Bulletin No. 2003–26
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Bulletin No. 2003–26
June 30, 2003
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2003–66, page 1115.
Information reporting requirements. This ruling provides guidance to federal agencies about the information reporting requirements under sections 6041A and 6050M of the Code for the payment of services.
Rev. Rul. 2003–67, page 1119.
Obsolete revenue rulings. This ruling obsoletes prior rulings
which have been identified as no longer being determinative.
Rev. Rul. 2003–68, page 1108.
LIFO; price indexes; department stores. The April 2003 Bureau of Labor Statistics price indexes are accepted for use by
department stores employing the retail inventory and last-in, firstout inventory methods for valuing inventories for tax years ended
on, or with reference to, April 30, 2003.
Rev. Rul. 2003–69, page 1118.
Small partnership exception. This ruling addresses the issue of whether a partnership qualifies for the small partnership
exception provided in section 6231(a)(1)(B) of the Code, and thus
does not fall within the unified audit and litigation procedures under sections 6221 through 6234 (TEFRA partnership provisions), where one of the partners is either an organization that
is exempt from taxation under section 501(a) that meets the definition of a C corporation for federal tax purposes or a foreign corporation.
T.D. 9059, page 1109.
Final regulations under section 755 of the Code provide guidance to partnerships and their partners concerning the allocation of basis adjustments among partnership assets.
Notice 2003–37, page 1121.
This notice provides a proposed revenue procedure that establishes an optional procedure for payors who make payments in
the course of their trade or business through payment cards to
determine whether the payments are reportable under sections 6041 and 6041A of the Code.
Announcement 2003–40, page 1132.
This announcement describes changes the IRS is testing under section 32 of the Code in determining qualifying child eligibility under the Earned Income Credit.
ADMINISTRATIVE
T.D. 9060, page 1116.
REG–103809–03, page 1132.
Temporary and proposed regulations incorporate and clarify the
phrase “return information reflected on returns” in conformance with the terms of section 6103(j)(5) of the Code. The temporary regulations also remove certain items of return information that the Department of Agriculture no longer needs for
conducting the census of Agriculture.
(Continued on the next page)
Finding Lists begin on page ii.
Announcement 2003–40, page 1132.
This announcement describes changes the IRS is testing under section 32 of the Code in determining qualifying child eligibility under the Earned Income Credit.
Announcement 2003–43, page 1139.
This announcement contains the annual report concerning the PreFiling Agreement Program of the Large and Mid-Size Business Division of the Service for Calendar Year 2002.
Announcement 2003–44, page 1144.
This document corrects a typographical error in Rev. Rul. 2003–
50, 2003-21 I.R.B. 944. Rev. Rul. 2003–50 modified.
June 30, 2003
2003–26 I.R.B.
The IRS Mission
Provide America’s taxpayers top quality service by helping them
understand and meet their tax responsibilities and by applying
the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of the
Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions,
legislation, court decisions, and other items of general interest. It is published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin contents are consolidated semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, modify,
or amend any of those previously published in the Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are
not published; however, statements of internal practices and procedures that affect the rights and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be relied on, used, or cited as precedents by Service personnel in the
disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court
decisions, rulings, and procedures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the 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 of
the 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, Legislation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the
Department of the Treasury’s Office of the Assistant Secretary
(Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the first Bulletin of the succeeding semiannual period, 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.
2003–26 I.R.B.
June 30, 2003
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 472.—Last-in,
First-out Inventories
Rev. Rul. 2003–68
26 CFR 1.472–1: Last-in, first-out inventories.
LIFO; price indexes; department
stores. The April 2003 Bureau of Labor
Statistics price indexes are accepted for use
by department stores employing the retail
inventory and last-in, first-out inventory
methods for valuing inventories for tax
years ended on, or with reference to, April
30, 2003.
The following Department Store Inventory Price Indexes for April 2003 were issued by the Bureau of Labor Statistics. The
indexes are accepted by the Internal Revenue Service, under § 1.472–1(k) of the Income Tax Regulations and Rev. Proc. 86–
46, 1986–2 C.B. 739, for appropriate
application to inventories of department
stores employing the retail inventory and
last-in, first-out inventory methods for tax
years ended on, or with reference to, April
30, 2003.
The Department Store Inventory Price
Indexes are prepared on a national basis and
include (a) 23 major groups of departments, (b) three special combinations of the
major groups — soft goods, durable goods,
and miscellaneous goods, and (c) a store total, which covers all departments, including some not listed separately, except for
the following: candy, food, liquor, tobacco,
and contract departments.
BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
Apr.
2002
Apr.
2003
Percent Change
from Apr. 2002 to
Apr. 20031
Piece Goods ..............................................................................
Domestics and Draperies ..........................................................
Women’s and Children’s Shoes ...............................................
Men’s Shoes..............................................................................
Infants’ Wear.............................................................................
Women’s Underwear.................................................................
Women’s Hosiery......................................................................
Women’s and Girls’ Accessories..............................................
Women’s Outerwear and Girls’ Wear ......................................
Men’s Clothing .........................................................................
Men’s Furnishings ....................................................................
Boys’ Clothing and Furnishings...............................................
Jewelry ......................................................................................
Notions ......................................................................................
Toilet Articles and Drugs..........................................................
Furniture and Bedding ..............................................................
Floor Coverings ........................................................................
Housewares ...............................................................................
Major Appliances ......................................................................
Radio and Television ................................................................
Recreation and Education2 .......................................................
Home Improvements2 ...............................................................
Auto Accessories2 .....................................................................
488.7
597.7
652.6
902.7
622.2
554.0
356.0
565.6
395.0
600.2
604.4
504.2
905.6
794.8
974.7
627.7
618.7
756.6
222.6
50.8
87.2
125.8
110.8
457.9
568.1
646.4
844.7
597.8
517.2
347.1
552.1
385.7
569.0
589.8
465.5
876.5
794.1
982.5
627.7
584.4
730.3
215.3
46.4
83.7
125.1
111.5
-6.3
-5.0
-1.0
-6.4
-3.9
-6.6
-2.5
-2.4
-2.4
-5.2
-2.4
-7.7
-3.2
-0.1
0.8
0.0
-5.5
-3.5
-3.3
-8.7
-4.0
-0.6
0.6
Groups 1–15: Soft Goods .....................................................................
Groups 16–20: Durable Goods .............................................................
Groups 21–23: Misc. Goods2 ...............................................................
591.9
413.9
97.1
573.8
399.0
94.8
-3.1
-3.6
-2.4
Store Total3................................................................................
526.3
510.0
-3.1
Groups
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
(Footnotes are on the following page.)
2003–26 I.R.B.
1108
June 30, 2003
1
Absence of a minus sign before the percentage change in this column signifies a price increase.
Indexes on a January 1986 = 100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor,
tobacco and contract departments.
2
DRAFTING INFORMATION
The principal author of this revenue ruling is Michael Burkom of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding
this revenue ruling, contact Mr. Burkom at
(202) 622–7718 (not a toll-free call).
Section 755.—Rules for
Allocation of Basis
ternal Revenue Code (Code). On April 5,
2000, a notice of proposed rulemaking
(REG–107872–99, 2000–1 C.B. 911 [65 FR
17829]) under section 755 was published
in the Federal Register. Only one commentator submitted written comments in response to the notice of proposed rulemaking, and no public hearing was requested
or held. After consideration of the comment, the proposed regulations are adopted
as revised by this Treasury decision.
26 CFR 1.755–1: Rules for allocation of basis.
Explanation of Revisions and Summary of Contents
T.D. 9059
1. Summary
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Section 743(b) provides for an optional
adjustment to the basis of partnership property following certain transfers of partnership interests. The amount of the basis adjustment is the difference between the
transferee’s basis in the partnership interest and the transferee’s share of the partnership’s basis in the partnership’s assets.
Once the amount of the basis adjustment
is determined, it is allocated among the partnership’s individual assets pursuant to section 755.
On December 14, 1999, final regulations (T.D. 8847, 1999–2 C.B. 701 [64 FR
69903]) were published in the Federal Register under section 755. Under these regulations, basis adjustments under section
743(b) are allocated among a partnership’s
assets as follows. First, the adjustment is
allocated between the two classes of property described in section 755(b). These
classes of property consist of capital assets and section 1231(b) property (capital
gain property), and any other property of
the partnership (ordinary income property). The amount of a basis adjustment under section 743(b) that is allocated to the
class of ordinary income property is equal
to the total amount of income, gain, or loss
that would be allocated to the transferee
from the sale of all ordinary income property. The amount of the basis adjustment under section 743(b) that is allocated to capital gain property is the total amount of the
basis adjustment under section 743(b) less
the amount of the basis adjustment allo-
Coordination of Sections 755
and 1060; Allocation of Basis
Adjustments Among
Partnership Assets and
Application of the Residual
Method to Certain
Partnership Transactions
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations and removal of
temporary regulations.
SUMMARY: This document finalizes regulations relating to the allocation of basis adjustments among partnership assets under
section 755. The regulations are necessary to implement section 1060, which applies the residual method to certain partnership transactions.
DATES: These regulations are effective
June 9, 2003.
FOR
FURTHER
INFORMATION
CONTACT: Craig Gerson, (202) 622–3050
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to
26 CFR part 1 under section 755 of the In-
June 30, 2003
1109
cated to ordinary income property. The basis adjustment is then allocated to individual assets within each class.
The final regulations issued on December 14, 1999, worked in conjunction with
§1.755–2T. In the case of a basis adjustment under section 743(b) or section 732(d),
the fair market values of all assets other
than goodwill or going concern value were
determined on the basis of all the facts and
circumstances, and the fair market value of
goodwill and going concern value was determined using the residual method. As described more fully in the notice of proposed rulemaking, §1.755–2T was published
prior to the enactment of section 1060(d),
which (as amended in 1993) requires the
residual method to be applied for purposes
of determining the values of section 197 intangibles for purposes of applying section 755. These final regulations implement section 1060(d) and replace §1.755–
2T.
These final regulations differ from
§1.755–2T by using the residual method to
value all section 197 intangibles (not just
goodwill and going concern value). In addition, these final regulations also apply to
basis adjustments under section 734(b) and
contain special rules for certain substituted basis transactions. Finally, for convenience, the provisions of the regulations have been relocated to the beginning
of §1.755–1.
Under these final regulations, a partnership is required to assign values to its assets as follows. First, the partnership must
determine the values of each of its assets
other than section 197 intangibles under all
the facts and circumstances, taking into account section 7701(g) (treating the fair market value of a property as not less than the
amount of any nonrecourse indebtedness to
which the property is subject). The partnership then must determine the gross value
of all partnership assets (partnership gross
value). Last, the partnership is required to
use the residual method to assign values to
the partnership’s section 197 intangibles. For
purposes of these regulations, the term section 197 intangibles includes all section 197
intangibles (as defined in section 197), as
2003–26 I.R.B.
well as any goodwill or going concern value
that would not qualify as a section 197 intangible under section 197.
If the aggregate value of partnership
property other than section 197 intangibles
is equal to or greater than partnership gross
value, then all section 197 intangibles are
deemed to have a value of zero. In all other
cases, the aggregate value of the partnership’s section 197 intangibles (the residual
section 197 intangibles value) is deemed to
equal the excess of partnership gross value
over the aggregate value of partnership
property other than section 197 intangibles.
The residual section 197 intangibles value
must be allocated, first, among section 197
intangibles other than goodwill and going
concern value. Any remaining value is assigned to goodwill and going concern value.
The proposed regulations used the residual method to assign values to all partnership assets, rather than limiting the scope
of the residual method to section 197 intangibles. Treasury and the IRS have concluded that these rules were unduly complex, especially when they applied to
partnerships whose partnership agreements
contained special allocations of partnership income or loss. Accordingly, the final regulations utilize the residual method
only to value section 197 intangibles.
2. Transactions Subject to the
Regulations
Because the proposed regulations used
the residual method to value all partnership assets (and not just section 197 intangibles), it was desirable for all partnerships to value their assets using the same
method. Accordingly, under the authority of
sections 1060(d) and 755, the proposed
regulations applied to all partnerships,
whether or not their assets constituted a
trade or business. In contrast, the final regulations apply the residual method only for
the purpose of valuing section 197 intangibles, which are usually held by partnerships whose assets constitute a trade or business. Thus, the final regulations apply the
residual method only to partnerships whose
assets constitute a trade or business (as described in §1.1060–1(b)(2)).
The proposed regulations specifically applied to basis adjustments under section
732(d). Some references to section 732(d)
have been removed in the final regulations to enhance readability. Neverthe-
2003–26 I.R.B.
less, the final regulations continue to apply to basis adjustments under section
732(d).
3. Methods for Determining Partnership
Gross Value
If a partnership interest is transferred in
a taxable transaction, the transferee’s basis in its partnership interest provides a
frame of reference for determining partnership gross value. In these transactions,
both the proposed and the final regulations generally provide that partnership gross
value is the amount that, if assigned to all
partnership property, would result in a liquidating distribution to the transferee partner equal to that partner’s basis (reduced by
the amount, if any, of such basis that is attributable to partnership liabilities) in the
transferred partnership interest immediately following the relevant transfer.
In certain circumstances involving basis adjustments under section 743(b), such
as where income or loss with respect to particular section 197 intangibles is allocated
differently among partners, partnership gross
value may vary depending on the fair market values of particular section 197 intangibles held by the partnership. In these situations, the final regulations require the
partnership to use a reasonable method, consistent with the purposes of the final regulations, to determine partnership gross value.
In the preamble to the proposed regulations, the IRS and the Treasury Department requested comments regarding how
the residual method applies in the context
of a basis adjustment that results from an
exchange of a partnership interest in which
the transferee’s basis in the interest is determined in whole or in part by reference
to the transferor’s basis in the interest (a
transferred basis exchange). Determining
partnership gross value in such an exchange
is problematic, because the transferee’s basis in the partnership interest does not necessarily have any connection to the fair market values of partnership assets. No
comments were received regarding the specific method to be adopted by the final
regulations.
The IRS and the Treasury Department
also requested comments regarding how the
residual method applies in the context of
basis adjustments under section 734(b). One
commentator suggested that the final regulations should require one method for valuing partnership assets in the case of a “pro
1110
rata” distribution, and another method for
valuing partnership assets in the case of a
“non-pro rata” distribution. The IRS and
the Treasury Department believe that this
approach would be unnecessarily complex.
The final regulations adopt a single
method for determining partnership gross
value that applies to all section 734(b) basis adjustments and to section 743(b) basis adjustments resulting from transferred
basis exchanges. In these circumstances,
partnership gross value is the value of the
entire partnership as a going concern, increased by the amount of partnership liabilities. In the case of a basis adjustment
under section 734(b), the value of the entire partnership as a going concern is determined immediately after the distribution causing the adjustment.
A commentator has suggested that the
same method for determining partnership
gross value should apply to exchanged basis transactions, such as the distribution of
a partnership interest by a partnership. The
final regulations adopt this comment by replacing all references to transferred basis
exchanges with references to substituted basis transactions. Conforming adjustments are
also made to the special rules contained in
§1.755–1(b)(5) for allocating basis adjustments under section 743(b) among a partnership’s assets in these exchanges.
4. Transferors of Partnership Interests
In the preamble to the proposed regulations, comments were requested as to
whether the residual method should be used
to determine the fair market values of partnership assets for purposes of applying section 1(h)(6)(B) (collectibles gain or loss),
section 1(h)(7) (section 1250 capital gain),
and section 751(a) (ordinary income) to the
sale or other disposition of a partnership interest. No comments were received on this
issue. Treasury and the IRS have determined that the potential benefits of a rule
allowing transferors to use the residual
method do not justify the increased complexity that the rule would have created.
5. Other Changes
The final regulations add two clarifying rules for allocating basis adjustments under section 743(b) among a partnership’s assets in the case of a transaction that is not
a substituted basis transaction. The first rule
provides that assets with respect to which
June 30, 2003
the transferee partner has no interest in income, gain, losses, or deductions are not
taken into account in allocating basis adjustments to capital assets. The second rule
provides that in no event may the amount
of any decrease in basis allocated to an item
of capital gain property exceed the partnership’s adjusted basis in that item. If the
amount of a decrease in basis otherwise allocable to a particular capital asset exceeds the partnership’s adjusted basis in that
asset, the transferee’s negative basis adjustment in that asset is limited to the partnership’s adjusted basis in that asset, and
the excess must be applied to reduce the remaining basis, if any, of other capital gain
assets pro rata in proportion to the partnership’s adjusted bases in such assets.
