Interest rates; underpayments and overpayments. The rate of interest determined under section 6621 of the Code for the calendar quarter beginning July 1, 2004, will be 4 percent for overpayments (3 percent in the case of a corporation), 4 percent for underpayments, and 6 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 1.5 percent.

Preproduction costs of creative property. This ruling provides that a taxpayer may not deduct as a loss under section 165 of the Code the costs of acquiring and developing creative property if the taxpayer does not establish an intention to abandon the property and an affirmative act of abandonment, or an identifiable event evidencing a closed and completed transaction establishing the worthlessness of the property.

State law conversion from partnership to corporation. This ruling explains the federal tax consequences when an entity classified as a partnership for federal tax purposes converts into a state law corporation under a state statute that does not require an actual transfer of the unincorporated entity’s assets or interests.

Final and temporary regulations under section 108 of the Code clarify that if a taxpayer realizes excluded COD income either during or after the taxable year in which the taxpayer is the distributor or transferor of assets for a transaction described in section 381(a), those attributes to which the acquiring corporation succeeds, including the basis of property, must reflect the reductions required by section 108(b).

Final, temporary, and proposed regulations under section 263A of the Code except interest expense incurred by a lessor in certain safe harbor leasing transactions from the requirement to capitalize interest under section 263A.

Final, temporary, and proposed regulations under section 263A of the Code except interest expense incurred by a lessor in certain safe harbor leasing transactions from the requirement to capitalize interest under section 263A.

Governmental plan; union; section 457(b). This ruling holds that a deferred compensation plan does not fail to be an eligible governmental plan under section 457(b) of the Code merely because the plan is created, offered, and administered by a union, provided adoption of the plan meets certain criteria set forth in the ruling.

Correction; section 457; Rev. Rul. 2004-57. A transition rule is set forth for a plan established before June 14, 2004, that does not satisfy the requirements of Rev. Rul. 2004-57 solely as a result of being established and maintained by a labor organization instead of being established and maintained by an eligible governmental employer.

Federal Insurance Contributions Act (FICA); options and deferred compensation transfer on divorce. This ruling concludes that nonqualified stock options and nonqualified deferred compensation transferred by an employee to a former spouse incident to a divorce are subject to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and income tax withholding to the same extent as if retained by the employee. The ruling also provides reporting requirements applicable to the wage payments. Notice 2002-31 modified.

This announcement provides the rates for various types of income under a new income tax treaty with Japan. For purposes of withholding, the treaty is generally effective July 1, 2004. The tables in this announcement can be used, depending on the effective dates, to replace the entries for Japan in Tables 1 and 2 in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities (For Withholding in 2004).

This procedure provides a safe harbor method of accounting that allows film producers to amortize certain creative property costs ratably over a period of 15 years beginning in the year the creative property costs are written off for book purposes under AICPA Statement of Position (SOP) 00-2, “Accounting for Producers or Distributors of Film.” Rev. Proc. 2002-9 modified and amplified.

Internal Revenue Service (IRS), Treasury.

Final and temporary regulations.

This document contains final regulations regarding the reduction of tax attributes under sections 108 and 1017 of the Internal Revenue Code. These final regulations affect taxpayers that realize income from the discharge of indebtedness that is excluded from gross income pursuant to section 108.

Effective Date: These final regulations are effective May 10, 2004.

Applicability Date: These final regulations apply to discharges of indebtedness occurring on or after May 10, 2004.

Theresa M. Kolish, (202) 622-7530, of the Office of Associate Chief Counsel (Corporate) (not a toll-free number).

Accordingly, 26 CFR part 1 is amended as follows:

The principal author of these regulations is Theresa M. Kolish, Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department participated in their development.

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May a taxpayer deduct the cost of acquiring and developing creative property as a loss under § 165(a) of the Internal Revenue Code in the situations described below?

X is a corporation that files returns on a calendar year basis for federal income tax purposes. X is engaged in the trade or business of producing motion pictures. As part of that trade or business, X routinely incurs costs to acquire and develop creative property such as screenplays, scripts, treatments, story outlines, motion picture production rights to books, plays, and other literary works, and similar property for purposes of potential development, production, and exploitation. The type of rights X acquires in creative property varies from property to property and may include exclusive rights of ownership or limited exploitation rights, and may include rights for the entire remaining copyright term of the property or rights for a limited period of time.

X ultimately sets for production only a small percentage of the creative property that X acquires. Most of the creative property that X sets for production is set within three years of X’s acquisition of the property. However, X does set some property for production that X has held for longer than three years. Additionally, X may sell to a third party X’s rights to a creative property not set for production. X does not discard, release to the public domain, or otherwise dispose of the creative properties not set for production or sold. Generally these properties are retained indefinitely.

In order to preserve the properties in a condition that allows for future use, X maintains facilities for storing creative property retained but not set for production. X retains these properties for various reasons, including, but not limited to, the following:

For financial accounting purposes, X applies generally accepted accounting principles (GAAP) to the cost of acquiring and developing creative property. For creative property that has not been set for production, X recognizes a loss for financial accounting purposes in the earliest of: (1) the year in which X decides not to set the property for production; (2) the year in which X sells or otherwise disposes of the property; or (3) the third year following the year in which X acquires the property.

Section 165(a) allows a deduction for any loss sustained during the taxable year and not compensated for by insurance or otherwise. Section 165(b) states that the amount of the deduction for a loss is the adjusted basis as provided in § 1011. See also § 1.165-1(c) of the Income Tax Regulations.

Section 1.165-1(b) provides that, to be allowable as a deduction under § 165(a), a loss must be evidenced by a closed and completed transaction, fixed by an identifiable event, and, except as provided in § 165(h) and § 1.165-11, actually sustained during the taxable year. Section 1.165-1(d)(1) provides that a loss is treated as sustained during the taxable year in which the loss occurs, as evidenced by a closed and completed transaction, and as fixed by an identifiable event occurring in such taxable year.

Section 1.165-2(a) allows a deduction under § 165(a) for a loss incurred in a business or in a transaction entered into for profit and arising from the sudden termination of the usefulness in such business or transaction of any nondepreciable property, when such business or transaction is discontinued or when such property is permanently discarded from use therein. Section 1.165-2(a) further provides that the taxable year in which a loss is sustained is not necessarily the taxable year in which the overt act of abandonment, or the loss of title to the property, occurs.

