one of nine targeted groups may be entitled to a credit equal to 40 percent of qualified first-year wages for the taxable year.

Section 51(d) of the Code lists the targeted groups and defines each of them. An individual who is a qualified IV-A recipient is a member of a targeted group. Section 51(d)(2)(A) defines a “qualified IV-A recipient” as an individual who is certified by the designated local agency (state employment security agency) as being a member of a family receiving assistance under a IV-A program for any 9 months during the 18-month period ending on the hiring date. Section 51(d)(2)(B) defines a “IV-A program” as any program providing assistance under a state program funded under part A of title IV of the Social Security Act (now Temporary Assistance for Needy Families Block Grants for States; formerly Aid for Families with Dependent Children) and any successor of such program.

Before the amendment of section 51(d) by the Small Business Job Protection Act of 1996, the corresponding targeted group was limited to individuals who were certified as "being eligible for financial assistance under part A of title IV of the Social Security Act and as having continually received such financial assistance during the 90-day period which immediately precedes the [hiring date]. . . ." Section 51(d)(9) as in effect for workers hired before October 1, 1996.

In its explanation of the amendment of section 51(d) by the Small Business Job Protection Act of 1996, the Senate Finance Committee described a qualified IV-A recipient as follows:

S. Rep. No. 104-291, 104^th Cong., 2d Sess. 33-34 (1996).

The language above does not reflect the amendment of section 51(d) by the Taxpayer Relief Act of 1997, Pub.L. No. 105-34, § 603(b)(1) (1997). The Taxpayer Relief Act replaced the requirement that the family receive assistance for a period of at least nine months part of which is during the nine-month period ending on the hiring date with the current requirement that the family receive assistance for “any nine months during the 18-month period ending on the hiring date.”

The 1996 amendment of section 51(d) and the legislative history evidence a clear intent to eliminate the requirement that a IV-A recipient receive assistance for the entire period specified. The corresponding targeted group before the 1996 amendment was explicitly limited to individuals who continually received assistance during a specified period. There is no such limitation in the definition of a qualified IV-A recipient; instead, a qualified IV-A recipient is required only to be a member of a family that receives assistance during the specified period.

Neither section 51(d) nor the legislative history specifies the persons who are members of the family receiving assistance. In the absence of other guidance, it is appropriate to look to the TANF rules to determine who is a family member. Thus, if an individual receives assistance under TANF as a member of a family, even if only for a day, the individual will be treated as a member of the family for purposes of section 51(d)(2)(A). Conversely, if the individual never receives assistance under TANF as a member of a family, the individual will not be treated as a member of the family for such purposes.

Accordingly, if the family receives assistance for the required period, and the individual is included on the grant for some portion of the period, the individual is a qualified IV-A recipient.

In Situation 1, H was not included on the family's TANF grant for any month and is therefore not a qualified IV-A recipient.

In Situation 2, the family received assistance for at least 9 months during the 18-month period ending on the hiring date and H was included on the grant for part of the period during which the family received assistance. Accordingly, H is a qualified IV-A recipient.

In Situation 3, H's hiring date was August 1, 2002. The 18-month period ending on the hiring date began February 2, 2001. The family received assistance for at least 9 months during the 18-month period ending on the hiring date, and H was included on the grant for part of the period during which the family received assistance. Thus, H is a qualified IV-A recipient.

In Situation 4, the family received assistance for at least 9 months during the 18-month period ending on the hiring date and S was included on the grant for part of the period during which the family received assistance. Accordingly, S is a qualified IV-A recipient.

An individual whose family receives assistance for the requisite period meets the requirements to be certified as a qualified IV-A recipient under section 51(d)(2)(A) of the Code if the individual is included on the grant (and thus receives assistance) for some portion of the specified period.

The principles of this revenue ruling also apply for purposes of determining whether an individual meets the corresponding family membership requirements to be certified as a qualified veteran under section 51(d)(3)(A), a qualified food stamp recipient under section 51(d)(8)(A), or a long-term family assistance recipient under section 51A(c)(1)(A).

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

Section 995(f)(1) of the Internal Revenue Code provides that a shareholder of a DISC shall pay interest each taxable year in an amount equal to the product of the shareholder's DISC-related deferred tax liability for the year and the “base period T-bill rate.” Under section 995(f)(4), the base period T-bill rate is the annual rate of interest determined by the Secretary to be equivalent to the average of the 1-year constant maturity Treasury yields, as published by the Board of Governors of the Federal Reserve System, for the 1-year period ending on September 30 of the calendar year ending with (or of the most recent calendar year ending before) the close of the taxable year of the shareholder. The base period T-bill rate for the period ending September 30, 2003, is 1.30 percent.

Pursuant to section 6222 of the Code, interest must be compounded daily. The table below provides factors for compounding the base period T-bill rate daily for any number of days in the shareholder's taxable year (including a 52-53 week accounting period) for the 2003 base period T-bill rate. To compute the amount of the interest charge for the shareholder's taxable year, multiply the amount of the shareholder's DISC-related deferred tax liability (as defined in section 995(f)(2)) for that year by the base period T-bill rate factor corresponding to the number of days in the shareholder's taxable year for which the interest charge is being computed. Generally, one would use the factor for 365 days. One would use a different factor only if the shareholder's taxable year for which the interest charge being determined is a short taxable year, if the shareholder uses the 52-53 week taxable year, or if the shareholder's taxable year is a leap year.

For the base period T-bill rates for the periods ending in prior years, see Rev. Rul. 2002-68, 2002-2 C.B. 808, Rev. Rul. 2001-56, 2001-2 C.B. 500, and Rev. Rul. 2000-52, 2000-2 C.B. 516.

The principal author of this revenue ruling is David Bergkuist of the Office of the Associate Chief Counsel (International). For further information about this revenue ruling, contact Mr. Bergkuist at

This revenue ruling provides various prescribed rates for federal income tax purposes for November 2003 (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.

Following is a copy of the News Release issued by the Director, International (U.S. Competent Authority), on October 7, 2003 (IR-2003-116).

IR-2003-116, Oct. 7, 2003

The text of the Agreement is as follows:

The competent authorities of the Netherlands and the United States hereby enter into an agreement under the Mutual Agreement Procedure Article (Article 29) of the Convention, with a view to the effective administration and resolution of cases conducted between them under the process. The Mutual Agreement Procedure (the “MAP”) of the Convention provides that the competent authorities of the two Contracting States shall endeavour to resolve by mutual agreement cases of taxation not in accordance with this Convention. The Netherlands and the United States are committed to assisting taxpayers in the conduct of cases under the MAP, to ensuring taxpayers know what they can expect from the competent authorities, and to making the MAP as expeditious and effective as possible.

Particular areas in which MAP cases arise include, but are not limited to:

In these and other areas of difficulties and doubts arising as to the interpretation or application of the Convention, the Netherlands and the United States are committed to promoting and supporting domestic initiatives and programs designed to assist taxpayers and to helping taxpayers in avoiding or resolving disputes which might arise.

These Arrangements set out certain objectives and practices the Netherlands and the United States will adopt in dealing with cases under the MAP of the Convention with a view to ensuring taxation in accordance with the Convention.

The Netherlands and the United States agree that requests presented under Article 29 of the Convention shall be dealt with as expeditiously as possible. The objective is to resolve cases accepted for consideration by the competent authorities within 18 months from transmittal of a position paper by one Contracting State to the other, excluding time during which the issues presented for competent authority consideration are under consideration by appellate or judicial authorities where permitted under applicable national procedures.

In order to ensure timely progress in the procedure, the competent authority of the country that made the adjustment (the “relevant competent authority”) will endeavour to deliver a position paper to its counterpart (the “responding competent authority”) within 120 days of acceptance of a case from a taxpayer. The case will be discussed without a written response unless such a response is needed to facilitate substantive discussion. If a written response is needed in a case concerning attribution of profits or transfer pricing adjustments under Article 7 or 9 of the Convention, the responding competent authority will endeavor to provide a position paper within 240 days after receipt of the first position paper. In all other cases in which a written response is needed, the responding competent authority will endeavor to deliver a position paper within 120 days of receipt of the first position paper. In cases of Advance Pricing Agreements or Arrangements, the competent authorities will endeavor to agree upon a joint target timetable for each stage of the consideration, with the aim of securing Mutual Agreements within a similar overall timeframe, taking into account the complexities of the particular cases involved.

The Netherlands and the United States agree that, in law, the negotiation of a MAP is a government-to-government process. A taxpayer has no legal right to attend negotiations between the competent authorities or to observe the negotiations.

However, it is also recognized that the taxpayer is a key stakeholder in the MAP process. The competent authorities therefore agree that they will keep taxpayers informed about the progress of a case under the MAP and will invite them to provide such further information as may be helpful in reaching a resolution. At their discretion, they may allow information to be provided to them in a joint presentation by the taxpayer.

While the staff of the respective competent authority offices will continue to carry on the primary negotiation of cases arising under Mutual Agreement Article of the Convention, the Netherlands and the United States agree that in any case that extends beyond the applicable timeframe agreed upon above, senior officials who have not been present at the competent authority meetings when the case was discussed or otherwise been personally involved in the decision making on the case will undertake a review of the case to ensure that all appropriate action is being taken to facilitate resolution of the matter.

The Netherlands and the United States will upon request also seek to resolve the issue for subsequent taxable periods, to the extent permitted under their respective national procedures.

It is understood that where the competent authorities are endeavoring to resolve a case pursuant to Article 29 of the Convention, the Netherlands and the United States generally will not seek to collect the tax in dispute until the mutual agreement procedure has been completed. Any tax that is due upon the completion of the mutual agreement procedure shall, however, be subject to interest charges, and, if appropriate, surcharges or penalties, to the extent provided by applicable national law. Any tax that is refunded upon completion of the mutual agreement procedure will be subject to interest payable on refunds, to the extent provided by applicable national law.

The Netherlands and the United States are committed to ensuring confidentiality concerning taxpayer information, under the Convention and their respective laws.

The Netherlands and the United States agree to meet at least twice a year to conduct face-to-face discussions. Interim meetings and other communications also will be conducted as necessary in an effort to resolve cases.

The Netherlands and the United States have agreed to publish these Arrangements to assist taxpayers in understanding and making full and appropriate use of the MAP in the Convention. The Arrangements will be reviewed from time to time.

Section 415 of the Internal Revenue Code (the Code) provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415 also requires that the Commissioner annually adjust these limits for cost-of-living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments. Many of the limitations will change for 2004. For most of the limitations, the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. Furthermore, several of these limitations, set by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), are scheduled to increase at the beginning of 2004. For example, under EGTRRA, the limitation under § 402(g)(1) of the Code on the exclusion for elective deferrals described in § 402(g)(3) is increased from $12,000 to $13,000. This limitation affects elective deferrals to § 401(k) plans and to the Federal Government's Thrift Savings Plan, among other plans.

Effective January 1, 2004, the limitation on the annual benefit under a defined benefit plan under § 415(b)(1)(A) is increased from $160,000 to $165,000. For participants who separated from service before January 1, 2004, the limitation for defined benefit plans under § 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2003, by 1.0220.

The limitation for defined contribution plans under § 415(c)(1)(A) is increased from $40,000 to $41,000.

The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of § 415(b)(1)(A). These dollar amounts and the adjusted amounts are as follows:

The Code, as amended by EGTRRA, specifies the applicable dollar amount for a particular year for certain limitations. These applicable dollar amounts are as follows:

Administrators of defined benefit or defined contribution plans that have received favorable determination letters should not request new determination letters solely because of yearly amendments to adjust maximum limitations in the plans.

