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. 2002–23, page 812.The Service will accept, as timely filed, a federal tax return,claim for refund, statement, or other document required or per-mitted to be filed with the Service that is mailed from and offi-cially postmarked in a foreign country on or before the last dateprescribed for filing, including any extension of time for filing.This ruling also sets forth the position that a federal return,claim for refund, statement, or other document required or per-mitted to be filed with the Service or with the United States TaxCourt given to a designated international private delivery ser-vice before midnight on the last date prescribed for filing shallbe deemed timely filed pursuant to section 7502 of the Code.Rev. Rul. 80–218 superseded.

Rev. Proc. 2002–28, page 815.Methods of accounting; inventories; small business tax-payers. This procedure provides that the Commissioner willexercise his discretion to except qualifying small business tax-payers from the requirements to use an accrual method ofaccounting under section 446 of the Code and to account forinventories under section 471 of the Code. Rev. Proc. 2002–9modified and amplified. Notice 2002–14 modified and super-seded.

EMPLOYEE PLANS

Notice 2002–27, page 814.Minimum distributions; reporting requirements. Thisnotice provides guidance on the reporting required from issu-ers, custodians, and trustees with respect to required mini-mum distributions from individual retirement arrangements(IRAs).

Announcement 2002–46, page 834.Safe harbor explanation (in Spanish); certain qualifiedplan distributions. This announcement repeats, in Spanish,the safe harbor explanation to employees portion of Notice2002–3 (2002–2 I.R.B. 289) that plan administrators may usefor recipients of eligible rollover distributions in order to satisfysection 402(f) of the Code.

EXEMPT ORGANIZATIONS

Announcement 2002–47, page 844.This document solicits comments addressing whether severalregulations under Chapter 42 should be revised, with respectto excise taxes imposed on foundation and organization man-agers, to conform to recently-issued final regulations undersection 4958 of the Code. This announcement also solicitscomments addressing any other areas of Chapter 42 regula-tions that may need updating.

Announcement 2002–50, page 845.A list is provided of organizations now classified as privatefoundations.

(Continued on the next page)Finding Lists begin on page ii.Index for January through April begins on page v.

Bulletin No. 2002–18May 6, 2002

EXCISE TAX

Announcement 2002–47, page 844.This document solicits comments addressing whether severalregulations under Chapter 42 should be revised, with respectto excise taxes imposed on foundation and organization man-agers, to conform to recently-issued final regulations undersection 4958 of the Code. This announcement also solicitscomments addressing any other areas of Chapter 42 regula-tions that may need updating.

ADMINISTRATIVE

REG–104762–00, page 825.Proposed regulations under section 6331 of the Code providefor the prohibition of levy while an installment agreement ispending with the Secretary, while an installment agreement is ineffect, and following the rejection or termination of an install-ment agreement. The regulations clarify when levy is prohibitedand the effect of that prohibition on the statute of limitations forcollection. They also provide that the IRS may not commence aproceeding in court for the collection of a tax included in a pro-posed or active installment agreement while levy is prohibitedby this section.

REG–105369–00, page 828.Proposed regulations under sections 148 and 141 of the Codeprovide guidance on the definitions of investment-type propertyand private loan for the arbitrage and private activity restric-tions applicable to tax-exempt bonds issued by state and localgovernments. A public hearing is scheduled for September 24,2002. REG–113526–98 withdrawn.

Announcement 2002–45, page 833.Methods of accounting; small business taxpayers. Thisannouncement discusses some of the most significant issuesraised in comments received in response to Notice 2001–76(2001–52 I.R.B. 613). The notice proposed procedures underwhich qualifying small business taxpayers with average annualgross receipts of $10,000,000 or less would be exceptedfrom the requirements to use an accrual method of accountingunder section 446 of the Code and to account for inventoriesunder section 471 of the Code for eligible businesses.

May 6, 2002 2002–18 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.

2002–18 I.R.B. May 6, 2002

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

Section 162.—Trade orBusiness Expenses

26 CFR 1.162–1: Cost of materials.

Qualifying small business taxpayers with aver-age annual gross receipts of $10,000,000 or less areexcepted from the requirement to account for inven-tories under § 471 for eligible trades or businesses,but may account for inventoriable items as materialsand supplies that are not incidental under § 1.162–3.See Rev. Proc. 2002–28, page 815.

Section 263A.—Capitalizationand Inclusion in InventoryCosts of Certain Expenses

26 CFR 1.263A–1: Uniform capitalization of costs.

For eligible trades or businesses, inventoriableitems of qualifying small business taxpayers withaverage annual gross receipts of $10,000,000 or lessare not subject to § 263A, but may be treated asmaterials and supplies that are not incidental under§ 1.162–3. See Rev. Proc. 2002–28, page 815.

Section 446.—General Rulefor Methods of Accounting

26 CFR 1.446–1: General rule for methods ofaccounting.

Qualifying small business taxpayers with aver-age annual gross receipts of $10,000,000 or less areexcepted from the requirements to use an accrualmethod of accounting under § 446 and to accountfor inventories under § 471 for eligible trades orbusinesses. See Rev. Proc. 2002–28, page 815.

Section 447.—Method ofAccounting for CorporationsEngaged in Farming

Taxpayers that are required to use the accrualmethod of accounting under § 447 are not “qualify-ing small business taxpayers” that are excepted fromthe requirements to use an accrual method ofaccounting under § 446 and to account for invento-ries under § 471. See Rev. Proc. 2002–28, page 815.

Section 448.—Limitation onUse of Cash Method ofAccounting

26 CFR 1.448–1T: Limitations on the use of thecash receipts and disbursements method of account-ing.

Taxpayers that are required to use the accrualmethod of accounting under § 448 are not “qualify-ing small business taxpayers” that are excepted fromthe requirements to use an accrual method ofaccounting under § 446 and to account for invento-ries under § 471. See Rev. Proc. 2002–28, page 815.

Section 460.—Special Rulesfor Long-Term Contracts

26 CFR 1.460–1: Long-term contracts.

Under § 460, qualifying small business taxpay-ers with average annual gross receipts of$10,000,000 or less that are excepted from therequirements to use an accrual method of account-ing under § 446 and to account for inventories under§ 471 for eligible trades or businesses may berequired to account for certain items using a long-term contract method. See Rev. Proc. 2002–28, page815.

Section 471.—General Rulefor Inventories

26 CFR 1.471–1: Need for inventories.

Qualifying small business taxpayers with aver-age annual gross receipts of $10,000,000 or less areexcepted from the requirements to use an accrualmethod of accounting under § 446 and to accountfor inventories under § 471 for eligible trades orbusinesses, and may account for inventoriable itemsas materials and supplies that are not incidentalunder § 1.162–3. See Rev. Proc. 2002–28, page 815.

Section 481.—AdjustmentsRequired for Changes inMethod of Accounting

26 CFR 1.481–1: Adjustments in general.26 CFR 1.481–4: Adjustments taken into accountwith consent.

For eligible trades or businesses, qualifyingsmall business taxpayers with average annual grossreceipts of $10,000,000 or less may obtain auto-matic consent to change to the cash receipts anddisbursements method of accounting and to accountfor inventoriable items as materials and supplies thatare not incidental under § 1.162–3. See Rev. Proc.2002–28, page 815.

Section 1001.—Determin-ation of Amount of andRecognition of Gain or Loss

26 CFR 1.1001–1: Computation of gain or loss.

Notwithstanding § 1001 and the regulationsthereunder, qualifying small business taxpayers thatare excepted from the requirements to use an accrualmethod of accounting under § 446 of the Code andto account for inventories under § 471 for eligibletrades or businesses will include amounts attribut-able to open accounts receivable (due in 120 days orless) in income as the amounts are actually or con-structively received. See Rev. Proc. 2002–28, page815.

Section 6081.—Extension ofTime for Filing Returns

Section 7502.—TimelyMailing Treated as TimelyFiling and Paying

26 CFR § 1.6081–1(a): Extension of time for filingreturns.26 CFR 301.7502–1: Timely mailing treated astimely filing.

This ruling sets forth the position thatthe Internal Revenue Service will accept,as timely filed, a federal tax return, claimfor refund, statement, or other documentrequired or permitted to be filed with theService that is mailed from and officiallypostmarked in a foreign country on orbefore the last date prescribed for filing,

2002–18 I.R.B. 811 May 6, 2002

including any extension of time for filing.The ruling also sets forth the position thata federal tax return, claim for refund,statement, or other document required orpermitted to be filed with the Service orwith the United States Tax Court given toa designated private delivery servicebefore midnight on the last date pre-scribed for filing shall be deemed timelyfiled pursuant to sections 7502(a), (d)(1),and (f)(1) of the Code.

Rev. Rul. 2002–23

ISSUES:

1. Whether the Internal Revenue Ser-vice (“Service”) will accept as timelyfiled a federal tax return, claim forrefund, statement, or other documentrequired or permitted to be filed with theService when it is mailed from and offi-cially postmarked in a foreign country onor before the last date prescribed for fil-ing?

2. Whether a federal tax return, claimfor refund, statement, or other documentrequired or permitted to be filed with theService or with the United States TaxCourt is timely filed when it is given to adesignated delivery service in a foreigncountry and recorded or marked asdescribed in section 7502(f)(2)(C) beforemidnight on the last date prescribed forfiling?

LAW AND ANALYSIS:

Pursuant to Rev. Rul. 80–218 (1980–2C.B. 386), and Policy Statement P–2–9(July 27, 1969), the Service has acceptedfederal tax returns mailed by taxpayersfrom foreign countries as timely filed ifthey bear an official postmark dated on orbefore the last date prescribed for filing,including any extension of time for suchfiling. If the last date for filing falls on aSaturday, Sunday, or a legal holidaywithin the meaning of section 7503,returns have been considered timely ifpostmarked on or before the next suc-ceeding day which is not a Saturday, Sun-day, or a legal holiday. This revenue rul-ing reaffirms the position previouslyannounced in Rev. Rul. 80–218 andPolicy Statement P–2–9. For purposes ofthis revenue ruling, the term legal holidaymeans a legal holiday in the District of

Columbia in the United States, or a State-wide legal holiday in the State where thefederal tax return, claim for refund orother document is required to be filed orsent. The term does not include legal holi-days in foreign countries unless such holi-days are also legal holidays in the Districtof Columbia or applicable State, asdescribed above.

In addition, pursuant to the authoritygranted by section 6081(a) of the Code,which permits the Commissioner to granta reasonable extension of time for filingany return, declaration, statement or otherdocument, this revenue ruling expandsthe application of the timely mailing istimely filing rules set forth in Rev. Rul.80–218 to claims for refund, statementsor other documents required or permittedto be filed with the Service. Accordingly,claims for refund, statements and otherdocuments will be treated as timely filedif the conditions described above are sat-isfied. If, however, the envelope that con-tains a claim, statement or other docu-ment has a timely postmark, but it isreceived after the time when an envelopepostmarked and mailed at that time andlocation would ordinarily be received, thesender may be required to prove that itwas timely mailed.

Timely filing treatment, however, willnot apply to foreign postmarked docu-ments filed with the United States TaxCourt, such as petitions and notices ofappeal, unless given to a designated inter-national delivery service as discussedbelow. See, e.g., Sarrell v. Commissioner,117 T.C. 122 (2001).

Section 7502(f) authorizes the Secre-tary to designate delivery services satisfy-ing the requirements of section 7502(f)(2)to deliver items qualifying for timelymailing as timely filing treatment in thesame manner as items postmarked anddeposited in the United States mail.Returns, claims for refund, statementsand other documents sent via an interna-tional delivery service qualify for timelymailing as timely filing treatment if theinternational delivery service meets therequirements of section 7502(f)(2) and isdesignated under Rev. Proc. 97–19(1997–1 C.B. 644). Accordingly, returns,claims for refund, statements and otherdocuments given to a designated interna-tional delivery service before midnight onthe last date prescribed for filing with the

Service will be deemed timely filed onthe date the document was given to thedelivery service, as recorded electroni-cally on its data base or marked on thecover in which the item is to be delivered,as described in section 7502(f)(2)(C). Ifthe last date for filing falls on a Saturday,Sunday, or a legal holiday within themeaning of section 7503, returns, claims,statements and other documents will beconsidered timely if given to a designatedinternational delivery service before mid-night on the next succeeding day which isnot a Saturday, Sunday, or a legal holiday.Timely filing treatment will also apply todocuments filed with the United StatesTax Court, such as petitions or notices ofappeal, pursuant to section 7502(d)(1).

HOLDINGS:

1. The Internal Revenue Service willaccept, as timely filed, a federal taxreturn, claim for refund, statement, orother document required or permitted tobe filed with the Service that is mailedfrom and officially postmarked in a for-eign country on or before the last dateprescribed for filing, including any exten-sion of time for filing. If the last date forfiling falls on a Saturday, Sunday, or alegal holiday within the meaning of sec-tion 7503, returns, claims, statements, andother documents will be consideredtimely if postmarked on or before thenext succeeding day which is not a Satur-day, Sunday, or a legal holiday.

2. A federal tax return, claim forrefund, statement, or other documentrequired or permitted to be filed with theService or with the United States TaxCourt that is given to a designated inter-national delivery service before midnighton the last date prescribed for filing shallbe deemed timely filed pursuant to sec-tion 7502(a), (d)(1), and (f)(1). If the lastdate for filing falls on a Saturday, Sunday,or a legal holiday within the meaning ofsection 7503, returns, claims, statements,and other documents will be consideredtimely if given to a designated interna-tional delivery service before midnight onthe next succeeding day which is not aSaturday, Sunday, or a legal holiday. Suchreturns, claims for refund, statements, orother documents will be deemed filed onthe date the document was given to thedesignated delivery service, as recordedelectronically on its data base or markedon the cover in which the item is to bedel ivered pursuant to sect ion7502(f)(2)(C).

May 6, 2002 812 2002–18 I.R.B.

EFFECT ON OTHER REVENUERULINGS:

Rev. Rul. 80–218 (1980–2 C.B. 386) issuperseded.

DRAFTING INFORMATION

The principal author of this revenueruling is David A. Abernathy of theOffice of Associate Chief Counsel (Proce-dure and Administration), AdministrativeProvisions and Judicial Practice Division.For further information regarding thisrevenue ruling, contact Mr. Abernathy at(202) 622–7860 (not a toll-free call).

2002–18 I.R.B. 813 May 6, 2002

Part III. Administrative, Procedural, and Miscellaneous

Reporting Required MinimumDistributions From IRAs

Notice 2002–27

PURPOSE

This notice provides guidance on thereports that trustees, custodians, and issu-ers are required to make with respect torequired minimum distributions fromindividual retirement accounts and annu-ities (IRAs).

BACKGROUND

Section 401(a)(9)(A) of the InternalRevenue Code provides rules for requiredminimum distributions from qualifiedplans during the life of an employee and§ 401(a)(9)(B) provides rules for requiredminimum distributions after the death ofan employee. Section 408(a)(6) and (b)(3)provides that rules similar to the rules of§ 401(a)(9) apply to IRA distributions.Under § 401(a)(9)(C), the required begin-ning date for an IRA owner is April 1 ofthe calendar year following the calendaryear in which the owner attains age 70½.

Section 408(i) provides that the trusteeof an IRA shall make reports regardingsuch accounts as the Secretary mayrequire.

Proposed regulations under §§ 401(a)(9) and 408(a)(6) and (b)(3) were pub-lished in January 2001 (REG–130477–00;REG–130481–00, 2001–1 C.B. 865). Theproposed regulations, which substantiallysimplified the rules for determiningrequired minimum distributions, providedthat the trustee, custodian, or issuer of anIRA is required to report the amount ofrequired minimum distributions from anIRA in accordance with IRS forms andinstructions. For purposes of this notice,the term “trustee” includes a trustee, cus-todian, and an issuer of IRAs. The pre-amble to the proposed regulationsdescribed a process under which the IRSwould be receiving public comments andconsulting with interested parties in orderto evaluate how to implement a reportingrequirement that would provide the mostuseful information to the IRA owners andbeneficiaries while minimizing the bur-den on IRA trustees.

The IRS has received a number ofcomments regarding the reportingrequirement in the proposed regulationsand the comments have been taken intoaccount. Final and temporary regulationsunder §§ 401(a)(9) and 408(a)(6) and(b)(3) were published at 67 F.R. 18988(Apr. 17, 2002). These regulations areeffective January 1, 2003.

Section 1.408–8, Q&A–10, of the newregulations provides that the trustee of anIRA is required to report information,with respect to the amount required to bedistributed from the IRA for each calen-dar year, to individuals or entities, at thetime, and in the manner, prescribed by theCommissioner in revenue rulings, notices,and other guidance published in the Inter-nal Revenue Bulletin as well as in federaltax forms and accompanying instructions.This notice is being issued in conjunctionwith those regulations and pursuant tothis delegation of authority to requirereporting with respect to required mini-mum distributions from IRAs.

The reporting provisions in this noticeare intended to assist taxpayers in com-plying with the minimum distributionrequirement. However, the Treasury andthe IRS continue to have concerns aboutthe overall level of compliance in thisarea and intend to monitor the effect ofthe new reporting regime on complianceto determine whether it would be appro-priate to modify the regime in the future.

Although reporting of a required mini-mum distribution applies with respect toeach IRA, the IRA owner may take therequired minimum distribution fromanother IRA of the owner to the extentpermitted under Q&A–9 of § 1.408–8.

REPORTING

I. Required Reporting to the IRAOwner

If a minimum distribution is requiredwith respect to an IRA for a calendar yearand the IRA owner is alive at the begin-ning of the year, the trustee that held theIRA as of December 31 of the prior yearmust provide a statement to the IRAowner by January 31 of the calendar yearregarding the required minimum distribu-tion in accordance with either of the two

alternatives in this section. This require-ment is effective beginning with requiredminimum distributions for 2003 (so thatthe first reports are due January 31,2003).

Alternative one. An IRA trustee fur-nishes the IRA owner with a statement ofthe amount of the required minimum dis-tribution with respect to the IRA for thecalendar year and the date by which suchamount must be distributed. The amountis permitted to be calculated assumingthat the sole beneficiary of the IRA is nota spouse more than 10 years younger thanthe IRA owner and that no amountsreceived by the IRA after December 31 ofthe prior year are required to be takeninto account to adjust the value of theIRA as of December 31 of the prior yearfor purposes of determining the requiredminimum distribution pursuant toQ&A–7 or Q&A–8 of § 1.408–8.

Alternative two. An IRA trustee pro-vides a statement to the IRA owner that:(1) informs the IRA owner that a mini-mum distribution with respect to the IRAis required for the calendar year and thedate by which such amount must be dis-tributed and (2) includes an offer to fur-nish the IRA owner, upon request, with acalculation of the amount of the requiredminimum distribution with respect to theIRA for that calendar year. If the IRAowner requests such a calculation, theIRA trustee must calculate the requiredminimum distribution for the IRA ownerand report that amount to the IRA owner.

Under both alternatives, the statementmust also inform the IRA owner that thetrustee will be reporting to the IRS,beginning with required minimum distri-butions for calendar year 2004, that theIRA owner is required to receive arequired minimum distribution for thecalendar year. (See section II below.) Thestatement can be provided to the IRAowner in conjunction with the statementof the fair market value of the IRA as ofDecember 31 of the prior year that is oth-erwise required to be provided to the IRAowner by January 31 of a year.

If the surviving spouse of a deceasedIRA owner elects to treat an IRA forwhich the spouse is the sole beneficiaryas the spouse’s own IRA by redesignatingthe IRA as an account in the name of the

May 6, 2002 814 2002–18 I.R.B.

spouse as IRA owner rather than as ben-eficiary, the IRA trustee reports informa-tion on the required minimum distributionto the surviving spouse under the IRAowner rules in this section I. If the spouseis the sole beneficiary of an IRA of adeceased owner but has not affirmativelyredesignated the IRA as the spouse’s ownIRA, the IRA trustee is permitted toassume that the surviving spouse of thedeceased IRA owner has not elected totreat the IRA as the spouse’s own IRAand continues to be treated as a benefi-ciary for purposes of § 401(a)(9).

II. Required Reporting to the IRS

Beginning with required minimum dis-tributions for calendar year 2004, if aminimum distribution is required withrespect to an IRA for a calendar year, thetrustee of the IRA must indicate that aminimum distribution is required withrespect to the IRA for the calendar year(but need not indicate the amount) onForm 5498, Individual RetirementArrangement Information, for the imme-diately preceding year (i.e., on a 2003Form 5498 for a 2004 required minimumdistribution) in accordance with theinstructions for Form 5498.

III. No Reporting for Section 403(b)Contracts and IRAs of Deceased Owners

Section 1.403(b)–3 provides that a sec-tion 403(b) contract is treated as an indi-vidual retirement plan for purposes of sat-isfying the required minimum distributionrules. Consequently, the delegation ofauthority to require reporting for IRAsalso applies to section 403(b) contracts.However, no reporting is required at thistime with respect to required minimumdistributions from section 403(b) con-tracts.

Reporting is also not required at thistime with respect to IRAs of deceasedowners. Accordingly, no reporting isrequired for Roth IRAs because there areno lifetime minimum distributionsrequired for Roth IRAs. If reporting isrequired in the future for section 403(b)contracts or IRAs of deceased owners, theIRS will issue additional guidance, whichwill be effective prospectively.

IV. Application for Years After 2003

This notice provides the reportingrules for required minimum distributionsfor calendar year 2003. For requiredminimum distributions for calendar yearsafter 2003, these rules apply except to theextent modified in federal tax forms andaccompanying instructions.

PAPERWORK REDUCTION ACT

The collections of information con-tained in this notice have been reviewedand approved by the Office of Manage-ment and Budget in accordance with thePaperwork Reduction Act (44 U.S.C. sec-tion 3507) under control number 1545–1779.

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 control number.

The collection of information in thisnotice is in the section titled “REPORT-ING.” This information is required toinform IRA owners of their requiredminimum distributions for the year. Thelikely respondents are (1) businesses orother for-profit institutions and (2) not-for-profit institutions.

The estimated total annual reportingburden is 1,170,000 hours.

The estimated annual burden perrespondent varies from 4 minutes to 20hours, depending on individual circum-stances, with an estimated average of 15hours. The estimated number of respon-dents is 78,000.

The estimated annual frequency ofresponses is one.

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.

DRAFTING INFORMATION

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 service

between 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).

26 CFR 601.204: Changes in accounting periodsand methods of accounting.(Also Part 1 §§, 162, 263A, 446, 447, 448, 460, 471,481, 1001; 1.162–3, 1.263A–1, 1.446–1, 1.448–1T,1.460–1, 1.471–1, 1.481–1, 1.481–4, 1.1001–1.)

Rev. Proc. 2002–28

SECTION 1. PURPOSE

In order to reduce the administrativeand tax compliance burdens on certainsmall business taxpayers and to minimizedisputes between the Internal RevenueService and small business taxpayersregarding the requirement to use anaccrual method of accounting (accrualmethod) under § 446 of the Internal Rev-enue Code because of the requirement toaccount for inventories under § 471, thisrevenue procedure provides that the Com-missioner of Internal Revenue will exer-cise his discretion to except a qualifyingsmall business taxpayer (as defined insection 5.01 of this revenue procedure)from the requirements to use an accrualmethod of accounting under § 446 and toaccount for inventories under § 471. Thisrevenue procedure also provides the pro-cedures by which a qualifying small busi-ness taxpayer may obtain automatic con-sent to change to the cash receipts anddisbursements method of accounting(cash method) and/or to a method ofaccounting for inventoriable items asmaterials and supplies that are not inci-dental under § 1.162–3 of the Income TaxRegulations.

SECTION 2. BACKGROUND

.01 Section 446(a) provides that tax-able income must be determined underthe method of accounting on the basis ofwhich the taxpayer regularly computes itsincome in keeping its books.

.02 Section 446(c) generally allows ataxpayer to select the method of account-ing it will use to compute its taxableincome. A taxpayer is entitled to adopt

2002–18 I.R.B. 815 May 6, 2002

any one of the permissible methods foreach separate trade or business, includingthe cash method or an accrual method,subject to certain restrictions. Forexample, § 446(b) provides that theselected method must clearly reflectincome. In addition, § 1.446–1(c)(2)(i)requires that a taxpayer use an accrualmethod with regard to purchases andsales of merchandise whenever § 471requires the taxpayer to account forinventories, unless otherwise authorizedby the Commissioner under § 1.446–1(c)(2)(ii). Under § 1.446–1(c)(2)(ii), theCommissioner has the authority to permita taxpayer to use a method of accountingthat clearly reflects income even thoughthe method is not specifically authorizedby the regulations.

.03 Section 447 generally requires thetaxable income from farming of a C cor-poration engaged in the trade or businessof farming, or a partnership engaged inthe trade or business of farming with a Ccorporation partner, to be determinedusing an accrual method, unless the Ccorporation meets the $1,000,000($25,000,000 for family corporations)gross receipts test.

.04 Section 448 generally prohibits theuse of the cash method by a C corpora-tion (other than a farming business and aqualified personal service corporation)and a partnership with a C corporationpartner (other than a farming business anda qualified personal service corporation),unless the C corporation or partnershipwith a C corporation partner meets a$5,000,000 gross receipts test. Section448 also prohibits tax shelters from usingthe cash method.

.05 The cash method generallyrequires an item of income to be includedin income when actually or constructivelyreceived and permits a deduction for anexpense when paid. Section 1.446–1(c)(1)(i). Other provisions of the Codeor regulations applicable to cash methodtaxpayers may change these general rules,including, for example, § 263 (requiringthe capitalization of expenses paid out fora new building or for permanent improve-ments or betterments made to increase thevalue of any property or estate, or forrestoring property or making good theexhaustion of property for which anallowance is or has been made); § 263A(requiring capitalization of direct and

allocable indirect costs of real or tangiblepersonal property produced by a taxpayeror real or personal property that isacquired by a taxpayer for resale); § 460(requiring the use of the percentage-of-completion method for certain long-termcontracts); and § 475 (requiring dealers insecurities to mark securities to market).

.06 Section 471 provides that when-ever, in the opinion of the Secretary, theuse of inventories is necessary to clearlydetermine the income of the taxpayer,inventories must be taken by the taxpayer.Section 1.471–1 generally requires a tax-payer to account for inventories when theproduction, purchase, or sale of merchan-dise is an income-producing factor in thetaxpayer’s business.

.07 Section 1.162–3 requires taxpayerscarrying materials and supplies (otherthan incidental materials and supplies) onhand to deduct the cost of materials andsupplies only in the amount that they areactually consumed and used in operationsduring the taxable year. In the case ofincidental materials and supplies on handfor which no record of consumption iskept or of which physical inventories atthe beginning and end of the year are nottaken, taxpayers may include in theirexpenses and deduct from gross incomethe total cost of such incidental suppliesand materials as were purchased duringthe taxable year for which the return ismade, provided the taxable income isclearly reflected by this method.

.08 Section 263A generally requiresdirect costs and an allocable portion ofindirect costs of certain property pro-duced or acquired for resale by a taxpayerto be included in inventory costs, in thecase of property that is inventory, or to becapitalized, in the case of other property.However, resellers with gross receipts of$10,000,000 or less are not required tocapitalize costs under § 263A, and certainproducers with $200,000 or less of indi-rect costs are not required to capitalizecertain costs under § 263A. See §§ 263A(b)(2)(B) and 1.263A–2(b)(3)(iv).

.09 Sections 446(e) and 1.446–1(e)state that, except as otherwise provided, ataxpayer must secure the consent of theCommissioner before changing a methodof accounting for federal income tax pur-poses. Section 1.446–1(e)(3)(ii) autho-rizes the Commissioner to prescribeadministrative procedures setting forth

the limitations, terms, and conditionsdeemed necessary to permit a taxpayer toobtain consent to change a method ofaccounting in accordance with § 446(e).

.10 Section 481(a) requires thoseadjustments necessary to prevent amountsfrom being duplicated or omitted to betaken into account when the taxpayer’staxable income is determined under amethod of accounting different from themethod used to determine taxable incomefor the preceding taxable year.

SECTION 3. SCOPE

.01 Applicability. This revenue proce-dure applies to a qualifying small busi-ness taxpayer as defined in section 5.01.

.02 Taxpayers Not within the Scope ofthis Revenue Procedure.

Notwithstanding section 3.01 of thisrevenue procedure, this revenue proce-dure does not apply to a farming business(within the meaning of § 263A(e)(4)) of aqualifying small business taxpayer. If aqualifying small business taxpayer isengaged in the trade or business of farm-ing, this revenue procedure may apply tothe taxpayer’s non-farming trades or busi-nesses, if any. A taxpayer engaged in thetrade or business of farming generally isallowed to use the cash method for anyfarming business, unless the taxpayer isrequired to use an accrual method under§ 447 or is prohibited from using the cashmethod under § 448.

SECTION 4. QUALIFYING SMALLBUSINESS TAXPAYER EXCEPTION

.01 Pursuant to his discretion under§§ 446 and 471, and to simplify therecordkeeping requirements of a qualify-ing small business taxpayer, the Commis-sioner, as a matter of administrative con-venience, will allow a qualifying smallbusiness taxpayer to use the cash methodas described in this revenue procedure fora trade or business described in this sec-tion 4.01 (eligible trade or business).

(1) A qualifying small business tax-payer may use the cash method asdescribed in this revenue procedure for allof its trades or businesses if the taxpayersatisfies any one of the following threetests and did not previously change (andwas not previously required to havechanged) from the cash method to anaccrual method for any trade or business

May 6, 2002 816 2002–18 I.R.B.

as a result of becoming ineligible to usethe cash method under this revenue pro-cedure.

(a) The taxpayer reasonably deter-mines that its principal business activity(as defined in section 5.04, below) isdescribed in a North American IndustryClassification System (“NAICS”) codeother than one of the ineligible codeslisted below. The ineligible NAICS codesare as follows:

(i) mining activities within themeaning of NAICS codes 211 and 212;

(ii) manufacturing within themeaning of NAICS codes 31–33;

(iii) wholesale trade within themeaning of NAICS code 42;

(iv) retail trade within the mean-ing of NAICS codes 44 and 45; and,

(v) information industries withinthe meaning of NAICS codes 5111 and5122.

