These synopses are intended only as aids to the reader in

Agency decision

Ask Donna

What actually matters in this document.

Text

Bulletin No. 2003–8

February 24, 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. 2003–21, page 509.

LIFO; price indexes; department stores. The December 2002

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, December 31, 2002.

Rev. Rul. 2003–22, page 494.

Low-income housing credit; satisfactory bond; “bond factor” amounts for the period January through March 2003.

This ruling announces errors in the monthly bond factor amounts

to be used by taxpayers who dispose of qualified low-income buildings or interests therein during the period January through March

2003. It also provides a list of the corrected bond factor amounts.

Rev. Rul. 2003–2 revoked.

Rev. Rul. 2003–23, page 511.

Estimated tax penalty safe harbor. This ruling addresses the

application of section 6654(d)(1)(B)(ii) of the Code where an individual filed a late original return for the preceding year.

T.D. 9030, page 495.

Final regulations under section 121 of the Code provide rules relating to the exclusion of gain from the sale or exchange of a principal residence and for the application of the exclusion to an

individual’s bankruptcy estate.

T.D. 9031, page 504.

REG–138882–02, page 522.

Temporary and proposed regulations under section 121 of the

Code provide rules relating to the reduced maximum exclusion

of gain from the sale or exchange of property that the taxpayer

has not owned and used as the taxpayer’s principal residence

Findings Lists begin on page ii.

for two of the preceding five years or when the taxpayer has excluded gain from the sale or exchange of a principal residence

within the preceding two years.

T.D. 9041, page 510.

Final and temporary regulations under section 3406 of the Code

allow a payor’s authorized agent to participate in the Taxpayer

Identification Number (TIN) Matching Program.

REG–116641–01, page 518.

Proposed regulations under sections 3406 and 6724 of the Code

provide guidance relating to the Taxpayer Identification Number (TIN) Matching Program and to information reporting requirements, information reporting penalties, and backup withholding

requirements for payment card transactions. The regulations provide that backup withholding does not apply to payment card

transactions if the reportable payments are made through a Qualified Payment Card Agent (QPCA) and the payee is a qualified

payee. The regulations also provide special Taxpayer Identification Number (TIN) solicitation rules under section 6724 for payments made through a QPCA. A public hearing is scheduled for

May 21, 2003.

Notice 2003–13, page 513.

This notice provides a proposed revenue procedure that would

establish a procedure for a payment card organization to request a determination that it is a Qualified Payment Card Agent.

A QPCA could act on behalf of cardholder/payors in soliciting,

collecting, and validating merchants’ names, Taxpayer Identification Numbers (TINs), and corporate status, and on behalf of

merchant/payees in furnishing such information to cardholder/

payors.

(Continued on the next page)

INCOME TAX—Cont.

Rev. Proc. 2003–9, page 516.

This procedure expands the Taxpayer Identification Number (TIN)

Matching Program, permitting payors to verify, prior to filing,

payee TINs required to be reported on information returns and

payee statements. The federal TIN Matching Program established by Rev. Proc. 97–31 was limited to federal agencies. Rev.

Proc. 2003–9 establishes an on-line system open to all payors

of reportable payments and their authorized agents. Program participants will be able to rely on a verified TIN/name match as reasonable cause under section 6724(a) of the Code, which will

provide significant incentive for payors to check and correct payee

TINs before filing. Rev. Proc. 97–31 modified.

EMPLOYEE PLANS

Notice 2003–14, page 515.

Weighted average interest rate update. The weighted average interest rate for February 2003 and the resulting permissible range of interest rates used to calculate current liability for

purposes of the full funding limitation of section 412(c)(7) of the

Code are set forth.

February 24, 2003

2003–8 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.

2003–8 I.R.B.

February 24, 2003

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

Section 42.—Low-Income

Housing Credit

Low-income housing credit; satisfactory bond; “bond factor” amounts for the

period January through March 2003.

This ruling announces errors in the monthly

bond factor amounts to be used by taxpayers who dispose of qualified low-income

buildings or interests therein during the period January through March 2003. It also

provides a list of the corrected bond factor amounts. Rev. Rul. 2003–2 revoked.

Rev. Rul. 2003–22

In Rev. Rul. 90–60, 1990–2 C.B. 3, the

Internal Revenue Service provided guidance to taxpayers concerning the general

methodology used by the Treasury Department in computing the bond factor amounts

used in calculating the amount of bond considered satisfactory by the Secretary under § 42(j)(6) of the Internal Revenue Code.

It further announced that the Secretary

would publish in the Internal Revenue Bul-

Month of

Disposition

Jan ’03

Feb ’03

Mar ’03

Month of

Disposition

Jan ’03

Feb ’03

Mar ’03

letin a table of bond factor amounts for dispositions occurring during each calendar

month.

Rev. Proc. 99–11, 1999–1 C.B. 275, established a collateral program as an alternative to providing a surety bond for

taxpayers to avoid or defer recapture of lowincome housing tax credits under § 42(j)(6).

Under this program, taxpayers may establish a Treasury Direct Account and pledge

certain United States Treasury securities to

the Internal Revenue Service as security.

This revenue ruling provides in Table 1

the bond factor amounts for calculating the

amount of bond considered satisfactory under § 42(j)(6) or the amount of United

States Treasury securities to pledge in a

Treasury Direct Account under Rev. Proc.

99–11 for dispositions of qualified lowincome buildings or interests therein during the period January through March 2003.

Due to a miscalculation, Rev. Rul.

2003–2, 2003–2 I.R.B. 251, is in error regarding dispositions of qualified low-income

buildings or interests therein during the period January through March 2003. The

present revenue ruling provides the corrected bond factor amounts.

Under the authority of § 7805(b), taxpayers that posted bonds and taxpayers that

established Treasury Direct Accounts under Rev. Proc. 99–11, based upon the above

mentioned bond factor amounts may continue to rely on those figures. Taxpayers that

choose to amend their previously posted

bonds by using the corrected bond factor

amounts listed in this revenue ruling may

do so by submitting an amended Form

8693, Low-Income Housing Tax Credit Disposition Bond, to the Internal Revenue Service Center, Philadelphia, PA 19255. The

amended form may be submitted either by

the taxpayer or the surety. Taxpayers that

choose to amend the amount of securities

pledged in their previously established Treasury Direct Account by using the corrected

bond factor amounts listed in this revenue ruling should contact the Bureau of

Public Debt, Division of Customer Service, IRS Collateral Desk at (304) 480–

6158 for further information.

1989

1990

Table 1

Rev. Rul. 2003–22

Monthly Bond Factor Amounts for Dispositions Expressed

As a Percentage of Total Credits

Calendar Year Building Placed in Service

or, if Section 42(f)(1) Election Was Made,

the Succeeding Calendar Year

1991

1992

1993

1994

1995

1996

16.23

30.04

41.83

2000

2001

Table 1 (cont’d)

Rev. Rul. 2003–22

Monthly Bond Factor Amounts for Dispositions Expressed

As a Percentage of Total Credits

Calendar Year Building Placed in Service

or, if Section 42(f)(1) Election Was Made,

the Succeeding Calendar Year

2002

2003

60.89

60.75

60.62

61.55

61.41

61.27

62.49

62.33

62.19

2003–8 I.R.B.

51.93

60.50

60.24

60.09

59.94

60.12

59.97

59.82

60.11

59.96

59.82

1997

1998

1999

60.18

60.03

59.89

60.39

60.24

60.10

60.62

60.47

60.33

62.68

494

February 24, 2003

For a list of bond factor amounts applicable to dispositions occurring during other

calendar years, see: Rev. Rul. 98–3, 1998–1

C.B. 248; Rev. Rul. 2001–2, 2001–1 C.B.

255; Rev. Rul. 2001–53, 2001–2 C.B. 488;

and Rev. Rul. 2002–72, 2002–44 I.R.B. 759.

EFFECT ON OTHER REVENUE

RULINGS

Rev. Rul. 2003–2, 2003–2 I.R.B. 251, is

revoked.

DRAFTING INFORMATION

The principal author of this revenue ruling is Gregory N. Doran of the Office of

Associate Chief Counsel (Passthroughs and

Special Industries). For further information regarding this revenue ruling, contact Mr. Doran at (202) 622–3040 (not a

toll-free call).

Section 121.—Exclusion of

Gain From Sale of Principal

Residence

26 CFR 1.121–1: Exclusion of gain from sale or

exchange of a principal residence.

T.D. 9030

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 1

Exclusion of Gain From Sale

or Exchange of a Principal

Residence

Applicability Date: For dates of applicability, see §§ 1.121–1(f), 1.121–2(c),

1.121–3(l), 1.121–4(l), and 1.1398–3(d).

FOR FURTHER INFORMATION CONTACT: Sara Paige Shepherd, (202) 622–

4960 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On October 10, 2000, the IRS and the

Treasury Department published in the Federal Register a notice of proposed rulemaking (REG–105235–99, 2000–44 I.R.B.

447 [65 FR 60136]) under section 121 of

the Internal Revenue Code. Comments were

specifically requested regarding what circumstances should qualify as unforeseen for

purposes of the reduced maximum exclusion under section 121(c). Written and electronic comments responding to the notice

of proposed rulemaking were received. A

public hearing was held on January 26,

2001.

After considering all of the comments,

the proposed regulations are adopted as

amended by this Treasury decision. Proposed and temporary regulations regarding the reduced maximum exclusion are

also published in this issue of the Federal

On September 9, 2002, the IRS published Notice 2002–60, 2002–36 I.R.B. 482,

which provides that certain taxpayers affected by the September 11, 2001, terrorist attacks may claim a reduced maximum

exclusion for a sale or exchange of the taxpayer’s principal residence by reason of unforeseen circumstances.

Explanation and Summary of

Comments

AGENCY: Internal Revenue Service (IRS),

Treasury.

1. Exclusion of Gain from the Sale or

Exchange of a Principal Residence

ACTION: Final regulations.

Under section 121 and the proposed

regulations, a taxpayer may exclude up to

$250,000 ($500,000 for certain joint returns) of gain realized on the sale or exchange of the taxpayer’s principal residence

if the taxpayer owned and used the property as the taxpayer’s principal residence for

at least two years during the five-year period ending on the date of the sale or exchange.

SUMMARY: This document contains final regulations relating to the exclusion of

gain from the sale or exchange of a taxpayer’s principal residence. These regulations reflect changes to the law made by the

Taxpayer Relief Act of 1997, as amended

by the Internal Revenue Service Restructuring and Reform Act of 1998.

DATES: Effective Date: These regulations

are effective December 24, 2002.

February 24, 2003

495

a. Principal residence

The proposed regulations provide that

whether property is used by the taxpayer

as the taxpayer’s residence, and whether the

property is used as the taxpayer’s principal residence, depends upon all the facts and

circumstances. The proposed regulations further provide that if a taxpayer alternates between two properties, the property that the

taxpayer uses a majority of the time during the year will ordinarily be considered

the taxpayer’s principal residence.

Commentators requested a bright line test

or a list of factors to identify a property as

the taxpayer’s principal residence in the case

of a taxpayer with multiple residences.