Section 165 losses have been referred to as abandonment losses to reflect that some act is required that evidences a taxpayer’s intent to permanently discard or discontinue use. Gulf Oil Corp. v. Commissioner, 914 F.2d 396, 402 (3d Cir. 1990). To establish the abandonment of an asset for purposes of § 165, a taxpayer must show both (1) an intention to abandon the asset, and (2) an affirmative act of abandonment. A.J. Indus., Inc. v. United States, 503 F.2d 660, 670 (9^th Cir. 1974); CRST, Inc. v. Commissioner, 92 T.C. 1249, 1257 (1989), aff’d, 909 F.2d 1146 (8^th Cir. 1990); Rev. Rul. 93-80, 1993-2 C.B. 239. A deduction is not allowable if a taxpayer intends to hold and preserve property for possible future use or to realize potential future value from the property. A.J. Indus., 503 F.2d at 670. Abandonment of an intangible property interest should be accompanied by some express manifestation. Citron v. Commissioner, 97 T.C. 200, 209 (1991). See also Echols v. Commissioner, 935 F.2d 703, 706-08 (5th Cir. 1991) (finding both an intent to abandon and an affirmative act of abandonment when taxpayers called a partnership meeting at which they tendered their 75% partnership interest to another partner, or anyone else, “gratis,” and announced that they would contribute no further funds to the partnership), reh’g denied, 950 F.2d 209 (5^th Cir. 1991).

The “identifiable event” required by § 1.165-1(b) and (d)(1) “must be observable to outsiders and constitute ‘some step which irrevocably cuts ties to the asset.’” United Dairy Farmers, Inc. v. U.S., 267 F.3d 510, 522 (6^th Cir. 2001) (quoting Corra Resources, Ltd. v. Commissioner, 945 F.2d 224, 226 (7^th Cir. 1991)). Mere non-use of an asset is not sufficient to establish an act of abandonment. Standley v. Commissioner, 99 T.C. 259, 272 (1992), aff’d without published opinion, 24 F.3d 249 (9^th Cir. 1994); Jones Beach Theatre Corp. v. Commissioner, T.C.M. 1966-100. Similarly, internal communications or decisions within a taxpayer’s organization are not sufficient affirmative acts of abandonment. See Corra Resources, 945 F.2d at 226.

A taxpayer need not relinquish legal title to property in all cases to establish abandonment, provided there is an intent to abandon and an affirmative act of abandonment. See Echols, 935 F.2d at 706; Middleton v. Commissioner, 77 T.C. 310, 322 (1981), aff’d per curiam, 693 F.2d 124 (11^th Cir. 1982). Retention of bare legal title to property does not preclude a deduction under § 165(a) in certain cases in which property has become worthless. See Helvering v. Gordon, 134 F.2d 685, 689 (4^th Cir. 1943), acq., 1951-1 C.B. 2; Rhodes v. Commissioner, 100 F.2d 966, 970 (6^th Cir. 1939); Rev. Rul. 54-581, 1954-2 C.B. 112. In such cases the courts have adopted the rule that a taxpayer may claim a loss on property without being required to divest legal title if the taxpayer does not intend to hold the property and the taxpayer proves by identifiable events that the property has become worthless. A.J. Indus., 503 F.2d at 670. The taxpayer’s conduct in regarding the property as worthless and not intending to preserve or hold it may be the practical equivalent of abandonment. See id.; Lockwood v. Commissioner, 94 TC 252, 258 (1990) (leaving master recordings on a closet shelf instead of storing in a necessary climate-controlled environment was tantamount to throwing them in the trash).

A deduction for worthlessness under § 165 is allowable only if there is a closed and completed transaction fixed by identifiable events establishing that the property is worthless in the taxable year for which the deduction is claimed. § 1.165-1(b) and (d)(1). Although the taxpayer is not required to be an “incorrigible optimist,” United States v. S.S. White Dental Manufacturing Co., 274 U.S. 398, 403 (1927), a mere diminution in the value of an asset is not sufficient to establish worthlessness. Proesel v. Commissioner, 77 T.C. 992, 1006 (1981). Assets may not be considered worthless, even when they have no liquidated value, if there is a reasonable hope and expectation that they will become valuable in the future. See Lawson v. Commissioner, 42 B.T.A. 1103, 1108 (1940); Morton v. Commissioner, 38 B.T.A. 1270, 1278 (1938), aff’d, 112 F.2d 320 (7^th Cir. 1940); Rev. Rul. 77-17, 1977-1 C.B. 44.

Abandonment and other transactions that divest the taxpayer’s title are identifiable events that support a closed and completed transaction. Additionally, identifiable events may include “other acts or events which reflect the fact that the property is worthless.” Proesel, 77 T.C. at 1005. To the extent that the transactions do not include divestitures of title or abandonment, the essential element for tax purposes is that a particular event destroyed the potential value and usefulness of the asset to the taxpayer. See Echols, 950 F.2d at 213 (partnership’s insolvency, third party developer’s default, and inability of partners to restructure the underlying debt were identifiable events that evidenced worthlessness); Corra Resources, 945 F.2d at 226-27 (loss realized in the year in which coal mining lease expired); George Freitas Dairy, Inc. v. United States, 582 F.2d 500, 502 (9^th Cir. 1978) (cancellation of production quota contract was identifiable event that evidenced the closed and completed transaction); Proesel, 77 T.C. at 998-99, 1006-07 (finding insufficient evidence of worthlessness despite unsuccessful attempts to sell or find distributor for a motion picture by contacting all major studios and major independent distributors; however, contract to produce the motion picture could have been found worthless upon settled litigation with respect to breach of contract or demonstration that litigation would be fruitless); Oak Harbor Freight Lines, Inc. v. Commissioner, T.C.M. 1999-291 (an act of Congress rendered motor carrier authorities worthless because all rights associated with the authorities were eliminated); Springfield Productions, Inc. v. Commissioner, T.C.M. 1979-23 (testimony by taxpayer’s president that film was worthless because taxpayer had unsuccessfully submitted it for sale or distribution to all major studios and small distribution companies was not substantial proof of worthlessness); Golden State Towel and Linen Service, Ltd. v. United States, 179 Ct. Cl. 300, 310 (1967) (finding that it is only when all or a substantial, identifiable, vendible portion of a customer list is terminated permanently, either through extraneous causes or the sudden and involuntary inability of the owner to serve them, that a tax loss may be claimed, and then only if the loss may be adequately measured.)

A taxpayer’s treatment of the costs of acquiring property for financial accounting purposes does not control the treatment of those costs for federal income tax purposes. See Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 542-44 (1979).

X has not performed an affirmative act of abandoning creative property merely because: (1) an X executive decides not to actively pursue the development or production of the property, see Corra Resources, 945 F.2d at 226; (2) X does not set the property for production within three taxable years of acquiring that property (notwithstanding that it is unlikely that X will ever set for production property that X retains for three years or more), see Standley, 99 T.C. at 272; and (3) X writes off for financial accounting purposes the cost of acquiring and developing the property, see Thor Power Tool, 439 U.S. at 542-44. Although the above facts may be relevant factors to consider, an affirmative act to abandon must be ascertained from all the facts and surrounding circumstances, Citron, 97 T.C. at 210. X retains creative properties for potential future exercise of ownership or other contractual rights, whether by sale or use, or to enforce those rights by preventing X’s competitors from using the property. In fact, X does sell or set for production some creative property after writing off the costs of such property for financial accounting purposes and having made a decision not to set the property for production. These facts are inconsistent with an intent to permanently abandon property and with an affirmative act of abandonment, both of which are required for an abandonment loss deduction under § 165(a).

