Bulletin No. 2004-11 HIGHLIGHTS OF THIS ISSUEMarch 15, 2004 2004-11 I.R.B. The IRS Mission Provide America’s taxpayers top quality service by helping them understand and meet their

Bulletin No. 2004-11March 15, 2004

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. 2004–23, page 585.Section 355; stock distribution. This ruling examineswhether a distribution that is expected to increase aggregatestock value satisfies the business purpose requirement ofsection 355 of the Code when the increased value is expectedto serve both a corporate business purpose and a shareholderpurpose.

Rev. Rul. 2004–25, page 587.Federal rates; adjusted federal rates; adjusted federallong-term rate and the long-term exempt rate. For pur-poses of sections 382, 642, 1274, 1288, and other sectionsof the Code, tables set forth the rates for March 2004.

Rev. Rul. 2004–26, page 598.Interest rates; underpayments and overpayments. Therate of interest determined under section 6621 of the Codefor the calendar quarter beginning April 1, 2004, will be 5 per-cent for overpayments (4 percent in the case of a corporation),5 percent for underpayments, and 7 percent for large corpo-rate underpayments. The rate of interest paid on the portion ofa corporate overpayment exceeding $10,000 will be 2.5 per-cent.

Rev. Rul. 2004–37, page 583.Reduction in stated principal amount of a recourse noteissued by employee to employer to acquire employerstock. This ruling provides guidance in cases where an em-ployer and employee reduce the stated principal amount of arecourse note issued by an employee to the employer to ac-quire employer stock. This ruling holds that the employee rec-ognizes compensation income equal to the amount of the re-duction.

T.D. 9114, page 589.Final regulations provide for the voluntary electronic furnishingof statements on Forms W–2, Wage and Tax Statement, un-der sections 6041 and 6051 of the Code, and statements onForms 1098–T, Tuition Statement, and Forms 1098–E, StudentLoan Interest Statement, under section 6050S.

Notice 2004–17, page 605.This notice provides that benefits received under the SmallpoxEmergency Personnel Protection Act of 2003 (SEPPA) are ex-empt from income and employment taxes.

Notice 2004–19, page 606.This notice withdraws Notice 98–5, but announces that theIRS will continue to scrutinize abusive transactions that are de-signed to generate foreign tax credits and will challenge theclaimed tax consequences of such transactions under princi-ples of existing law. The notice also describes the approachthat Treasury and the IRS are using to address transactions in-volving inappropriate foreign tax credit results. Notice 98–5withdrawn and Notice 2003–76 modified.

Notice 2004–20, page 608.This notice describes a transaction involving the purported ac-quisition of stock of a foreign target corporation, an electionunder section 338, and a prearranged plan to sell the targetcorporation’s assets in a transaction that gives rise to foreigntax without corresponding income for U.S. tax purposes. Thenotice identifies this transaction, and substantially similar trans-actions, as listed transactions that are subject to reporting,registration, and list maintenance requirements.

(Continued on the next page)

Finding Lists begin on page ii.

Notice 2004–21, page 609.Low-income housing tax credit; private activity bonds.Resident populations of the 50 states, the District of Columbia,Puerto Rico, and the insular areas are provided for purposesof determining the 2004 calendar year (1) state housing creditceiling under section 42(h) of the Code, (2) private activity bondvolume cap under section 146, and (3) private activity bondvolume limit under section 142(k)(5).

EXEMPT ORGANIZATIONS

Announcement 2004–15, page 612.A list is provided of organizations now classified as private foun-dations.

EMPLOYMENT TAX

Rev. Rul. 2004–37, page 583.Reduction in stated principal amount of a recourse noteissued by employee to employer to acquire employerstock. This ruling provides guidance in cases where an em-ployer and employee reduce the stated principal amount of arecourse note issued by an employee to the employer to ac-quire employer stock. This ruling holds that the employee rec-ognizes compensation income equal to the amount of the re-duction.

Notice 2004–17, page 605.This notice provides that benefits received under the SmallpoxEmergency Personnel Protection Act of 2003 (SEPPA) are ex-empt from income and employment taxes.

ADMINISTRATIVE

Notice 2004–18, page 605.This notice requests public comment regarding the propertreatment of capitalized amounts that facilitate an acquisitionof a trade or business, change in the capital structure of abusiness entity, and certain other transactions.

March 15, 2004 2004-11 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. Bul-letin contents are consolidated semiannually into CumulativeBulletins, 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, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

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,Tax Conventions and Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.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 Sec-retary (Enforcement).

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

The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.*

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.

* Beginning with Internal Revenue Bulletin 2003–43, we are publishing the index at the end of the month, rather than at the beginning.

2004-11 I.R.B. March 15, 2004

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 42.—Low-IncomeHousing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof March 2004. See Rev. Rul. 2004-25, page 587.

Section 83.—PropertyTransferred in ConnectionWith Performance ofServices26 CFR 1.83–4: Special rules.(Also §§ 108, 3121, 3306, 3401, 1.1001–3.)

Reduction in stated principal amountof a recourse note issued by employeeto employer to acquire employer stock.This ruling provides guidance in caseswhere an employer and employee reducethe stated principal amount of a recoursenote issued by an employee to the em-ployer to acquire employer stock. Thisruling holds that the employee recognizescompensation income equal to the amountof the reduction.

Rev. Rul. 2004–37

ISSUE

If an employee issued a recourse noteto his or her employer in satisfaction ofthe exercise price of an option to acquirethe employer’s stock and the employer andemployee subsequently agree to reduce thestated principal amount of the note, doesthe employee recognize compensation in-come under § 83 of the Internal RevenueCode?

FACTS

In Year 1, Employer, a corporation,grants a nontransferable, nonstatutory op-tion to its Employee to purchase 1,000shares of Employer common stock at anexercise price of $75 per share, the fairmarket value of a share of Employer stockat the time the option is granted. Employeemay exercise the option only during em-ployment with Employer or within 90 daysafter cessation of employment.

On January 1 of Year 2, when the fairmarket value of 1,000 shares of Employerstock is $100,000, Employee exercises the

option and purchases 1,000 shares of Em-ployer stock in exchange for a nontransfer-able recourse note (“Note”) secured by thestock Employee receives on the exercise ofthe option. The Note has a stated princi-pal amount of $75,000, which is payableat maturity on December 31 of Year 11.The Note also provides for payments ofinterest on December 31 of each year theNote is outstanding. The interest rate isone-year LIBOR (determined as of Jan-uary 1 of each year the Note is outstand-ing) plus 25 basis points. The interest rateon the Note is not less than the appropriateapplicable Federal rate (AFR) on the datethe Note is issued. The stock is not subjectto a substantial risk of forfeiture within themeaning of § 83(c).

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

In Years 2 and 3, Employee makes therequired interest payments under the Note.On January 1 of Year 4, the fair marketvalue of the Employer stock has declinedto $50,000 and Employer and Employeeagree to reduce the stated principal amountof the Note from $75,000 to $50,000. Theinterest rate on the Note is not less than theappropriate AFR on the date the Note ismodified.

LAW

Section 83(a) provides that if, in con-nection with the performance of services,property is transferred to any person otherthan the person for whom such servicesare performed, the excess of the fair mar-ket value of the property at the first timethat the rights to the property are eithertransferable or not subject to a substantialrisk of forfeiture (“substantially vested”),whichever occurs earlier, over the amountpaid for the property is included in thegross income of the service provider in thefirst taxable year in which the rights to theproperty are substantially vested.

Section 83(e)(3) provides that § 83does not apply to the transfer of an option

without a readily ascertainable fair marketvalue.

Section 83(h) provides that, in the caseof a transfer of property to which § 83 ap-plies, the person for whom were performedthe services in connection with which theproperty was transferred is allowed a de-duction in an amount equal to the amountincluded under § 83(a), (b), or (d)(2) in thegross income of the person who performedthe services. Such deduction is allowed forthe taxable year of such person in which orwith which ends the taxable year in whichsuch amount is included in the gross in-come of the person who performed suchservices.

Section 1.83–3(a)(1) of the Income TaxRegulations provides that a “transfer” ofproperty occurs when a person acquires abeneficial ownership interest in the prop-erty. A person acquires a beneficial own-ership interest in property when he or shehas been transferred both the right to sharein an increase in the value of the propertyand the obligation to share in the risk ofloss in its value. Whether a transfer has infact occurred is based on all the facts andcircumstances.

Section 1.83–3(g) provides that theterm “amount paid” refers to the value ofany money or property paid for the trans-fer of property to which § 83 applies. Forthis purpose, value does not include anystated or unstated interest.