Other commentators questioned whether the

property that a taxpayer uses a majority of

the time during the year should generally

be considered the taxpayer’s principal residence, arguing that the determination of the

taxpayer’s principal residence should be

judged on a day-by-day, rather than a yearby-year, basis.

The final regulations continue to provide that the residence that the taxpayer uses

a majority of the time during the year will

ordinarily be considered the taxpayer’s principal residence. However, this test is not dispositive. The final regulations also include

a nonexclusive list of factors that are relevant in identifying a property as a taxpayer’s principal residence.

b. Vacant land

Commentators requested clarification of

the circumstances in which vacant land surrounding a residential structure would be

treated as part of the residence for purposes of section 121. Several commentators maintained that a taxpayer who sells

vacant land should be entitled to the section 121 exclusion if the taxpayer used the

vacant land in conjunction with a dwelling unit as the taxpayer’s principal residence for at least two years.

Under section 1034 and former section 121, a sale of vacant land that did not

include a dwelling unit did not qualify as

a sale of the taxpayer’s residence. See Rev.

Rul. 56–420, 1956–2 C.B. 519; Rev. Rul.

83–50, 1983–1 C.B. 41; O’Barr v. Commissioner, 44 T.C. 501 (1965); Roy v. Commissioner, T.C. Memo. 1995–23; Hale v.

Commissioner, T.C. Memo. 1982–527.

However, if the sale of vacant land was one

of a series of transactions that included the

2003–8 I.R.B.

sale of the house, and the series of transactions all occurred during the replacement period provided by section 1034 (two

years before or after the date of the taxpayer’s purchase of a replacement residence), the sale of vacant land and the sale

of the house were treated as one sale. See

Bogley v. Commissioner, 263 F.2d 746 (4th

Cir. 1959); Rev. Rul. 76–541, 1976–2 C.B.

246.

Consequently, the final regulations provide that section 121 applies to the sale or

exchange of vacant land that the taxpayer

has owned and used as part of the taxpayer’s principal residence if the sale or exchange of the dwelling unit occurs within

two years before or after the sale or exchange of the vacant land. The vacant land

must be adjacent to land containing the

dwelling unit and the sale or exchange of

the vacant land must otherwise satisfy the

requirements of section 121.

For purposes of section 121(b)(1) and (2)

(regarding the maximum limitation amount

of the section 121 exclusion), sales or exchanges of the dwelling unit and vacant

land are treated as one sale or exchange.

Therefore, only one maximum limitation

amount of $250,000 ($500,000 for certain joint returns) applies to the combined

sales or exchanges of the vacant land and

dwelling unit. In applying the maximum

limitation amount to sales or exchanges that

occur in different taxable years, gain from

the sale or exchange of the dwelling unit,

up to the maximum limitation amount under section 121(b)(1) or (2), is excluded

first, and each spouse is treated as excluding one-half of the gain from a sale or exchange to which section 121(b)(2)(A) and

§ 1.121–2(a)(3)(i) (relating to the limitation for certain joint returns) apply. Sales

or exchanges of the dwelling unit and adjacent vacant land in separate transactions

are disregarded in applying section

121(b)(3) (restricting the application of section 121 to only 1 sale or exchange every

2 years) to each other but are taken into account as a sale or exchange of a principal

residence on the date of each transaction in

applying section 121(b)(3) to that transaction and the sale or exchange of any other

principal residence.

2. Use as a Principal Residence

should not require actual occupancy. Instead, they argued for a facts and circumstances test similar to the test employed

under section 1034. Under that test, a taxpayer’s non-occupancy of a residence would

count as use if the taxpayer did not intend to abandon the property as the taxpayer’s principal residence. The final

regulations do not adopt this suggestion because it is inconsistent with the statutory approach under section 121 of aggregating

periods of use over a five-year period, and

with the legislative history that provides that

“a taxpayer must have owned the residence and occupied it as a principal residence for at least two of the five years prior

to the sale or exchange.” See H.R. Rep. No.

148, 105th Cong., 1st Sess. 348 (1997),

1997–4 (Vol. 1) C.B. 319, 670; S. Rep. No.

33, 105th Cong., 1st Sess. 37 (1997),

1997–4 (Vol. 2) C.B. 1067, 1117; H.R.

Conf. Rep. No. 220, 105th Cong., 1st Sess.

386 (1997), 1997–4 (Vol. 2) C.B. 1457,

1856.

Commentators proposed a special exception to the occupancy requirement for

taxpayers who are absent from the home for

an extended period of time due to employment but have not purchased a replacement residence. Other commentators

suggested that members of the uniformed

services and the United States Foreign Service should be accorded a special exception because they are often away from home

for extended periods of time. A commentator also requested that the home daycare industry be exempted from the

occupancy requirement because calculating the days of actual occupancy presents

a particular difficulty for home daycare providers who often use the same space for

residential and business purposes.

The final regulations do not adopt these

comments because there is no specific authority under section 121 to provide exceptions to the use requirement except in

the cases of property of a deceased spouse

(section 121(d)(2)), property of a former

spouse (section 121(d)(3)(B)), and out-ofresidence care (section 121(d)(7)). Moreover, section 1034 contained a special rule

for members of the Armed Forces, which

Congress did not include in enacting section 121.

a. Occupancy requirement

b. Short temporary absences

Numerous commentators asserted that

the two-year use requirement of section 121

Commentators requested that the regulations specify a maximum period of time

2003–8 I.R.B.

496

that would constitute a short temporary absence from the residence and be considered use for purposes of satisfying the twoyear use requirement. One commentator

suggested that periods of up to five years

away from home due to international employment assignments should be considered short temporary absences.

Because the determination of whether an

absence is short and temporary depends on

the facts and circumstances, the final regulations do not adopt these suggestions.

c. Property used in part as a principal

residence

The proposed regulations provide that if

a taxpayer satisfies the use requirement with

respect to only a portion of the property sold

or exchanged, section 121 will apply only

to the gain allocable to that portion. Thus,

if the residence was used partially for residential purposes and partially for business purposes (mixed-use property), only

that part of the gain allocable to the residential portion is excludable under section 121.

Under section 121(d)(6), the exclusion

does not apply to so much of the gain from

the sale of the property as does not exceed depreciation attributable to periods after May 6, 1997. Commentators suggested

that the enactment of section 121(d)(6) illustrates legislative intent to eliminate the

allocation requirement for mixed-use property that existed under prior law.

The IRS and Treasury Department have

reconsidered the allocation rules of the proposed regulations. The final regulations provide that section 121 will not apply to the

gain allocable to any portion of property

sold or exchanged with respect to which a

taxpayer does not satisfy the use requirement if the non-residential portion is separate from the dwelling unit. Additionally,

if the depreciation for periods after May 6,

1997, attributable to the non-residential portion of the property exceeds the gain allocable to the non-residential portion of the

property, the excess will not reduce the section 121 exclusion applicable to gain allocable to the residential portion of the

property. No allocation of gain is required

if both the residential and non-residential

portions of the property are within the same

dwelling unit, however, section 121 will not

apply to the gain to the extent of any postMay 6, 1997, depreciation adjustments. The

final regulations provide that the term dwell-

February 24, 2003

ing unit has the same meaning as in section 280A(f)(1), but does not include

appurtenant structures or other property.

A commentator asked for clarification regarding how to allocate the basis and the

amount realized under the allocation rules

between the portions of the property used

for business and residential purposes. The

commentator suggested that the regulations should require allocation on the same

basis used to determine previous depreciation deductions. The regulations adopt this

comment and provide that the taxpayer must

use the same method to allocate the basis

and the amount realized between the business and residential portions of the property as the taxpayer used to allocate the

basis for purposes of depreciation, if applicable.

3. Ownership by Trusts

Commentators suggested that the regulations adopt the holdings of Rev. Rul. 66–

159, 1966–1 C.B. 162, and Rev. Rul. 85–

45, 1985–1 C.B. 183, regarding treatment

of sales of property by certain trusts. Rev.

Rul. 66–159 holds that, in cases in which

the grantor is treated as the owner of the

entire trust under sections 676 and 671, gain

realized from the sale of trust property used

by the grantor as the grantor’s principal residence qualifies under section 1034 for the

rollover of gain into a replacement residence. Because the grantor is treated as the

owner of the entire trust, the sale by the

trust will be treated for federal income tax

purposes as if made by the grantor.

Rev. Rul. 85–45 holds that, in cases in

which the beneficiary of a trust is treated

as the owner of the entire trust under sections 678 and 671, gain realized from the

sale of trust property used by the beneficiary as the beneficiary’s principal residence qualifies for the one-time exclusion

of gain from the sale of a residence under former section 121. For the period that

the beneficiary is treated as the owner of

the entire trust, the beneficiary will be

treated as owning the property for section

121 purposes, and the sale by the trust will

be treated for federal income tax purposes

as if made by the beneficiary.

The final regulations adopt these suggestions and provide that, if a residence is

held by a trust, a taxpayer is treated as the

owner and the seller of the residence during the period that the taxpayer is treated

as the owner of the trust or the portion of

February 24, 2003

the trust that includes the residence under

sections 671 through 679. The regulations

provide similar treatment for certain singleowner entities.

4. Dollar Limitations Applicable to

Jointly Owned Property

Commentators requested further clarification of the application of the dollar limitations of section 121(b) to non-married

taxpayers who are joint owners of a residence. In response, the final regulations provide that each unmarried taxpayer who

jointly owns a principal residence may be

eligible to exclude from gross income up

to $250,000 of gain that is attributable to

each taxpayer’s interest in the property.

5. Reduced Maximum Exclusion

Section 121(c) provides an exclusion of

gain in a reduced maximum amount for taxpayers who have owned or used a principal residence for less than two of the five

years preceding the sale or exchange or who

have excluded gain from another sale or exchange during the last two years. Taxpayers who fail to meet any of these conditions

may qualify for the reduced maximum exclusion if the sale or exchange is by reason of a change in place of employment,

health, or unforeseen circumstances.

The proposed regulations explain the

general rule and the computation of the reduced maximum exclusion but do not provide rules clarifying what is a sale or

exchange by reason of a change in place of

employment, health, or unforeseen circumstances. Comments were requested regarding what circumstances should qualify as

unforeseen. Because the rules formulated

in response to the comments are extensive, the IRS and Treasury Department have

concluded that it is appropriate to publish

proposed and temporary regulations to provide the public with adequate notice and opportunity to comment. These proposed and

temporary regulations are published elsewhere in this issue of the Bulletin. The final regulations provide guidance regarding

the computation of the reduced maximum

exclusion.

6. Property of Deceased Spouse

Commentators suggested that the regulations allow a surviving spouse to exclude up to $500,000 of gain if the sale or

exchange of the marital home occurs within

one year of the death of the decedent spouse

497

and the requirements of section 121 are otherwise met. Under section 121(b)(2), the

$500,000 exclusion is only available to

spouses who file a joint return. A surviving spouse is eligible to file a joint return

with the decedent spouse only for the year

of the decedent spouse’s death. Therefore,

the final regulations do not adopt this suggestion.

