bulletin no. 2002–2 highlights of this issueemployee plans-cont. announcement 2002–1, page 304....

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 2002–1, page 268.Options and spin-off. This ruling provides guidance for theincome tax treatment of employee stock options and restrictedstock in certain spin-offs.

Rev. Rul. 2002–2, page 271.Federal rates; adjusted federal rates; adjusted federallong-term rate and the long-term exempt rate. For pur-poses of sections 382, 1274, 1288, and other sections of theCode, tables set forth the rates for January 2002.

T.D. 8968, page 274.REG-105344–01, page 302.Temporary and proposed regulations under section 6103 ofthe Code permit the IRS to authorize federal, state, and localagencies with access to returns and return information to redis-close returns and return information, with the Commissioner’sapproval, to any authorized recipient set forth in section 6103,subject to the same conditions and restrictions, and for thesame purposes, as if the recipient had received the informationfrom the IRS directly.

T.D. 8969, page 276.Final regulations under sections 6103 and 6311 of the Codeauthorize the Commissioner to accept payment of internal rev-enue taxes by credit card or debit card. Additionally, this finalregulation provides that payment of tax by check or moneyorder should be made payable to the United States Treasury.

T.D. 8970, page 281.Final regulations under section 332 of the Code address therequirement of adoption of a plan of liquidation when a subsid-iary corporation makes an entity classification election to betreated as a partnership or disregarded as an entity separatefrom its owner.

EMPLOYEE PLANS

Notice 2002–1, page 283.EGTRRA; Employee plans user fees. This documentdescribes the changes in employee plans user fees as a resultof the enactment of the Economic Growth and Tax Relief Rec-onciliation Act of 2001 (EGTRRA). Rev. Procs. 2002–6 and2002–8 modified.

Notice 2002–2, page 285.EGTRRA; ESOP; dividend elections. This documentdescribes in question and answer format the changes in divi-dend elections under section 404(k) of the Code as amendedby the Economic Growth and Tax Relief Reconciliation Act of2001 (EGTRRA) and the effective date of section 409(p) of theCode as added by EGTRRA.

Notice 2002–3, page 289.Safe harbor explanation; certain qualified plan distribu-tions. This document provides an updated Safe Harbor Expla-nation that plan administrators may use for recipients of eli-gible rollover distributions from qualified plans in order tosatisfy section 402(f) of the Code. Notice 2000–11 obsoleted.

Notice 2002–4, page 298.EGTRRA; section 401(k) distributions; section 414(v)contributions. This document provides guidance with respectto the changes made by the Economic Growth and Tax ReliefReconciliation Act of 2001 (EGTRRA) which pertain to hardshipdistributions, severance of employment, and the availability ofcatch-up contributions.

(Continued on the next page)Finding Lists begin on page ii.

Bulletin No. 2002–2January 14, 2002

EMPLOYEE PLANS-CONT.

Announcement 2002–1, page 304.User fees. This announcement allows for the temporary use ofa draft Form 8717 in lieu of the Form 8717 described inQ&A–15 of Notice 2002–1 in this Bulletin.

ADMINISTRATIVE

Announcement 2002–2, page 304.Waiver of penalties. To encourage taxpayers to disclose theirtax treatment of certain tax shelters, the IRS will waive theaccuracy-related penalty under section 6662 of the Code.

Announcement 2002–3, page 305.This document includes the procedures for partnerships withmore than 100 partners during the year to request a waiver ofthe requirement to electronically file Form 1065, U.S. Partner-ship Return of Income.

Announcement 2002–4, page 306.This document contains corrections to final regulations (T.D.8966, 2001–45 I.R.B. 422) relating to the effect of the Familyand Medical Leave Act on the operation of cafeteria plans.

January 14, 2002 2002–2 I.R.B.

The IRS MissionProvide America’s taxpayers top quality service by helpingthem understand and meet their tax responsibilities and by

applying the tax law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are consolidated semiannually into Cumulative Bulle-tins, which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in the Bul-letin. All published rulings apply retroactively unless otherwiseindicated. Procedures relating solely to matters of internalmanagement are not published; however, statements of inter-nal practices and procedures that affect the rights and dutiesof taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in the rev-enue ruling. In those based on positions taken in rulings to tax-payers or technical advice to Service field offices, identifyingdetails and information of a confidential nature are deleted toprevent unwarranted invasions of privacy and to comply withstatutory requirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A, TaxConventions and Other Related Items, and Subpart B, Legisla-tion and Related Committee Reports.

Part III.—Administrative, Procedural, andMiscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Secre-tary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The first Bulletin for each month includes a cumulative index forthe matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the first Bulletin of the succeeding semiannualperiod, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2002–2 I.R.B. January 14, 2002

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 42.—Low-IncomeHousing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof January 2002. See Rev. Rul. 2002–2, page 271.

Section 83.—PropertyTransferred in ConnectionWith Performance of Services

26 CFR 1.83–6: Deduction by employer.

Options & Spin-off: Income tax treatment ofoptions and restricted stock in spin-offs, under thefacts presented. See Rev. Rul. 2002–1, page 268.

Section 280G.—GoldenParachute Payments

Federal short-term, mid-term, and long-termrates are set forth for the month of January 2002.See Rev. Rul. 2002–2, page 271.

Section 355.—Distributions ofStock and Securities of aControlled Corporation

26 CFR 1.355–1: Distribution of stock and securi-ties of a controlled corporation.(Also §§: 1.83–6, 1.1032–3).

Options and spin-off. Income tax treatment ofoptions and restricted stock in spin-offs, under thefacts presented.

Rev. Rul. 2002–1

ISSUE

Under the facts presented below, aftera distributing corporation (D) distributesthe stock of a controlled corporation (C)in a transaction to which § 355(c) of theInternal Revenue Code applies,

(1) Does D recognize gain or losswhen restrictions lapse on C stock heldby D employees that is received in con-nection with the § 355 transaction? DoesD recognize gain or loss when stockoptions for C stock held by D employeesthat are received in connection with the§ 355 transaction are exercised?

(2) Does C recognize gain or losswhen restrictions lapse on D stock heldby C employees that is received beforethe § 355 transaction? Does C recognizegain or loss when stock options for Dstock held by C employees that arereceived in connection with the § 355transaction are exercised?

(3) Who is entitled to deductions foramounts includible in employees’ incomeas a result of the lapse of restrictions onD and C stock and the exercise of optionsto acquire D and C stock describedabove?

FACTS

D is a domestic corporation of whichA is an employee at all times relevant tothis ruling. C is a wholly-owned domesticsubsidiary of D of which B is anemployee at all times relevant to this rul-ing.

In Year 1, D implements a plan toattract and retain qualified personnel andto provide incentives for continued per-formance of services by providing addi-tional compensation to its employees andto the employees of C in the form of: (i)stock of D that is not transferable and issubject to a substantial risk of forfeiture,as defined in § 83(c), for a period of fiveyears beginning in Year 1 (restrictedstock); and (ii) non-statutory options topurchase shares of D stock (the pre-division options). The plan is not imple-mented in anticipation of a spin-off.

Under the plan, in Year 1 D issuesrestricted D stock to A, and to B onbehalf of C, for the employees’ servicesperformed for their respective employers.In the event of forfeiture, the restrictedstock would revert to D. A and B do notmake an election in Year 1 pursuant to§ 83(b) with respect to the restrictedstock. Also in Year 1, D grants to A, andto B on behalf of C, pre-division optionsfor their services. The options do not havea readily ascertainable fair market value(within the meaning of § 1.83–7(b) of theIncome Tax Regulations) at the time theyare issued.

In Year 3, D distributes the stock of Cpro rata to D’s shareholders in a transac-tion that qualifies for nonrecognition ofgain to D under § 355(c) (hereinafter

referred to as the spin-off). In the spin-off, the shareholders of D receive oneshare of C stock for each share of Dstock.

Although, under § 83, A and B are nottreated as the owners of the restricted Dstock for Federal tax purposes, A and Bhave rights in the D stock and receive, inconnection with the spin-off, a distribu-tion of C stock with restrictions identicalto the restrictions on the D stock in orderto preserve their pre-spin-off economicinterest in the pre-spin-off restricted Dstock. In the event of forfeiture, therestricted D stock would revert to D andthe restricted C stock would revert to C.Thus, after the spin-off, A and B eachhold restricted stock in both D and C.

Also as part of the spin-off, the pre-division options held by A and B are can-celed and replaced with new options (thepost-division options) to acquire stock inD from D and stock in C from C. Pursu-ant to the terms of the post-divisionoptions, the post-division options’ exer-cise price is paid directly to the issuingcorporation in exchange for the stock.Except to the extent that the post-divisionoptions separate the pre-division optionsinto two instruments, the post-divisionoptions are designed to preserve the eco-nomic terms of the pre-division options.The total exercise price of the post-division options held by each of A and B,respectively, is equal to the total exerciseprice of the pre-division options held byeach of A and B, respectively. The totalnumber of shares of D stock subject tothe post-division options held by each ofA and B, respectively, is equal to the totalnumber of shares of D stock subject tothe pre-division options held by each of Aand B, respectively. The total number ofshares of C stock subject to the post-division options held by each of A and B,respectively, is equal to the total numberof shares of D stock subject to the pre-division options held by each of A and B,respectively. Finally, the ratio of (a) theexercise price for each share subject to apost-division option to acquire D stock to(b) the exercise price of each share sub-ject to a post-division option to acquire Cstock is equal to the ratio of (x) the esti-mated fair market value of all of the out-standing D stock, excluding the estimated

2002-2 I.R.B 268 January 14, 2002

fair market value attributable to D’s own-ership of C stock immediately prior to thespin-off to (y) the estimated fair marketvalue of all of the outstanding C stockimmediately prior to the spin-off.

In Year 6, the restrictions lapse on therestricted stock held by A and B. Also inYear 6, A and B exercise all of their post-division options.

LAW AND ANALYSIS

Under § 83(a), when property is trans-ferred to a person in connection with theperformance of services, the service pro-vider must include in gross income anamount equal to the fair market value ofsuch property, less the amount (if any)paid for the property. However, if theproperty transferred is not transferableand is subject to a substantial risk of for-feiture in the hands of the service pro-vider, the fair market value of the prop-erty, less the amount (if any) paid for theproperty, is not includible in the serviceprovider’s gross income until the propertyis transferable or is not subject to a sub-stantial risk of forfeiture, unless the ser-vice provider elects to include suchamount in gross income at the time of thetransfer under § 83(b). Section 83(e)(3)provides that § 83 does not apply to thegrant of an option without a readily ascer-tainable fair market value.

Under § 83(h), the service recipient isallowed a deduction under § 162 in anamount equal to the amount included inthe service provider’s gross income under§ 83(a). Where the property is not sub-stantially vested on transfer, the deductionis allowed for the taxable year of the ser-vice recipient in which or with whichends the service provider’s taxable year inwhich the amount is included in the ser-vice provider’s gross income.See § 1.83–6(a)(1), (2) of the Income TaxRegulations. Where property is substan-tially vested on transfer, the deduction isallowed in accordance with the servicerecipient’s method of accounting (in con-formity with §§ 446 and 461). See§ 1.83–6(a)(3).

Section 1.83–6(b) states that, except asprovided in § 1032, at the time of a trans-fer of property in connection with the per-formance of services, the transferor rec-ognizes gain to the extent that thetransferor receives an amount thatexceeds its basis in the property. In addi-

tion, at the time a deduction is allowedunder §§ 83(h) and 1.83–6(a), the trans-feror recognizes gain or loss to the extentof the difference between (1) the sum ofthe amount paid plus the amount allowedas a deduction under § 83(h), and (2) thesum of the transferor’s basis in the prop-erty plus any gain recognized at the timeof the transfer.

Section 1032(a) provides, in part, thatno gain or loss is recognized to a corpo-ration on the receipt of money or otherproperty in exchange for stock (includingtreasury stock) of such corporation.Under § 1.1032–1(a), for purposes of§ 1032(a), a transfer by a corporation ofits own stock as compensation for ser-vices is considered a disposition formoney or other property. Thus, when acorporation compensates employees withits own stock, the corporation does notrecognize gain or loss under § 1032.

Section 1.1032–3 generally providesthat in certain transactions in which a cor-poration (the acquiring entity) acquiresmoney or other property in exchange, inwhole or in part, for stock of a corpora-tion (the issuing corporation), the acquir-ing entity is treated as purchasing thestock of the issuing corporation from theissuing corporation for fair market valuewith cash contributed to the acquiringentity by the issuing corporation. If theissuing corporation receives money orother property in payment for its stock,the amount of cash deemed contributed isthe difference between the fair marketvalue of the issuing corporation stock andthe amount of money or fair market valueof other property that the issuing corpora-tion receives as payment. Section1.1032–3 generally enables a corporatesubsidiary to obtain a fair market valuebasis in parent stock contributed to thesubsidiary’s capital if the subsidiary dis-poses of the parent stock in a taxabletransaction immediately after it isreceived from the parent. Thus, as a resultof the operation of § 1.1032–3, a subsid-iary generally does not recognize gain orloss on the immediate transfer of parentstock to the subsidiary’s employee.

A and B recognize income in Year 6under the rules of § 83 when the restric-tions on the D and C stock lapse andwhen they exercise their options toacquire D and C stock. The following dis-

cussion addresses the Federal income taxconsequences to D and C when theseevents occur.

The characterization of the events thatoccur in Year 6 should reflect the rela-tionship of D and C that existed in Year 1and continued until immediately beforethe spin-off. Cf. Rev. Rul. 83–73, 1983–1C.B. 84 (applying a relation-back prin-ciple to characterize indemnity paymentsmade by former shareholders of a mergedcorporation to the acquiring corporation).Specifically, to determine whether D rec-ognizes gain or loss in Year 6 when therestrictions lapse on the restricted C stockheld by A, whether C recognizes gain orloss in Year 6 when the restrictions lapseon the restricted D stock held by B,whether D recognizes gain or loss in Year6 when A exercises the post-divisionoptions for C stock, and whether C recog-nizes gain or loss in Year 6 when B exer-cises the post-division options for Dstock, it is appropriate to take intoaccount the terms of the original arrange-ment created in Year 1, and the parent-subsidiary relationship between D and Cthat existed in Year 1 and continued untilimmediately before the spin-off.

Prior to the spin-off, the stock of Dreflected an interest in C. Although, priorto the spin-off, A was not treated as theowner of the restricted D stock for Fed-eral tax purposes, A had valuable eco-nomic rights with respect to that stockand, indirectly, with respect to D’s stockownership interest in C. Similarly,although the pre-division options did notgive A ownership in D stock, the pre-division options did give A valuable eco-nomic rights with respect to D stock byreason of the right to acquire D stock at afixed price, which would have includedan indirect ownership interest in C if thespin-off had not occurred. Thus, A’sreceipt in connection with the spin-off ofthe restricted C stock and the post-division options to acquire D and C stockpreserved A’s economic rights withrespect to the entire pre-spin-off D enter-prise, which included C.

Because the restricted C stock and thepost-division options to acquire C stockare a substitute in part for pre-spin-offrestricted D stock and the pre-divisionoptions, it is appropriate for purposes of§§ 1032 and 355 to treat a post-spin-offlapse in restrictions on the restricted C

January 14, 2002 269 2002-2 I.R.B.

stock held by A and A’s exercise of post-division options to acquire C stock in thesame manner under §§ 1032 and 355 as apre-spin-off lapse of restrictions on therestricted D stock held by A and A’s pre-spin-off exercise of pre-division options,respectively, would be treated followedby the spin-off. Accordingly, because Dwould have recognized no gain or lossunder § 1032 by reason of the pre-spin-off lapse of restrictions on D stock heldby A and A’s pre-spin-off exercise of thepre-division options to acquire D stock,and because § 355(c) applies to the spin-off in Year 3, in Year 6 D recognizes nogain or loss with respect to the C stock byreason of the lapse of restrictions on therestricted C stock issued to A and on A’sexercise of the post-division options toacquire C stock. Further, under § 83(h), inYear 6 D is entitled to a deduction under§ 162 in the amount that A includes inincome under § 83(a) as a result of thelapse in restrictions on the C stock andthe exercise of the post-division optionsto acquire C stock.

Similarly, it is appropriate for purposesof § 1032 to treat a post-spin-off lapse inrestrictions on the restricted D stock heldby B and B’s exercise of post-divisionoptions to acquire D stock in the samemanner under § 1032 as a pre-spin-offlapse of restrictions on the restricted Dstock held by B and B’s pre-spin-off exer-cise of pre-division options, respectively,would be treated followed by the spin-off.C would have recognized no gain or lossunder § 1032 by reason of the pre-spin-off lapse of restrictions on D stock heldby B and B’s pre-spin-off exercise of thepre-division options to acquire D stock.See §§ 1.83–6(d) and 1.1032–3; see also§ 1.1032–3(e), exs. 6, 8. Consistent withthis analysis, the consequences of thepost-spin-off lapse of restrictions on therestricted D stock held by B and B’s post-spin-off exercise of D options are charac-terized by reference to the parent-subsidiary relationship between D and Cthat existed in Year 1 and continued untilimmediately before the spin-off. Accord-ingly, in Year 6, for purposes of § 1032,C is treated as if it bought the D stockfrom D at fair market value after a share-holder capital contribution from D, withthe result that C recognizes no gain orloss with respect to the D stock by reasonof the lapse of restrictions on the

restricted D stock issued to B and on B’sexercise of the post-division options toacquire D stock. See §§ 1.83–6(d) and1.1032–3. Under § 83(h), in Year 6 C isentitled to a deduction under § 162 in theamount that B includes in income under§ 83(a) as a result of the lapse of restric-tions on the D stock and the exercise ofpost-division options to acquire D stock.

Under § 1032, in Year 6 D recognizesno gain or loss when the restrictions lapseon the restricted D stock held by A and Band when A and B exercise the post-division options to acquire D stock. Inaddition, under § 1032, C recognizes nogain or loss when the restrictions lapse onthe restricted C stock held by A and Band when A and B exercise the post-division options to acquire C stock.

HOLDING

Under the facts presented above, afterD distributes the stock of C in a transac-tion to which § 355(c) applies,

(1) D recognizes no gain or loss whenrestrictions lapse on the C stock held byA that is received in connection with thespin-off; D recognizes no gain or losswhen stock options for C stock held by Athat are received in connection with thespin-off are exercised;

(2) C recognizes no gain or loss whenrestrictions lapse on D stock held by Bthat is received before the spin-off; C rec-ognizes no gain or loss when stockoptions for D stock held by B that arereceived in connection with the spin-offare exercised; and

(3) D is entitled to deductions foramounts includible in A’s income as aresult of the lapse of restrictions on D andC stock and the exercise of options toacquire D and C stock, and C is entitledto deductions for amounts includible inB’s income as a result of the lapse ofrestrictions on D and C stock and theexercise of options to acquire D and Cstock.

DRAFTING INFORMATION

For further information regarding thisrevenue ruling, contact Mark Weiss of theOffice of Associate Chief Counsel (Cor-porate) at 202–622–7790 (not a toll-freecall).

Section 382.—Limitation onNet Operating LossCarryforwards and CertainBuilt-In Losses FollowingOwnership Change

The adjusted applicable federal long-term rate isset forth for the month of January 2002. See Rev.Rul. 2002–2, page 271.

Section 412.—MinimumFunding Standards


Section 467.—CertainPayments for the Use ofProperty or Services


Section 468.—Special Rulesfor Mining and Solid WasteReclamation and ClosingCosts


Section 482.—Allocation ofIncome and DeductionsAmong Taxpayers

Federal short-term, mid-term, and long-termrates are set forth for the month of January 2002.See Rev. Rul. 2002–2, page 271.

Section 483.—Interest onCertain Deferred Payments


2002-2 I.R.B 270 January 14, 2002

Section 642.—Special Rulesfor Credits and Deductions

Federal short-term, mid-term, and long-termrates are set forth for the month of January 2002.See Rev. Rul. 2002–2, on this page.

Section 807.—Rules forCertain Reserves

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof January 2002. See Rev. Rul. 2002–2, on thispage.

Section 846.—DiscountedUnpaid Losses Defined

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof January 2002. See Rev. Rul. 2002–2, on thispage.

Section 1032.—Exchange ofStock for Property

26 CFR 1.1032–3: Disposition of stock or stockoptions in certain transactions not qualifying underany other nonrecognition provision.

Options and Spin-off: Income tax treatment ofoptions and restricted stock in spin-offs, under thefacts presented. See Rev. Rul. 2002–1, page 268.

Section 1274.—Determina-tion of Issue Price in the Caseof Certain Debt InstrumentsIssued for Property

(Also sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates;adjusted federal long-term rate and thelong-term exempt rate. For purposes ofsections 382, 1274, 1288, and other sec-tions of the Code, tables set forth the ratesfor January 2002.

Rev. Rul. 2002–2

This revenue ruling provides variousprescribed rates for federal income taxpurposes for January 2002 (the currentmonth). Table 1 contains the short-term,mid-term, and long-term applicable fed-eral rates (AFR) for the current month forpurposes of section 1274(d) of the Inter-nal Revenue Code. Table 2 contains theshort-term, mid-term, and long-termadjusted applicable federal rates (adjustedAFR) for the current month for purposesof section 1288(b). Table 3 sets forth theadjusted federal long-term rate and thelong-term tax-exempt rate described insection 382(f). Table 4 contains theappropriate percentages for determiningthe low-income housing credit describedin section 42(b)(2) for buildings placed in

service during the current month. Table 5contains the federal rate for determiningthe present value of an annuity, an inter-est for life or for a term of years, or aremainder or a reversionary interest forpurposes of section 7520. Finally, Table 6contains the deemed rate of return fortransfers made during calendar year 2002to pooled income funds described in§ 642(c)(5) that have been in existencefor less than 3 taxable years immediatelypreceding the taxable year in which thetransfer is made.

REV. RUL. 2002–2 TABLE 1

Applicable Federal Rates (AFR) for January 2002

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-Term

AFR 2.73% 2.71% 2.70% 2.69%

110% AFR 3.00% 2.98% 2.97% 2.96%

120% AFR 3.28% 3.25% 3.24% 3.23%

130% AFR 3.55% 3.52% 3.50% 3.49%

January 14, 2002 271 2002-2 I.R.B.

REV. RUL. 2002–2 TABLE 1—CONTINUED

Applicable Federal Rates (AFR) for January 2002



Mid-Term

AFR 4.49% 4.44% 4.42% 4.40%

110% AFR 4.94% 4.88% 4.85% 4.83%

120% AFR 5.40% 5.33% 5.29% 5.27%

130% AFR 5.85% 5.77% 5.73% 5.70%

150% AFR 6.77% 6.66% 6.61% 6.57%

175% AFR 7.92% 7.77% 7.70% 7.65%

Long-Term

AFR 5.46% 5.39% 5.35% 5.33%

110% AFR 6.02% 5.93% 5.89% 5.86%

120% AFR 6.57% 6.47% 6.42% 6.38%

130% AFR 7.13% 7.01% 6.95% 6.91%


Adjusted AFR for January 2002



Short-termadjusted AFR 2.47% 2.45% 2.44% 2.44%

Mid-termadjusted AFR 3.57% 3.54% 3.52% 3.51%

Long-termadjusted AFR 4.82% 4.76% 4.73% 4.71%

2002-2 I.R.B 272 January 14, 2002


Rates Under Section 382 for January 2002

Adjusted federal long-term rate for the current month 4.82%

Long-term tax-exempt rate for ownership changes during the current month (thehighest of the adjusted federal long-term rates for the current month and the priortwo months.) 4.82%


Appropriate Percentages Under Section 42(b)(2) for January 2002

Appropriate percentage for the 70% present value low-income housing credit 8.16%

Appropriate percentage for the 30% present value low-income housing credit 3.50%


Rate Under Section 7520 for January 2002

Applicable federal rate for determining the present value of an annuity, aninterest for life or a term of years, or a remainder or reversionary interest 5.4%


Rate Under Section 7520 for January 2002

Deemed rate of return for transfers during 2002 to pooled income funds that havebeen in existence for less than 3 taxable years

6.6%

January 14, 2002 273 2002-2 I.R.B.

Section 1288.—Treatment ofOriginal Issue Discounts onTax-Exempt Obligations

The adjusted applicable federal short-term, mid-term, and long-term, rates are set forth for the monthof January 2002. See Rev. Rul. 2002–2, page 271.

Section 6103.—Confidentiality and Disclosureof Returns and ReturnInformation

26 CFR 301.6103(p)(2)(B)–1T: Disclosure ofreturns and return information by other agencies.

T.D. 8968

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Parts 301 and 602

Disclosure of Returns andReturn Information by OtherAgencies

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Temporary regulation.