Section 1.83–4(c) provides that, if anindebtedness that has been treated as an“amount paid” for purposes of § 83 is sub-sequently cancelled, forgiven, or satisfiedfor an amount less than the amount of suchindebtedness, the amount that is not, infact, paid is includible in the gross incomeof the service provider for the taxable yearin which such cancellation, forgiveness, orsatisfaction occurs.

Section 1.83–7(a) provides that thegrant of a nonqualified stock option istaxable to the extent that the option has areadily ascertainable fair market value, de-termined in accordance with § 1.83–7(b).Under § 1.83–7(b), an option that is nottraded on an established market does nothave a readily ascertainable value at thetime of grant unless certain specific condi-tions are all satisfied (including the option

2004-11 I.R.B. 583 March 15, 2004

being transferable, the option not beingsubject to a condition that has a signifi-cant effect on the fair market value of theoption, and the fair market value of the op-tion privilege being readily ascertainable).Under § 1.83–7(a), if the option does nothave a readily ascertainable value at thetime of grant, §§ 83(a) and 83(b) applyat such time as the option is exercised orotherwise disposed of, even though thefair market value of such option may havebecome readily ascertainable before suchtime.

Section 61(a)(12) provides that, in gen-eral, gross income includes income fromthe discharge of indebtedness.

Section 108(a)(1)(B) provides an exclu-sion from gross income for any amountthat would be includible in gross incomeby reason of the discharge of indebted-ness of the taxpayer if the discharge occurswhen the taxpayer is insolvent.

Under § 108(e)(5), for solvent and non-bankrupt taxpayers, if debt owed by a pur-chaser to a seller is reduced, the reductionis a purchase price adjustment and not in-come from discharge of indebtedness. Un-der § 108(e)(5)(C), § 108(e)(5) only ap-plies to reductions that, but for the appli-cation of § 108(e)(5), would be treated asincome to the purchaser from the dischargeof indebtedness.

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

Section 1.1001–3 provides rules todetermine whether a modification of theterms of a debt instrument results in anexchange of the original debt instrumentfor a modified instrument that differs ma-terially either in kind or in extent. If themodification results in an exchange, theadequacy of the interest rate on the modi-fied debt instrument generally is retestedunder the applicable Code section, such as§ 483.

Under § 1.1001–3(b), a modificationof a debt instrument results in an ex-change for purposes of § 1.1001–1(a) ifthe modification is significant. Under

§ 1.1001–3(c), a modification means anyalteration, including any deletion or addi-tion, in whole or in part, of a legal rightor obligation of the issuer or a holder of adebt instrument, whether the alteration isevidenced by an express agreement (oralor written), conduct of the parties, or oth-erwise.

Section 1.1001–3(e) provides rules fordetermining whether a modification is“significant.” Under § 1.1001–3(e)(2), achange in the yield of a debt instrument isa significant modification if the yield com-puted under § 1.1001–3(e)(2)(iii) variesfrom the annual yield on the unmodifieddebt instrument (determined as of thedate of the modification) by more thanthe greater of 1/4 of one percent (25 basispoints) or 5 percent of the annual yieldof the unmodified debt instrument (.05 xannual yield).

Sections 3101 and 3111 impose Fed-eral Insurance Contributions Act (FICA)taxes on “wages,” as that term is definedin § 3121(a). FICA taxes consist of theOld-Age, Survivors and Disability Insur-ance tax (social security tax) and the Hos-pital Insurance tax (Medicare tax). Thesetaxes are imposed both on the employerunder § 3111(a) and (b) and on the em-ployee under § 3101(a) and (b). Section3102(a) provides that the employee por-tion of FICA tax must be collected bythe employer of the taxpayer by deductingthe amount of the tax from the wages asand when paid. Section 31.3102(a)–1(a)of the Employment Tax Regulations pro-vides that the employer is required to col-lect the tax, notwithstanding that wages arepaid in something other than money. Theterm “wages” is defined in § 3121(a) forFICA purposes as all remuneration for em-ployment including the cash value of allremuneration (including benefits) paid inany medium other than cash, with certainspecific exceptions. Section 3121(b) de-fines “employment” for FICA purposes asany service, of whatever nature, performedby an employee for the person employinghim, with certain specific exceptions.

Rules similar to the FICA rules ap-ply with respect to Federal Unemploy-ment Tax Act (FUTA) tax under §§ 3301,3306(b), and 3306(c).

Section 3402(a), relating to incometax withholding, generally requires everyemployer making a payment of wages todeduct and withhold upon these wages

a tax determined in accordance withprescribed tables or computational pro-cedures. Section 3401(a) provides that“wages” for income tax withholdingpurposes means all remuneration forservices performed by an employee forhis employer, including the cash valueof all remuneration (including benefits)paid in any medium other than cash,with certain specific exceptions. Under§ 31.3402(a)–1(c), an employer is re-quired to deduct and withhold income taxnotwithstanding that the wages are paid insomething other than money (for example,wages paid in stock or bonds) and to payover the tax in money. If the wages arepaid in property other than money, theemployer should make necessary arrange-ments to insure that the amount of the taxrequired to be withheld is available forpayment in money.

Sections 31.3121(a)–1(e), 31.3306(b)–1(e), and 31.3401(a)–1(a)(4) provide thatin general the medium in which the remu-neration is paid is immaterial. It may bepaid in cash or other than in cash. Remu-neration paid in any medium other thancash is computed on the basis of the fairmarket value of such items at the timeof payment. Sections 31.3121(a)–1(i),31.3306(b)–1(i), and 31.3401(a)–1(a)(5)provide that, unless specifically excepted,remuneration for employment constituteswages even though at the time paid therelationship of employer and employee nolonger exists between the person in whoseemploy the services were performed andthe individual who performed the services.

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

ANALYSIS

Under § 1.83–7(b), the option grantedto Employee did not have a readily ascer-tainable fair market value at the time ofgrant. Therefore, § 83 applies when the op-tion is exercised and stock is transferred toEmployee.

March 15, 2004 584 2004-11 I.R.B.

Employee acquired beneficial owner-ship of the shares of Employer stock inYear 2 because, at that time, Employee ac-quired both the right to enjoy any increasein the value of the shares and the risk ofa decline in the value of the shares. Ac-cordingly, for purposes of § 83, the shareswere transferred to Employee in Year 2.Employee’s Note, with an issue price of$75,000, constituted the amount paid byEmployee for the shares under § 1.83–3(g)in Year 2. Employee included $25,000in gross income under § 83(a) in Year 2,the excess of the fair market value of Em-ployer stock at the time of transfer over theamount paid.

Under § 1.83–4(c), if an indebtednessthat has been treated as an “amount paid”for purposes of § 83 is subsequently can-celled, forgiven, or satisfied for an amountless than the amount of such indebtedness,the amount that is not, in fact, paid is in-cludible in the gross income of the ser-vice provider for the taxable year in whichsuch cancellation, forgiveness, or satisfac-tion occurs. Thus, if the reduction of thestated principal amount of the Note is acancellation, forgiveness, or satisfaction ofthe indebtedness for an amount less thanthe amount of such indebtedness, the re-duction of the stated principal amount is amedium for payment of compensation byEmployer to Employee, and any incomeresulting from the reduction is not incometo Employee from the discharge of indebt-edness subject to the provisions of section108. Accordingly, the tax consequencesof the reduction are governed by § 83 and§ 1.83–4(c), and not by § 108(a)(1)(B) or§ 108(e)(5).

Whether the reduction of the statedprincipal amount of the Note is a cancel-lation, forgiveness, or satisfaction for anamount less than the amount of the Note,and, thus, whether an amount is includiblein income under § 1.83–4(c), is deter-mined in accordance with § 1.1001–3.Under § 1.1001–3(e)(2), if a modifica-tion to the stated principal amount of anote produces a significant change in thenote’s yield, the modification is signifi-cant. A significant modification results inan exchange of the unmodified note forthe modified note, which, depending onthe issue price of the modified note andthe adjusted issue price of the unmodifiednote, may have tax consequences for boththe issuer and holder of the note.

In this case, the reduction in the statedprincipal amount of the Note is a signifi-cant modification under § 1.1001–3(e)(2).As a result, there is an exchange of the un-modified Note for the modified Note be-tween Employee and Employer and a sat-isfaction of the original indebtedness. Un-der § 1.83–4(c), the amount that is not, infact, paid, and thus the amount includibleas compensation by Employee, is the ex-cess of the adjusted issue price of the un-modified Note over the issue price of themodified Note.

The modified Note has adequate statedinterest under § 483. Under § 1273(b)(4),the modified Note has an issue priceof $50,000. The adjusted issue priceof the unmodified Note is $75,000.See § 1.1275–1(b). As a result, under§ 1.83–4(c), Employee recognizes com-pensation income of $25,000 (the excess ofthe adjusted issue price of the unmodifiedNote ($75,000) over the issue price of themodified Note ($50,000)). This amount isrecognized in Year 4, the taxable year inwhich the modification occurred.