Commentators also requested clarification regarding the computation of basis and

gain for surviving spouses. They asked for

guidance regarding the advantages of titling the marital home in the names of both

spouses so that a surviving spouse can obtain a step-up in basis and, consequently,

realize less gain from the disposition of the

marital home. Because the rules regarding the computation of basis and gain are

outside the scope of these regulations, the

final regulations do not address these issues.

7. Partial Interests

Commentators suggested that the regulations clarify that a taxpayer who sells a

partial interest in the taxpayer’s principal

residence and more than two years later

sells the remaining interest in the same

property is entitled to use up to the full exclusion for each sale.

The final regulations provide that a taxpayer may exclude gain from the sale or exchange of partial interests (other than

interests remaining after the sale or exchange of a remainder interest) in the taxpayer’s principal residence if the interest

sold or exchanged includes an interest in

the dwelling unit.

However, the IRS and Treasury Department believe that allowing more than the

maximum limitation amount with respect

to the same principal residence is contrary to the language and intent of section 121. Therefore, only one maximum

limitation amount of $250,000 ($500,000

for certain joint returns) applies to the combined sales or exchanges of partial interests.

In this regard, for purposes of determining the maximum limitation amount under section 121(b)(1) and (2), the sales or

exchanges of partial interests in the same

principal residence are treated as one sale

or exchange. In applying the maximum

limitation amount to sales or exchanges that

occur in different taxable years, a taxpayer

may exclude gain from the first sale or ex-

2003–8 I.R.B.

change of a partial interest up to the taxpayer’s full maximum limitation amount

and may exclude gain from the sale or exchange of any other partial interest in the

same principal residence to the extent of any

remaining maximum limitation amount, and

each spouse is treated as excluding onehalf of the gain from a sale or exchange to

which section 121(b)(2)(A) and § 1.121–

2(a)(3)(i) (relating to the limitation for certain joint returns) apply.

For purposes of applying section

121(b)(3) (restricting the application of section 121 to only 1 sale or exchange every

2 years), each sale or exchange of a partial interest is disregarded with respect to

other sales or exchanges of partial interests in the same principal residence, but is

taken into account as of the date of the sale

or exchange in applying section 121(b)(3)

to that sale or exchange and the sale or exchange of any other principal residence.

8. Elections Under Sections 121(d)(8)

and (f)

10. Election to Apply Regulations

Retroactively

The regulations provide that taxpayers

who would otherwise qualify under the provisions of §§ 1.121–1 through 1.121–4 of

the final regulations to exclude gain from

a sale or exchange before the effective date

of the regulations but on or after May 7,

1997, may elect to apply the provisions of

the final regulations for any years for which

the period of limitation under section 6511

has not expired. A taxpayer may make the

election by filing a return for the taxable

year of the sale or exchange that does not

include the gain from the sale or exchange

of the taxpayer’s principal residence in the

taxpayer’s gross income. Taxpayers who

have filed a return for the taxable year of

the sale or exchange may elect to apply the

provisions of the final regulations for any

years for which the period of limitation under section 6511 has not expired by filing

an amended return.

11. Audit Protection

Commentators asked for clarification regarding when a taxpayer may make or revoke an election under section 121(d)(8)

(election to have the section 121 exclusion apply to a sale or exchange of a remainder interest in the taxpayer’s principal

residence) or section 121(f) (election to have

the section 121 exclusion not apply to a sale

or exchange of the taxpayer’s principal residence). The final regulations adopt and

clarify the provisions of the proposed regulations and provide that a taxpayer may

make or revoke either election at any time

before the expiration of a three-year period beginning on the last date prescribed

by law (determined without regard to extensions) for the filing of the return for the

taxable year in which the sale or exchange

occurred.

9. Reporting Sales or Exchanges

Commentators recommended the creation of a form for taxpayers to use to report the sale or exchange of a principal

residence even if the gain is entirely excludable under section 121. The final regulations do not adopt this suggestion because,

unlike sales or exchanges under section

1034, no tax attributes of the sold residence carry over to a new residence. Therefore the reporting of excluded gain is

unnecessary and would be unduly burdensome for taxpayers.

2003–8 I.R.B.

The regulations provide that the IRS will

not challenge a taxpayer’s position that a

sale or exchange before the effective date

of these regulations but on or after May 7,

1997, qualifies for the section 121 exclusion if the taxpayer has made a reasonable, good faith effort to comply with the

requirements of section 121. Compliance

with the provisions of the proposed regulations that preceded these final regulations generally will be considered a

reasonable, good faith effort.

12. Section 121 Exclusion in Individuals’

Title 11 Cases

The regulations provide that the bankruptcy estate of an individual in a chapter

7 or 11 bankruptcy case under title 11 of

the United States Code succeeds to and

takes into account the individual’s section 121 exclusion if the individual satisfies the requirements of section 121.

Although the effective date for this provision is on or after publication of final regulations in the Federal Register, in view of

the IRS’s acquiescence in the case of Internal Revenue Service v. Waldschmidt (In

re Bradley), 222 B.R. 313 (M.D. Tenn.

1998), AOD CC–1999–009 (August 30,

1999), and Chief Counsel Notice (35)000–

162 (August 10, 1999), the IRS will not

challenge a position taken prior to the ef-

498

fective date of these regulations that a bankruptcy estate may use the section 121

exclusion if the debtor would otherwise satisfy the section 121 requirements.

13. Effective Date

These regulations apply to sales or exchanges on or after December 24, 2002.

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 these

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 business.

Drafting Information

The principal author of these regulations is Sara Paige Shepherd, Office of Associate Chief Counsel (Income Tax and

Accounting). However, other personnel from

the IRS and the Treasury Department participated in the development of the regulations.

*****

Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended

as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding an entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.1398–3 also issued under 26

U.S.C. 1398(g) * * *

Par. 2. Sections 1.121–1, 1.121–2,

1.121–3, and 1.121–4 are revised to read

as follows:

February 24, 2003

§ 1.121–1 Exclusion of gain from sale or

exchange of a principal residence.

(a) In general. Section 121 provides that,

under certain circumstances, gross income

does not include gain realized on the sale

or exchange of property that was owned and

used by a taxpayer as the taxpayer’s principal residence. Subject to the other provisions of section 121, a taxpayer may

exclude gain only if, during the 5-year period ending on the date of the sale or exchange, the taxpayer owned and used the

property as the taxpayer’s principal residence for periods aggregating 2 years or

more.

(b) Residence—(1) In general. Whether

property is used by the taxpayer as the taxpayer’s residence depends upon all the facts

and circumstances. A property used by the

taxpayer as the taxpayer’s residence may

include a houseboat, a house trailer, or the

house or apartment that the taxpayer is entitled to occupy as a tenant-stockholder in

a cooperative housing corporation (as those

terms are defined in section 216(b)(1) and

(2)). Property used by the taxpayer as the

taxpayer’s residence does not include personal property that is not a fixture under local law.

(2) Principal residence. In the case of

a taxpayer using more than one property as

a residence, whether property is used by the

taxpayer as the taxpayer’s principal residence depends upon all the facts and circumstances. If a taxpayer alternates between

2 properties, using each as a residence for

successive periods of time, the property that

the taxpayer uses a majority of the time during the year ordinarily will be considered

the taxpayer’s principal residence. In addition to the taxpayer’s use of the property, relevant factors in determining a

taxpayer’s principal residence, include, but

are not limited to—

(i) The taxpayer’s place of employment;

(ii) The principal place of abode of the

taxpayer’s family members;

(iii) The address listed on the taxpayer’s federal and state tax returns, driver’s

license, automobile registration, and voter

registration card;

(iv) The taxpayer’s mailing address for

bills and correspondence;

(v) The location of the taxpayer’s banks;

and

(vi) The location of religious organizations and recreational clubs with which the

taxpayer is affiliated.

February 24, 2003

(3) Vacant land—(i) In general. The sale

or exchange of vacant land is not a sale or

exchange of the taxpayer’s principal residence unless—

(A) The vacant land is adjacent to land

containing the dwelling unit of the taxpayer’s principal residence;

(B) The taxpayer owned and used the

vacant land as part of the taxpayer’s principal residence;

dwelling unit in a sale or exchange that

meets the requirements of section 121

within 2 years before or 2 years after the

date of the sale or exchange of the vacant

land; and

(D) The requirements of section 121

have otherwise been met with respect to the

vacant land.

(ii) Limitations—(A) Maximum limitation amount. For purposes of section

121(b)(1) and (2) (relating to the maximum limitation amount of the section 121

exclusion), the sale or exchange of the

dwelling unit and the vacant land are treated

as one sale or exchange. Therefore, only one

maximum limitation amount of $250,000

($500,000 for certain joint returns) applies to the combined sales or exchanges

of vacant land and the dwelling unit. In applying the maximum limitation amount to

sales or exchanges that occur in different

taxable years, gain from the sale or exchange of the dwelling unit, up to the maximum limitation amount under section

121(b)(1) or (2), is excluded first and each

spouse is treated as excluding one-half of

the gain from a sale or exchange to which

section 121(b)(2)(A) and § 1.121–2(a)(3)(i)

(relating to the limitation for certain joint

returns) apply.

(B) Sale or exchange of more than one

principal residence in 2-year period. If a

dwelling unit and vacant land are sold or

exchanged in separate transactions that

qualify for the section 121 exclusion under this paragraph (b)(3), each of the transactions is disregarded in applying section

121(b)(3) (restricting the application of section 121 to only 1 sale or exchange every

2 years) to the other transactions but is

taken into account as a sale or exchange of

a principal residence on the date of the

transaction in applying section 121(b)(3) to

that transaction and the sale or exchange of

any other principal residence.

499

of the dwelling unit occurs in a later taxable year than the sale or exchange of the

vacant land and after the date prescribed by

law (including extensions) for the filing of

the return for the taxable year of the sale

or exchange of the vacant land, any gain

from the sale or exchange of the vacant land

must be treated as taxable on the taxpayer’s return for the taxable year of the sale

or exchange of the vacant land. If the taxpayer has reported gain from the sale or exchange of the vacant land as taxable, after

satisfying the requirements of this paragraph (b)(3) the taxpayer may claim the section 121 exclusion with regard to the sale

or exchange of the vacant land (for any period for which the period of limitation under section 6511 has not expired) by filing

an amended return.

(4) Examples. The provisions of this

paragraph (b) are illustrated by the following examples:

Example 1. Taxpayer A owns 2 residences, one in

New York and one in Florida. From 1999 through

2004, he lives in the New York residence for 7 months

and the Florida residence for 5 months of each year.

In the absence of facts and circumstances indicating

otherwise, the New York residence is A’s principal residence. A would be eligible for the section 121 exclusion of gain from the sale or exchange of the New

York residence, but not the Florida residence.

Example 2. Taxpayer B owns 2 residences, one in

Virginia and one in Maine. During 1999 and 2000, she

lives in the Virginia residence. During 2001 and 2002,

she lives in the Maine residence. During 2003, she

lives in the Virginia residence. B’s principal residence during 1999, 2000, and 2003 is the Virginia residence. B’s principal residence during 2001 and 2002

is the Maine residence. B would be eligible for the

121 exclusion of gain from the sale or exchange of

either residence (but not both) during 2003.