Furthermore, X is not entitled to a worthlessness deduction in the absence of evidence of a closed and completed transaction fixed by an identifiable event establishing worthlessness. A creative property that X acquires may not be presumed worthless simply because X does not set that property for production, either by a specific internal decision or by inaction, as these are not identifiable events that irrevocably cut ties to the asset. See Corra Resources, 945 F.2d at 226. In addition, the facts indicate that the creative properties that X retains after writing off their costs for financial accounting purposes are not worthless to X. X maintains proper storage facilities for the properties, thereby preserving the properties in a condition that allows for future exercise of ownership or other contractual rights. By retaining its rights in a property, X can prevent a competitor from exploiting that property or prevent or defend against potential copyright infringement lawsuits. In some cases, X retains creative property to maintain good relations with the seller from whom X acquired the property. Finally, X retains some property in the hope that the property will have future value if the subject matter becomes more popular, if the writer becomes better known, or for various other reasons. These facts indicate that X has an intention to hold and preserve property because of a bona fide belief that the property has value due to the possibility that the property will be of future use. Thus, without an identifiable event that destroys the potential value and usefulness of the property to X, the property may not be considered worthless.

In Situation 1, an X executive’s decision in 2004 not to set script a for production, the write-off for financial accounting purposes, and the fact that the script has not been set for production by the end of 2004 do not constitute affirmative acts of abandonment of script a for purposes of § 165(a), nor are they identifiable events evidencing a closed and completed transaction establishing worthlessness. To the contrary, X’s retention of script a in order to keep the potential to exercise ownership or other contractual rights in the future is evidence that the script is not worthless. Thus, in the absence of any affirmative act of abandonment or showing of worthlessness in 2004, X may not deduct in that year as a loss under § 165(a) the cost of acquiring and developing script a.

In Situation 2, the facts do not indicate an affirmative act of abandonment or identifiable events evidencing a closed and completed transaction establishing worthlessness until 2007. X may deduct X’s adjusted basis in screenplay b under § 165(a) in 2007 because X’s rights to screenplay b expire in that year. See Rev. Rul. 81-160, 1981-1 C.B. 312. In the absence of any affirmative act of abandonment or showing of worthlessness in an earlier taxable year, X may not deduct in any earlier taxable year as a loss under § 165(a) the cost of acquiring and developing screenplay b.

In Situation 3, the facts do not indicate an affirmative act of abandonment or identifiable events evidencing a closed and completed transaction establishing worthlessness. X’s notification to A of A’s right to reacquire motion picture rights c pursuant to the contract between X and A does not constitute an affirmative act of abandonment by X of motion picture rights c for purposes of § 165(a). Rather, X is merely complying with its contractual obligations. When A declines to exercise its option, X continues to retain motion picture rights c in order to keep the potential to exercise its ownership or other contractual rights in the future. Furthermore, A’s failure to exercise the option to reacquire motion picture rights c does not establish that those rights are worthless in 2005. That A was unable to find another studio to purchase motion picture rights c at a satisfactory price is also insufficient to establish the worthlessness of motion picture rights c in 2005. See Proesel, 77 T.C. at 998-99, 1006-07. Neither of these acts is an identifiable event establishing that motion picture rights c are valueless in 2005 and without reasonable expectation of future value. X’s retention of motion picture rights c in order to keep the potential to exercise ownership or other contractual rights in the future is evidence that the script is not worthless. Thus, in the absence of any affirmative act of abandonment or showing of worthlessness in 2005, X may not deduct in that year as a loss under § 165(a) the cost of acquiring and developing motion picture rights c.

A taxpayer may not deduct the costs of acquiring and developing creative property as a loss under § 165(a) if the taxpayer does not establish an intention to abandon the property and an affirmative act of abandonment, or identifiable event(s) evidencing a closed and completed transaction establishing worthlessness.

The principal author of this revenue ruling is Joy Spies of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Ms. Spies at (202) 622-5020 (not a toll-free call).

Internal Revenue Service (IRS), Treasury.

Final and temporary regulations.

This document contains regulations relating to the capitalization of interest expense incurred in sale and leaseback transactions under the Economic Recovery Tax Act of 1981 (ERTA) safe harbor leasing provisions. The regulations affect taxpayers that provide purchase money obligations in connection with these transactions. The text of the temporary regulations also serves as the text of the proposed regulations (REG-148399-02) set forth in the notice of proposed rulemaking on this subject in this issue of the Bulletin. The final regulations consist of technical revisions to reflect the issuance of the temporary regulations.

Effective Date: These regulations are effective May 20, 2004.

Applicability Dates: For dates of applicability, see §1.263A-15T(a)(3).

Grant Anderson, 202-622-4930 (not a toll-free number).

Accordingly, 26 CFR part 1 is amended as follows:

The principal author of these regulations is Grant Anderson of the Office of Associate Chief Counsel (Income Tax and Accounting). However, other personnel from the IRS and the Treasury Department participated in their development.

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Does a plan fail to be an eligible governmental plan under § 457(b) of the Internal Revenue Code solely because the plan is offered and administered by a labor union for the benefit of those State employees who are union members?

An organization (including its local affiliates) that is a labor organization described in § 501(c)(5) (Union) represents professional firefighters employed by various city, municipal, and other local governments in State X (“Governmental Employers”) under collective bargaining agreements between the Union and the Governmental Employers.

State X maintains an eligible governmental § 457(b) plan (Plan A). Plan A is available to employees of State X and employees of any political subdivision of State X, including both unionized and non-unionized public safety employees and civilians.

The Union would like to offer an additional eligible governmental § 457(b) plan (Plan B) that is available only to members of the collective bargaining units represented by the Union who are employed by the Governmental Employers.

Under Plan B, the members of the Union who are employees of the Governmental Employers that adopt Plan B are eligible to participate and elect to have the Governmental Employers make contributions on their behalf to Plan B out of their compensation from the Governmental Employers. Plan B states that the plan is established and maintained by the Governmental Employers and participants are informed of this. Only investments approved by the Union are offered under Plan B and amounts deferred by employees of Governmental Employers that adopt Plan B, plus any amounts transferred directly from any other eligible governmental § 457(b) plan, provide Plan B’s exclusive source of funding.

Union members employed by Governmental Employers that do not adopt Plan B are not eligible to participate in Plan B, and no contributions may be made on their behalf regardless of whether their Governmental Employer is part of any collective bargaining agreement with the Union or its affiliates and regardless of whether the employees are union members. Employees of the Union are not eligible to participate in Plan B.