Information regarding the NAICScodes can be found at www.census.gov.Visitors to the site should select “SubjectsA to Z,” followed by “N,” and thenshould select “North American IndustryClassification System.” Taxpayers alsomay find a partial list of NAICS codes,described as “Principal Business ActivityCodes,” in the instructions to their taxreturn forms.

(b) Notwithstanding that a taxpay-er’s principal business activity isdescribed in one of the ineligible NAICScodes listed above in section 4.01(1)(a),the taxpayer reasonably determines thatits principal business activity is the provi-sion of services, including the provisionof property incident to those services.

(c) Notwithstanding that a taxpay-er’s principal business activity isdescribed in one of the ineligible NAICScodes listed above in section 4.01(1)(a),the taxpayer reasonably determines thatits principal business activity is the fabri-cation or modification of tangible per-sonal property upon demand in accor-dance with customer design orspecifications. For purposes of this rule,tangible personal property is not fabri-cated or modified in accordance with cus-tomer design or specifications if the cus-tomer merely chooses among pre-selectedoptions (such as size, color, or materials)offered by the taxpayer or if the taxpayermust make only minor modifications toits basic design to meet the customer’s

specifications. Moreover, a taxpayer thatmanufacturers an item in quantities for acustomer is not treated as fabricating ormodifying tangible personal property inaccordance with customer design orspecifications.

(2) Under current law, a taxpayerwith two or more trades or businesses thathas a trade or business that is permitted touse the cash method may use suchmethod for such trade or business. There-fore, notwithstanding that a taxpayer’sprincipal business activity is notdescribed above in section 4.01(1) andthus the taxpayer can not use the cashmethod for all of its trades or businesses,a taxpayer may use the cash method withrespect to any separate and distinct tradeor business if the principal business activ-ity of the trade or business is notdescribed in an ineligible NAICS code insection 4.01(1)(a)(i) through (v) or isdescribed in either section 4.01(1)(b) orsection 4.01(1)(c). No trade or businesswill be considered separate and distinctunless a complete and separable set ofbooks and records is kept for such tradeor business. See § 1.446–1(d)(2).

.02 A taxpayer who satisfies the quali-fying small business taxpayer exceptiondescribed in section 4.01 and chooses notto use an overall accrual method withinventories being accounted for under§ 471 has the following three options foran eligible trade or business under thisrevenue procedure:

(1) The taxpayer can use the overallcash method and account for inventoriesunder § 471;

(2) The taxpayer can use an overallaccrual method and account for inventori-able items, as defined in section 5.09below, in the same manner as materialsand supplies that are not incidental under§ 1.162–3 (see sections 4.04 and 4.05below); or

(3) The taxpayer can use the overallcash method and account for inventori-able items in the same manner as materi-als and supplies that are not incidentalunder § 1.162–3 (see sections 4.04 and4.05 below).

.03 Notwithstanding § 1001 and theregulations thereunder, qualifying smallbusiness taxpayers that use the cashmethod for an eligible trade or businessunder section 4.01 of this revenue proce-dure shall include amounts attributable to

“open accounts receivable” (as defined insection 5.10) in income as such amountsare actually or constructively received.However, § 1001 may be applicable toother transactions.

.04 Qualifying small business taxpay-ers that are permitted to use the cashmethod for an eligible trade or businessunder section 4.01 of this revenue proce-dure and that do not want to account forinventories under § 471 must treat allinventoriable items in such trade or busi-ness in the same manner as materials andsupplies that are not incidental under§ 1.162–3. For purposes of this revenueprocedure, taxpayers are not required toapply § 263A to inventoriable items thatare treated as materials and supplies thatare not incidental. Items that would beaccounted for as incidental materials andsupplies for purposes of § 1.162–3 maystill be accounted for in that manner.Whether an item is purchased for resaleor use (and thus accounted for as a non-incidental material and supply) or is pur-chased to provide to customers incident toservices (and thus may be accounted foras either an incidental or a non-incidentalmaterial and supply depending on thefacts and circumstances) must be deter-mined under general tax principles.

.05 Under § 1.162–3, materials andsupplies that are not incidental aredeductible only in the year in which theyare actually consumed and used in thetaxpayer’s business. For purposes of thisrevenue procedure, inventoriable itemsthat are treated as materials and suppliesthat are not incidental are consumed andused in the year the qualifying small busi-ness taxpayer provides the items to a cus-tomer. Thus, the cost of such inventori-able items are deductible only in thatyear, or in the year in which the taxpayeractually pays for the goods, whichever islater. A qualifying small business tax-payer may determine the amount of theallowable deduction for non-incidentalmaterials and supplies by using either aspecific identification method, a first in,first out (FIFO) method, or an averagecost method, provided that method isused consistently. See § 1.471–2(d). Ataxpayer may not use the last in, first out(LIFO) method described in § 472 andthe regulations thereunder to determinethe amount of the allowable deduction fornon-incidental materials and supplies.

2002–18 I.R.B. 817 May 6, 2002

.06 The method of accounting used bya qualifying small business taxpayer forfinancial accounting (“book”) purposeswill not affect the taxpayer’s eligibilityunder this revenue procedure to use thecash method or the method of accountingfor inventoriable items as non-incidentalmaterials and supplies under § 1.162–3.However, taxpayers must still complywith the requirements under § 446(a) andthe regulations thereunder to maintainadequate books and records, which mayinclude a reconciliation of any differencesbetween such books and records and theirreturn. See § 1.446–1(a)(4).

SECTION 5. DEFINITIONS

.01 Qualifying Small Business Tax-payer. A qualifying small business tax-payer is any taxpayer with “averageannual gross receipts” of $10,000,000 orless that is not prohibited from using thecash method under § 448.

.02 Average Annual Gross Receipts. Ataxpayer has average annual grossreceipts of $10,000,000 or less if, foreach prior taxable year ending on or afterDecember 31, 2000, the taxpayer’s aver-age annual gross receipts for the threetaxable-year period ending with the appli-cable prior taxable year do not exceed$10,000,000. If a taxpayer has not been inexistence for three prior taxable years, thetaxpayer must determine its averageannual gross receipts for the number ofyears (including short taxable years) thatthe taxpayer has been in existence. See§ 448(c)(3)(A).

.03 Business Activity. A taxpayer mayuse any reasonable method of applyingthe relevant facts and circumstances todetermine what is a business activity. Forexample, for some taxpayers, the provi-sion of services, the sale of goods, andthe production of goods each will betreated as a different business activity.However, if a taxpayer sells or producesgoods incident to the performance of ser-vices, the different activities may betreated as one business activity—the pro-vision of services.

.04 Principal Business Activity. A prin-cipal business activity is determined bythe sources of gross receipts. Under sec-tions 4.01(1)(a), (b), and (c), a taxpayermust apply the tests in this section to allthe taxpayer’s trades or businesses in theaggregate. Under section 4.01(2), a tax-

payer must apply the tests in such sectionseparately to each trade or business forwhich the taxpayer keeps a complete andseparable set of books and records. A tax-payer may use either of the followingtests to determine the principal businessactivity of the taxpayer or of the taxpay-er’s trades or businesses.

(1) Principal business activity prioryear test. Under the principal businessactivity prior year test, the principal busi-ness activity is the activity from whichthe largest percentage of gross receiptswas derived during the prior taxable year(even if this amount is less than 50 per-cent of the aggregate gross receipts of thetaxpayer or the trade or business). If ataxpayer or a trade or business is in itsfirst taxable year, the principal businessactivity is the activity from which thelargest percentage of gross receipts isderived for that taxable year.

(2) Principal business activity three-year average test. Under the principalbusiness activity three-year average test,the principal business activity is the activ-ity from which the largest percentage ofaverage annual gross receipts was derivedover the three taxable-year period endingwith the prior taxable year. If a taxpayeror a trade or business has not been inexistence for three prior taxable years, thetaxpayer must determine average annualgross receipts for the number of years(including short taxable years) that thetaxpayer or the trade or business has beenin existence. See § 448(c)(3)(A).

.05 Gross Receipts. Gross receipts isdefined consistent with § 1.448–1T(f)(2)(iv) of the Temporary Income TaxRegulations. Thus, gross receipts for ataxable year equal all receipts that mustbe recognized under the method ofaccounting actually used by the taxpayerfor that taxable year for federal incometax purposes. For example, gross receiptsinclude total sales (net of returns andallowances), all amounts received fromservices, interest, dividends, and rents.However, gross receipts do not includeamounts received by the taxpayer withrespect to sales tax or other similar stateand local taxes if, under the applicablestate or local law, the tax is legallyimposed on the purchaser of the good orservice, and the taxpayer merely collectsand remits the tax to the taxing authority.See also § 448(c)(3)(C).

.06 Aggregation of Gross Receipts. Forpurposes of computing gross receiptsunder section 5.02, all taxpayers treatedas a single employer under subsection (a)or (b) of § 52 or subsection (m) or (o) of§ 414 (or that would be treated as a singleemployer under these sections if the tax-payers had employees) will be treated asa single taxpayer. However, when trans-actions occur between taxpayers that aretreated as a single taxpayer by the previ-ous sentence, gross receipts arising fromthese transactions will not be treated asgross receipts for purposes of the averageannual gross receipts limitation. See§§ 448(c)(2) and 1.448–1T(f)(2)(ii).

.07 Treatment of Short Taxable Years.In the case of a short taxable year, a tax-payer’s gross receipts must be annualizedby multiplying the gross receipts for theshort taxable year by 12 and then dividingthe result by the number of months in theshort taxable year. See §§ 448(c)(3)(B)and 1.448–1T(f)(2)(iii).

.08 Treatment of Predecessors. Anyreference to a taxpayer in this section 5includes a reference to any predecessor ofthat taxpayer. See § 448(c)(3)(D).

.09 Inventoriable Item Defined. Aninventoriable item is any item either pur-chased for resale to customers or used asa raw material in producing finishedgoods.

.10 Open Accounts Receivable Def-ined. For purposes of this revenue proce-dure, open accounts receivable is definedas any receivable due in full in 120 daysor less.

SECTION 6. EXAMPLES

For purposes of the followingexamples, assume that:

(1) the taxpayers use the calendaryear;

(2) the taxpayers are not prohibitedfrom using the cash method under § 448(except Example 4); and

(3) the taxpayers satisfy the averageannual gross receipts test of section 5.02of this revenue procedure (exceptExamples 2 and 3).

Example 1—Principal Business Activ-ity Not an Ineligible NAICS Code. Tax-payer is a graphic design firm. Taxpayerplans, designs, and manages the produc-tion of visual communications that con-vey specific messages or concepts. Tax-payer’s activities include the design of

May 6, 2002 818 2002–18 I.R.B.

printed materials, packaging, advertising,signage systems, and corporate identifica-tion (logos). Taxpayer reasonably deter-mines that its principal business activityis described in NAICS code 541430(graphic design services), which is notone of the ineligible NAICS codes listedin section 4.01(1)(a)(i)–(v) of this rev-enue procedure. Taxpayer may use thecash method for its graphic design busi-ness.

Example 2—Satisfaction of the Aver-age Annual Gross Receipts Test. Taxpayeris a plumbing contractor that installsplumbing fixtures in customers’ homesand businesses. Taxpayer reasonablydetermines that its principal businessactivity is construction, which isdescribed in NAICS code 23. Taxpayer’sgross receipts at the end of the three pre-ceding taxable years are:

Gross receipts

1998: $ 6,000,000

1999: 9,000,000

2000: 12,000,000

Taxpayer’s average annual gross receiptsfor the three taxable-year period ending inthe 2000 taxable year are $9,000,000(($6,000,000 + $9,000,000 +$12,000,000) / 3 = $9,000,000). Taxpayermay use the cash method for all its tradesor businesses pursuant to this revenueprocedure for its 2001 taxable yearbecause its average annual gross receiptsfor each prior taxable year ending on orafter December 31, 2000, is $10,000,000or less and its principal business activityis not described in the ineligible NAICScodes listed in section 4.01(1)(a)(i)–(v).

Example 3—Failure of the AverageAnnual Gross Receipts Test. Same asExample 2, except that Taxpayer’s grossreceipts in 2001 equal $15,000,000. Tax-payer’s average annual gross receipts forthe three taxable-year period ending inthe 2001 taxable year are $12,000,000(($9,000,000 + $12,000,000 + $15,000,000/3) = $12,000,000). Taxpayer is not aqualifying small business taxpayer forpurposes of this revenue procedure for its2002 taxable year or any subsequent yearbecause its average annual gross receiptsfor each prior taxable year ending on orafter December 31, 2000, is not$10,000,000 or less.

Example 4—Inability to Use this Rev-enue Procedure When § 448 Applies.Same as Example 2, except that Taxpayeris a C corporation. Because Taxpayer’saverage annual gross receipts for the pre-vious three years ($9,000,000) exceed$5,000,000, Taxpayer is prohibited fromusing the cash method under § 448. Con-sequently, Taxpayer is not eligible to usethe cash method under this revenue pro-cedure. The same result would applyunder § 448 if, instead of being a C cor-poration, Taxpayer were a tax shelter(regardless of Taxpayer’s average annualgross receipts) or Taxpayer were a part-nership with a C corporation as a partner.

Example 5—Principal Business Activ-ity Prior Year Test. Taxpayer is a plumb-ing contractor that installs plumbing fix-tures in customers’ homes and businesses.Taxpayer also has a store that sellsplumbing equipment to homeowners andother plumbers who visit the store. Dur-ing its prior taxable year, Taxpayerderived 60 percent of its total receiptsfrom plumbing installation (including

amounts charged for parts and fixturesused in installation) and 40 percent of itstotal receipts from the sale of plumbingequipment through its store. Under theprincipal business activity prior year test,Taxpayer reasonably determines that itsprincipal business activity is plumbinginstallation, which is a construction activ-ity described in NAICS code 23. BecauseTaxpayer’s principal business activity—plumbing installation—is not described inthe ineligible NAICS codes listed in sec-tion 4.01(1)(a)(i)–(v), Taxpayer may usethe cash method for both business activi-ties (plumbing installation and retailsales).

Example 6—Principal Business Activ-ity Three-Year Average Test. Same asExample 5, except that for the prior tax-able year, Taxpayer derived 40 percent ofits total receipts from plumbing installa-tion (including amounts charged for partsand fixtures used in installation) and 60percent of its total receipts from the saleof plumbing equipment through its store.Under the principal business activity prioryear test, Taxpayer’s principal businessactivity is retail, which is described in anineligible NAICS code. Thus, Taxpayer isnot eligible to use the cash method for allof its trades or businesses under the prin-cipal business activity prior year test.However, Taxpayer may still be eligibleto use the cash method for all of its tradesor businesses under section 4.01(1) of thisrevenue procedure if Taxpayer reasonablydetermines that its principal businessactivity is plumbing installation under theprincipal business activity three-yearaverage test. Taxpayer’s gross receipts forthe prior three taxable years are as fol-lows:

2000 1999 1998 3 Year Average

Plumbing installation $2,000,000 $6,000,000 $4,000,000 $4,000,000

Retail sale of equipment $3,000,000 $2,000,000 $4,000,000 $3,000,000

Total $5,000,000 $8,000,000 $8,000,000 $7,000,000

The approximate percentage of Taxpay-er’s average annual gross receipts for theprior three taxable years is 57 percent($4,000,000/$7,000,000 total averagegross receipts) for plumbing installationand 43 percent ($3,000,000/$7,000,000)for the retail sale of plumbing equipment

through its store. Thus, Taxpayer reason-ably determines that its principal businessactivity is plumbing installation under theprincipal business activity three-yearaverage test. Because Taxpayer’s princi-pal business act ivi ty—plumbinginstallation—is not described in the ineli-

gible NAICS codes listed in section4.01(1)(a)(i)-(v), Taxpayer may use thecash method for both business activities(plumbing and retail sales).

Example 7—Application of Section4.01(2) Where Taxpayer Is Ineligible toUse the Cash Method Under Section

2002–18 I.R.B. 819 May 6, 2002

4.01(1). Same as Examples 5 and 6,except that Taxpayer’s principal businessactivity is retail sales under both the prin-cipal business activity prior year test andthe principal business activity three-yearaverage test. Taxpayer is not eligible touse the cash method for all of its trades orbusinesses under section 4.01(1) becauseTaxpayer’s principal business activity(retail sales) is described in an ineligibleNAICS code under section 4.01(1)(a)(iv)and is neither the provision of servicesunder section 4.01(1)(b) nor the fabrica-tion or modification of tangible personalproperty under section 4.01(1)(c). Tax-payer, however, maintains its retail salesand plumbing installation activities asseparate and distinct businesses with acomplete and separable set of books andrecords for each business. Under section4.01(2) of the revenue procedure, Tax-payer may use the cash method for itsseparate plumbing installation businessnotwithstanding that its principal businessactivity (retail sales) is ineligible undersection 4.01(1)(a)–(c).

Example 8—A Principal BusinessActivity Can Account for Less Than 50Percent of Gross Receipts. Taxpayer hasfour activities, Activities A through D.During the prior taxable year, Taxpayerderived 35 percent of its gross receiptsfrom Activity A, 25 percent from ActivityB, 20 percent from Activity C, and 20percent from Activity D. Under the prin-cipal business activity prior year test,Activity A would be Taxpayer’s principalbusiness activity because it represents thelargest percentage of gross receipts. Simi-larly, if the percentages of Taxpayer’saverage annual gross receipts for the priorthree taxable years were 35 percent fromActivity A, 25 percent from Activity B,20 percent from Activity C, and 20 per-cent from Activity D, under the principalbusiness activity three-year average test,Activity A would be Taxpayer’s principalbusiness activity because it represents thelargest percentage of average annualgross receipts.

Example 9—Taxpayer Does Not Sat-isfy the NAICS Code Exception in Section4.01(1)(a), the Service Exception in Sec-tion 4.01(1)(b), or the Custom Manufac-turing Exception in Section 4.01(1)(c).Taxpayer sells refrigerators. As part of thesale price, Taxpayer delivers the refrig-erator to the customer and confirms that

the refrigerator is functioning properly atthe customer’s site. Taxpayer’s principalbusiness activity is described in the ineli-gible NAICS code 44. Moreover, Taxpay-er’s principal business activity is not theprovision of services under section4.01(1)(b). Taxpayer does not providerefrigerators incident to the performanceof services. Rather, Taxpayer performscertain services (delivery and confirma-tion of functionality) incident to the saleof refrigerators. In addition, Taxpayerdoes not fabricate or modify tangible per-sonal property under section 4.01(1)(c).Taxpayer may not use the cash methodunder this revenue procedure.

Example 10—Taxpayer Does Not Sat-isfy the NAICS Code Exception in Section4.01(1)(a), the Service Exception in Sec-tion 4.01(1)(b), or the Custom Manufac-turing Exception in Section 4.01(1)(c).Taxpayer is a sofa manufacturer that onlyproduces sofas upon receipt of a customerorder. Customers are allowed to pickamong 150 different fabrics offered bythe Taxpayer or to provide their own fab-ric, which the Taxpayer will use to finishthe customer’s sofa. Taxpayer’s principalbusiness activity is described in the ineli-gible NAICS code 33. Taxpayer does notprovide sofas incident to the performanceof services for purposes of section4.01(1)(b). Rather, Taxpayer performscertain services (upholstering) incident tothe sale of sofas. Taxpayer also does notfabricate or modify tangible personalproperty for purposes of sect ion4.01(1)(c) because customers merelychoose among pre-selected optionsoffered by Taxpayer and Taxpayer onlymakes minor modifications to the basicdesign of its sofa. Taxpayer may not usethe cash method under this revenue pro-cedure.

Example 11—Taxpayer Does Not Sat-isfy the NAICS Code Exception in Section4.01(1)(a), the Service Exception in Sec-tion 4.01(1)(b) or the Custom Manufac-turing Exception in Section 4.01(1)(c).Taxpayer is a publisher who produces andsells high school and college yearbooks.Taxpayer’s principal business activity isdescribed in the ineligible NAICS code5111 (newspaper, periodical, book, anddatabase publishers). Taxpayer is not pro-viding a service for purposes of section4.01(1)(b) because Taxpayer’s principalbusiness activity is the production of

yearbooks for customers. In addition,Taxpayer is not a custom manufacturerfor purposes of section 4.01(1)(c) becauseTaxpayer, although it produces yearbooksto the detailed specifications of schools,is producing yearbooks in quantities. Assuch, Taxpayer may not use the cashmethod under this revenue procedure.

Example 12—Taxpayer Creating Pro-totype Does Not Satisfy the NAICS CodeException in Section 4.01(1)(a) but DoesSatisfy the Custom Manufacturing Excep-tion in Section 4.01(1)(c). Taxpayermakes tools based entirely on specificdesigns and specifications provided to itby customers. Taxpayer produces the cus-tomer’s prototype and gives the prototypeto the customer for production. Taxpay-er’s principal business activity isdescribed in the ineligible NAICS code33. However, Taxpayer’s principal busi-ness activity is the fabrication of tangiblepersonal property upon demand in accor-dance with customer design or specifica-tions for purposes of section 4.01(1)(c).Taxpayer may use the cash method underthis revenue procedure (subject to thepotential application of § 460).

Example 13—Taxpayer ProducingQuantities of Prototype Does Not Satisfythe Custom Manufacturing Exception inSection 4.01(1)(c). Same as Example 12,except that instead of producing the cus-tomer’s prototype and giving the proto-type to the customer for further produc-tion, Taxpayer is also the producer of thecustomer’s goods using the prototype.Taxpayer’s principal business activitywould not fall under the custom manufac-turer exception of section 4.01(1)(c).

Example 14—Application of AccountsReceivable 120–Day Rule in Section 4.03.Taxpayer is eligible to use the cashmethod under this revenue procedure.Taxpayer chooses to use the cash methodand to account for inventoriable items asnon-incidental materials and suppliesunder § 1.162–3. In December 2001, Tax-payer transfers property to a customer inexchange for an open accounts receivable(due in full in 120 days or less). In Feb-ruary 2002, the customer satisfies theaccounts receivable when it pays cash toTaxpayer. As provided by section 4.03 ofthis revenue procedure, Taxpayer wouldnot include any amount attributable to theaccounts receivable in income in 2001.Rather, Taxpayer would include the full

May 6, 2002 820 2002–18 I.R.B.

amount of the accounts receivable inincome in 2002 when it actually receivesthe cash payment from the customer.

Example 15—Timing of Deduction forInventoriable Items Treated as Non-Incidental Materials and Supplies Under§ 1.162–3—Construction. Taxpayer is aroofing contractor that is eligible to usethe cash method under this revenue pro-cedure. Taxpayer chooses to use the cashmethod and to account for inventoriableitems as non-incidental materials and sup-plies under § 1.162–3. Taxpayer entersinto a contract with a homeowner inDecember 2001 to replace the homeown-er’s roof. Taxpayer purchases roofingshingles from a local supplier and hasthem delivered to the homeowner’s resi-dence. Taxpayer pays the supplier $5,000for the shingles upon their delivery laterthat month. Taxpayer replaces the home-owner’s roof in December 2001, andgives the homeowner a bill for $15,000 atthat time. Taxpayer receives a check fromthe homeowner in January 2002. Theshingles are non-incidental materials andsupplies. The cost of the shingles isdeductible in the year Taxpayer uses andconsumes the shingles or actually paysfor the shingles, whichever is later. In thiscase, Taxpayer both pays for the shinglesand uses the shingles (by providing theshingles to the customer in connectionwith the performance of roofing services)in 2001. Thus, Taxpayer deducts the$5,000 cost of the shingles on its 2001federal income tax return. Taxpayerincludes the $15,000 in income in 2002when it receives the check from thehomeowner.

Example 16—Timing of Deduction forInventoriable Items Treated as Non-Incidental Materials and Supplies Under§ 1.162–3—Construction. Same as inExample 15, except that Taxpayer doesnot replace the roof until January 2002and is not paid until March 2002.Because the shingles are not used until2002, their cost can only be deducted onTaxpayer’s 2002 federal income taxreturn notwithstanding that Taxpayer paidfor the shingles in 2001. Thus, on its2002 return, Taxpayer must report$15,000 of income and $5,000 of deduc-tions.

Example 17—Timing of Deduction forNon-Inventoriable Items—SpeculativeHome Sales. Taxpayer is eligible to use

the cash method as described in this rev-enue procedure. Taxpayer is a speculativebuilder of houses that are built on land itowns. In 2001, Taxpayer builds a houseusing various items such as lumber, pip-ing, and metal fixtures that it had paid forin 2000. In 2002, Taxpayer sells thehouse to a buyer. Because the house isreal property held for sale by Taxpayer,the house and the material used to buildthe house are not inventoriable itemsunder this revenue procedure. Thus, Tax-payer may not account for the items usedto build the house as non-incidental mate-rials and supplies under § 1.162–3.Rather, Taxpayer must capitalize the costsof the lumber, piping, metal fixtures andother goods used by Taxpayer to build thehouse under § 263. Upon the sale of thehouse in 2002, the costs capitalized byTaxpayer will be offset against the housesales price to determine Taxpayer’s gainor loss from the sale.

Example 18—Timing of Deduction forInventoriable Items Treated as Non-Incidental Materials and Supplies Under§ 1.162–3—Construction. Same as inExample 17, except that (1) Taxpayerbuilds houses on land its customers own,and (2) the houses are built in threemonths with payment due at completion.Because Taxpayer does not own thehouse, the lumber, piping, metal fixturesand other goods used by Taxpayer in theprovision of construction services areinventoriable items, not real property heldfor sale. Taxpayer elects to treat the goodsused to build the house as non-incidentalmaterials and supplies under § 1.162–3.Taxpayer must deduct the cost of the lum-ber, piping, metal fixtures and other non-incidental materials and supplies that areused by it to build the house in 2001 (theyear those items were used by Taxpayerto build the house) notwithstanding thatTaxpayer had paid for the items in 2000.Taxpayer will report income it receivesfrom its customer as the income is actu-ally or constructively received.

Example 19—Timing of Deduction forInventoriable Items Treated as Non-Incidental Materials and Supplies Under§ 1.162–3—Reseller. Taxpayer is a veteri-narian that also sells pet supplies from itsclinic. Taxpayer reasonably determinesthat its principal business activity is vet-erinary services, which is not described inone of the ineligible NAICS codes in sec-

tion 4.01(1)(a)(i)–(v). Consequently, Tax-payer is eligible to use the cash methodfor all its business activities (veterinaryservices and retail sales). For both busi-ness activities, Taxpayer chooses to usethe cash method and to account for inven-toriable items (such as pet food) as non-incidental materials and supplies under§ 1.162–3. In December of 2001, Tax-payer purchases and pays for pet food tobe resold from its clinic. Taxpayer sellsthe pet food from its clinic (and receivescash payment from the customer) in2002. Because the pet food is not pro-vided to customers until 2002, its cost cannot be deducted until 2002.

Example 20—Timing of Deduction forInventoriable Items Treated as Non-Incidental Materials and Supplies Under§ 1.162–3—Manufacturer. Taxpayer is alandscape designer that also manufactureslawn ornaments. Taxpayer does notmanufacture lawn ornaments pursuant tocustomer contracts. Taxpayer reasonablydetermines that its principal businessactivity is landscape design, which is notdescribed in an ineligible NAICS codeunder section 4.01(1)(a)(i)–(v). Conse-quently, Taxpayer is eligible to use thecash method for all its business activities(landscape design and lawn ornamentmanufacturing). For both business activi-ties, Taxpayer chooses to use the cashmethod and to account for inventoriableitems (such as raw materials) as non-incidental materials and supplies under§ 1.162–3. In 2001, Taxpayer purchasesand pays for raw materials to be used inits manufacturing business and uses theraw materials to produce lawn ornaments.During 2002, Taxpayer sells the lawnornaments to customers. Because thelawn ornaments are not provided to cus-tomers until 2002, the cost of the rawmaterials used to produce the lawn orna-ments can not be deducted until 2002.

Example 21—Application of LongTerm Contract Rules—§ 460 Applicable.Taxpayer is a specialty tool and diemanufacturer. Taxpayer receives a requestfrom a large automobile manufacturer todesign and produce a custom-made diethat the customer will use in its manufac-turing operation. The contract to manu-facture the die is entered into in Decem-ber 2001 but is not completed until May2002. Because it satisfies the require-ments of section 4.01(1)(c) of this

2002–18 I.R.B. 821 May 6, 2002

revenue procedure, Taxpayer is eligible touse the overall cash method of account-ing. Notwithstanding the Taxpayer’s eli-gibility to use the overall cash method,however, because the contract to manu-facture the custom-made die requires theproduction of a “unique item” and willnot be completed in the year it is enteredinto, it is a “long term contract” for pur-poses of § 460, and the income andexpense relating to that contract must beaccounted for under the percentage-of-completion method of accountingdescribed in § 460 and the underlyingregulations.

Example 22—Application of LongTerm Contract Rules—§ 460 Not Appli-cable. Taxpayer is a residential homebuilder that specializes in modest singlefamily homes whose construction periodaverages six months. Taxpayer uses anoverall accrual method of accounting, andalthough it is not required to do so, Tax-payer has elected to use the percentage-of-completion method of accounting, asdescribed in § 1.460–4(b), in accountingfor its home construction activities.Because its principal business activity isnot described in an ineligible NAICScode described in section 4.01(1)(a), Tax-payer may elect the overall cash methoddescribed in this revenue procedure. Fur-ther, because its home construction activ-ity is not required to be accounted forusing the percentage-of-completionmethod described in § 460, Taxpayer iseligible (but not required) to change itsmethod of accounting for that activity tothe cash method.

Example 23—Taxpayer Satisfies theNAICS Code Provision in Section4.01(1)(a). Taxpayer is a licensed medicalclinic that provides specialized chemo-therapy treatment to cancer patients. Themedication provided to patients accountsfor 26 percent of Taxpayer’s averageannual gross receipts. Taxpayer does notsell the medications separately from itsprovision of services, selects the medica-tions to be used in a particular sessionbased on its own professional skill andjudgment, and does not maintain medica-tions for more than two weeks. Becausethe provision of medical services (NAICScode 62) represents Taxpayer’s principalbusiness activity, Taxpayer qualifies touse the cash method under section4.01(1)(a) for all of its trades or busi-

nesses. Even if the cost of the chemo-therapy medications represented Taxpay-er’s principal source of gross receipts,Taxpayer nonetheless would qualify touse the cash method under section4.01(1)(a) of this revenue procedure,because its principal business activitywould still be providing medical services,with goods being provided only incidentto the provision of those services. SeeOsteopathic Medical Oncology andHematology, P.C. v. Commissioner, 113T.C. 376 (1999), acq. in result 2000–1C.B. xvi.