Example 3. In 1991, Taxpayer C buys property consisting of a house and 10 acres that she uses as her

principal residence. In May 2005, C sells 8 acres of

the land and realizes a gain of $110,000. C does not

sell the dwelling unit before the due date for filing C’s

2005 return, therefore C is not eligible to exclude the

$110,000 of gain. In March 2007, C sells the house

and remaining 2 acres realizing a gain of $180,000

from the sale of the house. C may exclude the

$180,000 of gain. Because the sale of the 8 acres occurred within 2 years from the date of the sale of the

dwelling unit, the sale of the 8 acres is treated as a

sale of the taxpayer’s principal residence under paragraph (b)(3) of this section. C may file an amended

return for 2005 to claim an exclusion for $70,000

($250,000 - $180,000 gain previously excluded) of the

$110,000 gain from the sale of the 8 acres.

Example 4. In 1998, Taxpayer D buys a house and

1 acre that he uses as his principal residence. In 1999,

D buys 29 acres adjacent to his house and uses the

vacant land as part of his principal residence. In 2003,

D sells the house and 1 acre and the 29 acres in 2

separate transactions. D sells the house and 1 acre at

2003–8 I.R.B.

a loss of $25,000. D realizes $270,000 of gain from

the sale of the 29 acres. D may exclude the $245,000

gain from the 2 sales.

(1) In general. The requirements of ownership and use for periods aggregating 2

years or more may be satisfied by establishing ownership and use for 24 full

months or for 730 days (365 x 2). The requirements of ownership and use may be

satisfied during nonconcurrent periods if

both the ownership and use tests are met

during the 5-year period ending on the date

of the sale or exchange.

(2) Use. (i) In establishing whether a taxpayer has satisfied the 2-year use requirement, occupancy of the residence is

required. However, short temporary absences, such as for vacation or other seasonal absence (although accompanied with

rental of the residence), are counted as periods of use.

(ii) Determination of use during periods of out-of-residence care. If a taxpayer

has become physically or mentally incapable of self-care and the taxpayer sells or

exchanges property that the taxpayer owned

and used as the taxpayer’s principal residence for periods aggregating at least 1 year

during the 5-year period preceding the sale

or exchange, the taxpayer is treated as using the property as the taxpayer’s principal residence for any period of time during

the 5-year period in which the taxpayer

owns the property and resides in any facility (including a nursing home) licensed

by a State or political subdivision to care

for an individual in the taxpayer’s condition.

(3) Ownership—(i) Trusts. If a residence is owned by a trust, for the period

that a taxpayer is treated under sections 671

through 679 (relating to the treatment of

grantors and others as substantial owners) as the owner of the trust or the portion of the trust that includes the residence,

the taxpayer will be treated as owning the

residence for purposes of satisfying the

2-year ownership requirement of section

121, and the sale or exchange by the trust

will be treated as if made by the taxpayer.

(ii) Certain single owner entities. If a

residence is owned by an eligible entity

(within the meaning of § 301.7701–3(a) of

this chapter) that has a single owner and is

disregarded for federal tax purposes as an

entity separate from its owner under

§ 301.7701–3 of this chapter, the owner will

be treated as owning the residence for pur-

2003–8 I.R.B.

poses of satisfying the 2-year ownership requirement of section 121, and the sale or

exchange by the entity will be treated as if

made by the owner.

(4) Examples. The provisions of this

paragraph (c) are illustrated by the following examples. The examples assume that

§ 1.121–3 (relating to the reduced maximum exclusion) does not apply to the sale

of the property. The examples are as

follows:

Example 1. Taxpayer A has owned and used his

house as his principal residence since 1986. On January 31, 1998, A moves to another state. A rents his

house to tenants from that date until April 18, 2000,

when he sells it. A is eligible for the section 121 exclusion because he has owned and used the house as

his principal residence for at least 2 of the 5 years preceding the sale.

Example 2. Taxpayer B owns and uses a house as

her principal residence from 1986 to the end of 1997.

On January 4, 1998, B moves to another state and

ceases to use the house. B’s son moves into the house

in March 1999 and uses the residence until it is sold

on July 1, 2001. B may not exclude gain from the sale

under section 121 because she did not use the property as her principal residence for at least 2 years out

of the 5 years preceding the sale.

Example 3. Taxpayer C lives in a townhouse that

he rents from 1993 through 1996. On January 18,

1997, he purchases the townhouse. On February 1,

1998, C moves into his daughter’s home. On May 25,

2000, while still living in his daughter’s home, C sells

his townhouse. The section 121 exclusion will apply to gain from the sale because C owned the townhouse for at least 2 years out of the 5 years preceding

the sale (from January 19, 1997, until May 25, 2000)

and he used the townhouse as his principal residence for at least 2 years during the 5-year period preceding the sale (from May 25, 1995, until February

1, 1998).

Example 4. Taxpayer D, a college professor, purchases and moves into a house on May 1, 1997. He

uses the house as his principal residence continuously until September 1, 1998, when he goes abroad

for a 1-year sabbatical leave. On October 1, 1999, 1

month after returning from the leave, D sells the house.

Because his leave is not considered to be a short temporary absence under paragraph (c)(2) of this section, the period of the sabbatical leave may not be

included in determining whether D used the house for

periods aggregating 2 years during the 5-year period ending on the date of the sale. Consequently, D

is not entitled to exclude gain under section 121 because he did not use the residence for the requisite period.

Example 5. Taxpayer E purchases a house on February 1, 1998, that he uses as his principal residence. During 1998 and 1999, E leaves his residence

for a 2-month summer vacation. E sells the house on

March 1, 2000. Although, in the 5-year period preceding the date of sale, the total time E used his residence is less than 2 years (21 months), the section 121

exclusion will apply to gain from the sale of the residence because, under paragraph (c)(2) of this section, the 2-month vacations are short temporary

500

absences and are counted as periods of use in determining whether E used the residence for the requisite period.

(d) Depreciation taken after May 6,

1997—(1) In general. The section 121 exclusion does not apply to so much of the

gain from the sale or exchange of property as does not exceed the portion of the

depreciation adjustments (as defined in section 1250(b)(3)) attributable to the property for periods after May 6, 1997.

Depreciation adjustments allocable to any

portion of the property to which the section 121 exclusion does not apply under

paragraph (e) of this section are not taken

into account for this purpose.

(2) Example. The provisions of this paragraph (d) are illustrated by the following

example:

Example. On July 1, 1999, Taxpayer A moves into

a house that he owns and had rented to tenants since

July 1, 1997. A took depreciation deductions totaling $14,000 for the period that he rented the property. After using the residence as his principal residence

for 2 full years, A sells the property on August 1, 2001.

A’s gain realized from the sale is $40,000. A has no

other section 1231 or capital gains or losses for 2001.

Only $26,000 ($40,000 gain realized - $14,000 depreciation deductions) may be excluded under section 121. Under section 121(d)(6) and paragraph (d)(1)

of this section, A must recognize $14,000 of the gain

as unrecaptured section 1250 gain within the meaning of section 1(h).

(e) Property used in part as a principal residence—(1) Allocation required. Section 121 will not apply to the gain allocable

to any portion (separate from the dwelling unit) of property sold or exchanged with

respect to which a taxpayer does not satisfy the use requirement. Thus, if a portion of the property was used for residential

purposes and a portion of the property

(separate from the dwelling unit) was used

for non-residential purposes, only the gain

allocable to the residential portion is excludable under section 121. No allocation

is required if both the residential and nonresidential portions of the property are

within the same dwelling unit. However,

section 121 does not apply to the gain allocable to the residential portion of the property to the extent provided by paragraph (d)

of this section.

(2) Dwelling unit. For purposes of this

paragraph (e), the term dwelling unit has the

same meaning as in section 280A(f)(1), but

does not include appurtenant structures or

other property.

(3) Method of allocation. For purposes

of determining the amount of gain allocable to the residential and non-residential

February 24, 2003

portions of the property, the taxpayer must

allocate the basis and the amount realized

between the residential and the nonresidential portions of the property using the

same method of allocation that the taxpayer used to determine depreciation adjustments (as defined in section 1250(b)(3)),

if applicable.

(4) Examples. The provisions of this

paragraph (e) are illustrated by the following examples:

Example 1. Non-residential use of property not

within the dwelling unit. (i) Taxpayer A owns a property that consists of a house, a stable and 35 acres.

A uses the stable and 28 acres for non-residential purposes for more than 3 years during the 5-year period preceding the sale. A uses the entire house and

the remaining 7 acres as his principal residence for

at least 2 years during the 5-year period preceding the

sale. For periods after May 6, 1997, A claims depreciation deductions of $9,000 for the non-residential

use of the stable. A sells the entire property in 2004,

realizing a gain of $24,000. A has no other section

1231 or capital gains or losses for 2004.

(ii) Because the stable and the 28 acres used in the

business are separate from the dwelling unit, the allocation rules under this paragraph (e) apply and A

must allocate the basis and amount realized between

the portion of the property that he used as his principal residence and the portion of the property that he

used for non-residential purposes. A determines that

$14,000 of the gain is allocable to the non-residentialuse portion of the property and that $10,000 of the gain

is allocable to the portion of the property used as his

residence. A must recognize the $14,000 of gain allocable to the non-residential-use portion of the property ($9,000 of which is unrecaptured section 1250 gain

within the meaning of section 1(h), and $5,000 of

which is adjusted net capital gain). A may exclude

$10,000 of the gain from the sale of the property.

Example 2. Non-residential use of property not

within the dwelling unit and rental of the entire property. (i) In 1998, Taxpayer B buys a property that includes a house, a barn, and 2 acres. B uses the house

and 2 acres as her principal residence and the barn for

an antiques business. In 2002, B moves out of the

house and rents it to tenants. B sells the property in

2004, realizing a gain of $21,000. Between 1998 and

2004, B claims depreciation deductions of $4,800 attributable to the antiques business. Between 2002 and

2004, B claims depreciation deductions of $3,000 attributable to the house. B has no other section 1231

or capital gains or losses for 2004.

(ii) Because the portion of the property used in the

antiques business is separate from the dwelling unit,

the allocation rules under this paragraph (e) apply. B

must allocate basis and amount realized between the

portion of the property that she used as her principal residence and the portion of the property that she

used for non-residential purposes. B determines that

$4,000 of the gain is allocable to the non-residential

portion of the property and that $17,000 of the gain

is allocable to the portion of the property that she used

as her principal residence.

(iii) B must recognize the $4,000 of gain allocable to the non-residential portion of the property (all

of which is unrecaptured section 1250 gain within the

meaning of section 1(h)). In addition, the section 121

February 24, 2003

exclusion does not apply to the gain allocable to the

residential portion of the property to the extent of the

depreciation adjustments attributable to the residential portion of the property for periods after May 6,

1997 ($3,000). Therefore, B may exclude $14,000 of

the gain from the sale of the property.

Example 3. Non-residential use of a separate dwelling unit. (i) In 2002, Taxpayer C buys a 3-story townhouse and converts the basement level, which has a

separate entrance, into a separate apartment by installing a kitchen and bathroom and removing the interior stairway that leads from the basement to the

upper floors. After the conversion, the property constitutes 2 dwelling units within the meaning of paragraph (e)(2) of this section. C uses the first and second

floors of the townhouse as his principal residence and

rents the basement level to tenants from 2003 to 2007.