SUMMARY: This temporary regulationrelates to the disclosure of returns andreturn information by Federal, state andlocal agencies other than the IRS. Thetemporary regulation permits the IRS toauthorize agencies with access to returnsand return information under section6103 of the Internal Revenue Code(Code) to redisclose returns and returninformation, with the Commissioner’sapproval, to any authorized recipient setforth in section 6103, subject to the sameconditions and restrictions, and for thesame purposes, as if the recipient hadreceived the information from the IRSdirectly.

DATES: This regulation is effectiveDecember 13, 2001.

FOR FURTHER INFORMATIONCONTACT: Julie C. Schwartz, 202–622–4570 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

These temporary regulations are beingissued without prior notice and publicprocedure pursuant to the AdministrativeProcedure Act (5 U.S.C. 553). For thisreason, the collection of information con-tained in these regulations has beenreviewed and, pending receipt and evalu-ation of public comments, approved bythe Office of Management and Budgetunder control number 1545–1757.Responses to this collection of informa-tion are required if the Commissioner isto authorize the disclosure of returns andreturn information from agencies withaccess to returns and return informationunder section 6103 to other authorizedrecipients of returns and return informa-tion in accordance with section 6103.

An agency may not conduct or spon-sor, and a person is not required torespond to, a collection of informationunless the collection of information dis-plays a valid OMB control number.

For further information concerningthis collection of information, and whereto submit comments on the collection ofinformation and the accuracy of the esti-mated burden, and suggestions for reduc-ing this burden, please refer to the pre-amble to the cross-referencing notice ofproposed rulemaking published in theProposed Rules section of this issue ofthe Federal Register.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mate-rial in the administration of any internalrevenue law. Generally, tax returns andreturn information are confidential, asrequired by 26 U.S.C. 6103.

Background

Section 6103(p)(2)(B) provides thatreturn information disclosed pursuant tothe Code may be disclosed by any modeor means that the Secretary determinesnecessary or appropriate. 26 C.F.R. sec-tion 301.6103(p)(2)(B)–1 currently per-mits certain recipients of returns andreturn information under section 6103,with the Commissioner’s approval, to dis-close returns and return information tocertain other permissible recipients undersection 6103. Specifically, the existing

regulation permits disclosure by Federalagencies, with the Commissioner’sapproval, to 1) other Federal agencies, 2)state tax agencies, 3) the GeneralAccounting Office, 4) Federal, state andlocal child support enforcement agencies,5) persons described in section 6103(c)(person designated in a taxpayer consent),and 6) persons described in section6103(e) (person with a material interest).

The Consolidated Appropriations Act,2001, Pub. L. No. 106–554 (114 Stat.2763), was signed into law on December21, 2000. Section 1 of that Act enactedinto law H.R. 5662, the CommunityRenewal Tax Relief Act of 2000. Section310 of the Community Renewal TaxRelief Act of 2000 added section6103(j)(6) to the Code, authorizing theCommissioner to disclose return informa-tion to the Congressional Budget Office(CBO) for the purpose of, but only to theextent necessary for, long term models ofthe Social Security and Medicare pro-grams. The conference report, H.R. Conf.Rep. No. 106–1033, at 1020–21 (2000),provides that it is the intent of Congressthat all requests for information made byCBO under this provision be made to theCommissioner, who will use his authorityunder section 6103(p)(2) such that theSocial Security Administration (SSA) orother agency can furnish the informationdirectly to CBO for the purpose of CBO’slong term models of Social Security andMedicare. SSA, not IRS, collects andmaintains much of the information soughtby CBO and also receives the tax infor-mation CBO seeks under other provisionsof section 6103. However, section301.6103(p)(2)(B)–1 in its current formwould not allow the Commissioner toauthorize SSA to redisclose return infor-mation properly in its possession to CBO,an authorized recipient of the informationunder section 6103(j)(6). The temporaryregulation allows SSA to make returninformation in its possession available toCBO to the extent authorized by section6103(j)(6).

There are other situations, similar tothat found under section 6103(j)(6),where it is more efficient for returns andreturn information in the possession ofone authorized agency recipient, to bedisclosed by such agency to another statu-torily authorized recipient. The inabilityof agencies, including Federal, state and

2002-2 I.R.B 274 January 14, 2002

local agencies, to share returns and returninformation between themselves or eveninside a single agency, even where theinformation is more readily availablefrom an agency other than the IRS, washighlighted by the Department of theTreasury on pages 89-90 of its October2000 Report to the Congress on the Scopeand Use of Taxpayer Confidentiality andDisclosure Provisions. The report notes,for example, that currently a singleagency within a state (or even a singlecaseworker) may be administering bothchild support under Title IV-D of theSocial Security Act and welfare underTitle IV-A of the Social Security Act. Theagency may receive return informationunder both section 6103(l)(6) and section6103(l)(7) to aid the agency in makingdeterminations of eligibility for these pro-grams, but the current regulation does notpermit even intra-agency pooling or shar-ing of these data. The report notes thatboth intra- and inter-agency data sharingwith respect to common data elementscould be authorized by amendment to theTreasury regulations. The temporaryregulation allows the IRS to authorizeredisclosure in appropriate situations.

Explanation of Provisions

The temporary regulation expands theagencies that may redisclose returns andreturn information if authorized by theCommissioner of Internal Revenue to anyFederal, state or local agency thatreceives information under section 6103.Similarly, it expands the authorizedrecipients of returns and return informa-tion pursuant to this redisclosure author-ity to any recipient authorized to receivereturns and return information in accor-dance with section 6103. All redisclosuresby agencies pursuant to this regulationwill be made subject to the same condi-tions, restrictions, safeguards, record-keeping requirements, and civil andcriminal penalties that would apply if thedisclosure were made by the IRS. Thereference in the existing regulationexcepting redisclosures of return informa-tion under section 6103(m) from therecordkeeping requirements has beendeleted as unnecessary because section6103(p)(3) does not require recordkeep-ing by the IRS of section 6103(m) disclo-sures. As under the existing regulation,Federal, state and local agencies making

disclosures of return information underthe temporary regulation will continue toprovide to the IRS certain informationregarding disclosures made pursuant tothis authority, in order for the IRS to ful-fill its reporting requirements under sec-tion 6103(p).

Special Analyses

It has been determined that this Trea-sury Decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assess-ment is not required. It has also beendetermined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) and the Regulatory FlexibilityAct (5 U.S.C. chapter 6) do not apply tothese regulations, and, therefore, a Regu-latory Flexibility Analysis is not required.Pursuant to section 7805(f) of the InternalRevenue Code, these temporary regula-tions will be submitted to the Chief Coun-sel of the Small Business Administrationfor comment on their impact on smallbusinesses.

Drafting Information

The principal author of these regula-tions is Julie C. Schwartz, Office of theAssociate Chief Counsel (Procedure andAdministration), Disclosure and PrivacyLaw Division.

* * * * *

Amendments to the Regulations

Accordingly, 26 CFR parts 301 and602 are amended as follows:

PART 301—PROCEDURE ANDADMINISTRATION

Paragraph 1.The authority citation for part 301 is

amended by adding an entry in numericalorder to read as follows:

Authority: 26 U.S.C. 7805 ***Section 301.6103(p)(2)(B)–1T also

issued under 26 U.S.C. 6103(p)(2);***

§ 301.6103(p)(2)(B)–1 [Removed]

Par. 2. Section 301.6103(p)(2)(B)–1 isremoved.

Par. 3. Section 301.6103(p)(2)(B)–1Tis added to read as follows:

§ 301.6103(p)(2)(B)–1T Disclosure ofReturns and Return Information by OtherAgencies

(a) General Rule. Subject to therequirements of paragraphs (b), (c), and(d) of this section, returns or return infor-mation that have been obtained by a Fed-eral, state or local agency, or its agents orcontractors in accordance with section6103 (the “first recipient”) may be dis-closed by the first recipient to anotherrecipient authorized to receive suchreturns or return information under sec-tion 6103 (the “second recipient”).

(b) Approval by Commissioner. A dis-closure described in paragraph (a) of thissection may be made if the Commissionerof Internal Revenue (the “Commis-sioner”) determines, after receiving awritten request under this section, thatsuch returns or return information aremore readily available from the firstrecipient than from the Internal RevenueService. The disclosure authorization bythe Commissioner shall be directed to thehead of the first recipient and may con-tain such conditions or restrictions as theCommissioner may prescribe. The disclo-sure authorization may be revoked by theCommissioner at any time.

(c) Requirements and restrictions. Thesecond recipient may only receive returnsor return information as authorized by theprovision of section 6103 applicable tosuch second recipient. Any returns orreturn information disclosed may only beused by the second recipient for a purposeauthorized by and subject to any condi-tions imposed by section 6103 and theregulations thereunder, including, if appli-cable, safeguards imposed by section6103(p)(4).

(d) Records and reports of disclosure.The first recipient shall maintain to thesatisfaction of the Internal Revenue Ser-vice a permanent system of standardizedrecords regarding such disclosure authori-zation described in paragraph (a) of thissection and any disclosure of returns andreturn information made pursuant to suchauthorization, and shall provide suchinformation as prescribed by the Com-missioner in order to enable the InternalRevenue Service to comply with its obli-gations under section 6103(p)(3) to keepaccountings for disclosures and to makeannual reports of disclosures to the JointCommittee on Taxation. The information

January 14, 2002 275 2002-2 I.R.B.

required for reports to the Joint Commit-tee on Taxation must be provided within30 days after the close of each calendaryear. The requirements of this paragraphdo not apply to the disclosure of returnsand return information as provided byparagraph (a) of this section which, hadsuch disclosures been made directly bythe Service, would not have been subjectto the recordkeeping requirementsimposed by section 6103(p)(3)(A).

(e) Effective Date. This section isapplicable on December 13, 2001.

PART 602—OMB CONTROLNUMBERS UNDER THEPAPERWORK REDUCTION ACT

Par. 4. The authority citation for part602 continues to read as follows:

Authority: 26 U.S.C. 7805 ***Par. 5. In § 602.101, paragraph (b) is

amended by adding an entry to the tablein numerical order to read as follows:§ 602.101 OMB Control Numbers.

*****(b)***

CFR part or section whereidentified and described

Current OMBcontrol No.

*****

301.6103(p)(2)(B)–1T ............................................................................................................................... 1545–1757

*****

Robert E. Wenzel,Deputy Commissioner of Internal Revenue.

Approved December 4, 2001.

Mark Weinberger,Assistant Secretary (Tax Policy)

Department of the Treasury.

(Filed by the Office of the Federal Register on December 12, 2001, 8:45 a.m., and published in the issue of the Federal Register for December 13, 2001, 66F.R. 64351)

Section 6311.—Payment ofTax by CommerciallyAcceptable Means

26 CFR 6311–2: Payment by credit card and debitcard.

T.D. 8969

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 301

Payment by Credit Card andDebit Card


ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document containsfinal regulations authorizing the Commis-sioner to accept payment of internal rev-enue taxes by credit card or debit cardand limit the use and disclosure of infor-mation relating to payment of taxes bycredit card and debit card. Additionally,the final regulations provide that pay-ments of tax by check or money ordershould be made payable to the UnitedStates Treasury. The final regulationsreflect changes to the law made by theTaxpayer Relief Act of 1997 and affectpersons who pay their tax liabilities bycredit card, debit card, check, or moneyorder.

DATES: Effective Date: These final regu-lations are effective December 14, 2001.

Applicability Date: For dates of appli-cability, see §301.6311–2(h).

FOR FURTHER INFORMATION CON-TACT: Brinton Warren (202) 622–4940(not a toll-free number).


Background

This document contains final regula-tions amending the Procedure andAdministration Regulations (26 CFR part301) under sections 6103 and 6311 of theInternal Revenue Code (Code). The finalregulations reflect the amendment of sec-tions 6103 and 6311 by section 1205 ofthe Taxpayer Relief Act of 1997, PublicLaw 105–34 (111 Stat. 788) (TRA 1997);

2002-2 I.R.B 276 January 14, 2002

section 4003(k) of the Tax and TradeRelief Extension Act of 1998, Public Law105–277 (112 Stat. 2681) (TREA 1998);and section 3703 of the Internal RevenueService Restructuring and Reform Act of1998, Public Law 105–206 (112 Stat.685) (RRA 1998).

On December 15, 1998, the IRS andTreasury published temporary regulations(T.D. 8793, 1999–1 C.B. 466) in the Fed-eral Register (63 FR 68995). A notice ofproposed rulemaking (REG–111435–98,1999–1 C.B. 506) cross-referencing thetemporary regulations was published onthe same day in the Federal Register (63FR 69031). (References herein to the pro-posed regulations shall be to the tempo-rary regulations.) No public hearing wasrequested or held. Two written commentletters were received. After considerationof the comments, the proposed regula-tions are adopted as revised by this Trea-sury decision, and the corresponding tem-porary regulations are removed. Thecomments and revisions are discussedbelow.


Section 301.6311–1 currently providesthat checks or money orders should bemade payable to the Internal RevenueService. Section 3703 of RRA 1998 statesthat the Secretary of the Treasury shallestablish such rules, regulations, and pro-cedures as are necessary to allow pay-ment of taxes by check or money orderpayable to the United States Treasury.The amendment to § 301.6311–1 accord-ingly provides that checks and moneyorders should be made payable to theUnited States Treasury.

As amended by section 1205 of TRA1997, section 6311(a) provides that itshall be lawful for the Secretary of theTreasury to receive payment for internalrevenue taxes by any commerciallyacceptable means that the Secretarydeems appropriate, to the extent andunder the conditions provided in regula-tions prescribed by the Secretary. The leg-islative history accompanying TRA 1997explains that commercially acceptablemeans include “electronic funds transfers,including those arising from credit cards,debit cards, and charge cards.” H.R.Conf. Rep. No. 105–220, at 652 (1997).The current regulations under§ 301.6311–1 permit payment of taxes by

checks, drafts drawn on financial institu-tions, or money orders. The final regula-tions add payments by credit cards (whichincludes charge cards) and debit cards tothe acceptable methods of payment undersection 6311. Section 6302 and the regu-lations thereunder remain the authorityfor forms of payment by electronic fundstransfer other than payment by credit cardor debit card.

Only credit cards or debit cardsapproved by the Commissioner may beused for payment of internal revenuetaxes under section 6311, only the typesof tax liabilities specified by the Commis-sioner may be paid by credit card or debitcard, and all such payments must bemade in the manner and in accordancewith the forms, instructions, and proce-dures prescribed by the Commissioner.The Commissioner has entered into con-tracts with third party service providerswho will process the credit and debit cardtransactions. The Commissioner may notimpose any fee on persons making pay-ment of taxes by credit card or debit card.However, other persons participating inthe program, including third party serviceproviders who process credit or debit cardtransactions, are not prohibited fromcharging fees.

The final regulations provide, asrequired by section 6311(d)(3), that thepayment of taxes by credit card or debitcard is subject to the error resolution pro-cedures of section 161 of the Truth inLending Act (TILA) (15 U.S.C. 1666),section 908 of the Electronic Fund Trans-fer Act (EFTA) (15 U.S.C. 1693f), or anysimilar provisions of state or local law.The payment, however, is subject to theerror resolution procedures of these stat-utes only for the purpose of resolvingerrors relating to the credit card or debitcard account, and not for the purpose ofresolving any errors, disputes, or adjust-ments relating to the underlying tax liabil-ity. These provisions ensure that any dis-putes concerning the merits of the taxliability will be resolved in the traditionaladministrative and judicial forums (e.g.,by filing a petition in Tax Court or bypaying the disputed tax and filing a claimfor refund), and will not be raised in anydispute with the card issuer, financialinstitution, or other person participatingin the credit card or debit card transac-tion.

As authorized by section 6311(d)(3)(E), the final regulations permit theCommissioner to return funds errone-ously received due to errors relating tothe credit card or debit card account byarranging for a credit to the taxpayer’saccount with the issuer of the credit cardor debit card or other appropriate finan-cial institution or person. Returns offunds through credit card or debit cardaccount credits, however, are availableonly to correct errors relating to the creditcard or debit card account, and not torefund overpayments of taxes.

The final regulations also provide theprocedures required under sections6103(k)(9) and 6311(e) with respect tothe use and disclosure of informationrelating to payment of taxes by creditcard and debit card. Section 1205(c)(1) ofTRA 1997 (as amended by section6012(b)(2) of RRA 1998) added section6103(k)(9), which authorizes the IRS todisclose returns and return information tofinancial institutions and others to theextent necessary for the administration ofsection 6311. Section 6103(k)(9) furtherprovides that disclosures of informationfor purposes other than to accept pay-ments by check or money order (forexample, to accept payment by creditcard or debit card) shall be made only tothe extent authorized by written proce-dures promulgated by the Secretary. Sec-tion 6311(e) provides that no person shalluse or disclose any information relating tocredit card or debit card transactionsobtained pursuant to section 6103(k)(9),except to the extent authorized by writtenprocedures promulgated by the Secretary.

Pursuant to section 6311(e), the finalregulations provide that informationreceived by any person in connectionwith the payment of tax by credit card ordebit card shall be treated as confidentialby all persons who receive such informa-tion, whether such information is receivedfrom the IRS or from any other person,including the taxpayer. IRS personnel areauthorized to disclose to card issuers,financial institutions, and other personsinformation necessary to process the taxpayment or to bill or collect the amountcharged or debited (for example, toresolve billing errors).

The final regulations set forth the lim-ited purposes and activities for which

January 14, 2002 277 2002-2 I.R.B.

such information may be used or dis-closed by card issuers, financial institu-tions, and other persons. The permittedpurposes and activities principallyinvolve credit card and debit card pro-cessing, billing, collection, account ser-vicing, account transfers, internal busi-ness records, legal compliance, and legalproceedings. The final regulationsexpressly prohibit the selling of informa-tion, the sharing of information withcredit bureaus, or the use of informationfor any marketing purpose. Any personwho uses or discloses information in vio-lation of section 6311(e) is subject to civilliability for damages under section7431(a)(2). See section 7431(h), added bysection 1205(c)(2) of TRA 1997 (asamended by section 6012(b)(3) of RRA1998).

Summary of Comments

Commentators recommended that thefinal regulations be amended to permitthe IRS to compensate private sectorcompanies for the services they providein connection with the payment of taxesby credit and debit card. However, sec-tion 6311(d)(2) prohibits the payment ofsuch compensation. Thus, the final regu-lations do not adopt this recommendation.

Commentators also recommended thatthe final regulations incorporate by refer-ence the applicable regulations and staffcommentaries adopted by the FederalReserve Board under the provisions ofTILA and EFTA referenced in the finalregulations. The final regulations do notadopt this recommendation because thereferences in section 6311 and the finalregulations to section 161 of TILA andsection 908 of EFTA are sufficient tomake the Federal Reserve Board regula-tions and other legal guidance under sec-tion 161 of TILA and section 908 ofEFTA applicable to the payment of taxesby credit card or debit card, except asexpl ici t ly excepted in sect ions6311(d)(3)(A) and (C).

Commentators also recommended aclarification of § 301.6311–2T(c)(2) ofthe temporary regulations, which providesthat the United States has a lien for theguaranteed amount of a transaction uponall the assets of the institution making theguarantee if the United States is not duly

paid after the taxpayer tenders a paymentof taxes by credit card or debit card. Thecommentators note that the mere tender-ing of payment by credit card or debitcard is not sufficient for the United Statesto have a lien. Rather, the parties involvedin the transaction must also follow theapplicable procedures required to autho-rize the transaction and to obtain theguarantee. Thus, the commentators rec-ommended that language be added to thefinal regulations to provide that theUnited States will not have a lien unlessthe parties involved follow the proceduresrequired to authorize the transaction andobtain a guarantee.

Under the temporary regulations, thefinancial institution must expressly guar-antee the payment in order for the UnitedStates to have a lien on the assets of theinstitution making the guarantee. Thefinancial institution’s express guaranteewill arise only if the applicable proce-dures necessary to authorize the transac-tion and obtain the guarantee are properlyfollowed. Additional language in the finalregulations is therefore unnecessary.

One commentator questioned the useof the term commercial transactions in§ 301.6311–2T(d)(2)(D). The commenta-tor recommended removing the wordcommercial because, in general, TILAdoes not apply to commercial transac-tions. The final regulations adopt this rec-ommendation by replacing §301.6311–2T(d)(2)(D) in the final regulations with aprovision covering other types of errorssimilar to the ones explicitly covered byerror resolution procedures in the finalregulations.

One commentator recommended clari-fication of §301.6311–2T(g)(3)(i), whichprohibits use or disclosure of informationrelating to credit and debit card transac-tions for purposes related to the sale orexchange of such information separatefrom the underlying receivable oraccount. The commentator stated that thisprovision conflicts with other provisionsin the temporary regulations that specifi-cally permit an exchange of credit anddebit card information to process creditand debit card transactions and resolvebilling errors without a sale or exchangeof the underlying receivable or account.The commentator’s concern stems froman ambiguity created by the use of the

term exchange. To avoid confusion, thefinal regulations replace exchange withtransfer for consideration.

Explanation of Other Revisions

Other changes to the final regulationsinclude the following. First, the finalregulations clarify that sending receipts orconfirmation of a transaction to the tax-payer, including secured electronic trans-missions and facsimiles, is a permissibledisclosure. See §301.6311–2(g)(1)(i)(E).Second, the final regulations clarify thatdisclosure of information necessary tocomplete a transaction by the taxpayerwith a state or local government agency(for example, to pay state or local tax bycredit card or debit card) is a permissibledisclosure when explicitly authorized bythe taxpayer. This allows a taxpayer tomake a state or local tax payment imme-diately after making a federal tax pay-ment without requiring the taxpayer toreenter information (for example, nameand Taxpayer Identification Number). See§301.6311–2(g)(1)(i)(F). Third, the finalregulations provide that the term tax asused in these final regulations includesinterest, penalties, additional amounts,and additions to tax. See §301.6311–2(a)(1). The temporary regulations didnot refer to additional amounts.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assess-ment is not required. It also has beendetermined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) does not apply to these finalregulations, and because these final regu-lations do not impose a collection ofinformation on small entities, the Regula-tory Flexibility Act (5 U.S.C. chapter 6)does not apply. Therefore, a RegulatoryFlexibility Analysis is not required. Pur-suant to section 7805(f) of the Code, thenotice of proposed rulemaking precedingthese final regulations was submitted tothe Chief Counsel for Advocacy of theSmall Business Administration for com-ment on its impact on small business.

2002-2 I.R.B 278 January 14, 2002


The principal author of these finalregulations is R. Bradley Taylor of theOffice of Associate Chief Counsel, Proce-dure and Administration (AdministrativeProvisions and Judicial Practice Divi-sion).

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 301 isamended as follows:


Paragraph 1. The authority citation forpart 301 is amended by adding entries innumerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 301.6103(k)(9)–1 also issued

under 26 U.S.C. 6103(k)(9) and 26U.S.C. 6103(q). * * *

Section 301.6311–2 also issued under26 U.S.C. 6311. * * *

Par. 2. Section 301.6103(k)(9)–1 isadded to read as follows:

§ 301.6103(k)(9)–1 Disclosure of returnsand return information relating to pay-ment of tax by credit card and debit card.

Officers and employees of the InternalRevenue Service may disclose to cardissuers, financial institutions, or other per-sons such return information as the Com-missioner deems necessary in connectionwith processing credit card and debit cardtransactions to effectuate payment of taxas authorized by § 301.6311–2. Officersand employees of the Internal RevenueService may disclose such return infor-mation to such persons as the Commis-sioner deems necessary in connectionwith billing or collection of the amountscharged or debited, including resolutionof errors relating to the credit card ordebit card account as described in§ 301.6311–2(d).

§ 301.6103(k)(9)–1T [Removed]

Par. 3. Section 301.6103(k)(9)–1T isremoved.

§ 301.6311–1 [Amended]

Par. 4. In section 301.6311–1,paragraph(a)(1)(i) is revised by removingthe language “Internal Revenue Service”from the third sentence and adding thelanguage “United States Treasury” in itsplace.

Par. 5. Section 301.6311–2 is added toread as follows:

§ 301.6311–2 Payment by credit card anddebit card.

(a) Authority to receive—(1) Paymentsby credit card and debit card. Internalrevenue taxes may be paid by credit cardor debit card as authorized by this sec-tion. Payment of taxes by credit card ordebit card is voluntary on the part of thetaxpayer. Only credit cards or debit cardsapproved by the Commissioner may beused for this purpose, only the types oftax liabilities specified by the Commis-sioner may be paid by credit card or debitcard, and all such payments must bemade in the manner and in accordancewith the forms, instructions and proce-dures prescribed by the Commissioner.All references in this section to tax alsoinclude interest, penalties, additionalamounts, and additions to tax.