HOLDING

If an employee issued a recourse noteto his or her employer in satisfaction ofthe exercise price of an option to acquirethe employer’s stock and the employer andemployee subsequently agree to reduce thestated principal amount of the note, the em-ployee generally recognizes compensationincome under § 83 at the time of the re-duction. Thus, under the facts describedabove, Employee recognizes $25,000 ofcompensation income on January 1 of Year4 under § 1.83–4(c). If Employer andEmployee instead were, for example, toreduce the interest rate on the Note orchange the Note from recourse to non-recourse, that modification also generallywould result in compensation income forEmployee.

In addition, the compensation is wagesfor purposes of FICA, FUTA, and incometax withholding.

DRAFTING INFORMATION

The principal authors of this revenueruling are Jean M. Casey of the Officeof the Division Counsel/Associate ChiefCounsel (Tax Exempt and GovernmentEntities) and Rebecca Asta of the Asso-ciate Chief Counsel (Financial Institutions

and Products). For further information re-garding § 83, contact Ms. Casey at (202)622–6030 and for further information re-garding § 1.1001–3, contact Ms. Asta at(202) 622–3930 (not toll-free calls).

Section 108.—Income FromDischarge of Indebtedness

What are the income and employment tax conse-quences when an employer and employee reduce thestated principal of a recourse note issued by the em-ployee to the employer to acquire employer stock?See Rev. Rul. 2004-37, page 583.

Section 280G.—GoldenParachute Payments

Federal short-term, mid-term, and long-term ratesare set forth for the month of March 2004. See Rev.Rul. 2004-25, page 587.

Section 355.—Distributionsof Stock and Securities ofa Controlled Corporation26 CFR 1.355–2: Limitations.

Section 355; stock distribution. Thisruling examines whether a distributionthat is expected to increase aggregatestock value satisfies the business purposerequirement of section 355 of the Codewhen the increased value is expected toserve both a corporate business purposeand a shareholder purpose.

Rev. Rul. 2004–23

ISSUE

Whether a distribution that is expectedto cause the aggregate value of the stockof a distributing corporation and the stockof a controlled corporation to exceed thepre-distribution value of the distributingcorporation’s stock satisfies the corpo-rate business purpose requirement of§ 355 of the Internal Revenue Code and§ 1.355–2(b) of the Income Tax Regula-tions when the increased value is expectedto serve a corporate business purpose ofeither the distributing corporation or thecontrolled corporation (or both), even if itbenefits the shareholders of the distribut-ing corporation.

2004-11 I.R.B. 585 March 15, 2004

FACTS

D is a corporation that indirectly con-ducts Business 1 and Business 2 throughits subsidiaries. Some subsidiaries engageonly in Business 1 and others only in Busi-ness 2. D’s common stock is widely heldand publicly traded.

The two businesses attract different in-vestors, some of which are averse to in-vesting in D because of the presence ofthe other business. Therefore, D believes,and D’s investment banker has advised D,that if each business were conducted in aseparate and independent corporation, thestock of the two corporations likely wouldtrade publicly for a higher price, in the ag-gregate, than the stock of D if it contin-ued to represent an interest in both busi-nesses. The expected increase in the ag-gregate trading price of the stock of D andC over the pre-distribution trading price ofD would not, however, derive in any sig-nificant respect from any Federal tax ad-vantage made available to either D or C bythe transaction.

With the intent and expectation of in-creasing the aggregate trading price ofthe common stock representing Business1 and Business 2, D transfers the sub-sidiaries that engage in Business 2 to anewly formed corporation, C, in exchangefor all of the C stock and distributes theC stock to its common shareholders, prorata. D’s remaining subsidiaries will con-tinue to conduct Business 1.

Increasing the aggregate trading priceof the D and C common stock over thetrading price of the pre-distribution Dcommon stock is expected to confer a ben-efit to existing shareholders. In decidingwhether to undertake the distribution, D’sdirectors consider this expected benefit tothe shareholders, as well as the expectedbenefits to the corporation described be-low. However, D’s directors do not effectthe distribution to facilitate any particularshareholder’s disposition of the stock ofeither D or C.

Apart from the issue of whetherthe business purpose requirement of§ 1.355–2(b) is satisfied, the distributionmeets the requirements of §§ 368(a)(1)(D)and 355.

Situation 1. D uses equity-based in-centives as a significant part of its pro-gram to compensate a significant numberof employees of both Business 1 and Busi-

ness 2. D’s directors wish to enhance thevalue of employee compensation and haveconsidered either granting additional eq-uity-based incentives or making cash pay-ments in lieu of additional equity incen-tives. However, granting additional eq-uity-based incentives would unacceptablydilute D’s existing shareholders’ interests,and making cash payments would be un-duly expensive. Therefore, D undertakesthe separation of Business 2 from Busi-ness 1 with the expectation that its stockvalue will increase and such increase willenhance the value of its equity-based com-pensation, providing D with a real and sub-stantial benefit.

Situation 2. As part of its overall strate-gic planning, D has expanded both Busi-ness 1 and Business 2 through acquisitionsof assets and the stock of other corpora-tions. In some of these acquisitions, D hasused its stock, either in whole or in part, asconsideration. D’s directors expect to con-tinue expanding Business 1 as appropriateacquisition opportunities are identified inthe future. D expects to offer its commonstock as consideration, either in whole orin part, in connection with future acquisi-tions. Therefore D undertakes the separa-tion of Business 2 from Business 1 withthe expectation that its stock value will in-crease and such increase may permit D toeffect such acquisitions in a manner thatpreserves capital with significantly less di-lution of the existing shareholders’ inter-ests, providing D with a real and substan-tial benefit.

LAW

Section 355 provides that if certain re-quirements are met, a corporation may dis-tribute stock and securities in a controlledcorporation to its shareholders and securityholders without causing the distributees torecognize gain or loss.

In addition to the statutory require-ments, the regulations provide that § 355will apply to a transaction only if it iscarried out for one or more corporate busi-ness purposes. Section 1.355–2(b)(1).A transaction is carried out for a corpo-rate business purpose if it is motivated,in whole or substantial part, by one ormore corporate business purposes. Id.A corporate business purpose is a realand substantial non-Federal tax purposegermane to the business of the distribut-

ing corporation, the controlled corpora-tion, or the affiliated group (as definedin § 1.355–3(b)(4)(iv)) to which the dis-tributing corporation belongs. Section1.355–2(b)(2). The principal reason forthe business purpose requirement is toprovide nonrecognition treatment onlyto distributions that are incident to read-justments of corporate structures requiredby business exigencies and that effectonly readjustments of continuing inter-ests in property under modified corporateforms. Section 1.355–2(b)(1). If a cor-porate business purpose can be achievedthrough a nontaxable transaction that doesnot involve the distribution of stock ofa controlled corporation and that is nei-ther impractical nor unduly expensive,then the separation is not carried out forthat corporate business purpose. Section1.355–2(b)(3).

A shareholder purpose (for example,the personal planning purposes of a share-holder) is not a corporate business pur-pose. Section 1.355–2(b)(2). Dependingupon the facts of a particular case, how-ever, a shareholder purpose for a transac-tion may be so nearly coextensive with acorporate business purpose as to precludeany distinction between them. Id. In sucha case, the transaction is carried out forone or more corporate business purposes.Id. A transaction motivated in substantialpart by a corporate business purpose doesnot fail the business purpose requirementmerely because it is motivated in part bynon-Federal tax shareholder purposes. See§ 1.355–2(b)(5), Example (2).

ANALYSIS

Situation 1. Because D believes thatthe increased value of its stock expectedto result from the separation will enhancethe value of its employee compensation,providing a real and substantial benefit toD, the distribution is motivated by a realand substantial non-Federal tax purposegermane to the business of D. Section1.355–2(b)(1) and (2). Further, becausethis purpose cannot be achieved throughanother nontaxable transaction that is nei-ther impractical nor unduly expensive, thedistribution is carried out for a corporatebusiness purpose. Section 1.355–2(b)(2)and (3). Although the increase in stockvalue is expected to benefit the sharehold-ers by increasing the amount they would

March 15, 2004 586 2004-11 I.R.B.

realize on a sale of their shares, this share-holder purpose is so nearly coextensivewith the corporate business purpose as topreclude any distinction between them.Section 1.355–2(b)(2). Therefore, thedistribution is treated as carried out for acorporate business purpose. Id.