Plan B provides that all annual deferrals for a participant under the plan are combined with the participant’s annual deferrals under Plan A and all other eligible plans of the same employer for purposes of the Plan B limitations designed to comply with the limitations of § 457(b), and are combined with annual deferrals under eligible plans of other employers to the extent information concerning such plans is provided by the participant. Thus, Plan B treats all deferrals under all eligible plans in which an individual participates by virtue of his or her relationship with a single employer as a single plan for purposes of determining whether deferrals in excess of the § 457(b) limitations have been made.

Because both Plan A and Plan B must comply with these limitations, they each include terms providing for correction of any excess deferrals under all plans. Plan B provides that if an excess deferral arises which is only an excess amount as a result of the combined annual deferrals under both Plan A and Plan B, then the excess amount will be corrected by Plan B (even though there would be no excess if only annual deferrals under Plan B were taken into account). By adoption of Plan B, each Governmental Employer agrees not only to forward payroll amounts representing annual deferrals under Plan B, but also to inform Plan B of the amount of the annual deferrals made under Plan A by participants in Plan A who also participate in Plan B and such other information known to the Governmental Employers as Plan B may need for proper administration. The adoption agreement also requires the Union to provide to the Governmental Employers such information from Plan B as the Governmental Employers may need to complete tax returns for their employees and to administer Plan A.

In addition, for purposes of Plan B’s special catch-up contribution rules for participants who are within the three-year period ending before the year they reach normal retirement age, Plan B provides a normal retirement age which is the same as the normal retirement age under Plan A. Further, Plan B permits a plan-to-plan transfer of assets from Plan A (or any other eligible governmental plan) to Plan B for employees who have not had a separation from employment only if the following conditions are satisfied: (i) the transfer is from Plan A or any other plan that is an eligible governmental plan of State X; (ii) the transferring plan provides for the transfer; (iii) the participant whose deferred amounts are being transferred is performing services for a Governmental Employer that has adopted Plan B (and, for this purpose, Plan B treats the employer as the same employer only if the participant’s compensation is paid by the same entity); and (iv) the participant or beneficiary whose amounts deferred are being transferred must have an amount deferred immediately after the transfer at least equal to the amount deferred with respect to that participant or beneficiary immediately before the transfer.

Section 457 provides rules for the deferral of compensation by an individual participating in an eligible deferred compensation plan as defined in § 457(b). Section 457(b)(1) provides that the term “eligible deferred compensation plan” means a plan “established and maintained by an eligible employer” in which only individuals who perform services for the employer may be participants. The performance of services includes performance of services as an employee or as an independent contractor. Section 457(e)(2).

Section 457(e)(1) defines an “eligible employer” as (A) a State, political subdivision of a State, and any agency or instrumentality of a State or political subdivision of a State and (B) any other organization (other than a governmental unit) exempt under Subtitle A of the Internal Revenue Code. Section 1.457-2(e) of the Income Tax Regulations further defines the term “eligible employer” as including an entity that is a State that establishes a plan and § 1.457-2(l) provides that State means a State (treating the District of Columbia as a State as provided under § 7701(a)(10)), a political subdivision of a State, and any agency or instrumentality of a State.

Section 1.457-5(b) provides that for purposes of determining the amount of annual deferrals under a § 457 plan that are excluded from a participant’s gross income in any taxable year, the participant’s annual deferrals under all § 457 plans must be determined on an aggregate basis. For example, under § 1.457-5, all annual deferrals under all eligible plans (whether or not with the same employer) are combined for purposes of determining whether the limitations of § 457(b) have been exceeded. In this regard, § 1.457-4(e)(2) treats all deferrals under all eligible plans in which an individual participates by virtue of his or her relationship with a single employer as a single plan for purposes of determining excess deferrals.

Under § 1.457-10(b)(4), a plan-to-plan transfer from one eligible governmental plan to another eligible governmental plan of the same employer is permitted without a separation from employment if certain conditions are satisfied, including that the transfer is from an eligible governmental plan to another eligible governmental plan of the same employer (and, for this purpose, the employer is not treated as the same employer if the participant’s compensation is paid by a different entity).

Section 457(g) provides that a plan maintained by an eligible governmental employer is not to be treated as an eligible deferred compensation plan unless all amounts of compensation deferred under the plan, all property and rights purchased with such deferred compensation amounts, and all income attributable to such amounts, property, or rights of the plan are held in trust for the exclusive benefit of participants and their beneficiaries. In order to be an eligible plan of a tax-exempt entity, § 457(b)(6) provides that the plan must be unfunded and plan assets must not be set aside for participants or their beneficiaries.

An arrangement does not fail to constitute a single eligible governmental plan for purposes of § 457(b) merely because the arrangement is funded through more than one trustee, custodian, or insurance carrier. See § 1.457-8 of the regulations and Notice 98-8, 1998-1 C.B. 355.

Under § 457, therefore, different rules apply depending on whether the entity establishing and maintaining the plan is a tax-exempt entity or a State government entity. A union that is a tax-exempt entity may establish and maintain an eligible § 457(b) plan, but only if the plan is unfunded and is for its employees or other individuals who perform services for the union. A State (including an agency or instrumentality thereof) may establish and maintain an eligible § 457(b) plan, but only if it is funded and only for employees of the State or other individuals who perform services for the State. A union may not establish and maintain a funded plan for its employees or for individuals who do not perform services for the union. However, an eligible governmental employer may adopt, for its collectively-bargained employees, a plan created by the union for employees of the governmental employer and offered and administered by the union, provided that the plan is “established and maintained by” the governmental employer. Thus, if the plan is established and maintained by a governmental employer, it can qualify as an eligible governmental § 457(b) plan, assuming that the plan satisfies all of the other requirements of § 457(b).

If the governmental employer has adopted the plan in a manner that reflects the employer as having established and maintained the plan, a plan does not fail to be an “eligible governmental § 457(b) plan” merely because the plan is created, offered and administered by a union even if it is in addition to another plan that is offered and administered by the governmental employer.

Under these facts, Plan B includes special provisions designed to comply with the rules for eligible governmental § 457 plans of the same employer, including coordination of limitations and corrections under § 1.457-5 and plan-to-plan transfer provisions that comply with § 1.457-10(b)(4). These facts are consistent with the plan being established and maintained by the Governmental Employers. The Union’s involvement in administering the plan to be offered to employees of the Governmental Employers, such as coordinating the information necessary to determine whether any excess contributions are made for a participant and responsibility in providing information necessary for completing wage statements that reflect Plan B, is comparable to the involvement associated with a third party administrator who invests annual deferrals and administers the plan provisions for the employer. In this case, the Union is in effect administering Plan B for the Governmental Employers, as a plan that is established and maintained by the Governmental Employers as the actual employers of the union members.

Plan B does not fail to be an eligible governmental plan under § 457(b) solely because the plan is offered and administered by the Union, but only with respect to employees of the Governmental Employers that have adopted Plan B as described in these facts.