(2) Payments by electronic fundstransfer other than payments by creditcard and debit card. Provisions relatingto payments by electronic funds transferother than payments by credit card anddebit card are contained in section 6302and the Treasury Regulations promul-gated pursuant to section 6302.

(3) Definitions—(i) Credit card meansany credit card as defined in section103(k) of the Truth in Lending Act (15U.S.C. 1602(k)), including any creditcard, charge card, or other credit deviceissued for the purpose of obtainingmoney, property, labor, or services oncredit.

(ii) Debit card means any acceptedcard or other means of access as definedin section 903(1) of the Electronic FundTransfer Act (15 U.S.C. 1693a(1)),including any debit card or similar deviceor means of access to an account issuedfor the purpose of initiating electronicfund transfers to obtain money, property,labor, or services.

(b) When payment is deemed made. Apayment of tax by credit card or debitcard shall be deemed made when theissuer of the credit card or debit cardproperly authorizes the transaction, pro-vided that the payment is actuallyreceived by the United States in the ordi-nary course of business and is notreturned pursuant to paragraph (d)(3) ofthis section.

(c) Payment not made—(1) Continu-ing liability of taxpayer. A taxpayer whotenders payment of taxes by credit card ordebit card is not relieved of liability forsuch taxes until the payment is actuallyreceived by the United States and is notrequired to be returned pursuant to para-graph (d)(3) of this section. This continu-ing liability of the taxpayer is in additionto, and not in lieu of, any liability of theissuer of the credit card or debit card orfinancial institution pursuant to paragraph(c)(2) of this section.

(2) Liability of financial institutions. Ifa taxpayer has tendered a payment ofinternal revenue taxes by credit card ordebit card, the credit card or debit cardtransaction has been guaranteed expresslyby a financial institution, and the UnitedStates is not duly paid, then the UnitedStates shall have a lien for the guaranteedamount of the transaction upon all theassets of the institution making such guar-antee. The unpaid amount shall be paidout of such assets in preference to anyother claims whatsoever against suchguaranteeing institution, except the neces-sary costs and expenses of administrationand the reimbursement of the UnitedStates for the amount expended in theredemption of the circulating notes ofsuch institution.

(d) Resolution of errors relating to thecredit card or debit card account—(1) Ingeneral. Payments of taxes by credit cardor debit card shall be subject to the appli-cable error resolution procedures of sec-tion 161 of the Truth in Lending Act (15U.S.C. 1666), section 908 of the Elec-tronic Fund Transfer Act (15 U.S.C.1693f), or any similar provisions of stateor local law, for the purpose of resolvingerrors relating to the credit card or debitcard account, but not for the purpose ofresolving any errors, disputes or adjust-ments relating to the underlying tax liabil-ity.

January 14, 2002 279 2002-2 I.R.B.

(2) Matters covered by error resolutionprocedures. (i) The error resolution proce-dures of paragraph (d)(1) of this sectionapply to the following types of errors—

(A) An incorrect amount posted to thetaxpayer’s account as a result of a compu-tational error, numerical transposition, orsimilar mistake;

(B) An amount posted to the wrongtaxpayer’s account;

(C) A transaction posted to the taxpay-er’s account without the taxpayer’s autho-rization; and

(D) Other similar types of errors thatwould be subject to resolution under sec-tion 161 of the Truth in Lending Act(15 U.S.C. 1666), section 908 of the Elec-tronic Fund Transfer Act (15 U.S.C.1693f), or similar provisions of state orlocal law.

(ii) An error described in paragraph(d)(2)(i) of this section may be resolvedonly through the procedures referred to inparagraph (d)(1) of this section and can-not be a basis for any claim or defense inany administrative or court proceedinginvolving the Commissioner or theUnited States.

(3) Return of funds pursuant to errorresolution procedures. Notwithstandingsection 6402, if a taxpayer is entitled to areturn of funds pursuant to the error reso-lution procedures of paragraph (d)(1) ofthis section, the Commissioner may, inthe Commissioner’s sole discretion, effectsuch return by arranging for a credit tothe taxpayer’s account with the issuer ofthe credit card or debit card or any otherfinancial institution or person that partici-pated in the transaction in which the erroroccurred.

(4) Matters not subject to error resolu-tion procedures. The error resolution pro-cedures of paragraph (d)(1) of this sectiondo not apply to any error, question, ordispute concerning the amount of taxowed by any person for any year. Forexample, these error resolution proce-dures do not apply to determine a taxpay-er’s entitlement to a refund of tax for anyyear for any reason, nor may they be usedto pay a refund. All such matters shall beresolved through administrative and judi-cial procedures established pursuant tothe Internal Revenue Code and the rulesand regulations thereunder.

(5) Section 170 of the Truth in LendingAct not applicable. Payments of taxes by

credit card or debit card are not subject tosection 170 of the Truth in Lending Act(15 U.S.C. 1666i) or to any similar provi-sion of state or local law.

(e) Fees or charges. The Internal Rev-enue Service may not impose any fee orcharge on persons making payment oftaxes by credit card or debit card. Thissection does not prohibit the impositionof fees or charges by issuers of creditcards or debit cards or by any other finan-cial institution or person participating inthe credit card or debit card transaction.The Internal Revenue Service may notreceive any part of any fees that may becharged.

(f) Authority to enter into contracts.The Commissioner may enter into con-tracts related to receiving payments of taxby credit card or debit card if such con-tracts are cost beneficial to the Govern-ment. The determination of whether thecontract is cost beneficial shall be basedon an analysis appropriate for the contractat issue and at a level of detail appropri-ate to the size of the Government’sinvestment or interest. The Commissionermay not pay any fee or charge or provideany other monetary consideration undersuch contracts for such payments.

(g) Use and disclosure of informationrelating to payment of taxes by creditcard and debit card. Any information ordata obtained directly or indirectly by anyperson other than the taxpayer in connec-tion with payment of taxes by a creditcard or debit card shall be treated as con-fidential, whether such information isreceived from the Internal Revenue Ser-vice or from any other person (includingthe taxpayer).

(1) No person other than the taxpayershall use or disclose such informationexcept as follows—

(i) Card issuers, financial institutions,or other persons participating in the creditcard or debit card transaction may use ordisclose such information for the purposeand in direct furtherance of servicingcardholder accounts, including the resolu-tion of errors in accordance with para-graph (d) of this section. This authorityincludes the following—

(A) Processing the credit card or debitcard transaction, in all of its stagesthrough and including the crediting of theamount charged on account of tax to theUnited States Treasury;

(B) Billing the taxpayer for the amountcharged or debited with respect to pay-ment of the tax liability;

(C) Collecting the amount charged ordebited with respect to payment of the taxliability;

(D) Returning funds to the taxpayer inaccordance with paragraph (d)(3) of thissection;

(E) Sending receipts or confirmationof a transaction to the taxpayer, includingsecured electronic transmissions and fac-similes; and

(F) Providing information necessary tomake a payment to state or local govern-ment agencies, as explicitly authorized bythe taxpayer (e.g., name, address, tax-payer identification number).

(ii) Card issuers, financial institutionsor other persons participating in the creditcard or debit card transaction may useand disclose such information for the pur-pose and in direct furtherance of any ofthe following activities—

(A) Assessment of statistical risk andprofitability;

(B) Transfer of receivables or accountsor any interest therein;

(C) Audit of account information;(D) Compliance with federal, state, or

local law; and(E) Cooperation in properly authorized

civil, criminal, or regulatory investiga-tions by federal, state, or local authorities.

(2) Notwithstanding the provisions ofparagraph (g)(1), use or disclosure ofinformation relating to credit card anddebit card transactions for purposesrelated to any of the following is notauthorized—

(i) Sale of such information (or trans-fer of such information for consideration)separate from a sale of the underlyingaccount or receivable (or transfer of theunderlying account or receivable for con-sideration);

(ii) Marketing for any purpose, suchas, marketing tax-related products or ser-vices, or marketing any product or servicethat targets those who have used a creditcard or debit card to pay taxes; and

(iii) Furnishing such information toany credit reporting agency or creditbureau, except with respect to the aggre-gate amount of a cardholder’s account,with the amount attributable to paymentof taxes not separately identified.

2002-2 I.R.B 280 January 14, 2002

(3) Use and disclosure of informationother than as authorized by this paragraph(g) may result in civil liability under sec-tions 7431(a)(2) and (h).

(h) Effective date. This section appliesto payments of taxes made on and afterDecember 12, 2001.

§ 301.6311–2T [Removed]

Par. 6. Section 301.6311–2T isremoved.

Robert E. Wenzel,Deputy Commissioner of

Internal Revenue.


Mark Weinberger,Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register onDecember 13, 2001, 8:45 a.m., and published in theissue of the Federal Register for December 14,2001, 66 F.R. 64740)

Section 7520.—ValuationTables


Section 7701.—Definitions

26 CFR 301.7701–3: Classification of certain busi-ness entities.

T.D. 8970

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 301

Amendment, Check the BoxRegulations


ACTION: Final regulations.

SUMMARY: This document containsfinal regulations relating to electivechanges in entity classification under sec-tion 7701 of the Internal Revenue Code.

The regulations apply to subsidiary cor-porations that elect to change their classi-fication for federal tax purposes from acorporation to either a partnership or dis-regarded entity.

DATES: Effective Date: These regula-tions are effective December 17, 2001.

FOR FURTHER INFORMATION CON-TACT: Beverly Katz, (202) 622–3050(not a toll-free number).


Background

On November 29, 1999, final regula-tions were published in the Federal Reg-ister (T.D. 8844, 1999–2 C.B. 661 [64 FR66580]) describing the transactions thatare deemed to occur when an entity electsto change its classification for Federal taxpurposes. Those regulations did notaddress certain requirements of section332 as applied to the deemed liquidationincident to an association’s election to beclassified as a partnership or to be disre-garded as an entity separate from itsowner. This amendment to the final regu-lations addresses those requirements.

On January 25, 2000, final regulationswere published in the Federal Register(T.D. 8869, 2000–6 I.R.B. 498 [65 FR3843]) relating to qualified subchapter Ssubsidiaries (QSub). In order to permitthe deemed transaction resulting from aQSub election to comply with the require-ment of section 332 that a plan of liquida-tion has been adopted at the time of a liq-uidating distribution, the final regulationsprovide that a plan of liquidation isdeemed adopted immediately before thedeemed liquidation incident to the QSubelection, unless a formal plan of liquida-tion that contemplates the filing of aQSub election is adopted on an earlierdate. The preamble to the QSub regula-tions provides that Treasury and the IRSintend to amend the section 7701 regula-tions regarding elective changes in entityclassification to provide a similar ruleconcerning the timing of the plan of liq-uidation.

Consistent with the commitment in thepreamble to the QSub regulations, onJanuary 17, 2001, proposed regulationswere published in the Federal Register(REG–110659–00, 66 FR 3959 (2001–12

I.R.B. 917)) under section 7701. No com-ments were received from the public inresponse to the proposed regulations. Nopublic hearing was requested or held. Theproposed regulations are adopted by thisTreasury decision.


Section 301.7701–3(g)(1) describeshow elective changes in the classificationof an entity will be treated for tax pur-poses. Section 301.7701–3(g)(1)(ii) pro-vides that an elective conversion of anassociation to a partnership is deemed tohave the following form: the associationdistributes all of its assets and liabilitiesto its shareholders in liquidation of theassociation, and immediately thereafter,the shareholders contribute all of the dis-tributed assets and liabilities to a newlyformed partnership. Section 301.7701–3(g)(1)(iii) provides that an elective con-version of an association to an entity thatis disregarded as an entity separate fromits owner is deemed to have the followingform: the association distributes all of itsassets and liabilities to its single owner inliquidation of the association.

Section 332 may be relevant to thedeemed liquidation of an association if ithas a corporate owner. Under section 332,no gain or loss is recognized on thereceipt by a corporation of property dis-tributed in complete liquidation ofanother corporation if the requirements ofsection 332(b) are satisfied. Thoserequirements include the adoption of aplan of liquidation at a time when the cor-poration receiving the distribution ownsstock of the liquidating corporation meet-ing the requirements of sect ion1504(a)(2) (i.e., 80 percent of vote andvalue). The elective change from an asso-ciation to a partnership or to a disre-garded entity results in a constructive liq-uidation of the association for federal taxpurposes. Formally adopting a plan of liq-uidation for the entity, however, is poten-tially incompatible with an electivechange under section 301.7701–3, whichallows the local law entity to remain inexistence while liquidating only for fed-eral tax purposes. Accordingly, to providetax treatment of an association’s deemedliquidation that is compatible with the

January 14, 2002 281 2002-2 I.R.B.

requirements of section 332, the regula-tions state that, for purposes of satisfyingthe requirement of adoption of a plan ofliquidation under section 332(b), a plan ofliquidation is deemed adopted immedi-ately before the deemed liquidation inci-dent to an elective change in entity clas-sification, unless a formal plan ofliquidation that contemplates the filing ofthe elective change in entity classificationis adopted on an earlier date.

Effective Date

These regulations apply to electionsfiled on or after December 17, 2001;however, taxpayers may apply the amend-ments retroactively if the corporate ownerclaiming treatment under section 332 andits subsidiary making the election takeconsistent positions with respect to thefederal tax consequences of the election.

Special Analyses

It has been determined that these regu-lations are not a significant regulatoryaction as defined in Executive Order12866. Therefore, a regulatory assess-ment is not required. It also has beendetermined that section 533(b) of theAdministrative Procedures Act (5 U.S.C.chapter 5) does not apply to these regula-tions, and because these regulations donot impose a collection of information onsmall entities, the Regulatory FlexibilityAct (5 U.S.C. chapter 6) does not apply.Pursuant to section 7805(f) of the InternalRevenue Code, the notice of proposedrulemaking preceding these regulationswas submitted to the Chief Counsel forAdvocacy of the Small Business Admin-istration for comment on its impact onsmall business.


The principal authors of these regula-tions are Beverly M. Katz of the Office ofAssociate Chief Counsel (Passthroughs &

Special Industries) and David J. Sotos ofthe Office of Associate Chief Counsel(International). However, other personnelfrom the IRS and the Treasury Depart-ment participated in their development.

* * * * *Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 301 isamended as follows:


Paragraph 1. The authority citation forpart 301 continues to read in part as fol-lows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 301.7701–3 is amended

as follows:1. Redesignating the text of paragraph

(g)(2) as paragraph (g)(2)(i) and adding aheading for newly designated paragraph(g)(2)(i).

2. Adding a new paragraph (g)(2)(ii).3. Revising the first sentence of para-

graph (g)(4).The additions and revision read as fol-

lows:

§ 301.7701–3 Classification of certainbusiness entities.

* * * * *(g) * * *

(2) Effect of elective changes—(i) Ingeneral. * * *

(ii) Adoption of plan of liquidation.For purposes of satisfying the require-ment of adoption of a plan of liquidationunder section 332, unless a formal plan ofliquidation that contemplates the electionto be classified as a partnership or to bedisregarded as an entity separate from itsowner is adopted on an earlier date, themaking, by an association, of an electionunder paragraph (c)(1)(i) of this section to

be classified as a partnership or to be dis-regarded as an entity separate from itsowner is considered to be the adoption ofa plan of liquidation immediately beforethe deemed liquidation described in para-graph (g)(1)(ii) or (iii) of this section.This paragraph (g)(2)(ii) applies to elec-tions filed on or after December 17, 2001.Taxpayers may apply this paragraph(g)(2)(ii) retroactively to elections filedbefore December 17, 2001, if the corpo-rate owner claiming treatment under sec-tion 332 and its subsidiary making theelection take consistent positions withrespect to the federal tax consequences ofthe election.

* * * * *

(4) Effective date. Except as otherwiseprovided in paragraph (g)(2)(ii) of thissection, this paragraph (g) applies to elec-tions that are filed on or after November29, 1999.***

* * * * *


Internal Revenue.


Mark Weinberger,Assistant Secretary of the Treasury.


Section 7872.—Treatment ofLoans With Below-MarketInterest Rates


2002-2 I.R.B 282 January 14, 2002

Part III. Administrative, Procedural and Miscellaneous

Elimination of User Fees forCertain Determination LetterRequests Pursuant to Section620 of the Economic Growthand Tax Relief ReconciliationAct of 2001

Notice 2002–1

I. Purpose

This notice provides guidance on sec-tion 620 of the Economic Growth andTax Relief Reconciliation Act of 2001,Pub. L. 107–16 (EGTRRA) which pro-vides that, for requests made afterDecember 31, 2001, the Secretary of theTreasury or the Secretary’s delegate shallnot require payment of user fees forrequests to the Internal Revenue Service(Service) for certain determination letterswith respect to the qualified status of apension, profit-sharing, stock bonus,annuity, or employee stock ownershipplan. The guidance in this notice will helpa plan sponsor determine if it is requiredto pay a user fee for a determination let-ter application.

II. Background

Rev. Proc. 2002–6 (2002–1 I.R.B.203) (January 7, 2002), contains the pro-cedures of the Service for issuing deter-mination letters on the qualified status ofemployee plans under §§ 401(a), 403(a),409, and 4975(e)(7) of the Internal Rev-enue Code and the exempt status ofrelated trusts or custodial accounts under§ 501(a). Section 3.01 of Rev. Proc.2002–6 describes the types of determina-tion letters that may be requested by ataxpayer.

Rev. Proc. 2002–8 (2002–1 I.R.B.252) (January 7, 2002) provides guidancefor complying with the Service’s user feeprogram as it pertains to requests fordetermination letters on matters under thejurisdiction of the Commissioner, TaxExempt and Government Entities (TE/GE). Form 8717, User Fee for EmployeePlan Determination Letter Request, isused as an attachment to a determination

letter application to transmit the paymentof the required user fee.

Notice 98–4 (1998–1 C.B. 269) pro-vides guidance regarding SIMPLE IRAplans under § 408(p).

III. Questions and Answers on EGTRRAsection 620

Q–1: What does section 620 ofEGTRRA provide?

A–1: In general, section 620 ofEGTRRA provides that the Secretary ofthe Treasury or his delegate shall notrequire, for requests made after December31, 2001, payment of user fees for certainrequests to the Service for determinationletters with respect to the qualified statusof a pension, profit-sharing, stock bonus,annuity, or employee stock ownershipplan maintained solely by one or moreeligible employers, as defined in Q&A–5,or the exempt status of any trust which ispart of the plan. In order to be exemptfrom the user fee with respect to a deter-mination letter request, an eligibleemployer must also meet the require-ments of Q&A–3.

Q–2: Which determination letterrequests are eligible for elimination of theuser fee?

A–2: In general, any determination let-ter request described in section 3.01 ofRev. Proc. 2002–6 that meets the require-ments of this notice is exempt from theuser fee. However, a request for a deter-mination letter on the qualified status of agroup trust under Rev. Rul. 81–100(1981–1 C.B. 326) and a request for awaiver of the minimum funding require-ment are not eligible for elimination ofthe user fee. In addition, user fees are noteliminated for any opinion or advisoryletter request made by a sponsor of anymaster or prototype or volume submitterspecimen plan that the sponsor intends tomarket to participating employers.

Q–3: Are user fees eliminated for alldetermination letter requests filed by aneligible employer after December 31,2001?

A–3: No. User fees are not eliminatedfor any determination letter request madeafter the later of (a) the fifth plan year theplan is in existence or (b) the end of any

remedial amendment period with respectto the plan beginning within the first fiveplan years.

Q–4: When is a plan “in existence” forthis purpose?

A–4: In general, a plan is in existenceon the first day the plan was in effect.Thus, payment of a user fee generallywill not be required for any determinationletter request filed by an eligibleemployer before the first day of a plan’ssixth plan year. However, a plan estab-lished as a result of a spin-off fromanother plan will be treated as in exist-ence on the first day the plan from whichit was spun off was in effect. Also, a planestablished as the result of a merger oftwo or more plans will be treated as inexistence on the earliest date any of themerged plans was in effect.

Q–5: Who is an “eligible employer”for purposes of determining eligibility forelimination of the user fee?

A–5: An “eligible employer” means aneligible employer (as defined in§ 408(p)(2)(C)(i)(I) of the Code) that hasat least one employee who is not a highlycompensated employee (as defined in§ 414(q)) and is participating in the plan.Under § 408(p)(2)(C)(i)(I), an employeris an eligible employer for a year if theemployer had no more than 100 employ-ees who received at least $5,000 of com-pensation from the employer for the pre-ceding year. In general, the determinationof who is an eligible employer is to bemade in accordance with the provisionsof Q&As B–1, B–5, C–4, and C–5 ofNotice 98–4 (1998–1 C.B. 269) relatingto SIMPLE IRA Plans under § 408(p), asdescribed below. Thus, for example, indetermining if an employer is an eligibleemployer for purposes of the eliminationof the user fee, all employers aggregatedunder § 414(b), (c) or (m) are treated as asingle employer and leased employeesdescribed in § 414(n) are treated asemployed by the employer.

Q–6: When is the determination ofwhether an employer is an eligibleemployer made?

A–6: The determination of whether anemployer is an eligible employer is madeas of the date the determination request is

January 14, 2002 283 2002-2 I.R.B.

made. Thus, an employer will be an eli-gible employer with respect to a determi-nation letter application if the followingtwo conditions are met. First, theemployer must have had no more than100 employees who received at least$5,000 of compensation from theemployer for the calendar year immedi-ately preceding the calendar year inwhich the determination letter request isfiled (“the preceding calendar year”).Second, at least one employee who wasnot a highly compensated employee forthe plan year immediately preceding theplan year in which the determination let-ter request is filed (“preceding plan year”)must have participated in the plan for thepreceding plan year. If the determinationletter request is filed in the first plan year,then at least one employee who is not ahighly compensated employee must par-ticipate in the plan for the plan year. SeeQ&A–9 regarding when an employee istreated as participating in a plan.

Q–7: Which employees are taken intoaccount for purposes of determining if theemployer had no more than 100 employ-ees who received at least $5,000 of com-pensation from the employer for the pre-ceding calendar year met?

A–7: For this purpose, all employeesemployed at any time during the preced-ing calendar year, including self-employed individuals described in§ 401(c)(1) who received earned incomefrom the employer during the precedingcalendar year, are taken into account,regardless of whether they were eligibleto participate in the plan. Thus, forexample, employees who are excludableunder the rules of § 410(b)(3) or whohave not met the plan’s minimum eligibil-ity requirements must be taken intoaccount.

Q–8: What definition of compensationis used to determine if an employeereceived at least $5,000 of compensationfrom the employer for the preceding cal-endar year?

A–8: For purposes of determining if anemployee received at least $5,000 ofcompensation from the employer for thepreceding calendar year, in the case of anindividual who is not a self-employedindividual, compensation means theamount described in § 6051(a)(3) (wages,tips, and other compensation from theemployer subject to income tax withhold-ing under § 3401(a)) and amountsdescribed in § 6051(a)(8) (elective defer-rals within the meaning of § 402(g)(3)and compensation deferred under § 457).In the case of a self-employed individual,compensation means net earnings deter-mined from self-employment under§ 1402, prior to subtracting electivedeferral contributions made on behalf ofthe individual.

Q–9: When is an employee treated asparticipating in a plan for purposes ofdetermining if at least one employee whois not a highly compensated employeeparticipated in the plan for the precedingplan year?

A–9: For this purpose, an employee istreated as participating in a plan for aplan year if the employee benefits underthe plan (within the meaning of§ 1.410(b)–3 of the Income Tax Regula-tions) for the plan year. If the plan year inwhich the determination letter request isfiled is the first plan year of the plan, thenan employee is treated as participating ifthe employee is eligible to benefit underthe plan for the year, subject to the satis-faction of applicable conditions for accru-ing a benefit or receiving an allocation forthe year provided in the terms of the plan(whether or not the employee satisfiesthese conditions).

Q–10: Is the user fee for an applicationfor a determination letter for a plan main-tained by more than one employer elimi-nated if any of the employers that main-tain the plan are not eligible employers?

A–10: No. The user fee for an applica-tion for a determination letter for a planmaintained by more than one employer is

not eliminated unless each employer thatmaintains the plan meets the requirementsfor an eligible employer under this notice.For example, the user fee for an applica-tion for a determination letter for a mul-tiple employer plan is not eliminatedunless each employer that maintains theplan is an eligible employer, even if theapplication is for a letter only for the planand not for any employer that maintainsthe plan.

Q–11: When is the elimination of userfees effective?