Example 24—Change in PrincipalBusiness Activity. Taxpayer owns a hard-ware store and a small appliance repairbusiness. Following the issuance of thisrevenue procedure, Taxpayer reasonablydetermined that its principal businessactivity was its appliance repair business,which is not described in an ineligibleNAICS code under section 4.01(1)(a)(i)–(v). Consequently, Taxpayer was eligibleto use the cash method under this revenueprocedure for both its business activities(appliance repair and retail sales). Overtime, Taxpayer’s hardware store began togenerate a larger portion of Taxpayer’sgross receipts than its repair business. In2005, Taxpayer’s retail business becameits principal business activity. Becauseretail trade is described in ineligibleNAICS code 44, starting in 2006, Tax-payer is no longer eligible to use the cashmethod for all its trades or businessesunder section 4.01(1). Accordingly, Tax-payer must change to an accrual methodfor its retail business. If Taxpayer main-tains a complete and separable set ofbooks and records in 2006 for its repairbusiness, Taxpayer may continue to usethe cash method for its repair businessunder section 4.01(2). If Taxpayer doesnot maintain a complete and separable setof books and records in 2006 for its repairbusiness, Taxpayer also must change toan accrual method for its repair business—however, in any subsequent taxableyear that Taxpayer maintains completeand separable books and records for itsrepair business, Taxpayer will be eligibleunder section 4.01(2) to change to thecash method for its repair business.

Example 25—Change in PrincipalBusiness Activity. Same as Example 24,except that Taxpayer’s repair businessagain becomes its principal business

activity in 2009. Taxpayer is no longereligible to use the cash method for itsretail business under section 4.01(1). Forsection 4.01(1) to apply, Taxpayer mustnot have previously changed (or havebeen previously required to change) fromthe cash method to an accrual method forany trade or business as a result ofbecoming ineligible to use the cashmethod under this revenue procedure.Because Taxpayer was required to changeto an accrual method for its retail busi-ness in 2006 as a result of becomingineligible to use the cash method underthis revenue procedure, Taxpayer is noteligible to rely on section 4.01(1) for2006 or any subsequent taxable year.

Example 26—Change in PrincipalBusiness Activity. Same as Example 24,except that following the issuance of thisrevenue procedure, Taxpayer’s principalbusiness activity was retail sales and Tax-payer used an accrual method for bothbusinesses (retail and repair). Over time,Taxpayer’s repair business began to gen-erate a larger portion of Taxpayer’s grossreceipts than its retail business. In 2007,Taxpayer’s repair business became itsprincipal business activity. Starting in tax-able year 2008, Taxpayer is eligible undersection 4.01(1) to use the cash method forall its trades and businesses because Tax-payer did not change (and was notrequired to have changed) from the cashmethod to an accrual method for anytrade or business as a result of becomingineligible to use the cash method for thattrade or business under this revenue pro-cedure, and Taxpayer’s principal businessactivity is no longer described in an ineli-gible NAICS code under sect ion4.01(1)(a)(i)–(v).

SECTION 7. CHANGE INACCOUNTING METHOD

.01 In General. Any change in a tax-payer’s method of accounting pursuant tothis revenue procedure is a change inmethod of accounting to which the provi-sions of §§ 446 and 481 and the regula-tions thereunder apply.

.02 Automatic Change for Taxpayerswithin the Scope of this Revenue Proce-dure.

(1) Automatic change to the cashmethod. A qualifying small business tax-payer that wants to use the cash methodas described in this revenue procedure for

May 6, 2002 822 2002–18 I.R.B.

an eligible trade or business must followthe automatic change in accountingmethod provisions of Rev. Proc. 2002–9(2002–3 I.R.B. 327) (or its successor), asmodified by Rev. Proc. 2002–19(2002–13 I.R.B. 696), and Announcement2002–17 (2002–8 I.R.B. 561), with thefollowing modifications:

(a) The scope limitations in section4.02 of Rev. Proc. 2002–9 do not apply.However, if the taxpayer is under exami-nation, before an appeals office, or beforea federal court with respect to any incometax issue, see section 6.02(9) of Rev.Proc. 2002–9 for additional filing require-ments.

(b) Taxpayers filing Form 3115,Application for Change in AccountingMethod, for a change in method ofaccounting under this revenue proceduremust complete all applicable parts of theform but need not complete Part II ofSchedule A of Form 3115. Specifically,Part II of Form 3115, line 17 (regardinginformation on gross receipts in previousyears) and Part III of Form 3115 (regard-ing the § 481(a) adjustment) must becompleted. Taxpayers should write “Filedunder Rev. Proc. 2002–28” at the top oftheir Form 3115.

(c) A taxpayer making a changeunder section 7.02 of this revenue proce-dure for its first taxable year ending on orafter December 31, 2001, that, on orbefore May 6, 2002, files or filed itsoriginal federal income tax return forsuch year, is not required to comply withthe fi l ing requirement in section6.02(3)(a) of Rev. Proc. 2002–9, providedthe taxpayer complies with the followingfiling requirement. The taxpayer mustcomplete and file a Form 3115 in dupli-cate. The original must be attached to thetaxpayer’s amended federal income taxreturn for the taxpayer’s first taxable yearending on or after December 31, 2001.This amended return must be filed nolater than September 16, 2002. A copy ofthe Form 3115 must be filed with thenational office (see section 6.02(6) ofRev. Proc. 2002–9 for the address) nolater than when the taxpayer’s amendedreturn is filed.

(2) Automatic change to § 1.162–3.A qualifying small business taxpayer thatdoes not want to account for inventoriesunder § 471 must make any necessarychange from the taxpayer’s inventory

method (and, if applicable, from themethod of capitalizing costs under§ 263A) to treat inventoriable items in thesame manner as materials and suppliesthat are not incidental under § 1.162–3.For purposes of such a change, the rulesof section 7.02(1) of this revenue proce-dure apply.

(3) Other automatic changes. Anautomatic change in method under thisrevenue procedure would also includeany other change in method of accountingthat is eligible to be made under this rev-enue procedure in conjunction with eitheror both of the above changes in this sec-tion 7.02 (such as a change from a long-term contract method that is not requiredto be used by § 460). For purposes ofsuch a change, the rules of section 7.02(1)of this revenue procedure apply.

(4) Single Form 3115. Any combina-tion of changes under this revenue proce-dure may be included in the same Form3115 to be filed by the taxpayer.

.03 Section 481(a) Adjustment.(1) Determining the net amount. The

net amount of the § 481(a) adjustmentcomputed under this revenue proceduremust take into account both increases anddecreases in the applicable account bal-ances such as accounts receivable,accounts payable, and inventory. Forexample, the § 481(a) adjustment mayinclude the difference resulting fromchanging from taking inventory accountsunder § 471 to treating the inventoriableitems as materials and supplies that arenot incidental under § 1.162–3.

(2) Multiple adjustments. In the eventthat a taxpayer is taking into account a§ 481(a) adjustment from anotheraccounting method change in addition tothe § 481(a) adjustment required by thisrevenue procedure, the § 481(a) adjust-ments would be taken into account sepa-rately. For example, a taxpayer thatchanged from the cash method to anaccrual method in 1999 and was requiredto take its § 481(a) adjustment intoaccount over four years would continue totake into account that adjustment over theappropriate four years even though thetaxpayer changes back to the cash methodin 2001 and has an additional § 481(a)adjustment required by this revenue pro-cedure.

(3) Section 481(a) adjustment period.As provided in section 2 of Rev. Proc.

2002–19, the period for negative § 481(a)adjustments is one year, and the periodfor positive § 481(a) adjustments is fouryears.

.04 Taxpayers Not within the Scope ofthis Revenue Procedure.

(1) A taxpayer that ceases to qualifyfor the qualifying small business taxpayerexception described in section 4 of thisrevenue procedure for a trade or businessand that otherwise is required to use anaccrual method for that trade or businessmust change to an accrual method (and, ifapplicable an inventory method that com-plies with §§ 263A and 471) for that tradeor business using either the automaticchange in accounting method provisionsof section 5.01 of the APPENDIX to Rev.Proc. 2002–9, if applicable, as modifiedby Rev. Proc. 2002–19 or the advanceconsent provisions of Rev. Proc. 97–27(1997–1 C.B. 679) (or its successor), asmodified by Rev. Proc. 2002–19.

(2) No inference is intended regard-ing whether a taxpayer that does not sat-isfy the qualifying small business tax-payer exception in section 4 is otherwisepermitted to use the cash method. Tax-payers who do not qualify to change tothe cash method under this revenue pro-cedure may still request permission tochange to the cash method under Rev.Proc. 97–27, as modified. See also Rev.Proc. 2001–10 (2001–1 C.B. 272).

SECTION 8. EFFECT ON OTHERDOCUMENTS

Rev. Proc. 2002–9 is modified andamplified to include this automaticchange in sections 5 and 9 of the APPEN-DIX. Notice 2002–14 (2002–8 I.R.B.548) is modified and superseded.

SECTION 9. EFFECTIVE DATE

This revenue procedure is effective fortaxable years ending on or after Decem-ber 31, 2001. However, the Service willnot challenge a taxpayer’s use of the cashmethod under § 446 or a taxpayer’s fail-ure to account for inventories under § 471for a trade or business in an earlier year ifthe taxpayer, for that year, would havebeen a qualifying small business taxpayeras described in section 5.01 of this rev-enue procedure and would have been eli-gible to use the cash method in such yearunder section 4 of this revenue procedureif this revenue procedure had been appli-cable to that taxable year.

2002–18 I.R.B. 823 May 6, 2002

DRAFTING INFORMATION

The principal author of this revenueprocedure is W. Thomas McElroy, Jr., of

the Office of Associate Chief Counsel(Income Tax and Accounting). For furtherinformation regarding this revenue proce-

dure, contact Mr. McElroy at (202) 622–4970 (not a toll-free call).

APPENDIXAPPLICATION OF REV. PROC. 2002–28

May 6, 2002 824 2002–18 I.R.B.

Part IV. Items of General Interest

Notice of ProposedRulemaking

Levy Restrictions DuringInstallment Agreements

REG–104762–00

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemak-ing.

SUMMARY: This document containsproposed regulations relating to restric-tions on levy during the period that aninstallment agreement is proposed or ineffect. The proposed regulations reflectchanges to the law made by the InternalRevenue Service Restructuring andReform Act of 1998.

DATE: Written or electronically gener-ated comments and requests for a publichearing must be received by July 16,2002.

ADDRESSES: Send submissions to:CC:ITA:RU (REG–104762–00), room5226, Internal Revenue Service, POB7604, Ben Franklin Station, Washington,DC 20044. Submissions may be handdelivered Monday through Fridaybetween the hours of 8 a.m. and 5 p.m.to: CC:ITA:RU (REG–104762–00), Cou-rier’s Desk, Internal Revenue Service,1111 Constitution Avenue, NW, Washing-ton, DC. Alternatively, taxpayers maysubmit comments electronically via theIRS Internet site at www.irs.gov/regs.

FOR FURTHER INFORMATION CON-TACT: Concerning the regulations, Fred-erick W. Schindler, (202) 622–3620; con-cerning submissions of comments orrequests for a hearing Treena Garret,(202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposedamendments to the Procedure and Admin-istration Regulations (26 CFR part 301)

under section 6331 of the Internal Rev-enue Code (Code). The proposed regula-tions reflect the amendment of section6331 by section 3462 of the Internal Rev-enue Service Restructuring and ReformAct of 1998 Public Law, 105–206, (112Stat. 685, 764) (RRA 1998). New subsec-tion 6331(k) codifies the IRS practice ofwithholding collection during consider-ation of a taxpayer’s offer to compromiseand extends that practice to proposedinstallment agreements. The proposedregulations deal principally with theeffect of subsection 6331(k) when aninstallment agreement has been proposedand is pending, is in effect, or has beenrejected or terminated.

Prior to the enactment of RRA 1998,the IRS had a long-standing practice ofstaying action to collect a liability whilean offer to compromise that liability wasbeing evaluated and considered, unlessthe interests of the United States wouldbe jeopardized by doing so. See PolicyStatement P–5–97 (Approved July 10,1959), reprinted at IRM 1.5.17. To insurethat the interests of the United Stateswould not be jeopardized while collectionwas withheld, the IRS required that tax-payers execute a waiver of the statute oflimitations for collection of the liabilitiesthe taxpayer was attempting to compro-mise.

Section 3462 of RRA 1998 added sub-section 6331(k) to the Code. Paragraph(1) of the new subsection codifies the IRSpolicy of withholding collection duringthe pendency of an offer to compromiseby prohibiting levy while an offer to com-promise is pending, for thirty days after arejection, and during any appeal of thatrejection. Temporary regulations (T.D.8829, 1999–2 C.B. 235) published in theFederal Register on July 21, 1999, con-tained provisions governing the effects ofsubsection 6331(k) when taxpayers sub-mit offers to compromise. See§ 301.7122–1T.

Prior to RRA 1998, the IRS did notstay collection when a taxpayer submittedan offer of an installment agreement.Because installment agreements providefor the full payment of the tax liabilitiesat issue, the processing of requests forinstallment agreements is less formal andmost requests were accepted or rejected

within several days of receipt. Once aninstallment agreement took effect, regula-tions prohibited levy, as well as certainother enforced collection measures,unless the installment agreement providedotherwise. See § 301.6159–1(d).

Paragraph 6331(k)(2) prohibits levywhile a taxpayer’s proposal of an install-ment agreement is pending with the IRS,for thirty days after rejection of such aproposal, while an installment agreementis in effect, for thirty days after termina-tion of an installment agreement by theIRS, and during a timely filed appeal bythe taxpayer to the IRS Office of Appealsof a rejection or termination decision.

Paragraph 6331(k)(3) provides that“rules similar to” those contained in para-graphs (3), (4), and (5) of subsection6331(i) shall apply generally for the pur-poses of subsection 6331(k). Subsection6331(i) governs the prohibition on levyduring the pendency of a proceeding forrefund of a divisible tax. The cross-referenced provisions provide exceptionsto the prohibitions on levy, prohibit theinitiation by the IRS of court proceedingsto collect while the refund proceeding ispending, and provide that the statute oflimitations for collection is suspendedwhile levy is prohibited.

The proposed regulations implementthe provisions of subsection 6331(k) asthey relate to installment agreements. Inaddition to setting forth the periods dur-ing which levy is prohibited, they adaptthe rules of paragraphs (3), (4), and (5) ofsubsection 6331(i) in a manner tailored tothe installment agreement process. Thelegislative history accompanying RRA1998 explains that Congress did notintend that levy would be prohibited if theIRS determined that an offer to compro-mise was submitted solely to delay col-lection. H.R. Conf. Rep. No. 509, 105thCong., 2d Sess. 288 (1998). Because thelegislative history indicates that Congressintended the same restrictions on levywith respect to offers in compromise beapplicable to installment agreements,these proposed regulations adopt thesame rule with respect to proposedinstallment agreements that are submittedsolely to delay collection.

2002–18 I.R.B. 825 May 6, 2002

Explanation of Provisions

The proposed regulations provide that,subject to certain exceptions, the IRS maynot levy to collect a liability while a pro-posal to enter into an installment agree-ment for payment of that liability is pend-ing, for thirty days after rejection of sucha proposal, while an installment agree-ment is in effect, for thirty days after ter-mination of an installment agreement bythe IRS, and during a timely filed appealof a rejection or termination by the IRS.A proposed installment agreement is con-sidered pending when it is accepted forprocessing by the IRS, and remains pend-ing until the IRS accepts or rejects it orthe taxpayer withdraws the proposal. If aproposed installment agreement does notcontain sufficient information for the IRSto determine whether the proposal shouldbe accepted, the IRS will request theadditional necessary information from thetaxpayer and provide a reasonable timeperiod for the taxpayer to respond. TheIRS may reject the proposed installmentagreement if the requested information isnot provided.

Collection by levy is not prohibited ifthe taxpayer waives the restriction onlevy in writing, if the IRS determines thatthe proposed installment agreement wassubmitted solely to delay collection, or ifthe IRS determines that collection of thetax liability is in jeopardy.

The proposed regulations provide thatthe IRS may take actions other than levyto protect the interests of the UnitedStates with respect to collection of theliability to which an installment agree-ment or proposed installment agreementrelates. Those actions include, but are notlimited to: crediting an overpaymentagainst the liability pursuant to section6402, filing or refiling notices of Federaltax lien, and taking action to collect frompersons liable for the tax but not namedin the installment agreement.

Under the proposed regulations, theIRS cannot institute a court proceedingagainst the taxpayer named in the install-ment agreement to collect the tax coveredby the installment agreement. The IRS,however, may file a claim in any bank-ruptcy proceeding, insolvency action, orinterpleader case commenced by othercreditors of the taxpayer. The IRS alsomay join the taxpayer in any suit insti-

tuted by or against another person liablefor payment of the same liability—i.e., insituations where the liability for the taxmay be established or disputed. Such pro-ceedings may involve taxes for whichmore than one person may be jointly andseverally liable for the same tax, or mayinvolve persons liable for related liabili-ties, such as a trust fund recovery penaltyunder section 6672 or a personal liabilityfor excise tax under section 4103.

While an installment agreement allowsthe IRS to accept the payment of tax ininstallments, the agreement does not con-clusively establish the taxpayer’s liability.A taxpayer therefore is not prohibitedfrom seeking a refund of taxes paid pur-suant to an installment agreement. Allow-ing the IRS to join the taxpayer in a pro-ceeding where the liability for the taxmay be established or disputed will pro-tect the Government from having to liti-gate the same tax in multiple forums onlyto face the argument in each separate case(including, potentially, from the taxpayernamed in an installment agreement) thatthe person or persons not party to that suitwere solely or principally liable for non-payment of the taxes at issue. The pro-posed regulations provide, however, thatif a taxpayer named in an installmentagreement is joined in a proceeding andthe IRS obtains a judgment against thatperson, then collection will continue tooccur pursuant to the terms of the install-ment agreement.

The regulations provide that the statuteof limitations for collection under section6502 is suspended while a proposedinstallment agreement is pending, forthirty days after rejection or terminationof an installment agreement, and during atimely filed appeal of the rejection or ter-mination decision. The running of thecollection statute resumes, however, afteran installment agreement takes effect. Thestatute of limitations for collection shallcontinue to run if an exception under thissection applies and levy is not prohibitedwith respect to the taxpayer.

These regulations apply to installmentagreements proposed or entered into on orafter the date final regulations are pub-lished in the Federal Register. However,the rules set forth in these regulationsmirror practices the IRS has been follow-ing administratively since the enactmentof RRA 1998.

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) does not apply tothese regulations, and because the regula-tion does not impose a collection of infor-mation on small entities, the RegulatoryFlexibility Act (5 U.S.C. chapter 6) doesnot apply. Pursuant to section 7805(f) ofthe Code, this notice of proposed rule-making will be submitted to the ChiefCounsel for Advocacy of the Small Busi-ness Administration for comment on itsimpact on small business.

Comments and Requests for a PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written comments (asigned original and eight (8) copies) orelectronically generated comments thatare submitted timely to the IRS. The IRSgenerally requests any comments on theclarity of the proposed rule and how itmay be made easier to understand.

All comments will be available forpublic inspection and copying.

A public 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.

Drafting Information

The principal author of these regula-tions is Frederick W. Schindler, Office ofthe Associate Chief Counsel (Procedure& Administration), Collection, Bank-ruptcy & Summonses Division.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR Part 301 is pro-posed to be amended as follows:

May 6, 2002 826 2002–18 I.R.B.

PART 301 — PROCEDURE ANDADMINISTRATION

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

Authority: 26 U.S.C. 7805 ***Par. 2. Sections 301.6331–3 and

301.6331–4 are added to read as follows:

§ 301.6331–3 Restrictions on levy whileoffers to compromise are pending.

Cross-reference. For provisions relat-ing to the making of levies while an offerto compromise is pending, see § 301.7122–1T.

§ 301.6331–4 Restrictions on levy whileinstallment agreements are pending or ineffect.

(a) Prohibition on levy—(1) In gen-eral. No levy may be made to collect atax liability that is the subject of aninstallment agreement during the periodthat a proposed installment agreement ispending with the Internal Revenue Ser-vice (IRS), for 30 days immediately fol-lowing the rejection of a proposed install-ment agreement, during the period that aninstallment agreement is in effect, and for30 days immediately following the termi-nation of an installment agreement. If,within the 30 days following the rejectionor termination of an installment agree-ment, the taxpayer files an appeal withthe IRS Office of Appeals, no levy maybe made while the rejection or termina-tion is being considered by Appeals.

(2) When a proposed installmentagreement becomes pending. A proposedinstallment agreement becomes pendingwhen it is accepted for processing. Theproposed installment agreement remainspending until the IRS accepts the pro-posal, the IRS notifies the taxpayer thatthe proposal has been rejected, or the pro-posal is withdrawn by the taxpayer. If aproposed installment agreement that hasbeen accepted for processing does notcontain sufficient information to permitthe IRS to evaluate whether the proposalshould be accepted, the IRS will requestthe taxpayer to provide the needed addi-tional information. If the taxpayer doesnot submit the additional information thatthe IRS has requested within a reasonable

time period after such a request, the IRSmay reject the proposed installmentagreement.

(3) Revised proposals of installmentagreements submitted following rejection.If, following the rejection of a proposedinstallment agreement, the taxpayermakes a good faith revision of the pro-posal and submits the revision within 30days of the date of rejection, no levy maybe made while the IRS considers therevised proposal of an installment agree-ment.

(4) Exceptions. Paragraph (a)(1) of thissection shall not prohibit levy if the tax-payer files a written notice with the IRSthat waives the restriction on levyimposed by this section, the IRS deter-mines that the proposed installmentagreement was submitted solely to delaycollection, or the IRS determines that col-lection of the tax to which the installmentagreement or proposed installment agree-ment relates is in jeopardy. This sectionwill not prohibit levy to collect from anyperson other than the person named onthe installment agreement.

(b) Other actions by the IRS while levyis prohibited—(1) In general. The IRSmay take actions other than levy to pro-tect the interests of the Government withregard to the liability named in an install-ment agreement or proposed installmentagreement. Those actions include, forexample—

(i) Crediting an overpayment againstthe liability pursuant to section 6402;

(ii) Filing or refiling notices of Federaltax lien; and

(iii) Taking action to collect from anyperson who is not named on the install-ment agreement or proposed installmentagreement but who is liable for the tax towhich the installment agreement relates.

(2) Proceedings in court. The IRS willnot begin a proceeding in court for thecollection of any liability to which aninstallment agreement or proposed install-ment agreement relates against a personnamed in that installment agreementwhile levy is prohibited by paragraph(a)(1) of this section. In any refundaction, however, the IRS may file a coun-terclaim or third-party complaint againsta person without regard to whether thatperson is named in an installment agree-ment or proposed installment agreement.

In addition, the IRS may join a personnamed in an installment agreement in anyother proceeding in which liability for thetax that is the subject of the installmentagreement may be established or dis-puted, and may file a claim in any bank-ruptcy proceeding, insolvency action, orinterpleader case commenced by othercreditors of the taxpayer. If a personnamed in an installment agreement isjoined in a proceeding and the IRSobtains a judgment against that person,collection will continue to occur pursuantto the terms of the installment agreement.

(c) Statute of limitations—(1) Suspen-sion of the statute of limitations on collec-tion. The statute of limitations under sec-tion 6502 for collection of any liabilityshall be suspended during the period thata proposed installment agreement ispending with the IRS, for 30 days imme-diately following the rejection of a pro-posed installment agreement, and for 30days immediately following the termina-tion of an installment agreement. If,within the 30 days following the rejectionor termination of an installment agree-ment, the taxpayer files an appeal withthe IRS Office of Appeals, the statute oflimitations for collection shall be sus-pended while the rejection or terminationis being considered by Appeals. The stat-ute of limitations for collection shall con-tinue to run if an exception under para-graph (a)(4) of this section applies andlevy is not prohibited with respect to thetaxpayer.

(2) Waivers of the statute of limitationson collection. The IRS may continue torequest, to the extent permissible undersection 6502 and § 301.6159–1, that thetaxpayer agree to a reasonable extensionof the statute of limitations for collection.

(d) Effective date. This section isapplicable on the date final regulationsare published in the Federal Register.

Robert E. Wenzel,Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on April16, 2002, 8:45 a.m., and published in the issue ofthe Federal Register for April 17, 2002, 67 F.R.18839)

2002–18 I.R.B. 827 May 6, 2002

Withdrawal of Previous Noticeof Proposed Rulemaking;Notice of ProposedRulemaking and Notice ofPublic Hearing

Arbitrage and Private ActivityRestrictions Applicable to Tax-Exempt Bonds Issued by Stateand Local Governments;Investment-Type Property(Prepayment); Private Loan(Prepayment).

REG–105369–00

SUMMARY: This document containsproposed amendments to the final regula-tions on the arbitrage and private activityrestrictions applicable to tax-exemptbonds issued by State and local govern-ments. The proposed amendments affectissuers of tax-exempt bonds and provideguidance on the defini t ions ofinvestment-type property and private loanto help issuers comply with the arbitrageand private activity restrictions. Thisdocument also provides notice of a publichearing on these proposed regulations.The previous notice of proposed rulemak-ing (REG–113526–98, 1999–2 C.B. 417),published on August 25, 1999, relating toarbitrage and related restrictions appli-cable to tax-exempt bonds issued by Stateand local governments, is withdrawn.

DATES: Written or electronic commentsmust be received by July 16, 2002. Out-lines of topics to be discussed at the pub-lic hearing scheduled for September 24,2002, at 10 a.m., must be received bySeptember 10, 2002.

ADDRESSES: Send submissions to:CC:ITA:RU (REG–105369–00), room5226, Internal Revenue Service, POB7604, Ben Franklin Station, Washington,DC 20044. Submissions may be handdelivered between the hours of 8 a.m. and5 p.m. to: CC:ITA:RU (REG–105369–00), courier’s desk, Internal Revenue Ser-vice, 1111 Constitution Avenue NW,Washington, DC. Alternatively, submis-sions may be made electronically to theIRS Internet site at www.irs.gov/regs. Thepublic hearing will be held in the Audito-

rium, Internal Revenue Building, 1111Constitution Avenue NW, Washington,DC.

FOR FURTHER INFORMATION CON-TACT: Concerning the proposed regula-tions, Johanna Som de Cerff, (202) 622–3980; concerning submissions and thehearing, Sonya Cruse, (202) 622–7180(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposedamendments to 26 CFR part 1 (the pro-posed regulations). On August 25, 1999,the IRS published in the Federal Regis-ter a notice of proposed rulemaking(REG–113526–98) (64 FR 46320) (the1999 proposed regulations) proposing tomodify § 1.148–1(e) of the Income TaxRegulations to establish which prepay-ments for property or services give rise toinvestment-type property under section148(b)(2)(D) of the Internal RevenueCode (Code). Numerous written com-ments responding to the 1999 proposedregulations were received, and a publichearing was held on January 12, 2000. Inresponse to the extensive comments, par-ticularly with regard to certain natural gasprepayment transactions discussed below,the 1999 proposed regulations are with-drawn and amendments to § 1.148–1(e)are proposed in accordance with thisnotice of proposed rulemaking. Thisnotice of proposed rulemaking also pro-poses corresponding amendments to§ 1.141–5(c)(2) (relating to the privateloan financing test).

Explanation of Provisions

I. Existing Definition of Investment-typeProperty

With certain exceptions, section 148prohibits the use of proceeds of a tax-exempt bond issue to acquire investmentproperty with a yield that materiallyexceeds the yield on the issue. Section148(b)(2)(D) provides that the terminvestment property includes investment-type property. Section 148(b)(2)(D) wasadded to the Code by the Tax Reform Actof 1986, Pub. L. No. 99–514, 100 Stat.2085 (1986) (1986 Act). The ConferenceCommittee Report states that the legisla-

tion “expands the types of investments ofbond proceeds that are subject to the arbi-trage restr ict ions to include al linvestment-type property (including otherthan customary prepayments)....” H.R.Conf. Rep. No. 99–841, pt. 2, at 745.

As an economic matter, prepaymentsfor property or services generally containa built-in investment return. That is, if abuyer of property or services makes acash payment to the seller in advance ofthe seller’s performance, the buyer mayexpect to receive an implicit investmentreturn based on the time value of money.In the case of a prepayment financed withtax-exempt bond proceeds, the presenceof a built-in investment return raises theissue of whether the prepayment givesrise to investment-type property.

The existing regulations, at § 1.148–1(e)(2), contain rules for determiningwhen a prepayment for property or ser-vices results in investment-type property.Under that provision, a prepayment gen-erally gives rise to investment-type prop-erty if a principal purpose for prepayingis to receive an investment return fromthe time the prepayment is made until thetime payment otherwise would be made.However, a prepayment does not give riseto investment-type property under theexisting regulations if (1) it is made for asubstantial business purpose other thaninvestment return and the issuer has nocommercially reasonable alternative tothe prepayment (the business purposeexception); or (2) prepayments on sub-stantially the same terms are made by asubstantial percentage of persons who aresimilarly situated to the issuer but whoare not beneficiaries of tax-exemptfinancing (the customary exception).

II. 1999 Proposed Amendments to theDefinition of Investment-type Property

The 1999 proposed regulations pro-posed a modification to § 1.148–1(e)(2)to establish that a prepayment of a con-tract for property or services that is madeafter the date that the contract is enteredinto can give rise to investment-typeproperty. This modification was proposedin light of the opinion in City of Colum-bus v. Commissioner, 112 F.3d 1201(D.C. Cir. 1997), which concluded that a1994 prepayment by a city of its indebt-edness to a state did not constitute a pre-payment for property the city acquired in

May 6, 2002 828 2002–18 I.R.B.