The principal author of this notice is John Heil of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding the data in this notice, please contact the Employee Plans' taxpayer assistance telephone service at 1-877-829-5500 (a toll-free call) between the hours of 8 a.m. and 6:30 p.m. Eastern time Monday through Friday. For information regarding the methodology used at arriving at the data in this notice, please contact Mr. Heil at 1-202-283-9888 (not a toll-free call).

01. This revenue procedure provides: (1) limitations on depreciation deductions for owners of passenger automobiles first placed in service by the taxpayer during calendar year 2003, including special tables of limitations on depreciation deductions for trucks and vans, and for passenger automobiles designed to be propelled primarily by electricity and built by an original equipment manufacturer (electric automobiles); (2) the amounts to be included in income by lessees of passenger automobiles first leased by the taxpayer during calendar year 2003, including a separate table of inclusion amounts for lessees of trucks and vans, and a separate table for lessees of electric automobiles; and (3) the maximum allowable value of employer-provided passenger automobiles first made available to employees for personal use in calendar year 2003 for which the vehicle cents-per-mile valuation rule provided under § 1.61-21(e) of the Income Tax Regulations may be applicable.

02. This revenue procedure also provides: (1) tables of dollar limitations on depreciation deductions for owners of passenger automobiles to which the additional 30 percent first-year allowance for depreciation available under § 168(k)(1)(A) applies, including special tables of limitations on depreciation deductions for qualifying trucks and vans and for qualifying electric automobiles; (2) tables of dollar limitations on depreciation deductions for owners of passenger automobiles to which the additional 50 percent first-year allowance for depreciation available under § 168(k)(4) applies, including special tables of limitations on depreciation deductions for qualifying trucks and vans and for qualifying electric automobiles; and (3) revised tables of dollar limitations for passenger automobiles and electric automobiles that were placed in service by the taxpayer during 2001 and 2002 and to which the additional 30 percent first-year allowance for depreciation available under § 168(k)(1)(A) applies. For purposes of these tables, the additional 30 percent or 50 percent first-year allowance does not apply if the taxpayer has elected under § 168(k)(2)(C)(iii) not to take the additional allowance. Similarly, the additional 50 percent first-year allowance does not apply if the taxpayer has elected under § 168(k)(4)(E) to take the additional 30 percent allowance instead of the additional 50 percent allowance.

03. The tables detailing these depreciation limitations and lessee inclusion amounts reflect the automobile price inflation adjustments required by § 280F(d)(7). The maximum allowable passenger automobile value for applying the vehicle cents-per-mile valuation rule reflects the automobile price inflation adjustment of § 280F(d)(7) of the Internal Revenue Code, as required by § 1.61-21(e)(1)(iii)(A).

01. For owners of passenger automobiles, § 280F(a) imposes dollar limitations on the depreciation deduction for the year that the passenger automobile is placed in service by the taxpayer and each succeeding year. In the case of electric automobiles placed in service after August 5, 1997, and before January 1, 2005, § 280F(a)(1)(C) requires tripling of these limitation amounts. Section 280F(d)(7) requires the amounts allowable as depreciation deductions to be increased by a price inflation adjustment amount for passenger automobiles placed in service after 1988. The method of calculating this price inflation amount for trucks and vans placed in service in or after calendar year 2003 uses a different CPI “automobile component” (the “new trucks” component) than that used in the price inflation amount calculation for other passenger automobiles (the “new cars” component), resulting in somewhat higher depreciation deductions for trucks and vans. This change reflects the higher rate of price inflation that trucks and vans have been subject to since 1988. For purposes of this revenue procedure, the term “trucks and vans” refers to passenger automobiles that are built on a truck chassis, including minivans and sport utility vehicles (SUVs) that are built on a truck chassis.

02. Section 101 of the Job Creation and Worker Assistance Act of 2002, Pub. L. No. 107-147, 116 Stat. 21 (March 9, 2002) added § 168(k) to the Code. Generally, § 168(k)(1)(A) provides an additional 30 percent first-year depreciation deduction for new property acquired by the taxpayer after September 10, 2001, and before September 11, 2004 (subsequently extended to January 1, 2005), so long as no written binding contract for the acquisition of the property existed prior to September 11, 2001. In the case of a passenger automobile to which the 30 percent additional allowance applies (other than a § 168(k)(4) passenger automobile described in section 2.03 of this revenue procedure, or a passenger automobile for which a taxpayer has made an election under § 168(k)(2)(C)(iii)), § 168(k)(2)(E) increases the first-year depreciation allowed under § 280F(a)(1)(A) by $4,600. For purposes of this revenue procedure, a passenger automobile to which the additional 30 percent first-year allowance under § 168(k)(1)(A) applies (other than a § 168(k)(4) passenger automobile described in section 2.03 of this revenue procedure, or a passenger automobile for which a taxpayer has made an election under § 168(k)(2)(C)(iii)) is referred to as a “§ 168(k)(1) passenger automobile”.

03. Section 201 of the Jobs and Growth Tax Relief Reconciliation Act of 2003, Pub. L. No. 108-27, 117 Stat. 752 (May 28, 2003) added § 168(k)(4) to the Code. Section 168(k)(4)(A)(i) provides that § 168(k)(1) is applied by substituting “50 percent” for “30 percent” for new property acquired by the taxpayer after May 5, 2003, and before January 1, 2005, so long as no written binding contract for the acquisition of the property existed prior to May 6, 2003. In the case of a passenger automobile to which the 50 percent additional allowance applies (or would apply but for an election under § 168(k)(4)(E)) and for which no election has been made under § 168(k)(2)(C)(iii), § 168(k)(4)(D) increases the first-year depreciation allowed under § 280F(a)(1)(A) by $7,650. For purposes of this revenue procedure, a passenger automobile to which the additional 50 percent first-year allowance under § 168(k)(4) applies (or would apply but for an election under § 168(k)(4)(E)) and for which no election has been made under § 168(k)(2)(C)(iii) is referred to as a “§ 168(k)(4) passenger automobile”.

04. For leased passenger automobiles, § 280F(c) requires a reduction in the deduction allowed to the lessee of the passenger automobile. The reduction must be substantially equivalent to the limitations on the depreciation deductions imposed on owners of passenger automobiles. Under § 1.280F-7(a), this reduction requires the lessees to include in gross income an inclusion amount determined by applying a formula to the amount obtained from a table. There is a table for lessees of electric automobiles, a table for lessees of trucks and vans, and a table for all other passenger automobiles. Each table shows inclusion amounts for a range of fair market values for each tax year after the passenger automobile is first leased. These tables should also be used by lessees of § 168(k)(1) passenger automobiles and § 168(k)(4) passenger automobiles.

05. For passenger automobiles (including trucks, vans, and electric automobiles) first provided by employers to employees that meet the requirements of § 1.61-21(e)(1), the value to the employee of the use of the passenger automobile may be determined under the vehicle cents-per-mile valuation rule of § 1.61-21(e). Section 1.61-21(e)(1)(iii)(A) provides that for a passenger automobile first made available after 1988 to any employee of the employer for personal use, the value of the use of the passenger automobile may not be determined under the vehicle cents-per-mile valuation rule for a calendar year if the fair market value of the passenger automobile (determined pursuant to § 1.61-21(d)(5)(i) through (iv)) on the first date the passenger automobile is made available to the employee exceeds $12,800 as adjusted by § 280F(d)(7).

01. The limitations on depreciation deductions in section 4.02(2) of this revenue procedure apply to passenger automobiles (other than leased passenger automobiles) that are placed in service by the taxpayer in calendar year 2003, and continue to apply for each tax year that the passenger automobile remains in service.

02. The tables in section 4.03 of this revenue procedure apply to leased passenger automobiles for which the lease term begins during calendar year 2003. Lessees of such passenger automobiles must use these tables to determine the inclusion amount for each tax year during which the passenger automobile is leased. See Rev. Proc. 2002-14, 2002-1 C.B. 450, for passenger automobiles first leased before January 1, 2003.

03. The maximum fair market value figure in section 4.04(2) of this revenue procedure applies to employer-provided passenger automobiles first made available to any employee for personal use in calendar year 2003. See Rev. Proc. 2002-14 for the maximum fair market value figure for passenger automobiles first made available before January 1, 2003.

04. The revised limitations on depreciation deductions in section 4.05(2) of this revenue procedure apply to § 168(k)(1) passenger automobiles placed in service by the taxpayer during 2001 and 2002. The tables in section 4.05(2) of this revenue procedure amplify both Rev. Proc. 2001-19, 2001-1 C.B. 732, and Rev. Proc. 2002-14 by providing tables for § 168(k)(1) passenger automobiles to which those revenue procedures apply.

01. In General.

(1) Limitations on Depreciation Deductions for Certain Automobiles. The limitations on depreciation deductions for passenger automobiles placed in service by the taxpayer for the first time during calendar year 2003 are found in Tables 1 through 9 in section 4.02(2) of this revenue procedure. Table 1 of this revenue procedure provides limitations on depreciation deductions for a passenger automobile (other than a truck, van, electric automobile, § 168(k)(1) passenger automobile, or § 168(k)(4) passenger automobile). Table 2 of this revenue procedure provides limitations on depreciation deductions for a § 168(k)(1) passenger automobile (other than a truck, van, or electric automobile). Table 3 of this revenue procedure provides limitations on depreciation deductions for a § 168(k)(4) passenger automobile (other than a truck, van, or electric automobile). Table 4 of this revenue procedure provides limitations on depreciation deductions for a truck or van (other than a § 168(k)(1) passenger automobile or § 168(k)(4) passenger automobile). Table 5 of this revenue procedure provides limitations on depreciation deductions for a truck or van that is a § 168(k)(1) passenger automobile. Table 6 of this revenue procedure provides limitations on depreciation deductions for a truck or van that is a § 168(k)(4) passenger automobile. Table 7 of this revenue procedure provides limitations on depreciation deductions for an electric automobile (other than a § 168(k)(1) passenger automobile or § 168(k)(4) passenger automobile). Table 8 of this revenue procedure provides limitations on depreciation deductions for an electric automobile that is a § 168(k)(1) passenger automobile. Table 9 of this revenue procedure provides limitations on depreciation deductions for an electric automobile that is a § 168(k)(4) passenger automobile.

(2) Inclusions in Income of Lessees of Passenger Automobiles. A taxpayer first leasing a passenger automobile during calendar year 2003 must determine the inclusion amount that is added to gross income using the tables in section 4.03 of this revenue procedure. The inclusion amount is determined using Table 10 in the case of a passenger automobile (other than a truck, van, or electric automobile), Table 11 in the case of a truck or van, and Table 12 in the case of an electric automobile. In addition, the procedures of § 1.280F-7(a) must be followed.

(3) Maximum Automobile Value for Using the Cents-per-mile Valuation Rule. An employer providing a passenger automobile for the first time in calendar year 2003 for the personal use of any employee may determine the value of the use of the passenger automobile by using the cents-per-mile valuation rule in § 1.61-21(e) if the fair market value of the passenger automobile does not exceed the amount specified in section 4.04(2) of this revenue procedure. If the fair market value of the passenger automobile exceeds the amount specified in section 4.04(2) of this revenue procedure, the employer may determine the value of the use of the passenger automobile under the general valuation rules of § 1.61-21(b) or under the special valuation rules of § 1.61-21(d) (Automobile lease valuation) or § 1.61-21(f) (Commuting valuation) if the applicable requirements are met.