A–11: The elimination of user fees iseffective with respect to determinationletter requests made after December 31,2001. The user fee for any applicationfiled before January 1, 2002, is not elimi-nated, regardless of when the GUST1

remedial amendment period for the planends. Failure to include the proper userfee with an application filed before Janu-ary 1, 2002, may result in the return ofthe application and possible adverseeffect if the application is not resubmittedwith the correct user fee within 30 days.See section 9.03 of Rev. Proc. 2002–8.

Q–12: For purposes of determining if auser fee is eliminated, when does theGUST remedial amendment periodbegin?

A–12: The date the GUST remedialamendment period begins can vary fromplan to plan. The earliest date on which aplan’s GUST remedial amendment periodcould have begun is December 8, 1994,the date of enactment of the UruguayRound Agreements Act (GATT). For userfee purposes, the Service will treat theGUST remedial amendment period asbeginning on December 8, 1994, in allcases. The first day of the 5-year periodending on December 8, 1994, is Decem-ber 9, 1989. Thus, a GUST determinationletter application for a plan that was firstin existence on or after December 9,1989, may be eligible for elimination ofthe user fee.

1The term “GUST” refers to the following:• the Uruguay Round Agreements Act, Pub. L. 103–465;• the Uniformed Services Employment and Reemployment Rights Act of 1994, Pub. L. 103–353;• the Small Business Job Protection Act of 1996, Pub. L. 104–188;• the Taxpayer Relief Act of 1997, Pub. L. 105–34;• the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105–206; and• the Community Renewal Tax Relief Act of 2000, Pub. L. 106–554.

2002-2 I.R.B 284 January 14, 2002

Q–13: If a determination letter applica-tion filed before January 1, 2002, is with-drawn after December 31, 2001, will theuser fee be refunded?

A–13: No. As provided in section10.01 of Rev. Proc. 2002–8, unless theService declines to rule, a user fee willnot be refunded, regardless of when theapplication is withdrawn.

Q–14: If a determination letter applica-tion filed before January 1, 2002, is modi-fied after December 31, 2001, will theuser fee be affected?

A–14: Generally, the modificationafter December 31, 2001, of a determina-tion letter application filed before January1, 2002, will not result in a refund of theapplicable user fee. Furthermore, if theeffect of the modification of the applica-tion is to change the subcategory of theapplication under section 6.06 of Rev.Proc. 2002–8 to a different subcategorywith a higher user fee, the applicant willbe required to pay the additional user fee.

For example, assume an applicationfor a determination letter for a single-employer plan is filed on Form 5300before January 1, 2002. The applicationdoes not request a determination withrespect to the general test for nondis-crimination in amount of contributions orbenefits or the minimum coverage aver-age benefit test. The application includespayment of the required $700 user fee.After December 31, 2001, the applicantmodifies the application to request adetermination regarding the average ben-efit test. The Service will not issue adetermination letter covering the averagebenefit test unless the applicant pays anadditional $550, the difference betweenthe $700 fee and the $1,250 fee thatapplies to a request for a determinationwith respect to the general test or theaverage benefit test.

Q–15: Does a form have to be filed toindicate that a user fee for a determina-tion letter is not required?

A–15: Yes. Form 8717 is being revisedto allow applicants to indicate that theapplication meets the requirements forelimination of the user fee and to providefor the applicant’s signature in thesecases. The revised Form 8717 is to beused with all section 620 applications thatare filed after December 31, 2001 (whichis when that section becomes effective).The revised form will be available to be

downloaded from the IRS Web Site atht tp: / /www. irs .gov / forms_pubs /forms.html. Failure to include Form 8717,or to sign it, if required, may result in thereturn of the determination letter applica-tion.

IV. Effect on Documents

Rev. Proc. 2002–6 and Rev. Proc.2002–8 are modified.


The principal drafter of this notice isJames Flannery of the Employee Plans,Tax Exempt and Government EntitiesDivision. For further information regard-ing this notice, please contact theEmployee Plans’ taxpayer assistance tele-phone service at 1–877–829–5500 (a toll-free number), between the hours of 8:00a.m. and 6:30 p.m. Eastern Time, Mondaythrough Friday. Mr. Flannery may bereached at 1–202–283–9888 (not a toll-free number).

Questions and AnswersRegarding Dividend ElectionsUnder Section 404(k) andESOPs Holding S CorporationStock

Notice 2002–2

I. Purpose

This notice provides guidance in ques-tion and answer format regarding thechanges made to § 404(k) of the InternalRevenue Code (Code) by section 662 ofthe Economic Growth and Tax ReliefReconciliation Act of 2001 (EGTRRA)(Pub. L. No. 107–16) enacted on June 7,2001. This notice also provides guidanceon the effective date of § 409(p) of theCode, as added by section 656 ofEGTRRA, regarding the allocation ofstock in an S corporation held by anemployee stock ownership plan (ESOP),as defined in § 4975(e)(7) of the Code.

II. Background

Section 404(k) provides a deductionfor applicable dividends paid on appli-cable employer securities of a C corpora-

tion held by an ESOP. Under § 404(k)prior to its amendment by EGTRRA, anapplicable dividend included a dividendthat is paid in cash to participants or theirbeneficiaries or paid to the ESOP and dis-tributed in cash to participants or theirbeneficiaries not later than 90 days afterthe end of the plan year in which the divi-dends were paid by the corporation.Effective for taxable years of the corpora-tion beginning on or after January 1,2002, section 662 of EGTRRA amendedthe definition of applicable dividend byadding new § 404(k)(2)(A)(iii) of theCode to allow a deduction for dividendspaid on employer securities held by theESOP and with respect to which partici-pants or beneficiaries are provided anelection to have the dividend paid in cashto participants or beneficiaries pursuant to§ 404(k)(2)(A)(i), paid to the ESOP anddistributed in cash to participants or ben-eficiaries not later than 90 days after theclose of the plan year in which paid pur-suant to § 404(k)(2)(A)(ii), or paid to theESOP and reinvested in qualifyingemployer securities. The deduction under§ 404(k) is available both with respect todividends that the participant or benefi-ciary elects to reinvest and with respect todividends that the participant or benefi-ciary elects to receive in cash.

Section 404(k)(5)(A) prior to itsamendment by EGTRRA provided thatthe Secretary of the Treasury may disal-low a deduction under § 404(k)(1) if theSecretary determines that the dividendconstitutes, in substance, an evasion oftaxation. Section 662 of EGTRRA alsoamended § 404(k)(5)(A) of the Code toprovide that the Secretary may disallow adeduction under § 404(k)(1) if the Secre-tary determines that the dividend consti-tutes, in substance, an avoidance or eva-sion of taxation.

Section 656 of EGTRRA amended§ 409 of the Code to add a new subsec-tion (p) regarding the allocation ofemployer securities consisting of stock inan S corporation. Section 656(d)(1) ofEGTRRA provides that § 409(p) of theCode applies to plan years beginning afterDecember 31, 2004. However, section656(d)(2) provides that § 409(p) of theCode applies to plan years ending afterMarch 14, 2001 (the date the provisionwas introduced in committee), in the caseof any ESOP established after March 14,

January 14, 2002 285 2002-2 I.R.B.

2001, or in the case of an ESOP estab-lished on or before March 14, 2001, ifemployer securities held by the ESOPconsist of stock in a corporation withrespect to which an election to be an Scorporation under § 1362(a) of the Codeis not in effect on such date.

III. Questions and Answers

For purposes of this notice, the term“dividend” means a dividend paid withrespect to applicable employer securitiesthat otherwise satisfies the requirementsof § 404(k)(2) and the term “employersecurities” means employer securities asdefined in § 404(k)(6). References to par-ticipants include beneficiaries.

Q–1—What is the effective date of§ 404(k)(2)(A)(iii), as added by section662 of EGTRRA?

A–1—(a) Section 404(k)(2)(A)(iii), asadded by section 662 of EGTRRA, iseffective for taxable years of a corpora-tion beginning on or after January 1,2002. In order for dividends with respectto which an election is provided to beapplicable dividends under § 404(k)(2) ofthe Code for a taxable year beginning onor after January 1, 2002, the election pro-vided must comply with § 404(k)(2)(iii)(accordingly, Q&A–2 of § 1.404(k)–1T ofthe temporary Income Tax Regulations nolonger reflects current law).

(b) A dividend subject to an electionby ESOP participants is an applicabledividend under § 404(k)(2)(A)(iii) if theelection provided with respect to the divi-dend complies with Q&A–2 and Q&A–3and if, based on the timing rules inQ&A–4, the deduction for the dividend isallowed for a taxable year beginning onor after January 1, 2002. Therefore, if anESOP offers participants an electionbetween reinvestment in employer securi-ties and distribution with respect to divi-dends paid by a corporation to the ESOPin 2001 and all other applicable require-ments of § 404(k) are satisfied, a divi-dend that a participant elects to reinvest isan applicable dividend and the corpora-tion is allowed a deduction for 2002 if thelater of the date on which the dividend isreinvested in employer securities or thedate on which the participant’s electionbecomes irrevocable occurs in 2002. Adividend paid by a corporation to anESOP in 2001 that a participant elects toreceive in a distribution is an applicable

dividend and such corporation is alloweda deduction for 2002 if the date of thedistribution occurs in 2002. Dividendspaid by a corporation to an ESOP in 2001do not fail to be applicable dividends withrespect to which a corporation is alloweda deduction in 2002 solely because par-ticipants were offered an election in 2001between reinvestment and distribution,except to the extent that such dividendswere actually distributed to participants in2001.

(c) In no event is a dividend an appli-cable dividend under § 404(k)(2)(A)(iii)if such dividend was paid by a corpora-tion to an ESOP before January 1, 2001.

Q–2—What dividend elections can beoffered to ESOP participants under§ 404(k)(2)(A)(iii)?

A–2—Under § 404(k)(2)(A)(iii), theelection provided to ESOP participantswith respect to dividends paid on appli-cable employer securities must be offeredin accordance with the terms of the planand offer participants an electionbetween:

(a) Either (i) the payment of dividendsin cash to participants or (ii) the pay-ment to the ESOP and distribution incash to participants not later than 90days after the close of the plan year inwhich the dividends are paid by thecorporation, and,(b) The payment of dividends to theESOP and reinvestment in employersecurities.An ESOP can also offer participants a

choice among both of the optionsdescribed in (a) and the option describedin (b).

Q–3—What are the requirements forparticipant elections under § 404(k)(2)(A)(iii)?

A–3—In order for dividends subject toan election to be applicable dividendsunder 404(k)(2)(A)(iii), the election mustbe provided in a manner that satisfies thefollowing requirements:

(a) A participant must be given a rea-sonable opportunity before a dividendis paid or distributed to the participantin which to make the election.(b) A participant must have a reason-able opportunity to change a dividendelection at least annually.(c) If there is a change in the planterms governing the manner in whichthe dividends are paid or distributed to

participants, a participant must begiven a reasonable opportunity tomake an election under the new planterms prior to the date on which thefirst dividend subject to the new planterms is paid or distributed.

An ESOP does not fail to comply with therequirements of this Q&A–3 solelybecause it provides that, if a participantfails to make an affirmative dividendelection, one of the options offered to par-ticipants is treated as a default election.

Q–4—When are dividends withrespect to which an election is providedpursuant to Q&A–3 deductible by theemployer corporation under § 404(k)(2)(A)(iii)?

A–4—(a) Dividends reinvested inemployer securities pursuant to an elec-tion that satisfies the requirements ofQ&A–3 of this notice are deductible inthe later of the taxable year of the corpo-ration in which (i) the dividends are rein-vested in employer securities at the par-ticipant’s election or (ii) the participant’selection becomes irrevocable.

(b) Dividends paid to participants orpaid to the ESOP and distributed to par-ticipants within 90 days after the end ofthe plan year are deductible in the taxableyear of the corporation in which the divi-dend is paid or distributed to the partici-pant.

(c) An election is not considered madeuntil the date the election becomes irrevo-cable. Therefore, for purposes of (a), divi-dends are not considered to be reinvestedat the participant’s election prior to thetime that the participant’s electionbecomes irrevocable.

Q–5—Where dividends on employersecurities are paid to participants not laterthan 90 days after the close of the planyear in which the dividends are paid bythe corporation, can earnings on thosedividends be deducted under § 404(k) ifthey are paid to plan participants at thesame time and in the same manner? Dolosses reduce the amount that may bededucted under 404(k)?

A–5—(a) Section 404(k) allows adeduction for dividends paid on appli-cable employer securities if the require-ments of that section are satisfied. Earn-ings on dividends held in the plan do notconstitute dividends within the meaningof § 404(k) and accordingly are notdeductible under that section. Investment

2002-2 I.R.B 286 January 14, 2002

losses attributable to the dividends, or thereduction of the dividend amount paid tothe ESOP by the corporation through taxwithholding (e.g., by a foreign countrywith respect to dividends paid by a for-eign corporation) or other means, reducethe amount of dividend that is availablefor reinvestment or distribution to partici-pants and therefore reduce the amountthat is deductible under § 404(k).

For example, assume that dividends of$2 per share are paid to an ESOP andinvested in employer securities prior tothe time when participants elect either tohave the dividends reinvested inemployer securities or to receive a distri-bution of the dividends within 90 days ofthe end of the plan year. During theperiod between when the dividends arepaid by the corporation to the ESOP andwhen participant elections become irrevo-cable, the fund suffers investment lossesof 50%, so that the amount of the divi-dend remaining is $1 per share. Thededuction available with respect to par-ticipants who elect reinvestment is deter-mined based on $1 of dividends pershare. During the period between whenparticipant elections become irrevocableand dividends are distributed to partici-pants who elect a distribution, the fundsuffers further losses, so that the amountof the dividend remaining is 75¢. TheESOP pays the remaining dividends (75¢per share) and is allowed a deductionwith respect to participants who elect adistribution based on a dividend of 75¢per share, regardless of whether non-dividend amounts are paid to participantsby the ESOP.

Section 404(k)(5)(B) provides that aplan is not treated as violating therequirements of § 401, 409, or 4975(e)(7)merely by reason of any paymentdescribed in § 404(k)(2)(A). The distribu-tion of amounts not attributable to divi-dends from a participant’s account doesnot constitute a payment or distributiondescribed in § 404(k)(2) and accordinglycould be treated as violating the require-ments of § 401, 409 or 4975.

(b) The guidance provided in thisQ&A–5 is not applicable for deductionstaken in taxable years beginning beforeJanuary 1, 2003.

Q–6—Are dividends that are paid orreinvested as provided in § 404(k)(2)(A)(iii) treated as annual additions for

purposes of the limitations on contribu-tions to defined contribution plans under§ 415(c), elective contributions under§ 401(k), employee contributions under§ 401(m), or elective deferrals under§ 402(g)?

A–6—No. The payment or reinvest-ment of dividends under § 404(k)(2)(A)(iii) does not constitute an employercontribution, employee contribution orforfeiture under § 415(c)(2). Conse-quently, these dividends are not annualadditions for purposes of § 415(c). Inaddition, these dividends are not electivedeferrals for purposes of § 402(g), elec-tive contributions for purposes of§ 401(k), or employee contributions forpurposes of § 401(m).

Q–7—If, pursuant to an election satis-fying the requirements of Q&A–2 and 3of this notice, dividends are paid to theplan and reinvested in qualifyingemployer securities, how are those divi-dends treated under the ESOP?

A–7—Dividends that are reinvested inqualifying employer securities at the par-ticipant’s election lose their identity asdividends and are treated as earnings inthe same manner as dividends withrespect to which a participant is not pro-vided an election. Therefore, for example,dividends reinvested at a participant’selection are no longer eligible for theexception to the early distribution taxunder § 72(t)(2)(A)(vi) for dividends paidon employer securities under § 404(k).Similarly, such amounts are no longertreated as dividends for purposes of § 72,402, 411(a)(11) or 401(k).

In contrast, dividends paid in cash to aparticipant pursuant to an election under§ 404(k)(2)(A)(iii) are taxable withoutregard to the return of basis provisionsunder § 72, and are not subject to theconsent requirements of § 411(a)(11) orthe restrictions of § 401(k)(2)(B). In addi-tion, dividends paid to participants under§ 404(k) are not eligible rollover distribu-tions under § 402(c), even if the divi-dends are distributed at the same time asamounts that do constitute an eligiblerollover distribution (or are reported on a1099–R in accordance with Announce-ment 85–168, 1985–48 I.R.B. 40). There-fore, if, prior to the date a participantreceives a distribution, such participanthas made an irrevocable election offeredby the ESOP under § 404(k)(2)(A)(iii) to

have dividends distributed, any dividendssubject to that election are distributedunder § 404(k) and are not eligible roll-over distributions. The corporation isallowed a deduction with respect to suchdividends for the year in which the distri-bution is paid to the participant.

Q–8—In order to receive a hardshipdistribution from a qualified cash ordeferred arrangement, must an employeewho is also a participant in an ESOP electto receive either a payment of dividendsin cash from the employer or a paymentof dividends to the plan followed by acash distribution to the participant?

A–8—Under § 1.401(k)–1(d)(2) of theIncome Tax Regulations, a distribution ismade on account of hardship only if thedistribution is made on account of animmediate and heavy financial need ofthe employee and is necessary to satisfythe financial need. A distribution isdeemed necessary to satisfy an immediateand heavy financial need of an employeeif the employee has obtained all distribu-tions currently available under all plansmaintained by the employer. See § 1.401(k)–1(d)(2)(iii)(B)(4) or (iv)(B)(2). Forpurposes of satisfying these hardship dis-tribution requirements, a participant in anESOP that offers a dividend reinvestmentelection under Q&A–2 and 3 of thisnotice must elect to receive dividends tothe extent currently available to the par-ticipant under the ESOP.

Q–9—What are the vesting require-ments for dividends with respect to whicha corporation is allowed a deductionunder § 404(k)?

A–9—Participants must be fullyvested in dividends with respect to whicha corporation claims a deduction under§ 404(k). Prior to its amendment byEGTRRA, a corporation was allowed adeduction only with respect to dividendsthat were paid in cash or distributed toparticipants and therefore were nonfor-feitable with respect to the participantwho received the distribution (and withrespect to which a deduction was allow-able). Under § 404(k)(2)(A)(iii), a corpo-ration is permitted to offer participants anelection between receipt of a dividend incash or reinvestment in employer securi-ties under the ESOP and is allowed adeduction without regard to the partici-pant’s election. Therefore, an ESOP mustprovide that a participant is fully vested

January 14, 2002 287 2002-2 I.R.B.

in any dividend with respect to which theparticipant is offered an election under§ 404(k)(2)(A)(iii). This requirementapplies to applicable dividends under§ 404(k)(2)(A)(iii) for taxable years of acorporation beginning on or after January1, 2002. An ESOP can comply with thisrequirement by providing that participantsare fully vested in dividends with respectto which an election under§ 404(k)(2)(A)(iii) is offered, withoutregard to whether the participant is vestedin the stock with respect to which thedividend is paid. Alternatively, an ESOPcan comply with this requirement byoffering an election under§ 404(k)(2)(A)(iii) only to vested partici-pants. See § 1.401(a)(4)–4(b)(2)(ii)(2)(B).

Q–10—In order for an applicable divi-dend on stock held by an ESOP to bedeductible under 404(k), when must theplan be an ESOP?

A–10—Under § 404(k)(1), the appli-cable dividends must be paid with respectto applicable employer securities. Section404(k)(3) provides that, for this purpose,applicable employer securities areemployer securities held on the recorddate for a dividend by an ESOP main-tained by the corporation paying suchdividend or any other corporation whichis a member of the controlled group ofcorporations (within the meaning of§ 409(l)(4)) that includes such corpora-tion. In order to satisfy this requirement,the ESOP must be designated as an ESOPno later than the record date for such divi-dend and must comply with the otherrequirements of § 4975(e) as of a date nolater than the record date. The retroactivedesignation of a plan as an ESOP doesnot satisfy the requirement that a plan bedesignated as an ESOP no later than therecord date.

Q–11—When does the payment of adividend constitute an avoidance or eva-sion of taxation resulting in the disallow-ance of the deduction under§ 404(k)(5)(A)?

A–11—As amended by § 662 ofEGTRRA, § 404(k)(5)(A) provides thatthe Secretary may disallow a deductionfor any dividend under § 404(k)(1) if theSecretary determines that the dividendconstitutes, in substance, an avoidance orevasion of taxation. This includes theauthority to disallow a deduction forunreasonable dividends. With respect to

dividends reinvested under § 404(k)(2)(A)(iii), a dividend paid on commonstock that is primarily and regularlytraded on an established securities market(within the meaning of § 54.4975–7(b)(1)(iv) of the Pension Excise TaxRegulations) is presumed to be a reason-able dividend. In the case of a corporationwith no outstanding common stock(determined on a controlled group basis)that is primarily and regularly traded onan established securities market, a deter-mination regarding whether the dividendis reasonable is made by comparing thedividend rate on the stock held by theESOP with the dividend rate for commonstock of comparable corporations whosestock is primarily and regularly traded onan established securities market. Whethera closely held corporation is comparableto a corporation whose stock is primarilyand regularly traded on an establishedsecurities market is determined by com-paring relevant corporate characteristicssuch as industry, size of the corporation,earnings, debt-equity structure, and divi-dend history.

As under prior law, payments inredemption of stock held by an ESOP thatare used to make distributions to termi-nating ESOP participants constitute anevasion of taxation under § 404(k)(5)(A)and are not applicable dividends under§ 404(k)(1). See Rev. Rul. 2001–6(2001–6 I.R.B. 491). Moreover, anydeduction for such payments in redemp-tion of stock is barred under § 162(k).

Q–12—Can an ESOP offer a dividendelection to an ESOP participant who ter-minates employment but does not receivea distribution of his or her account bal-ance?

A–12—A participant who terminatesemployment but does not receive a distri-bution of his or her account balance con-tinues to be a participant in the ESOP. AnESOP may provide that the same electionunder § 404(k)(2)(A)(iii) is offered to allparticipants, including both active partici-pants and participants who are no longeractive participants in the ESOP, and thecorporation is allowed a deduction withrespect to all dividends subject to theelection. Cf. § 1.401(a)(4)–5(b); § 1.410(b)–2(c)(1).

Q–13—When does an ESOP have tobe amended for the changes made by§ 662 of EGTRRA?

A–13—An ESOP has a remedialamendment period under § 401(b), endingnot prior to the last day of the first planyear beginning on or after January 1,2005, in which to adopt any needed retro-active remedial amendment with regardto section 662 of EGTRRA. Amendmentsnecessary to establish an ESOP or forcompliance with the requirements of§ 4975(e) of the Code are not amend-ments with regard to section 662 ofEGTRRA.

Under Notice 2001–42 (2001–30I.R.B. 70) the availability of theEGTRRA remedial amendment period isconditioned on the timely adoption of agood faith EGTRRA plan amendment forsection 662 of EGTRRA. A good faithEGTRRA plan amendment is timely if itis adopted no later than the later of (i) theend of the plan year in which theEGTRRA change in the qualificationrequirement is required to be, or isoptionally, put into effect under the plan,or (ii) the end of the GUST remedialamendment period for the plan. See alsoNotice 2001–57 (2001–38 I.R.B. 279).Therefore, a good faith plan amendmentfor section 662 of EGTRRA must beadopted by the end of the plan year inwhich the first taxable year of the corpo-ration for which the deduction is beingsought ends.

For purposes of determining whether aplan provision is a disqualifying provi-sion under Notice 2001–42, a plan spon-sor will not fail to have adopted a timelygood faith amendment with respect tosection 662 solely because the amend-ment does not specifically address theguidance provided in this notice. Forexample, an amendment does not fail tobe a timely good faith amendment solelybecause it does not address vesting ofdividends with respect to which an elec-tion is provided. However, the plan mustoperate in accordance with this guidance,effective as of January 1, 2002. SeeNotice 2001–57, sec. III (In General).

Q–14—The following examples illus-trate the rules that appear in the questionsand answers of this notice:

Example 1 (i) Corporation A is a calendar yearC corporation that maintains an ESOP. The ESOPprovided that dividends paid by the corporation dur-ing 2001 would be paid to the ESOP and accumu-lated for distribution within 90 days of plan yearend. Corporation A pays quarterly dividends to itsESOP during 2001. The ESOP accumulates thesedividends during 2001 for payment to participants

2002-2 I.R.B 288 January 14, 2002

within 90 days of the end of the plan year andinvests the dividends in a short-term investmentfund. The ESOP is amended to provide that partici-pants can elect, in accordance with Q&A–2 and 3 ofthis notice, a distribution in cash of 2001 dividendswithin the first 90 days of 2002 or reinvestment ofsuch dividends in employer securities within thefirst 90 days of 2002.