C claims depreciation deductions of $2,000 for that

period with respect to the basement apartment. C sells

the entire property in 2007, realizing gain of $18,000.

C has no other section 1231 or capital gains or losses

for 2007.

(ii) Because the basement apartment and the upper floors of the townhouse are separate dwelling units,

C must allocate the gain between the portion of the

property that he used as his principal residence and

the portion of the property that he used for nonresidential purposes under paragraph (e) of this section. After allocating the basis and the amount realized

between the residential and non-residential portions

of the property, C determines that $6,000 of the gain

is allocable to the non-residential portion of the property and that $12,000 of the gain is allocable to the

portion of the property used as his residence. C must

recognize the $6,000 of gain allocable to the nonresidential portion of the property ($2,000 of which

is unrecaptured section 1250 gain within the meaning of section 1(h), and $4,000 of which is adjusted

net capital gain). C may exclude $12,000 of the gain

from the sale of the property.

Example 4. Separate dwelling unit converted to residential use. The facts are the same as in Example 3

except that in 2007 C incorporates the basement of

the townhouse into his principal residence by eliminating the kitchen and building a new interior stairway to the upper floors. C uses all 3 floors of the

townhouse as his principal residence for 2 full years

and sells the townhouse in 2010, realizing a gain of

$20,000. Under section 121(d)(6) and paragraph (d)

of this section, C must recognize $2,000 of the gain

as unrecaptured section 1250 gain within the meaning of section 1(h). Because C used the entire 3 floors

of the townhouse as his principal residence for 2 of

the 5 years preceding the sale of the property, C may

exclude the remaining $18,000 of the gain from the

sale of the house.

Example 5. Non-residential use within the dwelling unit, property depreciated. Taxpayer D, an attorney, buys a house in 2003. The house constitutes a

single dwelling unit but D uses a portion of the house

as a law office. D claims depreciation deductions of

$2,000 during the period that she owns the house. D

sells the house in 2006, realizing a gain of $13,000.

D has no other section 1231 or capital gains or losses

for 2006. Under section 121(d)(6) and paragraph (d)

of this section, D must recognize $2,000 of the gain

as unrecaptured section 1250 gain within the meaning of section 1(h). D may exclude the remaining

$11,000 of the gain from the sale of her house be-

501

cause, under paragraph (e)(1) of this section, she is

not required to allocate gain to the business use within

the dwelling unit.

Example 6. Non-residential use within the dwelling unit, property not depreciated. The facts are the

same as in Example 5, except that D is not entitled

to claim any depreciation deductions with respect to

her business use of the house. D may exclude $13,000

of the gain from the sale of her house because, under paragraph (e)(1) of this section, she is not required to allocate gain to the business use within the

dwelling unit.

(f) Effective date. This section is applicable for sales and exchanges on or after

December 24, 2002. For rules on electing

to apply the provisions of this section retroactively, see § 1.121–4(j).

§ 1.121–2 Limitations.

(a) Dollar limitations—(1) In general.

A taxpayer may exclude from gross income up to $250,000 of gain from the sale

or exchange of the taxpayer’s principal residence. A taxpayer is eligible for only one

maximum exclusion per principal residence.

(2) Joint owners. If taxpayers jointly own

a principal residence but file separate returns, each taxpayer may exclude from

gross income up to $250,000 of gain that

is attributable to each taxpayer’s interest in

the property, if the requirements of section 121 have otherwise been met.

(3) Special rules for joint returns—(i) In

general. A husband and wife who make a

joint return for the year of the sale or exchange of a principal residence may exclude up to $500,000 of gain if—

(A) Either spouse meets the 2-year ownership requirements of § 1.121–1(a) and (c);

(B) Both spouses meet the 2-year use requirements of § 1.121–1(a) and (c); and

a prior sale or exchange of property under section 121 within the last 2 years (as

determined under paragraph (b) of this section).

(ii) Other joint returns. For taxpayers filing jointly, if either spouse fails to meet the

requirements of paragraph (a)(3)(i) of this

section, the maximum limitation amount to

be claimed by the couple is the sum of each

spouse’s limitation amount determined on

a separate basis as if they had not been married. For this purpose, each spouse is treated

as owning the property during the period

that either spouse owned the property.

(4) Examples. The provisions of this

paragraph (a) are illustrated by the following examples. The examples assume that

2003–8 I.R.B.

§ 1.121–3 (relating to the reduced maximum exclusion) does not apply to the sale

of the property. The examples are as

follows:

Example 1. Unmarried Taxpayers A and B own a

house as joint owners, each owning a 50 percent interest in the house. They sell the house after owning and using it as their principal residence for 2 full

years. The gain realized from the sale is $256,000. A

and B are each eligible to exclude $128,000 of gain

because the amount of realized gain allocable to each

of them from the sale does not exceed each taxpayer’s available limitation amount of $250,000.

Example 2. The facts are the same as in Example

1, except that A and B are married taxpayers who file

a joint return for the taxable year of the sale. A and

B are eligible to exclude the entire amount of realized gain ($256,000) from gross income because the

gain realized from the sale does not exceed the limitation amount of $500,000 available to A and B as taxpayers filing a joint return.

Example 3. During 1999, married Taxpayers H and

W each sell a residence that each had separately owned

and used as a principal residence before their marriage. Each spouse meets the ownership and use tests

for his or her respective residence. Neither spouse

meets the use requirement for the other spouse’s residence. H and W file a joint return for the year of the

sales. The gain realized from the sale of H’s residence is $200,000. The gain realized from the sale of

W’s residence is $300,000. Because the ownership and

use requirements are met for each residence by each

respective spouse, H and W are each eligible to exclude up to $250,000 of gain from the sale of their

individual residences. However, W may not use H’s

unused exclusion to exclude gain in excess of her limitation amount. Therefore, H and W must recognize

$50,000 of the gain realized on the sale of W’s residence.

Example 4. Married Taxpayers H and W sell their

residence and file a joint return for the year of the sale.

W, but not H, satisfies the requirements of section 121.

They are eligible to exclude up to $250,000 of the gain

from the sale of the residence because that is the sum

of each spouse’s dollar limitation amount determined

on a separate basis as if they had not been married

($0 for H, $250,000 for W).

Example 5. Married Taxpayers H and W have owned

and used their principal residence since 1998. On February 16, 2001, H dies. On September 24, 2001, W

sells the residence and realizes a gain of $350,000. Pursuant to section 6013(a)(3), W and H’s executor make

a joint return for 2001. All $350,000 of the gain from

the sale of the residence may be excluded.

Example 6. Assume the same facts as Example 5,

except that W does not sell the residence until January 31, 2002. Because W’s filing status for the taxable year of the sale is single, the special rules for joint

returns under paragraph (a)(3) of this section do not

apply and W may exclude only $250,000 of the gain.

(b) Application of section 121 to only 1

sale or exchange every 2 years—(1) In general. Except as otherwise provided in

§ 1.121–3 (relating to the reduced maximum exclusion), a taxpayer may not exclude from gross income gain from the sale

or exchange of a principal residence if, dur-

2003–8 I.R.B.

ing the 2-year period ending on the date of

the sale or exchange, the taxpayer sold or

exchanged other property for which gain

was excluded under section 121. For purposes of this paragraph (b)(1), any sale or

exchange before May 7, 1997, is disregarded.

(2) Example. The following example illustrates the rules of this paragraph (b). The

example assumes that § 1.121–3 (relating

to the reduced maximum exclusion) does

not apply to the sale of the property. The

example is as follows:

Example. Taxpayer A owns a townhouse that he uses

as his principal residence for 2 full years, 1998 and

1999. A buys a house in 2000 that he owns and uses

as his principal residence. A sells the townhouse in

2002 and excludes gain realized on its sale under section 121. A sells the house in 2003. Although A meets

the 2-year ownership and use requirements of section 121, A is not eligible to exclude gain from the

sale of the house because A excluded gain within the

last 2 years under section 121 from the sale of the

townhouse.

December 24, 2002. For rules on electing

to apply the provisions of this section retroactively, see § 1.121–4(j).

§ 1.121–3 Reduced maximum exclusion

for taxpayers failing to meet certain

requirements.

(a) In general. In lieu of the limitation

under section 121(b) and § 1.121–2, a reduced maximum exclusion limitation may

be available for a taxpayer who sells or exchanges property used as the taxpayer’s

principal residence but fails to satisfy the

ownership and use requirements described

in § 1.121–1(a) and (c) or the 2-year limitation described in § 1.121–2(b).

(b) through (f) [Reserved]. For further

guidance, see § 1.121–3T(b) through (f).

(g) Computation of reduced maximum

exclusion. (1) The reduced maximum exclusion is computed by multiplying the

maximum dollar limitation of $250,000

($500,000 for certain joint filers) by a fraction. The numerator of the fraction is the

shortest of the period of time that the taxpayer owned the property during the 5-year

period ending on the date of the sale or exchange; the period of time that the taxpayer used the property as the taxpayer’s

principal residence during the 5-year period ending on the date of the sale or exchange; or the period of time between the

date of a prior sale or exchange of property for which the taxpayer excluded gain

502

under section 121 and the date of the current sale or exchange. The numerator of the

fraction may be expressed in days or

months. The denominator of the fraction is

730 days or 24 months (depending on the

measure of time used in the numerator).

(2) Examples. The following examples

illustrate the rules of this paragraph (g):

Example 1. Taxpayer A purchases a house that she

uses as her principal residence. Twelve months after

the purchase, A sells the house due to a change in place

of her employment. A has not excluded gain under section 121 on a prior sale or exchange of property within

the last 2 years. A is eligible to exclude up to $125,000

of the gain from the sale of her house (12/24 x

$250,000).

Example 2. (i) Taxpayer H owns a house that he has

used as his principal residence since 1996. On January 15, 1999, H and W marry and W begins to use

H’s house as her principal residence. On January 15,

2000, H sells the house due to a change in W’s place

of employment. Neither H nor W has excluded gain

under section 121 on a prior sale or exchange of property within the last 2 years.

(ii) Because H and W have not each used the house

as their principal residence for at least 2 years during the 5-year period preceding its sale, the maximum dollar limitation amount that may be claimed by

H and W will not be $500,000, but the sum of each

spouse’s limitation amount determined on a separate basis as if they had not been married. (See

§ 1.121–2(a)(3)(ii).)

(iii) H is eligible to exclude up to $250,000 of gain

because he meets the requirements of section 121. W

is not eligible to exclude the maximum dollar limitation amount. Instead, because the sale of the house

is due to a change in place of employment, W is eligible to claim a reduced maximum exclusion of up

to $125,000 of the gain (365/730 x $250,000). Therefore, H and W are eligible to exclude up to $375,000

of gain ($250,000 + $125,000) from the sale of the

house.

(h) [Reserved]. For further guidance, see

§ 1.121–3T(h).

(i) through (k) [Reserved].