Situation 2. Because D expects that theincreased value of its stock expected toresult from the separation may permit Dto effect future acquisitions in a mannerthat preserves capital with significantlyless dilution of the existing sharehold-ers’ interests, providing D with a realand substantial benefit, the distributionis motivated by a real and substantialnon-Federal tax purpose germane to thebusiness of D. Section 1.355–2(b)(1) and(2). Further, because this purpose cannotbe achieved through another nontaxabletransaction that is neither impractical norunduly expensive, the distribution is car-ried out for a corporate business purpose.Section 1.355–2(b)(2) and (3). Althoughthe increase in stock value is expectedto benefit the shareholders by increasingthe amount they would realize on a saleof their shares, this shareholder purposeis so nearly coextensive with the cor-porate business purpose as to precludeany distinction between them. Section1.355–2(b)(2). Therefore, the distributionis treated as carried out for a corporatebusiness purpose. Id.

HOLDING

A distribution that is expected to causethe aggregate value of the stock of a dis-tributing corporation and the stock ofa controlled corporation to exceed thepre-distribution value of the distributingcorporation’s stock satisfies the corporatebusiness purpose requirement of § 355 and§ 1.355–2(b) when the increased value isexpected to serve a corporate business pur-pose of either the distributing corporationor the controlled corporation (or both),even if it benefits the shareholders of thedistributing corporation.

DRAFTING INFORMATION

The principal author of this revenue rul-ing is Jeffrey B. Fienberg of the Officeof Associate Chief Counsel (Corporate).For further information regarding this rev-

enue ruling, contact Mr. Fienberg at (202)622–7930 (not a toll-free call).

Section 382.—Limitationon Net Operating LossCarryforwards and CertainBuilt-In Losses FollowingOwnership Changes

The adjusted applicable federal long-term rate isset forth for the month of March 2004. See Rev. Rul.2004-25, page 587.

Section 412.—MinimumFunding Standards


Section 467.—CertainPayments for the Use ofProperty or Services


Section 468.—SpecialRules for Mining and SolidWaste Reclamation andClosing Costs


Section 482.—Allocationof Income and DeductionsAmong Taxpayers


Section 483.—Interest onCertain Deferred Payments


Section 642.—SpecialRules for Credits andDeductions


Section 807.—Rules forCertain Reserves


Section 846.—DiscountedUnpaid Losses Defined


Section 1001.—Determi-nation of Amount of andRecognition of Gain or Loss26 CFR 1.1001–3: Modifications of debt instruments.


Section 1274.—Determi-nation of Issue Price in theCase of Certain Debt Instru-ments Issued for Property(Also sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates;adjusted federal long-term rate and thelong-term exempt rate. For purposes ofsections 382, 642, 1274, 1288, and othersections of the Code, tables set forth therates for March 2004.

Rev. Rul. 2004–25

This revenue ruling provides variousprescribed rates for federal income taxpurposes for March 2004 (the currentmonth). Table 1 contains the short-term,mid-term, and long-term applicable fed-eral rates (AFR) for the current monthfor purposes of section 1274(d) of theInternal Revenue Code. Table 2 containsthe short-term, mid-term, and long-term

2004-11 I.R.B. 587 March 15, 2004

adjusted applicable federal rates (adjustedAFR) for the current month for purposesof section 1288(b). Table 3 sets forth theadjusted federal long-term rate and thelong-term tax-exempt rate described in

section 382(f). Table 4 contains the ap-propriate percentages for determining thelow-income housing credit described insection 42(b)(2) for buildings placed inservice during the current month. Finally,

Table 5 contains the federal rate for de-termining the present value of annuity, aninterest for life or for a term of years, ora remainder or a reversionary interest forpurposes of section 7520.

REV. RUL. 2004–25 TABLE 1

Applicable Federal Rates (AFR) for March 2004

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-Term

AFR 1.58% 1.57% 1.57% 1.56%110% AFR 1.74% 1.73% 1.73% 1.72%120% AFR 1.89% 1.88% 1.88% 1.87%130% AFR 2.05% 2.04% 2.03% 2.03%

Mid-Term

AFR 3.34% 3.31% 3.30% 3.29%110% AFR 3.67% 3.64% 3.62% 3.61%120% AFR 4.01% 3.97% 3.95% 3.94%130% AFR 4.35% 4.30% 4.28% 4.26%150% AFR 5.03% 4.97% 4.94% 4.92%175% AFR 5.87% 5.79% 5.75% 5.72%

Long-Term

AFR 4.84% 4.78% 4.75% 4.73%110% AFR 5.33% 5.26% 5.23% 5.20%120% AFR 5.82% 5.74% 5.70% 5.67%130% AFR 6.31% 6.21% 6.16% 6.13%


Rates Under Section 382 for March 2004

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjustedAFR

1.30% 1.30% 1.30% 1.30%

Mid-term adjusted AFR 2.47% 2.45% 2.44% 2.44%

Long-term adjustedAFR

4.19% 4.15% 4.13% 4.11%

March 15, 2004 588 2004-11 I.R.B.


Rates Under Section 382 for March 2004

Adjusted federal long-term rate for the current month 4.19%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjustedfederal long-term rates for the current month and the prior two months.) 4.40%


Appropriate Percentages Under Section 42(b)(2) for March 2004

Appropriate percentage for the 70% present value low-income housing credit 7.95%

Appropriate percentage for the 30% present value low-income housing credit 3.41%


Rate Under Section 7520 for March 2004

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,or a remainder or reversionary interest 4.0%

Section 1288.—Treatmentof Original Issue Discountson Tax-Exempt Obligations


Section 3121.—Definitions26 CFR 31.3121(a)–1: Wages.


Section 3306.—Definitions26 CFR 31.3306(b)–1: Wages.


Section 3401.—Definitions26 CFR 31.3401(a)–1: Wages.

What are the income and employment tax conse-quences when an employer and employee reduce the

stated principal of a recourse note issued by the em-ployee to the employer to acquire employer stock?See Rev. Rul. 2004-37, page 583.

Section 6051.—Receiptsfor Employees26 CFR 31.6051–1: Statements for employees.

T.D. 9114

DEPARTMENT OFTHE TREASURYInternal Revenue Service26 CFR Parts 1, 31, 301, and602

Electronic Payee Statements

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document contains finalregulations relating to the voluntary elec-tronic furnishing of statements on FormsW–2, Wage and Tax Statement, undersections 6041 and 6051, and statementson Forms 1098–T, Tuition Statement, andForms 1098–E, Student Loan InterestStatement, under section 6050S. These

final regulations affect businesses, otherfor-profit institutions, and eligible edu-cational institutions that wish to furnishthese required statements electronically.The regulations will also affect individ-uals (recipients), principally employees,students, and borrowers, who consent toreceive these statements electronically.

DATES: Effective Date: These regulationsare effective February 18, 2004.

Applicability Date: These regulationsapply to statements and reports requiredto be furnished after February 13, 2004.The rules relating to maintenance of accessto website statements also apply to state-ments and reports required to be furnishedafter December 31, 2003.

FOR FURTHER INFORMATIONCONTACT: Michael E. Hara at (202)622–4910 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information con-tained in these final regulations has beenreviewed and approved by the Officeof Management and Budget in accor-dance with the Paperwork Reduction Act(44 U.S.C. 3507) under control number1545–1729. Responses to this collection

2004-11 I.R.B. 589 March 15, 2004

of information are required to obtain thebenefit of providing payee statementselectronically.

An agency may not conduct or sponsor,and a person is not required to respondto, a collection of information unless thecollection of information displays a validcontrol number assigned by the Office ofManagement and Budget.

The estimated annual burden per re-spondent or recordkeeper varies depend-ing on individual circumstances, with anestimated average of 6 minutes.

Comments concerning the accuracyof this burden estimate and sugges-tions for reducing this burden shouldbe sent to the Internal Revenue Service,Attn: IRS Reports Clearance Officer,SE:W:CAR:MP:T:SP Washington, DC20224, and to the Office of Manage-ment and Budget, Attn: Desk Officer forthe Department of the Treasury, Officeof Information and Regulatory Affairs,Washington, DC 20503.

Books or records relating to this col-lection of information must be retained aslong as their contents may become mate-rial in the administration of any internalrevenue law. Generally, tax returns and taxreturn information are confidential, as re-quired by 26 U.S.C. 6103.