(ii) Because the 2001 dividends are distributedto participants or reinvested at the participant’s elec-tion in 2002, Corporation A is allowed a deductionwith respect to the 2001 dividends for 2002. In tax-able years beginning on or after January 1, 2003, theamount of this deduction cannot exceed the amountof the dividends available for distribution or rein-vestment.

Example 2 (i) Corporation B is a calendar yearC corporation that maintains an ESOP that accumu-lates dividends during the year for distributionwithin 90 days of the end of the plan year. In 2002,the ESOP is amended to provide participants withan election with respect to dividends paid by Corpo-ration B in 2002. A participant’s election to have adividend distributed or reinvested in employer secu-rities becomes irrevocable when the dividend is paidto the ESOP. The ESOP provides that dividends areinvested in employer securities as soon as possibleafter the dividend is paid to the ESOP for those par-ticipants who elect to have dividends reinvested inemployer securities. All 2002 dividends that partici-pants elect to reinvest are actually reinvested inemployer securities during 2002. The ESOP alsoprovides that the dividends to be distributed basedon participant elections are invested in a short-terminvestment fund. This fund does not incur lossesprior to the distribution of the dividends. Distribu-tions are made to participants during the first 90days of 2003.

(ii) Corporation B is entitled to a deduction for2002 for the amount of the dividends reinvested inemployer securities in 2002. Corporation B is alsoentitled to a deduction for 2003 for the amount ofdividends distributed to participants in 2003.Because Corporation B did not incur any losses withrespect to the dividends that were accumulated fordistribution, Corporation B’s deduction is equal tothe dividends paid by Corporation B.

Q–15—By what date must a corpora-tion have filed a valid election to betreated as an S corporation under§ 1362(a) of the Code in order for thedelayed effective date in section656(d)(1) of EGTRRA to apply to anESOP maintained by the corporation?

A–15—Section 656(d)(1) providesthat section 409(p) of the Code, as addedby EGTRRA, applies to an ESOP for planyears beginning after December 31, 2004.Section 656(d)(2) of EGTRRA, however,provides that § 409(p) of the Code appliesto plan years ending after March 14,2001, if the ESOP is established after thatdate or, in the case of an ESOP estab-lished on or before March 14, 2001, theemployer securities held by the plan con-sist of stock in a corporation with respect

to which an election under § 1362(a) tobe an S corporation is not in effect on thatdate. For this purpose, a corporation doesnot have an election in effect on March14, 2001, unless a valid election wasactually filed on or before that date and iseffective with respect to such corporationon or before that date. For example, a cor-poration that, on a date after March 14,2001, files an election to be treated as anS corporation under § 1362(a) effective asof January 1, 2001, did not have an elec-tion under section 1362(a) in effect onMarch 14, 2001. Accordingly, § 409(p),as added by EGTRRA, applies to anESOP maintained by such corporationbeginning with the first plan year endingafter March 14, 2001.

IV. Drafting Information

The principal drafters of this notice areSteven Linder of the Employee Plans, TaxExempt and Government Entities Divi-sion and John Ricotta of the Office ofChief Counsel. For further informationregarding this notice, please contact theEmployee Plans’ taxpayer assistance tele-phone service at 1–877–829–5500 (a toll-free number) between the hours of 8:00a.m. and 6:30 p.m. Eastern Time, Mondaythrough Friday. Mr. Linder may bereached at (202) 283–9888; Mr. Ricottamay be reached at (202) 622–6060. Thetelephone numbers in the preceding sen-tence are not toll-free.

Safe Harbor Explanation—Certain Qualified PlanDistributions

Notice 2002–3

PURPOSE

This notice contains a “Safe HarborExplanation” that plan administratorsmay provide to recipients of eligible roll-over distributions from employer plans inorder to satisfy § 402(f) of the InternalRevenue Code (the “Code”). It is anupdated version of the Safe HarborExplanation that was published in Notice2000–11 (2000–6 I.R.B. 572) to reflectchanges made by the Economic Growth

and Tax Relief Reconciliation Act of2001 (“EGTRRA”), P.L. 107–16. Thisnotice also contains a Safe Harbor Expla-nation that administrators of “governmen-tal 457 plans” may provide to recipientsof eligible rollover distributions from agovernmental 457 plan in order to satisfy§ 402(f).

BACKGROUND

Section 402(f) requires a plan adminis-trator of a plan qualified under § 401(a)or a § 403(a) annuity plan to provide awritten explanation to any recipient of an“eligible rollover distribution.” In addi-tion, as amended by EGTRRA, §§ 403(b)(8)(B) and 457(e)(16)(B) require aplan administrator, or in the case of a§ 403(b) tax-sheltered annuity, a payor, toprovide the written explanation to therecipient of an “eligible rollover distribu-tion.” An “eligible rollover distribution”is a payment that may be rolled over to an“eligible retirement plan.” An “eligibleretirement plan” includes an individualretirement arrangement described in§ 408(a) or (b) (“traditional IRA”) or an“eligible employer plan.” An “eligibleemployer plan” includes a plan qualifiedunder § 401(a), including a profit-sharingplan or stock bonus plan (whether or notthe plan includes a § 401(k) plan), amoney purchase plan, or a defined benefitplan; a § 403(a) annuity plan; a § 403(b)tax-sheltered annuity; and an eligible§ 457(b) plan maintained by a govern-mental employer (a “governmental 457plan”). The written explanation mustcover the direct rollover rules, the manda-tory income tax withholding on distribu-tions not directly rolled over, the taxtreatment of distributions not rolled over(including the special tax treatment avail-able for certain lump sum distributions),and when distributions may be subject todifferent restrictions and tax conse-quences after being rolled over. Section402(f) provides that this explanation mustbe given within a reasonable period oftime before the plan makes an eligiblerollover distribution.

This notice is being issued to reflectrecent changes made to the Code byEGTRRA that affect the information pro-vided in the Safe Harbor Explanation.Sections 636, 641, 642, and 643 ofEGTRRA amended provisions of the

January 14, 2002 289 2002-2 I.R.B.

Code relating to eligible rollover distribu-tions. These sections apply to distribu-tions made on or after January 1, 2002.Section 643(a) of EGTRRA added Code§ 402(c)(2) to permit the rollover of after-tax contributions. Section 636(b)(1) ofEGTRRA amended Code § 402(c)(4)(C)to provide that hardship distributions arenot eligible rollover distributions. Section641(a)(1) of EGTRRA added section457(e)(16) of the Code, which permitsrollovers from a governmental 457 planto an eligible retirement plan. Section641(a)(2) of EGTRRA added Code§ 402(c)(8)(B)(iv) to provide that a gov-ernmental 457 plan is an eligible retire-ment plan. Section 641(b)(2) of EGTRRAadded Code § 402(c)(8)(B)(vi) to providethat a § 403(b) tax-sheltered annuity is aneligible retirement plan. Section 641(b)(1)of EGTRRA amended § 403(b)(8) to per-mit rollovers from a § 403(b) tax-sheltered annuity to any eligible retire-ment plan. Finally, Section 641(d) ofEGTRRA amended Code § 402(c)(9) toexpand the plans to which survivingspouses may roll over distributions.

In addit ion, sect ion 641(c) ofEGTRRA specifically expanded therequirements for the explanation under§ 402(f) by adding new subparagraph (E)to § 402(f)(1). The expanded explanationmust include information regarding whena later distribution from an eligible retire-ment plan receiving an eligible rolloverdistribution may be subject to restrictionsand tax consequences which are differentfrom the plan that made the first distribu-tion. Section 641(c) of EGTRRA providesthat if a plan administrator makes reason-able efforts to comply with the require-ment to provide the expanded explana-tion, no penalty will be imposed forfailing to provide the informationrequired under section 641(c) withrespect to any distribution made beforethe date that is 90 days after the issuanceof a safe harbor notice by the Secretary ofthe Treasury.

SAFE HARBOR AND ALTERNATIVEEXPLANATIONS

This notice contains two model writtenexplanations (“Safe Harbor Explana-tions”), one for distributions from planssubject to § 402(f) other than governmen-tal 457 plans and one for distributionsfrom governmental 457 plans. The appro-priate Safe Harbor Explanation meets therequirements of § 402(f) for distributionson or after January 1, 2002, if it is pro-vided to the recipient of an eligible roll-over distribution within a reasonableperiod of time before the distribution ismade. In general, under § 1.402(f)–1 ofthe Income Tax Regulations, a reasonableperiod of time for providing an explana-tion is no less than 30 days (subject towaiver) and no more than 90 days beforethe date on which a distribution is made.Notice 2000–11 indicated that, if the lawgoverning the tax treatment of distribu-tions is amended, the Safe Harbor Expla-nation contained in that notice would nolonger satisfy § 402(f) to the extent thatthe Safe Harbor Explanation no longeraccurately describes the relevant law.Thus, because of the changes made byEGTRRA, for distributions on or afterJanuary 1, 2002 (the effective date of therelevant EGTRRA provisions), the expla-nation provided in Notice 2000–11 willnot be considered a Safe Harbor Explana-tion. No penalty will be imposed, how-ever, for any failure to provide theexpanded explanation required byEGTRRA with respect to any distributionmade before April 14, 2002, provided theplan administrator makes a reasonableattempt to comply with the expandednotice requirement of EGTRRA.

In using one of the Safe Harbor Expla-nations, a plan administrator may “cus-tomize” the Safe Harbor Explanation byomitting any portion that does not applyto the plan. For example, if the plan doesnot hold after-tax employee contributions,it would be appropriate for the paragraphheaded “After-tax Contributions” to beeliminated. Similarly, if the plan does notprovide for distributions of employerstock or other employer securities, it

would be appropriate for the paragraphheaded “Employer Stock or Securities” tobe eliminated. Other paragraphs that maynot be relevant to a particular planinclude, for example, “Payments SpreadOver Long Periods,” “Direct Rollover ofa Series of Payments,” “Special TaxTreatment,” “Hardship Distributions,”and “Repayment of Plan Loans.” In addi-tion, a plan administrator may provideadditional information with the Safe Har-bor Explanation, if the information is notinconsistent with the Safe Harbor Expla-nation.

Alternatively, a plan administrator cansatisfy § 402(f) by providing distributeeswith an explanation that is different fromone of the Safe Harbor Explanations. Anyexplanation must contain the informationrequired by § 402(f) and must be writtenin a manner designed to be easily under-stood.

If the law governing the tax treatmentof distributions or the other provisionscovered by the Safe Harbor Explanationis amended after publication of thisnotice, the Safe Harbor Explanations willnot satisfy § 402(f) to the extent that theSafe Harbor Explanations no longer accu-rately describes the relevant law.

EFFECT ON OTHER DOCUMENT

Notice 2000–11 is obsoleted.


The principal authors of this notice areSteven Linder of the Employee Plans, TaxExempt and Government Entities Divi-sion and Cathy Vohs of the Office of theDivision Counsel/Associate Chief Coun-sel (Tax Exempt and Government Enti-ties). For further information regardingthis notice, contact the Employee Planstaxpayer assistance telephone servicebetween the hours of 8:00 a.m. and 6:30p.m. Eastern Time, Monday through Fri-day by calling 1–877–829–5500 (a toll-free number). Mr. Linder can be reachedat (202) 283–9888 (not a toll-free num-ber). Ms. Vohs can be reached at (202)622–6090 (not a toll-free number).

2002-2 I.R.B 290 January 14, 2002

SAFE HARBOR EXPLANATION FORPLANS QUALIFIED UNDER SEC-TION 401(a), SECTION 403(a) ANNU-ITY PLANS, OR SECTION 403(b) TAXSHELETERED ANNUITIES

SPECIAL TAX NOTICE REGARDINGPLAN PAYMENTS

This notice explains how you can con-tinue to defer federal income tax on yourretirement savings in the [INSERTNAME OF PLAN] (the “Plan”) and con-tains important information you will needbefore you decide how to receive yourPlan benefits.

This notice is provided to you by[INSERT NAME OF THE PLANADMINISTRATOR OR, IN THE CASEOF A § 403(b) TAX-SHELTEREDANNUITY, THE PAYOR] (your “PlanAdministrator”) because all or part of thepayment that you will soon receive fromthe Plan may be eligible for rollover byyou or your Plan Administrator to a tradi-tional IRA or an eligible employer plan.A rollover is a payment by you or thePlan Administrator of all or part of yourbenefit to another plan or IRA that allowsyou to continue to postpone taxation ofthat benefit until it is paid to you. Yourpayment cannot be rolled over to a RothIRA, a SIMPLE IRA, or a Coverdell Edu-cation Savings Account (formerly knownas an education IRA). An “eligibleemployer plan” includes a plan qualifiedunder section 401(a) of the Internal Rev-enue Code, including a 401(k) plan,profit-sharing plan, defined benefit plan,stock bonus plan, and money purchaseplan; a section 403(a) annuity plan; a sec-tion 403(b) tax-sheltered annuity; and aneligible section 457(b) plan maintainedby a governmental employer (governmen-tal 457 plan).

An eligible employer plan is notlegally required to accept a rollover.Before you decide to roll over your pay-ment to another employer plan, youshould find out whether the plan acceptsrollovers and, if so, the types of distribu-tions it accepts as a rollover. You shouldalso find out about any documents thatare required to be completed before thereceiving plan will accept a rollover.Even if a plan accepts rollovers, it mightnot accept rollovers of certain types ofdistributions, such as after-tax amounts. If

this is the case, and your distributionincludes after-tax amounts, you may wishinstead to roll your distribution over to atraditional IRA or split your rolloveramount between the employer plan inwhich you will participate and a tradi-tional IRA. If an employer plan acceptsyour rollover, the plan may restrict subse-quent distributions of the rollover amountor may require your spouse’s consent forany subsequent distribution. A subsequentdistribution from the plan that acceptsyour rollover may also be subject to dif-ferent tax treatment than distributionsfrom this Plan. Check with the adminis-trator of the plan that is to receive yourrollover prior to making the rollover.

If you have additional questions afterreading this notice, you can contact yourplan administrator at [INSERT PHONENUMBER OR OTHER CONTACTINFORMATION].

SUMMARY

There are two ways you may be able toreceive a Plan payment that is eligible forrollover:

(1) Certain payments can be madedirectly to a traditional IRA that youestablish or to an eligible employerplan that will accept it and hold it foryour benefit (“DIRECT ROLL-OVER”); or

(2) The payment can be PAID TO YOU.

If you choose a DIRECT ROLLOVER:

• Your payment will not be taxed in thecurrent year and no income tax willbe withheld.

• You choose whether your paymentwill be made directly to your tradi-tional IRA or to an eligible employerplan that accepts your rollover. Yourpayment cannot be rolled over to aRoth IRA, a SIMPLE IRA, or aCoverdell Education Savings Accountbecause these are not traditionalIRAs.

• The taxable portion of your paymentwill be taxed later when you take itout of the traditional IRA or the eli-gible employer plan. Depending onthe type of plan, the later distributionmay be subject to different tax treat-

ment than it would be if you receiveda taxable distribution from this Plan.

If you choose to have a Plan payment thatis eligible for rollover PAID TO YOU:

• You will receive only 80% of the tax-able amount of the payment, becausethe Plan Administrator is required towithhold 20% of that amount andsend it to the IRS as income tax with-holding to be credited against yourtaxes.

• The taxable amount of your paymentwill be taxed in the current yearunless you roll it over. Under limitedcircumstances, you may be able touse special tax rules that could reducethe tax you owe. However, if youreceive the payment before age 59½,you may have to pay an additional10% tax.

• You can roll over all or part of thepayment by paying it to your tradi-tional IRA or to an eligible employerplan that accepts your rollover within60 days after you receive the pay-ment. The amount rolled over will notbe taxed until you take it out of thetraditional IRA or the eligibleemployer plan.

• If you want to roll over 100% of thepayment to a traditional IRA or an eli-gible employer plan, you must findother money to replace the 20% of thetaxable portion that was withheld. Ifyou roll over only the 80% that youreceived, you will be taxed on the20% that was withheld and that is notrolled over.

Your Right to Waive the 30–DayNotice Period. Generally, neither a directrollover nor a payment can be made fromthe plan until at least 30 days after yourreceipt of this notice. Thus, after receiv-ing this notice, you have at least 30 daysto consider whether or not to have yourwithdrawal directly rolled over. If you donot wish to wait until this 30-day noticeperiod ends before your election is pro-cessed, you may waive the notice periodby making an affirmative election indicat-ing whether or not you wish to make adirect rollover. Your withdrawal will thenbe processed in accordance with yourelection as soon as practical after it isreceived by the Plan Administrator.

January 14, 2002 291 2002-2 I.R.B.

MORE INFORMATION

I. PAYMENTS THAT CAN ANDCANNOT BE ROLLEDOVER ....................................... [ ]

II. DIRECT ROLLOVER .............. [ ]

III. PAYMENT PAIDTO YOU................................... [ ]

IV. SURVIVING SPOUSES,ALTERNATE PAYEES, ANDOTHER BENEFICIARIES ...... [ ]

I. PAYMENTS THATCAN AND

CANNOT BE ROLLED OVER

Payments from the Plan may be “eli-gible rollover distributions.” This meansthat they can be rolled over to a tradi-tional IRA or to an eligible employer planthat accepts rollovers. Payments from aplan cannot be rolled over to a Roth IRA,a SIMPLE IRA, or a Coverdell EducationSavings Account. Your Plan administratorshould be able to tell you what portion ofyour payment is an eligible rollover dis-tribution.

After-tax Contributions. If you madeafter-tax contributions to the Plan, thesecontributions may be rolled into either atraditional IRA or to certain employerplans that accept rollovers of the after-taxcontributions. The following rules apply:a) Rollover into a Traditional IRA. You

can roll over your after-tax contribu-tions to a traditional IRA either directlyor indirectly. Your plan administratorshould be able to tell you how much ofyour payment is the taxable portionand how much is the after-tax portion.

If you roll over after-tax contributionsto a traditional IRA, it is your respon-sibility to keep track of, and report tothe Service on the applicable forms,the amount of these after-tax contribu-tions. This will enable the nontaxableamount of any future distributionsfrom the traditional IRA to be deter-mined.

Once you roll over your after-tax con-tributions to a traditional IRA, thoseamounts CANNOT later be rolled overto an employer plan.

b) Rollover into an Employer Plan. Youcan roll over after-tax contributionsfrom an employer plan that is qualifiedunder Code section 401(a) or a section403(a) annuity plan to another suchplan using a direct rollover if the otherplan provides separate accounting foramounts rolled over, including sepa-rate accounting for the after-taxemployee contributions and earningson those contributions. You can alsoroll over after-tax contributions from asection 403(b) tax-sheltered annuity toanother section 403(b) tax-shelteredannuity using a direct rollover if theother tax-sheltered annuity providesseparate accounting for amounts rolledover, including separate accounting forthe after-tax employee contributionsand earnings on those contributions.You CANNOT roll over after-tax con-tributions to a governmental 457 plan.If you want to roll over your after-taxcontributions to an employer plan thataccepts these rollovers, you cannothave the after-tax contributions paid toyou first. You must instruct the PlanAdministrator of this Plan to make adirect rollover on your behalf. Also,you cannot first roll over after-tax con-tributions to a traditional IRA and thenroll over that amount into an employerplan.

The following types of payments cannotbe rolled over:

Payments Spread over Long Periods.You cannot roll over a payment if it ispart of a series of equal (or almost equal)payments that are made at least once ayear and that will last for:

• your lifetime (or a period measuredby your life expectancy), or

• your lifetime and your beneficiary’slifetime (or a period measured byyour joint life expectancies), or

• a period of 10 years or more.Required Minimum Payments. Begin-

ning when you reach age 70½ or retire,whichever is later, a certain portion ofyour payment cannot be rolled overbecause it is a “required minimum pay-ment” that must be paid to you. Specialrules apply if you own more than 5% ofyour employer.

Hardship Distributions. A hardshipdistribution cannot be rolled over.

ESOP Dividends. Cash dividends paidto you on employer stock held in anemployee stock ownership plan cannot berolled over.

Corrective Distributions. A distribu-tion that is made to correct a failed non-discrimination test or because legal limitson certain contributions were exceededcannot be rolled over.

Loans Treated as Distributions. Theamount of a plan loan that becomes a tax-able deemed distribution because of adefault cannot be rolled over. However, aloan offset amount is eligible for rollover,as discussed in Part III below. Ask thePlan Administrator of this Plan if distribu-tion of your loan qualifies for rollovertreatment.

The Plan Administrator of this Planshould be able to tell you if your paymentincludes amounts which cannot be rolledover.

II. DIRECT ROLLOVER

A DIRECT ROLLOVER is a directpayment of the amount of your Plan ben-efits to a traditional IRA or an eligibleemployer plan that will accept it. You canchoose a DIRECT ROLLOVER of all orany portion of your payment that is aneligible rollover distribution, as describedin Part I above. You are not taxed on anytaxable portion of your payment forwhich you choose a DIRECT ROLL-OVER until you later take it out of thetraditional IRA or eligible employer plan.In addition, no income tax withholding isrequired for any taxable portion of yourPlan benefits for which you choose aDIRECT ROLLOVER. This Plan mightnot let you choose a DIRECT ROLL-OVER if your distributions for the yearare less than $200.

DIRECT ROLLOVER to a TraditionalIRA. You can open a traditional IRA toreceive the direct rollover. If you chooseto have your payment made directly to atraditional IRA, contact an IRA sponsor(usually a financial institution) to find outhow to have your payment made in adirect rollover to a traditional IRA at thatinstitution. If you are unsure of how toinvest your money, you can temporarilyestablish a traditional IRA to receive the

2002-2 I.R.B 292 January 14, 2002

payment. However, in choosing a tradi-tional IRA, you may wish to make surethat the traditional IRA you choose willallow you to move all or a part of yourpayment to another traditional IRA at alater date, without penalties or other limi-tations. See IRS Publication 590, Indi-vidual Retirement Arrangements, formore information on traditional IRAs(including limits on how often you canroll over between IRAs).

DIRECT ROLLOVER to a Plan. If youare employed by a new employer that hasan eligible employer plan, and you want adirect rollover to that plan, ask the planadministrator of that plan whether it willaccept your rollover. An eligibleemployer plan is not legally required toaccept a rollover. Even if your newemployer’s plan does not accept a roll-over, you can choose a DIRECT ROLL-OVER to a traditional IRA. If theemployer plan accepts your rollover, theplan may provide restrictions on the cir-cumstances under which you may laterreceive a distribution of the rolloveramount or may require spousal consent toany subsequent distribution. Check withthe plan administrator of that plan beforemaking your decision.

DIRECT ROLLOVER of a Series ofPayments. If you receive a payment thatcan be rolled over to a traditional IRA oran eligible employer plan that will acceptit, and it is paid in a series of paymentsfor less than 10 years, your choice tomake or not make a DIRECT ROLL-OVER for a payment will apply to alllater payments in the series until youchange your election. You are free tochange your election for any later pay-ment in the series.

Change in Tax Treatment Resultingfrom a DIRECT ROLLOVER. The taxtreatment of any payment from the eli-gible employer plan or traditional IRAreceiving your DIRECT ROLLOVERmight be different than if you receivedyour benefit in a taxable distributiondirectly from the Plan. For example, ifyou were born before January 1, 1936,you might be entitled to ten-year averag-ing or capital gain treatment, as explainedbelow. However, if you have your benefitrolled over to a section 403(b) tax-sheltered annuity, a governmental 457plan, or a traditional IRA in a DIRECTROLLOVER, your benefit will no longer

be eligible for that special treatment. Seethe sections below entitled “Additional10% Tax if You Are under Age 59½” and“Special Tax Treatment if You Were Bornbefore January 1, 1936.”

III. PAYMENT PAID TO YOU

If your payment can be rolled over(see Part I above) and the payment ismade to you in cash, it is subject to 20%federal income tax withholding on thetaxable portion (state tax withholdingmay also apply). The payment is taxed inthe year you receive it unless, within 60days, you roll it over to a traditional IRAor an eligible employer plan that acceptsrollovers. If you do not roll it over, spe-cial tax rules may apply.

Income Tax Withholding:

Mandatory Withholding. If any portionof your payment can be rolled over underPart I above and you do not elect to makea DIRECT ROLLOVER, the Plan isrequired by law to withhold 20% of thetaxable amount. This amount is sent tothe IRS as federal income tax withhold-ing. For example, if you can roll over ataxable payment of $10,000, only $8,000will be paid to you because the Plan mustwithhold $2,000 as income tax. However,when you prepare your income tax returnfor the year, unless you make a rolloverwithin 60 days (see “Sixty-Day RolloverOption” below), you must report the full$10,000 as a taxable payment from thePlan. You must report the $2,000 as taxwithheld, and it will be credited againstany income tax you owe for the year.There will be no income tax withholdingif your payments for the year are less than$200.