For § 457(b) plans that do not satisfy the requirements of this revenue ruling, see Announcement 2004-52, page .

The principal author of this revenue ruling is Vernon S. Carter of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this revenue ruling contact Vernon S. Carter at (202) 622-6060 (not a toll-free call).

If an unincorporated state law entity that is classified as a partnership for federal tax purposes (partnership) converts to a state law corporation under a state statute that does not require an actual transfer of the unincorporated entity’s assets or interests (state law formless conversion statute), how is the conversion treated for federal tax purposes?

On January 1, 2003, A is organized in State as an unincorporated entity that is classified as a partnership for federal tax purposes. A elects to convert under a state law formless conversion statute into a state law corporation, effective January 1, 2004. As a result of the conversion, A is classified as a corporation for federal tax purposes.

Section 7701(a)(2) of the Internal Revenue Code provides that the term partnership includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation.

Section 7701(a)(3) provides that the term corporation includes associations, joint-stock companies, and insurance companies.

Section 301.7701-2(b)(1) defines the term corporation to include a business entity organized under a federal or state statute, or under a statute of a federally recognized Indian tribe, if the statute describes or refers to the entity as incorporated or as a corporation, body corporate, or body politic.

Section 301.7701-3(a) provides that a business entity that is not classified as a corporation under § 301.7701-2(b)(1), (3), (4), (5), (6), (7) or (8) (an eligible entity), can elect its classification for federal tax purposes.

Section 301.7701-3(g)(1)(i) provides that, if an eligible entity classified as a partnership elects under § 301.7701-3(c)(1)(i) to be classified as an association, the following is deemed to occur: the partnership contributes all its assets and liabilities to the association in exchange for stock in the association, and immediately thereafter, the partnership liquidates, distributing the stock of the association to its partners.

Rev. Rul. 84-111, 1984-2 C.B. 88, describes the tax consequences when steps are taken as parts of a plan to transfer partnership operations to a corporation organized for valid business reasons. For each of three methods of incorporating a partnership, Rev. Rul. 84-111 describes the differences in the basis and holding periods of the various assets received by the corporation and the basis and holding periods of the stock received by the former partners provided the steps described are actually undertaken and the underlying assumptions and purposes for the conclusions in the revenue ruling are applicable. If the partnership converts into a corporation in accordance with a state law formless conversion statute, however, Rev. Rul. 84-111 does not apply.

For federal tax purposes, a partnership that converts to a corporation under a state law formless conversion statute will be treated in the same manner as one that makes an election to be treated as an association under § 301.7701-3(c)(1)(i). Therefore, when unincorporated entity A converts, under state law, to corporation A, the following steps are deemed to occur: unincorporated entity A contributes all of its assets and liabilities to corporation A in exchange for stock in corporation A, and immediately thereafter, unincorporated entity A liquidates, distributing the stock of corporation A to its partners.

If an unincorporated state law entity that is classified as a partnership for federal tax purposes converts into a state law corporation under a state law formless conversion statute, the following is deemed to occur: the partnership contributes all its assets and liabilities to the corporation in exchange for stock in such corporation, and immediately thereafter, the partnership liquidates distributing the stock of the corporation to its partners.

The principal author of this revenue ruling is Christopher L. Trump of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Christopher L. Trump at (202) 622-3080 (not a toll-free call).

(1) What is the effect upon taxation under the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and the Collection of Income Tax at Source on Wages (income tax withholding) of a transfer of interests in a nonstatutory stock option and in nonqualified deferred compensation to a former spouse incident to a divorce?

(2) What is the appropriate reporting of income and/or wages recognized with respect to nonstatutory stock options and nonqualified deferred compensation transferred to a former spouse incident to a divorce?

The facts are the same as in Rev. Rul. 2002-22, 2002-1 C.B. 849, and are restated here for convenience.

Prior to their divorce in 2002, A and B were married individuals residing in State X who used the cash receipts and disbursements method of accounting.

A is employed by Corporation Y. Prior to the divorce, Y issued nonstatutory stock options to A as part of A’s compensation. The nonstatutory stock options did not have a readily ascertainable fair market value within the meaning of § 1.83-7(b) of the Income Tax Regulations at the time granted to A, and thus no amount was included in A’s gross income with respect to those options at the time of grant.

Y maintains two unfunded, deferred compensation plans under which A earns the right to receive post-employment payments from Y. Under one of the deferred compensation plans, participants are entitled to payments based on the balance of individual accounts of the kind described in § 31.3121(v)(2)-1(c)(1)(ii) of the Employment Tax Regulations. By the time of A’s divorce from B, A had an account balance of $100x under that plan. Under the second deferred compensation plan maintained by Y, participants are entitled to receive single sum or periodic payments following separation from service based on a formula reflecting their years of service and compensation history with Y. By the time of A’s divorce from B, A had accrued the right to receive a single sum payment of $50x under the plan following A’s termination of employment with Y. A’s contractual rights to the deferred compensation benefits under these plans were not contingent on A’s performance of future services for Y.

Under the law of State X, stock options and unfunded deferred compensation rights earned by a spouse during the period of marriage are marital property subject to equitable division between the spouses in the event of divorce. Pursuant to the property settlement incorporated into their judgment of divorce, A transferred to B (1) one-third of the nonstatutory stock options issued to A by Y, (2) the right to receive deferred compensation payments from Y under the account balance plan based on $75x of A’s account balance under the plan at the time of the divorce, and (3) the right to receive a single sum payment of $25x from Y under the other deferred compensation plan upon A’s termination of employment with Y.

In 2006, B exercises all of the transferred stock options and receives Y stock with a fair market value in excess of the exercise price of the options. In 2011, A terminates employment with Y, and B receives a single sum payment of $150x from the account balance plan and a single sum payment of $25x from the other deferred compensation plan.

Rev. Rul. 2002-22 concludes that a taxpayer who transfers interests in nonstatutory stock options and nonqualified deferred compensation to the taxpayer’s former spouse incident to divorce is not required to include an amount in gross income upon the transfer. The ruling also concludes that the former spouse, rather than the taxpayer, is required to include an amount in gross income when the former spouse exercises the stock options or when the deferred compensation is paid or made available to the former spouse.

(1) The transfer of interests in nonstatutory stock options and in nonqualified deferred compensation from the employee spouse to the nonemployee spouse incident to a divorce does not result in a payment of wages for FICA and FUTA tax purposes.

The nonstatutory stock options are subject to FICA and FUTA taxes at the time of exercise by the nonemployee spouse to the same extent as if the options had been retained by the employee spouse and exercised by the employee spouse. The nonqualified deferred compensation also remains subject to FICA and FUTA taxes to the same extent as if the rights to the compensation had been retained by the employee spouse. To the extent FICA and FUTA taxation apply, the wages are the wages of the employee spouse. The employee portion of the FICA taxes is deducted from the wages as and when the wages are taken into account for FICA tax purposes. The employee portion of the FICA taxes is deducted from the payment to the nonemployee spouse.