Effective Date
These regulations apply to transfers of
partnership interests and distributions of
property from partnerships that occur on or
after June 9, 2003.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because the
regulations do not impose a collection of
information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f)
of the Internal Revenue Code, the notice of
proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on
small businesses.
Drafting Information
The principal author of these regulations is Craig Gerson of the Office of the
Associate Chief Counsel (Passthroughs and
Special Industries). However, personnel
from other offices of the IRS and the Treasury Department participated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602 are
amended as follows:
June 30, 2003
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry to
read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Section 1.755–2 also issued under 26
U.S.C. 755 and 26 U.S.C. 1060. * * *
Par. 2. Section 1.755–1 is amended as
follows:
1. Paragraph (a) is revised.
2–3. A paragraph heading is added for
paragraph (b)(1)(i).
4. The first two sentences of paragraph
(b)(1)(i) are revised.
5. Paragraph (b)(3)(iii) is redesignated
as paragraph (b)(3)(iv).
6. New paragraph (b)(3)(iii) is added.
7. In paragraph (b)(4)(ii), the Example
is revised.
8. The paragraph heading for paragraph
(b)(5) is revised.
9. Paragraph (b)(5)(i) is revised.
10. In paragraph (b)(5)(iv) Example 1,
the last sentence is amended by removing
the language “transferred basis exchange”
and adding “substituted basis transaction”
in its place.
11. In paragraph (b)(5)(iv) Example 2,
paragraph (iii), the third sentence is
amended by adding the language “this” before the language “paragraph (b)(5)”.
12. In paragraph (c)(5) Example (i) introductory text is revised.
13. Paragraph (d) is revised.
14. Paragraph (e) is added.
The revisions and additions read as
follows:
§1.755–1 Rules for allocation of basis.
(a) In general—(1) Scope. This section provides rules for allocating basis adjustments under sections 743(b) and 734(b)
among partnership property. If there is a basis adjustment to which this section applies, the basis adjustment is allocated
among the partnership’s assets as follows.
First, the partnership must determine the
value of each of its assets under paragraphs
(a)(2) through (5) of this section. Second,
the basis adjustment is allocated between
the two classes of property described in section 755(b). These classes of property consist of capital assets and section 1231(b)
property (capital gain property), and any
other property of the partnership (ordinary income property). For purposes of this
section, properties and potential gain treated
1111
as unrealized receivables under section
751(c) and the regulations thereunder shall
be treated as separate assets that are ordinary income property. Third, the portion of
the basis adjustment allocated to each class
is allocated among the items within the
class. Basis adjustments under section
743(b) are allocated among partnership assets under paragraph (b) of this section. Basis adjustments under section 734(b) are allocated among partnership assets under
paragraph (c) of this section.
(2) Coordination of sections 755 and
1060. If there is a basis adjustment to which
this section applies, and the assets of the
partnership constitute a trade or business (as
described in §1.1060–1(b)(2)), then the partnership is required to use the residual
method to assign values to the partnership’s section 197 intangibles. To do so, the
partnership must, first, determine the value
of partnership assets other than section 197
intangibles under paragraph (a)(3) of this
section. The partnership then must determine partnership gross value under paragraph (a)(4) of this section. Last, the partnership must assign values to the
partnership’s section 197 intangibles under paragraph (a)(5) of this section. For purposes of this section, the term section 197
intangibles includes all section 197 intangibles (as defined in section 197), as well
as any goodwill or going concern value that
would not qualify as a section 197 intangible under section 197.
(3) Values of properties other than section 197 intangibles. For purposes of this
section, the fair market value of each item
of partnership property other than section
197 intangibles shall be determined on the
basis of all the facts and circumstances, taking into account section 7701(g).
(4) Partnership gross value—(i) Basis
adjustments under section 743(b)—(A) In
general. Except as provided in paragraph
(a)(4)(ii) of this section, in the case of a basis adjustment under section 743(b), partnership gross value generally is equal to the
amount that, if assigned to all partnership
property, would result in a liquidating distribution to the partner equal to the transferee’s basis in the transferred partnership interest immediately following the
relevant transfer (reduced by the amount,
if any, of such basis that is attributable to
partnership liabilities).
(B) Special situations. In certain circumstances, such as where income or loss
2003–26 I.R.B.
with respect to particular section 197 intangibles are allocated differently among
partners, partnership gross value may vary
depending on the values of particular section 197 intangibles held by the partnership. In these special situations, the partnership must assign value, first, among
section 197 intangibles (other than goodwill and going concern value) in a reasonable manner that is consistent with the ordering rule in paragraph (a)(5) of this
section and would cause the appropriate liquidating distribution under paragraph
(a)(4)(i)(A) of this section. If the actual fair
market values, determined on the basis of
all the facts and circumstances, of all section 197 intangibles (other than goodwill
and going concern value) is not sufficient
to cause the appropriate liquidating distribution, then the fair market value of goodwill and going concern value shall be presumed to equal an amount that if assigned
to goodwill and going concern value would
cause the appropriate liquidating distribution.
(C) Income in respect of a decedent.
Solely for the purpose of determining partnership gross value under this paragraph
(a)(4)(i), where a partnership interest is
transferred as a result of the death of a partner, the transferee’s basis in its partnership interest is determined without regard
to section 1014(c), and is deemed to be adjusted for that portion of the interest, if any,
that is attributable to items representing income in respect of a decedent under section 691.
(ii) Basis adjustments under section
743(b) resulting from substituted basis
transactions. This paragraph (a)(4)(ii) applies to basis adjustments under section
743(b) that result from exchanges in which
the transferee’s basis in the partnership interest is determined in whole or in part by
reference to the transferor’s basis in the interest or to the basis of other property held
at any time by the transferee (substituted
basis transactions). In the case of a substituted basis transaction, partnership gross
value equals the value of the entire partnership as a going concern, increased by the
amount of partnership liabilities at the time
of the exchange giving rise to the basis adjustment.
(iii) Basis adjustments under section
734(b). In the case of a basis adjustment under section 734(b), partnership gross value
equals the value of the entire partnership
2003–26 I.R.B.
as a going concern immediately following the distribution causing the adjustment, increased by the amount of partnership liabilities immediately following the
distribution.
(5) Determining the values of section 197
intangibles—(i) Two classes. If the aggregate value of partnership property other than
section 197 intangibles (as determined in
paragraph (a)(3) of this section) is equal to
or greater than partnership gross value (as
determined in paragraph (a)(4) of this section), then all section 197 intangibles are
deemed to have a value of zero for purposes of this section. In all other cases, the
aggregate value of the partnership’s section 197 intangibles (the residual section 197
intangibles value) is deemed to equal the
excess of partnership gross value over the
aggregate value of partnership property
other than section 197 intangibles. The residual section 197 intangibles value must
be allocated between two asset classes in
the following order —
(A) Among section 197 intangibles other
than goodwill and going concern value; and
(B) To goodwill and going concern
value.
(ii) Values assigned to section 197 intangibles other than goodwill and going
concern value. The fair market value assigned to a section 197 intangible (other
than goodwill and going concern value)
shall not exceed the actual fair market value
(determined on the basis of all the facts and
circumstances) of that asset on the date of
the relevant transfer. If the residual section 197 intangibles value is less than the
sum of the actual fair market values (determined on the basis of all the facts and
circumstances) of all section 197 intangibles (other than goodwill and going concern value) held by the partnership, then the
residual section 197 intangibles value must
be allocated among the individual section
197 intangibles (other than goodwill and going concern value) as follows. The residual
section 197 intangibles value is assigned
first to any section 197 intangibles (other
than goodwill and going concern value)
having potential gain that would be treated
as unrealized receivables under the flush
language of section 751(c) (flush language
receivables) to the extent of the basis of
those section 197 intangibles and the
amount of income arising from the flush
language receivables that the partnership
would recognize if the section 197 intan-
1112
gibles were sold for their actual fair market values (determined based on all the facts
and circumstances) (collectively, the flush
language receivables value). If the value assigned to section 197 intangibles (other than
goodwill and going concern value) is less
than the flush language receivables value,
then the assigned value is allocated among
the properties giving rise to the flush language receivables in proportion to the flush
language receivables value in those properties. Any remaining residual section 197
intangibles value is allocated among the remaining portions of the section 197 intangibles (other than goodwill and going concern value) in proportion to the actual fair
market values of such portions (determined
based on all the facts and circumstances).
(iii) Value assigned to goodwill and going concern value. The fair market value
of goodwill and going concern value is the
amount, if any, by which the residual section 197 intangibles value exceeds the aggregate value of the partnership’s section
197 intangibles (other than goodwill and going concern value).
(6) Examples. The provisions of paragraphs (a)(2) through (5) are illustrated by
the following examples, which assume that
the partnerships have an election in effect
under section 754 at the time of the transfer and that the assets of each partnership
constitute a trade or business (as described
in §1.1060–1(b)(2)). Except as provided, no
partnership asset (other than inventory) is
property described in section 751(a), and
partnership liabilities are secured by all partnership assets. The examples are as follows:
Example 1. (i) A is the sole general partner in PRS,
a limited partnership having three equal partners. PRS
has goodwill and going concern value, two section 197
intangibles other than goodwill and going concern
value (Intangible 1 and Intangible 2), and two other
assets with fair market values (determined using all
the facts and circumstances) as follows: inventory
worth $1,000,000 and a building (a capital asset) worth
$2,000,000. The fair market value of each of Intangible 1 and Intangible 2 is $50,000. PRS has one liability of $1,000,000, for which A bears the entire risk
of loss under section 752 and the regulations thereunder. D purchases A’s partnership interest for
$650,000, resulting in a basis adjustment under section 743(b). After the purchase, D bears the entire risk
of loss for PRS’s liability under section 752 and the
regulations thereunder. Therefore, D’s basis in its interest in PRS is $1,650,000.
(ii) D’s basis in the transferred partnership interest (reduced by the amount of such basis that is attributable to partnership liabilities) is $650,000
($1,650,000 - $1,000,000). Under paragraph (a)(4)(i)
of this section, partnership gross value is $2,950,000
June 30, 2003
(the amount that, if assigned to all partnership property, would result in a liquidating distribution to D
equal to $650,000).
(iii) Under paragraph (a)(3) of this section, the inventory has a fair market value of $1,000,000, and the
building has a fair market value of $2,000,000. Thus,
the aggregate value of partnership property other than
section 197 intangibles, $3,000,000, is equal to or
greater than partnership gross value, $2,950,000. Accordingly, under paragraphs (a)(3) and (5) of this section, the value assigned to each of the partnership’s
assets is as follows: inventory, $1,000,000; building, $2,000,000; Intangibles 1 and 2, $0; and goodwill and going concern value, $0. D’s section 743(b)
adjustment must be allocated under paragraph (b) of
this section using these assigned fair market values.
Example 2. (i) Assume the same facts as in Example 1, except that the fair market values of Intangible 1 and Intangible 2 are each $300,000, and that
D purchases A’s interest in PRS for $1,000,000. After the purchase, D’s basis in its interest in PRS is
$2,000,000.
(ii) D’s basis in the transferred partnership interest (reduced by the amount of such basis that is attributable to partnership liabilities) is $1,000,000
($2,000,000 - $1,000,000). Under paragraph (a)(4)(i)
of this section, partnership gross value is $4,000,000
(the amount that, if assigned to all partnership property, would result in a liquidating distribution to D
equal to $1,000,000).
(iii) Under paragraph (a)(5) of this section, the residual section 197 intangibles value is $1,000,000 (the
excess of partnership gross value, $4,000,000, over the
aggregate value of assets other than section 197 intangibles, $3,000,000 (the sum of the value of the inventory, $1,000,000, and the value of the building,
$2,000,000)). The partnership must determine the values of section 197 assets by allocating the residual section 197 intangibles value among the partnership’s assets. The residual section 197 intangibles value is
assigned first to section 197 intangibles other than
goodwill and going concern value, and then to goodwill and going concern value. Thus, $300,000 is assigned to each of Intangible 1 and Intangible 2, and
$400,000 is assigned to goodwill and going concern
value (the amount by which the residual section 197
intangibles value, $1,000,000, exceeds the fair market value of section 197 intangibles other than goodwill and going concern value, $600,000). D’s section 743(b) adjustment must be allocated under
paragraph (b) of this section using these assigned fair
market values.
Example 3. (i) Assume the same facts as in Example 1, except that the fair market values of Intangible 1 and Intangible 2 are each $300,000, and that
D purchases A’s interest in PRS for $750,000. After
the purchase, D’s basis in its interest in PRS is
$1,750,000. Also assume that Intangible 1 was originally purchased for $300,000, and that its adjusted basis has been decreased to $50,000 as a result of amortization. Assume that, if PRS were to sell Intangible
1 for $300,000, it would recognize $250,000 of gain
that would be treated as an unrealized receivable under the flush language in section 751(c).
(ii) D’s basis in the transferred partnership interest (reduced by the amount of such basis that is attributable to partnership liabilities) is $750,000
($1,750,000 - $1,000,000). Under paragraph (a)(4)(i)
of this section, partnership gross value is $3,250,000
June 30, 2003
(the amount that, if assigned to all partnership property, would result in a liquidating distribution to D
equal to $750,000).
(iii) Under paragraph (a)(5) of this section, the residual section 197 intangibles value is $250,000 (the
amount by which partnership gross value, $3,250,000,
exceeds the aggregate value of partnership property
other than section 197 intangibles, $3,000,000). Intangible 1 has potential gain that would be treated as
unrealized receivables under the flush language of section 751(c). The flush language receivables value in
Intangible 1 is $300,000 (the sum of PRS’s basis in
Intangible 1, $50,000, and the amount of ordinary income, $250,000, that the partnership would recognize if Intangible 1 were sold for its actual fair market value). Because the residual section 197 intangibles
value, $250,000, is less than the flush language receivables value of Intangible 1, Intangible 1 is assigned a value of $250,000, and Intangible 2 and goodwill and going concern value are assigned a value of
zero. D’s section 743(b) adjustment must be allocated under paragraph (b) of this section using these
assigned fair market values.
Example 4. Assume the same facts as in Example
1, except that the fair market values of Intangible 1
and Intangible 2 are each $300,000, and that A does
not sell its interest in PRS. Instead, A contributes its
interest in PRS to E, a newly formed corporation
wholly-owned by A, in a transaction described in section 351. Assume that the contribution results in a basis adjustment under section 743(b) (other than zero).
PRS determines that its value as a going concern immediately following the contribution is $3,000,000. Under paragraph (a)(4)(ii) of this section, partnership gross
value is $4,000,000 (the value of PRS as a going concern, $3,000,000, increased by the partnership’s liability, $1,000,000, immediately after the contribution). Under paragraph (a)(5) of this section, the
residual section 197 intangibles value is $1,000,000
(the amount by which partnership gross value,
$4,000,000, exceeds the aggregate value of partnership property other than section 197 intangibles,
$3,000,000). Of the residual section 197 intangibles
value, $300,000 is assigned to each of Intangible 1 and
Intangible 2, and $400,000 is assigned to goodwill and
going concern value (the amount by which the residual section 197 intangibles value, $1,000,000, exceeds the fair market value of section 197 intangibles other than goodwill and going concern value,
$600,000). E’s section 743(b) adjustment must be allocated under paragraph (b)(5) of this section using
these assigned fair market values.
Example 5. G is the sole general partner in PRS,
a limited partnership having three equal partners (G,
H, and I). PRS has goodwill and going concern value,
two section 197 intangibles other than goodwill and
going concern value (Intangible 1 and Intangible 2),
and two capital assets with fair market values (determined using all the facts and circumstances) as
follows: vacant land worth $1,000,000, and a building worth $2,000,000. The fair market value of each
of Intangible 1 and Intangible 2 is $300,000. PRS has
one liability of $1,000,000, for which G bears the entire risk of loss under section 752 and the regulations thereunder. PRS distributes the land to H in liquidation of H’s interest in PRS. Immediately prior to
the distribution, PRS’s basis in the land is $800,000,
and H’s basis in its interest in PRS is $750,000. The
distribution causes the partnership to increase the basis of its remaining property by $50,000 under sec-
1113
tion 734(b)(1)(B). PRS determines that its value as a
going concern immediately following the distribution is $2,000,000. Under paragraph (a)(4)(iii) of this
section, partnership gross value is $3,000,000 (the value
of PRS as a going concern, $2,000,000, increased by
the partnership’s liability, $1,000,000, immediately after the distribution). Under paragraph (a)(5) of this section, the residual section 197 intangibles value of PRS’s
section 197 intangibles is $1,000,000 (the amount by
which partnership gross value, $3,000,000, exceeds
the aggregate value of partnership property other than
section 197 intangibles, $2,000,000). Of the residual
section 197 intangibles value, $300,000 is assigned to
each of Intangible 1 and Intangible 2, and $400,000
is assigned to goodwill and going concern value (the
amount by which the residual section 197 intangibles value, $1,000,000, exceeds the fair market value
of section 197 intangibles other than goodwill and going concern value, $600,000). PRS’s section 734(b)
adjustment must be allocated under paragraph (c) of
this section using these assigned fair market values.