Voluntary Withholding. If any portionof your payment is taxable but cannot berolled over under Part I above, the man-datory withholding rules described abovedo not apply. In this case, you may electnot to have withholding apply to that por-tion. If you do nothing, an amount will betaken out of this portion of your paymentfor federal income tax withholding. Toelect out of withholding, ask the PlanAdministrator for the election form andrelated information.

Sixty-Day Rollover Option. If youreceive a payment that can be rolled over

under Part I above, you can still decide toroll over all or part of it to a traditionalIRA or to an eligible employer plan thataccepts rollovers. If you decide to rollover, you must contribute the amount ofthe payment you received to a traditionalIRA or eligible employer plan within 60days after you receive the payment. Theportion of your payment that is rolledover will not be taxed until you take it outof the traditional IRA or the eligibleemployer plan.

You can roll over up to 100% of yourpayment that can be rolled over underPart I above, including an amount equalto the 20% of the taxable portion that waswithheld. If you choose to roll over100%, you must find other money withinthe 60-day period to contribute to the tra-ditional IRA or the eligible employerplan, to replace the 20% that was with-held. On the other hand, if you roll overonly the 80% of the taxable portion thatyou received, you will be taxed on the20% that was withheld.

Example: The taxable portion of your paymentthat can be rolled over under Part I above is$10,000, and you choose to have it paid to you. Youwill receive $8,000, and $2,000 will be sent to theIRS as income tax withholding. Within 60 days afterreceiving the $8,000, you may roll over the entire$10,000 to a traditional IRA or an eligible employerplan. To do this, you roll over the $8,000 youreceived from the Plan, and you will have to find$2,000 from other sources (your savings, a loan,etc.). In this case, the entire $10,000 is not taxeduntil you take it out of the traditional IRA or an eli-gible employer plan. If you roll over the entire$10,000, when you file your income tax return youmay get a refund of part or all of the $2,000 with-held.

If, on the other hand, you roll over only $8,000,the $2,000 you did not roll over is taxed in the yearit was withheld. When you file your income taxreturn, you may get a refund of part of the $2,000withheld. (However, any refund is likely to be largerif you roll over the entire $10,000.)

Additional 10% Tax If You Are underAge 59½. If you receive a payment beforeyou reach age 59½ and you do not roll itover, then, in addition to the regularincome tax, you may have to pay an extratax equal to 10% of the taxable portion ofthe payment. The additional 10% tax gen-erally does not apply to (1) payments thatare paid after you separate from servicewith your employer during or after theyear you reach age 55, (2) payments thatare paid because you retire due to disabil-ity, (3) payments that are paid as equal (or

January 14, 2002 293 2002-2 I.R.B.

almost equal) payments over your life orlife expectancy (or your and your benefi-ciary’s lives or life expectancies), (4)dividends paid with respect to stock by anemployee stock ownership plan (ESOP)as described in Code section 404(k), (5)payments that are paid directly to thegovernment to satisfy a federal tax levy,(6) payments that are paid to an alternatepayee under a qualified domestic rela-tions order, or (7) payments that do notexceed the amount of your deductiblemedical expenses. See IRS Form 5329 formore information on the additional 10%tax.

The additional 10% tax will not applyto distributions from a governmental 457plan, except to the extent the distributionis attributable to an amount you rolledover to that plan (adjusted for investmentreturns) from another type of eligibleemployer plan or IRA. Any amount rolledover from a governmental 457 plan toanother type of eligible employer plan orto a traditional IRA will become subjectto the additional 10% tax if it is distrib-uted to you before you reach age 59½,unless one of the exceptions applies.

Special Tax Treatment If You WereBorn before January 1, 1936. If youreceive a payment from a plan qualifiedunder section 401(a) or a section 403(a)annuity plan that can be rolled over underPart I and you do not roll it over to a tra-ditional IRA or an eligible employer plan,the payment will be taxed in the year youreceive it. However, if the payment quali-fies as a “lump sum distribution,” it maybe eligible for special tax treatment. (Seealso “Employer Stock or Securities”,below.) A lump sum distribution is a pay-ment, within one year, of your entire bal-ance under the Plan (and certain othersimilar plans of the employer) that is pay-able to you after you have reached age59½ or because you have separated fromservice with your employer (or, in thecase of a self-employed individual, afteryou have reached age 59½ or havebecome disabled). For a payment to betreated as a lump sum distribution, youmust have been a participant in the planfor at least five years before the year inwhich you received the distribution. Thespecial tax treatment for lump sum distri-butions that may be available to you isdescribed below.

Ten-Year Averaging. If you receive alump sum distribution and you were bornbefore January 1, 1936, you can make aone-time election to figure the tax on thepayment by using “10–year averaging”(using 1986 tax rates). Ten-year averag-ing often reduces the tax you owe.

Capital Gain Treatment. If youreceive a lump sum distribution and youwere born before January 1, 1936, andyou were a participant in the Plan before1974, you may elect to have the part ofyour payment that is attributable to yourpre-1974 participation in the Plan taxedas long-term capital gain at a rate of 20%.

There are other limits on the specialtax treatment for lump sum distributions.For example, you can generally elect thisspecial tax treatment only once in yourlifetime, and the election applies to alllump sum distributions that you receive inthat same year. You may not elect thisspecial tax treatment if you rolledamounts into this Plan from a 403(b) tax-sheltered annuity contract, a governmen-tal 457 plan, or from an IRA not origi-nally attributable to a qualified employerplan. If you have previously rolled over adistribution from this Plan (or certainother similar plans of the employer), youcannot use this special averaging treat-ment for later payments from the Plan. Ifyou roll over your payment to a tradi-tional IRA, governmental 457 plan, or403(b) tax-sheltered annuity, you will notbe able to use special tax treatment forlater payments from that IRA, plan, orannuity. Also, if you roll over only a por-tion of your payment to a traditional IRA,governmental 457 plan, or 403(b) tax-sheltered annuity, this special tax treat-ment is not available for the rest of thepayment. See IRS Form 4972 for addi-tional information on lump sum distribu-tions and how you elect the special taxtreatment.

Employer Stock or Securities. There isa special rule for a payment from the Planthat includes employer stock (or otheremployer securities). To use this specialrule, 1) the payment must qualify as alump sum distribution, as describedabove, except that you do not need fiveyears of plan participation, or 2) theemployer stock included in the paymentmust be attributable to “after-tax”employee contributions, if any. Under thisspecial rule, you may have the option of

not paying tax on the “net unrealizedappreciation” of the stock until you sellthe stock. Net unrealized appreciationgenerally is the increase in the value ofthe employer stock while it was held bythe Plan. For example, if employer stockwas contributed to your Plan accountwhen the stock was worth $1,000 but thestock was worth $1,200 when youreceived it, you would not have to pay taxon the $200 increase in value until youlater sold the stock.

You may instead elect not to have thespecial rule apply to the net unrealizedappreciation. In this case, your net unre-alized appreciation will be taxed in theyear you receive the stock, unless you rollover the stock. The stock can be rolledover to a traditional IRA or another eli-gible employer plan, either in a directrollover or a rollover that you make your-self. Generally, you will no longer be ableto use the special rule for net unrealizedappreciation if you roll the stock over toa traditional IRA or another eligibleemployer plan.

If you receive only employer stock ina payment that can be rolled over, noamount will be withheld from the pay-ment. If you receive cash or propertyother than employer stock, as well asemployer stock, in a payment that can berolled over, the 20% withholding amountwill be based on the entire taxableamount paid to you (including the valueof the employer stock determined byexcluding the net unrealized apprecia-tion). However, the amount withheld willbe limited to the cash or property (exclud-ing employer stock) paid to you.

If you receive employer stock in apayment that qualifies as a lump sum dis-tribution, the special tax treatment forlump sum distributions described above(such as 10-year averaging) also mayapply. See IRS Form 4972 for additionalinformation on these rules.

Repayment of Plan Loans. If youremployment ends and you have an out-standing loan from your Plan, youremployer may reduce (or “offset”) yourbalance in the Plan by the amount of theloan you have not repaid. The amount ofyour loan offset is treated as a distributionto you at the time of the offset and will betaxed unless you roll over an amountequal to the amount of your loan offset to

2002-2 I.R.B 294 January 14, 2002

another qualified employer plan or a tra-ditional IRA within 60 days of the date ofthe offset. If the amount of your loan off-set is the only amount you receive or aretreated as having received, no amountwill be withheld from it. If you receiveother payments of cash or property fromthe Plan, the 20% withholding amountwill be based on the entire amount paid toyou, including the amount of the loan off-set. The amount withheld will be limitedto the amount of other cash or propertypaid to you (other than any employersecurities). The amount of a defaultedplan loan that is a taxable deemed distri-bution cannot be rolled over.

IV. SURVIVING SPOUSES,ALTERNATE PAYEES, ANDOTHER BENEFICIARIES

In general, the rules summarizedabove that apply to payments to employ-ees also apply to payments to survivingspouses of employees and to spouses orformer spouses who are “alternate pay-ees.” You are an alternate payee if yourinterest in the Plan results from a “quali-fied domestic relations order,” which isan order issued by a court, usually in con-nection with a divorce or legal separation.

If you are a surviving spouse or analternate payee, you may choose to havea payment that can be rolled over, asdescribed in Part I above, paid in aDIRECT ROLLOVER to a traditionalIRA or to an eligible employer plan orpaid to you. If you have the payment paidto you, you can keep it or roll it overyourself to a traditional IRA or to an eli-gible employer plan. Thus, you have thesame choices as the employee.

If you are a beneficiary other than asurviving spouse or an alternate payee,you cannot choose a direct rollover, andyou cannot roll over the payment your-self.

If you are a surviving spouse, an alter-nate payee, or another beneficiary, yourpayment is generally not subject to theadditional 10% tax described in Part IIIabove, even if you are younger than age59½.

If you are a surviving spouse, an alter-nate payee, or another beneficiary, youmay be able to use the special tax treat-ment for lump sum distributions and thespecial rule for payments that includeemployer stock, as described in Part III

above. If you receive a payment becauseof the employee’s death, you may be ableto treat the payment as a lump sum distri-bution if the employee met the appropri-ate age requirements, whether or not theemployee had 5 years of participation inthe Plan.

HOW TO OBTAIN ADDITIONALINFORMATION

This notice summarizes only the fed-eral (not state or local) tax rules thatmight apply to your payment. The rulesdescribed above are complex and containmany conditions and exceptions that arenot included in this notice. Therefore, youmay want to consult with the PlanAdministrator or a professional tax advi-sor before you take a payment of yourbenefits from your Plan. Also, you canfind more specific information on the taxtreatment of payments from qualifiedemployer plans in IRS Publication 575,Pension and Annuity Income, and IRSPublication 590, Individual RetirementArrangements. These publications areavailable from your local IRS office, onthe IRS’s Internet Web Site at www.irs.gov, or by calling 1–800–TAX–FORMS.

SAFE HARBOR EXPLANATION FORGOVERNMENTAL 457 PLANS

SPECIAL TAX NOTICE REGARDINGPLAN PAYMENTS

This notice explains how you can con-tinue to defer federal income tax on yourretirement savings in the [INSERTNAME OF PLAN] (the “Plan”) and con-tains important information you will needbefore you decide how to receive yourPlan benefits.

This notice is provided to you by (your“Plan Administrator”) because all or partof the payment that you will soon receivefrom the Plan may be eligible for rolloverby you or your Plan Administrator to atraditional IRA or an eligible employerplan. A rollover is a payment by you orthe Plan Administrator of all or part ofyour benefit to another plan or IRA thatallows you to continue to postpone taxa-tion of that benefit until it is paid to you.Your payment cannot be rolled over to aRoth IRA, a SIMPLE IRA, or a CoverdellEducation Savings Account (formerlyknown as an education IRA). An “eligible

employer plan” includes a plan qualifiedunder section 401(a) of the Internal Rev-enue Code, including a 401(k) plan,profit-sharing plan, defined benefit plan,stock bonus plan, and money purchaseplan; a section 403(a) annuity plan; a sec-tion 403(b) tax-sheltered annuity; and aneligible section 457(b) plan maintainedby a governmental employer (governmen-tal 457 plan). The Plan is a governmental457 plan.

An eligible employer plan is notlegally required to accept a rollover.Before you decide to roll over your pay-ment to another employer plan, youshould find out whether the plan acceptsrollovers and, if so, the types of distribu-tions it accepts as a rollover. You shouldalso find out about any documents thatare required to be completed before thereceiving plan will accept a rollover.Even if a plan accepts rollovers, it mightnot accept rollovers of certain types ofdistributions. If this is the case, you maywish instead to roll your distribution overto a traditional IRA or to split your roll-over amount between the employer planin which you will participate and a tradi-tional IRA. If an employer plan acceptsyour rollover, the plan may restrict subse-quent distributions of the rollover amountor may require your spouse’s consent forany subsequent distribution. A subsequentdistribution from the plan that acceptsyour rollover may also be subject to dif-ferent tax treatment than distributionsfrom this Plan. Check with the adminis-trator of the plan that is to receive yourrollover prior to making the rollover.

If you have additional questions afterreading this notice, you can contact yourplan administrator at [INSERT PHONENUMBER OR OTHER CONTACTINFORMATION].

SUMMARY

There are two ways you may be ableto receive a Plan payment that is eligiblefor rollover:

(1) certain payments can be madedirectly to a traditional IRA thatyou establish or to an eligibleemployer plan that will accept itand hold it for your benefit(“DIRECT ROLLOVER”), or

January 14, 2002 295 2002-2 I.R.B.

(2) the payment can be PAID TOYOU.

If you choose a DIRECT ROLL-OVER:

• Your payment will not be taxed inthe current year and no income taxwill be withheld.

• You choose whether your paymentwill be made directly to your tradi-tional IRA or to an eligible employerplan that accepts your rollover. Yourpayment cannot be rolled over to aRoth IRA, a SIMPLE IRA, or aCoverdel l Educat ion SavingsAccount because these are not tradi-tional IRAs.

• Your payment will be taxed laterwhen you take it out of the tradi-tional IRA or the eligible employerplan. Depending on the type of plan,the later distribution may be subjectto different tax treatment than itwould be if you received a taxabledistribution from this Plan.

If you choose to have a Plan paymentthat is eligible for rollover PAID TOYOU:

• You will receive only 80% of thetaxable amount of the payment,because the Plan Administrator isrequired to withhold 20% of thatamount and send it to the IRS asincome tax withholding to be cred-ited against your taxes.

• The taxable amount of your paymentwill be taxed in the current yearunless you roll it over.

• You can roll over all or part of thepayment by paying it to your tradi-tional IRA or to an eligible employerplan that accepts your rollover within60 days after you receive the pay-ment. The amount rolled over willnot be taxed until you take it out ofthe traditional IRA or the eligibleemployer plan.

• If you want to roll over 100% of thepayment to a traditional IRA or aneligible employer plan, you must findother money to replace the 20% ofthe taxable portion that was with-held. If you roll over only the 80%that you received, you will be taxedon the 20% that was withheld andthat is not rolled over.

Your Right to Waive the 30-Day NoticePeriod. Generally, neither a direct roll-over nor a payment can be made from theplan until at least 30 days after yourreceipt of this notice. Thus, after receiv-ing this notice, you have at least 30 daysto consider whether or not to have yourwithdrawal directly rolled over. If you donot wish to wait until this 30-day noticeperiod ends before your election is pro-cessed, you may waive the notice periodby making an affirmative election indicat-ing whether or not you wish to make adirect rollover. Your withdrawal will thenbe processed in accordance with yourelection as soon as practical after it isreceived by the Plan Administrator.

MORE INFORMATION

I. PAYMENTS THAT CAN ANDCANNOT BE ROLLEDOVER ....................................... [ ]

II. DIRECT ROLLOVER .............. [ ]

III. PAYMENT PAID TO YOU....... [ ]

IV. SURVIVING SPOUSES,ALTERNATE PAYEES, ANDOTHER BENEFICIARIES ...... [ ]

I. PAYMENTS THAT CAN ANDCANNOT BE ROLLED OVER

Payments from the Plan may be “eli-gible rollover distributions.” This meansthat they can be rolled over to a tradi-tional IRA or to an eligible employer planthat accepts rollovers. Payments from aplan cannot be rolled over to a Roth IRA,a SIMPLE IRA, or a Coverdell EducationSavings Account. Your Plan administratorshould be able to tell you whether yourpayment is an eligible rollover distribu-tion.

The following types of payments can-not be rolled over:

Payments Spread over Long Periods.You cannot roll over a payment if it ispart of a series of equal (or almost equal)payments that are made at least once ayear and that will last for:

• your lifetime (or a period measuredby your life expectancy), or

• your lifetime and your beneficiary’slifetime (or a period measured byyour joint life expectancies), or

• a period of 10 years or more.Required Minimum Payments. Begin-

ning when you reach age 70½ or retire,

whichever is later, a certain portion ofyour payment cannot be rolled overbecause it is a “required minimum pay-ment” that must be paid to you.

Unforeseeable Emergency Distribu-tions. A distribution on account of anunforeseeable emergency cannot be rolledover.

Distributions of Excess Contributions.A distribution that is made because legallimits on certain contributions wereexceeded cannot be rolled over.

Loans Treated as Distributions. Theamount of a plan loan that becomes a tax-able deemed distribution because of adefault cannot be rolled over. However, aloan offset amount is eligible for rollover,as discussed in Part III below. Ask thePlan Administrator of this Plan if distribu-tion of your loan qualifies for rollovertreatment.

The Plan Administrator of this Planshould be able to tell you if your paymentincludes amounts which cannot be rolledover.

II. DIRECT ROLLOVER

A DIRECT ROLLOVER is a directpayment of the amount of your Plan ben-efits to a traditional IRA or an eligibleemployer plan that will accept it. You canchoose a DIRECT ROLLOVER of all orany portion of your payment that is aneligible rollover distribution, as describedin Part I above. You are not taxed on anytaxable portion of your payment forwhich you choose a DIRECT ROLL-OVER until you later take it out of thetraditional IRA or eligible employer plan.In addition, no income tax withholding isrequired for any taxable portion of yourPlan benefits for which you choose aDIRECT ROLLOVER. This Plan mightnot let you choose a DIRECT ROLL-OVER if your distributions for the yearare less than $200.

DIRECT ROLLOVER to a TraditionalIRA. You can open a traditional IRA toreceive the direct rollover. If you chooseto have your payment made directly to atraditional IRA, contact an IRA sponsor(usually a financial institution) to find outhow to have your payment made in adirect rollover to a traditional IRA at thatinstitution. If you are unsure of how toinvest your money, you can temporarilyestablish a traditional IRA to receive the

2002-2 I.R.B 296 January 14, 2002

payment. However, in choosing a tradi-tional IRA, you may wish to make surethat the traditional IRA you choose willallow you to move all or a part of yourpayment to another traditional IRA at alater date, without penalties or other limi-tations. See IRS Publication 590, Indi-vidual Retirement Arrangements, formore information on traditional IRAs(including limits on how often you canroll over between IRAs).

DIRECT ROLLOVER to a Plan. If youare employed by a new employer that hasan eligible employer plan, and you want adirect rollover to that plan, ask the planadministrator of that plan whether it willaccept your rollover. An eligibleemployer plan is not legally required toaccept a rollover. Even if your newemployer’s plan does not accept a roll-over, you can choose a DIRECT ROLL-OVER to a traditional IRA. If theemployer plan accepts your rollover, theplan may provide restrictions on the cir-cumstances under which you may laterreceive a distribution of the rolloveramount or may require spousal consent toany subsequent distribution. Check withthe plan administrator of that plan beforemaking your decision.

DIRECT ROLLOVER of a Series ofPayments. If you receive a payment thatcan be rolled over to a traditional IRA oran eligible employer plan that will acceptit, and it is paid in a series of paymentsfor less than 10 years, your choice tomake or not make a DIRECT ROLL-OVER for a payment will apply to alllater payments in the series until youchange your election. You are free tochange your election for any later pay-ment in the series.

Change in Tax Treatment Resultingfrom a DIRECT ROLLOVER. The taxtreatment of any payment from the eli-gible employer plan or traditional IRAreceiving your DIRECT ROLLOVERmight be different than if you receivedyour benefit in a taxable distributiondirectly from the Plan. See the sectionsbelow entitled “Additional 10% Tax MayApply to Certain Distributions.”

III. PAYMENT PAID TO YOU

If your payment can be rolled over(see Part I above) and the payment ismade to you in cash, it is subject to 20%

federal income tax withholding on thetaxable portion (state tax withholdingmay also apply). The payment is taxed inthe year you receive it unless, within 60days, you roll it over to a traditional IRAor an eligible employer plan that acceptsrollovers. If you do not roll it over, spe-cial tax rules may apply.

Income Tax Withholding:

Mandatory Withholding. If any portionof your payment can be rolled over underPart I above and you do not elect to makea DIRECT ROLLOVER, the Plan isrequired by law to withhold 20% of thetaxable amount. This amount is sent tothe IRS as federal income tax withhold-ing. For example, if you can roll over ataxable payment of $10,000, only $8,000will be paid to you because the Plan mustwithhold $2,000 as income tax. However,when you prepare your income tax returnfor the year, unless you make a rolloverwithin 60 days (see “Sixty-Day RolloverOption” below) you must report the full$10,000 as a taxable payment from thePlan. You must report the $2,000 as taxwithheld, and it will be credited againstany income tax you owe for the year.There will be no income tax withholdingif your payments for the year are less than$200.

Voluntary Withholding. If any portionof your payment is taxable but cannot berolled over under Part I above, the man-datory withholding rules described abovedo not apply. In this case, you may electnot to have withholding apply to that por-tion. If you do nothing, an amount will betaken out of this portion of your paymentfor federal income tax withholding. Toelect out of withholding, ask the PlanAdministrator for the election form andrelated information.

Sixty-Day Rollover Option. If youreceive a payment that can be rolled overunder Part I above, you can still decide toroll over all or part of it to a traditionalIRA or to an eligible employer plan thataccepts rollovers. If you decide to rollover, you must contribute the amount ofthe payment you received to a traditionalIRA or eligible employer plan within 60days after you receive the payment. Theportion of your payment that is rolledover will not be taxed until you take it out

of the traditional IRA or the eligibleemployer plan.

You can roll over up to 100% of yourpayment that can be rolled over underPart I above, including an amount equalto the 20% of the taxable portion that waswithheld. If you choose to roll over100%, you must find other money withinthe 60-day period to contribute to the tra-ditional IRA or the eligible employerplan, to replace the 20% that was with-held. On the other hand, if you roll overonly the 80% of the taxable portion thatyou received, you will be taxed on the20% that was withheld.

Example: Your payment that can be rolled overunder Part I above is $10,000, and you choose tohave it paid to you. You will receive $8,000, and$2,000 will be sent to the IRS as income tax with-holding. Within 60 days after receiving the $8,000,you may roll over the entire $10,000 to a traditionalIRA or an eligible employer plan. To do this, youroll over the $8,000 you received from the Plan, andyou will have to find $2,000 from other sources(your savings, a loan, etc.). In this case, the entire$10,000 is not taxed until you take it out of the tra-ditional IRA or an eligible employer plan. If you rollover the entire $10,000, when you file your incometax return you may get a refund of part or all of the$2,000 withheld.

If, on the other hand, you roll over only $8,000,the $2,000 you did not roll over is taxed in the yearit was withheld. When you file your income taxreturn, you may get a refund of part of the $2,000withheld. (However, any refund is likely to be largerif you roll over the entire $10,000.)

Additional 10% Tax May Apply to Cer-tain Distributions. Distributions from thisPlan are generally not subject to the addi-tional 10% tax that applies to pre-age-59½ distributions from other types ofplans. However, any distribution from thePlan that is attributable to an amount yourolled over to the Plan (adjusted forinvestment returns) from another type ofeligible employer plan or IRA amount issubject to the additional 10% tax if it isdistributed to you before you reach age59½, unless an exception applies.

Exceptions to the additional 10% taxgenerally include (1) payments that arepaid as equal (or almost equal) paymentsover your life or life expectancy (or yourand your beneficiary’s lives or lifeexpectancies), (2) payments that are paidfrom an eligible employer plan after youseparate from service with your employerduring or after the year you reach age 55,(3) payments that are paid because youretire due to disability, (4) payments that

January 14, 2002 297 2002-2 I.R.B.

are paid directly to the government to sat-isfy a federal tax levy, (5) payments thatare paid to an alternate payee under aqualified domestic relations order, or (6)payments that do not exceed the amountof your deductible medical expenses.These exceptions may be different fordistributions from a traditional IRA. SeeIRS Form 5329 for more information onthe additional 10% tax.