The income recognized by the nonemployee spouse with respect to the exercise of the nonstatutory stock options is subject to withholding under § 3402. The amounts distributed to the nonemployee spouse from the nonqualified deferred compensation plans are also subject to withholding under § 3402. The amounts to be withheld for income tax withholding are deducted from the payments to the nonemployee spouse. The supplemental wage flat rate may be used to determine the amount of income tax withholding. Pursuant to § 31, the nonemployee spouse is entitled to the credit allowable for the income tax withheld at the source on these wages.

(2) The social security wages, Medicare wages, social security taxes withheld, and Medicare taxes withheld, if applicable, are reportable on a Form W-2 with the name, address, and social security number of the employee spouse. However, no amount is includible in Box 1 and Box 2 of the employee’s Form W-2 with respect to these payments. The income with respect to the exercise of the nonstatutory stock options by the nonemployee spouse and the distributions from the nonqualified deferred compensation plans to the nonemployee spouse are reportable in Box 3 as other income on a Form 1099-MISC with the name, address, and social security number of the nonemployee spouse. Income tax withholding with respect to these payments of wages is included in Box 4, Federal income tax withheld.

Income tax withholding on payments to the nonemployee spouse is included on a Form 945 filed by Y. The social security tax and Medicare tax are reported on Y’s Form 941, and the FUTA tax is reported on Y’s Form 940.

Notice 2002-31, 2002-1 C.B. 908, included a proposed revenue ruling addressing the application of FICA, FUTA, and income tax withholding, and reporting of income and/or wages with respect to nonstatutory stock options and nonqualified deferred compensation transferred to a former spouse incident to a divorce, and requested comments on the proposal. After consideration of the comments that were received, the proposed ruling is adopted as revised by this revenue ruling.

This revenue ruling is effective January 1, 2005. For periods before the effective date, employers may rely on a reasonable, good faith interpretation including the interpretations in the proposed revenue ruling in Notice 2002-31 and this revenue ruling. However, with respect to compensation transferred to a spouse incident to divorce, failure to treat nonstatutory stock option compensation, or amounts deferred under a nonqualified deferred compensation plan, as subject to FICA will not be considered a reasonable, good faith interpretation.

The principal author of this revenue ruling is A. G. Kelley of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this revenue ruling, contact Mr. Kelley at (202) 622-6040 (not a toll-free call).

Section 6621 of the Internal Revenue Code establishes the rates for interest on tax overpayments and tax underpayments. Under section 6621(a)(1), the overpayment rate beginning July 1, 2004, is the sum of the federal short-term rate plus 3 percentage points (2 percentage points in the case of a corporation), except the rate for the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point for interest computations made after December 31, 1994. Under section 6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points.

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

Section 6621(b)(1) provides that the Secretary will determine the federal short-term rate for the first month in each calendar quarter.

Section 6621(b)(2)(A) provides that the federal short-term rate determined under section 6621(b)(1) for any month applies during the first calendar quarter beginning after such month.

Section 6621(b)(3) provides that the federal short-term rate for any month is the federal short-term rate determined during such month by the Secretary in accordance with § 1274(d), rounded to the nearest full percent (or, if a multiple of of 1 percent, the rate is increased to the next highest full percent).

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

Rounded to the nearest full percent, the federal short-term rate based on daily compounding determined during the month of April 2004 is 1 percent. Accordingly, an overpayment rate of 4 percent (3 percent in the case of a corporation) and an underpayment rate of 4 percent are established for the calendar quarter beginning July 1, 2004. The overpayment rate for the portion of a corporate overpayment exceeding $10,000 for the calendar quarter beginning July 1, 2004, is 1.5 percent. The underpayment rate for large corporate underpayments for the calendar quarter beginning July 1, 2004, is 6 percent. These rates apply to amounts bearing interest during that calendar quarter.

Interest factors for daily compound interest for annual rates of 1.5 percent, 3 percent, 4 percent, and 6 percent are published in Tables 56, 59, 61, and 65 of Rev. Proc. 95-17, 1995-1 C.B. 556, 610, 613, 615, and 619.

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

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

The United States recently exchanged instruments of ratification for a new income tax treaty with Japan.

Effective dates. The provisions for withholding tax at source are effective for amounts paid or credited after July 1, 2004. For all other taxes, the treaty is effective for tax periods beginning on or after January 1, 2005.

An individual who claimed treaty benefits under Article 19 (teachers and researchers) or Article 20 (students and trainees) of the former treaty can continue to apply those provisions. A person entitled to benefits under the previous treaty with Japan can elect to have that treaty apply in its entirety for the 12 month period following the date the new treaty would otherwise apply.

Tables 1 and 2. The following tables can be used, depending on the effective dates, to replace the entries for Japan in Tables 1 and 2 in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities (For Withholding in 2004). More information on the new treaty can be found in Publication 901, U.S. Tax Treaties (Rev. May 2004). The footnotes in those publications that relate to the column headings in these tables generally apply to these replacement entries.

You can find the complete text of the U.S.-Japan treaty on the Internet at www.irs.gov.

This revenue procedure provides a safe harbor method of accounting under which a taxpayer within the scope of this revenue procedure may amortize creative property costs (as defined in section 2.01 below) ratably over a 15-year period. This revenue procedure also provides procedures for taxpayers to obtain the automatic consent of the Commissioner of Internal Revenue to change to the safe harbor method of accounting provided in this revenue procedure.

The following definitions apply solely for the purpose of this revenue procedure:

.01 Creative property costs. Costs paid or incurred for federal tax purposes to acquire and develop screenplays, scripts, story outlines, motion picture production rights to books and plays, and other similar properties (creative properties) for purposes of potential future film development, production, and exploitation.

.02 Film. Feature films, television specials, television series, and similar products (including animated films and television programming) that are sold, licensed or exhibited, whether produced on film, videotape, digital, or other video recording format.

.03 Set for production. Management, with relevant authority, implicitly or explicitly authorizes and commits to funding the production of a film, active pre-production has begun, and the start of principal photography is expected to begin within 6 months of being set for production.

.04 SOP 00-2. The American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 00-2, “Accounting for Producers or Distributors of Films.”

.05 Initial write-off. The earliest date on which the taxpayer properly writes off under SOP 00-2 any creative property costs paid or incurred with respect to a particular creative property.

.01 Film studios (studios) routinely incur costs to acquire, produce, and develop creative properties. Studios may acquire these creative properties with exclusive rights of ownership, or they may have limited exploitation rights. Sometimes the rights acquired survive indefinitely while in other situations, the studios may acquire rights with a limited term. Studios ultimately set for production only a small percentage of the creative properties acquired. Most of the creative properties set for production are set within 3 years of acquisition of the property. However, studios set some properties for production that have been held for longer than 3 years.Studios do not usually discard, release to the public domain, or otherwise dispose of the creative properties not set for production or sold. Generally, studios retain these properties indefinitely.