(l) Effective date. This section is applicable for sales and exchanges on or after

December 24, 2002. For rules on electing

to apply the provisions of this section retroactively, see § 1.121–4(j).

§ 1.121–4 Special rules.

(a) Property of deceased spouse—(1) In

general. For purposes of satisfying the ownership and use requirements of section 121,

a taxpayer is treated as owning and using

property as the taxpayer’s principal residence during any period that the taxpayer’s deceased spouse owned and used the

property as a principal residence before

death if—

(i) The taxpayer’s spouse is deceased on

the date of the sale or exchange of the property; and

February 24, 2003

(ii) The taxpayer has not remarried at the

time of the sale or exchange of the property.

(2) Example. The provisions of this paragraph (a) are illustrated by the following example. The example assumes that § 1.121–3

(relating to the reduced maximum exclusion) does not apply to the sale of the property. The example is as follows:

Example. Taxpayer H has owned and used a house

as his principal residence since 1987. H and W marry

on July 1, 1999, and from that date they use H’s house

as their principal residence. H dies on August 15, 2000,

and W inherits the property. W sells the property on

September 1, 2000, at which time she has not remarried. Although W has owned and used the house for

less than 2 years, W will be considered to have satisfied the ownership and use requirements of section 121 because W’s period of ownership and use

includes the period that H owned and used the property before death.

(b) Property owned by spouse or former

spouse—(1) Property transferred to individual from spouse or former spouse. If a

taxpayer obtains property from a spouse or

former spouse in a transaction described in

section 1041(a), the period that the taxpayer owns the property will include the period that the spouse or former spouse owned

the property.

(2) Property used by spouse or former

spouse. A taxpayer is treated as using property as the taxpayer’s principal residence for

any period that the taxpayer has an ownership interest in the property and the taxpayer’s spouse or former spouse is granted

use of the property under a divorce or separation instrument (as defined in section

71(b)(2)), provided that the spouse or former

spouse uses the property as his or her principal residence.

housing corporation. A taxpayer who holds

stock as a tenant-stockholder in a cooperative housing corporation (as those terms are

defined in section 216(b)(1) and (2)) may

be eligible to exclude gain under section

121 on the sale or exchange of the stock.

In determining whether the taxpayer meets

the requirements of section 121, the ownership requirements are applied to the holding of the stock and the use requirements

are applied to the house or apartment that

the taxpayer is entitled to occupy by reason of the taxpayer’s stock ownership.

(d) Involuntary conversions—(1) In general. For purposes of section 121, the destruction, theft, seizure, requisition, or

condemnation of property is treated as a sale

of the property.

February 24, 2003

(2) Application of section 1033. In applying section 1033 (relating to involuntary conversions), the amount realized from

the sale or exchange of property used as the

taxpayer’s principal residence is treated as

being the amount determined without regard to section 121, reduced by the amount

of gain excluded from the taxpayer’s gross

income under section 121.

(3) Property acquired after involuntary conversion. If the basis of the property acquired as a result of an involuntary

conversion is determined (in whole or in

part) under section 1033(b) (relating to the

basis of property acquired through an involuntary conversion), then for purposes of

satisfying the requirements of section 121,

the taxpayer will be treated as owning and

using the acquired property as the taxpayer’s principal residence during any period

of time that the taxpayer owned and used

the converted property as the taxpayer’s

principal residence.

(4) Example. The provisions of this paragraph (d) are illustrated by the following

example:

Example. (i) On February 18, 1999, fire destroys

Taxpayer A’s house which has an adjusted basis of

$80,000. A had owned and used this property as her

principal residence for 20 years prior to its destruction. A’s insurance company pays A $400,000 for the

house. A realizes a gain of $320,000 ($400,000 $80,000). On August 27, 1999, A purchases a new

house at a cost of $100,000.

(ii) Because the destruction of the house is treated

as a sale for purposes of section 121, A will exclude $250,000 of the realized gain from A’s gross income. For purposes of section 1033, the amount

realized is then treated as being $150,000 ($400,000

- $250,000) and the gain realized is $70,000 ($150,000

amount realized - $80,000 basis). A elects under section 1033 to recognize only $50,000 of the gain

($150,000 amount realized - $100,000 cost of new

house). The remaining $20,000 of gain is deferred and

A’s basis in the new house is $80,000 ($100,000 cost

- $20,000 gain not recognized).

(iii) A will be treated as owning and using the new

house as A’s principal residence during the 20-year period that A owned and used the destroyed house.

(e) Sales or exchanges of partial

interests—(1) Partial interests other than

remainder interests—(i) In general. Except as provided in paragraph (e)(2) of this

section (relating to sales or exchanges of

remainder interests), a taxpayer may apply the section 121 exclusion to gain from

the sale or exchange of an interest in the

taxpayer’s principal residence that is less

than the taxpayer’s entire interest if the interest sold or exchanged includes an inter-

503

est in the dwelling unit. For rules relating

to the sale or exchange of vacant land, see

§ 1.121–1(b)(3).

(ii) Limitations—(A) Maximum limitation amount. For purposes of section

121(b)(1) and (2) (relating to the maximum limitation amount of the section 121

exclusion), sales or exchanges of partial interests in the same principal residence are

treated as one sale or exchange. Therefore, only one maximum limitation amount

of $250,000 ($500,000 for certain joint returns) applies to the combined sales or exchanges of the partial interests. In applying

the maximum limitation amount to sales or

exchanges that occur in different taxable

years, a taxpayer may exclude gain from the

first sale or exchange of a partial interest

up to the taxpayer’s full maximum limitation amount and may exclude gain from the

sale or exchange of any other partial interest in the same principal residence to the

extent of any remaining maximum limitation amount, and each spouse is treated as

excluding one-half of the gain from a sale

or exchange to which section 121(b)(2)(A)

and § 1.121–2(a)(3)(i) (relating to the limitation for certain joint returns) apply.

(B) Sale or exchange of more than one

principal residence in 2-year period. For

purposes of applying section 121(b)(3) (restricting the application of section 121 to

only 1 sale or exchange every 2 years), each

sale or exchange of a partial interest is disregarded with respect to other sales or exchanges of partial interests in the same

principal residence, but is taken into account as of the date of the sale or exchange

in applying section 121(b)(3) to that sale

or exchange and the sale or exchange of any

other principal residence.

(2) Sales or exchanges of remainder

interests—(i) In general. A taxpayer may

elect to apply the section 121 exclusion to

gain from the sale or exchange of a remainder interest in the taxpayer’s principal residence.

(ii) Limitations—(A) Sale or exchange

of any other interest. If a taxpayer elects to

exclude gain from the sale or exchange of

a remainder interest in the taxpayer’s principal residence, the section 121 exclusion

will not apply to a sale or exchange of any

other interest in the residence that is sold

or exchanged separately.

(B) Sales or exchanges to related parties. This paragraph (e)(2) will not apply to

a sale or exchange to any person that bears

2003–8 I.R.B.

a relationship to the taxpayer that is described in section 267(b) or 707(b).

(iii) Election. The taxpayer makes the

election under this paragraph (e)(2) by filing a return for the taxable year of the sale

or exchange that does not include the gain

from the sale or exchange of the remainder interest in the taxpayer’s gross income.

A taxpayer may make or revoke the election at any time before the expiration of a

3-year period beginning on the last date prescribed by law (determined without regard to extensions) for the filing of the

return for the taxable year in which the sale

or exchange occurred.

(3) Example. The provisions of this paragraph (e) are illustrated by the following

example:

Example. In 1991, Taxpayer A buys a house that A

uses as his principal residence. In 2004, A’s friend B

moves into A’s house and A sells B a 50% interest in

the house realizing a gain of $136,000. A may exclude the $136,000 of gain. In 2005, A sells his remaining 50% interest in the home to B realizing a gain

of $138,000. A may exclude $114,000 ($250,000 $136,000 gain previously excluded) of the $138,000

gain from the sale of the remaining interest.

(f) No exclusion for expatriates. The section 121 exclusion will not apply to any sale

or exchange by an individual if the provisions of section 877(a) (relating to the treatment of expatriates) applies to the

individual.

(g) Election to have section not apply.

A taxpayer may elect to have the section

121 exclusion not apply to a sale or exchange of property. The taxpayer makes the

election by filing a return for the taxable

year of the sale or exchange that includes

the gain from the sale or exchange of the

taxpayer’s principal residence in the taxpayer’s gross income. A taxpayer may make

an election under this paragraph (g) to have

section 121 not apply (or revoke an election to have section 121 not apply) at any

time before the expiration of a 3-year period beginning on the last date prescribed

by law (determined without regard to extensions) for the filing of the return for the

taxable year in which the sale or exchange

occurred.

(h) Residences acquired in rollovers under section 1034. If a taxpayer acquires

property in a transaction that qualifies under section 1034 (section 1034 property) for

the nonrecognition of gain realized on the

sale or exchange of another property and

later sells or exchanges such property, in determining the period of the taxpayer’s ownership and use of the property under section

2003–8 I.R.B.

121 the taxpayer may include the periods

that the taxpayer owned and used the section 1034 property as the taxpayer’s principal residence (and each prior residence

taken into account under section 1223(7) in

determining the holding period of the section 1034 property).

(i) [Reserved].

(j) Election to apply regulations retroactively. Taxpayers who would otherwise

qualify under §§ 1.121–1 through 1.121–4

to exclude gain from a sale or exchange of

a principal residence before December 24,

2002, but on or after May 7, 1997, may

elect to apply §§ 1.121–1 through 1.121–4

for any years for which the period of limitation under section 6511 has not expired.

The taxpayer makes the election under this

paragraph (j) by filing a return for the taxable year of the sale or exchange that does

not include the gain from the sale or exchange of the taxpayer’s principal residence in the taxpayer’s gross income.

Taxpayers who have filed a return for the

taxable year of the sale or exchange may

elect to apply the provisions of these regulations for any years for which the period

of limitation under section 6511 has not expired by filing an amended return.

(k) Audit protection. The Internal Revenue Service will not challenge a taxpayer’s position that a sale or exchange of a

principal residence occurring before December 24, 2002, but on or after May 7,

1997, qualifies for the section 121 exclusion if the taxpayer has made a reasonable, good faith effort to comply with the

requirements of section 121. Compliance

with the provisions of the regulations project

under section 121 (REG–105235–99,

2000–2 C.B. 447) generally will be considered a reasonable, good faith effort to

comply with the requirements of section

121.

(l) Effective date. This section is applicable for sales and exchanges on or after

December 24, 2002. For rules on electing

to apply the provisions retroactively, see

paragraph (j) of this section.

§ 1.121–5 [Removed].

Par. 3. Section 1.121–5 is removed.

Par. 4. Section 1.1398–3 is added to read

as follows:

§ 1.1398–3 Treatment of section 121

exclusion in individuals’ title 11 cases.

(a) Scope. This section applies to cases

under chapter 7 or chapter 11 of title 11 of

504

the United States Code, but only if the

debtor is an individual.

(b) Definition and rules of general application. For purposes of this section, section 121 exclusion means the exclusion of

gain from the sale or exchange of a debtor’s principal residence available under section 121.

commencement of case. The bankruptcy estate succeeds to and takes into account the

section 121 exclusion with respect to the

property transferred into the estate.