1967. The proposed amendment to§ 1.148–1(e)(2) addressed only the nar-row issue of whether a prepayment forproperty or services after the execution ofa contract to buy the property or servicescan give rise to investment-type property.

Commentators generally agreed withthe suggestion that a prepayment forproperty or services can occur after thedate the purchase contract is executed.The proposed regulations retain the pro-posed change to § 1.148–1(e)(2), withclarifying modifications that are consis-tent with this concept.

III. Definition of Investment-type Prop-erty in the Proposed Regulations

Although commentators generallyagreed with the 1999 proposed amend-ments to § 1.148–1(e)(2), they requestedadditional clarification of other aspects ofthe definition of investment-type property.After considering all of the comments,Treasury and the IRS have determinedthat additional changes to the definitionare needed to provide certainty to issuersand the IRS in a manner that is consistentwith the broad scope of the investment-type property concept. To allow for pub-lic comment, these additional changes areissued in proposed form. Furthermore, toprovide issuers with immediate certainty,issuers may rely on the proposed regula-tions to the extent specified below.

Commentators generally did not rec-ommend modifying the basic frameworkfor determining whether a prepaymentgives rise to investment-type propertyunder § 1.148–1(e)(2). The proposedregulations retain this basic structure, butmake certain modifications. In particular,the proposed regulations: (1) amend thebusiness purpose exception; (2) retain thecustomary exception in its present form;(3) add an exception for certain prepay-ments by municipal utilities to acquire asupply of natural gas; and (4) add a deminimis exception for prepayments madewithin 90 days of delivery of the propertyor services. In addition, the proposedregulations state that the Commissionermay, by published guidance, set forthadditional circumstances in which a pre-payment does not give rise to investment-type property.

A. Business purpose exception

As indicated, the existing regulationsprovide that a prepayment does not giverise to investment-type property if it ismade for a substantial business purposeother than investment return and theissuer has no commercially reasonablealternative to the prepayment. This provi-sion, which was intended to be a narrowexception to the definition of investment-type property, has raised difficult inter-pretive questions. For example, in manyinstances it may be unclear whether thealternatives available to the issuer are“commercially reasonable.”

Commentators suggested certainchanges to the provision to clarify itsapplication. For example, they suggestedthat a prepayment should be consideredmade for a substantial business purposeother than investment return if the effectof the prepayment is (1) to fix the price ofthe property or service, (2) to assure asupply of the property or service, (3) toguarantee delivery of the property or ser-vice at a location favorable to the issuer,or (4) to enable the issuer to obtain aprice discount that materially exceeds theinvestment return that could be earnedbetween the time the prepayment is madeand the time the property or services aredelivered. Commentators suggested thatan alternative should be viewed as “com-mercially reasonable” if it is reasonablyavailable to the issuer, it would achievethe same substantial business purpose asthe prepayment except that no investmentreturn is received, and it is not moreexpensive by an amount that materiallyexceeds the investment return from theprepayment. Some commentators recom-mended that a safe harbor be added underwhich an alternative would not be consid-ered commercially reasonable if the costof the alternative exceeded the cost of theprepayment by a specified amount on apresent value basis.

Treasury and the IRS have consideredthese suggested factors and have con-cluded that they do not, in and of them-selves, represent administrable standardsfor distinguishing between prepaymentsthat are made primarily for arbitrage pur-poses and those that are not. That is, aprepayment transaction may contain oneor more of these features, even if it is pri-marily arbitrage-motivated. Therefore, theproposed regulations do not adopt these

suggested amendments. Nevertheless, asdiscussed below, these factors are takeninto account, together with all the otherfacts and circumstances, in determiningwhether a prepayment satisfies the busi-ness purpose exception as revised by theproposed regulations.

In this regard, the proposed regulationsamend the business purpose exception inorder to clarify that it is to be appliednarrowly in a manner that is consistentwith the broad scope of the investment-type property concept. In particular, underthe proposed regulations a prepaymentmeets the business purpose exception ifthe facts and circumstances clearly estab-lish that the primary purpose for the pre-payment is to accomplish one or moresubstantial business purposes that (1) areunrelated to any investment return basedon the time value of money, and (2) can-not be accomplished without the prepay-ment. This exception is intended to bevery narrow and to apply only in veryunique circumstances, such as the situa-tion illustrated by an example in the pro-posed regulations.

B. Customary exception

As indicated, the existing regulationsprovide that a prepayment does not giverise to investment-type property if pre-payments on substantially the same termsare made by a substantial percentage ofpersons who are similarly situated to theissuer but who are not beneficiaries oftax-exempt financing. This provisionimplements the legislative history citedabove that indicates that customary pre-payments should not result in investment-type property.

Commentators suggested that a safeharbor be added for determining a “sub-stantial percentage” of similarly situatedpersons. However, Treasury and the IRShave concluded that the determination ofwhether a transaction is customary isappropriately made on a case-by-casebasis, taking into account all the facts andcircumstances, rather than by reference toa precise mathematical formula or prede-termined percentage. Therefore, the pro-posed regulations do not adopt this sug-gested change.

Commentators also recommended thatthe “substantial percentage” requirementshould be deemed satisfied if a substantialnumber of similarly situated persons who

2002–18 I.R.B. 829 May 6, 2002

are not beneficiaries of tax-exemptfinancing make a similarly sized prepay-ment. The proposed regulations do notadopt this comment because the incidenceof a particular number of transactions bysimilarly situated persons may not estab-lish that the transaction is customary ifthose persons represent only a small per-centage of all the similarly situated per-sons.

Finally, some commentators suggestedthat the customary exception should beautomatically satisfied if the issuer andthe supplier of the property or servicescertify reasonably and in good faith thatits requirements are met. The proposedregulations do not adopt this commentbecause a certification by the parties to atransaction should not be sufficient toestablish the legal conclusion that thetransaction meets the requirements of theexception.

C. Certain prepayments to acquire a sup-ply of natural gas

The preamble to the 1999 proposedregulations identified certain transactionsinvolving the issuance of bonds to prepayfor a supply of natural gas and the simul-taneous execution by the issuer of a com-modity swap under which the issuerreceives fixed payments and makes vari-able payments based on an index. The1999 preamble stated that Treasury andthe IRS were concerned that the transac-tions create investment-type property andrequested comments on the transactions.

Most, but not all, of the commentatorsdisagreed with the suggestion that theidentified transactions should result ininvestment-type property. They stated thatderegulation of the natural gas industryhas threatened the ability of municipalutilities to obtain a secure supply of natu-ral gas on commercially reasonable terms.They stated that the natural gas prepay-ment transactions are necessary to obtaina guaranteed supply of natural gas onfavorable terms in light of deregulation.

The proposed regulations add anexception to the definition of investment-type property for certain natural gas pre-payments that are made by or for one ormore utilities that are owned by a govern-mental person, as defined in § 1.141–1(b) (for example, where a joint actionagency acquires a natural gas supply forone or more municipal gas or electric

utilities). The exception applies only if atleast 95 percent of the natural gas pur-chased with the prepayment is to be con-sumed by retail customers in the servicearea of a municipal gas utility, or used toproduce electricity that will be furnishedto retail customers that a municipal elec-tric utility is obligated to serve under stateor Federal law. For this purpose, the ser-vice area of a municipal gas utility isdefined as (1) any area throughout whichthe municipal utility provided (at all timesduring the five-year period ending on theissue date) gas transmission or distribu-tion service, and any area that is contigu-ous to such an area, or (2) any area wherethe municipal utility is obligated understate or Federal law to provide gas distri-bution services as provided in such law.Issuers may apply principles similar tothe rules of § 1.141–12 in order to cure aviolation of this 95 percent requirement.

A transaction will not fail to qualifyfor this exception by reason of any com-modity swap contract that may be enteredinto between the issuer and an unrelatedparty (other than the gas supplier), orbetween the gas supplier and an unrelatedparty (other than the issuer), so long aseach swap contract is an independent con-tract. For this purpose, a swap contract isan independent contract if the obligationof each party to perform under the swapcontract is not dependent on performanceby any person (other than the other partyto the swap contract) under another con-tract (for example, a gas supply contractor another swap contract).

Comments are requested on the excep-tion for natural gas prepayments in theproposed regulations, including the defi-nition of service area and the workabilityof the 95 percent test.

D. De minimis prepayments

Commentators recommended addingto the regulations a de minimis exceptionunder which prepayments that are madein small amounts or shortly before theproperty or services are delivered, wouldbe disregarded. Treasury and the IRS rec-ognize that prepayments made shortlybefore the property or services are deliv-ered are unlikely to be arbitrage-motivated. Based on this consideration,and to provide administrative certainty,the proposed regulations add an exceptionfor prepayments that are made within 90

days of the date of delivery of the prop-erty or services. However, the proposedregulations do not provide an exceptionfor small prepayments because a prepay-ment may be made primarily for arbitragepurposes even if it is a small amount.

E. Timing mismatch between payment anddelivery of property or services

The preamble to the 1999 proposedregulations requested comments regard-ing the proper treatment of contracts thatprovide for a timing mismatch betweenthe buyer’s cash payments and the seller’sdelivery of property or services.

Commentators generally expressed theview that, depending on the particularfacts, payments made over time may giverise to investment-type property when thepayment schedule does not match theschedule for the provision of property orservices. The commentators did not rec-ommend any changes to the regulationson this issue. Treasury and the IRS havedetermined that § 1.148–1(e)(2) appro-priately addresses mismatches in paymentand delivery obligations. Therefore, theproposed regulations do not propose anyamendments in this regard.

F. Prepayments of capital charges

Some commentators recommendedthat the regulations be modified to pro-vide that a prepayment does not give riseto investment-type property if it is in sub-stance a reimbursement to a seller of allor a portion of the seller’s capital costs ofa specific, tangible project through whichthe seller produces or delivers a service orcommodity. The proposed regulations donot contain a specific exception for pre-payments that reimburse a seller for itscapital costs because a prepayment maybe made primarily for arbitrage purposeseven if it effectively reimburses the sellerfor capital costs. Nevertheless, this factoris taken into account, together with all theother facts and circumstances, in deter-mining whether a prepayment meets thebusiness purpose exception.

IV. Private Loans

With certain exceptions, interest on anissue that meets the private loan financingtest is not excluded from gross income.Under section 141(c), an issue generallymeets the private loan financing test ifmore than the lesser of 5 percent or $5

May 6, 2002 830 2002–18 I.R.B.

million of its proceeds are used to makeloans to nongovernmental persons. Sec-tion 1.141–5(c)(1) states that, for pur-poses of the private loan financing test, aloan may arise from the direct lending ofbond proceeds or may arise from transac-tions in which indirect benefits that arethe economic equivalent of a loan areconveyed. Thus, the determination ofwhether a loan is made depends on thesubstance of a transaction rather than itsform. See also H.R. Conf. Rep. No.99–841, pt. 2, at 692.

The existing regulations, at § 1.141–5(c)(2)(ii), provide that a prepayment forproperty or services generally is treated asa loan for purposes of the private loanfinancing test if a principal purpose forprepaying is to provide a benefit of tax-exempt financing to the seller. However,under the existing regulations a prepay-ment is not treated as a loan for purposesof the private loan financing test if (1) itis made for a substantial business purposeother than providing a benefit of tax-exempt financing to the seller and theissuer has no commercially reasonablealternative to the prepayment; or (2) pre-payments on substantially the same termsare made by a substantial percentage ofpersons who are similarly situated to theissuer but who are not beneficiaries oftax-exempt financing. The proposed regu-lations amend the private loan provisionsof §1.141–5(c)(2) to conform to theamendments to the defini t ion ofinvestment-type property in this notice ofproposed rulemaking.

Proposed Effective Date

The proposed regulations will apply tobonds sold on or after the date of publica-tion of final regulations in the FederalRegister. However, issuers may apply theproposed regulations in whole, but not inpart, to any issue that is sold on or afterthe date the proposed regulations are pub-lished in the Federal Register and beforethe effective date of the final regulations.

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. Ithas also been determined that section

553(b) of the Administrative ProceduresAct (5 U.S.C. chapter 5) does not apply tothese regulations, and, because the 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. Pursuant to section7805(f) of the Code, this notice of pro-posed rulemaking will be submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.

Comments and Public Hearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written commentsthat are submitted timely (preferably asigned original and eight copies) to theIRS. The Treasury Department and IRSspecifically request comments on the clar-ity of the proposed rules and how theymay be made easier to understand. Allcomments will be available for publicinspection and copying.

A public hearing has been scheduledfor September 24, 2002, at 10 a.m. in theAuditorium, Internal Revenue Building,1111 Constitution Avenue, NW, Washing-ton, DC. Because of access restrictions,visitors will not be admitted beyond thelobby more than 30 minutes before thehearing starts.

The rules of 26 CFR 601.601(a)(3)apply to the hearing.

Persons who wish to present oral com-ments at the hearing must submit writtencomments by July 16, 2002, and submitan outline of the topics to be discussedand the amount of time to be devoted toeach topic by September 10, 2002.

A period of 10 minutes will be allottedto each person for making comments.

An agenda showing the scheduling ofthe speakers will be prepared after thedeadline for receiving outlines haspassed. Copies of the agenda will beavailable free of charge at the hearing.

Drafting Information

The principal authors of these regula-tions are Rebecca L. Harrigal andJohanna Som de Cerff, Office of ChiefCounsel (TE/GE), IRS, and Stephen J.Watson, Office of Tax Policy, TreasuryDepartment. However, other personnel

from the IRS and Treasury Departmentparticipated in their development.

* * * * *Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is pro-posed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. In § 1.141–5, paragraph (c) is

amended as follows:1. Paragraph (c)(2)(ii) introductory

text is revised.2. Paragraph (c)(2)(ii)(A) is revised.3. Paragraph (c)(2)(ii)(B) is amended

by removing the period at the end of theparagraph and adding a semicolon in itsplace.

4. Paragraphs (c)(2)(ii)(C), (c)(2)(ii)(D), and (c)(2)(iii) are added.

The revisions and additions read asfollows:

§ 1.141–5 Private loan financing test.

* * * * *(c) * * *(2) * * *(ii) Certain prepayments treated as

loans. Except as otherwise provided, aprepayment for property or services,including a prepayment for property orservices that is made after the date thatthe contract to buy the property or ser-vices is entered into, is treated as a loanfor purposes of the private loan financingtest if a principal purpose for prepaying isto provide a benefit of tax-exempt financ-ing to the seller. A prepayment is nottreated as a loan for purposes of the pri-vate loan financing test if—

(A) The primary purpose for the pre-payment is to accomplish one or moresubstantial business purposes that—

(1) Are unrelated to providing anybenefit of tax-exempt financing to theseller; and

(2) Cannot be accomplished withoutthe prepayment;* * * * *

(C) The prepayment is made within 90days of the date of delivery to the issuerof all of the property or services forwhich the prepayment is made; or

2002–18 I.R.B. 831 May 6, 2002

(D) The prepayment meets the require-ments of § 1.148–1(e)(2)(ii) (relating tocertain prepayments to acquire a supplyof natural gas).

(iii) Additional prepayments as permit-ted by the Commissioner. The Commis-sioner may, by published guidance, setforth additional circumstances in which aprepayment is not treated as a loan forpurposes of the private loan financingtest.* * * * *

Par. 3. In § 1.148–1, paragraphs (e)(1)and (2) are revised to read as follows:

§ 1.148–1 Definitions and elections.

* * * * *(e) Investment-type property—(1) In

general . Investment-type propertyincludes any property, other than propertydescribed in sections 148(b)(2)(A), (B),(C), or (E), that is held principally as apassive vehicle for the production ofincome. For this purpose, production ofincome includes any benefit based on thetime value of money.

(2) Prepayments—(i) In general.Except as otherwise provided in this para-graph (e)(2), a prepayment for property orservices, including a prepayment forproperty or services that is made after thedate that the contract to buy the propertyor services is entered into, also gives riseto investment-type property if a principalpurpose for prepaying is to receive aninvestment return from the time the pre-payment is made until the time paymentotherwise would be made. A prepaymentdoes not give rise to investment-typeproperty if—

(A) The primary purpose for the pre-payment is to accomplish one or moresubstantial business purposes that—

(1) Are unrelated to any investmentreturn based on the time value of money;and

(2) Cannot be accomplished withoutthe prepayment;

(B) Prepayments on substantially thesame terms are made by a substantial per-centage of persons who are similarly situ-ated to the issuer but who are not benefi-ciaries of tax-exempt financing;

(C) The prepayment is made within 90days of the date of delivery to the issuerof all of the property or services forwhich the prepayment is made; or

(D) The prepayment meets the require-ments of paragraph (e)(2)(ii) of this sec-tion.

(ii) Certain prepayments to acquire asupply of natural gas—(A) In general. Aprepayment meets the requirements ofthis paragraph (e)(2)(ii) if—

(1) It is made by or for one or moreutilities that are owned by a governmen-tal person, as defined in § 1.141–1(b)(municipal utility), to purchase a supplyof natural gas; and

(2) At least 95 percent of the naturalgas purchased with the prepayment is tobe consumed by retail gas customers inthe service area (as defined in paragraph(e)(2)(ii)(B) of this section) of a munici-pal utility, or used to produce electricitythat will be furnished to retail electriccustomers that a municipal utility is obli-gated to serve under state or Federal law.An obligation that arises solely by reasonof a contract is not an obligation to serveunder state or Federal law.

(B) Service area. For purposes of para-graph (e)(2)(ii)(A)(2) of this section, theservice area of a municipal utility shallconsist of—

(1) Any area throughout which themunicipal utility provided (at all timesduring the 5-year period ending on theissue date) gas transmission or distribu-tion service, and any area that is contigu-ous to such an area; or

(2) Any area where the municipal util-ity is obligated under state or Federal lawto provide gas distribution services asprovided in such law.

(C) Commodity swaps. A prepaymentdoes not fail to meet the requirements ofthis paragraph (e)(2)(ii) by reason of anycommodity swap contract that may beentered into between the issuer and anunrelated party (other than the gas sup-plier), or between the gas supplier and anunrelated party (other than the issuer), solong as each swap contract is an indepen-dent contract. A swap contract is an inde-pendent contract if the obligation of eachparty to perform under the swap contractis not dependent on performance by anyperson (other than the other party to theswap contract) under another contract (forexample, a gas supply contract or anotherswap contract).

(iii) Additional prepayments as permit-ted by the Commissioner. The Commis-sioner may, by published guidance, set

forth additional circumstances in which aprepayment does not give rise toinvestment-type property.

( iv) Examples . The fol lowingexamples illustrate the application of thisparagraph (e)(2):

Example 1. Prepayment after contract isexecuted. In 1998, City A enters into a ten-year con-tract with Company Y. Under the contract, CompanyY is to provide services to City A over the term ofthe contract and in return City A will pay CompanyY for its services as they are provided. In 2004, CityA issues bonds to finance a lump sum payment toCompany Y in satisfaction of City A’s obligation topay for Company Y’s services to be provided overthe remaining term of the contract. The use of bondproceeds to make the lump sum payment constitutesa prepayment for services under paragraph (e)(2)(i)of this section, even though the payment is madeafter the date that the contract is executed.

Example 2. Prepayment necessary to accomplishsubstantial business purpose. Authority is a govern-mental unit that furnishes electricity to the generalpublic. In 1995, Authority enters into a 15–yearagreement (the Agreement) with Power Company toobtain certain of its power requirements. In 2003,Authority enters into another contract (the PurchaseContract) with Power Company to obtain a specifiedamount of additional firm power through 2013. Therates paid by Authority under the Purchase Contractare based on a fixed capacity charge, which reflectsPower Company’s average cost of certain plants andequipment, and a variable energy charge, whichreflects Power Company’s average system energycosts to operate the utility, primarily fuel costs.Simultaneously with entering into the PurchaseContract, Authority issues a $30 million issue witha 6 percent yield and uses the proceeds to make alump sum payment to Power Company to prepay forthe entire fixed capacity charge under the PurchaseContract. Authority pays the variable energy chargesas energy is actually delivered. Power Companyreports the lump sum payment for Federal tax pur-poses as income from the sale of capacity. PowerCompany also agrees to certain concessions underthe Agreement, including the elimination of floorson capacity charges and a moratorium on capacitycharge increases for five years. The discount rateused to compute the amount of the prepayment is 18percent, compounded semi-annually. Power Compa-ny’s taxable borrowing rate for a loan of a compa-rable size to the prepayment, with a term that coin-cides with the term of the Purchase Contract, is 8percent, compounded semiannually. The prepaymentallows Power Company to offer a low capacitycharge to Authority, yet prevent other wholesalecustomers from taking advantage of the proposal.Under Federal rate-making guidelines, if PowerCompany had offered Authority a contract based onfixed periodic capacity charges, Power Companywould have been obligated to offer the same capac-ity charges to its other wholesale customers (whichwould have been expected to accept the offer).Power Company is willing to offer Authority thelower capacity charge and to make the other conces-sions because it owns surplus generating capacity.Thus, it is important to Power Company to maintainits customer base. The loss of a significant customer

May 6, 2002 832 2002–18 I.R.B.

such as Authority would require that Power Com-pany either succeed in obtaining regulatory authori-zation to increase its rates charged to other custom-ers or suffer a diminished return on capital. PowerCompany will not build additional generating facili-ties directly or indirectly by reason of its obligationsunder the Purchase Contract, and at the time itentered into the Purchase Contract, it had alreadyincurred capital costs of facilities, which, if allo-cated to Authority’s demands for energy under thePurchase Contract, would exceed the up-frontcapacity charge. Under paragraph (e)(2)(i)(A) of thissection, the prepayment does not give rise toinvestment-type property.

* * * * *Robert E. Wenzel,

Deputy Commissioner ofInternal Revenue.

(Filed by the Office of the Federal Register on April12, 2002, 4:12 p.m., and published in the issue ofthe Federal Register for April 17, 2002, 67 F.R.18835)

Changes in Method ofAccounting

Announcement 2002–45

PURPOSE

Beginning with the publication of Rev.Proc. 2001–10 (2001–1 C.B. 272) super-seding Rev. Proc. 2000–22 (2000–1 C.B.1008), the Internal Revenue Service (IRS)and Treasury Department have beenworking to reduce the administrative andtax compliance burdens on small businesstaxpayers and to minimize disputesbetween the IRS and these taxpayersregarding the requirement to use anaccrual method of accounting under § 446of the Internal Revenue Code because ofthe requirement to account for inventoriesunder § 471. Rev. Proc. 2001–10 permitsany small business taxpayer having aver-age annual gross receipts of $1 million orless (other than tax shelters) to use thecash receipts and disbursements methodof accounting (the cash method), regard-less of the nature of its trade or business.Rev. Proc. 2001–10 also permits thesebusinesses to treat as non-incidentalmaterials and supplies under § 1.162–3 ofthe Income Tax Regulations items thatotherwise would be accounted for asinventory.

In December 2001, the IRS publishedNotice 2001–76 (2001–52 I.R.B. 613)proposing a revenue procedure (the pro-

posed revenue procedure) that wouldallow qualifying small business taxpayerswith average annual gross receipts of $10million or less to use the cash methodwith respect to eligible trades or busi-nesses. Notice 2001–76 also requestedcomments from the public regarding theproposed revenue procedure. Thisannouncement discusses certain issuesraised by those comments and the mannerin which those issues are addressed in thefinal revenue procedure.

The final revenue procedure appears inthis Internal Revenue Bulletin as Rev.Proc. 2002–28.

CHANGES TO THE PROPOSEDREVENUE PROCEDURE

General Application of Rev. Proc.2002–28

Several commentators asked for assis-tance in understanding which taxpayersare eligible to elect the cash methodunder the revenue procedure. In response,a flow chart has been added as an appen-dix to Rev. Proc. 2002–28. This flowchart provides a short-hand explanationof the scope and application of the finalrevenue procedure and helps explain theinteraction of the revenue procedure withother authorities (such as § 448). Taxpay-ers should keep in mind that it is lessdetailed than the actual provisions of therevenue procedure and should be usedonly as a guide.

Many commentators asked whetherthe proposed revenue procedure waivesthe statutory restrictions placed on the useof the cash method in § 448. Rev. Proc.2002–28 clarifies that the provisions of§ 448 are not affected by the revenue pro-cedure.

Many commentators requested clarifi-cation of the options available to qualify-ing small businesses under the proposedrevenue procedure in choosing their over-all method of accounting as well as theirmethod of accounting for inventoriableitems. In response to this request, Rev.Proc. 2002–28 lists the three optionsavailable under the revenue procedure toqualifying small business taxpayers whochoose not to use an overall accrualmethod and an inventory method ofaccounting.

Determination and Qualification of aTaxpayer’s Principal Business Activity

The proposed revenue procedureallowed any taxpayer whose principalbusiness activity is not described in a pro-hibited North American Industry Classifi-cation System (“NAICS”) code to use thecash method for all of its trades or busi-nesses. Several commentators expressedconcern that because the proposed rev-enue procedure looks only to the grossreceipts of the taxpayer’s most recent tax-able year in determining a taxpayer’sprincipal business activity, temporaryfluctuations in the nature of the taxpay-er’s trades or businesses could change itsprincipal business activity for purposes ofthe revenue procedure and thus its contin-ued ability to use the cash method for allof its trades or businesses. In response,the final revenue procedure adopts a two-prong principal business activity test. Ataxpayer may determine its principalbusiness activity using either (i) the grossreceipts for its prior taxable year, or (ii)the average annual gross receipts for itsthree most recent prior taxable years.

Rev. Proc. 2002–28 also clarifies thatthe revenue procedure may be used onlyby those taxpayers who did not previ-ously change (and were not required tohave previously changed) from the cashmethod to an accrual method for anytrade or business as a result of their tradeor business becoming ineligible to use thecash method under the revenue proce-dure. Such taxpayers may, however, applythe revenue procedure to separate tradesor businesses with complete and sepa-rable books and records that are notdescribed in an ineligible NAICS code insection 4.01(1)(a), that are service busi-nesses under section 4.01(1)(b), or thatare custom manufacturers under section4.01(1)(c).

A few commentators requested addi-tional guidance regarding how the pro-posed revenue procedure would apply toa taxpayer in its first year of business,given that it would not have any prioryear gross receipts for purposes of theprincipal business activity test. Rev. Proc.2002–28 provides that a taxpayer in itsfirst year of business may use its currentyear gross receipts to determine its princi-pal business activity.

2002–18 I.R.B. 833 May 6, 2002

Commentators requested guidance onthe interaction of the service provider safeharbor in section 4.01(1)(b) and the cus-tom manufacturer safe harbor in section4.01(1)(c) with the NAICS code safe har-bor of section 4.01(1)(a). In response tothis request, Rev. Proc. 2002–28 clarifiesthat a taxpayer may qualify to apply therevenue procedure to all of its trades orbusinesses by meeting the requirementsof either the NAICS code safe harbor insection 4.01(1)(a), the service providersafe harbor in section 4.01(1)(b), or thecustom manufacturer safe harbor in sec-tion 4.01(1)(c). A taxpayer’s principalbusiness activity must qualify under onlyone of these three provisions for all of thetaxpayer’s trades or businesses to be eli-gible to use the revenue procedure.

Inventoriable Items Treated as Materialsand Supplies that Are Not Incidentalunder § 1.162–3

In Rev. Proc. 2001–10, the IRS deter-mined that, for reasons of administrativeconvenience and reduction of taxpayerburden, taxpayers need not apply the uni-form capitalization rules of § 263A toinventoriable items treated as non-incidental materials and supplies under§ 1.162–3 for purposes of that revenueprocedure. Several commentators sug-gested that the provisions of § 263A simi-larly should not apply to inventoriableitems treated as non-incidental materialsand supplies for purposes of the proposedrevenue procedure. The IRS and TreasuryDepartment agree with this comment andhave included this provision in Rev. Proc.2002–28.

Commentators requested additionalguidance regarding when the costs ofmaterials and supplies that are not inci-dental may be deducted. In response tothis request, Rev. Proc. 2002–28 providesadditional examples to illustrate theappropriate timing of such deductionsunder § 1.162–3. One of these examplesclarifies that under the cash method, thecost of raw materials may not bededucted until the product is provided tothe customer (the costs must be added tothe basis of a manufactured item ratherthan currently deducted). In addition,Rev. Proc. 2002–28 clarifies that in deter-mining the amount of the deduction forinventoriable items that are treated asnon-incidental materials and supplies, the

taxpayer may use a specific identificationmethod, a first-in, first-out (FIFO)method, or an average cost method, butthat other methods, such as a last-in, first-out (LIFO) method, may not be used.

Other Issues

Several commentators requested clari-fication of the open accounts receivable(that is, for purposes of Rev. Proc. 2002–28, a receivable due in full in 120 days orless) rule in section 4.03 of the proposedrevenue procedure. In response to thisrequest, Rev. Proc. 2002–28 contains anadditional example to illustrate the rule.

Several commentators requested addi-tional guidance on the treatment of spe-cific methods of accounting for particularitems (such as specific methods for long-term contracts) for taxpayers using one ofthe options under Rev. Proc. 2002–28. Inresponse, the final revenue procedureclarifies that taxpayers may, in somecases, be able to retain their specificmethod of accounting even when they useone of the options under the revenueprocedure.

Additional Safe HarborExplanations of CertainQualified Plan Distributions

Announcement 2002–46

This announcement contains a safeharbor explanation in Spanish that planadministrators can provide to Spanish-speaking employees who are recipients ofeligible rollover distributions from quali-fied employer plans, tax-sheltered annu-ities or governmental § 457 plans in orderto satisfy § 402(f) of the Internal RevenueCode. Previously, in Notice 2002–3(2002–2 I.R.B. 289), the Internal Rev-enue Service published these safe harborexplanations in English.

EXPLICACIÓN DEL CONCEPTO DEREFUGIO TRIBUTARIO EN LOS

PLANES CALIFICADOS CONFORMEA LA SECCIÓN 401(a), LA SECCIÓN403(a), PLANES DE ANUALIDADES,

O LA SECCIÓN 403(b),ANUALIDADES CON PAGO DEL

IMPUESTO DIFERIDO

NOTIFICACIÓN TRIBUTARIA ESPE-CIAL SOBRE LOS PAGOS DE PLANES

En esta notificación se explica laforma en que usted puede continuar apla-zando el pago del impuesto federal sobreel ingreso en sus ahorros de la jubilaciónen el [INSERTAR AQUÍ EL NOMBREDEL PLAN] (en adelante denominado el“Plan”). La notificación contiene tambiénuna información importante que usteddebe conocer antes de decidir cómo va arecibir los beneficios o pagos de su Plan.