(b) Adjustments under section 743(b)—
(1) Generally—(i) Application. For basis adjustments under section 743(b) resulting
from substituted basis transactions, paragraph (b)(5) of this section shall apply. For
basis adjustments under section 743(b) resulting from all other transfers, paragraphs
(b)(2) through (4) of this section shall apply. * * *
*****
(3) * * *
(iii) Special rules—(A) Assets in which
partner has no interest. An asset with respect to which the transferee partner has no
interest in income, gain, losses, or deductions shall not be taken into account in applying paragraph (b)(3)(ii)(B) of this section.
(B) Limitation in decrease of basis. In
no event may the amount of any decrease
in basis allocated to an item of capital gain
property under paragraph (b)(3)(ii)(B) of this
section exceed the partnership’s adjusted basis in that item (or in the case of property
subject to the remedial allocation method,
the transferee’s share of any remedial loss
under §1.704–3(d) from the hypothetical
transaction). In the event that a decrease in
basis allocated under paragraph (b)(3)(ii)(B)
of this section to an item of capital gain
property would otherwise exceed the partnership’s adjusted basis in that item, the excess must be applied to reduce the remaining basis, if any, of other capital gain assets
pro rata in proportion to the bases of such
assets (as adjusted under this paragraph
(b)(3)).
*****
(4) * * *
(ii) * * *
2003–26 I.R.B.
Example. (i) A and B are equal partners in personal service partnership PRS.
In 2004, as a result of B’s death, B’s partnership
interest is transferred to T when PRS’s balance sheet
(reflecting a cash receipts and disbursements method
of accounting) is as follows (based on all the facts and
circumstances):
Assets
Adjusted
Basis
Fair
Market
Value
Section 197 Intangible ....................................................
Unrealized Receivables ...................................................
$2,000
0
$ 5,000
15,000
Total ......................................................
$2,000
$20,000
Liabilities and Capital
Adjusted
Per Books
Fair
Market
Value
Capital:
A ......................................................................................
B.......................................................................................
1,000
1,000
10,000
10,000
Total ......................................................
$2,000
$20,000
(ii) None of the assets owned by PRS is section
704(c) property, and the section 197 intangible is not
amortizable. The fair market value of T’s partnership interest on the applicable date of valuation set
forth in section 1014 is $10,000. Of this amount,
$2,500 is attributable to T’s 50% share of the partnership’s section 197 intangible, and $7,500 is attributable to T’s 50% share of the partnership’s unrealized receivables. The partnership’s unrealized
receivables represent income in respect of a decedent. Accordingly, under section 1014(c), T’s basis in
its partnership interest is not adjusted for that portion of the interest which is attributable to the unrealized receivables. Therefore, T’s basis in its partnership interest is $2,500.
(iii) Under paragraph (a)(4)(i)(C) of this section,
solely for purposes of determining partnership gross
value, T’s basis in its partnership interest is deemed
to be $10,000. Under paragraph (a)(4)(i) of this section, partnership gross value is $20,000 (the amount
that, if assigned to all partnership property, would result in a liquidating distribution to T equal to $10,000).
(iv) Under paragraph (a)(5) of this section, the residual section 197 intangibles value is $5,000 (the excess of partnership gross value, $20,000, over the aggregate value of assets other than section 197
intangibles, $15,000). The residual section 197 intangibles value is assigned first to section 197 intangibles other than goodwill and going concern value,
and then to goodwill and going concern value. Thus,
$5,000 is assigned to the section 197 intangible, and
$0 is assigned to goodwill and going concern value.
T’s section 743(b) adjustment must be allocated using these assigned fair market values.
(v) At the time of the transfer, B’s share of the partnership’s basis in partnership assets is $1,000. Accordingly, T receives a $1,500 basis adjustment under section 743(b). Under this paragraph (b)(4), the
entire basis adjustment is allocated to the partnership’s section 197 intangible.
(5) Substituted basis transactions—(i) In
general. This paragraph (b)(5) applies to ba-
2003–26 I.R.B.
sis adjustments under section 743(b) that result from exchanges in which the transferee’s basis in the partnership interest is
determined in whole or in part by reference to the transferor’s basis in that interest. For exchanges on or after June 9, 2003,
this paragraph (b)(5) also applies to basis
adjustments under section 743(b) that result from exchanges in which the transferee’s basis in the partnership interest is determined by reference to other property held
at any time by the transferee. For example,
this paragraph (b)(5) applies if a partnership interest is contributed to a corporation in a transaction to which section 351
applies, if a partnership interest is contributed to a partnership in a transaction to
which section 721(a) applies, or if a partnership interest is distributed by a partnership in a transaction to which section 731(a)
applies.
*****
(c) * * *
(5) * * *
Example. (i) A, B, and C form equal partnership
PRS. A contributes $50,000 and Asset 1, nondepreciable capital gain property with a fair market value
of $50,000 and an adjusted tax basis of $25,000. B
and C each contributes $100,000. PRS uses the cash
to purchase Assets 2, 3, 4, 5, and 6. Assets 2 and 3
are nondepreciable capital assets, and Assets 4, 5, and
6 are inventory that has not appreciated substantially in value within the meaning of section 751(b)(3).
Assets 4, 5, and 6 are the only assets held by the partnership that are subject to section 751. The partnership has an election in effect under section 754. Af-
1114
ter seven years, the adjusted basis and fair market value
of PRS’s assets are as follows:
*****
(d) Required statements. See §1.743–
1(k)(2) for provisions requiring the transferee of a partnership interest to provide information to the partnership relating to the
transfer of an interest in the partnership. See
§1.743–1(k)(1) for a provision requiring the
partnership to attach a statement to the partnership return showing the computation of
a basis adjustment under section 743(b) and
the partnership properties to which the adjustment is allocated under section 755. See
§1.732–1(d)(3) for a provision requiring a
transferee partner to attach a statement to
its return showing the computation of a basis adjustment under section 732(d) and the
partnership properties to which the adjustment is allocated under section 755. See
§1.732–1(d)(5) for a provision requiring the
partnership to provide information to a
transferee partner reporting a basis adjustment under section 732(d).
(e) Effective Date—(1) Generally. Except as provided in paragraphs (b)(5) and
(e)(2) of this section, this section applies to
transfers of partnership interests and distributions of property from a partnership that
occur on or after December 15, 1999.
(2) Special rules. Paragraphs (a) and
(b)(3)(iii) of this section apply to transfers of partnership interests and distributions of property from a partnership that occur on or after June 9, 2003.
June 30, 2003
§1.755–2T [Removed]
Par. 3. Section 1.755–2T is removed.
Par. 4. In §1.1060–1, paragraph (e)(2) is
revised to read as follows:
§1.1060–1 Special allocation rules for
certain asset acquisitions.
*****
reporting requirements under sections
6041A and 6050M of the Internal Revenue Code. This revenue ruling clarifies that
sections 6041A and 6050M impose separate information reporting requirements and
have different underlying purposes and that,
in some cases, the required information may
overlap.
(e) * * *
(2) Transfers of interests in partnerships. For reporting requirements relating
to the transfer of a partnership interest, see
§1.755–1(d).
ISSUE
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
FACTS
Par. 5. The authority citation for part 602
continues to read as follows:
Authority: 26 U.S.C. 7805.
602.101 [Amended]
Par. 6. In §602.101, paragraph (b), the
entry for “1.755–2T” is removed.
David A. Mader,
Assistant Deputy Commissioner of
Internal Revenue.
Approved May 22, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on June 6, 2003,
8:45 a.m., and published in the issue of the Federal Register for June 9, 2003, 68 F.R. 34293)
Section 6041A.—Returns
Regarding Payments of
Remuneration for Services
and Direct Sales
(Also: 6050M.)
26 CFR 1.6041A–1: Return of information as to
payments of $600 or more.
(Also: 1.6050M–1.)
Information reporting requirements.
This ruling provides guidance to federal
agencies about the information reporting requirements under sections 6041A and
6050M of the Code for the payment of services.
Rev. Rul. 2003–66
PURPOSE
This revenue ruling provides guidance
to federal agencies about the information
June 30, 2003
When is a federal executive agency required to report under sections 6041A and
6050M?
Agency X is a federal executive agency
of the United States as defined by section
6050M(b), which is (1) any Executive
agency (as defined in section 105 of title
5, United States Code) other than the General Accounting Office, (2) any military department (as defined in section 102 of such
title), and (3) the United States Postal Service and the Postal Rate Commission of the
United States. All payments are made during the same calendar year.
Situation 1. Agency X pays Corporation A for cleaning services. The contract
between Agency X and Corporation A provides that the total payment for the services is $30,000.
Situation 2. Agency X pays Corporation B for the purchase of computer equipment. The contract requires a total payment of $25,000 for the computer
equipment.
Situation 3. Agency X pays Corporation C for repairs to one of the agency’s automobiles. The repairs include the replacement of parts. The agency pays $1000 for
the repairs of which $700 is for services.
None of the situations described above
fall within the exception under section
6050M(e).
LAW
Section 6041A(a) provides that if (1) any
service-recipient engaged in a trade or business pays in the course of such trade or
business during any calendar year remuneration to any person for services performed by such person, and (2) the aggregate of such remuneration paid to such
person during such calendar year is $600
or more, then the service-recipient must file
a return, according to the forms or regulations prescribed by the Secretary, set-
1115
ting forth the aggregate amount of such payments and the name and address of the
recipient of such payments. For purposes
of the preceding sentence, the term “servicerecipient” means the person for whom the
service is performed. This information must
be filed on Form 1099–MISC, Miscellaneous Income.
Section 6041A(d)(1) provides that the
term “person” includes any governmental
unit (and any agency or instrumentality
thereof). Section 6041A(d)(2) provides that
in the case of any payment by a governmental entity or any agency or instrumentality thereof (A) section 6041A(a) shall be
applied without regard to the trade or business requirement contained therein, and (B)
any return under section 6041A shall be
made by the officer or employee having
control of the payment or appropriately designated for the purpose of making such return.
Section 6041A(d)(3)(A) provides that
section 6041A(a) shall apply to remuneration paid to a corporation by any federal executive agency (as defined in section
6050M(b)).
Section 6050M(a) provides that the head
of every federal executive agency which enters into any contract shall make a return
setting forth (1) the name, address, and TIN
of each person with which such agency entered into a contract during the calendar
year, and (2) such other information as the
Secretary may require. This information
must be filed on Form 8596, Information
Return for Federal Contracts. See Treas.
Reg. § 1.6050M–1(d).
Section 1.6050M–1(b)(2) of the Income
Tax Regulations defines a “contract” as an
obligation of a federal executive agency to
make payment of money (or other property) to a person in return for the sale of
property, the rendering of services, or other
consideration.
Section 1.6050M–1(c)(1)(i) limits the information reporting requirement of section 6050M by providing that any contract or contract action for which the amount
obligated is $25,000 or less does not have
to be reported.
Sections 6041A and 6050M are separate reporting requirements and differ in
their primary purpose. The purpose of section 6041A is to identify unreported income. See S. Rep. No. 494, 97th Cong, 2d
Sess. 247 (1982), July 12, 1982 (Senate Report). The purpose of section 6050M is to
2003–26 I.R.B.
provide the IRS with information concerning sources from which it can collect delinquent taxes owed by federal contractors. See H.R. Rep. No. 426, 99th Congress,
1st Sess. 855 (1985), 1986–3 (Vol. 2) C.B.
855.
ANALYSIS
Situation 1. The payment for the contracted cleaning services is subject to information reporting under section 6041A because the agency’s payment for services
exceeds the $600 threshold. Agency X must
file Form 1099–MISC. In addition, upon entering into the contract, Agency X is subject to information reporting under section 6050M because the contracted amount
exceeds the $25,000 threshold. Agency X
must file Form 8596.
Situation 2. The payment for the purchase of computer equipment is not subject to information reporting under section 6041A because the payment is not for
services. The contract is not subject to information reporting under section 6050M
because the agency did not enter into a contract obligating an amount exceeding
$25,000. Agency X does not have to file either Form 1099–MISC or Form 8596.
Situation 3. The payment for the automobile repairs is subject to information reporting under section 6041A because the
portion attributable to services exceeds the
$600 threshold. Agency X must file Form
1099–MISC. Agency X is not subject to
section 6050M because the agency did not
enter into a contract obligating an amount
exceeding $25,000. Agency X does not have
to file Form 8596.
HOLDING
Sections 6041A and 6050M are separate information reporting requirements.
Thus, with respect to a contract and the payments under that contract, a federal agency
may be required, depending on the circumstances, to make an information return only
under section 6041A, only under section
6050M, under both provisions, or under neither provision.
DRAFTING INFORMATION
The principal author of this revenue procedure is Tiffany P. Smith of the Office of
the Associate Chief Counsel (Procedure and
Administration), Administrative Provi-
2003–26 I.R.B.
sions and Judicial Practice Division. For further information regarding this revenue procedure, contact Tiffany P. Smith at (202)
622–4910 (not a toll-free call).
Section 6050M.—Returns
Relating to Persons Receiving
Contracts From Federal
Executive Agencies
Guidance is provided to federal agencies about the information reporting requirements under sections 6041A and
6050M of the Internal Revenue Code. This
ruling clarifies that sections 6041A and
6050M impose separate information reporting requirements and have different underlying purposes and that, in some cases,
the required information may overlap. See
Rev. Rul. 2003–66, page 1115.
Section 6103.—Confidentiality and Disclosure of
Returns and Return
Information
26 CFR 301.6103(j)(5)–1T: Disclosures of return
information reflected on returns to officers and
employees of the Department of Agriculture for
conducting the census of agriculture (temporary).
T.D. 9060
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 301
Disclosure of Return
Information to the
Department of Agriculture
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary regulations.
SUMMARY: This document contains regulations that incorporate and clarify the
phrase “return information reflected on returns” in conformance with the terms of
section 6103(j)(5) of the Internal Revenue Code (Code). These temporary regulations also remove certain items of return information that the IRS currently
discloses, but the Department of Agricul-
1116
ture no longer needs, for conducting the
census of agriculture. The text of the temporary regulations serves as the text of the
proposed regulations (REG–103809–03) set
forth on page 1132 of this issue of the Bulletin.
DATES: Effective Date: These regulations
are effective on June 6, 2003.
FOR FURTHER INFORMATION CONTACT: Christine Irwin at (202) 622–4570
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
These temporary regulations incorporate the phrase “return information reflected
on returns” into §301.6103(j)(5)–1 in conformance with the statutory language that
describes the type of return information that
the IRS may disclose to the Department of
Agriculture under section 6103(j)(5) of the
Code. These temporary regulations are consistent with a recent clarification of the same
phrase (i.e., return information reflected on
returns) in §301.6103(j)(1)–1, involving the
disclosure of return information to the Bureau of the Census. See 68 FR 2691 (T.D.
9037, 2003–9 I.R.B. 535).
Also, currently §301.6103(j)(5)–1 provides an itemized description of the return information authorized for disclosure in conjunction with the census of
agriculture. These temporary regulations remove certain items of return information
currently listed in §301.6103(j)(5)–1 that the
Department of Agriculture no longer needs
in conjunction with the census of agriculture.
Explanation of Provisions
These temporary regulations adopt the
phrase “return information reflected on returns” in lieu of the phrase “return information” that currently appears in
§301.6103(j)(5)–1. (The phrase “return information reflected on returns” encompasses the phrase “return information reflected thereon” in section 6103(j)(5) of the
Code.) These temporary regulations clarify
the phrase “return information reflected on
returns” by explaining that the phrase includes, but is not limited to, information on
returns, information derived from processing such returns, and information derived
from other sources for the purposes of establishing and maintaining taxpayer infor-
June 30, 2003
mation relating to returns. The phrase includes information derived from returns,
monthly corrections of, and additions to,
taxpayer information contained in IRS databases (e.g., taxpayer address and name
changes) that are obtained from other
sources, and computer codes the IRS derives from returns and/or tax forms and integrates within taxpayer data bases.