(4) Limitations on Depreciation Deductions for Certain Passenger Automobiles Placed in Service in 2001 or 2002. Depreciation deductions with respect to § 168(k)(1) passenger automobiles placed in service during calendar year 2001 or 2002 are limited to the amounts set forth in Tables 13 through 16 of section 4.05(2) of this revenue procedure.

02. Limitations on Depreciation Deductions for Certain Automobiles.

(1) Amount of the Inflation Adjustment. Under § 280F(d)(7)(B)(i), the automobile price inflation adjustment for any calendar year is the percentage (if any) by which the CPI automobile component for October of the preceding calendar year exceeds the CPI automobile component for October 1987. The term “CPI automobile component” is defined in § 280F(d)(7)(B)(ii) as the “automobile component” of the Consumer Price Index for all Urban Consumers published by the Department of Labor (the CPI). The new car component of the CPI was 115.2 for October 1987 and 136.7 for October 2002. The October 2002 index exceeded the October 1987 index by 21.5. The Service has, therefore, determined that the automobile price inflation adjustment for 2003 for passenger automobiles (other than trucks and vans) is 18.66 percent (21.5/115.2 x 100%). This adjustment is applicable to all passenger automobiles (other than trucks and vans) that are first placed in service in calendar year 2003. The dollar limitations in § 280F(a) must therefore be multiplied by a factor of 0.1866, and the resulting increases, after rounding to the nearest $100, are added to the 1988 limitations to give the depreciation limitations applicable to passenger automobiles (other than trucks, vans, and electric automobiles) for calendar year 2003. To determine the dollar limitations applicable to an electric automobile first placed in service during calendar year 2003, the dollar limitations in § 280F(a) are tripled in accordance with § 280F(a)(1)(C) and are then multiplied by a factor of 0.1866; the resulting increases, after rounding to the nearest $100, are added to the tripled 1988 limitations to give the depreciation limitations for calendar year 2003. To determine the dollar limitations applicable to trucks and vans first placed in service during calendar year 2003, the new truck component of the CPI is used instead of the new car component. The new truck component of the CPI was 112.4 for October 1987 and 147.5 for October 2002. The October 2002 index exceeded the October 1987 index by 35.1. The Service has, therefore, determined that the automobile price inflation adjustment for 2003 for trucks and vans is 31.23 percent (35.1/112.4 x 100%). This adjustment is applicable to all trucks and vans that are first placed in service in calendar year 2003. The dollar limitations in § 280F(a) must therefore be multiplied by a factor of 0.3123, and the resulting increases, after rounding to the nearest $100, are added to the 1988 limitations to give the depreciation limitations applicable to trucks and vans.

(2) Amount of the Limitation. For passenger automobiles placed in service by the taxpayer in calendar year 2003, Tables 1 through 9 contain the dollar amount of the depreciation limitation for each tax year. Use Table 1 for passenger automobiles (other than trucks, vans, electric automobiles, § 168(k)(1) passenger automobiles, and § 168(k)(4) passenger automobiles) placed in service by the taxpayer in calendar year 2003. Use Table 2 for § 168(k)(1) passenger automobiles (other than trucks, vans, and electric automobiles) placed in service by the taxpayer in calendar year 2003. Use Table 3 for § 168(k)(4) passenger automobiles (other than trucks, vans, and electric automobiles) placed in service by the taxpayer in calendar year 2003. Use Table 4 for trucks and vans (other than § 168(k)(1) passenger automobiles and § 168(k)(4) passenger automobiles) placed in service by the taxpayer in calendar year 2003. Use Table 5 for trucks or vans that are § 168(k)(1) passenger automobiles placed in service by the taxpayer in calendar year 2003. Use Table 6 for trucks or vans that are § 168(k)(4) passenger automobiles placed in service by the taxpayer in calendar year 2003. Use Table 7 for electric automobiles (other than § 168(k)(1) passenger automobiles and § 168(k)(4) passenger automobiles) placed in service by the taxpayer in calendar year 2003. Use Table 8 for electric automobiles that are § 168(k)(1) passenger automobiles placed in service by the taxpayer in calendar year 2003. Use Table 9 for electric automobiles that are § 168(k)(4) passenger automobiles placed in service by the taxpayer in calendar year 2003.

03. Inclusions in Income of Lessees of Passenger Automobiles.

The inclusion amounts for passenger automobiles (including § 168(k)(1) passenger automobiles and § 168(k)(4) passenger automobiles) first leased in calendar year 2003 are calculated under the procedures described in § 1.280F-7(a). Lessees of passenger automobiles other than trucks, vans, and electric automobiles should use Table 10 of this revenue procedure in applying these procedures, while lessees of trucks and vans should use Table 11 of this revenue procedure and lessees of electric automobiles should use Table 12 of this revenue procedure.

04. Maximum Automobile Value for Using the Cents-per-mile Valuation Rule.

(1) Amount of Adjustment. Under § 1.61-21(e)(1)(iii)(A), the limitation on the fair market value of an employer-provided passenger automobile first made available to any employee for personal use after 1988 is to be adjusted in accordance with § 280F(d)(7). Accordingly, the adjustment for any calendar year is the percentage (if any) by which the CPI automobile component for October of the preceding calendar year exceeds the CPI automobile component for October 1987. See, section 4.02(1) of this revenue procedure. The new car component of the CPI was 115.2 for October 1987 and 136.7 for October 2002. The October 2002 index exceeded the October 1987 index by 21.5. The Service has, therefore, determined that the adjustment for 2003 is 18.66 percent (21.5/115.2 x 100%). This adjustment is applicable to all employer-provided passenger automobiles first made available to any employee for personal use in calendar year 2003. The maximum fair market value specified in § 1.61-21(e)(1)(iii)(A) must therefore be multiplied by a factor of 0.1866, and the resulting increase, after rounding to the nearest $100, is added to $12,800 to give the maximum value for calendar year 2003.

(2) The Maximum Automobile Value. For passenger automobiles first made available in calendar year 2003 to any employee of the employer for personal use, the vehicle cents-per-mile valuation rule may be applicable if the fair market value of the passenger automobile on the date it is first made available does not exceed $15,200.

05. Revised Limitation Amounts for § 168(k)(1) Passenger Automobiles Placed in Service During 2001 and 2002.

(1) Calculation of the Revised Amount. The revised depreciation limits provided in this section for § 168(k)(1) passenger automobiles (other than electric automobiles) were calculated by augmenting the existing limitations on the first year allowance in Rev. Proc. 2001-19 (for passenger automobiles placed in service in calendar year 2001) and in Rev. Proc. 2002-14 (for passenger automobiles placed in service in calendar year 2002) by $4,600. Similarly, the revised depreciation limits provided in this section for electric automobiles that are § 168(k)(1) passenger automobiles were calculated by augmenting the existing limitations on the first year allowance in Rev. Proc. 2001-19 (for electric automobiles placed in service in calendar year 2001) and in Rev. Proc. 2002-14 (for electric automobiles placed in service in calendar year 2002) by $13,800 ($4,600 tripled).

(2) Amount of the Revised Limitation. For § 168(k)(1) passenger automobiles (other than electric automobiles) placed in service by the taxpayer in calendar year 2001, Table 13 of this revenue procedure contains the revised dollar amount of the depreciation limitations for each tax year. For electric automobiles that are § 168(k)(1) passenger automobiles placed in service by the taxpayer in calendar year 2001, Table 14 of this revenue procedure contains these revised amounts. For § 168(k)(1) passenger automobiles (other than electric automobiles) placed in service by the taxpayer in calendar year 2002, Table 15 of this revenue procedure contains the revised dollar amount of the depreciation limitations for each tax year. For electric automobiles that are § 168(k)(1) passenger automobiles placed in service by the taxpayer in calendar year 2002, Table 16 of this revenue procedure contains these revised amounts.

This revenue procedure, with the exception of section 4.05, applies to passenger automobiles (other than leased passenger automobiles) that are first placed in service by the taxpayer during calendar year 2003, to leased passenger automobiles that are first leased by the taxpayer during calendar year 2003, and to employer-provided passenger automobiles first made available to employees for personal use in calendar year 2003. Section 4.05 of this revenue procedure applies to § 168(k)(1) passenger automobiles that are placed in service by the taxpayer during calendar year 2001 or 2002.

Rev. Proc. 2001-19 and Rev. Proc. 2002-14 are amplified.

The principal author of this revenue procedure is Bernard P. Harvey of the Office of the Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding the depreciation limitations and lessee inclusion amounts in this revenue procedure, contact Mr. Harvey at (202) 622-3110; for further information regarding the maximum automobile value for applying the vehicle cents-per-mile valuation rule, contact John B. Richards of the Office of the Associate Chief Counsel (Tax Exempt and Government Entities) at (202) 622-6040 (not toll-free calls).

This revenue procedure provides instructions for establishing exemption from the section 4371 excise tax on insurance premiums paid to a foreign insurer or reinsurer when the exemption is based on the provisions of an income tax treaty to which the United States is a party.

.01 Section 4371 of the Internal Revenue Code generally imposes a tax (the "insurance excise tax") on each policy of insurance or reinsurance with respect to United States risks issued by any foreign insurer or reinsurer, unless the premiums paid are taxed as income effectively connected with the conduct of a United States trade or business.

.02 Section 4374 provides that the insurance excise tax shall be paid by any person who makes, signs, issues, or sells any of the documents and instruments subject to the tax, or for whose use or benefit the same are made, signed, issued or sold.

.03 Section 46.4374-1(c) of the Excise Tax Regulations provides that the insurance excise tax shall be paid on the basis of a return. Such return shall be filed and tax remitted by the person who makes the payment of a premium to a foreign insurer or reinsurer. If the tax is not paid by the person who makes payment of a premium, the insurance excise tax shall be paid on the basis of a return by any person who makes, signs, issues or sells any of the documents or instruments subject to the tax imposed by section 4371, or for whose use or benefit such document or instrument is made, signed, issued or sold.

.04 Pursuant to income tax treaties between the United States and several countries, policies issued by a foreign insurer or reinsurer that is a resident of any of such countries may be exempt from the insurance excise tax. This revenue procedure applies to a treaty excise tax exemption that is either a qualified exemption (for example, the exemption in the treaties with Germany and France) or an exemption subject to an anti-conduit arrangement limitation (for example, the exemption in the treaty with the United Kingdom), depending on the treaty.

.01 A person otherwise required to remit the insurance excise tax on account of premiums paid to a foreign insurance or reinsurance company may consider the premiums exempt from the insurance excise tax under an income tax treaty if the premiums are paid to an insurer or reinsurer that is a resident for treaty purposes of a country with which the United States has a treaty containing an excise tax exemption and, prior to filing the return for the taxable period, such person has knowledge that there was in effect for such taxable period a closing agreement between the Internal Revenue Service and the foreign insurer or reinsurer as provided by section 3.04(2). As part of the closing agreement, the foreign insurer or reinsurer must agree to be liable as a United States taxpayer for the insurance excise tax pursuant to section 4371 et seq., subject to an applicable exemption under the relevant treaty or any other United States treaty. However, a person required to remit the excise tax may not consider the premiums exempt if prior to filing the return for the taxable period such person has knowledge that the foreign insurer or reinsurer did not qualify for benefits under the relevant treaty during the taxable period.