The additional 10% tax does not applyto distributions from the Plan or any othergovernmental 457 plan, except to theextent the distribution is attributable to anamount you rolled over to the govern-mental 457 plan (adjusted for investmentreturns) from another type of eligibleemployer plan or IRA.

In addition, any amount rolled overfrom the Plan to another type of eligibleemployer plan or to a traditional IRA willbe subject to the additional 10% tax if itis distributed to you before you reach age59½, unless an exception applies.

Repayment of Plan Loans. If youremployment ends and you have an out-standing loan from your Plan, youremployer may reduce (or “offset”) yourbalance in the Plan by the amount of theloan you have not repaid. The amount ofyour loan offset is treated as a distributionto you at the time of the offset and will betaxed unless you roll over an amountequal to the amount of your loan offset toanother qualified employer plan or a tra-ditional IRA within 60 days of the date ofthe offset. If the amount of your loan off-set is the only amount you receive or aretreated as having received, no amountwill be withheld from it. If you receiveother payments of cash or property fromthe Plan, the 20% withholding amountwill be based on the entire amount paid toyou, including the amount of the loan off-set. The amount withheld will be limitedto the amount of other cash or propertypaid to you. The amount of a defaultedplan loan that is a taxable deemed distri-bution cannot be rolled over.

IV. SURVIVING SPOUSES, ALTER-NATE PAYEES, AND OTHER BENEFI-CIARIES

In general, the rules summarizedabove that apply to payments to employ-ees also apply to payments to survivingspouses of employees and to spouses or

former spouses who are “alternate pay-ees.” You are an alternate payee if yourinterest in the Plan results from a “quali-fied domestic relations order,” which isan order issued by a court, usually in con-nection with a divorce or legal separation.

If you are a surviving spouse or analternate payee, you may choose to havea payment that can be rolled over, asdescribed in Part I above, paid in aDIRECT ROLLOVER to a traditionalIRA or to an eligible employer plan orpaid to you. If you have the payment paidto you, you can keep it or roll it overyourself to a traditional IRA or to an eli-gible employer plan. Thus, you have thesame choices as the employee.

If you are a beneficiary other than asurviving spouse or an alternate payee,you cannot choose a direct rollover, andyou cannot roll over the payment your-self.

If you are a surviving spouse, an alter-nate payee, or another beneficiary, yourpayment is generally not subject to theadditional 10% tax described in Part IIIabove, even if you are younger than age59½.

HOW TO OBTAIN ADDITIONALINFORMATION

This notice summarizes only the fed-eral (not state or local) tax rules thatmight apply to your payment. The rulesdescribed above are complex and containmany conditions and exceptions that arenot included in this notice. Therefore, youmay want to consult with the PlanAdministrator or a professional tax advi-sor before you take a payment of yourbenefits from your Plan. Also, you canfind more specific information on the taxtreatment of payments from qualifiedemployer plans in IRS Publication 575,Pension and Annuity Income, and IRSPublication 590, Individual RetirementArrangements. These publications areavailable from your local IRS office, onthe IRS’s Internet Web Site at www.irs.gov, or by calling 1–800–TAX–FORMS.

Guidance on CertainProvisions of the EconomicGrowth and Tax ReliefReconciliation Act of 2001

Notice 2002–4

I. PURPOSE

This notice provides guidance withrespect to the effect on distributions froma section 401(k) plan of §§ 636(a) and646 of the Economic Growth and TaxRelief Reconciliation Act of 2001(“EGTRRA”), Pub. L. 107–16. Section636(a) of EGTRRA provides that the Sec-retary shall revise the regulations relatingto hardship distributions under§ 401(k)(2)(B)(i)(IV) of the Internal Rev-enue Code. Section 646 of EGTRRAamends the provisions of Code§ 401(k)(2) and (10) to permit a plan toprovide for distributions on severancefrom employment. This notice also pro-vides guidance under Code § 414(v),added by § 631 of EGTRRA, on theapplication of the universal availabilityrequirement under Code § 414(v)(4) inthe case of an applicable employer plan(within the meaning of § 414(v)(6)(A))that is also qualified under Puerto Ricolaw and provides a transition rule for sat-isfying the universal availability require-ment for 2002.

Specifically this notice provides that:• A plan may be amended to provide

for distributions on severance fromemployment under § 401(k)(2)(B)(i)(I), as amended by EGTRRA,on or after January 1, 2002, regardlessof whether the severance fromemployment occurred before, on, orafter January 1, 2002.

• Beginning in 2002, for a plan thatuses the safe harbor hardship provi-sions of § 1.401(k)–1(d)(2)(iv)(B) ofthe Income Tax Regulations, theamount of elective contributions thata participant is permitted to make inthe year following a hardship distri-bution is no longer required to be lim-ited to the amount of elective contri-butions permitted under Code§ 402(g) for that year minus theamount of the elective contributionsmade in the year of the hardship.

2002-2 I.R.B 298 January 14, 2002

• A plan will not be treated as failing tosatisfy the requirements of § 414(v)(4) for 2002 solely because differ-ent plans maintained by the sameemployer (as defined in Regulations§ 1.410(b)–9) adopt catch-up contri-butions beginning on different datesduring 2002, provided that all suchplans begin offering catch-up contri-butions no later than October 1, 2002.

• Until the issuance of further guidance,an applicable employer plan that per-mits catch-up contributions will notfail to satisfy the requirements ofCode § 414(v)(4) or § 1.414(v)–1(e)of the Proposed Income Tax Regula-tions solely because another appli-cable employer plan maintained bythe employer that is qualified underPuerto Rico law does not provide forcatch-up contributions.

II. BACKGROUND

A. Distributions from a Section401(k) Plan

Code § 401(k)(2) as in effect prior toEGTRRA provides that elective contribu-tions under a qualified cash or deferredarrangement subject to § 401(k) may notbe distributed prior to the occurrence ofcertain events, including the employee’sseparation from service, the occurrence ofan event described in § 401(k)(10), and inthe event of a hardship. The events listedin § 401(k)(10) are the termination of theplan without establishment or mainte-nance of another defined contributionplan (other than an employee stock own-ership plan as defined in § 4975(e)(7)),the disposition by a corporation of sub-stantially all of the assets used by the cor-poration in a trade or business of suchcorporation, and the disposition by a cor-poration of such corporation’s interest ina subsidiary. Distributions may be madein connection with a sale of assets orinterest in a subsidiary only with respectto an employee who continues employ-ment with the corporation acquiring theassets or with the subsidiary, as appli-cable, and only if the seller continues tomaintain the plan.

Section 646 of EGTRRA amendedCode § 401(k)(2)(B)(i)(I) by replacing“separation from service” with “sever-ance from employment.” In addition,

§ 646 of EGTRRA amended Code§ 401(k)(10) by deleting disposition by acorporation of substantially all of theassets of a trade or business and disposi-tion of a corporation’s interest in a sub-sidiary, leaving termination of a plan asthe only distributable event described in§ 401(k)(10). The amendments made by§ 646 apply to distributions made afterDecember 31, 2001.

Under Regulations § 1.401(k)–1(d)(2)(iv), a distribution is treated asmade on account of hardship if it is madeon account of an immediate and heavyfinancial need and is necessary to satisfythe financial need. Section 1.401(k)–1(d)(2)(iv)(B) provides that a distributionis deemed necessary to satisfy an imme-diate and heavy financial need if certainrequirements are met. One such require-ment is that, after receipt of the hardshipdistribution, a participant is prohibitedfrom making elective contributions andemployee contributions to the plan and allother plans maintained by the employerfor a period of at least 12 months (the“elective contribution prohibit ionperiod”). Another requirement is that theplan, and all other plans maintained bythe employer, limit the employee’s elec-tive contributions for the next taxableyear to the applicable limit under Code§ 402(g) for that year minus the employ-ee’s elective contributions for the year ofthe hardship distribution (the “post-hardship contribution limit”).

Section 636(a) of EGTRRA directs theSecretary of the Treasury to revise theregulations relating to distributions underCode § 401(k)(2)(B)(i)(IV) to providethat the period during which an employeeis prohibited from making elective andemployee contributions following a hard-ship distribution is 6 months, instead of12 months, as required under Regulations§ 1.401(k)–1(d)(2)(iv)(B)(4). Section636(a) is effective for years beginningafter December 31, 2001. Notice 2001–56(2001–38 I.R.B. 277) provides guidanceon § 636(a) of EGTRRA.

Code §§ 401(k)(12) and 401(m)(11)provide design-based safe harbor methodsfor satisfying the actual deferral percent-age (“ADP”) test contained in§ 401(k)(3)(A)(ii) and the actual contri-bution percentage (“ACP”) test containedin § 401(m)(2) based on matching contri-butions that meet certain conditions and

that satisfy certain notice requirements.Section V.B.1.c.iv of Notice 98–52(1998–2 C.B. 632) provides that a planwill not fail to satisfy the ADP matchingcontribution safe harbor merely becausean eligible employee’s ability to makeelective contributions is suspended for 12months following a hardship distribution.Section VI.B.3 of Notice 98–52 providesthat a plan will not fail to satisfy the ACPmatching contribution safe harbor merelybecause an eligible employee’s ability tomake employee contributions is sus-pended for 12 months following a hard-ship distribution. Notice 2001–56 pro-vides that, in order to continue to rely onthe matching contribution safe harbors, aplan must reduce the period during whichelective contributions and employee con-tributions are suspended following ahardship distribution from 12 months to 6months for calendar years beginning afterDecember 31, 2001.

B. Universal Availability of Catch-upContributions under § 414(v)

Section 631 of EGTRRA added§ 414(v) to the Code. Under § 414(v), anindividual age 50 or over is permitted tomake catch-up contributions (up to a dol-lar limit provided in § 414(v)(2)) underan applicable employer plan if certainrequirements provided in § 414(v) are sat-isfied. Section 414(v) also provides that aplan generally will not violate any provi-sion of the Code by permitting thesecatch-up contributions to be made. Pro-posed regulations under § 414(v) werepublished in the Federal Register onOctober 23, 2001 (66 FR 53555). Section414(v) is effective for contributions intaxable years beginning after December31, 2001. The regulations are proposed toapply as of this effective date.

Section 414(v)(4)(A) provides that anapplicable employer plan shall be treatedas failing to meet the nondiscriminationrequirements under § 401(a)(4) withrespect to benefits, rights, and featuresunless the plan allows all eligible partici-pants to make the same election withrespect to catch-up contributions. Section414(v)(4)(B) provides that, for this pur-pose, all plans maintained by employerswho are treated as a single employerunder subsection (b), (c), (m), or (o) of§ 414 shall be treated as one plan.

January 14, 2002 299 2002-2 I.R.B.

Proposed Regulations § 1.414(v)–1(e)provides that an applicable employer planthat offers catch-up contributions will notsatisfy the requirements of Code§ 401(a)(4) unless all catch-up eligibleparticipants who participate under anyapplicable employer plan maintained bythe employer are provided with the effec-tive opportunity to make the same dollaramount of catch-up contributions. Pro-posed Regulations § 1.414(v)–1(a)(4)provides that a catch-up eligible partici-pant is an employee who is eligible tomake elective deferrals during the planyear under an applicable employer plan(without regard to Code § 414(v) or theproposed regulations) and is age 50 orover (or is treated as age 50 as of January1 of a year in accordance with ProposedRegulations § 1.414(v)–1(a)(4)(ii)). Anapplicable employer plan is a section401(k) plan, a SIMPLE IRA plan, a sim-plified employee pension, a plan or con-tract that satisfies the requirements ofCode § 403(b), or a § 457 eligible gov-ernmental plan. The term “employer”under the proposed regulations has thesame meaning as this term under Regula-tions § 1.410(b)–9. Under § 1.410(b)–9,the definition of employer includes theemployer maintaining the plan and thoseemployers required to be aggregated withthe employer under Code § 414(b), (c),(m), or (o).

C. Remedial Amendment Period forEGTRRA

Notice 2001–42 (2001–30 I.R.B. 70)provides a remedial amendment periodunder Code § 401(b) ending not prior tothe last day of the first plan year begin-ning on or after January 1, 2005, in whichany needed retroactive remedial amend-ment with regard to EGTRRA may beadopted. The availability of this remedialamendment period is conditioned on theadoption of a good faith EGTRRA planamendment no later than the later of: (i)the end of the plan year in which theEGTRRA change in the qualificationrequirement is required to be, or isoptionally, put into effect under the plan;or (ii) the end of the GUST remedialamendment period for the plan. Notice2001–57 (2001–38 I.R.B. 279) providessample good faith amendments with

respect to several provisions ofEGTRRA, including §§ 631, 636(a), and646.

III. DISTRIBUTIONS ONSEVERANCE FROM EMPLOYMENT

Under Code § 401(k)(2)(B)(i)(I), asamended by § 646 of EGTRRA, amountsattributable to elective contributions maybe distributed upon the employee’s sever-ance from employment with the employermaintaining the plan. For this purpose,the employer includes all corporationsand other entities treated as the sameemployer under Code § 414(b), (c), (m),or (o). An employee does not have a sev-erance from employment if, in connectionwith a change of employment, theemployee’s new employer maintains thesection 401(k) plan with respect to theemployee (for example, by assumingsponsorship of the plan or by accepting atransfer of plan assets and liabilities(within the meaning of Code § 414(l))with respect to the employee). Thus, forexample, if all employees of a controlledgroup of corporations (within the mean-ing of § 414(b)) are covered by a section401(k) plan and a transaction occurs suchthat one subsidiary corporation in thegroup is no longer aggregated with othermembers in the group under § 414(b), (c),(m), or (o), and in connection with thetransaction no assets are transferred fromthe section 401(k) plan to a plan main-tained by the former subsidiary corpora-tion, then, participants in the section401(k) plan who continue employmentwith the subsidiary corporation will havea severance from employment with theemployer maintaining the section 401(k)plan and may receive a distribution ofamounts attributable to elective contribu-tions from that plan. However, if the sub-sidiary corporation maintained a section401(k) plan for its employees before thetransaction and continues to maintain thesection 401(k) plan following the transac-tion, the employees who continueemployment with the subsidiary do nothave a severance from employment withthe employer maintaining the plan.

The amendments to Code §§ 401(k)(2)and 401(k)(10) made by § 646 ofEGTRRA are effective for distributionsmade after December 31, 2001. A plansponsor of a section 401(k) plan thatintends to permit distributions following

an employee’s severance from employ-ment must amend the plan to substituteseverance from employment for separa-tion from service. A plan may provide fordistributions on severance from employ-ment under Code § 401(k)(2)(B)(i)(I), asamended, on or after January 1, 2002,regardless of whether the severance fromemployment occurred before, on, or afterJanuary 1, 2002, and regardless ofwhether the distribution would satisfy therequirements of pre-EGTRRA § 401(k)(2)(B) and the regulations thereunder(including the 2-year rule in Regulations§ 1.401(k)–1(d)(4)(iii)). Alternatively, theplan could provide for distributions on orafter January 1, 2002, to participants whohave a severance from employment on orafter January 1, 2002 (or on or afteranother date specified in the plan). Forthe rules regarding the timing of theadoption of such an amendment, seeNotices 2001–42 and 2001–57.

A section 401(k) plan will not fail tocomply with Code § 401(k)(2)(B), asamended by § 646 of EGTRRA, merelybecause it does not permit distributions inall situations in which a participant has aseverance from employment. Thus, forexample, a plan could limit distributionsto situations in which a participant has aseparation from service or following adisposition of assets or disposition of asubsidiary under circumstances underwhich a distribution is permitted underCode § 401(k)(2)(B)(i)(II) and § 401(k)(10)(A)(ii) and (iii) as in effect prior tothe EGTRRA amendments (see Rev. Rul.2000–27, 2000–21 I.R.B. 1016). Accord-ingly, a section 401(k) plan need not beamended to provide for distributions uponseverance from employment. However, ifthe plan is not amended to provide fordistributions following a severance fromemployment, elective contributions canbe distributed only to the extent permittedby the plan.

IV. DISTRIBUTIONS ON HARDSHIP

In response to the direction in § 636(a)of EGTRRA, the safe harbor provisionsof Regulations § 1.401(k)–1(d)(2)(iv)(B)will be revised. The requirement in§ 1.401(k)–1(d)(2)(iv)(B)(4) will berevised to reduce the elective contributionprohibition period from a period of atleast 12 months to a period of at least 6months. In addition, the post-hardship

2002-2 I.R.B 300 January 14, 2002

contribution limit in § 1.401(k)–1(d)(2)(iv)(B)(3) will be eliminated. Untilthe issuance of further guidance, taxpay-ers can rely on the rules in this section IV.

This revised safe harbor will be effec-tive for calendar years beginning afterDecember 31, 2001. Accordingly, therequirement that a participant’s electivecontributions under a plan (and all otherplans maintained by the employer) belimited to the post-hardship contributionlimit is permitted to be eliminated effec-tive for calendar years beginning afterDecember 31, 2001, for participants whoreceived hardship distributions during2001. A section 401(k) plan will not failto comply with the hardship distributionsafe harbor provisions under Regulations§ 1.401(k)–1(d)(2)(iv)(B) solely becauseit retains its existing post-hardship contri-bution limit. However, in order to con-tinue to rely on the matching contributionsafe harbor under Code § 401(k)(12) or§ 401(m)(11), a plan must eliminate thepost-hardship contribution limit, effectivefor calendar years beginning afterDecember 31, 2001, for participants whoreceive a hardship distribution afterDecember 31, 2000.

Amendments related to the changes inthe safe harbor for hardship distributionsaddressed in this notice are integral to aqualification requirement that has beenchanged by EGTRRA. For purposes ofdetermining whether a plan provision is adisqualifying provision under Notice2001–42, a plan sponsor will not fail tohave adopted a timely good faith amend-ment with respect to the hardship distri-bution safe harbor even though theamendment does not specifically elimi-nate the post-hardship contribution limit.However, if the plan sponsor does notadopt a good faith amendment changingthe elective contribution prohibitionperiod (or adopts such a change effectivefor a year different from the year in whichthe post-hardship contribution limit iseliminated under the plan), the plan spon-sor must adopt a timely good faithamendment eliminating the post-hardshipcontribution limit in order for the provi-sion to be a disqualifying provision forpurposes of the remedial amendmentperiod under Notice 2001–42.

For example, a plan (other than a planthat relies on the matching contributionsafe harbor under Code § 401(k)(12) or

§ 401(m)(11)) will not fail to comply withthe revised safe harbor if it continues toprohibit elective and employee contribu-tions for 12 months following a hardshipdistribution and, therefore, there is norequirement that a good faith amendmentbe adopted changing this period from 12months to 6 months. However, in suchcase, a timely good faith amendmenteliminating the post-hardship contributionlimit is required for there to be a remedialamendment period with respect to theelimination of the limit.

V. CATCH-UP CONTRIBUTIONSUNDER § 414(v)

Under Code § 414(v)(4), a plan willnot satisfy § 401(a)(4) unless all thecatch-up eligible participants in anyapplicable employer plan maintained bythe employer are provided with the effec-tive opportunity to make the same dollaramount of catch-up contributions. Underthe proposed regulations, an applicableemployer plan would fail to comply withthis provision unless all other applicableemployer plans maintained by the sameemployer begin offering catch-up contri-butions as of the same effective date. Oth-erwise, there will be a period duringwhich catch-up contributions are offeredto some catch-up eligible participants butnot to all. In contrast, a plan does not failto satisfy the requirements of § 414(v)(4)and the proposed regulations solelybecause catch-up contributions areadministered differently under differentplans, provided that the administrativemethod under each plan satisfies the basicrequirement that it provide the catch-upeligible participants in that plan with theeffective opportunity to make the samedollar amount of catch-up contributionsas the catch-up eligible participants inother plans maintained by the sameemployer.

The Service has received commentssince the issuance of the proposed regula-tions indicating that it will be difficult foremployers to comply with the universalavailability requirement as of the begin-ning of 2002. These comments point outthat this is a new section of the Code, sothat plan administrative systems must bemodified to allow for catch-up contribu-tions. In addition, employers haveexpressed concern that there may be someplans that have difficulty with these new

provisions, and that, as a result, plansmaintained by the same employer mayadopt and implement catch-up contribu-tions as of different dates.

The Service has also received com-ments regarding compliance with Code§ 414(v)(4) by an employer that main-tains a plan that is qualified under PuertoRico tax law as well as under the Code(pursuant to § 1022(i)(2) of ERISA).Puerto Rico law does not provide forcatch-up contributions. If an employermaintains a plan qualified both underPuerto Rico law and under the Code, theemployer could be effectively prohibitedfrom offering catch-up contributions tocatch-up eligible participants in otherapplicable employer plans maintained bythe employer.

In response to these concerns and toease the administrative burden of the ini-tial implementation of Code § 414(v), thisnotice provides that a plan will not betreated as failing to satisfy the require-ments of § 414(v)(4) for 2002 solelybecause different plans maintained by thesame employer (as defined in Regulations§ 1.410(b)–9) adopt catch-up contribu-tions beginning on different dates during2002, provided that all such plans beginoffering catch-up contributions no laterthan October 1, 2002.

In addition, until the issuance of fur-ther guidance, an applicable employerplan (within the meaning of Code§ 414(v)(6)(A)) that permits catch-upcontributions will not fail to satisfy therequirements of Code § 414(v)(4) or Pro-posed Regulations § 1.414(v)–1(e) solelybecause another applicable employer planmaintained by the employer that is quali-fied under Puerto Rico law does not pro-vide for catch-up contributions.


The principal author of this notice isRoger Kuehnle of the Employee Plans,Tax Exempt and Government EntitiesDivision. For further information regard-ing this notice, please contact EmployeePlans’ taxpayer assistance telephone ser-vice at 1–877–829–5500 (a toll-free num-ber), between the hours of 8:00 a.m. and6:30 p.m. Eastern Time, Monday throughFriday. Mr. Kuehnle can be reached at1–202–283–9888 (not a toll-free number).

January 14, 2002 301 2002-2 I.R.B.

Part IV. Items of General Interest

Notice of ProprosedRulemaking by Cross-Reference to TemporaryRegulations

Disclosure of Returns andReturn Information by OtherAgencies

REG–105344–01


ACTION: Notice of proposed rulemakingby cross-reference to temporary regula-tions.

SUMMARY: In the Rules and Regula-tions section of the December 13, 2001,issue of the Federal Register, the IRS isissuing a temporary regulation to enablethe Commissioner to authorize federal,state and local agencies with access toreturns and return information under sec-tion 6103 of the Internal Revenue Code toredisclose such returns and return infor-mation, with the Commissioner ’sapproval, to any authorized recipient setforth in section 6103 of the Internal Rev-enue Code, subject to the same restric-tions and for the same purposes, as if therecipient had received the informationfrom the IRS directly.

DATES: Written comments and electroniccomments and requests for a public hear-ing must be received by February 14,2002.

ADDRESSES: Send submissions toCC:ITA:RU (REG–105344–01), room5226, Internal Revenue Service, POB7604, Ben Franklin Station, Washington,DC 20044. Submissions may be deliveredMonday through Friday between thehours of 8 a.m. and 5 p.m. to CC:ITA:RU(REG–105344–01), Courier’s Desk,Internal Revenue Service, 1111 Constitu-tion Avenue, NW, Washington, DC. Alter-natively, taxpayers may submit commentselectronically via the Internet by selectingthe “Tax Regs” option on the IRS HomePage, or by submitting comments directlyto the IRS Internet site: http://www.irs.gov/prod/tax_regs/comments/html.

FOR FURTHER INFORMATIONCONTACT: Julie C. Schwartz, 202–622–4570 (not a toll-free number).


Paperwork Reduction Act

The collection of information con-tained in this notice of proposed rulemak-ing has been submitted to the Office ofManagement and Budget for review inaccordance with the Paperwork Reduc-tion Act of 1995 (44 U.S.C. 3507(d)).Comments on the collection of informa-tion should be sent to the Office of Man-agement and Budget, Attn: Desk Officerfor the Department of the Treasury, Officeof Information and Regulatory Affairs,Washington, DC 20503, with copies tothe Internal Revenue Service, Attn: IRSReports Clearance Officer, W:CAR:MP:FP:S, Washington, DC 20224. Com-ments on the collection of informationshould be received by February 14, 2002.Comments are specifically requested con-cerning:

Whether the proposed collection ofinformation is necessary for the properperformance of the functions of the Inter-nal revenue Service, including whetherthe information will have practical utility;

The accuracy of the estimated burdenassociated with the proposed collection ofinformation (see below);

How the quality, utility, and clarity ofthe information to be collected may beenhanced; How the burden of complyingwith the proposed collection of informa-tion may be minimized, including throughthe application of automated collectiontechniques or other forms of informationtechnology; and

Estimates of capital or start-up costsand costs of operation, maintenance, andpurchase of service to provide informa-tion.