On March 4, 2003, and March 17, 2003,
the Department of Agriculture’s National
Agriculture Statistics Service (NASS) notified the IRS that certain items of return
information that are currently listed in
§301.6103(j)(5)–1 are no longer needed in
conjunction with the census of agriculture. Specifically, the Department of Agriculture no longer needs the following
items currently extracted from IRS forms:
(1) From Form 1040, Schedule F (Profit or
Loss From Farming): sales of livestock and
produce raised; (2) From Form 1120 series:
Parent corporation Employer Identification Number, and related Name and Principal Business Activity (PBA) code for entities with agricultural activity; and (3) From
Form 851 (Affiliations Schedule): subsidiary taxpayer identity information, annual
accounting period, subsidiary PBA code,
parent taxpayer identity information, parent PBA code, Master File Tax Code, Document Locator Number, and cycle posted. As
a result, these items of return information
currently listed in §301.6103(j)(5)–1 will be
removed by this document.
sociate Chief Counsel, Procedure & Administration (Disclosure & Privacy Law
Division).
Special Analyses
(a) General rule. Pursuant to the provisions of section 6103(j)(5) of the Internal Revenue Code and subject to the requirements of paragraph (c) of this section,
officers or employees of the Internal Revenue Service will disclose return information reflected on returns to officers and employees of the Department of Agriculture
to the extent, and for such purposes, as may
be provided by paragraph (b) of this section. “Return information reflected on returns” includes, but is not limited to, information on returns, information derived
from processing such returns, and information derived from other sources for the
purposes of establishing and maintaining
taxpayer information relating to returns.
(b) Disclosure of return information reflected on returns to officers and employees of the Department of Agriculture. (1)
Officers or employees of the Internal Revenue Service will disclose the following return information reflected on returns in this
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because no
preceding notice of proposed rulemaking is
required for this temporary regulation, the
provisions of the Regulatory Flexibility Act
(5 U.S.C. chapter 6) do not apply. Pursuant to section 7805(f) of the Code, the IRS
will submit this Treasury decision to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on its
impact on small business.
Drafting Information
The principal author of these regulations is Christine Irwin, Office of the As-
June 30, 2003
*****
Adoption of
Regulations
Amendments
to
the
Accordingly, 26 CFR part 301 is
amended as follows:
PART 301— PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 is amended by removing the entry for “Section 301.6103(j)(5)–1” and adding an entry in numerical order to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.6103(j)(5)–1T also issued
under 26 U.S.C. 6103(j)(5). * * *
§301.6103(j)(5)–1 [Removed]
Par. 2. Section 301.6103(j)(5)–1 is removed.
Par. 3. Section 301.6103(j)(5)–1T is
added to read as follows:
§301.6103(j)(5)–1T Disclosures of return
information reflected on returns to
officers and employees of the
Department of Agriculture for
conducting the census of agriculture
(temporary).
1117
paragraph (b) for individuals, partnerships
and corporations with agricultural activity, as determined generally by industry code
classification or the filing of returns for such
activity, to officers and employees of the
Department of Agriculture for purposes of,
but only to the extent necessary in, structuring, preparing, and conducting, as authorized by chapter 55 of title 7, United
States Code, the census of agriculture.
(2) From Form 1040 (Schedule F)—
(i) Taxpayer identity information (as defined in section 6103(b)(6) of the Internal
Revenue Code);
(ii) Spouse’s Social Security Number;
(iii) Annual accounting period;
(iv) Principal Business Activity (PBA)
code;
(v) Taxable cooperative distributions;
(vi) Income from custom hire and machine work;
(vii) Gross income;
(viii) Master File Tax (MFT) code;
(ix) Document Locator Number (DLN);
(x) Cycle posted;
(xi) Final return indicator;
(xii) Part year return indicator; and
(xiii) Taxpayer telephone number.
(3) From Form 943—
(i) Taxpayer identity information;
(ii) Annual accounting period;
(iii) Total wages subject to Medicare
taxes;
(iv) MFT code;
(v) DLN;
(vi) Cycle posted;
(vii) Final return indicator; and
(viii) Part year return indicator.
(4) From Form 1120 series —
(i) Taxpayer identity information;
(ii) Annual accounting period;
(iii) Gross receipts less returns and allowances;
(iv) PBA code;
(v) MFT Code;
(vi) DLN;
(vii) Cycle posted;
(viii) Final return indicator;
(ix) Part year return indicator; and
(x) Consolidated return indicator.
(5) From Form 1065 series —
(i) Taxpayer identity information;
(ii) Annual accounting period;
(iii) PBA code;
(iv) Gross receipts less returns and allowances;
(v) Net farm profit (loss);
(vi) MFT code;
2003–26 I.R.B.
(vii) DLN;
(viii) Cycle posted;
(ix) Final return indicator; and
(x) Part year return indicator.
(c) Procedures and Restrictions. (1) Disclosure of return information reflected on
returns by officers or employees of the Internal Revenue Service as provided by paragraph (b) of this section will be made only
upon written request designating, by name
and title, the officers and employees of the
Department of Agriculture to whom such
disclosure is authorized, to the Commissioner of Internal Revenue by the Secretary of Agriculture and describing—
(i) The particular return information reflected on returns for disclosure;
(ii) The taxable period or date to which
such return information reflected on returns relates; and
(iii) The particular purpose for the requested return information reflected on returns.
(2) (i) No such officer or employee to
whom the Internal Revenue Service discloses return information reflected on returns pursuant to the provisions of paragraph (b) of this section shall disclose such
information to any person, other than the
taxpayer to whom such return information reflected on returns relates or other officers or employees of the Department of
Agriculture whose duties or responsibilities require such disclosure for a purpose
described in paragraph (b) of this section,
except in a form that cannot be associated with, or otherwise identify, directly or
indirectly, a particular taxpayer.
(ii) If the Internal Revenue Service determines that the Department of Agriculture, or any officer or employee thereof, has
failed to, or does not, satisfy the requirements of section 6103(p)(4) of the Internal Revenue Code or regulations or published procedures thereunder, the Internal
Revenue Service may take such actions as
are deemed necessary to ensure that such
requirements are or shall be satisfied, including suspension of disclosures of return information reflected on returns otherwise authorized by section 6103(j)(5) and
paragraph (b) of this section, until the Internal Revenue Service determines that such
requirements have been or will be satisfied.
(d) Effective date. This section is applicable on June 6, 2003.
2003–26 I.R.B.
David A. Mader,
Assistant Deputy Commissioner of
Internal Revenue.
Approved May 12, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury
(Tax Policy).
(Filed by the Office of the Federal Register on June 5, 2003,
8:45 a.m., and published in the issue of the Federal Register for June 6, 2003, 68 F.R. 33857)
Section 6231(a)(1)(B).—Definitions and Special Rules —
Exception for Small
Partnerships
26 CFR 1.6231(a)(1)–1: Exception for small
partnerships.
Small partnership exception. This ruling addresses the issue of whether a partnership qualifies for the small partnership
exception provided in section 6231(a)(1)(B)
of the Code, and thus does not fall within
the unified audit and litigation procedures under sections 6221 through 6234
(TEFRA partnership provisions), where one
of the partners is either an organization that
is exempt from taxation under section
501(a) that meets the definition of a C corporation for federal tax purposes or a foreign corporation.
Rev. Rul. 2003–69
ISSUE:
Whether a partnership qualifies for the
small partnership exception provided in
I.R.C. § 6231(a)(1)(B), and thus does not
fall within the unified audit and litigation
procedures under sections 6221 through
6234 (TEFRA partnership provisions),
where one of the partners is either an organization that is exempt from taxation under section 501(a) that meets the definition of a C corporation for federal tax
purposes or a foreign corporation.
FACTS:
Situation 1. Partnership A (a domestic
partnership required to file returns pursuant to section 6031(a)) consists of three partners, X, Y, and Z. X is an individual and
U.S. citizen, Y is a domestic C corporation, and Z is an association that is ex-
1118
empt from taxation under section 501(a). Z
also meets the definition of a C corporation for federal tax purposes.
Situation 2. Partnership B (a domestic
partnership required to file returns pursuant to section 6031(a)) consists of three partners, U, V, and W. U is an individual and
U.S. citizen, V is a domestic C corporation, and W is a foreign corporation.
LAW AND ANALYSIS:
Section 6231 defines a partnership item
as an item required to be taken into account for the partnership’s taxable year under subtitle A, to the extent regulations provide that the item is more appropriately
determined at the partnership level than at
the partner level. Under section 6221, the
tax treatment of any partnership item shall
be determined at the partnership level under the TEFRA partnership provisions. As
a general rule, the TEFRA partnership provisions apply to any partnership required to
file a return of partnership income under
section 6031. Section 6231(a)(1)(A). The
TEFRA partnership provisions, however, do
not apply to a partnership that qualifies as
a small partnership under section
6231(a)(1)(B), unless the partnership elects
to apply those provisions.
For taxable years ending after August 5,
1997, section 6231(a)(1)(B) defines a small
partnership as a partnership in which there
are ten or fewer partners each of whom is
an individual (other than a nonresident
alien), an estate of a deceased partner, or
a C corporation. Treas. Reg. § 301.6231
(a)(1)–1, which is effective for partnership taxable years beginning on or after October 4, 2001, addresses the exception for
small partnerships and refers to section
1361(a)(2) for the definition of C corporation. Section 1361(a)(2) provides that “for
purposes of [the Internal Revenue Code],
the term ‘C corporation’ means, with respect to any taxable year, a corporation
which is not an S corporation for such
year.”
Section 7701(a)(3) defines the term corporation as including “associations, jointstock companies, and insurance companies.” Treas. Reg. § 301.7701–2(b) states
that the term corporation means: (1) a business entity organized under federal or state
statute (or under a statute of a federally recognized Indian tribe) if the statute refers to
the entity as incorporated or as a corporation, body corporate, or body politic; (2) an
June 30, 2003
association (determined under section
301.7701–3); (3) a business entity organized under state statute, if the statute refers to the entity as a joint-stock company or joint-stock association; (4) an
insurance company; (5) a state-chartered
business entity conducting banking activities, if any of its deposits are insured under the Federal Deposit Insurance Act (12
U.S.C. § 1811 et seq.), or a similar federal statute; (6) a business entity wholly
owned by a state or any political subdivision thereof; (7) a business entity that is taxable as a corporation under a provision of
the Internal Revenue Code other than section 7701(a)(3); and (8) certain foreign entities.
Treas. Reg. § 301.7701–3 allows a business entity that is not classified as a corporation under Treas. Reg. § 301.7701–
2(b)(1), (3), (4), (5), (6), (7), or (8) (an
eligible entity) to elect its classification for
federal tax purposes. Under Treas. Reg.
§ 301.7701–3(c)(1)(v), an eligible entity that
is determined to be, or claims to be, exempt from tax under section 501(a) is
treated as having made an election to be
classified as a corporation.
As a general matter, an S corporation is
defined in section 1361(a) as a “small business corporation.” A “small business corporation” is defined by section 1361(b), in
part, as “a domestic corporation.” Treas.
Reg. § 301.7701–5 defines a domestic corporation as one organized or created in the
United States and a foreign corporation as
one that is not domestic.
Thus, an exempt organization under section 501(a) can be a “C corporation” for
purposes of the small partnership exception. Similarly, because a foreign corporation cannot be an S corporation, the corporation is a C corporation for purposes of
the small partnership exception.
Accordingly, in each of the situations described above, all of the partners in the respective partnerships are either individuals (other than a nonresident alien) or C
corporations.
HOLDINGS:
Situation 1. Partnership A qualifies for
the small partnership exception to the
TEFRA partnership provisions.
Situation 2. Partnership B qualifies for
the small partnership exception to the
TEFRA partnership provisions.
DRAFTING INFORMATION
The principal author of this revenue ruling is David A. Abernathy of the Office of
Associate Chief Counsel (Procedure and
Administration), Administrative Provisions and Judicial Practice Division. For further information regarding this revenue ruling, contact Mr. Abernathy at (202) 622–
7940 (not a toll-free call).
Section 7805.—Rules and
Regulations
26 CFR 301.7805–1: Rules and Regulations.
obsoletes prior rulings which have been
identified as no longer being determinative.
Rev. Rul. 2003–67
The Internal Revenue Service is continuing its program of reviewing rulings (including revenue rulings, revenue procedures and notices) published in the Internal
Revenue Bulletin to identify and publish
lists of those rulings that, although not specifically revoked or superseded, are no
longer considered determinative because: (1)
the applicable statutory provisions or regulations have been changed or repealed; (2)
the ruling position is specifically covered
by statute, regulations, or subsequent published position; or, (3) the facts set forth no
longer exist or are not sufficiently described
to permit clear application of the current
statute and regulations.
This revenue ruling publishes a list of
rulings that have been identified under the
Service’s review program as no longer being determinative. The rulings are categorized by the Assistant Chief Counsel offices in the Office of Associate Chief
Counsel (Procedure and Administration) that
have primary jurisdiction over the subject
matter of the rulings that have been identified as no longer being determinative.
Accordingly, the rulings listed below are
hereby declared obsolete.
Obsolete revenue rulings. This ruling
Assistant Chief Counsel (Administrative Provisions and Judicial Practice)
Ruling No.
Rev. Rul. 54–86
Rev. Rul. 54–431
Rev. Rul. 54–571
Rev. Rul. 55–606
Rev. Rul. 59–328
Rev. Rul. 63–248
Rev. Rul. 64–36
Rev. Rul. 65–129
Rev. Rul. 65–248
Rev. Rul. 66–270
Rev. Rul. 67–121
Rev. Rul. 67–197
Rev. Rul. 71–310
Rev. Rul. 73–232
Rev. Rul. 74–126
June 30, 2003
C.B. Citation
1954–1 C.B. 79
1954–2 C.B. 116
1954–2 C.B. 235
1955–2 C.B. 489
1959–2 C.B. 379
1963–2 C.B. 623
1964–1 C.B. 446
1965–1 C.B. 519
1965–2 C.B. 432
1966–2 C.B. 106
1967–1 C.B. 363
1967–1 C.B. 319
1971–2 C.B. 169
1973–1 C.B. 541
1974–1 C.B. 337
1119
2003–26 I.R.B.
Ruling No.
Rev. Rul. 76–561
Rev. Rul. 77–53
Rev. Rul. 78–157
Rev. Rul. 78–169
Rev. Rul. 81–245
Rev. Rul. 85–37
Rev. Rul. 85–50
Rev. Proc. 88–16
Rev. Rul. 93–70
C.B. Citation
1976–2 C.B. 395
1977–1 C.B. 368
1978–1 C.B. 431
1978–1 C.B. 432
1981–2 C.B. 235
1985–1 C.B. 362
1985–1 C.B. 345
1988–1 C.B. 691
1993–2 C.B. 294
Assistant Chief Counsel (Collection, Bankruptcy and Summons)
Ruling No.
Rev. Rul. 225 (1953)
Rev. Rul. 54–93
Rev. Rul. 54–125
Rev. Rul. 55–134
Rev. Rul. 55–227
Rev. Rul. 56–41
Rev. Rul. 66–383
Rev. Proc. 67–25
Rev. Proc. 71–37
Rev. Proc. 76–23
Citation
1953–2 C.B. 467
1954–1 C.B. 280
1954–1 C.B. 282
1955–1 C.B. 196
1955–1 C.B. 551
1956–1 C.B. 562
1966–2 C.B. 502
1967–1 C.B. 626
1971–2 C.B. 573
1976–1 C.B. 562
Assistant Chief Counsel (Disclosure and Privacy Law)
Ruling No.
Rev. Rul. 54–598
Rev. Proc. 58–120
Rev. Proc. 66–4
Rev. Proc. 70–11
Rev. Proc. 73–6
Rev. Proc. 85–21
Rev. Proc. 85–33
Rev. Proc. 88–39
Rev. Proc. 89–33
Rev. Proc. 91–42
Rev. Proc. 92–55
Citation
1954–2 C.B. 121
1958–1 C.B. 498
1966–1 C.B. 607
1970–1 C.B. 437
1973–1 C.B. 752
1985–1 C.B. 539
1985–2 C.B. 414
1988–2 C.B. 562
1989–1 C.B. 905
1991–2 C.B. 717
1992–2 C.B. 394
The Service will continue to review other
rulings to identify those that, for the reasons stated above, are no longer determinative. Therefore, failure to include any particular ruling in the above list should not
be construed as an indication that the ruling necessarily is determinative.