.02 Premiums paid on policies written by a foreign insurer or reinsurer cannot qualify for exemption from the insurance excise tax under a treaty with a qualified exemption to the extent that the risks covered by such premiums are reinsured with a person not entitled to the benefits of the relevant treaty or any other treaty that provides exemption from the insurance excise tax. Premiums paid on policies written by a foreign insurer or reinsurer cannot qualify for exemption from the insurance excise tax under a treaty with an exemption subject to an anti-conduit arrangement limitation to the extent that the premium is paid pursuant to a conduit arrangement as defined in the treaty.

.03 In addition to the requirements of sections 3.01 and 3.02, premiums paid on policies written by a foreign insurer or reinsurer cannot qualify for exemption from the insurance excise tax under a treaty to which the United States is a party unless the foreign insurer or reinsurer qualifies for benefits under the relevant treaty, including the limitation on benefits provision.

.04 A foreign insurer or reinsurer that wishes to enter into a closing agreement under this revenue procedure must:

(1) Submit the following information and documentation:

a. A statement signed under penalties of perjury that:

i. The foreign insurer or reinsurer is a resident of (name of treaty country) for purposes of the income tax treaty between the United States and (name of treaty country); and

ii. The foreign insurer or reinsurer qualifies for benefits under the Limitation on Benefits Article of the income tax treaty between the United States and (name of treaty country), accompanied by an explanation of the basis on which the foreign insurer or reinsurer so qualifies;

b. A letter of credit in the amount of $75,000. The Service may determine at any time that circumstances warrant a letter of credit in an increased amount and will notify the taxpayer if such a determination is made;

c. A completed Form SS-4 (Application for Employer Identification Number) to apply for an EIN if the applicant does not already have an EIN;

d. A list of the position titles of those persons who will be the responsible parties for performance under the closing agreement, and the names, addresses, and telephone numbers of those persons as of the date the application is submitted; and

(2) Enter into a closing agreement identical to the form set forth in Appendix A of this revenue procedure for treaties with qualified exemptions, or Appendix B of this revenue procedure for treaties with an exemption subject to an anti-conduit arrangement limitation.

.05 (1) Any foreign insurer or reinsurer wishing to enter into a closing agreement under this revenue procedure should submit a request for a closing agreement in accordance with Rev. Proc. 2003-1, 2003-1 I.R.B. 1, or any successor procedure, with the user fee stated in Appendix A of Rev. Proc. 2003-1, or any successor procedure, to the following address:

(2) The request must be accompanied by three (3) copies of the closing agreement with an original signature on each copy and the information and documentation required by section 3.04. The Internal Revenue Service will sign the closing agreement and return one (1) copy to the Taxpayer.

The Service may periodically publish in the Internal Revenue Bulletin a list of foreign insurers or reinsurers that have entered into closing agreements under this revenue procedure and also a list of foreign insurers or reinsurers whose closing agreements are terminated.

This revenue procedure is effective October 10, 2003.

Rev. Proc. 92-39, 1992-1 C.B. 860, is superceded except with respect to existing closing agreements. With respect to closing agreements in existence prior to the effective date of this revenue procedure, the Internal Revenue Service will treat a taxpayer as fully complying with the requirements of Paragraph 7(b) of a closing agreement under Rev. Proc. 92-39, Rev. Proc. 87-13, 1987-1 C.B. 596, or Rev. Proc. 84-82, 1984-2 C.B. 779 (requiring the taxpayer (i) to obtain a certificate of residency from the tax authorities in its home jurisdiction every three years, and/or (ii) to certify its eligibility for benefits under the relevant treaty on an annual basis), if such taxpayer complies with the certification of residency and entitlement to treaty benefits requirement as provided in paragraph 9 of the closing agreement set forth in Appendix A of this revenue procedure (requiring the taxpayer to certify residency and qualification for eligibility for benefits under the relevant treaty every three years and without a requirement for obtaining a certificate of residency from the tax authorities of the taxpayer's home jurisdiction).

The principal author of this revenue procedure is Karen Rennie-Quarrie of the Office of the Associate Chief Counsel (International). For further information on this procedure, call Ms. Rennie-Quarrie or Mr. W. Edward Williams at (202) 622-3880 (not a toll-free call).

Rev. Proc. 2002-38, 2002-1 C.B. 1037, and Rev. Proc. 2002-39, 2002-1 C.B. 1046, provide procedures for a partnership or S corporation to change its annual accounting period if its current taxable year no longer qualifies as a natural business year (or, for certain S corporations, an ownership taxable year). This revenue procedure provides procedures under which a partner or S corporation shareholder (within the scope of this revenue procedure) of such a partnership or S corporation may elect to take into account ratably over four taxable years the partner's or S corporation shareholder's share of income from the partnership or S corporation that is attributable to the short taxable year ending on or after May 10, 2002, but before June 1, 2004.

.01 Section 442 of the Internal Revenue Code and § 1.442-1(a) of the Income Tax Regulations generally provide that a taxpayer that wants to change its annual accounting period and use a new taxable year must obtain the approval of the Commissioner.

.02 Section 1.442-1(b)(2) provides, in relevant part, that a change in annual accounting period will be approved only where the taxpayer agrees to the Commissioner's prescribed terms, conditions, and adjustments for effecting the change.

.03 Section 1.442-1(b)(3) provides that such terms, conditions, and adjustments may include adjustments necessary to neutralize the tax effects of a substantial distortion of income that would otherwise result from the requested annual accounting period.

.04 Rev. Proc. 2002-38 provides the exclusive procedures for certain partnerships and S corporations to obtain automatic approval to adopt, change, or retain their annual accounting periods under § 442 and § 1.442-1(b). Among the provisions of Rev. Proc. 2002-38:

(1) Section 4 provides that a partnership or S corporation may secure the Commissioner's approval to adopt or change to its “required taxable year,” a “natural business year,” or an “ownership taxable year;”

(2) Section 5.04 defines a “permitted taxable year” to include a required taxable year, natural business year, or ownership taxable year;

(3) Section 5.05 provides that a partnership or S corporation establishes a natural business year by satisfying a “25-percent gross receipts test;”

(4) Section 5.06 provides generally that an S corporation shareholder that is a tax-exempt entity under § 501(a) and that is not subject to tax on any income attributable to the S corporation is disregarded for purposes of determining an ownership taxable year of the S corporation unless the S corporation is wholly-owned by such tax-exempt entity; and

(5) Sections 6.05 and 6.06 provide that if a taxpayer changes to or retains a natural business year or an ownership taxable year and that year no longer qualifies as a permitted taxable year, the taxpayer is using an impermissible annual accounting period and should change to a permitted taxable year under Rev. Proc. 2002-38 or Rev. Proc. 2002-39, whichever applies.

.05 Rev. Proc. 2002-39 provides the exclusive procedures for taxpayers, including partnerships and S corporations, that do not qualify under one of the automatic approval procedures, to obtain prior approval of the Commissioner to adopt, change, or retain their annual accounting periods under § 442 and § 1.442-1(b). Among the provisions of Rev. Proc. 2002-39:

(1) Section 5.01 provides that a request to adopt, change, or retain an annual accounting period ordinarily will be approved if the taxpayer establishes a business purpose;

(2) Section 5.02 provides that a taxpayer requesting to adopt, change, or retain an annual accounting period that is the taxpayer's natural business year has established a business purpose to the satisfaction of the Commissioner;

(3) Section 5.03 provides that a natural business year of a taxpayer may be determined under the “annual business cycle test,” the “seasonal business test,” or the “25% gross receipts test;” and

(4) Section 5.04 provides that if a partnership or S corporation changed to or retained under Rev. Proc. 2002-39 a taxable year that was its natural business year, and that taxable year no longer qualifies as a permitted taxable year, the partnership or S corporation is using an impermissible annual accounting period and should change to a permitted taxable year under Rev. Proc. 2002-38 or Rev. Proc. 2002-39, whichever applies.

.06 In the case of a partnership or S corporation that changes its taxable year to a permitted taxable year, a partner or S corporation shareholder may be required to include in gross income in a single taxable year income items and expense items from more than one taxable year of the partnership or S corporation. The Internal Revenue Service and Treasury Department have determined that it is appropriate to allow partners and S corporation shareholders within the scope of this revenue procedure to elect to spread ratably over a four-year period their share of income from the partnership's or S corporation's short taxable year.

For purposes of this revenue procedure:

.01 Share of income. The term “share of income” means a partner's or S corporation shareholder's share of “income items” that exceeds its share of “expense items” from the partnership or S corporation that are attributable to the short taxable year;

.02 Income Items and Expense Items. The terms “income items” and “expense items” have the same meaning as in § 1.702-3T(b); and

.03 Short Taxable Year. The term “short taxable year” means the short taxable year of the partnership or S corporation that is required to effect the change in annual accounting period. An initial short year following an election under section 1362(a) will not be considered a “short taxable year” for purposes of this revenue procedure.

This revenue procedure applies to a partner or S corporation shareholder, if:

.01 The partnership or S corporation has changed, or will change, its taxable year solely because either:

(1) its current taxable year no longer qualifies as a natural business year under Rev. Proc. 2002-38 or Rev. Proc. 2002-39, whichever applies; or

(2) in the case of an S corporation, its current taxable year no longer qualifies as an ownership taxable year because a tax-exempt owner is disregarded under section 5.06 of Rev. Proc. 2002-38;

.02 The partnership's or S corporation's short taxable year ends on or after May 10, 2002, but before June 1, 2004 (or, in the case of a taxpayer that uses a 52-53-week taxable year, with reference to the last day of any calendar month after April 30, 2002, and before June 1, 2004);

.03 As a consequence of the partnership or S corporation changing its taxable year to a permitted taxable year, income items and expense items from more than one taxable year of the partnership or S corporation would, but for the provisions of this revenue procedure, be includible in the income of the partner or S corporation shareholder in a single taxable year; and

.04 The partner's or S corporation shareholder's share of income items exceeds its share of expense items attributable to the short taxable year of the partnership or S corporation.

.01 A partner or S corporation shareholder within the scope of this revenue procedure may elect to take into account its share of income from the short taxable year of the partnership or S corporation ratably over a four-year period.

.02 A partner or S corporation shareholder within the scope of this revenue procedure that elects a ratable four-year spread period under this revenue procedure must apply the provisions of § 1.702-3T (b), (d), (e), (f) and (g) with the following modifications for purposes of this section:

(1) the term “partner” in §1.702-3T means any partner or S corporation shareholder within the scope of this revenue procedure;

(2) the term “partnership” includes S corporations;

(3) the term “distributive share” includes a shareholder's pro rata share of S corporation items; and

(4) references to “section 806 of the 1986 Act” should be replaced with “Rev. Proc. 2002-38 or Rev. Proc. 2002-39, whichever applies.”

A partner or S corporation shareholder within the scope of this revenue procedure that wants to elect to spread income ratably over a four-year period under this revenue procedure must make the election by:

(1) recording the appropriate ratable income amount (i.e., one quarter of its share of income) on either:

(a) a timely filed original federal income tax return for the taxable year of the partner or S corporation shareholder with or within which the partnership's or S corporation's short taxable year ends; or

(b) in the case of a partner or S corporation shareholder within the scope of this revenue procedure that wants to make the four-year spread period election, but prior to November 24, 2003, has timely filed a federal income tax return for the taxable year with or within which the partnership's or S corporation's short taxable year ends, on an appropriate amended federal income tax return that is filed on or before April 12, 2004; and

(2) attaching to the original or amended federal income tax return for the taxable year with or within which the partnership's or S corporation's short taxable year ends, and to the federal income tax returns for every other taxable year of the spread period, a completed Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request, containing an explanation in Part III similar to the following: “Election under Rev. Proc. 2003-79 to apply a ratable 4-year spread of the share of income attributable to a change in annual accounting period.”