The collection of information in thisproposed regulation is in 26 CFR301.6103(p)(2)(B)–1T. This informationis required for the Commissioner toauthorize agencies with access to returnsand return information under section6103 to disclose such to other authorizedrecipients of returns and return informa-

tion in accordance with section 6103. Thecollection of information is required toobtain a benefit. The likely respondentsand recordkeepers are federal agenciesand state or local governments.

Estimated total annual reporting and/orrecordkeeping burden: 11 hours.

Estimated average annual burdenhours per respondent and/or record-keeper: 1 hour.

Estimated number of respondentsand/or recordkeepers: 11.

Est imated annual frequency ofresponses: once.

An agency may not conduct or spon-sor, and a person is not required torespond to, a collection of informationunless it displays a valid control numberassigned by the Office of Managementand Budget.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mate-rial in the administration of an internalrevenue law. Generally, tax returns andreturn information are confidential, asrequired by 26 U.S.C. 6103.

Background

Section 6103(p)(2)(B) provides thatreturn information disclosed pursuant tothe Code may be disclosed by any modeor means that the Secretary determinesnecessary or appropriate. 26 CFR301.6103(p)(2)(B)–1 currently permitscertain recipients of returns and returninformation under section 6103, with theCommissioner’s approval, to disclosereturns and return information to certainother permissible recipients under section6103. Specifically, the existing regulationpermits disclosure by Federal agencies,with the Commissioner’s approval, to 1)other Federal agencies, 2) state tax agen-cies, 3) the General Accounting Office, 4)Federal, state and local child supportenforcement agencies, 5) personsdescribed in section 6103(c) (person des-ignated in a taxpayer consent), and 6) per-sons described in section 6103(e) (personwith a material interest).

The Consolidated Appropriations Act,2001, Pub. L. No. 106–554 (114 Stat.2763), was signed into law on December21, 2000. Section 1 of that Act enacted

2002-2 I.R.B 302 January 14, 2002

into law H.R. 5662, the CommunityRenewal Tax Relief Act of 2000. Section310 of the Community Renewal TaxRelief Act of 2000 added section6103(j)(6) to the Code, authorizing theCommissioner to disclose return informa-tion to the Congressional Budget Office(CBO) for the purpose of, but only to theextent necessary for, long term models ofthe Social Security and Medicare pro-grams. The conference report, H.R. Conf.Rep. No. 106–1033, at 1020–21 (2000),provides that it is the intent of Congressthat all requests for information made byCBO under this provision be made to theCommissioner, who will use his authorityunder section 6103(p)(2) such that theSocial Security Administration (SSA) orother agency can furnish the informationdirectly to CBO for the purpose of CBO’slong term models of Social Security andMedicare. SSA, not IRS, collects andmaintains much of the information soughtby CBO and also receives the tax infor-mation CBO seeks under other provisionsof section 6103. However, section301.6103(p)(2)(B)–1 in its current formwould not allow the Commissioner toauthorize SSA to redisclose return infor-mation properly in its possession to CBO,an authorized recipient of the informationunder section 6103(j)(6). Updating theregulation would allow SSA to makereturn information in its possession avail-able to CBO to the extent authorized bysection 6103(j)(6).

There are other situations, similar tothat found under section 6103(j)(6),where it is more efficient for returns andreturn information in the possession ofone authorized agency recipient, to bedisclosed by such agency to another statu-torily authorized recipient. The inabilityof agencies, including Federal, state andlocal agencies, to share returns and returninformation between themselves or eveninside a single agency, even where theinformation is more readily availablefrom an agency other than the IRS, washighlighted by the Department of theTreasury on pages 89–90 of its October2000 Report to the Congress on the Scopeand Use of Taxpayer Confidentiality andDisclosure Provisions. The report notes,for example, that currently a singleagency within a state (or even a singlecaseworker) may be administering bothchild support under Title IV-D of the

Social Security Act and welfare underTitle IV-A of the Social Security Act. Theagency may receive return informationunder both section 6103(l)(6) and section6103(l)(7) to aid the agency in makingdeterminations of eligibility for these pro-grams, but the current regulation does notpermit even intra-agency pooling or shar-ing of these data. The report notes thatboth intra- and inter-agency data sharingwith respect to common data elementscould be authorized by amendment to theTreasury regulations. Updating the regu-lation would allow the IRS to authorizesuch redisclosure in appropriate situa-tions.

The text of the proposed temporaryregulation also serves as the text of thisproposed regulation. The preamble to thetemporary regulation contains a fullexplanation of the reasons underlying theissuance of the proposed regulation.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined inExecutive Order 12866. Therefore, aregulatory assessment is not required. Italso has been determined that section553(b) of the Administrative ProcedureAct (5 U.S.C. chapter 5) and the Regula-tory Flexibility Act (5 U.S.C. chapter 6)do not apply to these regulations, and,therefore, a Regulatory Flexibility Analy-sis is not required. Pursuant to section7805(f) of the Code, this notice of pro-posed rulemaking will be submitted to theChief Counsel of the Small BusinessAdministration for comment on its impacton small businesses.

Comments and Request for a PublicHearing

Before this proposed regulation isadopted as a final regulation, consider-ation will be given to any electronic andwritten comments (a signed original andeight (8) copies) that are submitted timelyto the IRS. All comments will be avail-able for public inspection and copying. Apublic hearing may be scheduled ifrequested in writing by a person thattimely submits written comments. If apublic hearing is scheduled, notice of thedate, time, and place for the hearing willbe published in the Federal Register.


The principal author of this regulationis Julie C. Schwartz, Office of the Asso-ciate Chief Counsel (Procedure andAdministration), Disclosure and PrivacyLaw Division.

* * * * *

Amendments to the Regulations

Accordingly, 26 CFR parts 301 and602 are proposed to be amended as fol-lows:


Paragraph 1. The authority citation forpart 301 is amended by adding an entry innumerical order to read as follows:

Authority: 26 U.S.C. 7805 ***Section 301.6103(p)(2)(B)–1 also

issued under 26 U.S.C. 6103(p)(2);***

§ 301.6103(p)(2)(B)–1 [Removed]

Par. 2. Section 301.6103(p)(2)(B)–1 isremoved.

Par. 3. Section 301.6103(p)(2)(B)–1Tis added to read as follows:

[The text of this proposed section isthe same as the text of § 301.6103(p)(2)(B)–1T published elsewhere in thisissue of the Federal Register].

PART 602—OMB CONTROL NUM-BERS UNDER THE PAPERWORKREDUCTION ACT

Par. 4. The authority citation for part602 continues to read as follows:

Authority: 26 U.S.C. 7805 ***Par. 5. In § 602.101, paragraph (b) is

amended by adding an entry to the tablein numerical order to read as follows:

[The text of this proposed section isthe same as the text of § 602.101 pub-lished elsewhere in this issue of the Fed-eral Register].


Internal Revenue.


January 14, 2002 303 2002-2 I.R.B.

Elimination of User Fees forCertain Determination LetterRequests Pursuant to Section620 of the Economic Growthand Tax Relief ReconciliationAct of 2001

Announcement 2002–1

Q&A–15 of Notice 2002–1, page 283,this Bulletin, describes a revised Form8717 that is to be used with section 620applications, i.e., certain Employee Plansdetermination letter requests, that arefiled after December 31, 2001. Therevised form will not be available on theIRS Web Site until late in January 2002.Accordingly, prior to that time employersthat meet the requirements described inthe notice may use the draft Form 8717and the related instructions that are beingmade available through the EmployeePlans Newsletter and the various tax ser-vices.


The principal author of this announce-ment is Michael Rubin of the EmployeePlans, Tax Exempt and Government Enti-ties Division. For further informationregarding this announcement, please con-tact the Employee Plans’ taxpayer assis-tance telephone service at 1–877–829–5500 (a toll-free number), between thehours of 8:00 a.m. and 6:30 p.m. EasternTime, Monday through Friday. Mr. Rubincan be reached at 1–202–283–9888 (not atoll-free number).

Disclosure Initiative forCertain TransactionsResulting in Waiver of CertainPenalties Under § 6662 of theInternal Revenue Code


The Internal Revenue Service (IRS)announces a disclosure initiative toencourage taxpayers to disclose their taxtreatment of tax shelters and other itemsfor which the imposition of the accuracy-related penalty may be appropriate if

there is an underpayment of tax. If a tax-payer discloses any item in accordancewith the provisions of this announcementbefore April 23, 2002, the IRS will waivethe accuracy-related penalty under§ 6662(b)(1), (2), (3), and (4) for anyunderpayment of tax attributable to thatitem.

This disclosure initiative covers allitems except items resulting from a trans-action that (1) did not in fact occur, inwhole or in part, but for which the tax-payer claimed a tax benefit on its return;(2) involved the taxpayer’s fraudulentconcealment of the amount or source ofany item of gross income; (3) involvedthe taxpayer’s concealment of its interestin, or signature or other authority over afinancial account in a foreign country; (4)involved the taxpayer’s concealment of adistribution from, a transfer of assets to,or that the taxpayer was a grantor of aforeign trust; or (5) involved the treat-ment of personal, household, or livingexpenses as deductible trade or businessexpenses.

SCOPE OF THE WAIVER

Under this disclosure initiative, theIRS will waive the accuracy-related pen-alty under § 6662(b) for that portion of anunderpayment attributable to the dis-closed item and due to one or more of thefollowing: (1) negligence or disregard ofrules or regulations; (2) any substantialunderstatement of income tax; (3) anysubstantial or gross valuation misstate-ment under chapter 1 of the Code, exceptfor any portion of an underpaymentattributable to a net § 482 transfer priceadjustment, unless the standards of§ 6662(e)(3)(B) regarding documentationare met; and (4) any substantial overstate-ment of pension liabilities.

Disclosure under this initiative doesnot affect whether the IRS will impose, asappropriate, any other civil penalty thatmay be applicable under the Code or willinvestigate any associated criminal con-duct or recommend prosecution for viola-tion of any criminal statute.

PERIOD OF DISCLOSURE

The IRS will waive the accuracy-related penalty if the taxpayer disclosesthe item before the earlier of (1) the date

the item or another item arising from thesame transaction is an issue raised duringan examination, or (2) April 23, 2002. Forpurposes of this disclosure initiative, anitem is an issue raised during an examina-tion if the person examining the return(the examiner) communicates to the tax-payer knowledge about the specific itemor on or before December 21, 2001, theexaminer has made a request to the tax-payer for information, and the taxpayercould not make a complete response tothat request without giving the examinerknowledge of the specific item.

INFORMATION REQUIRED TOMAKE A DISCLOSURE

To disclose an item under this initia-tive, a taxpayer must provide the follow-ing:

(1) A statement describing the mate-rial facts of the item;(2) A statement describing the tax-payer’s tax treatment of the item;(3) The taxable years affected by theitem;(4) If the taxpayer is a CoordinatedIndustry Case (CIC) taxpayer, astatement that the taxpayer will agreeto address the disclosed item underthe Accelerated Issue Resolution pro-cess described in Rev. Proc. 94–67(1994–2 C.B. 800) if requested to doso by the IRS;(5) The names and addresses of (a)any parties who promoted, solicited,or recommended the taxpayer’s par-ticipation in the transaction underly-ing the item and who had a financialinterest, including the receipt of fees,in the taxpayer’s decision to partici-pate, and (b) if known to the tax-payer, any parties who advised thepromoter, solicitor or recommenderwith respect to that transaction;(6) A statement agreeing to provide,if requested, copies of all of the fol-lowing:

(a) All transactional documents,including agreements, contracts,instruments, schedules, and, if thetaxpayer’s participation in the trans-action was promoted, solicited orrecommended by any other party,all material received from that otherparty or that party’s advisor(s);

2002-2 I.R.B 304 January 14, 2002

(b) All internal documents ormemoranda used by the taxpayer inits decision-making process, includ-ing, if applicable, information pre-sented to the taxpayer’s board ofdirectors; and(c) All opinions and memorandathat provide a legal analysis of theitem, whether prepared by the tax-payer or a tax professional onbehalf of the taxpayer; and

(7) A penalty of perjury statementthat the person signing the disclosurehas examined the disclosure and thatto the best of that person’s knowl-edge and belief, the information pro-vided as part of the disclosure con-tains all relevant facts and is true,correct, and complete. In the case ofan individual taxpayer, the declara-tion must be signed and dated by thetaxpayer, and not the taxpayer’s rep-resentative. In the case of a corporatetaxpayer, the declaration must besigned and dated by an officer of thecorporate taxpayer who has personalknowledge of the facts. If the corpo-rate taxpayer is a member of anaffiliated group filing consolidatedreturns, a penalties of perjury state-ment also must be signed, dated, andsubmitted by an officer of the com-mon parent of the group. The personsigning for a trust, a state law part-nership, or a limited liability com-pany must be, respectively, a trustee,general partner, or member-managerwho has personal knowledge of thefacts. A stamped signature is not per-mitted.

PROCEDURE FOR MAKING THEDISCLOSURE

A CIC taxpayer must submit the dis-closure information to the assigned teammanager and send a copy of the informa-tion to the Office of Tax Shelter Analysis.

A non-CIC taxpayer not under exami-nation as of December 21, 2001, mustsend the disclosure information to theOffice of Tax Shelter Analysis.

A non-CIC taxpayer under examina-tion as of December 21, 2001, must sub-mit the disclosure information to theexaminer and send a copy of the informa-tion to the Office of Tax Shelter Analysis.

The address for the Office of Tax Shel-ter Analysis is LM:PFTG:OTSA, 1111Constitution Ave, NW, Washington, DC20224.

MISCELLANEOUS

The IRS is committed to consideringand resolving disclosed items promptly. Ataxpayer’s disclosure of an item createsno inference that the taxpayer’s tax treat-ment of the item was improper or that theaccuracy-related penalty would apply ifthere is an underpayment of tax. Further-more, taxpayers that do not discloseunder this initiative are not preventedfrom demonstrating that they satisfy thereasonable cause exception under§ 6664(c) and the regulations thereunderwith respect to any portion of an under-payment of tax.

PAPERWORK REDUCTION ACT

The collection of information con-tained in this announcement has beenreviewed and approved by the Office ofManagement and Budget in accordancewith the Paperwork Reduction Act (44U.S.C. § 3507) under control number1545–1764. An agency may not conductor sponsor, and a person is not required torespond to, a collection of informationunless the collection of information dis-plays a valid OMB control number.

The collection of information in thisannouncement is in the section titledINFORMATION REQUIRED TOMAKE A DISCLOSURE. This informa-tion is required to assess the item the tax-payer is disclosing under the initiative.This information will be used to deter-mine whether the taxpayer has reportedthe disclosed item properly for incometax purposes. The collection of informa-tion is required to obtain the benefitdescribed in this announcement. Thelikely respondents are businesses or otherfor-profit institutions, small businesses ororganizations, and individuals.

The estimated total annual reportingburden is 450 hours.

The estimated annual burden perrespondent varies from 2 hours to 4hours, depending on individual circum-stances, with an estimated average of 3hours. The estimated number of respon-dents is 150.

The estimated frequency of responsesis one time per respondent.

Books or records relating to a collec-tion of information must be retained aslong as their contents may become mate-rial in the administration of any internalrevenue law. Generally tax returns andtax return information are confidential, asrequired by 26 U.S.C. § 6103.

CONTACT INFORMATION

For further information regarding thisannouncement, contact Jozef Chilinski ofthe Office of Tax Shelter Analysis at(202) 283–8425 (not a toll-free call).

Form 1065 ElectronicFiling Waiver RequestProcedures


Section 6011(e) of the Internal Rev-enue Code and section 301.6011–3(a) ofthe Regulations on Procedure and Admin-istration require partnerships with morethan 100 partners to file their partnershipreturns (Form 1065 series) on magneticmedia. The regulations define “magneticmedia” to include electronic filing, ifelectronic filing is required by the Inter-nal Revenue Service (Service).

Beginning with taxable years endingon or after December 31, 2000, the Ser-vice will require partnerships with morethan 100 partners to file their partnershipreturns electronically. IRS Publication1524 contains instructions for filing part-nership returns electronically, andexcludes certain partnerships from theelectronic filing requirement. For TaxYear 2001, the IRS has excluded Partner-ships with the following type of returnsfrom the electronic filing requirement:

1) Fiscal Year Filers2) Foreign Address Partnerships3) Amended Returns4) Delinquent Returns

(Note: For a detailed list of the exclu-sions, refer to Publication 1524.)

Section 301.6011–3(b) of the regula-tions permits the Commissioner of Inter-nal Revenue to waive the electronic filingrequirement if the partnership demon-strates that a hardship would result if it

January 14, 2002 305 2002-2 I.R.B.

were required to file its return electroni-cally. The regulations require partnershipsseeking a waiver to request one in themanner prescribed by the Service.

To request a waiver for the taxableyear ending December 31, 2001, partner-ships must file a written request contain-ing the following information:(1) A notation at the top of the requeststating, in large letters, “Form 1065 e-fileWaiver Request: IRC Section 6011(e)(2)”;(2) The name, federal tax identificationnumber, and mailing address of the part-nership;(3) The taxable year for which the waiveris requested;(4) A detailed statement which lists:

a) the steps the partnership has takenin an attempt to meet its require-ment to file its return electronically,

b) why the steps were unsuccessful,c) the hardship that would result,

including any incremental cost tothe partnership of complying withthe electronic filing requirements.Incremental costs are those coststhat are above and beyond the coststo file on paper. The incrementalcosts must be supported by adetailed computation. The detailedcomputation must include a sched-ule detailing the costs to file onpaper and the costs to file electroni-cally.

(5) A statement as to what steps the part-nership will take to assure its ability toelectronically file its partnership returnfor the next tax year.(6) A statement (signed by the Tax Mat-ters Partner, as defined in section6231(a)(7) of the Code) indicating:

“Under penalties of perjury, Ideclare that the information con-tained in this waiver request is true,correct and complete to the best ofmy knowledge and belief.”

All requests for waiver must be filedwith the Ogden Submission ProcessingCenter during one of the following peri-ods:

1) For returns due April 15, 2002 (Form8736 Extension not filed); January 15,2002, to March 1, 2002.

2) For returns due July 15, 2002 (Form8736 Extension filed); January 15,2002, to June 1, 2002.

3) For returns due October 15, 2002(Form 8800 Extension filed andapproved); January 15, 2002, to Sep-tember 15, 2002.Requests from the partnership’s tax

advisor/preparer must be accompanied bya valid power of attorney. The address forthe Ogden Submission Processing Center:

Internal Revenue ServiceOgden Submission Processing CenterP.O. Box 9941Ogden, UT 84409Attn: Form 1065 e-file Waiver Request,

Stop 1057

Fax: 801–620–7622

(Note: Do not attach the waiver requestto the partnership’s paper tax return.Also, do not file extension requests withthe waiver.)

The Service will approve or denywaiver requests based on the facts andcircumstances of each request. In deter-mining whether to approve or deny awaiver request, the Service will considerthe ability of the partnership to file itsreturn electronically without incurring anundue economic hardship.

Within 30 days after receipt of thewaiver request, the Service will send aletter to the partnership either approvingor denying the request for waiver. Part-nerships may not appeal a denial of awaiver request. However, partnershipsmay request a waiver of any penaltyimposed by the Service for failing to filetheir partnership returns electronically.For further information regarding penaltywaivers, see IRS Notice 746.

For questions concerning a request forwaiver, contact the Ogden SubmissionProcessing Center 801–620–7444 (not atoll-free call).

Effect of the Family andMedical Leave Act on theOperation of Cafeteria Plans;Correction


AGENCY: Internal Revenue Service(IRS), Treasury

ACTION: Correction to final regulations.

SUMMARY: This document contains acorrection to final regulations (T.D. 8966,2001-45 I.R.B. 422) that were publishedin the Federal Register on October 17,2001 (66 FR 52676). These regulationsrelate to cafeteria plans that reflectchanges made by the Family and MedicalAct of 1993 (Act).

DATES: This correction is effective Octo-ber 17, 2001.

FOR FURTHER INFORMATION CON-TACT: Shoshanna Chaiton (202) 622–6080 (not a toll-free number).


BackgroundThe final regulations that are the sub-

ject of this correction are under section125 of the Internal Revenue Code.

Need for Correction

As published, the final regulations(T.D. 8966) contains errors that mayprove to be misleading and are in need ofclarification.

Correction of Publication

Accordingly, final reglations (T.D.8966), (FR. Doc 01–25909), publishedOctober 17, 2001, is corrected as follows:

§ 1.125–3 [Corrected]

On page 52677, column 3, § 1.125–3,line 3, the language “Family and MedicalLeave Act (FMLA)” is corrected to read“Family and Medical Leave Act (FMLA),29 U.S.C. 2601 et seq.,”

2002-2 I.R.B 306 January 14, 2002

On page 52677, column 3, §1.125–3,Q–1, line 4 and 5, the language “whentaking unpaid Family and Medical LeaveAct (FMLA), 29 U.S.C., is corrected toread “when taking unpaid FMLA, 29U.S.C.”

LaNita Van Dyke,Acting Chief, Regulations Unit,

Associate Chief Counsel(Income Tax and Accounting).


January 14, 2002 307 2002-2 I.R.B.

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as“rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe theeffect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus, ifan earlier ruling held that a principleapplied to A, and the new ruling holdsthat the same principle also applies to B,the earlier ruling is amplified. (Comparewith modified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previouslypublished ruling and points out an essen-tial difference between them.

Modified is used where the substanceof a previously published position isbeing changed. Thus, if a prior rulingheld that a principle applied to A but notto B, and the new ruling holds that it

applies to both A and B, the prior rulingis modified because it corrects a pub-lished position. (Compare with amplifiedand clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly usedin a ruling that lists previously publishedrulings that are obsoleted because ofchanges in law or regulations. A rulingmay also be obsoleted because the sub-stance has been included in regulationssubsequently adopted.

Revoked describes situations where theposition in the previously published rul-ing is not correct and the correct positionis being stated in the new ruling.

Superseded describes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over aperiod of time in separate rulings. If the

new ruling does more than restate thesubstance of a prior ruling, a combinationof terms is used. For example, modifiedand superseded describes a situationwhere the substance of a previously pub-lished ruling is being changed in part andis continued without change in part and itis desired to restate the valid portion ofthe previously published ruling in a newruling that is self contained. In this case,the previously published ruling is firstmodified and then, as modified, is super-seded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further namesin subsequent rulings. After the originalruling has been supplemented severaltimes, a new ruling may be published thatincludes the list in the original ruling andthe additions, and supersedes all prior rul-ings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in currentuse and formerly used will appear inmaterial published in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.

E.O.—Executive Order.ER—Employer.ERISA—Employee Retirement Income SecurityAct.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign Corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Intemal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.

PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statements of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D.—Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z—Corporation.

2002-2 I.R.B i January 14, 2002

Numerical Finding List1

Bulletin 2002–1

Revenue Procedures:

2002–1, 2002–1 I.R.B. 12002–2, 2002–1 I.R.B. 822002–3, 2002–1 I.R.B. 1172002–4, 2002–1 I.R.B. 1272002–5, 2002–1 I.R.B. 1732002–6, 2002–1 I.R.B. 2032002–7, 2002–1 I.R.B. 2492002–8, 2002–1 I.R.B. 252

1 A cumulative list of all revenue rulings, revenue

procedures, Treasury decisions, etc., published in

Internal Revenue Bulletins 2001–27 through 2001–53 is

in Internal Revenue Bulletin 2002–1, dated January 7, 2002.

January 14, 2002 ii 2002-2 I.R.B.

Finding List of Current Actions onPreviously Published Items2

Bulletin 2002–1

Revenue Procedures:

84–37Modified byRev. Proc. 2002–1, 2002–1 I.R.B. 1

Rev. Proc. 96–13Modified byRev. Proc. 2002–1, 2002–1 I.R.B. 1

2000–20Modified byRev. Proc. 2002–6, 2002–1 I.R.B. 203

2001–1Superseded byRev. Proc. 2002–1, 2002–1 I.R.B. 1











2 A cumulative list of current actions on previously published

items in Internal Revenue Bulletins 2001–27 through 2001–53 is

in Internal Revenue Bulletin 2002–1, dated January 7, 2002.

2002-2 I.R.B iii January 14, 2002