DRAFTING INFORMATION
Name
Assistant Chief Counsel
Telephone No.
Blaise Dusenberry
Administrative Provisions &
Judicial Practice
Collection, Bankruptcy & Summons
Disclosure & Privacy Law
202–622–7940
Peter Devlin
A. M. Gulas
2003–26 I.R.B.
The principal author of this revenue ruling is A. M. Gulas of the Office of Associate Chief Counsel, Procedure and Administration (Disclosure and Privacy Law).
1120
For further information regarding the rulings obsoleted in this revenue ruling, contact the following persons from the appropriate Assistant Chief Counsel offices (not
toll-free calls):
202–622–3600
202–622–4560
June 30, 2003
Part III. Administrative, Procedural, and Miscellaneous
Notice of Proposed Revenue
Procedure for
Cardholder/Payors to Rely on
Merchant Category Codes to
Determine Reportable
Payments
Notice 2003–37
This notice provides a proposed revenue procedure that, when finalized, would
provide an optional procedure that payors
and their authorized agents may use in determining whether payment card transactions are reportable under section 6041 or
section 6041A of the Internal Revenue
Code.
The Internal Revenue Service requests
comments on this proposed revenue procedure. Written comments must be received
by September 29, 2003. Comments should
be submitted to: CC:PA:RU (NOT–129380–
02), Room 5526, Internal Revenue Service, Ben Franklin Station, Washington, DC
20224. Alternatively, comments may be
hand delivered between the hours of 8:00
a.m. and 5:00 p.m. to CC:PA:RU (NOT–
129380–02), Courier’s Desk, Internal Revenue Service, 1111 Constitution Ave., NW,
Washington, DC. Comments may also be
transmitted electronically via the following e-mail address: Notice.Comments@
irscounsel.treas.gov. Please include “Notice 2003–37” in the subject line of any
electronic communications.
For further information regarding this notice, contact Joseph P. Dewald of the Office of Associate Chief Counsel (Procedure and Administration), Administrative
Provisions and Judicial Practice Division.
Mr. Dewald may be contacted at 202–622–
4910 (not a toll-free call).
APPENDIX
(PROPOSED REVENUE
PROCEDURE)
SECTION 1. PURPOSE
This revenue procedure provides an optional procedure that payors may use in determining whether payment card transactions are reportable under section 6041 or
section 6041A of the Internal Revenue
Code. In addition, payors, or their authorized agents, may use this optional proce-
June 30, 2003
dure in determining whether payment card
transactions are reportable payments for purposes of the Internal Revenue Service TIN
Matching Program under section 3406.
In general, this revenue procedure classifies businesses, by Merchant Category
Codes (MCCs), according to whether they
predominantly furnish services (for which
payments are reportable) or predominantly
provide goods (for which payments are not
reportable). A payment card organization or
one of its members or affiliates may assign MCCs, or equivalent Industry Codes,
to merchant/payees that accept its payment cards and notify cardholder/payors that
use its payment card of the MCC or equivalent Industry Code assigned to a merchant/
payee. A cardholder/payor may then rely on
the MCC or equivalent Industry Code assigned to a merchant/payee in determining whether a payment card transaction with
that merchant/payee is subject to reporting under section 6041 or section 6041A.
SECTION 2. BACKGROUND
.01 Reporting requirements under sections 6041 and 6041A. If a person is engaged in a trade or business and, in the
course of that trade or business, pays any
person $600 or more of rent, salaries,
wages, premiums, annuities, compensation, remunerations, emoluments, or other
fixed or determinable gains, profits, and income during a calendar year, section 6041
generally requires the payor to file an information return with the Internal Revenue Service and to furnish an information statement to the payee.
Section 1.6041–3(c) of the Income Tax
Regulations provides an exception to reporting for payments for merchandise, telegrams, telephone, freight, storage and similar charges. Section 1.6041–3(p)(1) provides
an exception to reporting for payments
made to a corporation, unless the corporation is engaged in providing medical and
health care services or is engaged in the billing and collecting of payments in respect
to providing medical and health care services. The same provision also provides that
reporting is not required for payments made
to a hospital or extended care facility that
is a tax-exempt organization described in
section 501(c)(3) or to a hospital or extended care facility owned and operated by
the United States, a State, the District of Co-
1121
lumbia, a possession of the United States,
or a political subdivision, agency or instrumentality of any of the foregoing. Section 1.6041–3(p)(2) provides that reporting is not required for payments to an
organization exempt from taxation under
section 501(a) or an individual retirement
plan. Section 1.6041–3(p)(3) provides that
reporting is not required for payments made
to the United States. Section 1.6041–3(p)(4)
provides that reporting is not required for
payments made to a State, the District of
Columbia, a possession of the United States,
or any political subdivision of the foregoing.
If a person is engaged in a trade or business and, in the course of that trade or business, pays any person $600 or more for services during a calendar year, section
6041A(a) generally requires the payor to file
an information return with the Service and
to furnish an information statement to the
service provider. In general, the exceptions to reporting under section 6041 apply to reporting under section 6041A. However, section 6041A(d)(3) provides that
reporting is generally required for payments made by a federal executive agency
to a corporation.
Revenue Ruling 81–232, 1981–2 C.B.
231, involved an insurance company making payments to an automobile repair shop
for the repair of an insured automobile. The
repair contract required payment of $300
for labor and $700 for parts. The ruling held
that the entire payment was reportable under section 6041 because the portion of the
payment attributable to parts was merely incidental to the obligation to repair the automobile. The ruling further held that no
part of the payment was excepted from the
reporting requirements of section 6041 as
a payment of a bill for merchandise.
.02 Payment card transactions. A payment card transaction is a transaction in
which a cardholder/payor uses a payment
card (as defined in section 4.05 of this revenue procedure) to purchase goods or services and a merchant agrees to accept a
payment card as a means of obtaining payment. A payment card organization (as defined in section 4.06 of this revenue procedure) sets the standards and provides the
mechanism, either directly or indirectly
through members and affiliates, for effecting the payment.
2003–26 I.R.B.
Payment card organizations and the Information Reporting Program Advisory
Committee have recommended that
cardholder/payors be allowed to rely on
MCCs or equivalent Industry Codes provided by the payment card organization in
determining, for purposes of sections 6041
and 6041A(a), whether a payment card
transaction is a payment for services or a
payment for goods.
SECTION 3. SCOPE.
This revenue procedure applies to payment card organizations and their members and affiliates and to cardholder/payors
that purchase goods or services in payment card transactions. In addition,
cardholder/payors, or their authorized agents,
will be allowed to rely on MCCs or equivalent Industry Codes for purposes of TIN
matching with respect to reportable payments.
SECTION 4. DEFINITIONS
For purposes of this revenue procedure,
the terms listed below are defined as
follows:
.01 Cardholder. A cardholder is the
payor for payments made to a merchant/
payee through a payment card.
.02 Merchant. A merchant is a payee that
has entered into an agreement with a payment card organization, or a member or affiliate, to accept the organization’s payment card as payment for goods and
services.
.03 Merchant Category Code. A Merchant Category Code (MCC) is a classification code that is assigned by a payment
card organization or one of its members or
affiliates to a merchant that has been accepted to participate in the payment card
system as a card-accepting merchant. The
payment card organization or one of its
members or affiliates assigns the merchant
a particular code based on the predominant business activity of the merchant.
2003–26 I.R.B.
.04 Industry Code. An Industry Code is
the number that corresponds to, and identifies, a merchant in the same business as
a merchant assigned a particular MCC.
.05 Payment Card. A payment card is a
card (or an account) issued by a payment
card organization, or one of its members or
affiliates, to a cardholder/payor, which upon
presentation to a merchant/payee, represents an agreement of the cardholder to pay
the merchant through the payment card organization.
.06 Payment Card Organization. A payment card organization is an entity that sets
the standards and provides the mechanism,
either directly or indirectly through members and affiliates, for effectuating payment between a purchaser and a merchant
in a payment card transaction. A payment
card organization generally provides such
a payment mechanism by issuing payment
cards, enrolling merchants as authorized acceptors of payment cards for payment for
goods or services, and ensuring the system conducts the transactions in accordance with prescribed standards.
.07 Payment Card Transactions. A payment card transaction is a transaction in
which a cardholder/payor uses a payment
card (as defined in section 4.05 of this revenue procedure) to purchase goods or services, and a merchant agrees to accept a
payment card as a means of obtaining payment.
SECTION 5. APPLICATION
.01 Payment Card Organizations. A payment card organization or one of its members or affiliates may assign MCCs, or
equivalent Industry Codes, to merchant/
payees that accept its payment cards and notify cardholder/payors that use its payment card of the MCC or equivalent
Industry Code assigned to a merchant/
payee. The MCCs assigned to merchant/
payees must be determined under the table
in section 5.03 of this revenue procedure.
If the Internal Revenue Service notifies the
1122
payment card organization that the MCC or
equivalent Industry Code assigned to a
merchant/payee is incorrect, this revenue
procedure does not apply to a payment card
transaction with the merchant/payee occurring after the date of the notification unless the payment card organization or one
of its members or affiliates has assigned the
merchant/payee a MCC or equivalent Industry Code that is satisfactory to the Internal Revenue Service and has notified the
cardholder/payor of the correction.
02. Cardholder/payors. A cardholder/
payor may rely on the MCC or equivalent Industry Code assigned to a merchant/
payee in determining whether a payment
card transaction with that merchant/payee
is subject to information reporting under
section 6041 or section 6041A. Thus, if a
merchant/payee is assigned a MCC and the
table in section 5.03 indicates that payments to merchants in that category are not
reportable under section 6041 or section
6041A, a cardholder/payor is not required
to report payment card transactions with the
merchant/payee. Similarly, an indication in
the table that payments to a category of
merchants are reportable under section 6041
or section 6041A reflects a determination
by the Internal Revenue Service that those
merchants predominantly furnish services,
and cardholder/payors may treat payment
card transactions with those merchants as
payments for services. Although the transactions do not qualify for the merchandise exception to information reporting under this revenue procedure, they may qualify
for the exception under the generally applicable rules of sections 6041 and 6041A
if, in fact, only merchandise is provided. In
addition, other exceptions to information reporting (such as the exception for payments to corporations) may apply.
.03 Table. The following table is used in
applying the optional procedure permitted under this revenue procedure.
June 30, 2003
Reportable under
6041/6041A and
Authority for Exception
MCC
Merchant
0742
0763
0780
1520
1711
1731
1740
1750
1761
1771
1799
2741
2791
2842
3000–3299
3351–3441
3501–3790
4011
Veterinary Services
Agricultural Cooperative
Landscaping Services
General Contractors
Heating, Plumbing, A/C
Electrical Contractors
Masonry, Stonework, and Plaster
Carpentry Contractors
Roofing/Siding, Sheet Metal
Concrete Work Contractors
Special Trade Contractors
Miscellaneous Publishing and Printing
Typesetting, Plate Making, and Related Services
Specialty Cleaning
Airlines
Car Rental
Hotels/Motels/Inns/Resorts
Railroads
4111
4112
4119
4121
4131
4214
4411
4457
4468
4511
4582
4722
4723
4784
Commuter Transport, Ferries
Passenger Railways
Ambulance Services
Taxicabs/Limousines
Bus Lines
Motor Freight Carriers and Trucking - Local and Long Distance, Moving and
Storage Companies, and Local Delivery Services
Courier Services
Public Warehousing and Storage - Farm Products, Refrigerated Goods, Household Goods, and Storage
Cruise Lines
Boat Rentals and Leases
Marinas, Service and Supplies
Airlines, Air Carriers
Airports, Flying Fields
Travel Agencies, Tour Operators
TUI Travel - Germany
Tolls/Bridge Fees
4789
4812
Transportation Services (Not Elsewhere Classified)
Telecommunication Equipment and Telephone Sales
4814
Telecommunication Services
4815
Visaphone
4816
Computer Network Services
4821
Telegraph Services
4215
4225
June 30, 2003
1123
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
1.6041–3(c)
Yes
Yes
Yes
Yes
Yes
No
1.6041–3(c)
Yes
No
1.6041–3(c)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
1.6041–3(c)
Yes
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
2003–26 I.R.B.
Reportable under
6041/6041A and
Authority for Exception
MCC
Merchant
4829
Wires, Money Orders
4899
Cable, Satellite, and Other Pay Television and Radio
4900
Utilities
5013
Motor Vehicle Supplies and New Parts
5021
Office and Commercial Furniture
5039
Construction Materials (Not Elsewhere Classified)
5044
Photographic, Photocopy, Microfilm Equipment, and Supplies
5045
Computers, Peripherals, and Software
5046
Commercial Equipment (Not Elsewhere Classified)
5047
Medical, Dental, Ophthalmic, and Hospital Equipment and Supplies
5051
Metal Service Centers
5065
Electrical Parts and Equipment
5072
Hardware, Equipment, and Supplies
5074
Plumbing, Heating Equipment, and Supplies
5085
Industrial Supplies (Not Elsewhere Classified)
5094
Precious Stones and Metals, Watches and Jewelry
5099
Durable Goods (Not Elsewhere Classified)
5111
Stationary, Office Supplies, Printing and Writing Paper
5122
Drugs, Drug Proprietaries, and Druggist Sundries
5131
Piece Goods, Notions, and Other Dry Goods
5137
Uniforms, Commercial Clothing
5139
Commercial Footwear
5169
Chemicals and Allied Products (Not Elsewhere Classified)
5172
Petroleum and Petroleum Products
5192
Books, Periodicals, and Newspapers
5193
Florists Supplies, Nursery Stock, and Flowers
2003–26 I.R.B.
1124
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
June 30, 2003
Reportable under
6041/6041A and
Authority for Exception
MCC
Merchant
5198
Paints, Varnishes, and Supplies
5199
Nondurable Goods (Not Elsewhere Classified)
5200
Home Supply Warehouse Stores
5211
Lumber, Building Materials Stores
5231
Glass, Paint, and Wallpaper Stores
5251
Hardware Stores
5261
Nurseries, Lawn and Garden Supply Stores
5271
Mobile Home Dealers
5300
Wholesale Clubs
5309
Duty Free Stores
5310
Discount Stores
5311
Department Stores
5331
Variety Stores
5399
Miscellaneous General Merchandise
5411
Grocery Stores, Supermarkets
5422
Freezer and Locker Meat Provisioners
5441
Candy, Nut, and Confectionery Stores
5451
Dairy Products Stores
5462
Bakeries
5499
Miscellaneous Food Stores - Convenience Stores and Specialty Markets
5511
5521
Auto Service, Repairs
Auto/Truck Dealers
5531
Auto and Home Supply Stores
5532
Automotive Tire Stores
5533
Automotive Parts and Accessories Stores
5541
Service Stations
June 30, 2003
1125
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
Yes
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
2003–26 I.R.B.
Reportable under
6041/6041A and
Authority for Exception
MCC
Merchant
5542
Automated Fuel Dispensers
5551
Boat Dealers
5561
Motorcycle Shops, Dealers
5571
Motorcycle Shops and Dealers
5592
Motor Homes Dealers
5598
Snowmobile Dealers
5599
Miscellaneous Auto Dealers
5611
Men’s and Boy’s Clothing and Accessories Stores
5621
Women’s Ready-To-Wear Stores
5631
Women’s Accessory and Specialty Shops
5641
Children’s and Infant’s Wear Stores
5651
Family Clothing Stores
5655
Sports and Riding Apparel Stores
5661
Shoe Stores
5681
Furriers and Fur Shops
5691
Men’s, Women’s Clothing Stores
5697
5698
Tailors, Alterations
Wig and Toupee Stores
5699
Miscellaneous Apparel and Accessory Shops
5712
Furniture, Home Furnishings, and Equipment Stores, Except Appliances
5713
Floor Covering Stores
5714
Drapery, Window Covering, and Upholstery Stores
5718
Fireplace, Fireplace Screens, and Accessories Stores
5719
Miscellaneous Home Furnishing Specialty Stores
5722
Household Appliance Stores
5732
Electronics Stores
2003–26 I.R.B.