Esta notificación se la envía a usted[INSERTAR AQUÍ EL NOMBRE DELADMINISTRADOR DEL PLAN O, ENEL CASO DE UNA ANUALIDADCONFORME A LA SECCIÓN 403(b),ANUALIDADES CON PAGO DELIMPUESTO DIFERIDO, LA ENTIDADPAGADORA] (en adelante denominadoel “Administrador del Plan”), porque todala cantidad o parte del pago que va usteda recibir dentro de poco del Plan podríacumplir con los requisitos establecidospara una reinversión por usted o suAdministrador del Plan en una cuentaIRA tradicional o en un plan patronalcalificado. Una reinversión es un pago otransferencia efectuado por usted o elAdministrador del Plan de todo o parte desu beneficio a otro plan o a una cuentaIRA que le permite continuar pospo-niendo el pago del impuesto sobre esebeneficio hasta que se le pague. Su pagono puede reinvertirse en una cuenta RothIRA, en una cuenta SIMPLE IRA ni enuna cuenta de ahorro para la educaciónCoverdell Education Savings Account(anteriormente conocida como cuentaIRA para educación). Un “plan patronalcalificado” consiste en un plan que reúnelos requisitos legales establecidos en lasección 401(a) del Código Tributario, quecomprende los planes siguientes: plan401(k) del empleador, plan de partici-pación en los beneficios, plan de benefi-cios definidos, plan de acciones gratuitasy plan de contribución dineraria patronalal fondo de pensiones; un plan de anual-idad de la sección 403(a), una anualidadcon pago del impuesto diferido de la sec-ción 403(b), y un plan calificado de lasección 457(b) mantenido por un emplea-dor del gobierno (plan 457 gubernamen-tal).

May 6, 2002 834 2002–18 I.R.B.

Un plan patronal calificado no estálegalmente obligado a aceptar una rein-versión. Antes de decidir reinvertir supago en otro plan patronal, deberá averi-guar si el plan acepta reinversiones y, encaso afirmativo, los tipos de distribu-ciones que acepta como reinversión.Deberá informarse también sobre losdocumentos requeridos que han de lle-narse para que el plan receptor acepte unareinversión. Aunque un plan acepte rein-versiones, podría no aceptar reinversionesde ciertos tipos de distribuciones, talescomo las cantidades después de pagar losimpuestos. Cuando éste sea el caso y sudistribución comprenda sumas después depagar los impuestos, usted podría en sulugar, si lo desea, reinvertir su dis-tribución en una cuenta IRA tradicional obien dividir la cantidad de la reinversiónentre el plan patronal en el que va a par-ticipar y una cuenta IRA tradicional. Siun plan patronal acepta su reinversión, elmismo podría limitar las distribucionesposteriores de la cantidad de reinversión orequerir el consentimiento de su cónyugepara cualquier distribución posterior. Unadistribución posterior del plan que aceptasu reinversión podría estar también sujetaa un tratamiento tributario distinto al delas distribuciones de este Plan. Consultecon el administrador del plan que va arecibir su reinversión antes de hacer lareinversión.

Si tiene usted algunas preguntas quehacer después de leer esta notificación,puede ponerse en contacto con el Admin-istrador de su plan [INSERTAR AQUÍ ELNÚMERO DE TELÉFONO U OTRAINFORMACIÓN DE CONTACTO].

RESUMEN

Hay dos maneras en que usted podríarecibir un pago del Plan que reúne losrequisitos exigidos para una reinversión:

(1) Ciertos pagos pueden hacersedirectamente a una cuenta IRA tradicional

que usted tenga o a un plan patronal cali-ficado que lo aceptará y mantendrá parasu benef ic io (“REINVERSIÓNDIRECTA”). O

(2) Pago HECHO A USTED.

Si usted opta por una REINVERSIÓNDIRECTA:

• Su pago no tributará en el año actualni se le hará ninguna retención delimpuesto sobre el ingreso.

• Usted decide si su pago se harádirectamente a su cuenta IRA tradi-cional o a un plan patronal califi-cado que acepta su reinversión. Supago no puede reinvertirse en unacuenta Roth IRA, una cuentaSIMPLE IRA ni en una cuenta deahorro para educación CoverdellEducation Savings Account porqueéstas no son cuentas IRA tradiciona-les.

• La parte tributable de su pago segravará más tarde cuando la saquede su cuenta IRA tradicional o delplan patronal calificado. Dependi-endo del tipo de plan de que se trate,la distribución posterior podría estarsujeta a un tratamiento tributariodiferente al que se aplicaría si ustedrecibiera una distribución tributablede este Plan.

Si opta por un pago HECHO AUSTED del Plan que reúne los requisitosexigidos para una reinversión:

• Recibirá solamente el 80% de lacantidad tributable del pago, porqueel Administrador del Plan tiene queretener el 20% de esa cantidad yenviarla al IRS como retención delimpuesto sobre el ingreso para seracreditada contra sus impuestos.

• La cantidad tributable de su pago segravará en el año actual, a menosque la reinvierta. En ciertas circun-

stancias, usted podrá aplicar unasreglas tributarias especiales quepodrían reducir el impuesto quedebe. Sin embargo, si usted recibe elpago antes de cumplir 59 años ymedio, tendr ía que pagar unimpuesto adicional del 10%.

• Usted puede reinvertir todo o partedel pago, transfiriéndolo a su cuentaIRA tradicional o a un plan patronalcalificado que acepte su reinversióndentro de un plazo de 60 días apartir del recibo del pago. La can-tidad reinvertida no tributará hastaque usted no la saque de su cuentaIRA tradicional o del plan patronalcalificado.

• Si usted desea reinvertir el 100% delpago en una cuenta IRA tradicionalo en un plan patronal calificado, ten-drá que obtener el dinero de otrafuente para reponer el 20% de laparte tributable que se le retuvo. Sireinvierte solamente el 80% delpago que recibió, tendrá que pagarimpuestos sobre el 20% que se leretuvo y no se reinvierte.

Su Derecho a Renunciar al Plazo deNotificación de 30 Días. En general, nopodrá hacerse una reinversión directa niun pago del plan hasta 30 días, comomínimo, después de haber recibido estanotificación. Por lo tanto, después de reci-bir esta notificación, tendrá un plazo,como mínimo, de 30 días para pensar siva o no a reinvertir directamente su retiro.Si no quiere esperar hasta que finalice eseplazo de notificación de 30 días para latramitación de su opción, puede renunciaral mismo, haciendo una elección afirma-tiva e indicando si desea o no una reinver-sión directa. Su retiro será entonces tra-mitado de acuerdo con su opción lo antesposible después de recibirla el Adminis-trador del Plan.

MÁS INFORMACIÓN

I. PAGOS QUE PUEDEN Y QUE NO PUEDEN REINVERTIRSE........................................................................... [ ]

II. REINVERSIÓN DIRECTA ........................................................................................................................................ [ ]

III. PAGO HECHO A USTED ........................................................................................................................................ [ ]

IV. CÓNYUGES SOBREVIVIENTES, BENEFICIARIOS SUSTITUTOS Y OTROS BENEFICIARIOS ...................... [ ]

2002–18 I.R.B. 835 May 6, 2002

I. PAGOS QUE PUEDEN Y QUE NOPUEDEN REINVERTIRSE

Los pagos recibidos del Plan puedenser “distribuciones de reinversión califi-cadas”, o sea, que pueden reinvertirse enuna cuenta IRA tradicional o en un planpatronal calificado que acepte reinver-siones. Los pagos de un plan no puedenreinvertirse en una cuenta Roth IRA, unacuenta SIMPLE IRA ni en una cuentaCoverdell Education Savings Account[cuenta de ahorro para educación]. Eladministrador de su Plan podrá decirlequé parte de su pago es una distribuciónde reinversión calificada.

Contribuciones después de pagar losimpuestos. Si usted hizo contribuciones alPlan después de pagar los impuestos,estas contribuciones pueden reinvertirseen una cuenta IRA tradicional o en ciertosplanes patronales que acepten reinver-siones de contribuciones después depagar los impuestos. Se aplican las reglassiguientes:

a) Reinversión en una cuenta IRAtradicional. Puede reinvertir suscontribuciones después de pagar losimpuestos en una cuenta IRA tradi-cional directa o indirectamente. Eladministrador de su plan podrádecirle qué cantidad de su pago esla parte tributable y qué cantidad esla parte después de los impuestos.

Si reinvierte contribuciones despuésde pagar los impuestos en unacuenta IRA tradicional, será suresponsabilidad mantener un regis-tro, e informar al IRS en las formascorrespondientes, de la cantidad deesas contribuciones después de losimpuestos. Esto permitirá calcular lacantidad no tributable de cualquierdistribución futura de la cuenta IRAtradicional.

Una vez realizada la reinversión desus contribuciones después de losimpuestos en una cuenta IRA tradi-cional , estas cant idades NOPODRÁN reinvertirse más tarde enun plan patronal.

b) Reinversión en un Plan Patronal.Puede reinvertir contribucionesdespués del impuesto procedentesde un plan patronal que cumpla conlos requisitos establecidos conforme

a la sección 401(a) o un plan deanualidad de la sección 403(a) delCódigo Tributario en otro plansemejante utilizando una reinver-sión directa, si este otro plan man-tiene una contabilidad separada delas cantidades reinvertidas, incluidauna contabilidad separada para lascontr ibuciones del empleadodespués del impuesto y de losingresos devengados en dichas con-tribuciones. Asimismo, puede ustedreinvertir también contribucionesdespués del impuesto de una anual-idad con pago del impuesto diferidode la sección 403(b) en otra anual-idad del mismo tipo, utilizando unareinversión directa, si la otra anual-idad con pago del impuesto diferidomantiene una contabilidad separadapara las cantidades reinvertidas,incluida una contabilidad separadapara las contr ibuciones delempleado después de pagar losimpuestos y de los ingresos deven-gados en dichas contribuciones.Usted NO PUEDE reinvertir con-tribuciones después del impuesto enun plan 457 gubernamental. Siquiere reinvertir sus contribucionesdespués del impuesto en un planpatronal que acepta dichas reinver-siones, no podrá ordenar que lepaguen a usted primero las con-tribuciones después del impuesto.Tendrá que dar instrucciones alAdministrador del Plan de dichoPlan para que haga una reinversióndirecta en su nombre. Además,usted no puede reinvertir primerocontr ibuciones después delimpuesto en una cuenta IRA tradi-cional y reinvertir luego esa can-tidad en un plan patronal.

Los tipos de pagos que se indican a con-tinuación no pueden reinvertirse:

Pagos espaciados en períodos largosde tiempo. No podrá reinvertir un pago siéste forma parte de una serie de pagosiguales (o casi iguales) que se hacen almenos una vez al año y que durarán:

• Toda su vida (o un período basadoen su expectativa de vida). O

• Toda su vida y toda la vida de subeneficiario (o un período basado en lasexpectativas de vida de ambos). O

• Un período de 10 o más años.

Pagos mínimos requeridos. A partir dela fecha en que cumpla 70 años y medioo se jubile, la fecha que ocurra más tarde,cierta cantidad de su pago no podrá rein-vertirse, porque existe un “pago mínimorequerido” que deberá hacérsele a usted.Se aplican unas reglas especiales si ustedposee una participación de más del 5% enla empresa de su empleador.

Distribuciones por dificultades excep-cionales. Una distribución por dificulta-des excepcionales no puede reinvertirse.

Dividendos de un plan ESOP. Losdividendos en efectivo que usted percibede acciones poseídas en un plan de com-pra de acciones para los empleados uobreros (ESOP) no pueden reinvertirse.

Distribuciones correctivas. Una dis-tribución que se hace para remediar unaprueba de no discriminación no satisfechao porque los límites legales establecidospara ciertas contribuciones fueron excedi-dos no puede reinvertirse.

Préstamos tratados como distribu-ciones. La cuantía de un préstamo concargo a un plan considerada una dis-tribución tributable por incumplimientode pago no puede reinvertirse. Sinembargo, una cuantía compensatoria delpréstamo puede reinvertirse, como seexplicará en la Parte III más adelante.Pregunte al Administrador del Plan dedicho Plan si la distribución de su prés-tamo cumple con los requisitos exigidospara tratarlo como reinversión.

El Administrador del Plan de dichoPlan podrá indicarle si su pago incluyecantidades que no pueden reinvertirse.

II. REINVERSIÓN DIRECTA

UNA REINVERSIÓN DIRECTA esun pago directo de la cantidad de sus ben-eficios recibidos del Plan en una cuentaIRA tradicional o en un plan patronalcalificado que lo acepte. Usted puedeoptar por una REINVERSIÓN DIRECTAde todo o de cualquier parte de su pagoque sea una distribución de reinversióncalificada, según se ha descrito anterior-mente en la Parte I. Cualquier parte trib-utable de su pago de la que opte por unaREINVERSIÓN DIRECTA se gravarámás tarde cuando la saque de su cuenta

May 6, 2002 836 2002–18 I.R.B.

IRA tradicional o del plan patronal califi-cado. Además, no se requerirá hacer nin-guna retención del impuesto sobre elingreso en ninguna parte tributable de susbeneficios del Plan de la que opte por unaREINVERSIÓN DIRECTA. Este planposiblemente no le permita optar por unaREINVERSIÓN DIRECTA si sus dis-tribuciones durante el año son menos de$200.

REINVERSIÓN DIRECTA en unacuenta IRA tradicional. Puede abrir unacuenta IRA tradicional para recibir lareinversión directa. Si decide que se lehaga su pago directamente en una cuentaIRA tradicional, póngase en contacto conuna entidad patrocinadora de una cuentaIRA (normalmente una institución finan-ciera) para averiguar cómo se hace unareinversión directa en una cuenta IRAtradicional en esa institución. Si no estáseguro de cómo invertir su dinero, puedeabrir temporalmente una IRA tradicionalpara recibir el pago. Sin embargo, alelegir una cuenta IRA tradicional, debieraasegurarse de que la cuenta IRA tradicio-nal que elige le permitirá transferir todo oparte de su pago a otra cuenta IRA tradi-cional en una fecha posterior sin penaliza-ciones u otras restricciones. Véase la Pub-licación 590, Planes de Ahorro para laJubilación, del IRS, para obtener infor-mación adicional sobre las cuentas IRAtradicionales (incluidas las limitacionessobre la frecuencia con que puede ustedreinvertir entre cuentas IRA).

REINVERSIÓN DIRECTA en un Plan.Si usted trabaja para un nuevo empleadorque posee un plan patronal calificado ydesea hacer una reinversión directa en eseplan, pregunte al administrador del plande ese plan si aceptará su reinversión. Unplan patronal calificado no está legal-mente obligado a aceptar una reinversión.Aunque el plan de su nuevo empleador noacepte una reinversión, usted puede optarpor una REINVERSIÓN DIRECTA enuna cuenta IRA tradicional. Si el plan delempleador acepta su reinversión, elmismo podría poner restricciones encuanto a las circunstancias en que ustedpodría recibir más tarde una distribuciónde la cantidad reinvertida o podríarequerir el consenso del cónyuge paracualquier distribución posterior. Consultecon el administrador del plan de dichoplan antes de tomar su decisión.

REINVERSIÓN DIRECTA de una seriede pagos. Si usted recibe un pago quepuede reinvertirse en una cuanta IRAtradicional o en un plan patronal califi-cado que lo acepte y se efectúa en unaserie de pagos durante un plazo de menosde 10 años, su opción de hacer o no unaREINVERSIÓN DIRECTA para un pagose aplicará a todos los pagos posterioresde la serie hasta que cambie su opción.Tendrá libertad para cambiar su opciónrespecto a cualquier pago posterior de laserie.

Cambio del tratamiento tributariocomo resultado de una REINVERSIÓNDIRECTA. El tratamiento tributario decualquier pago del plan patronal califi-cado o la cuenta IRA tradicional querecibe su REINVERSIÓN DIRECTApodría ser diferente al que se aplicaría sirecibiera su beneficio en una distribucióntributable directamente del Plan. Porejemplo, si usted nació antes del 1 deenero de 1936, podría tener derecho a untratamiento en forma de prorrateo delimpuesto de diez años o como gananciade capital, como se explicará másadelante. Sin embargo, si ordena que subeneficio se le reinvierta en una anualidadcon pago del impuesto diferido de la sec-ción 403(b), un plan 457 gubernamental ouna cuenta IRA tradicional en una REIN-VERSIÓN DIRECTA, su beneficio nopodrá ya acogerse a dicho tratamientotributario especial. Véanse más adelantelas secciones tituladas “Impuesto adicio-nal del 10% si usted no ha cumplido 59años y medio” y “Tratamiento tributarioespecial si usted nació antes del 1 deenero de 1936”.

III. PAGO HECHO A USTED

Si su pago puede reinvertirse (véase laParte I anterior) y éste se le hace en efec-tivo, entonces estará sujeto a una reten-ción del impuesto federal sobre el ingresodel 20% sobre la parte tributable (yposiblemente también a una retención delimpuesto estatal). El impuesto sobre elpago se grava en el año en que lo recibe,a menos que lo reinvierta dentro de unplazo de 60 días en una cuenta IRA tradi-cional o en un plan patronal calificadoque acepte reinversiones. Si no lo reinvi-erte, podrían aplicarse ciertas reglas tribu-tarias especiales.

Retención del impuesto sobre elingreso:

Retención obligatoria. Si cualquierparte de su pago puede reinvertirse con-forme a lo establecido en la Parte I ante-rior y usted no opta por hacer una REIN-VERSIÓN DIRECTA, el Plan estaráobligado por ley a retenerle el 20% de lacantidad tributable. Esta cantidad se envíaal IRA como retención del impuesto sobreel ingreso. Por ejemplo, si puede rein-vertir un pago tributable de $10,000, se lepagará solamente $8,000, porque el Plantiene que retener $2,000 como impuestosobre el ingreso. Sin embargo, cuandousted prepare su declaración del impuestosobre el ingreso para el año, salvo quehaga una reinversión dentro de un plazode 60 días (véase “Opción de reinversiónde sesenta días” más adelante), tendrá quedeclarar la cantidad total de $10,000como un pago tributable del Plan. Debedeclarar los $2,000 como una retencióndel impuesto y se le acreditará esa can-tidad contra cualquier impuesto sobre elingreso que deba para el año. No se haráninguna retención del impuesto sobre elingreso si sus pagos para el año sonmenos de $200.

Retención voluntaria. Si cualquierparte de su pago es tributable, pero nopuede reinvertirse de acuerdo con loestablecido en la Parte I precedente, lasreglas sobre la retención obligatoria quese han descrito anteriormente no son apli-cables. En tal caso, podría elegir que nose le haga retención sobre esa parte. Siusted no hace nada, se le descontará unacantidad de esa parte de su pago en con-cepto de retención del impuesto federalsobre el ingreso. Para no optar por laretención, solicite al Administrador delPlan la forma de la opción y la infor-mación pertinente.

Opción de reinversión de sesenta días.Si recibe un pago que puede reinvertirseconforme a lo establecido en la Parte Ianterior, usted podrá, no obstante, optarpor reinvertir todo el pago o parte delmismo en una cuenta IRA tradicional o enun plan patronal calificado que aceptereinversiones. Si decide hacer una rein-versión, tendrá que transferir la cantidaddel pago que recibió a una cuenta IRAtradicional o a un plan patronal califi-cado dentro de un plazo de 60 días apartir de la fecha en que recibió el pago.

2002–18 I.R.B. 837 May 6, 2002

La parte de su pago que se reinvierte nose gravará hasta que usted la saque de lacuenta IRA tradicional o del plan patronalcalificado.

Podrá reinvertir hasta el 100% de supago que pueda reinvertirse conforme a lodispuesto en la Parte I anterior, incluidauna cantidad igual al 20% de la parte trib-utable que le fue retenida. Si opta porreinvertir el 100%, tendrá que obtener eldinero de otra parte dentro de un plazo de60 días para contribuir a la cuenta IRAtradicional o al plan patronal calificadopara reponer el 20% que se le retuvo. Porotra parte, si reinvierte solamente el 80%de la parte tributable que recibió, tendráque pagar impuesto sobre el 20% que sele retuvo.

Ejemplo: La parte tributable de supago que puede reinvertirse de acuerdocon lo establecido en la Parte I anteriores una suma de $10,000 y puede elegirque se le pague a usted. Recibirá$8,000, y $2,000 se enviarán al IRScomo retención del impuesto sobre elingreso. Dentro de un plazo de 60 díasde haber recibido los $8,000, ustedpodrá reinvertir toda la cantidad de$10,000 en una cuenta IRA tradicionalo en un plan patronal calificado. Paraello, reinvertirá los $8,000 que recibiódel Plan y tendrá que obtener $2,000de otras fuentes (sus ahorros, un prés-tamo, etc.). En tal caso, la cantidadtotal de $10,000 no tributará hasta quela saque de la cuenta IRA tradicional odel plan patronal calificado. Si reinvi-erte la suma total de los $10,000,cuando presente su declaración delimpuesto sobre el ingreso, podríaobtener un reembolso de parte o detoda la cantidad de los $2,000 reteni-dos.

Si, por otro lado, usted reinvierte sola-mente $8,000, los $2,000 que no rein-virtió tributarán en el año en que seretuvieron. Cuando presente sudeclaración del impuesto sobre elingreso, podría obtener un reembolsode parte de los $2,000 que le fueronretenidos. (Sin embargo, cualquierreembolso será probablemente mayorsi reinvierte toda la cantidad de los$10,000).

Impuesto adicional del 10% si ustedno ha cumplido 59 años y medio”. Si

recibe un pago antes de cumplir 59 añosy medio y no lo reinvierte, entonces,además del impuesto ordinario sobre elingreso, tendría que pagar un impuestoadicional igual al 10% de la parte tribut-able del pago. El impuesto adicional del10% no se aplica generalmente a (1) lospagos que se hacen después de habercesado usted de trabajar para su emplea-dor en el año o después del año en quecumpla usted 55 años; (2) los pagos quese hacen porque se jubila por inca-pacidad; (3) los pagos que se hacen comopagos iguales (o casi iguales) durante suvida o expectativa de vida (o durante lasvidas y expectativas de vida de usted y subeneficiario); (4) los dividendos pagadosen acciones por un plan de compra deacciones para los empleados (ESOP),según se describe en la sección 404(k) delCódigo Tributario; (5) los pagos que sehacen directamente al gobierno parapagar un gravamen de impuesto federal;(6) los pagos que se hacen a un beneficia-rio sustituto conforme a una orden judi-cial de asuntos familiares calificada, o (7)los pagos que no exceden de la cantidadde sus gastos médicos deducibles. Véasela Forma 5329 del IRS para obtener infor-mación adicional sobre el impuesto adi-cional del 10% .

El impuesto adicional del 10% no seaplica a las distribuciones de un plan 457gubernamental, salvo en la medida en quela distribución sea atribuible a una can-tidad que usted reinvirtió en ese plan(ajustada para los rendimientos de lainversión) de otro tipo de plan patronalcalificado o IRA. Cualquier cantidad rein-vertida de un plan 457 gubernamental enotro tipo de plan patronal calificado o enuna cuenta IRA tradicional estará sujeta alimpuesto adicional del 10% si se le dis-tribuye antes de cumplir usted los 59 añosy medio, a menos que le sea aplicable unade las excepciones.

“Tratamiento tributario especial siusted nació antes del 1 de enero de1936”. Si recibe un pago de un plan cali-ficado conforme a la sección 401(a) o unplan de anualidad de la sección 403(a)que puede reinvertirse de acuerdo con laParte I y no lo reinvierte en una cuentaIRA tradicional o en un plan patronalcalificado, el pago tributará en el año quelo recibe. Sin embargo, si el pago se con-sidera una “distribución en una suma glo-

bal”, podría calificarse para un trata-miento tributario especial. (Véasetambién “Acciones o títulos del emplea-dor” más adelante.) La distribución enuna suma global es un pago, dentro de unaño, de todo su saldo en el Plan (y enotros planes patronales similares) que espagadero a su favor después de habercumplido 59 años y medio o porque hacesado usted de trabajar para su emplea-dor (o, en el caso de una persona que tra-baja por cuenta propia, después de haberusted cumplido 59 años y medio o dehaberse declarado incapacitado). Para queun pago pueda tratarse como una dis-tribución en una suma global, usted ten-drá que haber participado en el plan cincoaños, como mínimo, antes del año en querecibió la distribución. A continuación sedescribe el tratamiento tributario especialpara las distribuciones en una suma glo-bal que podría haber a su disposición.

Prorrateo de diez años. Si recibe unadistribución en una suma global y nacióantes del 1 de enero de 1936, podrá tomaruna opción usada una sola vez para calcu-lar el impuesto sobre el pago, utilizandoel “prorrateo de 10 años” (utilizando lastasas de impuesto de 1986). El prorrateode diez años suele reducir el impuestoque usted debe.

Tratamiento como ganancia de capi-tal. Si recibe una distribución en unasuma global, nació antes del 1 de enerode 1936 y participó en el Plan antes de1974, podrá elegir que la parte de su pagoatribuible a su participación anterior a1974 en el Plan le sea tratada para efec-tos de los impuestos como ganancia decapital a una tasa del 20%.

Hay otras restricciones sobre el trata-miento tributario especial para las dis-tribuciones en una suma global. Por ejem-plo, usted puede generalmente optar poreste tratamiento tributario especial sola-mente una vez durante su vida, y laopción se aplica a todas las distribucionesen una suma global que reciba en esemismo año. Puede no elegir este trata-miento tributario especial si reinvirtiócantidades en ese Plan de un contrato deanualidad con pago del impuesto diferidode la sección 403(b), un plan 457 guber-namental o una cuenta IRA no atribuibleoriginalmente a un plan patronal califi-cado. Si ha reinvertido anteriormente unadistribución de dicho Plan (o de otros

May 6, 2002 838 2002–18 I.R.B.

planes patronales similares determina-dos), no podrá utilizar el tratamientoespecial del prorrateo para pagos posteri-ores del Plan. Si reinvierte su pago en unacuenta IRA tradicional, un plan 457gubernamental o en una anualidad conpago del impuesto diferido de la sección403(b), no podrá utilizar el tratamientotributario especial para pagos posterioresde esa cuenta IRA, plan o anualidad. Asi-mismo, si reinvierte solamente una partede su pago en una cuenta IRA tradicional,un plan 457 gubernamental o en una anu-alidad con pago del impuesto diferido dela sección 403(b), no se podrá aplicar estetratamiento tributario especial al resto delpago. Véase la Forma 4972 del IRS paraobtener información adicional sobre lasdistribuciones en una suma global y cómopuede usted elegir el tratamiento tribu-tario especial.

Acciones o títulos de un plan patronal.Hay una regla especial que se aplica a unpago del Plan que incluye accionespatronales (u otros títulos patronales).Para utilizar esta regla especial, 1) elpago tiene que calificarse como dis-tribución en una suma global, como se hadescrito ya anteriormente, salvo que ustedno necesitará cinco años de participaciónen el plan o 2) las acciones patronalesincluidas en el pago deben ser atribuiblesa contribuciones del empleado u obrero“después del impuesto”, si las hubiera. Deacuerdo con esa regla especial, ustedpuede tener la opción de no pagarimpuesto sobre la “valorización no real-izada neta” de las acciones hasta que lasvenda. La valorización no realizada netaes generalmente el incremento del valorde la acción patronal durante el tiempo enque la acción fue poseída por el Plan. Porejemplo, si la acción patronal fue contri-buida a su cuenta del Plan cuando éstavalía $1,000, pero la acción valía $1,200cuando la recibió, no tendría que pagarimpuesto sobre el incremento de valor de$200 hasta que usted venda la acción pos-teriormente.

Usted podría, en su lugar, optar porhacer que no se aplique la regla especiala la valorización no realizada neta. En talcaso, su valorización no realizada neta segravará en el año que reciba la acción, amenos que la reinvierta. La acción puedereinvertirse en una cuenta IRA tradicionalo en otro plan patronal calificado, bien en

forma de una reinversión directa o de unareinversión que haga usted mismo. Engeneral, no podrá ya utilizar la regla espe-cial para la valorización no realizada netasi reinvierte la acción en una cuenta IRAtradicional o en un plan patronal califi-cado.

Si recibe solamente acciones de unplan patronal en un pago que puede rein-vertirse, no se le retendrá ninguna can-tidad del pago. Si recibe dinero efectivo uotros bienes que no sean acciones de unplan patronal, y también acciones de unplan patronal, en un pago que puede rein-vertirse, la cantidad de la retención del20% se basará en la cantidad total tribut-able que se le haya pagado (incluido elvalor de las acciones de un plan patronalcalculado excluyendo la valorización norealizada neta). Sin embargo, la cantidadretenida se limitará al efectivo o bienesrecibidos (excluidas las acciones de unplan patronal) que se le hayan pagado.

Si recibe acciones de un plan patronalen un pago que se considera una dis-tribución en una suma global, se podrátambién aplicar el tratamiento tributarioespecial para las distribuciones en unasuma global que se ha descrito anterior-mente (como el prorrateo de 10 años).Véase la Forma 4972 del IRS paraobtener información adicional sobre estasreglas.

Reembolso de préstamos del Plan. Sisu empleo cesa y tiene usted un préstamopendiente con su Plan, su empleadorpuede reducir (o “compensar”) su saldoen el Plan por la cuantía del préstamo queno haya pagado. La cuantía de la com-pensación del préstamo se trata como sifuera una distribución que se le hace austed en el momento de la compensacióny tributará, a menos que usted reinviertauna cantidad igual a la cantidad de lacompensación de su préstamo en otroplan patronal calificado o en una cuentaIRA tradicional dentro de un plazo de 60días a partir de la fecha de la com-pensación. Si la cantidad de la com-pensación de su préstamo es la única can-tidad que usted recibe o se trata como sila hubiera recibido, no se le retendrá nin-guna cantidad de ella. Si recibe otrospagos en efectivo o bienes del Plan, lacantidad de retención del 20% se basaráen la cantidad total que se le haya pagado,incluida la cantidad de la compensación

del préstamo. La cantidad retenida selimitará a la cantidad de otros pagos enefectivos o bienes que se le hayan hecho(que no sean títulos de planes patronales).La cantidad de un préstamo del plan conincumplimiento de pago que se considereuna distribución tributable no puede rein-vertirse.