Background

On February 14, 2001, the IRS pub-lished a notice of proposed rulemaking (bycross reference to temporary regulations,T.D. 8942, 2001–1 C.B. 929) and a no-tice of public hearing (REG–107186–00,2001–1 C.B. 973 [66 FR 10247]). Theregulations proposed to permit the volun-tary electronic furnishing of (1) statementson Form W–2 under sections 6041 and6051, (2) “Tuition Statements” (Form1098–T) under section 6050S, and (3)“Student Loan Interest Statements” (Form1098–E) under section 6050S. These pro-posed amendments were intended (1) toincrease electronic filing consistent withsection 2001 of the Internal RevenueService Restructuring and Reform Actof 1998, Public Law 105–206 (July 22,1998); and (2) to facilitate the use of elec-tronic communication and record keepingconsistent with the Electronic Signaturesin Global and National Commerce Act(E-SIGN Act) Public Law No. 106–229,114 Stat. 464 (2000), 15 U.S.C. sections

7001 through 7006 (2000). The IRS re-ceived written comments on the proposedregulations. A public hearing was held onJuly 25, 2001. After consideration of allthe comments, the proposed regulationsare adopted as revised by this TreasuryDecision. The temporary regulations un-der sections 6041, 6050S, 6051, and 6724are removed.

On December 18, 2002, final regula-tions were issued under section 6050S(T.D. 9029, 2003–1 C.B. 403), addressinginformation reporting for qualified tuitionpayments and reimbursements; T.D. 9029also renumbered the regulations undersection 6050S.

Explanation of Revisions and Summaryof Comments

1. Expansion to Additional Statements,Notices, and Reports

Five commentators recommended thatthe regulations be expanded to allow theelectronic furnishing of additional state-ments and reports, including Forms 5498and 1099–R. After the IRS issued the pro-posed regulations, Congress enacted theJob Creation and Worker Assistance Actof 2002 (JCWAA), Public Law 107–147(March 9, 2002). Section 401 of JCWAApermits the electronic furnishing of anystatement required under subpart B of partIII of subchapter A of chapter 61 of Title26 (sections 6041 through 6050T). Section401 of JCWAA specifically eliminatedthe first-class-mailing requirement thatprevented electronic furnishing of state-ments under sections 6042(c), 6044(e),and 6049(c)(2). In addition, Congressexpressed its support for electronic fur-nishing of all statements required by theCode. See Joint Committee on TaxationStaff, Technical Explanation of the “JobCreation and Worker Assistance Act of2002,” 107th Cong., 2d Sess. (2002) atpage 27.

Section 401 of JCWAA permits theelectronic furnishing of all statementsrequired under sections 6041 through6050T, if the recipient consents to receivethe statement in a manner similar to theone permitted by regulations under section6051 or in such other manner as pro-vided by the Secretary. Because section401 of JCWAA authorizes the electronicfurnishing of all statements required un-

der sections 6041 through 6050T, finalregulations are not necessary to allowthe voluntary electronic furnishing ofstatements required under sections 6041through 6050T, as long as the recipientconsents to receive the statement in amanner similar to the one permitted un-der these final regulations. In addition,Notice 2004–10 (2004–6 I.R.B. 433) per-mits electronic furnishing of the Form1099–R, Distributions From Pensions,Annuities, Retirement or Profit-SharingPlans, IRAs, Insurance Contracts, etc.,Form 1099–MSA, Distributions Froman Archer MSA or Medicare+ChoiceMSA, Form 1099–Q, Payments FromQualified Education Programs (UnderSections 529 and 530), Form 5498, In-dividual Retirement Arrangement Con-tribution Information, Form 5498–ESA,Coverdell ESA Contribution Informa-tion, and Form 5498–MSA, Archer MSAor Medicare+Choice MSA Information,payee statements.

2. Electronic Mail Attachments

The only method of electronic furnish-ing specifically authorized by the proposedregulations required posting on websites.Two commentators recommended that theregulations allow taxpayers to send state-ments as attachments to e-mail. One com-mentator stated that some organizationsmight not wish to provide tax statementsby e-mail because of security and privacyconcerns.

The final regulations do not restrictfurnishers solely to the use of websitetechnology. Treasury and the IRS believethat website technology currently pro-vides the most secure method of furnish-ing statements electronically but do notintend to limit the technology to be usedin furnishing statements electronically.Accordingly, under the final regulations,taxpayers are permitted to furnish state-ments through any electronic means towhich the recipient consents, including bye-mail.

3. Standards to Ensure Confidentiality ofTaxpayer Information

One commentator recommended thatthe IRS adopt security requirements thatrequire simply a sign-on and a password.Two commentators recommended against

March 15, 2004 590 2004-11 I.R.B.

adoption of specific standards. The finalregulations do not adopt specific securitystandards to ensure the confidentialityof recipient information. Rather, thefinal regulations leave room for securitymethodologies to evolve through advancesin technology.

4. Consent Consistent With the E-SIGNAct’s Notice and Consent Provisions

The proposed regulations adopted no-tice and consent requirements consistentwith the E-SIGN Act. Three commenta-tors stated that the notice and consent re-quirements of the regulation should not ap-ply to the electronic transmission of state-ments between employers and employees.One commentator observed that the no-tice and consent requirement will requirethe employer to modify existing databasesand/or create a separate data base to distin-guish between employees who have con-sented to receive statements electronicallyand those who will receive a paper state-ment. The commentator asserted that thecost of these database changes would off-set any savings from electronic furnish-ing. Two commentators stated that creditunions could not efficiently provide state-ments to their employees electronically, ifthe credit unions were subject to the reg-ulation’s (E-SIGN Act’s) notice and con-sent requirements.

The final regulations retain the noticeand consent requirements. The notice andconsent requirements are justified on taxadministration grounds; it is importantthat taxpayers be able to demonstrate theability to receive the tax statements elec-tronically and then actually receive them.Moreover, the IRS and Treasury con-tinue to believe that electronic furnishingshould be voluntary for recipients as wellas furnishers to accommodate recipientswho prefer to receive their statements bytraditional paper delivery for perceivedsecurity and privacy reasons. Section 401of JCWAA, which adopted the notice andconsent requirements in the temporaryregulations, suggests that Congress alsobelieves that electronic furnishing shouldbe voluntary.

5. Verification of Receipt

Two commentators stated that, since therecipient chooses whether to receive infor-mation electronically, the recipient should

be responsible for having the hardware andsoftware necessary to receive the infor-mation electronically. The commentatorspointed out that electronic mail systemsare not standardized and some systems donot provide verification of delivery.

The regulations were not changed toreflect these comments. Both the furnisherand the recipient must voluntarily partic-ipate in the electronic delivery system.Both parties are responsible for ensuringthat the system complies with the require-ments of the regulations.

6. Consent Demonstrating Ability toObtain Statements

One commentator recommended clari-fication of the example provided in the reg-ulations regarding consent from the recip-ient. The commentator noted that a re-cipient’s being able to receive and sende-mail does not necessarily prove that therecipient can access a website and down-load the statement. The commentator rec-ommended an example describing alterna-tives to consent by e-mail.

The rule for consent requires that therecipient demonstrate the ability to accessstatements, which is done in the regula-tion’s example by opening the attachment.However, the IRS agrees with the com-mentator’s observation and has added twoexamples of alternative methods of provid-ing consent in the final regulation.

7. Posting Despite Lack of Consent toElectronic Delivery

Two commentators recommended thatthe regulations expressly permit furnishersto post all their statements to a website andto send each recipient his/her statement asan e-mail attachment, even if the recipi-ent has not consented to electronic furnish-ing. The furnisher could then provide pa-per copies of the statements to recipientswho did not consent to electronic furnish-ing. The commentators cited the ease andeconomy of total versus piecemeal post-ing.

The final regulations do not expresslyadopt the recommendation. However, theregulations do not prohibit a furnisherfrom storing all statements on the webserver. Whether the furnisher stores allstatements or only those statements forwhich consents are received is a businessdecision for the furnisher.

8. Contact Information of Person toWhom a Withdrawal of Consent ShouldBe Furnished

Three commentators noted that provid-ing the contact information for a specificindividual to whom withdrawal of consentshould be furnished may cause confusion,because in many large companies no sin-gle individual can accommodate commu-nications from a potentially large numberof recipients. The commentators suggestthat the regulations provide that the recipi-ents may be provided the name, address,phone number and e-mail address of anindividual or department, such as a Hu-man Resources Department, or Payroll De-partment on the disclosure statement. Theregulations have been amended to providethat either the name of an individual or of adepartment may be included in the disclo-sure statement.

9. Definition of High Importance

Two commentators requested clarification of the term high importance inproposed §§1.6050S–1(a)(6)(i), 1.6050S–2(a)(6)(i), and 31.6051–1(j)(6)(i). Thecommentators noted that if this term refersto assigning a high priority to the e-mail,as some e-mail software allows, there mustbe allowances made for e-mail softwarethat does not have that capability. Thecommentators suggest that in a case wherethe sending or receiving software does notoffer or recognize levels of priority, theregulations should allow the use of a sub-ject line stating “HIGH IMPORTANCE— IMPORTANT TAX RETURN DOCU-MENT AVAILABLE.”

The final regulations do not require fur-nishers to assign high priority to e-mail be-cause some software does not have thiscapability and the IRS and Treasury donot intend to favor any particular technol-ogy. Accordingly, furnishers will not berequired to use e-mail software with the ca-pability of assigning high priority.