Rev. Proc. 2002-38 and Rev. Proc. 2002-39 are modified.

The principal authors of this revenue procedure are Roy A. Hirschhorn and Jeffrey S. Marshall of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Mr. Hirschhorn or Mr. Marshall at (202) 622-4960 (not a toll-free call).

This revenue procedure updates Rev. Proc. 2002-63, 2002-2 C.B. 691, by providing rules under which the amount of ordinary and necessary business expenses of an employee for lodging, meal, and incidental expenses or for meal and incidental expenses incurred while traveling away from home will be deemed substantiated under § 1.274-5 of the Income Tax Regulations when a payor (the employer, its agent, or a third party) provides a per diem allowance under a reimbursement or other expense allowance arrangement to pay for the expenses. In addition, this revenue procedure provides an optional method for employees and self-employed individuals who pay or incur meal costs to use in computing the deductible costs of business meal and incidental expenses paid or incurred while traveling away from home. This revenue procedure also provides an optional method for use in computing the deductible costs of incidental expenses paid or incurred while traveling away from home by employees and self-employed individuals who do not pay or incur meal costs and who are not reimbursed for the incidental expenses. Use of a method described in this revenue procedure is not mandatory, and a taxpayer may use actual allowable expenses if the taxpayer maintains adequate records or other sufficient evidence for proper substantiation. This revenue procedure does not provide rules under which the amount of an employee's lodging expenses will be deemed substantiated when a payor provides an allowance to pay for those expenses but not meal and incidental expenses.

.01 Section 162(a) of the Internal Revenue Code allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Under that provision, an employee or self-employed individual may deduct expenses paid or incurred while traveling away from home in pursuit of a trade or business. However, under § 262, no portion of the travel expenses that is attributable to personal, living, or family expenses is deductible.

.02 Section 274(n) generally limits the amount allowable as a deduction under § 162 for any expense for food, beverages, or entertainment to 50 percent of the amount of the expense that otherwise would be allowable as a deduction. In the case of any expenses for food or beverages consumed while away from home (within the meaning of § 162(a)(2)) by an individual during, or incident to, the period of duty subject to the hours of service limitations of the Department of Transportation, § 274(n)(3) gradually increases the deductible percentage to 80 percent for taxable years beginning in 2008. For taxable years beginning in 2003, the deductible percentage for these expenses is 65 percent. For taxable years beginning in 2004, the deductible percentage for these expenses is 70 percent.

.03 Section 274(d) provides, in part, that no deduction shall be allowed under § 162 for any traveling expense (including meals and lodging while away from home) unless the taxpayer complies with certain substantiation requirements. Section 274(d) further provides that regulations may prescribe that some or all of the substantiation requirements do not apply to an expense that does not exceed an amount prescribed by such regulations.

.04 Section 1.274-5(g), in part, grants the Commissioner the authority to prescribe rules relating to reimbursement arrangements or per diem allowances for ordinary and necessary expenses paid or incurred while traveling away from home. Pursuant to this grant of authority, the Commissioner may prescribe rules under which such arrangements or allowances, if in accordance with reasonable business practice, will be regarded (1) as equivalent to substantiation, by adequate records or other sufficient evidence, of the amount of such travel expenses for purposes of § 1.274-5(c), and (2) as satisfying the requirements of an adequate accounting to the employer of the amount of such travel expenses for purposes of § 1.274-5(f).

.05 For purposes of determining adjusted gross income, § 62(a)(2)(A) allows an employee a deduction for expenses allowed by Part VI (§ 161 and following), subchapter B, chapter 1 of the Code, paid or incurred by the employee in connection with the performance of services as an employee under a reimbursement or other expense allowance arrangement with a payor.

.06 Section 62(c) provides that an arrangement will not be treated as a reimbursement or other expense allowance arrangement for purposes of § 62(a)(2)(A) if it—

(1) does not require the employee to substantiate the expenses covered by the arrangement to the payor, or

(2) provides the employee with the right to retain any amount in excess of the substantiated expenses covered under the arrangement.

Section 62(c) further provides that the substantiation requirements described therein shall not apply to any expense to the extent that, under the grant of regulatory authority prescribed in § 274(d), the Commissioner has provided that substantiation is not required for such expense.

.07 Under § 1.62-2(c)(1) a reimbursement or other expense allowance arrangement satisfies the requirements of § 62(c) if it meets the requirements of business connection, substantiation, and returning amounts in excess of expenses as specified in the regulations. Section 1.62-2(e)(2) specifically provides that substantiation of certain business expenses in accordance with rules prescribed under the authority of § 1.274-5(g) or 1.274-5(j) will be treated as substantiation of the amount of such expenses for purposes of § 1.62-2. Under § 1.62-2(f)(2), the Commissioner may prescribe rules under which an arrangement providing per diem allowances will be treated as satisfying the requirement of returning amounts in excess of expenses, even though the arrangement does not require the employee to return the portion of such an allowance that relates to days of travel substantiated and that exceeds the amount of the employee's expenses deemed substantiated pursuant to rules prescribed under § 274(d), provided the allowance is reasonably calculated not to exceed the amount of the employee's expenses or anticipated expenses and the employee is required to return any portion of such an allowance that relates to days of travel not substantiated.

.08 Section 1.62-2(h)(2)(i)(B) provides that if a payor pays a per diem allowance that meets the requirements of § 1.62-2(c)(1), the portion, if any, of the allowance that relates to days of travel substantiated in accordance with § 1.62-2(e), that exceeds the amount of the employee's expenses deemed substantiated for such travel pursuant to rules prescribed under § 274(d) and § 1.274-5(g) or § 1.274-5(j), and that the employee is not required to return, is subject to withholding and payment of employment taxes. See §§ 31.3121(a)-3, 31.3231(e)-1(a)(5), 31.3306(b)-2, and 31.3401(a)-4 of the Employment Tax Regulations. Because the employee is not required to return this excess portion, the reasonable period of time provisions of § 1.62-2(g) (relating to the return of excess amounts) do not apply to this portion.

.09 Under § 1.62-2(h)(2)(i)(B)(4), the Commissioner has the discretion to prescribe special rules regarding the timing of withholding and payment of employment taxes on per diem allowances.

.10 Section 1.274-5(j)(1) grants the Commissioner the authority to establish a method under which a taxpayer may elect to use a specified amount for meals paid or incurred while traveling away from home in lieu of substantiating the actual cost of meals.

.11 Section 1.274-5(j)(3) grants the Commissioner the authority to establish a method under which a taxpayer may elect to use a specified amount for incidental expenses paid or incurred while traveling away from home in lieu of substantiating the actual cost of incidental expenses.

.12 Sections 4.04(5) and 5.06 of this revenue procedure provide transition rules for the last 2 months of calendar year 2003.

.13 Section 4.05 of this revenue procedure is revised to provide a new rate for substantiating only incidental expenses for any OCONUS locality of travel.

.14 Section 5.02 of this revenue procedure contains revisions to the per diem rates for high-cost localities and for other localities for purposes of section 5.

.15 Sections 5.03 and 5.04 of this revenue procedure contain revisions to the list of high-cost localities for purposes of section 5.

.01 per diem allowance. The term “per diem allowance” means a payment under a reimbursement or other expense allowance arrangement that meets the requirements specified in § 1.62-2(c)(1) and that is —

(1) paid with respect to ordinary and necessary business expenses incurred, or which the payor reasonably anticipates will be incurred, by an employee for lodging, meal, and incidental expenses, or for meal and incidental expenses for travel away from home in connection with the performance of services as an employee of the employer,

(2) reasonably calculated not to exceed the amount of the expenses or the anticipated expenses, and

(3) paid at or below the applicable federal per diem rate, a flat rate or stated schedule, or in accordance with any other Service-specified rate or schedule.

.02 Federal per diem rate and federal M&IE rate.

(1) General rule. The federal per diem rate is equal to the sum of the applicable federal lodging expense rate and the applicable federal meal and incidental expense (M&IE) rate for the day and locality of travel.

(a) CONUS rates. The rates for localities in the continental United States (“CONUS”) are set forth in Appendix A to 41 C.F.R. ch. 301. However, in applying section 4.01, 4.02, or 4.03 of this revenue procedure, a taxpayer may continue to use the CONUS rates in effect after October 1, 2002, that the taxpayer most recently used prior to October 1, 2003, for expenses of all CONUS travel away from home that are paid or incurred during the last three months of 2003, in lieu of the GSA rates that are updated effective October 1, 2003, provided that the taxpayer consistently uses those prior rates for the last three months of 2003.

(b) OCONUS rates. The rates for localities outside the continental United States (“OCONUS”) are established by the Secretary of Defense (rates for non-foreign localities, including Alaska, Hawaii, Puerto Rico, the Northern Mariana Islands, and the possessions of the United States) and by the Secretary of State (rates for foreign localities), and are published in the per diem Supplement to the Standardized Regulations (Government Civilians, Foreign Areas) (updated on a monthly basis).

(c) Internet access to the rates. The CONUS and OCONUS rates may be found on the Internet at www.policy works.gov/perdiem.

(2) Locality of travel. The term “locality of travel” means the locality where an employee traveling away from home in connection with the performance of services as an employee of the employer stops for sleep or rest.

(3) Incidental expenses. The term “incidental expenses” has the meaning given to it in the Federal Travel Regulations, 41 C.F.R. 300-3.1 (2003). Thus, based on the current definition of “incidental expenses” in the Federal Travel Regulations, “incidental expenses” means fees and tips given to porters, baggage carriers, bellhops, hotel maids, stewards or stewardesses and others on ships, and hotel servants in foreign countries; transportation between places of lodging or business and places where meals are taken, if suitable meals cannot be obtained at the temporary duty site; and the mailing cost associated with filing travel vouchers and payment of employer-sponsored charge card billings.

.03 Flat rate or stated schedule.

(1) In general. Except as provided in section 3.03(2) of this revenue procedure, an allowance is paid at a flat rate or stated schedule if it is provided on a uniform and objective basis with respect to the expenses described in section 3.01 of this revenue procedure. Such allowance may be paid with respect to the number of days away from home in connection with the performance of services as an employee or on any other basis that is consistently applied and in accordance with reasonable business practice. Thus, for example, an hourly payment to cover meal and incidental expenses paid to a pilot or flight attendant who is traveling away from home in connection with the performance of services as an employee is an allowance paid at a flat rate or stated schedule. Likewise, a payment based on the number of miles traveled (such as cents per mile) to cover meal and incidental expenses paid to an over-the-road truck driver who is traveling away from home in connection with the performance of services as an employee is an allowance paid at a flat rate or stated schedule.

(2) Limitation. For purposes of this revenue procedure, an allowance that is computed on a basis similar to that used in computing the employee's wages or other compensation (such as the number of hours worked, miles traveled, or pieces produced) does not meet the business connection requirement of § 1.62-2(d), is not a per diem allowance, and is not paid at a flat rate or stated schedule, unless, as of December 12, 1989, (a) the allowance was identified by the payor either by making a separate payment or by specifically identifying the amount of the allowance, or (b) an allowance computed on that basis was commonly used in the industry in which the employee is employed. See § 1.62-2(d)(3)(ii).