1126
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
Yes
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
June 30, 2003
Reportable under
6041/6041A and
Authority for Exception
MCC
Merchant
5733
Music Stores-Musical Instruments, Pianos, and Sheet Music
5734
Computer Software Stores
5735
Record Stores
5811
5812
Caterers
Eating Places, Restaurants
5813
Drinking Places
5814
Fast Food Restaurants
5912
Drug Stores and Pharmacies
5921
Package Stores-Beer, Wine, and Liquor
5931
Used Merchandise and Secondhand Stores
5932
Antique Shops
5933
Pawn Shops
5935
5937
Wrecking and Salvage Yards
Antique Reproductions
5940
Bicycle Shops
5941
Sporting Goods Stores
5942
Book Stores
5943
Stationery Stores, Office, and School Supply Stores
5944
Jewelry Stores, Watches, Clocks, and Silverware Stores
5945
Hobby, Toy, and Game Shops
5946
Camera and Photographic Supply Stores
5947
Gift, Card, Novelty, and Souvenir Shops
5948
Luggage and Leather Goods Stores
5949
Sewing, Needlework, Fabric, and Piece Goods Stores
5950
Glassware, Crystal Stores
5960
5962
5963
Direct Marketing - Insurance Services
Direct Marketing - Travel
Door-To-Door Sales
June 30, 2003
1127
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
Yes
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
Yes
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
Yes
Yes
No
1.6041–3(c)
2003–26 I.R.B.
Reportable under
6041/6041A and
Authority for Exception
MCC
Merchant
5964
Direct Marketing - Catalog Merchant
5965
Direct Marketing - Combination Catalog and Retail Merchant
5966
Direct Marketing - Outbound Tele
5967
Direct Marketing - Inbound Tele
5968
Direct Marketing - Subscription
5969
Direct Marketing - Other
5970
Artist’s Supply and Craft Shops
5971
Art Dealers and Galleries
5972
Stamp and Coin Stores
5973
Religious Goods Stores
5975
Hearing Aids Sales and Supplies
5976
Orthopedic Goods - Prosthetic Devices
5977
Cosmetic Stores
5978
Typewriter Stores
5983
Fuel Dealers (Non Automotive)
5992
Florists
5993
Cigar Stores and Stands
5994
News Dealers and Newsstands
5995
Pet Shops, Pet Food, and Supplies
5996
Swimming Pools Sales
5997
Electric Razor Stores
5998
Tent and Awning Shops
5999
Miscellaneous Specialty Retail
6010
Manual Cash Disburse
6011
Automated Cash Disburse
6012
Financial Institutions
2003–26 I.R.B.
1128
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
Yes
June 30, 2003
MCC
Merchant
6051
Non-FI, Money Orders
6211
6300
Security Brokers/Dealers
Insurance Underwriting, Premiums
6381
Insurance Premiums
6399
Insurance — Default
6513
7011
7012
7032
7033
7210
7211
7216
7217
7221
7230
7251
7261
7273
7276
7277
7278
7296
7297
7298
7299
7311
7321
7332
7333
7338
7339
7342
7349
7361
7372
7375
7379
7392
7393
7394
7395
7399
7511
7512
7513
Real Estate Agents and Managers - Rentals
Hotels, Motels, and Resorts
Timeshares
Sporting/Recreation Camps
Trailer Parks, Campgrounds
Laundry, Cleaning Services
Laundries
Dry Cleaners
Carpet/Upholstery Cleaning
Photographic Studios
Barber and Beauty Shops
Shoe Repair/Hat Cleaning
Funeral Services, Crematories
Dating/Escort Services
Tax Preparation Services
Counseling Services
Buying/Shopping Services
Clothing Rental
Massage Parlors
Health and Beauty Spas
Miscellaneous General Services
Advertising Services
Credit Reporting Agencies
Blueprinting and Photocopying Services
Commercial Photography
Quick Copy, Repro, and Blueprint
Secretarial Support Services
Exterminating Services
Cleaning and Maintenance
Employment/Temp Agencies
Computer Programming
Information Retrieval Services
Computer Repair
Consulting, Public Relations
Detective Agencies
Equipment Rental
Photo Developing
Miscellaneous Business Services
Truck Stop
Car Rental Agencies
Truck/Utility Trailer Rentals
June 30, 2003
Reportable under
6041/6041A and
Authority for Exception
No
1.6041–3(c)
Yes
No
1.6041–3(c)
No
1.6041–3(c)
No
1.6041–3(c)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
1129
2003–26 I.R.B.
MCC
Merchant
7519
7523
7531
7534
7535
7538
7542
7549
7622
7623
7629
7631
7641
7692
7699
7829
7832
7841
7911
7922
7929
7932
7933
7941
7991
7992
7993
Recreational Vehicle Rentals
Parking Lots, Garages
Auto Body Repair Shops
Tire Retreading and Repair
Auto Paint Shops
Auto Service Shops
Car Washes
Towing Services
Electronics Repair Shops
A/C, Refrigeration Repair
Small Appliance Repair
Watch/Jewelry Repair
Furniture Repair, Refinishing
Welding Repair
Miscellaneous Repair Shops
Picture/Video Production
Motion Picture Theaters
Video Tape Rental Stores
Dance Hall, Studios, Schools
Theatrical Ticket Agencies
Bands, Orchestras
Billiard/Pool Establishments
Bowling Alleys
Sports Clubs/Fields
Tourist Attractions and Exhibits
Golf Courses - Public
Video Amusement Game Supplies
7994
7995
7996
7997
7998
7999
8011
8021
8031
8041
8042
8043
8044
Video Game Arcades
Betting/Casino Gambling
Amusement Parks/Carnivals
Country Clubs
Aquariums
Miscellaneous Recreation Services
Doctors
Dentists, Orthodontists
Osteopaths
Chiropractors
Optometrists, Ophthalmologist
Opticians, Eyeglasses
Optical Goods and Glasses
8049
8050
8062
8071
8099
8111
8211
Chiropodists, Podiatrists
Nursing/Personal Care
Hospitals
Medical and Dental Labs
Medical Services
Legal Services, Attorneys
Elementary, Secondary Schools
2003–26 I.R.B.
Reportable under
6041/6041A and
Authority for Exception
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
1.6041–3(c)
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
1.6041–3(c)
Yes
Yes
Yes
Yes
Yes
Yes
No
1.6041–3(p)(2)
1130
June 30, 2003
Reportable under
6041/6041A and
Authority for Exception
MCC
Merchant
8220
Colleges, Universities
8241
Correspondence Schools
8244
Business/Secretarial Schools
8249
Vocational/Trade Schools
8299
8351
8398
Educational Services
Child Care Services
Charitable and Social Service Organizations - Fundraising
8641
Civic, Social, Fraternal Associations
8651
8661
Political Organizations
Religious Organizations
8675
8699
8734
8911
8931
8999
9211
Automobile Associations
Membership Organizations
Testing Laboratories
Architectural/Surveying Services
Accounting/Bookkeeping Services
Professional Services
Court Costs, Including Alimony and Child Support - Courts of Law
9222
Fines - Government Administrative Entities
9223
9311
Bail and Bond Payments
Tax Payments - Government Agencies
9399
Government Services (Not Elsewhere Classified)
9402
Postal Services - Government Only
9405
U.S. Federal Government Agencies or Departments
9950
Intra-Company Purchases
No
1.6041–3(p)(2)
No
1.6041–3(p)(2)
No
1.6041–3(p)(2)
No
1.6041–3(p)(2)
Yes
Yes
No
1.6041–3(p)(2)
No
1.6041–3(p)(2)
Yes
No
1.6041–3(p)(2)
Yes
Yes
Yes
Yes
Yes
Yes
No
1.6041–3(p)(4)
No
1.6041–3(p)(4)
Yes
No
1.6041–3(p)(4)
No
1.6041–3(p)(4)
No
1.6041–3(p)(3)
No
1.6041–3(p)(3)
No
1.6041–3(c)
SECTION 5. EFFECTIVE DATE
The procedures are proposed to be
effective on the date they are published as
a final revenue procedure.
June 30, 2003
1131
2003–26 I.R.B.
Part IV. Items of General Interest
Notice of Proposed Rulemaking by Cross-Reference to
Temporary Regulations
Disclosure of Return
Information to the
Department of Agriculture
REG–103809–03
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations.
SUMMARY: The IRS is issuing regulations to incorporate and clarify the phrase
“return information reflected on returns” in
conformance with the terms of section
6103(j)(5) of the Internal Revenue Code
(Code). These temporary regulations also
remove certain items of return information that the IRS currently discloses, but the
Department of Agriculture no longer needs,
for conducting the census of agriculture. The
text of the temporary regulations (T.D.
9060) published in this issue of the Bulletin serves as the text of the proposed regulations.
DATES: Written and electronic comments
and requests for a public hearing must be
received by September 8, 2003.
ADDRESSES: Send submissions to:
CC:PA:RU (REG–103809–03), room 5226,
Internal Revenue Service, P.O. Box 7604,
Ben Franklin Station, Washington, DC
20044. Submissions may be hand-delivered
between the hours of 8 a.m. and 4 p.m. to
CC:PA:RU (REG–103809–03), Courier’s
Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or
sent electronically, via the IRS Internet site
at www.irs.gov/regs.
FOR FURTHER INFORMATION CONTACT: Christine Irwin at (202) 622–4570
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Temporary regulations in this issue of the
Bulletin amend the Procedure and Admin-
2003–26 I.R.B.
istration Regulations (26 CFR Part 301) relating to Code section 6103(j)(5). The temporary regulations contain rules relating to
the disclosure of return information reflected on returns to officers and employees of the Department of Agriculture for
conducting the census of agriculture.
The text of the temporary regulations
also serves as the text of these proposed
regulations. The preamble to the temporary regulations explains the temporary
regulations and these proposed regulations.
Special Analyses
It has been determined this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory
assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations,
and because the regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the IRS
will submit this notice of proposed rulemaking to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small
business.
Comments and Requests for Public
Hearing
Before adoption of these proposed regulations as final regulations, the IRS will consider any written (a signed original and eight
(8) copies) or electronic comments that the
IRS timely receives. The IRS and Treasury Department request comments on the
clarity of the proposed rules and how they
can be made easier to understand. All comments will be available for public inspection and copying. The IRS may schedule
a public hearing if any person who timely
submits written comments requests such a
hearing in writing. If a public hearing is
scheduled, notice of the date, time, and
place for the public hearing will be published in the Federal Register.
ministration (Disclosure & Privacy Law
Division).
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 301 is proposed to be amended as follows:
PART 301— PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.6103(j)(5)–1 is added
to read as follows:
§301.6103(j)(5)–1 Disclosures of return
information reflected on returns to
officers and employees of the
Department of Agriculture for
conducting the census of agriculture.
[The text of this proposed section is the
same as the text of §301.6103(j)(5)–1T published elsewhere in this issue of the Bulletin.]
David A. Mader,
Assistant Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on June 5, 2003,
8:45 a.m., and published in the issue of the Federal Register for June 6, 2003, 68 F.R. 33887)
Administration of the Earned
Income Credit
Announcement 2003–40
I. Purpose
This announcement describes changes
the Internal Revenue Service (IRS) is testing in determining qualifying child eligibility under the earned income credit (EIC)
under I.R.C. section 32. This announcement also solicits public comment on those
changes.
Drafting Information
II. Background
The principal author of these regulations is Christine Irwin, Office of the Associate Chief Counsel, Procedure & Ad-
The EIC plays a vital role in rewarding work and lifting working families out
of poverty. Historically, the EIC program
1132
June 30, 2003
has experienced a relatively high participation rate. The IRS received claims totaling over $32 billion from 19 million claimants for tax year 2002. Studies indicate that
between 75 and 86 percent of eligible taxpayers participate in the EIC program. In
2001, the EIC lifted 3.9 million people out
of poverty.
Although the EIC program has been successful in reaching and assisting low income working families, the EIC program
also suffers from high noncompliance. The
most recent compliance study, Compliance Estimates For Earned Income Tax
Credit Claimed on 1999 Returns (the 1999
study), released in February 2002, estimates that out of the $31.3 billion of EIC
claims made by taxpayers for tax year 1999,
between $8.5 and $9.9 billion — or between 27.0 and 31.7 percent of total EIC
claims — were erroneous unrecovered overclaims. The largest amount of EIC overclaims (for which errors were known) was
associated with taxpayers claiming children who were not the taxpayers’ qualifying children. The most common qualifying child error was claiming a child who
did not live with the taxpayer for over half
the taxable year and therefore did not satisfy the residency requirement of the EIC.
Another common qualifying child error was
claiming a child who did not bear an appropriate relationship to the taxpayer. Most
taxpayers who did not meet the relationship requirement also did not meet the residency requirement.
EIC noncompliance is high in part because it is difficult for the IRS to verify
whether a child claimed by a taxpayer meets
the residency and relationship tests of the
EIC prior to paying out a refund. The IRS
employs extensive outreach and educational programs to inform taxpayers and tax
return preparers of the requirements of the
EIC. These programs encourage eligible taxpayers to participate in the EIC program and
discourage ineligible taxpayers from making erroneous EIC claims. In addition, the
IRS conducts examinations to verify the eligibility of individuals with questionable
claims. Despite these and other efforts, the
IRS has been unable to significantly reduce the noncompliance rate over the years.
To prevent qualifying child errors, the
IRS and Treasury Department plan to implement a certification program under which
certain taxpayers will be required to demonstrate that they meet the residency re-
June 30, 2003
quirement with respect to a child before
their EIC claims are accepted. The taxpayers required to demonstrate residency will
be those who, based on IRS research, are
more likely to claim children who do not
satisfy the residency requirement (such as
caregivers other than the child’s parents and
fathers who do not file joint returns).
Under the certification program, a taxpayer will be encouraged to fill out a form
and provide certain documentation that establishes that the taxpayer meets the residency requirement with respect to a child
in advance of the filing season. If such taxpayers choose not to pre-certify, they will
be required to send in the same forms and
documentation with their tax returns. Taxpayers who pre-certify will receive their EIC
refunds faster than taxpayers who send information with their tax returns. Taxpayers who do not pre-certify or send in the
required information with their tax returns
will be given an additional opportunity to
certify residency, after which time, they will
be denied the EIC with respect to a claimed
child, subject to normal appeals rights and
the ability to contest the denial in Tax Court.
The goal of the certification program is
to evaluate high-risk EITC claims before
they are paid, using a process that is less
burdensome to taxpayers and less costly to
the IRS than an audit. In addition, the certification program will enable eligible, but
high-risk, taxpayers to receive their refunds faster than if they were subsequently
challenged by the IRS. By helping to ensure that certain high-risk taxpayers receive the right amount of the credit before refunds are paid, the program will also
reduce the burden that is imposed when taxpayers must repay erroneous refunds.
The IRS and the Treasury Department
want to implement this program in a manner that will continue the goals of the EIC
program, will not be overly burdensome for
taxpayers (and other parties) and will not
adversely affect participation. Accordingly,
the IRS will test the certification program
with a limited number of taxpayers (approximately 45,000) and will carefully study
the results from this group to determine the
effect of certification on compliance and
participation. In addition, the IRS and Treasury Department are continuing to evaluate the proposed form and instructions, the
types of documentation that will be required, and the IRS’ communication and
outreach strategy. As part of this evalua-
1133
tion, the IRS will be conducting focus
groups of taxpayers, practitioners and third
parties (who are asked to help establish residency) prior to the test of the certification program.
As part of the certification program, the
IRS and Treasury Department previously
considered requiring certain taxpayers
whose relationship with a claimed child
could not be systematically checked by the
IRS through existing databases (e.g., social security records) to establish a qualifying relationship with the child before their
EIC claim is accepted. The certification test
will not include a relationship certification requirement and will be limited to residency certification.
III. Request for Comments
Based on preliminary discussions and
initial drafts of the residency certification
form, stakeholders have expressed concerns about various aspects of the certification program. The IRS and Treasury Department are committed to continuing this
dialogue with stakeholders and are issuing this announcement to help facilitate
comments. Concerns expressed by stakeholders prior to and in response to this announcement will be carefully considered by
the IRS and Treasury Department in developing the certification program.
The IRS has revised Form 8836, which
is attached to this announcement and will
be posted on the IRS’ website at http://
www.irs.gov/taxpros/lists/0,,id=97784,00
.html.