10. Use of Other Subject Lines

One commentator expressed concernthat requiring use of the language “IM-PORTANT TAX RETURN DOCUMENTAVAILABLE” on the subject line of e-mailnotices could be exploited to spread a com-puter virus through e-mails with the samesubject line. The commentator suggests

2004-11 I.R.B. 591 March 15, 2004

that each organization be permitted tocreate its own subject line containing thename of the issuing organization.

The regulations have not been amendedto include this modification of the subjectline. It is important to use standard lan-guage to identify the statement. Moreover,to prevent the spread of computer viruses,the recipient need only monitor who sentthe e-mail.

11. Undeliverable Notice

One commentator suggested that whenan electronic notice is returned and thefurnisher notifies the recipient, the recip-ient may give the furnisher a correctedelectronic address to receive the statementelectronically. The consent rule in the finalregulations allows the furnisher to obtain anew address from the recipient and resendthe notice.

12. Allowable Period to Deliver PaperStatement

Two commentators recommended thatif the recipient states that he or she nolonger has an e-mail address or internetaccess, and desires a paper statement, thefurnisher should construe the recipient’sstatement as a withdrawal of consent. Fur-nishers will then be allowed a certain num-ber of days to furnish the paper statementto the recipient. In addition, several mem-bers of the information reporting industryrequested that a cut-off date be providedfor withdrawing consent.

The final regulations retain the rulesregarding withdrawal of consent, but al-low the furnisher to treat a request for apaper statement as a withdrawal of con-sent. Treasury and the IRS do not think theregulations should impose a cut-off datefor withdrawing consent. Furnishers may,however, provide that a withdrawal of con-sent takes effect either on the date it is re-ceived by the furnisher or on a subsequentdate, thereby imposing their own cut-offdate for withdrawing consents.

The final regulations retain the rule thata withdrawal of consent will not affect astatement that has been furnished electron-ically. Thus, if the withdrawal takes ef-fect after the statement is furnished elec-tronically, the statement will be consideredtimely if it was furnished electronically bythe applicable due date. The final regula-tions also provide that if the withdrawal of

consent takes effect before the statementis furnished electronically a paper state-ment must be furnished. In this case, apaper statement furnished after the state-ment due date will be considered timelyif furnished within 30 days after the datethe withdrawal of consent is received bythe furnisher. This extension of time elim-inates the need to address reasonable causefor late filing under section 6724. There-fore, the proposed amendment to the reg-ulations under section 6724 is not adoptedand temporary regulation §301.6724–1T isremoved.

13. Corrected Statements

Two commentators requested that thefurnisher be able to post both Forms W–2cand replacement Forms W–2 on the web-site. The commentators noted that anemployer may prefer to completely re-place an employee’s W–2, if it can bedone before W–2s are filed with the SocialSecurity Administration, thereby avoidingthe W–2c process. The regulations havenot been amended to allow a replacementForm W–2 if a Form W–2c is otherwiserequired. The purpose of the regulationsis to describe the manner in which state-ments may be furnished electronically.The regulations are not intended to changethe established procedures for correctingstatements. Employers should consult IRSforms and instructions for the appropriatecorrection procedures.

14. Access Period

Two commentators recommendedshortening the period of time during whichstatements can be accessed by changingthe period’s end date from October 15thto April 30th (or August 15) to reducethe amount of time computer hackers willhave to access the confidential informationon the website. One commentator notedthat even if a recipient intends to applyfor two extensions, it is highly likely thatthe recipient will have accessed the FormW–2 on the website by April 15 to deter-mine whether a payment was necessaryby that date. One commentator suggestedthat furnishers have the option to maintainstatements on the website until April 30, aslong as they provide replacements throughOctober 15 by paper or as attachments toan e-mail.

The final regulations do not change theaccess period. It is the responsibility ofthe furnisher to maintain a secure website.It is important to allow access to the web-site during the entire filing season (includ-ing the period of extensions) to enable tax-payers to import the information directlyto their returns if they choose to file elec-tronically.

Special Analyses

It has been determined that these fi-nal regulations are not a significant regu-latory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It has also been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. Chapter 5) doesnot apply to these regulations.

Final Regulatory Flexibility Analysis

The collection of information containedin §§1.6041–2, 1.6050S–2, 1.6050S–4,and 31.6051–1 is required if a personrequired to furnish a taxpayer with a state-ment wishes to furnish the statement elec-tronically. This information will be used todetermine that the recipient has consentedto receive the statement electronically.The objectives of these final regulationsare to provide uniform, practicable, andadministrable rules for providing informa-tion statements electronically. The typesof small entities to which the regulationsmay apply are small eligible educationalinstitutions (such as colleges and universi-ties), small corporations and partnerships,and small employers.

There are no known Federal rules thatduplicate, overlap, or conflict with theseregulations. The regulations impose theleast economic burden on small entitiesof all of the alternatives considered. Thecollection of information is required onlyfrom persons receiving the statementselectronically using a method authorizedby the final regulations.

Drafting Information

The principal author of these final reg-ulations is Michael E. Hara, of the Of-fice of Associate Chief Counsel (Proce-dure and Administration), AdministrativeProvisions and Judicial Practice Division.However, other personnel from the IRS

March 15, 2004 592 2004-11 I.R.B.

and Treasury Department participated intheir development.

* * * * *

Adoption of Amendments to theRegulations

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

PART 1—INCOME TAXES

Paragraph 1. The authority citationfor part 1 is amended by removing theentries for “Section 1.6041–2T,” “Section6050S–4T,” and “Section 6050S–2T” andadding entries in numerical order to readin part as follows:

Authority: 26 U.S.C. 7805 * * *Section 1.6041–2 also issued under 26

U.S.C. 6041(d). * * *Section 1.6050S–2 also issued under 26

U.S.C. 6050S(g).Section 1.6050S–4 also issued under 26

U.S.C. 6050S(g). * * *Par. 2. Section 1.6041–2(a)(5) is added

to read as follows:

§1.6041–2 Return of information as topayments to employees.

(a) * * *(5) Statement for employees. An em-

ployer required under this paragraph (a) tofile Form W–2 with respect to an employeeis also required under sections 6041(d) and6051 to furnish a written statement to theemployee. This written statement mustbe furnished on Form W–2 in accordancewith section 6051 and the regulations.

* * * * *

§1.6041–2T [Removed]

Par. 3. Section 1.6041–2T is removed.Par. 4. Section 1.6050S–2 is added to

read as follows:

§1.6050S–2 Information reporting forpayments and reimbursements or refundsof qualified tuition and related expenses.

(a) Electronic furnishing of state-ments—(1) In general. A person requiredby section 6050S(d) to furnish a writ-ten statement regarding payments andreimbursements or refunds of qualifiedtuition and related expenses (furnisher) to

the individual to whom it is required tobe furnished (recipient) may furnish thestatement in an electronic format in lieu ofa paper format. A furnisher who meets therequirements of paragraphs (a)(2) through(6) of this section is treated as furnishingthe required statement.

(2) Consent—(i) In general. The re-cipient must have affirmatively consentedto receive the statement in an electronicformat. The consent may be made elec-tronically in any manner that reasonablydemonstrates that the recipient can accessthe statement in the electronic format inwhich it will be furnished to the recipient.Alternatively, the consent may be made ina paper document if it is confirmed elec-tronically.

(ii) Withdrawal of consent. The consentrequirement of this paragraph (a)(2) is notsatisfied if the recipient withdraws the con-sent and the withdrawal takes effect beforethe statement is furnished. The furnishermay provide that a withdrawal of consenttakes effect either on the date it is receivedby the furnisher or on a subsequent date.The furnisher may also provide that a re-quest for a paper statement will be treatedas a withdrawal of consent.

(iii) Change in hardware or software re-quirements. If a change in the hardwareor software required to access the state-ment creates a material risk that the recipi-ent will not be able to access the statement,the furnisher must, prior to changing thehardware or software, provide the recipientwith a notice. The notice must describe therevised hardware and software required toaccess the statement and inform the recipi-ent that a new consent to receive the state-ment in the revised electronic format mustbe provided to the furnisher. After im-plementing the revised hardware and soft-ware, the furnisher must obtain from therecipient, in the manner described in para-graph (a)(2)(i) of this section, a new con-sent or confirmation of consent to receivethe statement electronically.