IV. CÓNYUGES SOBREVIVIENTES,BENEFICIARIOS SUSTITUTOS YOTROS BENEFICIARIOS

En general, las reglas que se han resu-mido anteriormente aplicables a los pagosefectuados a los empleados se aplicantambién a los cónyuges sobrevivientes delos empleados y a los cónyuges o ex cón-yuges que son “beneficiarios sustitutos”.Usted es un beneficiario sustituto cuandosu participación en el Plan se debe a una“orden judicial de asuntos familiaresespecificada”, que es una orden dictadapor un tribunal, normalmente en relacióncon un divorcio o una separación legal.

Si usted es un cónyuge sobreviviente oun beneficiario sustituto, podría optar porun pago que puede reinvertirse, como yase ha descrito en la Parte I, efectuado enforma de REINVERSIÓN DIRECTA enuna cuenta IRA tradicional o un planpatronal calificado o hecho a usted. Sihace que el pago se le haga a usted, puedequedarse con él o reinvertirlo ustedmismo en una cuenta IRA tradicional o enun plan patronal calificado. Así, pues,usted tendrá las mismas opciones que lasdel empleado.

Si es un beneficiario que no sea uncónyuge sobreviviente o un beneficiariosustituto, no podrá optar por una reinver-sión directa ni reinvertir el pago ustedmismo.

Si es un cónyuge sobreviviente, unbeneficiario sustituto u otro beneficiario,su pago no estará normalmente sujeto alimpuesto adicional del 10% que se hadescrito anteriormente en la Parte III,aunque no haya cumplido los 59½.

Si es un cónyuge sobreviviente, unbeneficiario sustituto u otro beneficiario,usted podría utilizar el tratamiento tribu-tario especial para las distribuciones enuna suma global y la regla especial paralos pagos que incluyen acciones de planespatronales, como ya se ha descrito en la

2002–18 I.R.B. 839 May 6, 2002

Parte III. Si recibe un pago por fallec-imiento del empleado, usted podría tratarel pago como una distribución en unasuma global si el empleado cumple conlos requisitos de edad correspondientes,independientemente de si éste participó ono 5 años en el Plan.

CÓMO OBTENER INFORMACIÓNADICIONAL

Esta notificación ofrece solamente unresumen de las reglas tributarias federales(no estatales o municipales) que podríanaplicarse a su pago. Las reglas que se handescrito anteriormente son complejas ycontienen muchas condiciones y excep-ciones que no se han incluido en estanotificación. Por lo tanto, debiera consul-tar con el Administrador del Plan o conun asesor de impuestos profesional antesde obtener un pago de sus beneficios delPlan. Puede también encontrar infor-mación más específica sobre el trata-miento fiscal de los pagos percibidos deplanes patronales calificados en la Publi-cación 575, Ingresos de Pensiones y Anu-alidades, y la Publicación 590, Planes deAhorro para la Jubilación, del IRS. Estaspublicaciones se pueden obtener en suoficina local del IRS, a través del sitioweb de la Internet en la direcciónwww.irs.gov o llamando al número1–800–TAX-FORM (1–800–829–3676).

EXPLICACIÓN DEL CONCEPTO DEREFUGIO TRIBUTARIO EN LOSPLANES 457 GUBERNAMENTALES

NOTIFICACIÓN TRIBUTARIA ESPE-CIAL SOBRE LOS PAGOS DE PLANES

En esta notificación se explica laforma en que usted puede continuar apla-zando el pago del impuesto federal sobreel ingreso en sus ahorros de la jubilaciónen el [INSERTAR AQUÍ EL NOMBREDEL PLAN] (en adelante denominado el“Plan”). La notificación contiene tambiénuna información importante que usteddebe conocer antes de decidir cómo va arecibir los beneficios o pagos de su Plan.

Esta notificación se la envía a usted[INSERTAR AQUÍ EL NOMBRE DELADMINISTRADOR DEL PLAN] (enadelante denominado el “Administradordel Plan”), porque toda la cantidad oparte del pago que va usted a recibir den-tro de poco del Plan podría cumplir conlos requisitos establecidos para una rein-

versión por usted o su Administrador delPlan en una cuenta IRA tradicional o enun plan patronal calificado. Una reinver-sión es un pago o transferencia efectuadopor usted o el Administrador del Plan detodo o parte de su beneficio a otro plan oa una cuenta IRA que le permite con-tinuar posponiendo el pago del impuestosobre ese beneficio hasta que se le pague.Su pago no puede reinvertirse en unacuenta Roth IRA, en una cuenta SIMPLEIRA ni en una cuenta de ahorro para laeducación Coverdell Education SavingsAccount (anteriormente conocida comocuenta IRA para educación). Un “planpatronal calificado” consiste en un planque reúne los requisitos legales estableci-dos en la sección 401(a) del CódigoTributario, que comprende los planessiguientes: plan 401(k) del empleador,plan de participación en los beneficios,plan de beneficios definidos, plan deacciones gratuitas y plan de contribucióndineraria patronal al fondo de pensiones;un plan de anualidad de la sección 403(a),una anualidad con pago del impuestodiferido de la sección 403(b), y un plancalificado de la sección 457(b) mantenidopor un empleador del gobierno (plan 457gubernamental). El Plan aquí es un plan457 gubernamental.

Un plan patronal calificado no estálegalmente obligado a aceptar una rein-versión. Antes de decidir reinvertir supago en otro plan patronal, deberá averi-guar si el plan acepta reinversiones y, encaso afirmativo, los tipos de distribu-ciones que acepta como reinversión.Deberá informarse también sobre losdocumentos requeridos que han de lle-narse para que el plan receptor acepte unareinversión. Aunque un plan acepte rein-versiones, podría no aceptar reinversionesde ciertos tipos de distribuciones. Cuandoéste sea el caso, usted podría en su lugar,si lo desea, reinvertir su distribución enuna cuenta IRA tradicional o bien dividirla cantidad de la reinversión entre el planpatronal en el que va a participar y unacuenta IRA tradicional. Si un planpatronal acepta su reinversión, el mismopodría limitar las distribuciones posteri-ores de la cantidad de reinversión orequerir el consentimiento de su cónyugepara cualquier distribución posterior. Unadistribución posterior del plan que aceptasu reinversión podría estar también sujetaa un tratamiento tributario distinto al de

las distribuciones de este Plan. Consultecon el administrador del plan que va arecibir su reinversión antes de hacer lareinversión.

Si tiene usted algunas preguntas quehacer después de leer esta notificación,puede ponerse en contacto con el admin-istrador de su plan [INSERTAR AQUÍ ELNÚMERO DE TELÉFONO U OTRAINFORMACIÓN DE CONTACTO].

RESUMEN

Hay dos maneras en que usted podríarecibir un pago del Plan que reúne losrequisitos exigidos para una reinversión:

(1) Ciertos pagos pueden hacersedirectamente a una cuenta IRAtradicional que usted tenga o a unplan patronal calificado que loaceptará y mantendrá para su ben-ef ic io (“REINVERSIÓNDIRECTA”). O

(2) Pago HECHO A USTED.

Si usted opta por una REINVERSIÓNDIRECTA:

• Su pago no tributará en el año actualni se le hará ninguna retención delimpuesto sobre el ingreso.

• Usted decide si su pago se harádirectamente a su cuenta IRA tradi-cional o a un plan patronal califi-cado que acepta su reinversión. Supago no puede reinvertirse en unacuenta Roth IRA, una cuentaSIMPLE IRA ni en una cuenta deahorro para educación CoverdellEducation Savings Account porqueéstas no son cuentas IRA tradiciona-les.

• La parte tributable de su pago segravará más tarde cuando la saquede su cuenta IRA tradicional o delplan patronal calificado. Dependi-endo del tipo de plan de que se trate,la distribución posterior podría estarsujeta a un tratamiento tributariodiferente al que se aplicaría si ustedrecibiera una distribución tributablede este Plan.

Si opta por un pago HECHO AUSTED del Plan que reúne los requisitosexigidos para una reinversión:

• Recibirá solamente el 80% de lacantidad tributable del pago, porque

May 6, 2002 840 2002–18 I.R.B.

el Administrador del Plan tiene queretener el 20% de esa cantidad yenviarla al IRS como retención delimpuesto sobre el ingreso para seracreditada contra sus impuestos.

• La cantidad tributable de su pago segravará en el año actual, a menosque la reinvierta.

• Usted puede reinvertir todo o partedel pago, transfiriéndolo a su cuentaIRA tradicional o a un plan patronalcalificado que acepte su reinversióndentro de un plazo de 60 días apartir del recibo del pago. La can-tidad reinvertida no tributará hasta

que usted no la saque de su cuentaIRA tradicional o del plan patronalcalificado.

• Si usted desea reinvertir el 100% delpago en una cuenta IRA tradicionalo en un plan patronal calificado, ten-drá que obtener el dinero de otrafuente para reponer el 20% de laparte tributable que se le retuvo. Sireinvierte solamente el 80% delpago que recibió, tendrá que pagarimpuestos sobre el 20% que se leretuvo y no se reinvierte.

Su Derecho a Renunciar al Plazo deNotificación de 30 Días. En general, no

podrá hacerse una reinversión directa niun pago del plan hasta 30 días, comomínimo, después de haber recibido estanotificación. Por lo tanto, después de reci-bir esta notificación, tendrá un plazo,como mínimo, de 30 días para pensar siva o no a reinvertir directamente su retiro.Si no quiere esperar hasta que finalice eseplazo de notificación de 30 días para latramitación de su opción, puede renunciaral mismo, haciendo una elección afirma-tiva e indicando si desea o no una reinver-sión directa. Su retiro será entonces tra-mitado de acuerdo con su opción lo antesposible después de recibirla el Adminis-trador del Plan.

MÁS INFORMACIÓN

I. PAGOS QUE PUEDEN Y QUE NO PUEDEN REINVERTIRSE........................................................................... [ ]

II. REINVERSIÓN DIRECTA ........................................................................................................................................ [ ]

III. PAGO HECHO A USTED ........................................................................................................................................ [ ]

IV. CÓNYUGES SOBREVIVIENTES, BENEFICIARIOS SUSTITUTOS Y OTROS BENEFICIARIOS ...................... [ ]

I. PAGOS QUE PUEDEN Y QUE NOPUEDEN REINVERTIRSE

Los pagos recibidos del Plan puedenser “distribuciones de reinversión califi-cadas”, o sea, que pueden reinvertirse enuna cuenta IRA tradicional o en un planpatronal calificado que acepte reinver-siones. Los pagos de un plan no puedenreinvertirse en una cuenta Roth IRA, unacuenta SIMPLE IRA ni en una cuenta deahorro para educación Coverdell Educa-tion Savings Account. El administradorde su Plan podrá decirle qué parte de supago es una distribución de reinversióncalificada.

Los tipos de pagos que se indican a con-tinuación no pueden reinvertirse:

Pagos espaciados en períodos largosde tiempo. No podrá reinvertir un pago siéste forma parte de una serie de pagosiguales (o casi iguales) que se hacen almenos una vez al año y que durarán:

• Toda su vida (o un período basadoen su expectativa de vida). O

• Toda su vida y toda la vida de subeneficiario (o un período basado enlas expectativas de vida de ambos).O

• Un período de 10 o más años.

Pagos mínimos requeridos. A partir dela fecha en que cumpla 70 años y medioo se jubile, la fecha que ocurra más tarde,cierta cantidad de su pago no podrá rein-vertirse, porque existe un “pago mínimorequerido” que deberá hacérsele a usted.

Distribuciones por casos de emergen-cia imprevistos. Una distribución por uncaso de emergencia imprevisto no puedereinvertirse.

Distribuciones de contribuciones exce-sivas. Una distribución que se hace porque se han excedido los límites legalesestablecidos para ciertas contribucionesno puede reinvertirse.

Préstamos tratados como distribu-ciones. La cuantía de un préstamo concargo a un plan considerada una dis-tribución tributable por incumplimientode pago no puede reinvertirse. Sinembargo, una cuantía compensatoria delpréstamo puede reinvertirse, como seexplicará en la Parte III más adelante.Pregunte al Administrador del Plan dedicho Plan si la distribución de su prés-tamo cumple con los requisitos exigidospara tratarlo como reinversión.

El Administrador del Plan de dichoPlan podrá indicarle si su pago incluyecantidades que no pueden reinvertirse.

II. REINVERSIÓN DIRECTA

UNA REINVERSIÓN DIRECTA esun pago directo de la cantidad de sus ben-eficios recibidos del Plan en una cuentaIRA tradicional o en un plan patronalcalificado que lo acepte. Usted puedeoptar por una REINVERSIÓN DIRECTAde todo o de cualquier parte de su pagoque sea una distribución de reinversióncalificada, según se ha descrito anterior-mente en la Parte I. Cualquier parte trib-utable de su pago de la que opte por unaREINVERSIÓN DIRECTA se gravarámás tarde cuando la saque de su cuentaIRA tradicional o del plan patronal califi-cado. Además, no se requerirá hacer nin-guna retención del impuesto sobre elingreso en ninguna parte tributable de susbeneficios del Plan de la que opte por unaREINVERSIÓN DIRECTA. Este planposiblemente no le permita optar por unaREINVERSIÓN DIRECTA si sus dis-tribuciones durante el año son menos de$200.

REINVERSIÓN DIRECTA en unacuenta IRA tradicional. Puede abrir unacuenta IRA tradicional para recibir lareinversión directa. Si decide que se lehaga su pago directamente en una cuentaIRA tradicional, póngase en contacto conuna entidad patrocinadora de una cuenta

2002–18 I.R.B. 841 May 6, 2002

IRA (normalmente una institución finan-ciera) para averiguar cómo se hace unareinversión directa en una cuenta IRAtradicional en esa institución. Si no estáseguro de cómo invertir su dinero, puedeabrir temporalmente una IRA tradicionalpara recibir el pago. Sin embargo, alelegir una cuenta IRA tradicional, debieraasegurarse de que la cuenta IRA tradicio-nal que elige le permitirá transferir todo oparte de su pago a otra cuenta IRA tradi-cional en una fecha posterior sin penaliza-ciones u otras restricciones. Véase la Pub-licación 590, Planes de Ahorro para laJubilación, del IRS, para obtener infor-mación adicional sobre las cuentas IRAtradicionales (incluidas las limitacionessobre la frecuencia con que puede ustedreinvertir entre cuentas IRA).

REINVERSIÓN DIRECTA en un Plan.Si usted trabaja para un nuevo empleadorque posee un plan patronal calificado ydesea hacer una reinversión directa en eseplan, pregunte al administrador del plande ese plan si aceptará su reinversión. Unplan patronal calificado no está legal-mente obligado a aceptar una reinversión.Aunque el plan de su nuevo empleador noacepte una reinversión, usted puede optarpor una REINVERSIÓN DIRECTA enuna cuenta IRA tradicional. Si el plan delempleador acepta su reinversión, elmismo podría poner restricciones encuanto a las circunstancias en que ustedpodría recibir más tarde una distribuciónde la cantidad reinvertida o podríarequerir el consenso del cónyuge paracualquier distribución posterior. Consultecon el administrador del plan de dichoplan antes de tomar su decisión.

REINVERSIÓN DIRECTA de una seriede pagos. Si usted recibe un pago quepuede reinvertirse en una cuanta IRAtradicional o en un plan patronal califi-cado que lo acepte y se efectúa en unaserie de pagos durante un plazo de menosde 10 años, su opción de hacer o no unaREINVERSIÓN DIRECTA para un pagose aplicará a todos los pagos posterioresde la serie hasta que cambie su opción.Tendrá libertad para cambiar su opciónrespecto a cualquier pago posterior de laserie.

Cambio del tratamiento tributariocomo resultado de una REINVERSIÓNDIRECTA. El tratamiento tributario decualquier pago del plan patronal califi-

cado o la cuenta IRA tradicional querecibe su REINVERSIÓN DIRECTApodría ser diferente al que se aplicaría sirecibiera su beneficio en una distribucióntributable directamente del Plan. Véasemás adelante la sección ti tulada“Impuesto adicional del 10% que puedeaplicarse a ciertas distribuciones”.

III. PAGO HECHO A USTED

Si su pago puede reinvertirse (véase laParte I anterior) y éste se le hace en efec-tivo, entonces estará sujeto a una reten-ción del impuesto federal sobre el ingresodel 20% sobre la parte tributable (yposiblemente también a una retención delimpuesto estatal). El impuesto sobre elpago se grava en el año en que lo recibe,a menos que lo reinvierta dentro de unplazo de 60 días en una cuenta IRA tradi-cional o en un plan patronal calificadoque acepte reinversiones. Si no lo reinvi-erte, podrían aplicarse ciertas reglas tribu-tarias especiales.

Retención del impuesto sobre elingreso:

Retención obligatoria. Si cualquierparte de su pago puede reinvertirse con-forme a lo establecido en la Parte I ante-rior y usted no opta por hacer una REIN-VERSIÓN DIRECTA, el Plan estaráobligado por ley a retenerle el 20% de lacantidad tributable. Esta cantidad se envíaal IRA como retención del impuesto fed-eral sobre el ingreso. Por ejemplo, sipuede reinvertir un pago tributable de$10,000, se le pagará solamente $8,000,porque el Plan tiene que retener $2,000como impuesto sobre el ingreso. Sinembargo, cuando usted prepare sudeclaración del impuesto sobre el ingresopara el año, salvo que haga una reinver-sión dentro de un plazo de 60 días (véase“Opción de reinversión de sesenta días”más adelante), tendrá que declarar la can-tidad total de $10,000 como un pago trib-utable del Plan. Debe declarar los $2,000como una retención del impuesto y se leacreditará esa cantidad contra cualquierimpuesto sobre el ingreso que deba parael año. No se hará ninguna retención delimpuesto sobre el ingreso si sus pagospara el año son menos de $200.

Retención voluntaria. Si cualquierparte de su pago es tributable, pero nopuede reinvertirse de acuerdo con loestablecido en la Parte I precedente, las

reglas sobre la retención obligatoria quese han descrito anteriormente no son apli-cables. En tal caso, podría elegir que nose le haga retención sobre esa parte. Siusted no hace nada, se le descontará unacantidad de esa parte de su pago en con-cepto de retención del impuesto federalsobre el ingreso. Para no optar por laretención, solicite al Administrador delPlan la forma de la opción y la infor-mación pertinente.

Opción de reinversión de sesenta días.Si recibe un pago que puede reinvertirseconforme a lo establecido en la Parte Ianterior, usted podrá, no obstante, optarpor reinvertir todo el pago o parte delmismo en una cuenta IRA tradicional o enun plan patronal calificado que aceptereinversiones. Si decide hacer una rein-versión, tendrá que transferir la cantidaddel pago que recibió a una cuenta IRAtradicional o a un plan patronal califi-cado dentro de un plazo de 60 días apartir de la fecha en que recibió el pago.La parte de su pago que se reinvierte nose gravará hasta que usted la saque de lacuenta IRA tradicional o del plan patronalcalificado.

Podrá reinvertir hasta el 100% de supago que pueda reinvertirse conforme a lodispuesto en la Parte I anterior, incluidauna cantidad igual al 20% de la parte trib-utable que le fue retenida. Si opta porreinvertir el 100% , tendrá que obtener eldinero de otra parte dentro de un plazo de60 días para contribuir a la cuenta IRAtradicional o al plan patronal calificadopara reponer el 20% que se le retuvo. Porotra parte, si reinvierte solamente el 80%de la parte tributable que recibió, tendráque pagar impuesto sobre el 20% que sele retuvo.

Ejemplo: Su pago que puede rein-vertirse de acuerdo con lo establecidoen la Parte I anterior es una suma de$10,000 y puede elegir que se le paguea usted. Recibirá $8,000, y $2,000 seenviarán al IRS como retención delimpuesto sobre el ingreso. Dentro deun plazo de 60 días de haber recibidolos $8,000, usted podrá reinvertir todala cantidad de $10,000 en una cuentaIRA tradicional o en un plan patronalcalificado. Para ello, reinvertirá los$8,000 que recibió del Plan y tendráque obtener $2,000 de otras fuentes(sus ahorros, un préstamo, etc.). En tal

May 6, 2002 842 2002–18 I.R.B.

caso, la cantidad total de $10,000 notributará hasta que la saque de lacuenta IRA tradicional o del planpatronal calificado. Si reinvierte lasuma total de los $10,000, cuando pre-sente su declaración del impuestosobre el ingreso, podría obtener unreembolso de parte o de toda la can-tidad de los $2,000 retenidos.

Si, por otro lado, usted reinvierte sola-mente $8,000, los $2,000 que no rein-virtió tributarán en el año en que seretuvieron. Cuando presente sudeclaración del impuesto sobre elingreso, podría obtener un reembolsode parte de los $2,000 que le fueronretenidos. (Sin embargo, cualquierreembolso será probablemente mayorsi reinvierte toda la cantidad de los$10,000).

Impuesto adicional del 10% que puedeaplicarse a ciertas distribuciones. Lasdistribuciones que se reciben de este Planno están generalmente sujetas al impuestoadicional del 10% que se aplica a dis-tribuciones de otros tipos de planes antesde cumplir 59 años y medio. Sinembargo, cualquier distribución que seaatribuible a una cantidad que usted rein-virtió en el Plan (ajustada para los ren-dimientos de la inversión) de otro tipo deplan patronal calificado o de una cuentaIRA estará sujeta al impuesto adicionaldel 10% si se le distribuye antes de cum-plir usted los 59 años y medio, a menosque le sea aplicable una de las excep-ciones.

Las excepciones al impuesto adicionaldel 10% son generalmente (1) los pagosque se hacen como pagos iguales (o casiiguales) durante su vida o expectativa devida (o durante las vidas y expectativasde vida de usted y su beneficiario); (2) lospagos que se hacen de un plan patronalcalificado después de haber cesado ustedde trabajar para su empleador en el año odespués del año en que cumpla usted 55años; (3) los pagos que se hacen porquese jubila por incapacidad; (4) los pagosque se hacen directamente al gobiernopara pagar un gravamen de impuesto fed-eral; (5) los pagos que se hacen a un ben-eficiario sustituto conforme a una ordenjudicial de asuntos familiares calificada, o(6) los pagos que no exceden de la can-tidad de sus gastos médicos deducibles.Estas excepciones podrían ser diferentes

para las distribuciones de una cuenta IRAtradicional. Véase la Forma 5329 del IRSpara obtener información adicional sobreel impuesto adicional del 10%.

El impuesto adicional del 10% no seaplica a las distribuciones del Plan o decualquier otro plan 457 gubernamental,salvo en la medida en que la distribuciónsea atribuible a una cantidad que ustedreinvirtió en el plan 457 gubernamental(ajustada para los rendimientos de lainversión) de otro tipo de plan patronalcalificado o de una cuenta IRA.

Asimismo, cualquier cantidad rein-vertida del Plan en cualquier otro tipo deplan patronal calificado o en una cuentaIRA tradicional estará sujeta al impuestoadicional del 10% si se le distribuye antesde cumplir usted los 59 años y medio, amenos que le sea aplicable una de lasexcepciones.

Reembolso de préstamos del Plan. Sisu empleo cesa y tiene usted un préstamopendiente con su Plan, su empleadorpuede reducir (o “compensar”) su saldoen el Plan por la cuantía del préstamo queno haya pagado. La cuantía de la com-pensación del préstamo se trata como sifuera una distribución que se le hace austed en el momento de la compensacióny tributará, a menos que usted reinviertauna cantidad igual a la cantidad de lacompensación de su préstamo en otroplan patronal calificado o en una cuentaIRA tradicional dentro de un plazo de 60días a partir de la fecha de la com-pensación. Si la cantidad de la com-pensación de su préstamo es la única can-tidad que usted recibe o se trata como sila hubiera recibido, no se le retendrá nin-guna cantidad de ella. Si recibe otrospagos en efectivo o bienes del Plan, lacantidad de retención del 20% se basaráen la cantidad total que se le haya pagado,incluida la cantidad de la compensacióndel préstamo. La cantidad retenida selimitará a la cantidad de otros pagos enefectivos o bienes que se le hayan hecho.La cantidad de un préstamo del plan conincumplimiento de pago que se considereuna distribución tributable no puede rein-vertirse.

IV. CÓNYUGES SOBREVIVIENTES,BENEFICIARIOS SUSTITUTOS YOTROS BENEFICIARIOS

En general, las reglas que se han resu-mido anteriormente aplicables a los pagosefectuados a los empleados se aplicantambién a los cónyuges sobrevivientes delos empleados y a los cónyuges o ex cón-yuges que son “beneficiarios sustitutos”.Usted es un beneficiario sustituto cuandosu participación en el Plan se debe a una“orden judicial de asuntos familiaresespecificada”, que es una orden dictadapor un tribunal, normalmente en relacióncon un divorcio o una separación legal.

Si usted es un cónyuge sobreviviente oun beneficiario sustituto, podría optar porun pago que puede reinvertirse, como yase ha descrito en la Parte I, efectuado enforma de REINVERSIÓN DIRECTA enuna cuenta IRA tradicional o en un planpatronal calificado o hecho a usted. Sihace que el pago se le haga a usted, puedequedarse con él o reinvertirlo ustedmismo en una cuenta IRA tradicional o enun plan patronal calificado. Así, pues,usted tendrá las mismas opciones que lasdel empleado.

Si es un beneficiario que no sea uncónyuge sobreviviente o un beneficiariosustituto, no podrá optar por una reinver-sión directa ni reinvertir el pago ustedmismo.

Si es un cónyuge sobreviviente, unbeneficiario sustituto u otro beneficiario,su pago no estará normalmente sujeto alimpuesto adicional del 10% que se hadescrito anteriormente en la Parte III,aunque no haya cumplido los 59½.

CÓMO OBTENER INFORMACIÓNADICIONAL

Esta notificación ofrece solamente unresumen de las reglas tributarias federales(no estatales o municipales) que podríanaplicarse a su pago. Las reglas que se handescrito anteriormente son complejas ycontienen muchas condiciones y excep-ciones que no se han incluido en estanotificación. Por lo tanto, debiera consul-tar con el Administrador del Plan o conun asesor de impuestos profesional antesde obtener un pago de sus beneficios delPlan. Puede también encontrar infor-mación más específica sobre el trata-miento fiscal de los pagos percibidos deplanes patronales calificados en la Publi-cación 575, Ingresos de Pensiones y Anu-alidades, y la Publicación 590, Planes de

2002–18 I.R.B. 843 May 6, 2002

Ahorro para la Jubilación, del IRS. Estaspublicaciones se pueden obtener en suoficina local del IRS, a través del sitioweb de la Internet en la direcciónwww.irs.gov o llamando al número1–800–TAX-FORM (1–800–829–3676).

Comments Requested onPossible Amendments toRegulations GoverningChapter 42 Excise Taxes

Announcement 2002–47

The purpose of this announcement isto solicit comments addressing whetherseveral regulations under Chapter 42should be revised with respect to excisetaxes imposed on foundation and organi-zation managers to conform to recently-issued final regulations under section4958 of the Internal Revenue Code (T.D.8978, 67 Fed. Reg. 3076; 2002–7 I.R.B.500). Section 4958 imposes taxes on anytransaction that provides excess economicbenefits to a person in a position to exer-cise substantial influence over the affairsof a public charity or a social welfareorganization. Under section 4958, taxesare imposed both on the disqualified per-son who benefits from an excess benefittransaction and any organization managerwho knowingly participates in an excessbenefit transaction, unless the participa-tion is not willful and is due to reasonablecause. The structure of these section 4958taxes is similar to excise taxes imposedunder Chapter 42 on certain transactionsinvolving private foundations.

The final regulations under section4958 published in January 2002 providethat an organization manager’s participa-tion in an excess benefit transaction willordinarily not be considered knowing tothe extent that, after full disclosure of thefactual situation to an appropriate profes-sional, the organization manager relies ona reasoned written opinion of that profes-sional with respect to elements of thetransaction within the professional’sexpertise. For this purpose, appropriateprofessionals are legal counsel (includingin-house counsel), certified publicaccountants or accounting firms withexpertise regarding the relevant tax lawmatters, and independent valuationexperts who meet specified requirements.

The requirements for appropriate valua-tion experts are modeled after the section170 regulations that define qualifiedappraisers for charitable deduction pur-poses. Under the section 4958 regula-tions, the valuation experts must holdthemselves out to the public as appraisersor compensation consultants; perform therelevant valuations on a regular basis; bequalified to make valuations of the typeof property or services being valued; andinclude in the written opinion a certifica-tion that they meet the preceding require-ments. See Treas. Reg. § 53.4958–1(d)(4)(iii). Organization managers mayseek the opinion of such an expert to helpdetermine whether the economic benefitprovided to a disqualified person in a par-ticular transaction represents fair marketvalue (or reasonable compensation).

Like section 4958, sections 4941(taxes on private foundation self-dealing),4944 (taxes on investments which jeopar-dize a private foundation’s exempt pur-poses), 4945 (taxes on taxable expendi-tures by private foundations), and 4955(taxes on political expenditures of section501(c)(3) organizations) also imposeexcise taxes on foundation managers ororganization managers who knowinglyparticipate in transactions prohibitedunder those sections, unless the participa-tion is not willful and is due to reasonablecause. The regulations under each sectioncontain a safe harbor for managers whodisclose the factual situation to legalcounsel and rely on a reasoned writtenlegal opinion that the particular transac-tion is not a prohibited transaction. Insuch cases, the participation of the man-ager will not ordinarily be considered“knowing” or “willful”, and will ordi-narily be considered “due to reasonablecause”. See Treas. Reg. § 53.4941(a)–1(b)(6); § 53.4944–1(b)(2)(v); § 53.4945–1(a)(2)(vi); § 53.4955–1(b)(7).Treasury Regulation § 53.4944–1(b)(2)(v)provides an additional safe harbor withrespect to taxes on jeopardizing invest-ments, where the foundation managermakes full disclosure to a qualifiedinvestment counsel and relies on theadvice of such counsel. In that instance,the advice must be derived in a mannerconsistent with generally accepted prac-tices of persons who are qualified invest-ment counsel, and the opinion that a par-ticular investment will provide for the

long and short term financial needs of thefoundation must be expressed in writing.Treas. Reg. § 53.4944–1(b)(2)(v).