(d) Effective date. This section is applicable for sales or exchanges on or after December 24, 2002.

Robert E. Wenzel,

Deputy Commissioner

of Internal Revenue.

Approved December 11, 2002.

Pamela F. Olson,

Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on December 23,

2002, 8:45 a.m., and published in the issue of the Federal Register for December 24, 2002, 67 F.R. 78358)

26 CFR 1.121–3T: Reduced minimum exclusion for

taxpayers failing to meet certain requirements

(temporary).

T.D. 9031

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 1

Reduced Maximum Exclusion

of Gain From Sale or

Exchange of Principal

Residence

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains temporary regulations relating to the exclusion of gain from the sale or exchange of

a taxpayer’s principal residence in the case

of a taxpayer who has not owned and used

the property as the taxpayer’s principal residence for two of the preceding five years

or who has excluded gain from the sale or

exchange of a principal residence within the

February 24, 2003

preceding two years. The text of these temporary regulations also serves as the text of

the proposed regulations set forth in the notice of proposed rulemaking (REG–138882–

02) on this subject in this issue of the

Bulletin.

DATES: Effective Date: These regulations

are effective December 24, 2002.

Applicability Date: For dates of applicability, see § 1.121–3T(l).

FOR FURTHER INFORMATION CONTACT: Sara Paige Shepherd, (202) 622–

4960 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to

the Income Tax Regulations (26 CFR part

1) under section 121(c) relating to the exclusion of gain from the sale or exchange

of the principal residence of a taxpayer who

has not owned and used the property as the

taxpayer’s principal residence for two of the

preceding five years or who has excluded

gain on the sale or exchange of a principal residence within the preceding two

years.

Under section 121(a), a taxpayer may

exclude up to $250,000 ($500,000 for certain joint returns) of gain realized on the

sale or exchange of the taxpayer’s principal residence if the taxpayer owned and

used the property as the taxpayer’s principal residence for at least two years during the five-year period ending on the date

of the sale or exchange. Section 121(b)(3)

allows the taxpayer to apply the maximum exclusion to only one sale or exchange during the two-year period ending

on the date of the sale or exchange. Section 121(c) provides that a taxpayer who

fails to meet any of these conditions by reason of a change in place of employment,

health, or, to the extent provided in regulations, unforeseen circumstances, may be

entitled to an exclusion in a reduced maximum amount.

On October 10, 2000, a notice of proposed rulemaking (REG–105235–99,

2000–44 I.R.B. 447) under section 121 was

published in the Federal Register (65 FR

60136). The proposed regulations did not

define change in place of employment,

health, or unforeseen circumstances for purposes of the reduced maximum exclusion.

Comments were specifically requested re-

February 24, 2003

garding what circumstances should qualify

as unforeseen. A public hearing was held

on January 26, 2001.

The IRS and Treasury Department received numerous comments regarding the

reduced maximum exclusion and have concluded that many of these comments should

be adopted. However, because the rules formulated in response to these comments are

extensive, the IRS and Treasury Department have concluded that the rules relating to the reduced maximum exclusion

should be issued as proposed and temporary regulations to provide the public with

adequate notice and opportunity to comment. Final regulations under section 121

addressing provisions other than the reduced maximum exclusion are set forth in

T.D. 9030 on page 495 of this Bulletin.

Explanation of Provisions

1. General Provisions

Under the temporary regulations, a reduced maximum exclusion limitation is

available to a taxpayer who has sold or exchanged property owned and used as the

taxpayer’s principal residence for less than

two of the preceding five years or who has

excluded gain on the sale or exchange of

a principal residence within the preceding two years. This reduced maximum exclusion applies only if the sale or exchange

is by reason of a change in place of employment, health, or unforeseen circumstances. A sale or exchange is by reason of

a change in place of employment, health,

or unforeseen circumstances only if the taxpayer’s primary reason for the sale or exchange is a change in place of employment,

health, or unforeseen circumstances. The

taxpayer’s primary reason for the sale or exchange is determined based on the facts and

circumstances. The temporary regulations

provide a list of factors that may be relevant in determining the taxpayer’s primary reason. These factors are suggestive

only. No single fact or particular combination of facts is determinative of the taxpayer’s entitlement to the reduced maximum

exclusion.

In addition, for each of the three grounds

for claiming a reduced maximum exclusion, the temporary regulations provide a

general definition and one or more safe harbors. If a safe harbor applies, the taxpayer’s primary reason for the sale or exchange

505

is deemed to be a change in place of employment, health, or unforeseen circumstances.

2. Change in Place of Employment

The temporary regulations provide that

a sale or exchange is by reason of a change

in place of employment if the taxpayer’s

primary reason for the sale or exchange is

a change in the location of the employment of a qualified individual. Employment is defined as the commencement of

employment with a new employer, the continuation of employment with the same employer, or the commencement or

continuation of self-employment. A qualified individual is defined as the taxpayer,

the taxpayer’s spouse, a co-owner of the

residence, or a person whose principal place

of abode is in the same household as the

taxpayer.

The temporary regulations adopt a safe

harbor, suggested by commentators, that

provides that the primary reason for the sale

or exchange is deemed to be a change in

place of employment if the new place of

employment of a qualified individual is at

least fifty miles farther from the residence

sold or exchanged than was the former

place of employment. If the individual was

unemployed, the distance between the new

place of employment and the residence sold

or exchanged must be at least fifty miles.

This standard is derived from section

217(c)(1) relating to the moving expense deduction. The safe harbor applies only if the

change in place of employment occurs during the period of the taxpayer’s ownership and use of the property as the

taxpayer’s principal residence. If a sale or

exchange does not satisfy this safe harbor, a taxpayer may still qualify for the reduced maximum exclusion by reason of a

change in place of employment if the facts

and circumstances indicate that a change in

place of employment is the primary reason for the sale or exchange.

3. Sale or Exchange by Reason of

Health

Commentators proposed that, for purposes of determining whether a sale or exchange is by reason of health, the

regulations adopt standards similar to those

for the deductibility of medical expenses under section 213(a). Commentators also suggested that the regulations provide that the

reduced maximum exclusion by reason of

2003–8 I.R.B.

health apply to sales and exchanges due to

(1) advanced age-related infirmities, (2) the

taxpayer’s need to move in order to care for

a family member, (3) severe allergies, and

(4) emotional problems.

In response to these comments, the temporary regulations provide the general rule

that a sale or exchange is by reason of

health if the taxpayer’s primary reason for

the sale or exchange is (1) to obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or

injury of a qualified individual, or (2) to obtain or provide medical or personal care for

a qualified individual suffering from a disease, illness, or injury. A sale or exchange

that is merely beneficial to the general

health or well-being of the individual is not

a sale or exchange by reason of health.

One commentator suggested that the

regulations establish a safe harbor allowing a taxpayer to claim a reduced maximum exclusion if the taxpayer obtains

documentation of a specific medical condition from a licensed physician. The temporary regulations provide a safe harbor that

the primary reason for the sale or exchange

is deemed to be health if a physician (as defined in section 213(d)(4)) recommends a

change of residence for reasons of health.

For purposes of the reduced maximum

exclusion by reason of health, the term

qualified individual includes the taxpayer,

the taxpayer’s spouse, a co-owner of the

residence, a person whose principal place

of abode is in the same household as the

taxpayer, and certain family members of

these individuals. The definition of qualified individual in the case of health is

broader than the definition that applies to

the exclusions by reason of change in place

of employment and unforeseen circumstances to encompass taxpayers who sell or

exchange their residence in order to care for

sick family members.

4. Sale or Exchange by Reason of

Unforeseen Circumstances

The temporary regulations provide that

a sale or exchange is by reason of unforeseen circumstances if the primary reason for

the sale or exchange is the occurrence of

an event that the taxpayer does not anticipate before purchasing and occupying the

residence.

Many commentators provided suggestions regarding circumstances that should

qualify as unforeseen. A large number of

2003–8 I.R.B.

commentators suggested that unforeseen circumstances should encompass divorce or

the termination of a permanent residential relationship. Others suggested that unforeseen circumstances should include death,

birth, marriage, bankruptcy, the loss of employment, incarceration, admission to an institution of higher learning, natural and manmade disasters, involuntary conversions, and

a substantial increase in medical or living

expenses leading to a significant change in

economic circumstances. One commentator suggested that any delay of over three

years in selling the residence due to a decline in the real estate market should be

deemed an unforeseen circumstance. A few

commentators suggested that unforeseen circumstances should include unfavorable

changes affecting the desirability of the

property, such as environmental problems,

zoning-law changes, slovenly neighbors, and

serious nuisance or safety concerns.

The temporary regulations adopt many

of these suggestions as safe harbors. A taxpayer’s primary reason for the sale or exchange is deemed to be unforeseen

circumstances if one of the safe harbor

events occurs during the taxpayer’s ownership and use of the property. The safe harbor events include the involuntary

conversion of the residence, a natural or

man-made disaster or act of war or terrorism resulting in a casualty to the residence,

and, in the case of a qualified individual:

(1) death, (2) the cessation of employment as a result of which the individual is

eligible for unemployment compensation,

(3) a change in employment or selfemployment status that results in the taxpayer’s inability to pay housing costs and

reasonable basic living expenses for the taxpayer’s household, (4) divorce or legal separation under a decree of divorce or separate

maintenance, and (5) multiple births resulting from the same pregnancy. The Commissioner may designate other events or

situations as unforeseen circumstances in

published guidance of general applicability or in a ruling directed to a specific taxpayer. A taxpayer who does not qualify for

a safe harbor may demonstrate that the primary reason for the sale or exchange is unforeseen circumstances, under a facts and

circumstances test.

For purposes of the reduced maximum

exclusion by reason of unforeseen circumstances, a qualified individual includes the

taxpayer, the taxpayer’s spouse, a co-owner

506

of the residence, and a person whose principal place of abode is in the same household as the taxpayer.

The regulations include examples illustrating the application of the safe harbors

and the facts and circumstances test.

5. Election to Apply Regulations

Retroactively

The regulations provide that taxpayers

who would otherwise qualify under these

temporary regulations to exclude gain from

a sale or exchange that occurred before the

effective date of the regulations but on or

after May 7, 1997, may elect to apply all

of the provisions of the temporary regulations to the sale or exchange. A taxpayer

may make the election by filing a return for

the taxable year of the sale or exchange that

does not include the gain from the sale or

exchange of the taxpayer’s principal residence in the taxpayer’s gross income. Taxpayers who have filed a return for the

taxable year of the sale or exchange may

elect to apply all of the provisions of these

regulations for any years for which the period of limitations under section 6511 has

not expired by filing an amended return.

6. Audit Protection

The temporary regulations provide that

the IRS will not challenge a taxpayer’s position that a sale or exchange before the effective date of these regulations but on or

after May 7, 1997, qualifies for the reduced maximum exclusion under section

121(c) if the taxpayer has made a reasonable, good faith effort to comply with the

requirements of section 121(c) and if the

sale or exchange otherwise qualifies under section 121.

7. Effective Date

These temporary regulations apply to

sales and exchanges on or after December 24, 2002.