(iv) Examples. The following examplesillustrate the rules of this paragraph (a)(2):

Example 1. Furnisher F sends Recipient R a letterstating that R may consent to receive statements re-quired by section 6050S(d) electronically on a web-site instead of in a paper format. The letter containsinstructions explaining how to consent to receive thestatements electronically by accessing the website,downloading the consent document, completing theconsent document and e-mailing the completed con-sent back to F. The consent document posted on the

website uses the same electronic format that F willuse for the electronically furnished statements. Rreads the instructions and submits the consent in themanner provided in the instructions. R has consentedto receive the statements electronically in the mannerdescribed in paragraph (a)(2)(i) of this section.

Example 2. Furnisher F sends Recipient R ane-mail stating that R may consent to receive state-ments required by section 6050S(d) electronically in-stead of in a paper format. The e-mail contains an at-tachment instructing R how to consent to receive thestatements electronically. The e-mail attachment usesthe same electronic format that F will use for the elec-tronically furnished statements. R opens the attach-ment, reads the instructions, and submits the consentin the manner provided in the instructions. R has con-sented to receive the statements electronically in themanner described in paragraph (a)(2)(i) of this sec-tion.

Example 3. Furnisher F posts a notice on its web-site stating that Recipient R may receive statementsrequired by section 6050S(d) electronically instead ofin a paper format. The website contains instructionson how R may access a secure webpage and consentto receive the statements electronically. By accessingthe secure webpage and giving consent, R has con-sented to receive the statements electronically in themanner described in paragraph (a)(2)(i) of this sec-tion.

(3) Required disclosures—(i) In gen-eral. Prior to, or at the time of, a recipient’sconsent, the furnisher must provide to therecipient a clear and conspicuous disclo-sure statement containing each of the dis-closures described in paragraphs (a)(3)(ii)through (viii) of this section.

(ii) Paper statement. The recipient mustbe informed that the statement will be fur-nished on paper if the recipient does notconsent to receive it electronically.

(iii) Scope and duration of consent. Therecipient must be informed of the scopeand duration of the consent. For example,the recipient must be informed whether theconsent applies to statements furnished ev-ery year after the consent is given until itis withdrawn in the manner described inparagraph (a)(3)(v)(A) of this section oronly to the statement required to be fur-nished on or before the January 31 im-mediately following the date on which theconsent is given.

(iv) Post-consent request for a paperstatement. The recipient must be informedof any procedure for obtaining a papercopy of the recipient’s statement aftergiving the consent described in paragraph(a)(2)(i) of this section and whether a re-quest for a paper statement will be treatedas a withdrawal of consent.

(v) Withdrawal of consent. The recipi-ent must be informed that—

2004-11 I.R.B. 593 March 15, 2004

(A) The recipient may withdraw a con-sent by writing (electronically or on pa-per) to the person or department whosename, mailing address, telephone number,and e-mail address is provided in the dis-closure statement;

(B) The furnisher will confirm the with-drawal and the date on which it takes effectin writing (either electronically or on pa-per); and

(C) A withdrawal of consent does notapply to a statement that was furnishedelectronically in the manner described inthis paragraph (a) before the date on whichthe withdrawal of consent takes effect.

(vi) Notice of termination. The recipi-ent must be informed of the conditions un-der which a furnisher will cease furnishingstatements electronically to the recipient.

(vii) Updating information. The recip-ient must be informed of the proceduresfor updating the information needed by thefurnisher to contact the recipient. The fur-nisher must inform the recipient of anychange in the furnisher’s contact informa-tion.

(viii) Hardware and software require-ments. The recipient must be providedwith a description of the hardware andsoftware required to access, print, and re-tain the statement, and the date when thestatement will no longer be available onthe website.

(4) Format. The electronic version ofthe statement must contain all requiredinformation and comply with applicablerevenue procedures relating to substitutestatements to recipients.

(5) Notice—(i) In general. If the state-ment is furnished on a website, the fur-nisher must notify the recipient that thestatement is posted on a website. The no-tice may be delivered by mail, electronicmail, or in person. The notice must provideinstructions on how to access and print thestatement. The notice must include the fol-lowing statement in capital letters, “IM-PORTANT TAX RETURN DOCUMENTAVAILABLE.” If the notice is providedby electronic mail, the foregoing statementmust be on the subject line of the electronicmail.

(ii) Undeliverable electronic address.If an electronic notice described in para-graph (a)(5)(i) of this section is returnedas undeliverable, and the correct electronicaddress cannot be obtained from the fur-

nisher’s records or from the recipient, thenthe furnisher must furnish the notice bymail or in person within 30 days after theelectronic notice is returned.

(iii) Corrected statements. If the fur-nisher has corrected a recipient’s statementthat was furnished electronically, the fur-nisher must furnish the corrected statementto the recipient electronically. If the recip-ient’s statement was furnished through awebsite posting and the furnisher has cor-rected the statement, the furnisher must no-tify the recipient that it has posted the cor-rected statement on the website within 30days of such posting in the manner de-scribed in paragraph (a)(5)(i) of this sec-tion. The corrected statement or the noticemust be furnished by mail or in person if—

(A) An electronic notice of the websiteposting of an original statement was re-turned as undeliverable; and

(B) The recipient has not provided anew e-mail address.

(6) Access Period. Statements fur-nished on a website must be retained onthe website through October 15 of the yearfollowing the calendar year to which thestatements relate (or the first business dayafter such October 15, if October 15 fallson a Saturday, Sunday, or legal holiday).The furnisher must maintain access tocorrected statements that are posted on thewebsite through October 15 of the yearfollowing the calendar year to which thestatements relate (or the first business dayafter such October 15, if October 15 fallson a Saturday, Sunday, or legal holiday)or the date 90 days after the correctedstatements are posted, whichever is later.

(b) Paper statements after withdrawalof consent. If a recipient withdraws con-sent to receive a statement electronicallyand the withdrawal takes effect before thestatement is furnished electronically, a pa-per statement must be furnished. A paperstatement furnished after the statement duedate under this paragraph (b) will be con-sidered timely if furnished within 30 daysafter the date the withdrawal of consent isreceived by the furnisher.

(c) Effective date. This section appliesto statements required to be furnished afterFebruary 13, 2004. Paragraph (a)(6) of thissection also applies to statements requiredto be furnished after December 31, 2003.

§1.6050S–4T [Removed]

Par. 5. Section 1.6050S–4T is re-moved.

Par. 6. Section 1.6050S–4 is added toread as follows:

§1.6050S–4 Information reportingfor payments of interest on qualifiededucation loans.

(a) Electronic furnishing of state-ments—(1) In general. A person requiredby section 6050S(d) to furnish a writtenstatement regarding payments of intereston qualified education loans (furnisher) tothe individual to whom it is required tobe furnished (recipient) may furnish thestatement in an electronic format in lieu ofa paper format. A furnisher who meets therequirements of paragraphs (a)(2) through(6) of this section is treated as furnishingthe required statement.

(2) Consent—(i) In general. The re-cipient must have affirmatively consentedto receive the statement in an electronicformat. The consent may be made elec-tronically in any manner that reasonablydemonstrates that the recipient can accessthe statement in the electronic format inwhich it will be furnished to the recipient.Alternatively, the consent may be made ina paper document if it is confirmed elec-tronically.

(ii) Withdrawal of consent. The consentrequirement of this paragraph (a)(2) is notsatisfied if the recipient withdraws the con-sent and the withdrawal takes effect beforethe statement is furnished. The furnishermay provide that a withdrawal of consenttakes effect either on the date it is receivedby the furnisher or on a subsequent date.The furnisher may also provide that a re-quest for a paper statement will be treatedas a withdrawal of consent.

(iii) Change in hardware or software re-quirements. If a change in the hardwareor software required to access the state-ment creates a material risk that the recipi-ent will not be able to access the statement,the furnisher must, prior to changing thehardware or software, provide the recipientwith a notice. The notice must describe therevised hardware and software required toaccess the statement and inform the recipi-ent that a new consent to receive the state-ment in the revised electronic format mustbe provided to the furnisher. After im-

March 15, 2004 594 2004-11 I.R.B.

plementing the revised hardware and soft-ware, the furnisher must obtain from therecipient, in the manner described in para-graph (a)(2)(i) of this section, a new con-sent or confirmation of consent to receivethe statement electronically.

(iv) Examples. The following examplesillustrate the rules of this paragraph (a)(2):

Example 1. Furnisher F sends Recipient R a letterstating that R may consent to receive statements re-quired by section 6050S(d) electronically on a web-site instead of in a paper format. The letter containsinstructions explaining how to consent to receive thestatements electronically by accessing the website,downloading the consent document, completing theconsent document and e-mailing the completed con-sent back to F. The consent document posted on thewebsite uses the same electronic format that F willuse for the electronically furnished statements. Rreads the instructions and submits the consent in themanner provided in the instructions. R has consentedto receive the statements electronically in the mannerdescribed in paragraph (a)(2)(i) of this section.