The IRS and Treasury Department welcome all comments and suggestions and are
particularly interested in comments on the
following matters:
1. Under Form 8836, taxpayers will have
the option to provide different types of information or documentation to establish
residency. Are there other sources or types
of information that should be added to the
form (as another option) that would still
give the IRS reasonable assurances that the
taxpayer satisfies the residency requirement? What information or documentation could the IRS request that taxpayers
currently possess or could reasonably obtain to verify that the taxpayer resides with
a child? What information or documentation currently requested on the forms is difficult or burdensome for the taxpayer or a
third party to provide, and why?
2003–26 I.R.B.
2. How can Form 8836 be simplified or
clarified? For example, would it be easier
for taxpayers to certify one child per form
or two children per form? How could the
instructions to Form 8836 be simplified or
clarified?
3. What can the IRS do to reach out to
taxpayers and encourage them to pre-certify,
rather than wait until the filing season?
What is the message the IRS needs to convey and what are the best means through
which to convey that message? Who should
be the primary deliverer of particular messages — the IRS or outside stakeholders?
Are there other incentives the IRS can provide to taxpayers to encourage them to precertify?
4. How can the certification program be
used to reach out to taxpayers who are eligible for the EIC, but not currently claim-
2003–26 I.R.B.
ing the credit? Should the messages associated with the certification program be
coupled with messages designed to educate taxpayers about their eligibility to claim
the EIC and to increase participation? Alternatively, would combining these messages cause confusion, in which case, what
separate measures should the IRS take to
reach out to eligible taxpayers who are not
claiming the credit?
5. What factors should the IRS take into
account in designing the study of the initial group of taxpayers who are asked to
certify and in evaluating the results of that
study?
Comments about the draft Form 8836 or
the certification pilot must be submitted on
or before July 14, 2003, in order to be considered for the pilot. Otherwise, comments
about the precertification process should be
1134
submitted on or before December 31, 2003.
Comments about certification taking place
during the filing season should be submitted on or before April 15, 2004.
Taxpayers may submit electronic comments on Form 8836 at http://www.irs.gov/
taxpros/lists/0,,id=97784,00.html and on the
pre-certification and certification processes
to notice.comments@irscounsel.treas.gov.
Alternatively, comments may be sent to:
CC:PA:RU (Announcement 2003–40), room
5226, Internal Revenue Service, POB 7604,
Ben Franklin Station, Washington, DC
20044. Submissions may be hand delivered Monday through Friday between the
hours of 8 a.m. and 4 p.m. to: CC:PA:RU
(Announcement 2003–40), Courier’s Desk,
Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC.
June 30, 2003
Form
8836
OMB No. 1545-1829
Part I
2003
Qualifying Children Residency Statement
Department of the Treasury
Internal Revenue Service
Attachment
Sequence No. 136
䊳 See instructions starting on page 2.
Taxpayer Information (to be completed by taxpayer)
Your first name and initial
Last name
Your social security number
If you will be filing a joint return for 2003, spouse’s first
name and initial
Last name
Spouse’s social security number
Home address (number and street). If you have a P.O. box, see instructions
Your daytime phone number
(
)
City, town or post office, state, and ZIP code
Your evening phone number
(
)
Part II
Qualifying Children Information (to be completed by taxpayer)
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Caution. If you have two qualifying children, see instructions before completing this part.
䊳 Child’s first name
Child 2 䊳 Child’s first name
Child 1
Part III
Last name
Child’s social security number
Last name
Child’s social security number
Proof of Residency (to be completed by taxpayer) (see instructions)
Check one or more boxes below and attach any required documentation. The combined documentation must include your
name, the child’s name, street address, and dates the child lived with you to show that you and the child lived together for
more than half of 2003. See Residency Test on page 2 for details and exceptions.
I have attached copies of one or more of the following official records: Child-care records, community-based organization
records, employment records, Indian tribal enrollment records, leases, medical records, religious records, school records,
social service agency records, or utility bills.
I have attached a letter on official letterhead from one or more of the following third parties: Child-care provider, clergy,
community-based organization official, employer, health-care provider, Indian tribal official, landlord or property manager,
school official, social service agency official, or utility company.
A third party has completed Part IV below.
Note. The IRS may contact the third party who signs Part IV and any person or organization that provides the documentation
you attach to this form.
Under penalties of perjury, I declare that I have examined this statement, and to the best of my knowledge and belief, it is true, correct, and complete.
Taxpayer
Sign Here
Part IV
䊳
Signature of spouse
named in Part I 䊳
Date 䊳
Third Party Affidavit (to be completed by third party if the last box in Part III is checked)
First, check the box below that best describes your relationship to the taxpayer or one or both children named above.
Child-care provider
Clergy
Community-based organization official
Employer
Health-care provider
Social service agency official
Indian tribal official
Landlord or property manager
School official
Next, complete the following statement.
Based on my records or personal knowledge, I believe that one (or both) of the above-named taxpayer(s) and (check the box that applies)
Child 1
Child 2
Child 1 and 2
lived together at the following address:
Address (number and street) 䊳
City, town or post office, state, and ZIP code 䊳
day 䊳
from month 䊳
, 2003, through month 䊳
day 䊳
, 2003.
Under penalties of perjury, I declare that I have examined this affidavit, and to the best of my knowledge and belief, it is true, correct, and complete.
Third Party
Sign Here
䊳
Your name
(print or type) 䊳
Date 䊳
Title (if any) 䊳
Name of organization (if any) 䊳
Address (including city, town or post office, state, and ZIP code)
Your daytime phone number
(
For Privacy Act and Paperwork Reduction Act Notice, see page 4.
June 30, 2003
Cat. No. 14955C
1135
)
Form 8836 (2003)
2003–26 I.R.B.
Page 2
Form 8836 (2003)
Residency Test
Instructions
Purpose of Form
Use Form 8836 if the IRS sent this form to you and
you have a qualifying child for the earned income
credit (EIC). We need this form to show that you and
your child met the residency test (defined on this
page) for 2003.
Who Must File
File this form only if:
● You are claiming or expect to claim the EIC with a
qualifying child for 2003 and
● The IRS sent this form to you with a letter directing
you to file it.
If you do not file Form 8836, the IRS will not allow
the EIC with a qualifying child for 2003.
For details on the EIC eligibility rules, including the
definition of qualifying child, see Pub. 596, Earned
Income Credit (EIC). You can order Pub. 596 by calling
1-800-TAX-FORM (1-800-829-3676) or you can
download it from the IRS website at www.irs.gov.
Pre-recorded information about the EIC is also
available by phone 24 hours a day, 7 days a week. Call
1-800-829-4477 and select TeleTax Topic No. 601.
Have paper and a pen or pencil handy to take notes.
When To File
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There are two different time periods for filing Form
8836 for 2003. You may file Form 8836 either:
● Before January 1, 2004. If you file the form during
this period, you may be able to avoid a delay in
receiving the EIC part of your tax refund for 2003.
● With your 2003 tax return. Under this option, the
EIC part of your refund will be delayed while we
review the information you submitted.
Where To File
Send the form to:
Internal Revenue Service
Stop 4300, Annex R2
Kansas City, MO 64999-0065
Note. If you file this form after December 31, 2003,
you may either file it at the above address or attach it
to your tax return. If you file it with your return, be sure
to send it to the Internal Revenue Service address
shown in the instructions for your tax return.
You cannot file this form electronically.
However, you may still file your tax return
electronically. If you do so, send Form 8836
and all required attachments to:
Internal Revenue Service
Stop 4300, Annex R2
Kansas City, MO 64999-0065
2003–26 I.R.B.
Your child must have lived with you in the United
States for more than half of 2003. Include the time that
you or your child are temporarily apart due to a special
circumstance, such as military service, school
attendance, or juvenile detention. It does not matter
where you lived with your child. For example, you may
live with your child in a homeless shelter. For more
details on the residency test, see Pub. 596.
Special Rule For a Child Who Was Born or Died in
2003. A child is considered to have lived with you for
more than half of 2003 if the child was born or died in
2003 and your home was the child’s home for the
entire time he or she was alive in 2003.
What We Will Do After We Receive This
Form
We will review the information you send us. We will let
you know if you have met the residency test needed to
get your EIC. If we need more information, we will
contact you.
If you do not meet the residency test for a child, we
will let you know. The IRS will not allow the EIC based
on that child.
How To Get Help
Call 1-800-294-2723 if you need assistance
completing this form or you are having difficulty
obtaining the documentation you are required to
provide with this form. Assistance is available Monday
through Friday from 8:00 a.m. to 8:00 p.m. Eastern
time.
You may also visit any IRS Taxpayer Assistance
Center. To find out the location and hours of the
nearest center, call 1-800-829-1040 or visit the IRS
website at www.irs.gov/localcontacts. You also can
contact the Taxpayer Advocate Service at
1-877-777-4778 or the local Taxpayer Advocate office
in your area.
Part I
P.O. Box. Enter your box number only if your post
office does not deliver mail to your home. Otherwise,
enter your home street address.
Daytime and Evening Phone Numbers. Providing
your daytime and evening phone numbers may help
speed the processing of this form. We may have
questions about the information you provided. By
answering our questions over the phone, we may be
able to continue processing the form without mailing
you a letter. If you will be filing a joint return, you may
enter either spouse’s phone numbers.
Part II
Be sure that any child named is your qualifying child
and you expect to claim that child for the EIC on your
2003 tax return.
Your qualifying child must have a valid social security
number (SSN), unless the child was born and died in
2003. If the qualifying child was born and died in 2003
1136
June 30, 2003
Page 3
Form 8836 (2003)
and did not have an SSN, attach a copy of that child’s
birth certificate to Form 8836 and enter “Died” instead
of the child’s SSN.
For purposes of claiming the EIC, a valid SSN is a
number issued by the Social Security Administration
unless “Not Valid for Employment” is printed on the
social security card and the number was issued solely
to apply for or receive a Federally funded benefit.
If you have two qualifying children you may need to
complete more than one Form 8836. For example, if in
Part IV a doctor is signing for Child 1 and a clergyman
is signing for Child 2, you will have to complete two
forms. List Child 1 on the form you are giving to the
doctor and Child 2 on the form you are giving to the
clergyman.
Do not provide information for more than two
qualifying children. You need only two qualifying
children to claim the maximum EIC.
Part III
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You must attach documentation showing that each
qualifying child lived with you for more than half of
2003. You may need to send more than one item to
show that your child lived with you for more than half
of 2003.
If you and your spouse are filing a joint return, you
only need to show that one of you lived with your child
for more than half of 2003.
Who Can Provide Documents to You. You may
submit documentation from any of the following third
parties (other than you or your spouse).
● School official (such as a teacher, principal, or
adminstrative assistant).
● Health-care provider (such as your doctor, your
nurse practitioner, or a clinic official).
● Member of the clergy (such as your minister, priest,
rabbi, or imam).
● Child-care provider who is age 18 or older (and not
your neighbor or relative) or licensed or regulated by
the state or local government for the area in which the
child care was provided.
● Your employer.
● Landlord or property manager.
● Social service agency official (such as a case worker
at a public assistance office).
● Community-based organization official (such as an
official from the YMCA, YWCA, Boy Scouts, Girl
Scouts, Boys and Girls Clubs, 4-H, Little League,
Police Athletic League, immigrant advocacy groups,
low-income taxpayer clinics, neighborhood
associations, homeowners and condominium
associations and other non-profit groups).
● Indian tribal official.
● Utility company (such as an electric power or natural
gas company).
What Kind of Documents You Must Provide. You
may provide either of the following from any third party
listed above:
June 30, 2003
● A copy of an official record (such as child-care
records, a lease, medical records, a pay stub, or
school records), or
● A letter on official letterhead.
You also may ask any third party that is listed in Part
IV of the form to complete the Part IV affidavit to show
that you and your child lived together for part or all of
2003. See the instructions for Part IV on page 4.
What the Documents Must Show. If you send an
official record or letter, it must clearly show:
● Your name, your child’s name, or both names, and
● A street address and the dates that you or your child
lived at that address during 2003, and
● The name, address, and phone number of the
person or organization that provided the record or
letter.
If someone fills out Part IV of this form for you, be
sure that it is complete.
How Many Documents Do You Need? You may
submit any combination of the documents listed above
as long as they show, when taken together, that you
lived with your child for more than half of 2003. In
some cases, a single document will show that you and
your child lived at the same address. In other cases,
you may need to provide one document showing your
name and address as well as a second document
showing your child’s name with the same address.
Multiple documents may be necessary to show that
your address and your child’s address were the same
for more than half of 2003.
Here are a few acceptable combinations of
documents:
● One document that shows that both you and your
child lived at the same address for more than half of
2003.
● One document that shows that you lived at an
address for more than half of 2003 and a second
document that shows that your child lived at the same
address during the same period of time.
● One document that shows that you and your child
lived at the same address for part of 2003 and a
second document that shows that you and your child
lived together for the remainder of 2003.
● If you have two children, separate documents for
each child to show that each one lived with you for
more than half of 2003.
● If you have two children, one document to show that
both of your children lived with you for more than half
of 2003.
Example 1. You attach a letter on official letterhead
from Acme Medical Clinic showing that your child lived
with you from January 1, 2003, through March 31,
2003. You also have Reverend Smith, your clergyman,
complete Part IV showing that you and your child lived
together from April 1, 2003, through July 31, 2003. You
check the second and third boxes in Part III. Because
the total time shown is more than half of the year, the
residency test is met.
1137
2003–26 I.R.B.
Page 4
Form 8836 (2003)
Example 2. You attach a transcript of your child’s
grades from the Washington Elementary School
showing that your child lived with you from January 1,
2003, through May 31, 2003. You also attach a letter
on official letterhead from the principal of the Lincoln
Middle School. The letter shows the dates of school
attendance and that the child’s address was the same
as yours. The letter covers the period from September
1, 2003, through October 31, 2003. You check the first
two boxes in Part III. Because the total time shown is
more than half of the year, the residency test is met.
Note. If you cannot obtain official records, a letter, or a
completed Part IV from one or more third parties to
show that your child lived with you for more than half
of 2003, call 1-800-294-2723 and we will help you.
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Signing the Form. You must sign and date Part III
under penalties of perjury before you send it to us with
the documents. Criminal penalties may be imposed for
making a false statement.
Part IV
Our legal right to ask for information is Internal
Revenue Code sections 6001, 6011, and 6012(a), and
their regulations. They say that you must file a return
or statement with us for any tax for which you are
liable. Your response is mandatory under these
sections. Code section 6109 and its regulations say
that you must provide your taxpayer identification
number on what you file. This is so we know who you
are, and can process your return and other papers.
You are not required to provide the information
requested on a form that is subject to the Paperwork
Reduction Act unless the form displays a valid OMB
control number. Books or records relating to a form or
its instructions must be retained as long as their
contents may become material in the administration of
any Internal Revenue law. Generally, tax returns and
return information are confidential, as stated in Code
section 6103.
We ask for tax return information to carry out the tax
laws of the United States. We need it to figure and
collect the right amount of tax.
We may give the information to the Department of
Justice and to other Federal agencies, as provided by
law. We may give it to cities, states, the District of
Columbia, and U.S. commonwealths or possessions to
carry out their tax laws. We may also disclose this
information to other countries under a tax treaty, or to
Federal and state agencies to enforce Federal nontax
criminal laws and to combat terrorism.
If you do not file a return or give fraudulent
information, you may be charged penalties and be
subject to criminal prosecution.
Please keep this notice with your records. It may
help you if we ask you for other information. If you
have any questions about the rules for filing and giving
information, please call or visit any Internal Revenue
Service office.
The time needed to complete and file this form will
vary depending on individual circumstances. The
estimated average time is: Recordkeeping, 6 min.;
Learning about the law, 11 min.; Preparing the form,
24 min.; Copying, assembling, and sending the form
to the IRS, 20 min.
If you have comments concerning the accuracy of
these time estimates or suggestions for making this
form simpler, we would be happy to hear from you.
You can write to the Tax Products Coordinating
Committee, Western Area Distribution Center, Rancho
Cordova, CA 95743-0001. Do not send the form to
this address. Instead, see Where To File on page 2.
You may skip Part IV if you are submitting official
records or letters that show that your child lived with
you for more than half the year in 2003.
If you need to provide more than one
affidavit (Part IV) to show that your child
lived with you for more than half of 2003,
complete as many additional Forms 8836 as
you need. On the additional Forms 8836, you do not
have to enter your spouse’s name and SSN or your
address.
Neither you nor your spouse may complete this part.
A third party listed in Part IV who has records that
show, or who personally knows, that you and your
qualifying child lived together for part or all of 2003
must complete this part. The third party must complete
all applicable information and sign Part IV under
penalties of perjury. If the third party does not
complete all applicable information in Part IV, the
affidavit may not be accepted. Criminal penalties may
be imposed for making a false statement.