In connection with the section 4958regulation project, some commentatorssuggested that the “advice of counsel”safe harbors contained in regulationsunder section 4941 (self-dealing) and sec-tion 4945 (taxable expenditures) beexpanded to parallel the safe harbor forreliance on professional advice containedin the section 4958 regulations. Like sec-tion 4958, both sections 4941 and 4945raise issues relating to the reasonablenessof compensation.

Under section 4941, taxes are imposedon acts of self-dealing between a privatefoundation and its disqualified persons.Although most transactions between aprivate foundation and its disqualifiedpersons are absolutely prohibited, section4941 provides an exception for the pay-ment of compensation for personal ser-vices that are reasonable and necessary tothe foundation’s exempt purposes, if thecompensation is not excessive. See sec-tion 4941(d)(2)(E); Treas. Reg. § 53.4941–3(c)(1).

Section 4945 imposes taxes on taxableexpenditures by private foundations,including any amount paid or incurred bya private foundation for any purpose otherthan one specified in section 170(c)(2)(B)(which lists exempt purposes of section501(c)(3) organizations). Reasonablecompensation may be an issue under sec-tion 4945 in connection with the stan-dards for permitted administrativeexpenses. See Treas. Reg. § 53.4945–6(b).

By contrast, section 4944 (jeopardiz-ing investments) and section 4955 (politi-cal expenditures) do not involve fair mar-ket value or reasonable compensationissues.

The section 4958 regulation projectdid not undertake any revisions to theadvice of counsel safe harbors in otherregulations under chapter 42. At this time,the IRS and the Treasury Departmentrequest comments on the issue of whetherconforming revisions to the rules con-tained in the section 4958 regulations areappropriate or advisable in the case ofany or all of the chapter 42 regulationsmentioned above. Please send your com-ments addressing this issue, as well ascomments addressing other areas of

May 6, 2002 844 2002–18 I.R.B.

Chapter 42 regulations that may needupdating, to the following address byAugust 6, 2002, referencing Announce-ment 2002–47:

Internal Revenue ServiceCC:ITA:RU, Room 52281111 Constitution Ave., N.W.Washington, DC 20224

The principal author of this announce-ment is Phyllis D. Haney of the Office ofDivision Counsel/Associate Chief Coun-sel (Tax Exempt and Government Enti-ties). For further information regardingthis announcement, contact Phyllis D.Haney at (202) 622–4290 (not a toll-freecall).

Foundations Status of CertainOrganizations

Announcement 2002–50

The following organizations havefailed to establish or have been unable tomaintain their status as public charities oras operating foundations. Accordingly,grantors and contributors may not, afterthis date, rely on previous rulings or des-ignations in the Cumulative List of Orga-nizations (Publication 78), or on the pre-sumption arising from the filing ofnotices under section 508(b) of the Code.This listing does not indicate that theorganizations have lost their status asorganizations described in section501(c)(3), eligible to receive deductiblecontributions.

Former Public Charities. The follow-ing organizations (which have beentreated as organizations that are not pri-vate foundations described in section509(a) of the Code) are now classified asprivate foundations:

55 Whipple Street Housing DevelopmentFund, Brooklyn, NY

Adult Care Philanthropic Corporation,Roseburg, OR

African-Americans With Disabilities,Wilkinsburg, PA

Algonquin Casino Management, Inc.,Springfield, MA

All Children’s Assistance Fund,Tustin, CA

All-Together, Inc., Westborough, MAAlliance for Recovery, Seattle, WA

American Association Affirmative ActionEducational Foundation,Indianapolis, IN

American Disabled and Senior Citizens,Inc., Shawnee Mission, KS

American Friends of ManchelayTorah, Inc., Chicago, IL

American Indian Festival, Inc.,Cleveland, OH

American Museum of Asmat Art,St. Paul, MN

Amish Innerlight Ministries,Sugar Creek, OH

Andre Sobel River of Life Foundation,Beverly Hills, CA

Animal Refuge Keepers, Inc.,North Augusta, SC

ARC Community HousingOpportunities, Inc., Manville, NJ

Artists Collaborative, Minneapolis, MNAssociation of Skateboarders in Hawaii,

Kailua, HIAugust Ensemble Theatre, Inc.,

River Forest, ILBaldwinsville Masonic Historical

Society, Baldwinsville, NYBehavioral Health Improvement and

Developmental Assistance, Tucson, AZB G C, Inc., Brentwood, TNBig E. Elvin Hayes Foundation,

Crosby, TXBrunswick Trenton Housing Corporation,

Clinton, NJCalifornia Association of American

Physicians & Surgeons Educational,Torrance, CA

Caring for the Hills, Chino Hills, CACarmelites of the Sacred Heart and the

Immaculate Heart, Steubenville, OHCarroll Community Development

Association, Inc., Lakeland, FLCavaliers Booster Club, Inc.,

Cherry Hill, NJCenter for Intercultural Harmony,

Minneapolis, MNChance Connection, Las Vegas, NVCharlotte Dare Advisory Board,

Charlotte, MIChestertown Housing Foundation, Inc.,

Chestertown, MDChestnut Knolls Aviation Foundation,

Inc., London, KYChicago Endowment for the Arts,

Chicago, ILChicago Fine Arts Society, Chicago, ILChild and Adult Development Center of

Houston, Inc., Houston, TXChildren’s Aids Foundation, Inc.,

Binghamton, NY

Childrens Health Foundation, Inc.,Beachwood, NJ

Childrens Place Housing Corporation-Childrens Place Association,Chicago, IL

Chillicothe-Ross CommunityFoundation, Inc., Chillicothe, OH

Cincinnati Consortium for FamilyDevelopment, Inc., Cincinnati, OH

Cleveland Club of the NationalAssociation of Negro Business &Prof., Shaker Heights, OH

Community Housing Corporation,Kamuela, HI

Community Resource and DevelopmentCo., Naperville, IL

Community Youth Home Corp. ofForsyth County Mental Health,Raleigh, NC

Comprehensive Innovations Institute,Tampa, FL

Computer Programming Institute,Bedminster, NJ

Consumers Mental Health Services ofAshtabula County, Inc., Ashtabula, OH

Core Heights, Rapid City, SDCoronado Teen Club, Inc.,

Coronado, CACorporation for Public Information,

Tallmadge, OHCrime Victims Foundation, Inc.,

Temple City, CADance Educators Coalition of Minn.,

St. Paul, MNDeixis Publishing Foundation, Inc.,

Pittsburgh, PADepressive and Manic Depressive

Association of the Leigh Valley,Allentown, PA

Detweiler Corporation, Clifton Park, NYDilley Community Assistance

Corporation, Dilley, TXDistrict 34 Educational Foundation,

Antioch, ILDonald J. Doody Foundation,

Hinsdale, ILDover Exchange Club Childrens

Foundation, Dover, OHDyna-Tek Corporation International,

Fresno, CAE.J. Morris Senior Citizen Community

Outreach Center, Inc.,New Orleans, LA

East Orange L.L. Sports, Inc.East Orange, NJ

Ella and Robert Ridley ScholarshipFoundation, Inc., Winston-Salem, NC

2002–18 I.R.B. 845 May 6, 2002

Empowerment Foundation,Memphis, TN

Enchantment Productions, Inc.,Wrightwood, CA

Fallbrook Chorale, Fallbrook, CAFamily Learning Tree, Inc., Decatur, GAFeather, Riverside, CAFlare, Inc., Flemington, NJFLS, Inc., Laurens, SCForest Meadows East Resident

Management Corp., Jacksonville, FLFort Pocahontas, Ltd., Charles City, VAFoundation for Independent American

Schools World Wide, Evanston, ILFreedom Educational Foundation,

Hudsonville, MIFriends of Arts Education,

Golden Valley, MNFriends of Historic New Salem, Inc.,

New Salem, MAFriends of Joseph & Sarah Levy Senior

Center, Bolingbrook, ILFriends of Oyler Foundation,

Cincinnati, OHFriends of the James R. Leonard

Community Center, Port Huron, MIFriends of the Madison School Forest,

Inc., Madison, WIGenerations Youth and Family Services,

Flint, MIGenesee Oneida Housing Opportunities,

Utica, NYGeorge Cook Jr. Memorial Supplemental

Educational Library Facility,Philadelphia, PA

Glencoe Educational Foundation,Glencoe, IL

Glendale Eruv, Inc., Glendale, WIGlobal Technology Exchange

Foundation, Incorporated,Pennington, NJ

Good News Fellowship, Ketchikan, AKGrafton Improvement Foundation, Inc.,

Grafton, WIGreater Princeton Steinway Society, Inc.,

Princeton, NJGreen Mountain Foundation,

Houston, TXHand-N-Hand Creations, Inc.,

Binghamton, NYHarrisburg Mayors Commission on

Literacy, Harrisburg, PAHemophilia Outreach of Wisconsin, Inc.,

Green Bay, WIHeritage House Group Home,

Columbus, OHHighland Rim Rural Housing Assistance,

McMinnville, TN

Holland Public Schools-Holland BandParents Association, Holland, MI

Homeless Care Foundation, Inc.,Feasterville, PA

Holmes Counseling Center,Carbondale, IL

Hoot Owl Servants Corporation,Spokane, WA

Hope House, Chicago, ILHopewell Valley Soccer Club,

Pennington, NJHudson Consulting for Social Services,

Inc., North Bergen, NJHuntington Community Strings, Inc.,

Huntington, INInstitute of Alternative Healing,

Pacific Palisades, CAInstitute of World Traditional Medicine,

San Francisco, CAInternational Center for Law Trade and

Diplomacy, Inc., Rye Brook, NYInternational Foundation for Mental

Health and Neurosciences, Inc.,Potomac, MD

Interpreters of Southern California, Inc.,Riverside, CA

Irish-American Heritage Foundation ofCentral New York, Inc., Syracuse, NY

Jackson Community Services,Chicago, IL

Job Connection, Inc., Whittier, CAJohn J. Wagner Ministries, Inc.,

Cooper City, FLJubilee Foundation, Prescott, WAJust for Kids Education Foundation,

Bensalem, PaKankakee Track Club, Kankakee, ILKevin J. Lehnert Scholarship Trust Fund,

Crestwood, ILKick-Off, Palmdale, CAKids Citizenship Foundation,

Chicago, ILKids Help Foundation, Schaumburg, ILKids Voting Michigan, Detroit, MIKingdom Harvest Ministries,

Escondido, CAKiwanis Foundation of Table Rock,

Central Point, ORKora Filmworks, Berkeley, CALa Crescent Foundation, Inc.,

La Crescent, MNLady of Grace Room & Board,

Riverside, CALakota Foundation, W. Chester, OHLao Parent-Student-Teacher Association,

San Diego, CALaurel Highlands Academic Foundation,

Uniontown, PA

Learning Immune FunctionEnchancement Foundation,San Francisco, CA

Lifecircles Unlimited, Inc.,Granada Hills, CA

Lolly Cohen Foundation, Inc.,Virginia Beach, VA

Maryland Educational MediaOrganization, Inc., Queenstown, MD

Meals on Wheels Fund, Inc.,Madison, WI

Medical and Scientific InformationOnline, Inc., Indianapolis, IN

Methuen Community Television Corp.,Methuen, MA

Michael P. Corrigan MemorialScholarship Fund, Poughkeepsie, NY

Milwaukee Concert Band, Inc.,Elm Grove, WI

Minnesota Chapter Federal BarAssociation Foundation,Minneapolis, MN

Minuteman Institute for NationalDefense Studies, Alexandria, VA

Mississippi Union Club USA,Incorporated, Indianapolis, IN

Moshannon Valley Parent TeacherOrganization, Houtzdale, PA

Nanston Educational Foundation, Inc.,Norcross, GA

National Organization for WaterAwareness, Wallingford, CT

National Sports Concepts, Inc.,Canton, OH

Naturelands Project, San Diego, CANew Directions Treatment Center,

Danville, ILNew Images, Inc., Pine Bluff, ARNew Jersey Coalition for Inclusive

Education, Inc., Turnersville, NJNew Vision Enterprises, Inc.,

South Pasadena, CAN F A Crew Booster Club, Inc.,

Newburgh, NYNoeticus, Plymouth, MNNorth Bergen Urban Enterprise Zone

Development Corporation,W. Caldwell, NJ

North Caldwell Hoops, Inc.,North Caldwell, NJ

North Philadelphia Financial Partnership,Philadelphia, PA

North Star Academy, Philadelphia, PANortheast Homeownership Consortium,

Inc., Oklahoma City, OKNorthern Kentucky School-to-Work

Partnership, Inc., Covington, KYNueva Esperanza-Camden, Inc.,

Camden, NJ

May 6, 2002 846 2002–18 I.R.B.

Old Bridge Youth Hockey Association,Inc., Hazlet, NJ

Omega Phi Alpha Scholarship FundTrust, Fort Worth, TX

Our Lady of Fatima Society of HolyCross of Harrison, Inc., Harrison, NJ

Our World of Learning, West Mifflin, PAParents and Community Together of

Northeast Cincinnati, Maineville, OHParents Association, Westerville, OHPark Forest Community Development

Corporation, Park Forest, ILParkvision 98, Belleville, ILPartnership FPR Families, Inc.,

Richmond, VAPaseo Gratis Foundation,

San Antonio, TXPass It On, Montclair, NJPenn-Harris-Madison Educational

Foundation, Inc., Mishawaka, INPennsylvania Coalition to Prevent Teen

Pregnancy, Harrisburg, PAPhiladelphia Festival Ballet,

Princeton, NJPinelands Chronically Ill Childrens

Fund, Inc., Little Egg Harbor, NJPipsqueaks, Inc., Pittsburgh, PAPittsburg Sunrise Rotary Foundation,

Inc., Pittsburg, KSPlymouth Education Foundation,

Detroit, MIPolish American Bobsleigh Federation,

Inc., Shavertown, PAPositive People, Inc., Chicago, ILPsychiatric Resource Center, Inc.,

Palm Beach, FLPuerto Rican Education Policy and Law

Center, Harrisburg, PAPurple Onion Production, Inc.,

Wallingford, CTR. Clay Simmons Foundation for

Community and EconomicDevelopment, Starkville, MS

Rainbow Wellness Center, Inc.,Absecon, NJ

Redwood Area Quilters Association,New Ulm, MN

Reform Jewish Day School of GreaterPhiladelphia, Newton, PA

River Falls Community Arts Base, Inc.,River Falls, WI

Rochelle Park Education AssociationPhilanthropic Fund, Inc.,Rochelle Park, NJ

Ronald N. Terrill Memorial Fund, Inc.,Morrisville, VT

Rotary Club of Pike County Foundation,Waverly, OH

Rotary Club of Severna ParkFoundation, Inc., Severna Park, MD

Round Table Services, Philadelphia, PARuby Porter Family Counseling Center,

Forest Park, ILRural Community Housing Assistance,

Smithville, TNRural Housing Assistance, Alamo, TNSaginaw High School Neighborhood

Association, Saginaw, MISan Antonio Mayors Committee for

Employment of People withDisabilities, San Antonio, TX

San Marcos High School Alumni &Associates, Inc., Escondido, CA

Senior Citizens Home Safety Project,New Brunswick, NJ

Show Me Shooters, Inc., St. Louis, MOSilveyville Parents Association,

Dixon, CASingers Companye, Akron, OHSmith College Class of 1946,

Stamford, CTSojourner Truth Center for Ethnic

Diversity, Inc., Chicago, ILSolutions VII, Inc., Washington, DCSouth Jersey Museum of Art and

Culture, Inc., Somerdale, NJSouth Suburban Community Council,

Riverdale, ILSpringfield Volunteer Memorial Fund,

Inc., Springfield, PASt. Charles High School Hockey Club,

Inc., St. Charles, MOSt. Francis Humane Society of Buffalo

County, Inc., Mondovi, WISt. Joseph County Minority Health

Coalition, South Bend, INStaten Island Children’s Campaign

Charitable Tr, Staten Island, NYSudanese-American Community

Development, Minneapolis, MNSunrise Residential, Inc., Tinley Park, ILSusana Mi Amor Fund, Huntington, NYSussex County Knights Hockey Club,

Inc., Newton, NJSwartmore Rotary Charitable Tr,

Media, PATehillah Ministries, Inc., Macon, GATen Ten Foundation, Greenwich, CTTennessee Warbirds, Inc., Prescott, AZTexas Music International, Inc.,

Austin, TXThree Rivers Academic Mentoring, Inc.,

Three Rivers, MIThursday Night Live, Pittsburgh, PATops Rural Housing Programs,

Newport, TN

Tot N Teen Foundation, Inc.,Lake Forest, CA

Tru Development and Human Services,Inc., Jacksonville, FL

UMOJA Works, Washington, DCUnified Human Services, Inc., Wall, NJUnion County Schools Endowment

Fund, Inc., New Albany, MSUnited Congregation of Chester County,

Coatesville, PAUniversal Improvement Association,

Plainfield, NJUpper Bluff Society, Joliet, ILU.S. Friends of Nightingale House, Inc.,

Great Neck, NYVeddersburg, Inc., Amsterdam, NYVerona Educational Foundation, Inc.,

Verona, NJVolunteer Institute for Creative

Educational Science, Rockwood, TNWashington Regional Network for

Livable Communities, Washington, DCWatch Hill Security Trust,

Watch Hill, RIWebster International Associates,

Manchester, MOWest Amwell Township Education

Foundation, Inc., Lambertville, NJWest Deptford Field of Dreams, Inc.,

Thorofare, NJWings for Wishes, Ltd., Greenfield, WIWings of Healing-Minnesota Incest

Recovery Project, Minneapolis, MNWings of Mercy Mid-Michigan, Inc.,

Midland, MIWisconsin Foundation for School Music,

Inc., Madison, WIWoman Theatre, Inc., Philadelphia, PAWomen In Unity Foundation,

Seattle, WAWonder World Enterprises, Blair, NEYpsilanti Band Association, Inc.,

Ypsilanti, MI

If an organization listed above submitsinformation that warrants the renewal ofits classification as a public charity or asa private operating foundation, the Inter-nal Revenue Service will issue a ruling ordetermination letter with the revised clas-sification as to foundation status. Grant-ors and contributors may thereafter relyupon such ruling or determination letteras provided in section 1.509(a)–7 of theIncome Tax Regulations. It is not thepractice of the Service to announce suchrevised classification of foundation statusin the Internal Revenue Bulletin.

2002–18 I.R.B. 847 May 6, 2002

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 Security Act.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.

May 6, 2002 i 2002–18 I.R.B.

Numerical Finding List1

Bulletins 2002–1 through 2002–17

Announcements:

2002–1, 2002–2 I.R.B. 3042002–2, 2002–2 I.R.B. 3042002–3, 2002–2 I.R.B. 3052002–4, 2002–2 I.R.B. 3062002–5, 2002–4 I.R.B. 4202002–6, 2002–5 I.R.B. 4582002–7, 2002–5 I.R.B. 4592002–8, 2002–6 I.R.B. 4942002–9, 2002–7 I.R.B. 5362002–10, 2002–7 I.R.B. 5392002–11, 2002–6 I.R.B. 4942002–12, 2002–8 I.R.B. 5532002–13, 2002–7 I.R.B. 5402002–14, 2002–7 I.R.B. 5402002–15, 2002–7 I.R.B. 5402002–16, 2002–7 I.R.B. 5412002–17, 2002–8 I.R.B. 5612002–18, 2002–10 I.R.B. 6212002–19, 2002–8 I.R.B. 5612002–20, 2002–8 I.R.B. 5612002–21, 2002–8 I.R.B. 5622002–22, 2002–8 I.R.B. 5622002–23, 2002–8 I.R.B. 5632002–24, 2002–9 I.R.B. 6062002–25, 2002–10 I.R.B. 6212002–26, 2002–11 I.R.B. 6292002–27, 2002–11 I.R.B. 6292002–28, 2002–11 I.R.B. 6302002–29, 2002–11 I.R.B. 6312002–30, 2002–11 I.R.B. 6322002–31, 2002–15 I.R.B. 7472002–32, 2002–12 I.R.B. 6642002–33, 2002–12 I.R.B. 6662002–34, 2002–13 I.R.B. 7022002–35, 2002–12 I.R.B. 6672002–36, 2002–13 I.R.B. 7032002–37, 2002–13 I.R.B. 7032002–38, 2002–14 I.R.B. 7382002–39, 2002–14 I.R.B. 7382002–40, 2002–15 I.R.B. 7472002–41, 2002–14 I.R.B. 7392002–42, 2002–14 I.R.B. 7392002–43, 2002–16 I.R.B. 7922002–44, 2002–17 I.R.B. 8092002–48, 2002–17 I.R.B. 809

Court Decisions:

2073, 2002–14 I.R.B. 718

Notices:

2002–1, 2002–2 I.R.B. 2832002–2, 2002–2 I.R.B. 2852002–3, 2002–2 I.R.B. 2892002–4, 2002–2 I.R.B. 2982002–5, 2002–3 I.R.B. 3202002–6, 2002–3 I.R.B. 3262002–7, 2002–6 I.R.B. 489

Notices:—Continued

2002–8, 2002–4 I.R.B. 3982002–9, 2002–5 I.R.B. 4502002–10, 2002–6 I.R.B. 4902002–11, 2002–7 I.R.B. 5262002–12, 2002–7 I.R.B. 5262002–13, 2002–8 I.R.B. 5472002–14, 2002–8 I.R.B. 5482002–15, 2002–8 I.R.B. 5482002–16, 2002–9 I.R.B. 5672002–17, 2002–9 I.R.B. 5672002–18, 2002–12 I.R.B. 6442002–19, 2002–10 I.R.B. 6192002–20, 2002–17 I.R.B. 7962002–21, 2002–14 I.R.B. 7302002–22, 2002–14 I.R.B. 7312002–23, 2002–15 I.R.B. 7422002–24, 2002–16 I.R.B. 7852002–25, 2002–15 I.R.B. 7432002–26, 2002–15 I.R.B. 7432002–28, 2002–16 I.R.B. 7852002–29, 2002–17 I.R.B. 7972002–30, 2002–17 I.R.B. 797

Proposed Regulations:

REG–209135–88, 2002–4 I.R.B. 418REG–209114–90, 2002–9 I.R.B. 576REG–107100–00, 2002–7 I.R.B. 529REG–107366–00, 2002–12 I.R.B. 645REG–118861–00, 2002–12 I.R.B. 651REG–105344–01, 2002–2 I.R.B. 302REG–112991–01, 2002–4 I.R.B. 404REG–115054–01, 2002–7 I.R.B. 530REG–119436–01, 2002–3 I.R.B. 377REG–120135–01, 2002–8 I.R.B. 552REG–125450–01, 2002–5 I.R.B. 457REG–125626–01, 2002–9 I.R.B. 604REG–142299–01, 2002–4 I.R.B. 418REG–159079–01, 2002–6 I.R.B. 493REG–165706–01, 2002–16 I.R.B. 787REG–167648–01, 2002–16 I.R.B. 790REG–102740–02, 2002–13 I.R.B. 701

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. 2522002–9, 2002–3 I.R.B. 3272002–10, 2002–4 I.R.B. 4012002–11, 2002–7 I.R.B. 5262002–12, 2002–3 I.R.B. 3742002–13, 2002–8 I.R.B. 5492002–14, 2002–5 I.R.B. 4502002–15, 2002–6 I.R.B. 4902002–16, 2002–9 I.R.B. 5722002–17, 2002–13 I.R.B. 676

Revenue Procedures—Continued:

2002–18, 2002–13 I.R.B. 6782002–19, 2002–13 I.R.B. 6962002–20, 2002–14 I.R.B. 7322002–22, 2002–14 I.R.B. 7332002–23, 2002–15 I.R.B. 7442002–24, 2002–17 I.R.B. 7982002–25, 2002–17 I.R.B. 8002002–26, 2002–15 I.R.B. 7462002–27, 2002–17 I.R.B. 802

Revenue Rulings:2002–1, 2002–2 I.R.B. 2682002–2, 2002–2 I.R.B. 2712002–3, 2002–3 I.R.B. 3162002–4, 2002–4 I.R.B. 3892002–5, 2002–6 I.R.B. 4612002–6, 2002–6 I.R.B. 4602002–7, 2002–8 I.R.B. 5432002–8, 2002–9 I.R.B. 5642002–9, 2002–10 I.R.B. 6142002–10, 2002–10 I.R.B. 6162002–11, 2002–10 I.R.B. 6082002–12, 2002–11 I.R.B. 6242002–13, 2002–12 I.R.B. 6372002–14, 2002–12 I.R.B. 6362002–15, 2002–13 I.R.B. 6682002–16, 2002–15 I.R.B. 7402002–17, 2002–14 I.R.B. 7162002–18, 2002–16 I.R.B. 7792002–19, 2002–16 I.R.B. 7782002–20, 2002–17 I.R.B. 7942002–21, 2002–17 I.R.B. 793

Tax Conventions:

2002–14 I.R.B. 725

Treasury Decisions:

8968, 2002–2 I.R.B. 2748969, 2002–2 I.R.B. 2768970, 2002–2 I.R.B. 2818971, 2002–3 I.R.B. 3088972, 2002–5 I.R.B. 4438973, 2002–4 I.R.B. 3918974, 2002–3 I.R.B. 3188975, 2002–4 I.R.B. 3798976, 2002–5 I.R.B. 4218977, 2002–6 I.R.B. 4638978, 2002–7 I.R.B. 5008979, 2002–6 I.R.B. 4668980, 2002–6 I.R.B. 4778981, 2002–7 I.R.B. 4968982, 2002–8 I.R.B. 5448983, 2002–9 I.R.B. 5658984, 2002–13 I.R.B. 6688985, 2002–14 I.R.B. 7078986, 2002–16 I.R.B. 780

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.

2002–18 I.R.B. ii May 6, 2002

Finding List of Current Actionson Previously Published Items2

Bulletins 2002–1 through 2002–17

Announcements:

2001–83Modified byAnn. 2002–36, 2002–13 I.R.B. 703

2002–9Corrected byAnn. 2002–30, 2002–11 I.R.B. 632Ann. 2002–35, 2002–12 I.R.B. 667

Notices:

90–24Modified and superseded byNotice 2002–24, 2002–16 I.R.B. 785

98–31Supplemented byAnn. 2002–37, 2002–13 I.R.B. 703

98–43Modified and superseded byNotice 2002–5, 2002–3 I.R.B. 320

2000–11Obsoleted byNotice 2002–3, 2002–2 I.R.B. 289

2001–10Revoked byNotice 2002–8, 2002–4 I.R.B. 398

2001–61Supplemented byNotice 2002–15, 2002–8 I.R.B. 548

2001–68Supplemented byNotice 2002–15, 2002–8 I.R.B. 548

Proposed Regulations:

REG–209135–88Corrected byAnn. 2002–15, 2002–7 I.R.B. 540Ann. 2002–30, 2002–11 I.R.B. 632

REG–251502–96Withdrawn byAnn. 2002–33, 2002–12 I.R.B. 666

REG–107100–00Corrected byAnn. 2002–30, 2002–11 I.R.B. 632

REG–105344–01Corrected byAnn. 2002–7, 2002–5 I.R.B. 459

Proposed Regulations:—Continued

REG–112991–01Corrected byAnn. 2002–30, 2002–11 I.R.B. 632Ann. 2002–38, 2002–14 I.R.B. 738

REG–115054–01Corrected byAnn. 2002–30, 2002–11 I.R.B. 632

REG–119436–01Corrected byAnn. 2002–30, 2002–11 I.R.B. 632

REG–120135–01Corrected byAnn. 2002–30, 2002–11 I.R.B. 632

REG–125450–01Corrected byAnn. 2002–30, 2002–11 I.R.B. 632

REG–125626–01Corrected byAnn. 2002–30, 2002–11 I.R.B. 632

REG–126485–01Corrected byAnn. 2002–30, 2002–11 I.R.B. 632

REG–137519–01Corrected byAnn. 2002–30, 2002–11 I.R.B. 632

REG–142299–01Corrected byAnn. 2002–15, 2002–7 I.R.B. 540Ann. 2002–30, 2002–11 I.R.B. 632

REG–142686–01Corrected byAnn. 2002–30, 2002–11 I.R.B. 632

REG–159079–01Corrected byAnn. 2002–30, 2002–11 I.R.B. 632

Revenue Procedures:

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

84–57Obsoleted byT.D. 8976, 2002–5 I.R.B. 421

87–50Modified byRev. Proc. 2002–10, 2002–4 I.R.B. 401

89–45Superseded byRev. Proc. 2002–23, 2002–15 I.R.B. 744

Revenue Procedures:—Continued

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

97–27Modified and amplified byRev. Proc. 2002–19, 2002–13 I.R.B. 696

98–49Obsoleted byT.D. 8976, 2002–5 I.R.B. 421

99–49Modified and superseded byRev. Proc. 2002–9, 2002–3 I.R.B. 327

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

2000–46Superseded byRev. Proc. 2002–22, 2002–14 I.R.B. 733

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

2001–2Superseded byRev. Proc. 2002–2, 2002–1 I.R.B. 82

2001–3Superseded byRev. Proc. 2002–3, 2002–1 I.R.B. 117

2001–4Superseded byRev. Proc. 2002–4, 2002–1 I.R.B. 127

2001–5Superseded byRev. Proc. 2002–5, 2002–1 I.R.B. 173

2001–6Superseded byRev. Proc. 2002–6, 2002–1 I.R.B. 203

2001–7Superseded byRev. Proc. 2002–7, 2002–1 I.R.B. 249

2001–8Superseded byRev. Proc. 2002–8, 2002–1 I.R.B. 252

2001–13Corrected byAnn. 2002–5, 2002–4 I.R.B. 420

2001–16Modified byAnn. 2002–26, 2002–11 I.R.B. 629

2001–27Supplemented byRev. Proc. 2002–20, 2002–14 I.R.B. 732

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.