.01 per diem allowance. If a payor pays a per diem allowance in lieu of reimbursing actual expenses for lodging, meal, and incidental expenses incurred or to be incurred by an employee for travel away from home, the amount of the expenses that is deemed substantiated for each calendar day is equal to the lesser of the per diem allowance for that day or the amount computed at the federal per diem rate (see section 3.02 of this revenue procedure) for the locality of travel for that day (or partial day, see section 6.04 of this revenue procedure).

.02 Meals and incidental expenses only per diem allowance. If a payor pays a per diem allowance only for meal and incidental expenses in lieu of reimbursing actual expenses for meal and incidental expenses incurred or to be incurred by an employee for travel away from home, the amount of the expenses that is deemed substantiated for each calendar day is equal to the lesser of the per diem allowance for that day or the amount computed at the federal M&IE rate for the locality of travel for that day (or partial day). A per diem allowance is treated as paid only for meal and incidental expenses if (1) the payor pays the employee for actual expenses for lodging based on receipts submitted to the payor, (2) the payor provides the lodging in kind, (3) the payor pays the actual expenses for lodging directly to the provider of the lodging, (4) the payor does not have a reasonable belief that lodging expenses were or will be incurred by the employee, or (5) the allowance is computed on a basis similar to that used in computing the employee's wages or other compensation (such as the number of hours worked, miles traveled, or pieces produced).

.03 Optional method for meal and incidental expenses only deduction. In lieu of using actual expenses in computing the amount allowable as a deduction for ordinary and necessary meal and incidental expenses paid or incurred for travel away from home, employees and self-employed individuals who pay or incur meal expenses may use an amount computed at the federal M&IE rate for the locality of travel for each calendar day (or partial day) the employee or self-employed individual is away from home. Such amount will be deemed substantiated for purposes of paragraphs (b)(2) and (c) of § 1.274-5, provided the employee or self-employed individual substantiates the elements of time, place, and business purpose of the travel for that day (or partial day) in accordance with those regulations. See section 6.05(1) of this revenue procedure for rules related to the application of the limitation under § 274(n) to amounts determined under this section 4.03. See section 4.05 of this revenue procedure for a method for substantiating incidental expenses that may be used by employees or self-employed individuals who do not pay or incur meal expenses.

.04 Special rules for transportation industry.

(1) In general. This section 4.04 applies to (a) a payor that pays a per diem allowance only for meal and incidental expenses for travel away from home as described in section 4.02 of this revenue procedure to an employee in the transportation industry, or (b) an employee or self-employed individual in the transportation industry who computes the amount allowable as a deduction for meal and incidental expenses for travel away from home in accordance with section 4.03 of this revenue procedure.

(2) Rates. A taxpayer described in section 4.04(1) of this revenue procedure may treat $41 as the federal M&IE rate for any CONUS locality of travel, and $46 as the federal M&IE rate for any OCONUS locality of travel. A payor that uses either (or both) of these special rates with respect to an employee must use the special rate(s) for all amounts subject to section 4.02 of this revenue procedure paid to that employee for travel away from home within CONUS and/or OCONUS, as the case may be, during the calendar year. Similarly, an employee or self-employed individual that uses either (or both) of these special rates must use the special rate(s) for all amounts computed pursuant to section 4.03 of this revenue procedure for travel away from home within CONUS and/or OCONUS, as the case may be, during the calendar year. See section 4.04(5) of this revenue procedure for transition rules.

(3) Periodic rule. A payor described in section 4.04(1) of this revenue procedure may compute the amount of the employee's expenses that is deemed substantiated under section 4.02 of this revenue procedure periodically (not less frequently than monthly), rather than daily, by comparing the total per diem allowance paid for the period to the sum of the amounts computed at the federal M&IE rate(s) for the localities of travel for the days (or partial days) the employee is away from home during the period. For example, assume an employee in the transportation industry travels away from home within CONUS on 17 days (including partial days) during a calendar month and receives a per diem allowance only for meal and incidental expenses from a payor that uses the special rule under section 4.04(2) of this revenue procedure. The amount deemed substantiated under section 4.02 of this revenue procedure is equal to the lesser of the total per diem allowance paid for the month or $697 (17 days at $41 per day).

(4) Transportation industry defined. For purposes of this section 4.04, an employee or self-employed individual is “in the transportation industry” only if the employee's or individual's work (a) is of the type that directly involves moving people or goods by airplane, barge, bus, ship, train, or truck, and (b) regularly requires travel away from home which, during any single trip away from home, usually involves travel to localities with differing federal M&IE rates. For purposes of the preceding sentence, a payor must determine that an employee or a group of employees is “in the transportation industry” by using a method that is consistently applied and in accordance with reasonable business practice.

(5) Transition rules. Under the calendar-year convention provided in section 4.04(2), a taxpayer who used the federal M&IE rates during the first 10 months of calendar year 2003 to substantiate the amount of an individual's travel expenses under sections 4.02 or 4.03 of Rev. Proc. 2002-63 may not use, for that individual, the special transportation industry rates provided in this section 4.04 until January 1, 2004. Similarly, a taxpayer who used the special transportation industry rates during the first 10 months of calendar year 2003 to substantiate the amount of an individual's travel expenses may not use, for that individual, the federal M&IE rates until January 1, 2004.

.05 Optional method for incidental expenses only deduction. In lieu of using actual expenses in computing the amount allowable as a deduction for ordinary and necessary incidental expenses paid or incurred for travel away from home, employees and self-employed individuals who do not pay or incur meal expenses for a calendar day (or partial day) of travel away from home may use, for each calendar day (or partial day) the employee or self-employed individual is away from home, an amount computed at the rate of $3 per day for any CONUS or OCONUS locality of travel. Such amount will be deemed substantiated for purposes of paragraphs (b)(2) and (c) of § 1.274-5, provided the employee or self-employed individual substantiates the elements of time, place, and business purpose of the travel for that day (or partial day) in accordance with those regulations. See section 4.03 of this revenue procedure for a method that may be used by employees or self-employed individuals who pay or incur meal expenses. The method authorized by this section 4.05 may not be used by payors that use section 4.01, 4.02 or 5.01 of this revenue procedure, or by employees or self-employed individuals who use the method described in section 4.03 of this revenue procedure. See section 6.05(4) of this revenue procedure for rules related to the application of the limitation under § 274(n) to amounts determined under this section 4.05.

.01 General rule. If a payor pays a per diem allowance in lieu of reimbursing actual expenses for lodging, meal, and incidental expenses incurred or to be incurred by an employee for travel away from home and the payor uses the high-low substantiation method described in this section 5 for travel within CONUS, the amount of the expenses that is deemed substantiated for each calendar day is equal to the lesser of the per diem allowance for such day or the amount computed at the rate set forth in section 5.02 of this revenue procedure for the locality of travel for such day (or partial day, see section 6.04 of this revenue procedure). Except as provided in section 5.06 of this revenue procedure, this high-low substantiation method may be used in lieu of the per diem substantiation method provided in section 4.01 of this revenue procedure, but may not be used in lieu of the meals only substantiation method provided in section 4.02 or 4.03 of this revenue procedure.

.02 Specific high-low rates. Except as provided in section 5.06 of this revenue procedure, the per diem rate set forth in this section 5.02 is $207 for travel to any “high-cost locality” specified in section 5.03 of this revenue procedure, or $126 for travel to any other locality within CONUS. Whichever per diem rate applies, it is applied as if it were the federal per diem rate for the locality of travel. For purposes of applying the high-low substantiation method and the § 274(n) limitation on meal expenses (see section 6.05 of this revenue procedure), the federal M&IE rate shall be treated as $46 for a high-cost locality and $36 for any other locality within CONUS.

.03 High-cost localities. The following localities have a federal per diem rate of $167 or more, and are high-cost localities for all of the calendar year or the portion of the calendar year specified in parenthesis under the key city name, except as provided in section 5.06 of this revenue procedure:

.04 Changes in high-cost localities. The list of high-cost localities in section 5.03 of this revenue procedure differs from the list of high-cost localities in section 5.03 of Rev. Proc. 2002-63.

(1) The following localities (listed by key cities) have been added to the list of high-cost localities: Naples, Florida; and Coeur d'Alene, Idaho.

(2) The portion of the year for which the following are high-cost localities (listed by key city) has been changed: Santa Monica, California; and King of Prussia/Ft. Washington/Bala Cynwyd, Pennsylvania.

(3) The following localities have been removed from the list of high-cost localities: San Mateo/Redwood City, California; Sunnyvale/Palo Alto/San Jose, California; Ogden/Layton/Davis County, Utah; Provo, Utah; and Salt Lake City, Utah.

(4) The borough of Brooklyn is now separately listed as a high-cost locality and is no longer combined with the boroughs of The Bronx and Queens.

.05 Specific limitation.

(1) Except as provided in section 5.05(2) of this revenue procedure, a payor that uses the high-low substantiation method with respect to an employee must use that method for all amounts paid to that employee for travel away from home within CONUS during the calendar year. See section 5.06 of this revenue procedure for transition rules.

(2) With respect to an employee described in section 5.05(1) of this revenue procedure, the payor may reimburse actual expenses or use the meals only per diem method described in section 4.02 of this revenue procedure for any travel away from home, and may use the per diem substantiation method described in section 4.01 of this revenue procedure for any OCONUS travel away from home.

.06 Transition rules. A payor who used the substantiation method of section 4.01 of Rev. Proc. 2002-63 for an employee during the first 10 months of calendar year 2003 may not use the High-Low Substantiation Method in section 5 of this revenue procedure for that employee until January 1, 2004. A payor who used the High-Low Substantiation Method of section 5 of Rev. Proc. 2002-63 for an employee during the first 10 months of calendar year 2003 must continue to use the High-Low Substantiation Method for the remainder of calendar year 2003 for that employee. A payor described in the previous sentence may use the rates and high-cost localities published in section 5 of Rev. Proc. 2002-63, in lieu of the updated rates and high-cost localities provided in section 5 of this revenue procedure, for travel on or after November 1, 2003, and before January 1, 2004, if those rates and localities are used consistently during this period for all employees reimbursed under this method.

.01 In general. The federal per diem rate and the federal M&IE rate described in section 3.02 of this revenue procedure for the locality of travel will be applied in the same manner as applied under the Federal Travel Regulations, 41 C.F.R. Part 301-11 (2003), except as provided in sections 6.02 through 6.04 of this revenue procedure.

.02 Federal per diem rate. A receipt for lodging expenses is not required in determining the amount of expenses deemed substantiated under section 4.01 or 5.01 of this revenue procedure. See section 7.01 of this revenue procedure for the requirement that the employee substantiate the time, place, and business purpose of the expense.

.03 Federal per diem or M&IE rate. A payor is not required to reduce the federal per diem rate or the federal M&IE rate for the locality of travel for meals provided in kind, provided the payor has a reasonable belief that meal and incidental expenses were or will be incurred by the employee during each day of travel.