Privacy Act and Paperwork Reduction Act Notice.
The Privacy Act of 1974 and the Paperwork Reduction
Act of 1980 require that when we ask you for
information we must first tell you our legal right to ask
for the information, why we are asking for it, and how
it will be used. We must also tell you what could
happen if we do not receive it and whether your
response is voluntary, required to obtain a benefit, or
mandatory under the law.
This notice applies to all papers you file with us. It
also applies to any questions we need to ask you so
we can complete, correct, or process your return;
figure your tax; and collect tax, interest, or penalties.
Printed on recycled paper
2003–26 I.R.B.
1138
June 30, 2003
Announcement and Report
Concerning Pre-Filing
Agreements
Announcement 2003–43
Introduction
This announcement is issued pursuant to
the Conference Report to H.R. 4577 (Pub.
L. 106–554), The Community Renewal Tax
Relief Act of 2000, which requires that the
Secretary of the Treasury make publicly
available an annual report relating to the
Pre-Filing Agreement (“PFA”) program operations for the preceding calendar year. The
Conference Report states that the report is
to include: (1) the number of pre-filing
agreements completed, (2) the number of
applications received, (3) the number of applications withdrawn, (4) the types of issues which are resolved by completed
agreements, (5) whether the program is being utilized by taxpayers who were previously subject to audit, (6) the average length
of time required to complete an agreement, (7) the number, if any, and subject
of technical advice and Chief Counsel advice memoranda issued to address issues
arising in connection with any pre-filing
agreement, (8) any model agreements, and
(9) any other information the Secretary
deems appropriate. This is the third annual report. It provides information concerning activity under the permanent PFA
program (Rev. Proc. 2001–22, 2001–1 C.B.
745), during calendar year 2002.
Background
The Large and Mid-Size Business Division (“LMSB”) within the Internal Revenue Service serves corporations and partnerships with assets greater than $10
million. In 2002, approximately 150,000
corporations and partnerships filed returns
reporting assets in this range. The returns
filed by these taxpayers present a wide variety of complex issues. The largest of these
taxpayers deal with the IRS on a continuous basis.
One of LMSB’s strategic initiatives is
issue management. Through effective issue management, LMSB seeks to resolve
issues of tax controversy on a more current basis. This includes, but is not limited to, increasing the efficiency of the examination process and seeking alternative
issue resolution tools. The Pre-Filing Agreement program was designed to support
June 30, 2003
LMSB’s issue management strategy. LMSB
believes the Pre-Filing Agreement program reduces taxpayer burden and makes
more effective use of IRS resources by resolving or eliminating tax controversy before the tax return is filed.
The PFA program is designed to permit a taxpayer to resolve, before the filing of a return, the treatment of an issue that
otherwise would likely be disputed in a
post-filing examination. The PFA program
is intended to produce agreement on factual issues and apply settled legal principles to those facts. A PFA is a specific
matter closing agreement under § 7121 of
the Internal Revenue Code and resolves the
subject of the PFA for a specified taxable
period. Execution of a PFA that resolves issues prior to filing permits taxpayers to
avoid costs, burdens and delays that are frequently incident to post-filing examination disputes between taxpayers and the
IRS.
PFA Program
As a result of the success of a pilot program, the IRS established a permanent PFA
Program with the issuance of Rev. Proc.
2001–22. Although many of the procedures remained the same, there were some
significant changes, including:
1. All taxpayers, both Coordinated Issue and Industry cases, within the jurisdiction of LMSB are eligible to participate;
2. More issues are considered appropriate;
3. There are fewer excludible circumstances;
4. Certain international issues are now
considered appropriate; and
5. A user fee was implemented for those
taxpayers accepted into the program.
PFA Process
The PFA process is managed and conducted by LMSB Industry Directors and
field staff, with support from the Office of
Pre-Filing and Technical Guidance in
LMSB Headquarters. The PFA Program
Manager receives all applications and, with
the assistance of the Technical Advisors and
the Office of Chief Counsel, ensures that
the issues presented are appropriate for inclusion in the PFA program.
The Industry Director with jurisdiction
over the taxpayer makes the final deci-
1139
sion whether to accept a taxpayer’s request for participation in the PFA program.
The criteria for selecting a request include:
a. The suitability of the issue presented
by the taxpayer;
b. The direct or indirect impact of a PFA
upon other years, issues, taxpayers, or related cases;
c. The availability of IRS resources;
d. The ability and willingness of the taxpayer to dedicate sufficient resources to the
process;
e. The likelihood that the PFA may result in contrary positions with respect to an
item or transaction (“whipsaw”); and
f. The probability of completing the examination of the issue and entering into a
PFA by the target date.
For the cases selected, a mandatory orientation session for the examination team
and the taxpayer is conducted. Subsequently,
the taxpayer and examination team convene a joint planning meeting to reach
agreement on a proposed timeframe, to
identify and arrange for IRS access to relevant records and testimony, and to define the potential scope and nature of the
PFA.
The examination team conducts the factual determination and issue development
consistent with IRS auditing standards.
Based upon an examination of the issue, the
Team Manager prepares a PFA recommendation for the Industry Director. The Industry Director’s decision to execute a PFA
Closing Agreement is based on the Team
Manager’s recommendation and discussions with the PFA Program Manager, Chief
Counsel attorneys, appropriate Technical
Advisors and the taxpayer. Following Chief
Counsel review to ensure that the proposed PFA conforms with guidance provided in Rev. Proc. 68–16 (regarding closing agreements), the Industry Director could
execute a PFA if he or she determines that:
a. Entering into the PFA is consistent
with the goals of the PFA program as stated
in Rev. Proc. 2001–22;
b. The resolution in the PFA reflects
settled legal principles and correctly applies those principles (or positions authorized under Delegation Order Nos. 236 or
247) to facts found by the examination
team; and
c. There appears to be an advantage in
having the issue(s) permanently and conclusively closed for the taxable period covered by the PFA, or that the taxpayer shows
2003–26 I.R.B.
good and sufficient reasons for desiring a
closing agreement and that the United States
would sustain no disadvantage through consummation of such an agreement (see
§ 301.7121–1(a) of the Procedure and Administration Regulations).
Program Oversight
Pre-Filing Agreement Program
Accomplishments
A designated PFA Program Manager assigned to the Office of Pre-Filing and Technical Guidance in LMSB Headquarters provides oversight for the PFA program. The
PFA Program Manager provides assistance
to taxpayers, Industry Directors and Team
Managers throughout the process.
Statistical Overview of PFA Program —
Calendar Year 2002
The table below reflects activity concerning those PFA requests which were received in calendar year 2001 and carried
over into calendar year 2002.
Overview of PFA Applications Received in Calendar Year 2001
Applications Pending Acceptance/Rejection on January 1, 2002
Applications In-Process on January 1, 2002
Applications Rejected in 2002
Applications Withdrawn in 2002
Applications for Which There Were Closing Agreements in 2002
Applications Pending Acceptance/Rejection on December 31, 2002
Applications in-Process on December 31, 2002
Totals
5
7
1
0
7
0
4
The table below reflects the status of PFA requests received in calendar year 2002.
Overview of PFA Applications Received in Calendar Year 2002
Applications Received in 2002
Applications Accepted in 2002
Applications Rejected in 2002
Applications Withdrawn before Acceptance/Rejection in 2002
Applications Withdrawn after Acceptance in 2002
Applications for Which There Were Closing Agreements in 2002
Applications Pending Acceptance/Rejection on December 31, 2002
Applications in-Process on December 31, 2002
Totals
44
25
14
1
4
5
4
16
Description of Applications Received in Calendar Year 2002
The forty-four applications that were received for the PFA program in calendar year 2002 came from each LMSB industry segment and involved a variety of issues.
Number of Requests Received and Accepted by Industry Segment
Industry Segment
Financial Services (FS)
Retailers, Food, Pharmaceuticals & Healthcare (RFP&H)
Natural Resources & Construction (NR&C)
Communications, Technology & Media (CT&M)
Heavy Manufacturing & Transportation (HM&T)
Total
2003–26 I.R.B.
Received
6
9
16
6
7
44
1140
Accepted
3
5
9
4
4
25
June 30, 2003
Types of Issues Received
Issue
Original Issue Discount Issue Price
Fair Market Value of Assets Exchanged for Stock
Abandonment Loss
Sale of Assets – Amount of Built-in Gains and Built-in Losses
Sale of Assets &/or Stock
Allocation of Sales Price
Research & Experiment Credit
Sale – Leaseback
Bad Debts &/or Worthless Securities
Legal/Consulting Fees vs Lobbying
Bank Owned Life Insurance
Spin-off & Merger
Deduction for Dividends Paid to Employee Stock Ownership Plan
Investigatory Costs
Allocation of Losses
Restructuring
Period of Income Inclusion
Tax Motivated Transaction
Donation of Intangibles
Donation of Real Property
Qualified Conservation Donation
Liquidation
Synthetic Fuel Credit
Total
Received
1
2
1
1
2
1
5
1
3
1
1
1
1
3
1
1
1
2
2
1
1
2
9
44
Reasons Why Applications Received in Calendar Year 2002 Were Not Accepted
Fourteen of the applications received in 2002 were not considered appropriate for the PFA program.
Reasons for Non-acceptance
Issue Not Suitable or Ineligible
International Issue Not Listed in Rev. Proc. 2001–22
Not Well-Settled Law
Tax Motivated Transaction
Total
Applications
6
2
4
2
14
Taxpayer Withdrawal (3)
IRS Withdrawal (2)
PFAs Executed (12)
In accordance with the procedures set
forth in Section 8 of Rev. Proc. 2001–22,
three taxpayers withdrew from the PFA process — 2 after their requests had been accepted and one prior to acceptance. In two
cases, the withdrawals were necessitated, as
indicated by the taxpayers, by their inability to devote sufficient resources required
to successfully continue the PFA process.
In the other instance, the taxpayer withdrew because of the reluctance of the Industry Director to reach agreement on all
the issues in the taxpayer’s application.
The Service withdrew from the PFA process in one case where, after significant factual development and legal analysis of all
of the issues, the Service concluded that the
issues did not involve well settled law. The
Service withdrew from the PFA process in
a second case where, after factual development, the Service determined that the issues were not suitable for the PFA program and would be more effectively
considered during a post-filing examination.
Twelve PFAs were completed in calendar year 2002, resulting in the execution of
closing agreements.
The Office of Chief Counsel provided
advice to the examination teams and assisted in the drafting and review of the PFA
closing agreements. No Technical Advice
or Chief Counsel Advice Memoranda were
issued for issues addressed in the PFA process. The executed PFAs covered the following issues:
June 30, 2003
1141
2003–26 I.R.B.
PFAs Executed by Issue
Year
Application
Received
2001
2001
2001
2001
2001
2001
2002
2002
2002
2002
2002
Issue
Tax Basis/Holding Period/Reorganization
Bad Debts & Worthless Stock
Accounting Method
Reorganization & Basis of Stock
Donation of Intangibles
Gain on Sale of Assets
Treatment of costs associated with acquiring another corporation
Allocation of Sales Price
Sale of Assets – Amount of Built-in Gains and Built-in Losses
Spin-off & Merger
Deduction for Dividends Paid to ESOP
Total
Tax Basis/Holding Period/Reorganization
The taxpayer requested a determination concerning the tax basis and holding
period of stock acquired in a reorganization described in §§ 368(a)(1)(B) and
368(a)(2)(E). The parties entered into a closing agreement that established the amount
of the taxpayer’s basis in the stock. The
closing agreement also established the date
that the taxpayer will have met the fiveyear holding period prescribed by § 355(d).
Bad Debts & Worthless Stock
The taxpayer and the IRS entered into
a closing agreement stipulating that the entire debt owed by a subsidiary to the taxpayer had become worthless within the
meaning of § 166(a)(1) during the taxpayer’s taxable year ending in 2002. In addition, the closing agreement stipulated that
the taxpayer’s securities in the subsidiary
had become worthless within the meaning of § 165(g)(3) during the taxpayer’s taxable year ending in 2002.
Accounting Method
The taxpayer requested a determination concerning the proper tax accounting
treatment of rebates paid to customers. The
taxpayer had acquired all the assets and liabilities of another corporation that used a
different method of accounting for rebates
than the taxpayer. In integrating the two accounting systems, the taxpayer wanted to
use the method previously used by the ac-
2003–26 I.R.B.
Number
quired corporation. A closing agreement was
executed allowing the taxpayer to use the
desired method of accounting.
Reorganization & Basis of Stock
The taxpayer requested a determination concerning its basis in stock acquired
in a reorganization described in
§ 368(a)(2)(E). The parties entered into a
closing agreement whereby it was agreed
that the taxpayer could determine its basis under § 1.358–6 as if the basis in the
acquired stock was determined under
§ 362(b). In addition, the parties agreed to
the amount of the basis.
Donation of Intangibles (2)
In each of these unrelated cases, taxpayers sought an agreement as to the fair
market value of certain intellectual property donated to qualified organizations. In
both instances, a closing agreement was
reached specifying the fair market value of
the property contributed. The closing agreement did not address the deductibility of the
charitable contributions.
Gain on Sale of Assets
In this case, the taxpayer sold assets to
an unrelated third party in a transaction described in § 1060. The purchaser paid cash
and assumed liabilities in exchange for the
assets. A closing agreement was executed
establishing the amount of capital gain and
ordinary loss to be reported from the transaction for each asset class under § 1060.
1142
1
1
1
1
2
1
1
1
1
1
1
12
Treatment of Costs Associated with
Acquiring another Corporation
Taxpayer requested a determination with
respect to the treatment of certain costs associated with the acquisition of another corporation. A closing agreement was executed
specifying, based on the facts, the amount
deductible as ordinary and necessary business expenses under § 162, the amount allowable under § 195 as start-up expenditures and the amount required to be
capitalized under § 263.
Allocation of Sales Price
In this case, the taxpayer sold assets to
a third party. The taxpayer requested an
agreement concerning the proper allocation of the sale proceeds among the assets sold. A factual determination was
reached concerning the allocation of the
sales proceeds and the amount and character of income, gain and loss to be reported.
Sale of Assets — Amount of Built-in
Gains and Built-in Losses
The taxpayer requested a factual determination regarding the amount of built-in
gains and built-in losses, as defined in
§§ 1374(d)(3) and (d)(4), recognized from
the sale of its qualified subchapter S subsidiaries (QSubs). Under § 1.1361–5, the
sale of the QSubs was treated as a direct
sale of the assets of the QSubs. The examination consisted of a review of the taxpayer’s computations and a review of the
June 30, 2003
books and records and other information
provided by the taxpayer. A closing agreement was entered into specifying the
amounts of gain and loss to be recognized.
Spin-off & Merger
The taxpayer distributed all of the issued and outstanding stock of a number of
its wholly-owned subsidiaries to shareholders in complete redemption of their shares.
Subsequent to the distribution, the subsidiaries merged into another corporation. An
agreement was reached indicating the distribution satisfied the requirements of § 355,
other than the business purpose requirement (which was not addressed by the closing agreement), and therefore, subject to satisfying the business purpose requirement,
no gain or loss was recognized by any of
the shareholders or any of the corporations as a result of the distribution and subsequent merger.
Deduction for Dividends Paid to ESOP
PFA Program Utilization
The taxpayer requested a determination regarding the treatment of dividends
that were paid by the taxpayer to an Employee Stock Ownership Plan (ESOP) and
were subject to a distribution/reinvestment
election during the first 90 days of 2002.
A closing agreement was executed stipulating the amount of dividends that qualified as applicable dividends under § 404(k)
and therefore were deductible by the taxpayer.
The PFA Program is available to all taxpayers under the jurisdiction of LMSB. During calendar year 2002, 44 taxpayers submitted PFA requests. These included both
Coordinated Industry Case (CIC) taxpayers that are typically subject to examination on a continuing basis and Industry Case
(IC) taxpayers that are subject to examination on a more limited basis. Of the 44
requests, 38 were from CIC taxpayers and
6 from IC taxpayers. For the twelve cases
that resulted in closing agreements during calendar year 2002, 10 were with CIC
taxpayers and 2 were with IC taxpayers.
Closing Agreements
A pro forma or model agreement does
not exist for a PFA Closing Agreement. A
PFA represents a specific matter closing
agreement under § 7121. The closing agreements entered into under this program were
p
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