May 6, 2002 iii 2002–18 I.R.B.

Revenue Procedures:—Continued

2001–35Obsoleted, except as provided in section 5.02 byRev. Proc. 2002–24, 2002–17 I.R.B. 798

2001–36Superseded byRev. Proc. 2002–3, 2002–1 I.R.B. 117

2001–41Superseded byRev. Proc. 2002–2, 2002–1 I.R.B. 82

2001–51Superseded byRev. Proc. 2002–3, 2002–1 I.R.B. 117

2002–3Modified byRev. Proc. 2002–22 I.R.B. 733

2002–6Modified byNotice 2002–1, 2002–2 I.R.B. 283

2002–8Modified byNotice 2002–1, 2002–2 I.R.B. 283

2002–9Modified and clarified byAnn. 2002–17, 2002–8 I.R.B. 561Modified and amplified byRev. Rul. 2002–9, 2002–10 I.R.B. 614Rev. Proc. 2002–17, 2002–13 I.R.B. 676Rev. Proc. 2002–19, 2002–13 I.R.B. 696Rev. Proc. 2002–27, 2002–17 I.R.B. 802

Revenue Rulings:

55–261Distinguished byRev. Rul. 2002–19, 2002–16 I.R.B. 778

55–747Revoked byNotice 2002–8, 2002–4 I.R.B. 398

61–146Distinguished byRev. Rul. 2002–3, 2002–3 I.R.B. 316

64–328Modified byNotice 2002–8, 2002–4 I.R.B. 398

66–110Modified byNotice 2002–8, 2002–4 I.R.B. 398

73–304Superseded byRev. Proc. 2002–26, 2002–15 I.R.B. 746

73–305Superseded byRev. Proc. 2002–26, 2002–15 I.R.B. 746

76–270Amplified and superseded byRev. Rul. 2002–20, 2002–17 I.R.B. 794

Revenue Rulings:—Continued

79–151Distinguished byRev. Rul. 2002–19, 2002–16 I.R.B. 778

79–284Superseded byRev. Proc. 2002–26, 2002–15 I.R.B. 746

89–29Obsoleted byT.D. 8976, 2002–5 I.R.B. 421

92–19Supplemented in part byRev. Rul. 2002–12, 2002–11 I.R.B. 624

2002–7Corrected byAnn. 2002–13, 2002–7 I.R.B. 540

Treasury Decisions:

8971Corrected byAnn. 2002–20, 2002–8 I.R.B. 561

8972Corrected byAnn. 2002–23, 2002–8 I.R.B. 563

8973Corrected byAnn. 2002–14, 2002–7 I.R.B. 540

8975Corrected byAnn. 2002–21, 2002–8 I.R.B. 562

8976Corrected byAnn. 2002–21, 2002–8 I.R.B. 562

8978Corrected byAnn. 2002–39, 2002–14 I.R.B. 738

2002–18 I.R.B. iv May 6, 2002

INDEXInternal Revenue Bulletins2002–1 through 2002–17

The abbreviation and number in paren-thesis following the index entry refer tothe specific item; numbers in roman anditalic type following the parenthesis referto the Internal Revenue Bulletin in whichthe item may be found and the page num-ber on which it appears.

Key to Abbreviations:Ann AnnouncementCD Court DecisionDO Delegation OrderEO Executive OrderPL Public LawPTE Prohibited Transaction

ExemptionRP Revenue ProcedureRR Revenue RulingSPR Statement of Procedural

RulesTC Tax ConventionTD Treasury DecisionTDO Treasury Department Order

EMPLOYEE PLANSAdvance letter rulings and determination

letters, areas which will not be issuedfrom:Associates Chief Counsel and Division

Counsel/Associate Chief Counsel(TE/GE) (RP 3) 1, 117

Associate Chief Counsel (Interna-tional) (RP 7) 1, 249

Contributions by employer to accidentand health plans (RR 3) 3, 316

Determination letters:Issuing procedures (RP 6) 1, 203Temporary use of draft Form 8717

(Ann 1) 2, 304User fees (Notice 1) 2, 283

EGTRRA, section 401(k) hardship distri-butions; section 414(v) catch-up contri-butions (Notice 4) 2, 298

Eligible rollover distributions, safe harborexplanation (Notice 3) 2, 289

Employee stock ownership plans, divi-dend elections (Notice 2) 2, 285

EMPLOYEE PLANS—Cont.Family and Medical Leave Act and caf-

eteria plans (Ann 4) 2, 306Fringe benefit plans, filing requirement

(Notice 24) 16, 785Full funding limitations:

Weighted average interest rate for:January 2002 (Notice 9) 5, 450February 2002 (Notice 16) 9, 567First quarter 2002 (Notice 26)

15, 743April 2002 (Notice 28) 16, 785

Individual retirement arrangements, sim-plified employee pension plans, etc.,opinion letters (RP 10) 4, 401

Late filing of Form 5500, relief frompenalties (Notice 23) 15, 742

Letter rulings:Determination letters and information

letters issued by Associates ChiefCounsel and Division Counsel/Associate Chief Counsel (TE/GE)(RP 1) 1, 1

Information letters, etc. (RP 4) 1, 127Minimum funding standards, terrorist

attack relief (Notice 7) 6, 489Nonbank trustees and custodians,

approval list (Ann 12) 8, 553Prohibited transactions, proposed class

exemption (Ann 31) 15, 747Qualified retirement plans:

Catch-up contributions, change of dateof public hearing for REG–142499–01 (Ann 24) 9, 606

Determination letter program, exten-sion of comment period (Ann 36)13, 703

Regulations:26 CFR 1.125–3; effect of the Family

and Medical Leave Act on theoperation of cafeteria plans; correc-tion (Ann 4) 2, 306

Technical advice to:Directors and chiefs, appeals offices,

from Associates Chief Counsel andDivision Counsel/Associate ChiefCounsel (TEGE) (RP 2) 1, 82

IRS employees (RP 5) 1, 173User fees, request for letter rulings

(RP 8) 1, 252

EMPLOYMENT TAXApplication of partial undesignated pay-

ments to assessed tax, penalty, andinterest (RP 26) 15, 746

EMPLOYMENT TAX—Cont.Contributions by employer to accident

and health plans (RR 3) 3, 316Disclosure of return information, author-

ity for other agencies to redisclose (TD8968) 2, 274; (REG–105344–01)2, 302; correction (Ann 7) 5, 459

Form W-2, extension of time for employ-ers to furnish to household employees(Ann 19) 8, 561

Frequent flyer miles attributable to busi-ness or official travel (Ann 18)10, 621

Notice of Determination of Worker Clas-sification, procedures (Notice 5) 3, 320

Proposed Regulations:26 CFR 301.6103(p)(2)(B)–1,

removed; 301.6103(p)(2)(B)–1T,added; 602.101(b), amended; disclo-sure of returns and return informa-tion by other agencies (REG–105344–01) 2, 302; correction (Ann7) 5, 459

26 CFR 301.7433–1(a), (d), (e), and(f), revised; civil cause of action forcertain unauthorized collectionactions; withdrawn (Ann 33)12, 666

Regulations:26 CFR 301.6103(p)(2)(B)–1,

removed; 301.6103(p)(2)(B)–1T,added; 602.101(b), amended; disclo-sure of returns and return informa-tion by other agencies (TD 8968)2, 274

Statutory stock options:Change in hearing date for REG–

142686–01 (Ann 11) 6, 494Extension of deadline for comments to

Notices 2001–72 and 2001–73 (Ann8) 6, 494

Unauthorized collection actions, civilcause of action (Ann 33) 12, 666

ESTATE TAXApplication of partial undesignated pay-

ments to assessed tax, penalty, andinterest (RP 26) 15, 746

Disclosure of return information, author-ity for other agencies to redisclose (TD8968) 2, 274; (REG–105344–01)2, 302; correction (Ann 7) 5, 459

May 6, 2002 v 2002–18 I.R.B.

ESTATE TAX—Cont.Proposed Regulations:

26 CFR 301.6103(p)(2)(B)–1,removed; 301.6103(p)(2)(B)–1T,added; 602.101(b), amended; disclo-sure of returns and return informa-tion by other agencies (REG–105344–01) 2, 302; correction (Ann7) 5, 459

26 CFR 301.7433–1(a), (d), (e), and(f), revised; civil cause of action forcertain unauthorized collectionactions; withdrawn (Ann 33)12, 666

Regulations:26 CFR 301.6103(p)(2)(B)–1,

removed; 301.6103(p)(2)(B)–1T,added; 602.101(b), amended; disclo-sure of returns and return informa-tion by other agencies (TD 8968)2, 274

Unauthorized collection actions, civilcause of action (Ann 33) 12, 666

EXCISE TAXAmended quarterly federal excise tax

return, new Form 720X (Ann 10)7, 539

Application of partial undesignated pay-ments to assessed tax, penalty, andinterest (RP 26) 15, 746

Disclosure of return information, author-ity for other agencies to redisclose (TD8968) 2, 274; (REG–105344–01) 2,302; correction (Ann 7) 5, 459

Excise taxes on excess benefit transac-tions (TD 8978) 7, 500; correction(Ann 39) 14, 738

Forms:720, time for filing by eligible air car-

riers (TD 8983) 9, 565720X, Amended Quarterly Federal

Excise Tax Return, new (Ann 10)7, 539

Gambling-related taxes, Indian GamingRegulatory Act (CD 2073) 14, 718

Golden parachute payments (REG–209114–90) 9, 576

Liability for the foreign insurer or rein-surer excise tax (REG–125450–01)5, 457

EXCISE TAX—Cont.Nonconventional source fuel credit,

inflation-adjustment factor, referenceprice for CY 2001 (Notice 30) 17, 797

Prohibited transactions, proposed classexemption (Ann 31) 15, 747

Proposed Regulations:26 CFR 1.280G–1, added; golden

parachute payments (REG–209114–90) 9, 576

26 CFR 46.4374–1, revised; liabilityfor insurance premium excise tax(REG–125450–01) 5, 457

26 CFR 301.6103(p)(2)(B)–1,removed; 301.6103(p)(2)(B)–1T,added; 602.101(b), amended; disclo-sure of returns and return informa-tion by other agencies (REG–105344–01) 2, 302; correction (Ann7) 5, 459

26 CFR 301.7433–1(a), (d), (e), and(f), revised; civil cause of action forcertain unauthorized collectionactions; withdrawn (Ann 33)12, 666

Regulations:26 CFR 40.6071(a)–3, added; time for

eligible air carriers to file the thirdcalendar quarter 2001 Form 720 (TD8983) 9, 565

26 CFR 53.4958–0 through –8, added;53.4958–0T through –8T, removed;301.7611–1, revised; 602.101,amended; excise taxes on excessbenefit transactions (TD 8978) 7,500; correction (Ann 39) 14, 738

26 CFR 301.6103(p)(2)(B)–1,removed; 301.6103(p)(2)(B)–1T,added; 602.101(b), amended; disclo-sure of returns and return informa-tion by other agencies (TD 8968)2, 274

Unauthorized collection actions, civilcause of action (Ann 33) 12, 666

Valuation of stock options for goldenparachute payments (RP 13) 8, 549

EXEMPTORGANIZATIONSAdvance letter rulings and determination

letters, areas which will not be issuedfrom:Associates Chief Counsel and Division

Counsel/Associate Chief Counsel(TE/GE) (RP 3) 1, 117

EXEMPTORGANIZATIONS—Cont.Electronic filing system for exempt orga-

nization returns, development (Ann 27)11, 629

Excise taxes on excess benefit transac-tions (TD 8978) 7, 500; correction(Ann 39) 14, 738

Letter rulings:Determination letters and information

letters issued by Associates ChiefCounsel and Division Counsel/Associate Chief Counsel (TE/GE)(RP 1) 1, 1

Information letters, etc. (RP 4) 1, 127List of organizations classified as private

foundations (Ann 16) 7, 541; (Ann 25)10, 621; (Ann 28) 11, 630; (Ann 32)12, 664

Obligations of state and local govern-ments, refunding issue (REG–165706–01) 16, 787

Proposed Regulations:26 CFR 1.150–1, amended; obliga-

tions of states and political subdivi-sions (REG–165706–01) 16, 787

Qualified 501(c)(3) bonds, gross proceeds(Notice 10) 6, 490

Regulations:26 CFR 53.4958–0 through –8, added;

53.4958–0T through –8T, removed;301.7611–1, revised; 602.101,amended; excise taxes on excessbenefit transactions (TD 8978) 7,500; correction (Ann 39) 14, 738

Revocations (Ann 29) 11, 631Tax-exempt bonds, hospital refinancing

bonds, refunding issues (Ann 43) 16,792

Technical advice to:Directors and chiefs, appeals offices,

from Associates Chief Counsel andDivision Counsel/Associate ChiefCounsel (TEGE) (RP 2) 1, 82

IRS employees (RP 5) 1, 173User fees, request for letter rulings (RP 8)

1, 252

GIFT TAXApplication of partial undesignated pay-

ments to assessed tax, penalty, andinterest (RP 26) 15, 746

2002–18 I.R.B. vi May 6, 2002

GIFT TAX—Cont.Disclosure of return information, author-

ity for other agencies to redisclose (TD8968) 2, 274; (REG–105344–01)2, 302; correction (Ann 7) 5, 459

Proposed Regulations:26 CFR 301.6103(p)(2)(B)–1,

removed; 301.6103(p)(2)(B)–1T,added; 602.101(b), amended; disclo-sure of returns and return informa-tion by other agencies (REG–105344–01) 2, 302; correction (Ann7) 5, 459

26 CFR 301.7433–1(a), (d), (e), and(f), revised; civil cause of action forcertain unauthorized collectionactions; withdrawn (Ann 33) 12,666

Regulations:26 CFR 301.6103(p)(2)(B)–1,

removed; 301.6103(p)(2)(B)–1T,added; 602.101(b), amended; disclo-sure of returns and return informa-tion by other agencies (TD 8968)2, 274

Unauthorized collection actions, civilcause of action (Ann 33) 12, 666

INCOME TAXAccounting, unit livestock price method

(REG–125626–01) 9, 604Advance letter rulings and determination

letters, areas which will not be issuedfrom:Associates Chief Counsel and Division

Counsel/Associate Chief Counsel(TE/GE) (RP 3) 1, 117

Associate Chief Counsel (Interna-tional) (RP 7) 1, 249

Advance Pricing Agreement (APA) pro-gram for 2001 (Ann 40) 15, 747

Agent, definition for certain purposes(REG–120135–01) 8, 552

Allocation of loss with respect to stockand other personal property (TD 8973)4, 391; correction (Ann 14) 7, 540

Application of partial undesignated pay-ments to assessed tax, penalty, andinterest (RP 26) 15, 746

Automobile owners and lessees, determi-nation of correct tax liability, 2002inflation adjustment (RP 14) 5, 450

Averaging of farm income (TD 8972) 5,443; correction (Ann 23) 8, 563

INCOME TAX—Cont.Capitalized costs, impact fees (RR 9) 10,

614Charitable contributions, substantiation

requirements relief (Notice 25) 15, 743Classification of certain business entities,

check-the-box regulations (TD 8970)2, 281

Combat zone personnel, tax relief (Notice17) 9, 567

Consolidated returns, loss disallowance,duplicated loss (Notice 11) 7, 526;(Notice 18) 12, 644

Contributions by employer to accidentand health plans (RR 3) 3, 316

Credits:Low-income housing credit:

Resident population estimates, 2002(Notice 13) 8, 547

Satisfactory bond, “bond factor”amounts for the period: Januarythrough March 2002 (RR 8)9, 564

Tax-exempt bond financing (RR 21)17, 793

New markets tax credit (TD 8971)3, 308; correction (Ann 20) 8, 561;(REG–119436–01) 3, 377

Nonconventional source fuel credit,inflation adjustment factor, referenceprice for CY 2001 (Notice 30) 17,797

Damage actions for unlawful collections(REG–107366–00) 12, 645

Dealers in securities futures contracts, let-ter rulings (RP 11) 7, 526

Deduction and capitalization of expendi-tures, rules and standards, public com-ment (Ann 9) 7, 536; correction (Ann35) 12, 667

Deemed sale or acquisition of an insur-ance company’s assets, application ofsection 338 (REG–118861–00) 12, 651

Disallowance of deductions and creditsfor failure to file timely return (TD8981) 7 496; (REG–107100–00)7, 529

Disaster relief for September 11, 2001,terrorist attack for:Tentative carryback adjustments; post-

ponement of time to apply (Notice15) 8, 548

INCOME TAX—Cont.Disclosure of return information, author-

ity for other agencies to redisclose (TD8968) 2, 274; (REG–105344–01) 2,302; correction (Ann 7) 5, 459

Electronic and magnetic filing, specifica-tions for questionable Forms W-4,updated information (Ann 26) 11, 629

Enrolled agent renewal (Ann 41) 14, 739Entity classification election, relief (RP

15) 6, 490Extension for filing Form 1042-S (Ann

34) 13, 702Forms:

1042-S, reporting to nonresidentaliens, withholding agents, filingextension (Ann 34) 13, 702

8850, electronic submission (Ann 44)17, 809

Frequent flyer miles attributable to busi-ness or official travel (Ann 18) 10, 621

Gain recognition, section 469 (Notice 29)17, 797

Golden parachute payments (REG–209114–90) 9, 576

Guidance priority list, comments (Notice22) 14, 731

Hedging transactions (TD 8985) 14, 707Home-based business tax avoidance

schemes (Ann 48) 17, 809Industry Issue Resolution (IIR) Program,

establishment for resolution of taxissues (Notice 20) 17, 796

Inflation-adjusted items for 2001, expa-triation, correction (Ann 5) 4, 420

Insurance companies:Computation of life insurance reserves

for annuity contracts using NAICActuarial Guideline 33, changesbasis subject to section 807(f) (RR 6)6, 460

Interest rate tables (RR 12) 11, 624Tentative differential earnings rate and

tentative recomputed differentialearnings rate (Notice 19) 10, 619

Interest:Investment:

Federal short-term, mid-term, andlong-term rates for:

January 2002 (RR 2), 271;correction (Ann 13) 7, 540

February 2002 (RR 5) 6, 461March 2002 (RR 10) 10, 616April 2002 (RR 17) 14, 716

May 6, 2002 vii 2002–18 I.R.B.

INCOME TAX—Cont.

Rates:Underpayments and overpayments,

quarter beginning:April 1, 2002 (RR 13) 12, 367

Inventory:Automobile dealers, replacement cost

method of accounting (RP 17) 13,676

Dollar-value LIFO and inventory priceindex computation (IPIC) methods(TD 8976) 5, 421; correction (Ann22) 8, 562

LIFO:Price indexes used by department

stores for:November 2001 (RR 4) 4, 389December 2001 (RR 7) 8, 543January 2002 (RR 14) 12, 636February 2002 (RR 18) 16, 779

Letter rulings, Determination letters, andinformation letters issued by AssociatesChief Counsel and Division Counsel/Associate Chief Counsel (TE/GE) (RP1) 1, 1

Like-kind exchanges, definition of dis-qualified person (TD 8982) 8, 544

Loss limitation rules (TD 8984) 13, 668;(REG–102740–02) 13, 701

Major disaster and emergency areas list-ing (RR 11) 10, 608

Materials and supplies, restaurant small-wares (RP 12) 3, 374

Medical expense deduction, weight-lossprogram (RR 19) 16, 778

Methods of accounting:Automatic consent to change:

Certain methods of accounting (RP9) 3, 327; correction (Ann 17)8, 561

To the cash method and the materi-als and supplies method (Notice14) 8, 547

Depreciation of tires, safe harbormethod, original tire capitalizationmethod (RP 27) 17, 802

Involuntary changes, discussion ofissues (Ann 37) 13, 703

Prior consent, automatic consent tochanges in (RP 19) 13, 696

Service-imposed changes (RP 18) 13,678

Miscellaneous federal tax matters, correc-tion of language referring taxpayers tothe IRS Internet site for several pro-posed regulations (Ann 30) 11, 632

INCOME TAX—Cont.Mortgage bonds and credit certificates,

median income figures–2002 (RP 24)17, 798

Notice and opportunity for hearing:Before levy (TD 8980) 6, 477Upon filing of notice of federal tax

lien (TD 8979) 6, 466Obligations of state and local govern-

ments, refunding issue (REG–165706–01) 16, 787

Partnerships:Basis adjustments upon the sale of a

corporate partner’s stock (TD 8986)16, 780; (REG–167648–01) 16, 790

Form 1065 electronic filing waiverrequest (Ann 3) 2, 305

Optional election to make monthlysection 706(a) computations (RP 16)9, 572

Patriots’ Day, filing date (Notice 12)7, 526

Payment of internal revenue taxes bycredit card and debit card (TD 8969)2, 276

Private foundations, organizations nowclassified as (Ann 16) 7, 541; (Ann 25)10, 621; (Ann 28) 11, 630; (Ann 32)12, 664

Proposed Regulations:26 CFR Parts 1, 31, 46, and 301; mis-

cellaneous federal tax matters; cor-rection of language referring taxpay-ers to the IRS Internet site forseveral proposed regulations (Ann30) 11, 632

26 CFR 1.41–0, –3, –8, amended;1.41–4, revised; credit for increasingresearch activities (REG–112991–01) 4, 404; correction (Ann 38) 14,738

26 CFR 1.45D–1, added; new marketstax credit (REG–119436–01) 3, 377

26 CFR 1.66–1 through –5, added;treatment of community income forcertain individuals not filing jointreturns (REG–115054–01) 7, 530

26 CFR 1.150–1, amended; obliga-tions of states and political subdivi-sions (REG–165706–01) 16, 787

INCOME TAX—Cont.

26 CFR 1.197–0, revised; 1.197–2,amended; 1.338–0, –1, amended;1.338–11, added; 1.381(c)(22)–1,amended; 1.1060–1, amended;application of section 338 to insur-ance companies (REG–118861–00)12, 651

26 CFR 1.280G–1, added; goldenparachute payments (REG–209114–90) 9, 576

26 CFR 1.337(d)–2, added; 1.1502–20(i), added; 1.1502–32(b)(4)(v),added; loss limitation rules (REG–102740–02) 13, 701

26 CFR 1.337(d)–6, –7, added; certaintransfers of property to regulatedinvestment companies (RICs) andreal estate investment trusts (REITs)(REG–142299–01, REG–209135–88) 4, 418; notice of public hearing(Ann 6) 5, 458; correction (Ann 15)7, 540

26 CFR 1.705–1, –2, amended;amendments to rules for determina-tion of basis of partner’s interest,special rules (REG–167648–01) 16,790

26 CFR 1.471–6, amended; unit live-stock price method (REG–125626–01) 9, 604

26 CFR 1.874–1, amended; 1.882–4,amended; disallowance of deduc-tions and credits for failure to filetimely return (REG–107100–00)7, 529

26 CFR 1.1441–1, amended;301.6109–1, amended; taxpayeridentification number rule wheretaxpayer claims treaty rate and isentitled to an unexpected payment(REG–159079–01) 6, 493

26 CFR 301.6103(1)–1, added;301.6103(m)–1, added; definition ofagent for certain purposes (REG–120135–01) 8, 552

26 CFR 301.6103(p)(2)(B)–1,removed; 301.6103(p)(2)(B)–1T,added; 602.101(b), amended; disclo-sure of returns and return informa-tion by other agencies (REG–105344–01) 2, 302; correction (Ann7) 5, 459

2002–18 I.R.B. viii May 6, 2002

INCOME TAX—Cont.

26 CFR 301.7426–2, added;301.7430–1, –2, –3, –6, amended;301.7430–8, added; 301.7433–1,amended; 301.7433–2, added; civilcause of action for damages causedby unlawful tax collection actions,including actions taken in violationof section 362 or section 524 of thebankruptcy code (REG–107366–00),12, 645

26 CFR 301.7433–1(a), (d), (e), and(f), revised; civil cause of action forcertain unauthorized collectionactions; withdrawn (Ann 33) 12, 666

Publication 1245, Specifications for Fil-ing Form W-4, Employee’s Withhold-ing Allowance Certificate, Magneti-cally or Electronically, updatedinformation for questionable FormsW-4 (Ann 26) 11, 629

Qualified 501(c)(3) bonds, gross proceeds(Notice 10) 6, 490

Qualified research, credit computation(REG–112991–01) 4, 404; correction(Ann 38) 14, 738

Qualified zone academy bonds, limitationfor 2002 (RP 25) 17, 800

Regulations:26 CFR 1.45D–1T, added; 602.101(b),

amended; new markets tax credit(TD 8971) 3, 308; correction (Ann20) 8, 561

26 CFR 1.337(d)–2, amended;1.337(d)–2T, added; 1.1502–20(i),added; 1.1502–20T, added; 1.1502–32, amended; 1.1502–32T, added;602.101, amended; loss limitationrules (TD 8984) 13, 668

26 CFR 1.337(d)–5T, amended;1.337(d)–6T, –7T, added; 602.101,amended; certain transfers of prop-erty to regulated investment compa-nies (RICs) and real estate invest-ment trusts (REITs) (TD 8975) 4,379; correction (Ann 21) 8, 562

26 CFR 1.472–8, amended; 602.101,revised; dollar-value LIFO regula-tions; inventory price index compu-tation (IPIC) method (TD 8976) 5,421; correction (Ann 22) 8, 562

26 CFR 1.705–1, amended; 1.705–2,added; determination of basis ofpartner’s interest, special rules (TD8986) 16, 780

INCOME TAX—Cont.

26 CFR 1.861–8, –8T, amended;1.865–1, added; 1.865–1T, –2T,removed; 1.865–2, amended;1.904–4, amended; allocation of losswith respect to stock and other per-sonal property (TD 8973) 4, 391;correction (Ann 14) 7, 540

26 CFR 1.874–1, amended; 1.874–1T,added; 1.882–4, amended; 1.882–4T, added; disallowance of deduc-tions and credits for failure to filetimely return (TD 8981) 7, 496

26 CFR 1.1031(k)–1, revised; defini-tion of disqualified person (TD8982) 8, 544

26 CFR 1.1221–2, revised;1.1256(e)–1, revised; 602.101,amended; hedging transactions (TD8985) 14, 707

26 CFR 1.1301–1, added; 602.101,amended; averaging of farm income(TD 8972) 5, 443; correction (Ann23) 8, 563

26 CFR 1.1441–6, amended; 1.1441–1T, –6T, added; 301.6109–1,revised; 301.6109–1T, added; tax-payer identification number rulewhere taxpayer claims treaty rateand is entitled to an unexpected pay-ment (TD 8977) 6, 463

26 CFR 1.6050I–0, –1, amended; crossreferencing section 5331 of title 31relating to reporting of certain cur-rency transactions by nonfinancialtrades or businesses under the BankSecrecy Act (TD 8974) 3, 318

26 CFR 301.6103(k)(9)–1, added;301.6103(k)(9)–1T, removed;301.6311–1, revised; 301.6311–2,added; 301.6311–2T, removed; pay-ment by credit card and debit card(TD 8969) 2, 276

26 CFR 301.6103(p)(2)(B)–1,removed; 301.6103(p)(2)(B)–1T,added; 602.101(b), amended; disclo-sure of returns and return informa-tion by other agencies (TD 8968)2, 274

26 CFR 301.6320–1, added;301.6320–1T, removed; notice andopportunity for hearing upon filingof notice of federal tax lien (TD8979) 6, 466

INCOME TAX—Cont.

26 CFR 301.6330–1, added;301.6330–1T, removed; notice andopportunity for hearing before levy(TD 8980) 6, 477

26 CFR 301.7701–3, amended; classi-fication of certain business entities,check-the-box regulations (TD8970) 2, 281

Rental real estate, undivided fractionalinterests (RP 22) 14, 733

Renewal of continuing professional edu-cation sponsor agreements (Ann 42) 14,739

Reporting of certain currency transactionsby nonfinancial trades or businesses tothe IRS and FinCEN (TD 8974) 3, 318

Restrictions on disclosure and use of taxreturn information by tax return prepar-ers (Notice 6) 3, 326

Revocations, exempt organizations (Ann29) 11, 631

Section 911(d)(4) waiver, 2001 update(RP 20) 14, 732

Spin-offs, employee stock options andrestricted stock (RR 1) 2, 268

Split-dollar life insurance arrangements(Notice 8) 4, 398

Standard Industry Fare Level (SIFL) for-mula (RR 15) 13, 668

Tax conventions:Election to defer U.S. income tax on

certain Canadian pension plans (RP23) 15, 744

Netherlands income tax convention,investment yield tax (RR 16) 15,740

Shipping and aircraft agreement,Republic of Ghana, 14, 725

Tax-exempt bonds, hospital refinancingbonds, refunding issues (Ann 43) 16,792

Tax shelters, tax avoidance using inflatedbasis (Notice 21) 14, 730

Taxpayer identifying number, rule for cer-tain foreign individuals claiming treatybenefits (TD 8977) 6, 463; (REG–159079–01) 6, 493

Technical advice to:Directors and chiefs, appeals offices,

from Associates Chief Counsel andDivision Counsel/Associate ChiefCounsel (TEGE) (RP 2) 1, 82

IRS employees (RP 5) 1, 173

May 6, 2002 ix 2002–18 I.R.B.

INCOME TAX—Cont.Transfers of property to RICs and REITs

(TD 8975) 4, 379; (REG–142299–01,REG–209135–88) 4, 418; notice ofpublic hearing (Ann 6) 5, 458; correc-tion (Ann 15) 7, 540; correction (Ann21) 8, 562

Treatment of community income for cer-tain individuals not filing joint returns(REG–115054–01) 7, 530

Trust, charitable remainder unitrust (RR20) 17, 794

Unauthorized collection actions, civilcause of action (Ann 33) 12, 666

Valuation of stock options for goldenparachute payments (RP 13) 8, 549

Waiver of accuracy-related penalty fordisclosure of tax shelter treatment (Ann2) 2, 304

SELF-EMPLOYMENTTAXApplication of partial undesignated pay-

ments to assessed tax, penalty, andinterest (RP 26) 15, 746

2002–18 I.R.B. x May 6, 2002