.02 On June 12, 2000, the AICPA issued SOP 00-2, and rescinded Statement of Financial Accounting Standards No. 53. SOP 00-2 is effective for fiscal years beginning after December 15, 2000. SOP 00-2 established new generally accepted accounting principles for financial reporting purposes for the way studios account for creative property costs. SOP 00-2 states that an entity should periodically review creative properties in order to determine whether they will be used in the production of a film. SOP 00-2 states that “[w]hen an entity determines that a property will not be used (disposed of), it should recognize any loss by a charge to the income statement.” SOP 00-2 further states that it is presumed that an entity will dispose of a property (whether by sale or abandonment) if it has not been set for production within 3 years from the time of the first capitalized transaction. Amounts written off should not be subsequently reestablished as assets.

.03 Section 165(a) of the Internal Revenue Code allows a deduction for any loss sustained during the taxable year and not compensated for by insurance or otherwise.

.04 Rev. Rul. 2004-58, 2004-24 I.R.B. , concludes that a taxpayer may not deduct the costs of acquiring and developing creative property as a loss under § 165(a) if the taxpayer does not establish an intention to abandon the property and an affirmative act of abandonment, or identifiable event(s) evidencing a closed or completed transaction establishing worthlessness.

.05 Thus, taxpayers generally are required under the Code and regulations to capitalize creative property costs and, unless a film is produced from the creative property, are not permitted to recover those costs through deductions for depreciation or amortization. See Rev. Rul. 79-285, 1979-2 C.B. 91. However, to minimize disputes regarding the accounting for creative property costs, the Internal Revenue Service, as a matter of administrative convenience, will allow a taxpayer that complies with the requirements of this revenue procedure to use the safe harbor amortization method described in section 5 of this revenue procedure for these costs.

This revenue procedure applies to taxpayers engaged in the trade or business of film production that choose to account for creative property costs under the safe harbor method provided in section 5 of this revenue procedure.

.01 In general. The Service will not challenge the use of this safe harbor method of accounting by a taxpayer within the scope of this revenue procedure provided the taxpayer follows all of the requirements of this section 5 and, if the taxpayer is changing from another method to the safe harbor method, the provisions of section 6 of this revenue procedure regarding changes in method of accounting. Under the safe harbor method, the taxpayer must amortize creative property costs properly written off by the taxpayer under SOP 00-2 ratably over an amortization period of 15 years beginning on the first day of the second half of the taxable year in which the taxpayer properly writes off the costs under SOP 00-2. For example, for a calendar-year taxpayer with a full 12-month taxable year, the first day of the second half of the taxable year is July 1^st. All creative property costs that the taxpayer begins to amortize under this safe harbor method in the same taxable year are treated as a single asset. Creative property costs that the taxpayer amortizes under this safe harbor method must not be subsequently reestablished as assets, even if a particular creative property is set for production subsequent to the initial write-off. See section 5.02 of this revenue procedure for rules regarding creative property costs paid or incurred subsequent to the initial write-off, whether or not the creative property has been set for production subsequent to the initial write-off. Except as provided in section 5.03 and 5.04 of this revenue procedure, no disposition or other event accelerates recovery of the creative property costs that the taxpayer has begun to amortize under this safe harbor method.

.02 Costs paid or incurred subsequent to the initial write-off.

(1) Property not set for production. Creative property costs that are (a) associated with a particular creative property that has not been set for production and (b) paid or incurred by the taxpayer subsequent to the initial write-off must be amortized by the taxpayer (in accordance with section 5.01 of this revenue procedure) ratably over an amortization period of 15 years beginning on the first day of the second half of the taxable year in which the taxpayer pays or incurs those costs.

(2) Property set for production. Creative property costs that are (a) associated with a particular creative property that has been set for production subsequent to the initial write-off and (b) paid or incurred by the taxpayer after the property is set for production must be capitalized by the taxpayer from the time the property is set for production and depreciated using an allowable depreciation method for produced films (for example, income forecast method) at the time the property is placed in service by the taxpayer.

.03 Costs associated with property upon disposition. If, during the 15-year amortization period, creative property rights are disposed of, the taxpayer must nevertheless continue to amortize the creative property costs over the remainder of the 15-year period. A disposition includes the sale, exchange, abandonment, or destruction of creative property or the rights relating thereto. A disposition also occurs upon the expiration of a taxpayer’s rights to a particular creative property. Immediately before a disposition, the creative property or creative property rights are treated as having an adjusted basis of zero for purposes of § 1011. Therefore, no loss shall be realized upon a disposition. Any amount realized on a disposition shall be recognized as ordinary income (notwithstanding any other provision of the Code). However, these rules do not apply if a taxpayer disposes of all of its creative properties, for example, as a result of a sale (not including elective recognition of gain or loss transactions under § 338(h)(10)) of its entire trade or business. Thus, in the case of a disposition of an entire trade or business, any gain from the disposition of creative property rights, the costs for which were accounted for using this safe harbor method, will be treated as ordinary income to the extent of the amortization allowed under this safe harbor method.

.04 Special rule for certain transfers. In the case of any creative property transferred in a transaction described in §§ 332, 351, 361, 721, 731, 1031, or 1033, and in any transaction between members of the same affiliated group during any taxable year for which a consolidated return is made by the group, the transferee shall be treated as the transferor for purposes of applying the safe harbor method as described in section 5 of this revenue procedure with respect to so much of the adjusted basis in the hands of the transferee as does not exceed the adjusted basis in the hands of the transferor. However, this section 5.04 does not apply in the case of a termination of a partnership under section 708(b)(1)(B).

.01 Change in method of accounting. A change in a taxpayer’s treatment of creative property costs is a change in method of accounting to which §§ 446(e) and 481 apply. If a taxpayer within the scope of this revenue procedure wants to change to the safe harbor method provided in this revenue procedure for creative property costs properly written off under SOP 00-2, the taxpayer must follow the automatic change in method of accounting provisions in Rev. Proc. 2002-9, 2002-1 C.B. 327 (as modified by Rev. Proc. 2002-19, 2002-1 C.B. 696 and Rev. Proc. 2002-54, 2002-2 C.B. 432, and as modified and clarified by Announcement 2002-17, 2002-1 C.B. 561) or any successor, with the following modifications:

(1) The scope limitations in section 4.02 of Rev. Proc. 2002-9 do not apply to a taxpayer that wants to change to the safe harbor method described in section 5 of this revenue procedure for either its first or second taxable year ending on or after December 31, 2003;

(2) A taxpayer that wants to change to the safe harbor method described in section 5 of this revenue procedure for its first taxable year ending on or after December 31, 2003, and that on or before July 12, 2004, files its original federal income tax return for that year, and that did not change to the safe harbor method described in section 5 of this revenue procedure on that return is not required to comply with the filing requirement in section 6.02(3)(a) of Rev. Proc. 2002-9, provided the taxpayer complies with the following filing requirements. The taxpayer must instead complete and file the Form 3115, Application for Change in Accounting Method, in duplicate. The original Form 3115 must be attached to an amended federal income tax return for the taxpayer’s first taxable year ending on or after December 31, 2003. This amended return must be filed no later than November 29, 2004. The copy of the Form 3115 must be filed with the national office (see section 6.02(6) of Rev. Proc. 2002-9 for the address) no later than when the taxpayer’s amended return is filed; and

(3) For purposes of Line 1a of Form 3115, the designated number for the automatic accounting method change authorized by this revenue procedure is “85”.