.04 Proration of the federal per diem or M&IE rate. Pursuant to the Federal Travel Regulations, in determining the federal per diem rate or the federal M&IE rate for the locality of travel, the full applicable federal M&IE rate is available for a full day of travel from 12:01 a.m. to 12:00 midnight. The method described in section 6.04(1) of this revenue procedure must be used for purposes of determining the amount deemed substantiated under section 4.03 or 4.05 of this revenue procedure for partial days of travel away from home. For purposes of determining the amount deemed substantiated under section 4.01, 4.02, 4.04 or 5 of this revenue procedure for partial days of travel away from home, either of the following methods may be used to prorate the federal M&IE rate to determine the federal per diem rate or the federal M&IE rate for the partial days of travel:

(1) The rate may be prorated using the method prescribed by the Federal Travel Regulations. Currently the Federal Travel Regulations allow three-fourths of the applicable federal M&IE rate for each partial day during which the employee or self-employed individual is traveling away from home in connection with the performance of services as an employee or self-employed individual. The same ratio may be applied to prorate the allowance for incidental expenses described in section 4.05 of this revenue procedure; or

(2) The rate may be prorated using any method that is consistently applied and in accordance with reasonable business practice. For example, if an employee travels away from home from 9 a.m. one day to 5 p.m. the next day, a method of proration that results in an amount equal to two times the federal M&IE rate will be treated as being in accordance with reasonable business practice (even though only one and a half times the federal M&IE rate would be allowed under the Federal Travel Regulations).

.05 Application of the appropriate § 274(n) limitation on meal expenses. Except as provided in section 6.05(4), all or part of the amount of an expense deemed substantiated under this revenue procedure is subject to the appropriate limitation under § 274(n) (see section 2.02 of this revenue procedure) on the deductibility of food and beverage expenses.

(1) If an amount for meal and incidental expenses is computed pursuant to section 4.03 of this revenue procedure, the taxpayer must treat such amount as an expense for food and beverages.

(2) If a per diem allowance is paid only for meal and incidental expenses, the payor must treat an amount equal to the lesser of the allowance or the federal M&IE rate for the locality of travel for such day (or partial day, see section 6.04 of this revenue procedure) as an expense for food and beverages.

(3) If a per diem allowance is paid for lodging, meal, and incidental expenses, the payor must treat an amount equal to the federal M&IE rate for the locality of travel for each calendar day (or partial day) the employee is away from home as an expense for food and beverages. For purposes of the preceding sentence, if a per diem allowance for lodging, meal, and incidental expenses is paid at a rate that is less than the federal per diem rate for the locality of travel for such day (or partial day), the payor may treat an amount equal to 40 percent of such allowance as the federal M&IE rate for the locality of travel for such day (or partial day).

(4) If an amount for incidental expenses is computed under section 4.05 of this revenue procedure, none of the amount so computed is subject to limitation under § 274(n) on the deductibility of food and beverage expenses.

.06 No double reimbursement or deduction. If a payor pays a per diem allowance in lieu of reimbursing actual expenses for lodging, meal, and incidental expenses or for meal and incidental expenses in accordance with section 4 or 5 of this revenue procedure, any additional payment with respect to such expenses is treated as paid under a nonaccountable plan, is included in the employee's gross income, is reported as wages or other compensation on the employee's Form W-2, and is subject to withholding and payment of employment taxes. Similarly, if an employee or self-employed individual computes the amount allowable as a deduction for meal and incidental expenses for travel away from home in accordance with section 4.03 or 4.04 of this revenue procedure, no other deduction is allowed to the employee or self-employed individual with respect to such expenses. For example, assume an employee receives a per diem allowance from a payor for lodging, meal, and incidental expenses or for meal and incidental expenses incurred while traveling away from home. During that trip, the employee pays for dinner for the employee and two business associates. The payor reimburses as a business entertainment meal expense the meal expense for the employee and the two business associates. Because the payor also pays a per diem allowance to cover the cost of the employee's meals, the amount paid by the payor for the employee's portion of the business entertainment meal expense is treated as paid under a nonaccountable plan, is reported as wages or other compensation on the employee's Form W-2, and is subject to withholding and payment of employment taxes.

.07 Related parties. Sections 4.01 and 5 of this revenue procedure will not apply in any case in which a payor and an employee are related within the meaning of § 267(b), but for this purpose the percentage of ownership interest referred to in § 267(b)(2) shall be 10 percent.

.01 If the amount of travel expenses is deemed substantiated under the rules provided in section 4 or 5 of this revenue procedure, and the employee actually substantiates to the payor the elements of time, place, and business purpose of the travel for that day (or partial day) in accordance with paragraphs (b)(2) and (c) (other than subparagraph (2)(iii)(A) thereof) of § 1.274-5, the employee is deemed to satisfy the adequate accounting requirements of § 1.274-5(f) as well as the requirement to substantiate by adequate records or other sufficient evidence for purposes of § 1.274-5(c). See § 1.62-2(e)(1) for the rule that an arrangement must require business expenses to be substantiated to the payor within a reasonable period of time.

.02 An arrangement providing per diem allowances will be treated as satisfying the requirement of § 1.62-2(f)(2) with respect to returning amounts in excess of expenses if the employee is required to return within a reasonable period of time (as defined in § 1.62-2(g)) any portion of such an allowance that relates to days of travel not substantiated, even though the arrangement does not require the employee to return the portion of such an allowance that relates to days of travel substantiated and that exceeds the amount of the employee's expenses deemed substantiated. For example, assume a payor provides an employee an advance per diem allowance for meal and incidental expenses of $200, based on an anticipated 5 days of business travel at $40 per day to a locality for which the federal M&IE rate is $34, and the employee substantiates 3 full days of business travel. The requirement to return excess amounts will be treated as satisfied if the employee is required to return within a reasonable period of time (as defined in § 1.62-2(g)) the portion of the allowance that is attributable to the 2 unsubstantiated days of travel ($80), even though the employee is not required to return the portion of the allowance ($18) that exceeds the amount of the employee's expenses deemed substantiated under section 4.02 of this revenue procedure ($102) for the 3 substantiated days of travel. However, the $18 excess portion of the allowance is treated as paid under a nonaccountable plan as discussed in section 7.04 of this revenue procedure.

.03 An employee is not required to include in gross income the portion of a per diem allowance received from a payor that is less than or equal to the amount deemed substantiated under the rules provided in section 4 or 5 of this revenue procedure if the employee substantiates the business travel expenses covered by the per diem allowance in accordance with section 7.01 of this revenue procedure. See § 1.274-5(f)(2)(i). In addition, such portion of the allowance is treated as paid under an accountable plan, is not reported as wages or other compensation on the employee's Form W-2, and is exempt from the withholding and payment of employment taxes. See § 1.62-2(c)(2) and (c)(4).

.04 An employee is required to include in gross income only the portion of the per diem allowance received from a payor that exceeds the amount deemed substantiated under the rules provided in section 4 or 5 of this revenue procedure if the employee substantiates the business travel expenses covered by the per diem allowance in accordance with section 7.01 of this revenue procedure. See § 1.274-5(f)(2)(ii). In addition, the excess portion of the allowance is treated as paid under a nonaccountable plan, is reported as wages or other compensation on the employee's Form W-2, and is subject to withholding and payment of employment taxes. See § 1.62-2(c)(3)(ii), (c)(5), and (h)(2)(i)(B).

.05 If the amount of the expenses that is deemed substantiated under the rules provided in section 4.01, 4.02, or 5 of this revenue procedure is less than the amount of the employee's business expenses for travel away from home, the employee may claim an itemized deduction for the amount by which the business travel expenses exceed the amount that is deemed substantiated, provided the employee substantiates all the business travel expenses, includes on Form 2106, Employee Business Expenses, the deemed substantiated portion of the per diem allowance received from the payor, and includes in gross income the portion (if any) of the per diem allowance received from the payor that exceeds the amount deemed substantiated. See § 1.274-5(f)(2)(iii). However, for purposes of claiming this itemized deduction with respect to meal and incidental expenses, substantiation of the amount of the expenses is not required if the employee is claiming a deduction that is equal to or less than the amount computed under section 4.03 of this revenue procedure minus the amount deemed substantiated under sections 4.02 and 7.01 of this revenue procedure. The itemized deduction is subject to the appropriate limitation (see section 2.02 of this revenue procedure) on meal and entertainment expenses provided in § 274(n) and the 2-percent floor on miscellaneous itemized deductions provided in § 67.

.06 An employee who pays or incurs amounts for meal expenses and does not receive a per diem allowance for meal and incidental expenses may deduct an amount computed pursuant to section 4.03 of this revenue procedure only as an itemized deduction. This itemized deduction is subject to the appropriate limitation on meal and entertainment expenses provided in § 274(n) and the 2-percent floor on miscellaneous itemized deductions provided in § 67. See section 7.07 of this revenue procedure for the treatment of an employee who does not pay or incur amounts for meal expenses and does not receive a per diem allowance for incidental expenses.

.07 An employee who does not pay or incur amounts for meal expenses and does not receive a per diem allowance for incidental expenses may deduct an amount computed pursuant to section 4.05 of this revenue procedure only as an itemized deduction. This itemized deduction is subject to the 2-percent floor on miscellaneous itemized deductions provided in § 67. See section 7.06 of this revenue procedure for the treatment of an employee who pays or incurs amounts for meal expenses and does not receive a per diem allowance for meal and incidental expenses.

.08 A self-employed individual who pays or incurs meal expenses for a calendar day (or partial day) of travel away from home may deduct an amount computed pursuant to section 4.03 of this revenue procedure in determining adjusted gross income under § 62(a)(1). This deduction is subject to the appropriate limitation on meal and entertainment expenses provided in § 274(n).

.09 A self-employed individual who does not pay or incur meal expenses for a calendar day (or partial day) of travel away from home may deduct an amount computed pursuant to section 4.05 of this revenue procedure in determining adjusted gross income under § 62(a)(1).

.10 If a payor's reimbursement or other expense allowance arrangement evidences a pattern of abuse of the rules of § 62(c) and the regulations thereunder, all payments under the arrangement will be treated as made under a nonaccountable plan. Thus, such payments are included in the employee's gross income, are reported as wages or other compensation on the employee's Form W-2, and are subject to withholding and payment of employment taxes. See § 1.62-2(c)(3), (c)(5), and (h)(2).

.01 The portion of a per diem allowance, if any, that relates to the days of business travel substantiated and that exceeds the amount deemed substantiated for those days under section 4.01, 4.02, or 5 of this revenue procedure is subject to withholding and payment of employment taxes. See § 1.62-2(h)(2)(i)(B).

.02 In the case of a per diem allowance paid as a reimbursement, the excess described in section 8.01 of this revenue procedure is subject to withholding and payment of employment taxes in the payroll period in which the payor reimburses the expenses for the days of travel substantiated. See § 1.62-2(h)(2)(i)(B)(2).

.03 In the case of a per diem allowance paid as an advance, the excess described in section 8.01 of this revenue procedure is subject to withholding and payment of employment taxes no later than the first payroll period following the payroll period in which the days of travel with respect to which the advance was paid are substantiated. See § 1.62-2(h)(2)(i)(B)(3). If some or all of the days of travel with respect to which the advance was paid are not substantiated within a reasonable period of time and the employee does not return the portion of the allowance that relates to those days within a reasonable period of time, the portion of the allowance that relates to those days is subject to withholding and payment of employment taxes no later than the first payroll period following the end of the reasonable period. See § 1.62-2(h)(2)(i)(A).