Example 2. Furnisher F sends Recipient R ane-mail stating that R may consent to receive state-ments required by section 6050S(d) electronically in-stead of in a paper format. The e-mail contains an at-tachment instructing R how to consent to receive thestatements electronically. The e-mail attachment usesthe same electronic format that F will use for the elec-tronically furnished statements. R opens the attach-ment, reads the instructions, and submits the consentin the manner provided in the instructions. R has con-sented to receive the statements electronically in themanner described in paragraph (a)(2)(i) of this sec-tion.

Example 3. Furnisher F posts a notice on its web-site stating that Recipient R may receive statementsrequired by section 6050S(d) electronically instead ofin a paper format. The website contains instructionson how R may access a secure webpage and consentto receive the statements electronically. By accessingthe secure webpage and giving consent, R has con-sented to receive the statements electronically in themanner described in paragraph (a)(2)(i) of this sec-tion.

(3) Required disclosures—(i) In gen-eral. Prior to, or at the time of, a recipient’sconsent, the furnisher must provide to therecipient a clear and conspicuous disclo-sure statement containing each of the dis-closures described in paragraphs (a)(3)(ii)through (viii) of this section.

(ii) Paper statement. The recipient mustbe informed that the statement will be fur-nished on paper if the recipient does notconsent to receive it electronically.

(iii) Scope and duration of consent. Therecipient must be informed of the scopeand duration of the consent. For example,the recipient must be informed whether theconsent applies to statements furnished ev-ery year after the consent is given until itis withdrawn in the manner described in

paragraph (a)(3)(v)(A) of this section oronly to the statement required to be fur-nished on or before the January 31 im-mediately following the date on which theconsent is given.

(iv) Post-consent request for a paperstatement. The recipient must be informedof any procedure for obtaining a papercopy of the recipient’s statement aftergiving the consent described in paragraph(a)(2)(i) of this section and whether a re-quest for a paper statement will be treatedas a withdrawal of consent.

(v) Withdrawal of consent. The recipi-ent must be informed that—

(A) The recipient may withdraw a con-sent by writing (electronically or on pa-per) to the person or department whosename, mailing address, telephone number,and e-mail address is provided in the dis-closure statement;

(B) The furnisher will confirm the with-drawal and the date on which it takes effectin writing (either electronically or on pa-per); and

(C) A withdrawal of consent does notapply to a statement that was furnishedelectronically in the manner described inthis paragraph (a) before the date on whichthe withdrawal of consent takes effect.

(vi) Notice of termination. The recipi-ent must be informed of the conditions un-der which a furnisher will cease furnishingstatements electronically to the recipient.

(vii) Updating information. The recip-ient must be informed of the proceduresfor updating the information needed by thefurnisher to contact the recipient. The fur-nisher must inform the recipient of anychange in the furnisher’s contact informa-tion.

(viii) Hardware and software require-ments. The recipient must be providedwith a description of the hardware andsoftware required to access, print, and re-tain the statement, and the date when thestatement will no longer be available onthe website.

(4) Format. The electronic version ofthe statement must contain all requiredinformation and comply with applicablerevenue procedures relating to substitutestatements to recipients.

(5) Notice—(i) In general. If the state-ment is furnished on a website, the fur-nisher must notify the recipient that thestatement is posted on a website. The no-tice may be delivered by mail, electronic

mail, or in person. The notice must provideinstructions on how to access and print thestatement. The notice must include the fol-lowing statement in capital letters, “IM-PORTANT TAX RETURN DOCUMENTAVAILABLE.” If the notice is providedby electronic mail, the foregoing statementmust be on the subject line of the electronicmail.

(ii) Undeliverable electronic address.If an electronic notice described in para-graph (a)(5)(i) of this section is returnedas undeliverable, and the correct electronicaddress cannot be obtained from the fur-nisher’s records or from the recipient, thenthe furnisher must furnish the notice bymail or in person within 30 days after theelectronic notice is returned.

(iii) Corrected statements. If the fur-nisher has corrected a recipient’s statementthat was furnished electronically, the fur-nisher must furnish the corrected statementto the recipient electronically. If the re-cipient’s statement was furnished though awebsite posting and the furnisher has cor-rected the statement, the furnisher must no-tify the recipient that it has posted the cor-rected statement on the website within 30days of such posting in the manner de-scribed in paragraph (a)(5)(i) of this sec-tion. The corrected statement or the noticemust be furnished by mail or in person if—

(A) An electronic notice of the websiteposting of an original statement or the cor-rected statement was returned as undeliv-erable; and

(B) The recipient has not provided anew e-mail address.

(6) Access Period. Statements fur-nished on a website must be retained onthe website through October 15 of the yearfollowing the calendar year to which thestatements relate (or the first business dayafter such October 15, if October 15 fallson a Saturday, Sunday, or legal holiday).The furnisher must maintain access tocorrected statements that are posted on thewebsite through October 15 of the yearfollowing the calendar year to which thestatements relate (or the first business dayafter such October 15, if October 15 fallson a Saturday, Sunday, or legal holiday)or the date 90 days after the correctedstatements are posted, whichever is later.

(b) Effective date. This section appliesto statements required to be furnished afterFebruary 13, 2004. Paragraph (a)(6) of this

2004-11 I.R.B. 595 March 15, 2004

section also applies to statements requiredto be furnished after December 31, 2003.

§1.6050S–2T [Removed]

Par. 7. Section 1.6050S–2T is re-moved.

PART 31—EMPLOYMENT TAXESAND COLLECTION OF INCOME TAXAT SOURCE

Par. 8. The authority citation for part31 is amended by revising the entry for“31.6051–1(d)” and removing the entry for“Section 31.6051–1T” to read, in part, asfollows:

Authority: 26 U.S.C. 7805 * * *Section 31.6051–1 also issued under 26

U.S.C. 6051. * * *Par. 9. In §31.6051–1, paragraph (j) is

added to read as follows:

§31.6051–1 Statements for employees.

* * * * *(j) Electronic furnishing of state-

ments—(1) In general. A person requiredby section 6051 to furnish a written state-ment on Form W–2 (furnisher) to theindividual to whom it is required to be fur-nished (recipient) may furnish the FormW–2 in an electronic format in lieu of apaper format. A furnisher who meets therequirements of paragraphs (j)(2) through(6) of this section is treated as furnishingthe Form W–2 in a timely manner.

(2) Consent—(i) In general. The re-cipient must have affirmatively consentedto receive the Form W–2 in an electronicformat. The consent may be made elec-tronically in any manner that reasonablydemonstrates that the recipient can accessthe Form W–2 in the electronic format inwhich it will be furnished to the recipient.Alternatively, the consent may be made ina paper document if it is confirmed elec-tronically.

(ii) Withdrawal of consent. The consentrequirement of this paragraph (j)(2) is notsatisfied if the recipient withdraws the con-sent and the withdrawal takes effect beforethe statement is furnished. The furnishermay provide that a withdrawal of consenttakes effect either on the date it is receivedby the furnisher or on a subsequent date.The furnisher may also provide that a re-quest for a paper statement will be treatedas a withdrawal of consent.

(iii) Change in hardware or software re-quirements. If a change in hardware orsoftware required to access the Form W–2creates a material risk that the recipientwill not be able to access the Form W–2,the furnisher must, prior to changing thehardware or software, provide the recipientwith a notice. The notice must describe therevised hardware and software required toaccess the Form W–2 and inform the re-cipient that a new consent to receive theForm W–2 in the revised electronic for-mat must be provided to the furnisher. Af-ter implementing the revised hardware andsoftware, the furnisher must obtain fromthe recipient, in the manner described inparagraph (j)(2)(i) of this section, a newconsent or confirmation of consent to re-ceive the Form W–2 electronically.

(iv) Examples. The following examplesillustrate the rules of this paragraph (j)(2):

Example 1. Furnisher F sends Recipient R a let-ter stating that R may consent to receive Form W–2electronically on a website instead of in a paper for-mat. The letter contains instructions explaining howto consent to receive Form W–2 electronically by ac-cessing the website, downloading the consent docu-ment, completing the consent document and e-mail-ing the completed consent back to F. The consent doc-ument posted on the website uses the same electronicformat that F will use for the electronically furnishedForm W–2. R reads the instructions and submits theconsent in the manner provided in the instructions. Rhas consented to receive the statements electronicallyin the manner described in paragraph (j)(2)(i) of thissection.

Example 2. Furnisher F sends Recipient R ane-mail stating that R may consent to receive FormW–2 electronically instead of in a paper format. Thee-mail contains an attachment instructing R how toconsent to receive Form W–2 electronically. Thee-mail attachment uses the same electronic formatthat F will use for the electronically furnished FormW–2. R opens the attachment, reads the instructions,and submits the consent in the manner provided in theinstructions. R has consented t