.02 Audit protection. If a taxpayer within the scope of this revenue procedure currently uses a method consistent with the safe harbor method described in section 5 of this revenue procedure, the method of accounting for the taxpayer’s creative property costs will not be raised as an issue by the Service in a taxable year that ends before December 31, 2003. Also, if a taxpayer currently uses a method consistent with the safe harbor method described in section 5 of this revenue procedure, and its use of that method is an issue under consideration (within the meaning of section 3.09 of Rev. Proc. 2002-9) in examination, before an appeals office, or before the U.S. Tax Court for any taxable year that ends before December 31, 2003, that issue will not be further pursued by the Service.

Rev. Proc. 2002-9 is modified and amplified to include this change in method of accounting in section 2 of the APPENDIX.

This revenue procedure is effective for taxable years ending on or after December 31, 2003.

The principal author of this revenue procedure is Lauren Ross Taylor of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue procedure, contact Ms. Taylor at (202) 622-3040 (not a toll-free call).

Internal Revenue Service (IRS), Treasury.

Notice of proposed rulemaking by cross-reference to temporary regulations.

In this issue of the Bulletin, the IRS is issuing final and temporary regulations (T.D. 9129) relating to the capitalization of interest expense in sale and leaseback transactions under the Economic Recovery Tax Act of 1981 (ERTA) safe harbor leasing provisions. The regulations affect taxpayers that provide purchase money obligations in connection with these transactions. The text of those regulations also serves as the text of these proposed regulations.

Written or electronic comments must be received by August 18, 2004.

Send submissions to: CC:PA:LPD:RU (REG-148399-02), room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:RU (REG-148399-02), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically via the IRS Internet site at www.irs.gov/regs or the Federal eRulemaking Portal at http://www.regulations.gov (indicate IRS and REG-148399-02 or RIN 1545-BB62).

Concerning the proposed regulations, Grant Anderson, (202) 622-4970; concerning submission of comments and/or requests for a public hearing, LaNita Van Dyke, (202) 622-7180 (not toll-free numbers).

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

The principal author of these regulations is Grant Anderson of the Office of Associate Chief Counsel (Income Tax & Accounting). However, other personnel from the IRS and Treasury Department participated in their development.

* * * * *

Under Title 31, Code of Federal Regulations, Part 10, an attorney, certified public accountant, enrolled agent, or enrolled actuary, in order to avoid institution or conclusion of a proceeding for his or her disbarment or suspension from practice before the Internal Revenue Service, may offer his or her consent to disbarment from such practice. The Director, Office of Professional Responsibility, in his discretion, may disbar an attorney, certified public accountant, enrolled agent, or enrolled actuary in accordance with the consent offered.

The following individuals have been placed under consent disbarment from practice before the Internal Revenue Service:

Under Title 31, Code of Federal Regulations, Part 10, an attorney, certified public accountant, enrolled agent, or enrolled actuary, in order to avoid institution or conclusion of a proceeding for his or her disbarment or suspension from practice before the Internal Revenue Service, may offer his or her consent to suspension from such practice. The Director, Office of Professional Responsibility, in his discretion, may suspend an attorney, certified public accountant, enrolled agent, or enrolled actuary in accordance with the consent offered.

The following individuals have been placed under consent suspension from practice before the Internal Revenue Service:

Under Title 31, Code of Federal Regulations, Part 10, the Director, Office of Professional Responsibility, is authorized to immediately suspend from practice before the Internal Revenue Service any practitioner who, within five years from the date the expedited proceeding is instituted (1) has had a license to practice as an attorney, certified public accountant, or actuary suspended or revoked for cause or (2) has been convicted of certain crimes.

The following individuals have been placed under suspension from practice before the Internal Revenue Service by virtue of the expedited proceeding provisions:

Under Title 31, Code of Federal Regulations, Part 10, in lieu of a proceeding being instituted or continued, an attorney, certified public accountant, enrolled agent, or enrolled actuary, may offer his or her consent to the issuance of a censure. Censure is a public reprimand.

The following individuals have consented to the issuance of a Censure:

Rev. Rul. 2004-57, page this Bulletin, provides that an eligible governmental plan under § 457(b) of the Internal Revenue Code must be established and maintained by an eligible employer as defined under § 457(e)(1)(A). A plan established before June 14, 2004, that does not satisfy the requirements of the revenue ruling solely as a result of being established and maintained by a labor organization instead of being established and maintained by an eligible governmental employer may nonetheless be treated as established and maintained by an eligible governmental employer if:

(1) contributions to the plan cease with respect to payroll periods that begin after December 31, 2004, and

(2) either of the following corrective actions is completed by December 31, 2005:

(a) The eligible employer as defined under § 457(e)(1)(A) adopts the plan, or

(b) The accounts of the employees under the plan are transferred (not rolled over) into an eligible governmental plan maintained by the eligible employer as defined under § 457(e)(1)(A) in accordance with the requirements of § 1.457-10(b)(4) of the Income Tax Regulations. For this limited purpose, the transferor plan will be treated as an eligible governmental plan of the same employer.

Even if such correction is made, however, the plan will not be treated as an eligible governmental plan under § 457(b) unless it also satisfies all of the requirements for such plans under § 457 and the regulations thereunder (other than the requirement that the plan be established and maintained by an eligible employer with respect to periods before December 31, 2005).

If the corrective actions described above fail to be completed by December 31, 2005, the plan will be treated as an ineligible deferred compensation arrangement that is subject to § 457(f) of the Code. Under § 457(f), benefits may be currently includible in income even if they are not currently available to the participants under the terms of the plan. Likewise, if the plan is liquidated before December 31, 2005, without corrective action as described above, distributions from the plan will be taxed in accordance with § 457(f). A funded plan solely established by a labor organization after June 14, 2004, that does not satisfy the requirements of Rev. Rul. 2004-57 will be treated as an arrangement subject to § 457(f).

For further information, please call the Employee Plans’ taxpayer assistance telephone service at 1 (877) 829-5500 (a toll-free call) between the hours of 8:00 AM and 6:30 PM Eastern time, Monday through Friday.