.04 In the case of a per diem allowance only for meal and incidental expenses for travel away from home paid to an employee in the transportation industry by a payor that uses the rule in section 4.04(3) of this revenue procedure, the excess of the per diem allowance paid for the period over the amount deemed substantiated for the period under section 4.02 of this revenue procedure (after applying section 4.04(3) of this revenue procedure), is subject to withholding and payment of employment taxes no later than the first payroll period following the payroll period in which the excess is computed. See § 1.62-2(h)(2)(i)(B)(4).

.05 For example, assume that an employer pays an employee a per diem allowance to cover business expenses for meals and lodging for travel away from home at a rate of 120 percent of the federal per diem rate for the localities to which the employee travels. The employer does not require the employee to return the 20 percent by which the reimbursement for those expenses exceeds the federal per diem rate. The employee substantiates 6 days of travel away from home: 2 days in a locality in which the federal per diem rate is $100 and 4 days in a locality in which the federal per diem rate is $125. The employer reimburses the employee $840 for the 6 days of travel away from home (2 x (120% x $100) + 4 x (120% x $125)), and does not require the employee to return the excess payment of $140 (2 days x $20 ($120-$100) + 4 days x $25 ($150-$125)). For the payroll period in which the employer reimburses the expenses, the employer must withhold and pay employment taxes on $140. See section 8.02 of this revenue procedure.

Rev. Proc. 2002-63 is hereby superseded (except to the extent specified in sections 4.04(5) and 5.06 of this revenue procedure) for per diem allowances that are paid both (1) to an employee on or after November 1, 2003, and (2) with respect to lodging, meal, and incidental expenses or with respect to meal and incidental expenses paid or incurred for travel away from home on or after November 1, 2003. Rev. Proc. 2002-63 is also hereby superseded (except to the extent specified in section 4.04(5) of this revenue procedure) for purposes of computing the amount allowable as a deduction for meal and incidental expenses or for incidental expenses only paid or incurred by an employee or self-employed individual for travel away from home on or after November 1, 2003.

The principal author of this revenue procedure is Sameera Hasan, of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Ms. Hasan at (202) 622-4930 (not a toll-free call).

This revenue procedure supplements Rev. Proc. 2003-49, 2003-29 I.R.B. 89, and provides issuers of qualified mortgage bonds, as defined in § 143(a) of the Internal Revenue Code, and issuers of mortgage credit certificates, as defined in § 25(c) with a list of qualified census tracts for the Northern Mariana Islands, American Samoa, and Guam.

.01 Section 103(a) provides that, except as provided in § 103(b), gross income does not include interest on any State or local bond. Section 103(b)(1) provides that § 103(a) shall not apply to any private activity bond that is not a “qualified bond” within the meaning of § 141. Section 141(e) provides that the term “qualified bond” includes any private activity bond if that bond: (1) is a qualified mortgage bond; (2) meets the volume cap requirements under § 146; and (3) meets the applicable requirements under § 147.

.02 Section 143(a)(1) provides that the term “qualified mortgage bond” means a bond that is issued as part of a “qualified mortgage issue”. Section 143(a)(2)(A) provides that the term “qualified mortgage issue” means an issue by a state or political subdivision thereof of one or more bonds, but only if (i) all proceeds of the issue (exclusive of issuance costs and a reasonably required reserve) are to be used to finance owner-occupied residences; (ii) the issue meets the requirements of subsections (c), (d), (e), (f), (g), (h), (i) and (m)(7) of § 143; (iii) the issue does not meet the private business tests of paragraphs (1) and (2) of § 141(b); and (iv) with respect to amounts received more than 10 years after the date of issuance, repayments of $250,000 or more of principal on financing provided by the issue are used not later than the close of the first semi-annual period beginning after the date the prepayment (or complete repayment) is received to redeem bonds that are part of the issue.

.03 An issue of bonds meets the requirements of § 143(h)(1) only if at least 20 percent of the proceeds of the issue is made available for owner financing of “targeted area residences” for at least 1 year after the date on which owner-financing is first made available with respect to targeted area residences. Section 143(h)(2) provides, however, that the amount made available need not exceed 40 percent of the average annual aggregate principal amount of mortgages executed during the immediately preceding 3 calendar years for single-family, owner-occupied residences located in targeted areas within the jurisdiction of the issuing authority.

.04 Targeted area residences are defined in § 143(j)(1)(A) to include residences in a qualified census tract. A “qualified census tract”, according to § 143(j)(2)(A), is a census tract in which 70 percent or more of the families have income that is 80 percent or less of the statewide median family income. Section 143(j)(2)(B) provides that the determination that a census tract is a “qualified census tract” must be based on the most recent decennial census for which data are available.

.05 Section 6a.103A-2(b)(4)(ii) of the Temporary Income Tax Regulations provides that, with respect to any particular bond issue, the determination that a census tract is a “qualified census tract” may be based upon the decennial census data available 3 months prior to the date of issuance and shall not be affected by official changes to the data during or after that 3-month period.

.06 Section 143(k)(2)(A) of the Code provides that the term “statistical area” means (i) a metropolitan statistical area (“MSA”) and (ii) any county (or the portion thereof) that is not within an MSA.

.07 An MSA is currently defined as an area containing at least one urbanized area with a population of at least 50,000, plus adjacent territory having a high degree of social and economic integration with the core as measured through commuting ties. See Office of Management and Budget (“OMB”), Standards for Defining Metropolitan and Micropolitan Statistical Areas; Notice, 65 FR 249 (December 27, 2000); OMB Bulletin No. 03-04 (June 6, 2003).

.08 A state or local government may elect to exchange all or part of its qualified mortgage bond authority to issue mortgage credit certificates. Section 25(a)(1) states, in general, that the recipient of a mortgage credit certificate may claim a federal income tax credit equal to the product of the certificate credit rate and the interest paid or accrued during the tax year on the remaining principal of the certified indebtedness amount. Section 25(c)(2)(A)(iii)(V) of the Code provides that the indebtedness certified by mortgage credit certificates must meet the requirements of § 143(h) concerning the portion of loans to be placed in targeted areas.

.09 The list of qualified census tracts is developed by the Department of Housing and Urban Development (“HUD”) for publication by the Internal Revenue Service. HUD's determination is based upon decennial census data received by HUD from the Bureau of the Census.

.10 Qualified census tracts for the states, the District of Columbia, and Puerto Rico, based on the 2000 census, were most recently published in Rev. Proc. 2003-49, 2003-29 I.R.B. 89. Qualified census tracts for the Northern Mariana Islands, American Samoa, and Guam have not been published in any previous revenue procedure.

The qualified census tracts for the Northern Mariana Islands, American Samoa, and Guam as listed below are based on the 2000 census. In 2000, the Bureau of the Census provided data for all areas, not only MSAs. Thus, the list of qualified census tracts includes tracts in Block Numbering Areas in nonmetropolitan counties as well as tracts in MSAs.

This revenue procedure supplements Rev. Proc. 2003-49 by providing a list of qualified census tracts for the Northern Mariana Islands, American Samoa, and Guam.

An issuer may rely on the list of qualified census tracts set forth in this revenue procedure with respect to a commitment to provide financing, if that commitment was made during the period specified in this section, or the if purchase of the residence was made during the period specified in this section. The period begins on November 10, 2003, the date of publication of this revenue procedure in the Internal Revenue Bulletin, and ends on the date as of which the list of qualified census tracts is rendered obsolete by a new revenue procedure.

This revenue procedure is effective on November 10, 2003, the date of publication of this revenue procedure in the Internal Revenue Bulletin, and ends on the date as of which the list of qualified census tracts is rendered obsolete by a new revenue procedure.

The principal authors of this revenue procedure are Laura W. Lederman and Timothy L. Jones of the Office of Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this revenue procedure, contact Ms. Lederman at (202) 622-3980 (not a toll-free call).

Internal Revenue Service (IRS), Treasury.

Correction to final regulations.

This document contains corrections to final regulations (T.D. 9083, 2003-40 I. R.B. 700) that were published in the Federal Register on Monday, August 4, 2003 (68 FR 45745), relating to golden parachute payments under section 280G of the Internal Revenue Code.

This correction is effective August 4, 2003.

Erinn Madden (202) 622-6030 (not a toll-free number).

4. On page 45755, column 2, § 1.280G-1, paragraph (a) of A-11, line 3, the language “to receive cash, or a transfer of property” is corrected to read “to receive cash (including the value of accelerated vesting under Q/4-24(c)), or a transfer of property.”.

5. On page 45772, column 2, § 1.280G-1, A-48, line 5, the language “on or after January 1, 2004.” is corrected to read “on or after January 1, 2004. Taxpayers may rely on these regulations after August 4, 2003, for the treatment of any parachute payment.”.

The Internal Revenue Service announces the Sixteenth Annual Institute on Current Issues in International Taxation, jointly sponsored by the Internal Revenue Service and The George Washington University Law School, to be held on December 11 and 12, 2003, at the J.W. Marriott Hotel in Washington, DC. Registration is currently underway for the Institute, which is intended for international tax professionals.

The program will present a unique opportunity for top IRS and Treasury officials and tax experts, and leading private sector specialists, to address breaking issues and present key perspectives on new developments. The first day will feature sessions on the following:

The Honorable Pamela F. Olson, Assistant Secretary (Tax Policy), U.S. Department of the Treasury, will deliver the luncheon address. The day will begin with an address by the Honorable George Yin, Chief of Staff, Joint Committee on Taxation.

The second day will focus on the following topics:

Emily Parker, Acting Chief Counsel, Internal Revenue Service will deliver the luncheon address. The second day will also include an “Ask the IRS” panel featuring senior officials from the Service.

Those interested in attending or obtaining more information should contact The George Washington University Law School, at http://www.law.gwu.edu/ciit.

The Internal Revenue Service announces a delay of the implementation of the new rolling renewal schedule for enrolled agents to renew their enrollment under section 10.6(d)(1) of the Regulations Governing Practice Before the Internal Revenue Service, Treasury Department Circular No. 230, 31 CFR part 10. Under Treasury Department Circular No. 230, amended July 26, 2002, approximately one-third of all enrolled agents will renew their enrollment each year according to a rolling renewal schedule for enrollment. Except for those individuals who receive their initial enrollment after November 1, 2003, individuals licensed to practice before the Internal Revenue Service who have a social security number or tax identification number that ends with the numbers 0, 1, 2, or 3 (affected enrolled agents) are scheduled to apply for enrollment between November 1, 2003, and January 31, 2004.

To ensure an orderly transition to rolling renewals, the implementation of the new renewal of enrollment schedule for affected enrolled agents will be delayed until the 2004 calendar year. The Internal Revenue Service will publish the schedule for affected enrolled agents to apply for renewal of enrollment in the Internal Revenue Bulletin and on the Office of Professional Responsibility webpage at http://www.irs.gov/taxpros/agents/index.html
.html at least 30 calendar days prior to the beginning of the period for renewal of enrollment and no later than June 1, 2004. The period for renewal of enrollment will last at least 60 calendar days, but no more than 90 calendar days.

Affected enrolled agents should not file an application for renewal of enrollment before the period for renewal of enrollment is announced in the Internal Revenue Bulletin and on the Office of Professional Responsibility webpage. This delay will not impact an affected enrolled agent's current status as an enrolled agent in good standing. This delay will not affect the number of hours of continuing professional education required for renewal or the time period within which these hours must be completed.

The principal author of this announcement is Heather L. Dostaler of the Office of Associate Chief Counsel (Procedure and Administration). For further information regarding this announcement, contact Heather L. Dostaler at (202) 622-4940 (not a toll-free call).