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. For the applicability of the Regulatory Flexibility Act (5

February 24, 2003

U.S.C. chapter 6) refer to the Special Analyses section of the preamble to the crossreference notice of proposed rulemaking,

REG–138882–02, on page 522 of this Bulletin. Pursuant to section 7805(f) of the Internal Revenue Code, these temporary

regulations will be submitted to the Chief

Counsel for Advocacy of the Small Business Administration for comment on their

impact on small business.

Drafting Information

The principal author of these regulations is Sara Paige Shepherd, Office of Associate Chief Counsel (Income Tax and

Accounting). However, other personnel from

the IRS and the Treasury Department participated in the development of the regulations.

*****

Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended

as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.121–3T is added to read

as follows:

§ 1.121–3T Reduced maximum exclusion

for taxpayers failing to meet certain

requirements (temporary).

(a) [Reserved]. For further guidance, see

§ 1.121–3(a).

(b) Primary reason for sale or exchange.

In order for a taxpayer to claim a reduced

maximum exclusion under section 121(c),

the sale or exchange must be by reason of

a change in place of employment, health,

or unforeseen circumstances. A sale or exchange is by reason of a change in place

of employment, health, or unforeseen circumstances only if the primary reason for

the sale or exchange is a change in place

of employment (within the meaning of paragraph (c) of this section), health (within the

meaning of paragraph (d) of this section),

or unforeseen circumstances (within the

meaning of paragraph (e) of this section).

Whether the requirements of this section are

satisfied depends upon all the facts and circumstances. If the taxpayer qualifies for a

safe harbor described in this section, the tax-

February 24, 2003

payer’s primary reason is deemed to be a

change in place of employment, health, or

unforeseen circumstances. If the taxpayer

does not qualify for a safe harbor, factors

that may be relevant in determining the taxpayer’s primary reason for the sale or exchange include (but are not limited to) the

extent to which—

(1) The sale or exchange and the circumstances giving rise to the sale or exchange are proximate in time;

(2) The suitability of the property as the

taxpayer’s principal residence materially

changes;

(3) The taxpayer’s financial ability to

maintain the property materially changes;

(4) The taxpayer uses the property as the

taxpayer’s residence during the period of

the taxpayer’s ownership of the property;

(5) The circumstances giving rise to the

sale or exchange are not reasonably foreseeable when the taxpayer begins using the

property as the taxpayer’s principal residence; and

(6) The circumstances giving rise to the

sale or exchange occur during the period

of the taxpayer’s ownership and use of the

property as the taxpayer’s principal residence.

change in place of employment—(1) In general. A sale or exchange is by reason of a

change in place of employment if, in the

case of a qualified individual described in

paragraph (f) of this section, the primary

reason for the sale or exchange is a change

in the location of the individual’s employment.

(2) Distance safe harbor. The primary

reason for the sale or exchange is deemed

to be a change in place of employment

(within the meaning of paragraph (c)(1) of

this section) if—

(i) The change in place of employment

occurs during the period of the taxpayer’s ownership and use of the property as

the taxpayer’s principal residence; and

(ii) The individual’s new place of employment is at least 50 miles farther from

the residence sold or exchanged than was

the former place of employment, or, if there

was no former place of employment, the

distance between the individual’s new place

of employment and the residence sold or

exchanged is at least 50 miles.

(3) Employment. For purposes of this

paragraph (c), employment includes the

commencement of employment with a new

507

employer, the continuation of employment

with the same employer, and the commencement or continuation of selfemployment.

(4) Examples. The following examples

illustrate the rules of this paragraph (c):

Example 1. A is unemployed and owns a townhouse that she has owned and used as her principal

residence since 2002. In 2003, A obtains a job that is

54 miles from her townhouse, and she sells the townhouse. Because the distance between A’s new place

of employment and the townhouse is at least 50 miles,

the sale is within the safe harbor of paragraph (c)(2)

of this section and A is entitled to claim a reduced

maximum exclusion under section 121(c)(2).

Example 2. B is an officer in the United States Air

Force stationed in Florida. B purchases a house in

Florida in 2001. In May 2002, B moves out of his

house to take a 3-year assignment in Germany. B sells

his house in January 2003. Because B’s new place of

employment in Germany is at least 50 miles farther

from the residence sold than is B’s former place of

employment in Florida, the sale is within the safe harbor of paragraph (c)(2) of this section and B is entitled to claim a reduced maximum exclusion under

section 121(c)(2).

Example 3. C is employed by Employer R at R’s

Philadelphia office. C purchases a house in February 2001 that is 35 miles from R’s Philadelphia office. In May 2002, C begins a temporary assignment

at R’s Wilmington office that is 72 miles from C’s

house, and moves out of the house. In June 2004, C

is assigned to work in R’s London office, and as a result, sells her house in August 2004. The sale of the

house is not within the safe harbor of paragraph (c)(2)

of this section by reason of the change in place of employment from Philadelphia to Wilmington because

the Wilmington office is not 50 miles farther from C’s

house than is the Philadelphia office. Furthermore, the

sale is not within the safe harbor by reason of the

change in place of employment to London because C

is not using the house as her principal residence when

she moves to London. However, C is entitled to claim

a reduced maximum exclusion under section 121(c)(2)

because, under the facts and circumstances, the primary reason for the sale is the change in C’s place of

employment.

Example 4. In July 2002, D buys a condominium

that is 5 miles from her place of employment and uses

it as her principal residence. In February 2003, D, who

works as an emergency medicine physician, obtains

a job that is located 51 miles from D’s condominium.

D may be called in to work unscheduled hours and,

when called, must be able to arrive at work quickly.

Therefore, D sells her condominium and buys a townhouse that is 4 miles from her new place of employment. Because D’s new place of employment is only

46 miles farther from the condominium than is D’s

former place of employment, the sale is not within the

safe harbor of paragraph (c)(2) of this section. However, D is entitled to claim a reduced maximum exclusion under section 121(c)(2) because, under the facts

and circumstances, the primary reason for the sale is

the change in D’s place of employment.

(d) Sale or exchange by reason of

health—(1) In general. A sale or exchange

is by reason of health if the primary reason for the sale or exchange is to obtain,

2003–8 I.R.B.

provide, or facilitate the diagnosis, cure,

mitigation, or treatment of disease, illness, or injury of a qualified individual described in paragraph (f) of this section, or

to obtain or provide medical or personal

care for a qualified individual suffering from

a disease, illness, or injury. A sale or exchange that is merely beneficial to the general health or well-being of the individual

is not a sale or exchange by reason of

health.

(2) Physician’s recommendation safe harbor. The primary reason for the sale or exchange is deemed to be health if a physician

(as defined in section 213(d)(4)) recommends a change of residence for reasons of

health (as defined in paragraph (d)(1) of this

section).

(3) Examples. The following examples

illustrate the rules of this paragraph (d):

Example 1. In 2002, A buys a house that she uses

as her principal residence. A is injured in an accident and is unable to care for herself. As a result, A

sells her house in 2003 and moves in with her daughter so that the daughter can provide the care that A

requires as a result of her injury. Because, under the

facts and circumstances, the primary reason for the sale

of A’s house is A’s health, A is entitled to claim a reduced maximum exclusion under section 121(c)(2).

Example 2. H’s father has a chronic disease. In 2002,

H and W purchase a house that they use as their principal residence. In 2003, H and W sell their house in

order to move into the house of H’s father so that they

can provide the care he requires as a result of his disease. Because, under the facts and circumstances, the

primary reason for the sale of their house is the health

of H’s father, H and W are entitled to claim a reduced maximum exclusion under section 121(c)(2).

Example 3. H and W purchase a house in 2002 that

they use as their principal residence. Their son suffers from a chronic illness that requires regular medical care. Later that year, their doctor recommends that

their son begin a new treatment that is available at a

medical facility 100 miles away from their residence. In 2003, H and W sell their house to be closer

to the medical facility. Because, under the facts and

circumstances, the primary reason for the sale is to

facilitate the treatment of their son’s chronic illness,

H and W are entitled to claim a reduced maximum

exclusion under section 121(c)(2).

Example 4. B, who has chronic asthma, purchases

a house in Minnesota in 2002 that he uses as his principal residence. B’s doctor tells B that moving to a

warm, dry climate would mitigate B’s asthma symptoms. In 2003, B sells his house and moves to Arizona to relieve his asthma symptoms. The sale is

within the safe harbor of paragraph (d)(2) of this section and B is entitled to claim a reduced maximum

exclusion under section 121(c)(2).

Example 5. In 2002, H and W purchase a house in

Michigan that they use as their principal residence. H’s

doctor tells H that he should get more exercise, but

H is not suffering from any disease that can be treated

or mitigated by exercise. In 2003, H and W sell their

house and move to Florida so that H can increase his

general level of exercise by playing golf year-round.

2003–8 I.R.B.

Because the sale of the house is merely beneficial to

H’s general health, the sale of the house is not by reason of H’s health. H and W are not entitled to claim

a reduced maximum exclusion under section 121(c)(2).

(e) Sale or exchange by reason of unforeseen circumstances—(1) In general. A

sale or exchange is by reason of unforeseen circumstances if the primary reason for

the sale or exchange is the occurrence of

an event that the taxpayer does not anticipate before purchasing and occupying the

residence.

(2) Specific event safe harbors. The primary reason for the sale or exchange is

deemed to be unforeseen circumstances

(within the meaning of paragraph (e)(1) of

this section) if any of the events specified in paragraphs (e)(2)(i) through (iii) of

this section occur during the period of the

taxpayer’s ownership and use of the residence as the taxpayer’s principal

residence—

(i) The involuntary conversion of the

residence;

(ii) Natural or man-made disasters or acts

of war or terrorism resulting in a casualty

to the residence (without regard to deductibility under section 165(h));

(iii) In the case of a qualified individual

described in paragraph (f) of this section—

(A) Death;

(B) The cessation of employment as a

result of which the individual is eligible for

unemployment compensation (as defined in

section 85(b));

reasonable basic living expenses for the taxpayer’s household (including amounts for

food, clothing, medical expenses, taxes,

transportation, court-ordered payments, and

expenses reasonably necessary to the production of income, but not for the maintenance of an affluent or luxurious standard

of living);

(D) Divorce or legal separation under a

decree of divorce or separate maintenance;

(E) Multiple births resulting from the

same pregnancy; or

(iv) An event determined by the Commissioner to be an unforeseen circumstance

to the extent provided in published guidance of general applicability or in a ruling directed to a specific taxpayer.

(3) Examples. The following examples

illustrate the rules of this paragraph (e):

508

Example 1. In 2003, A buys a house in California. After A begins to use the house as her principal

residence, an earthquake causes damage to A’s house.

A sells the house in 2004. The sale is within the safe

harbor of paragraph (e)(2)(ii) of this section and A is

entitled to claim a reduced maximum exclusion under section 121(c)(2).

Example 2. H works as a teacher and W works as

a pilot. In 2003, H and W buy a house that they use

as their principal residence. Later that year, W is furloughed from her job for six months. H and W are unable to pay their mortgage during the period W is

furloughed. H and W sell their house in 2004. The sale

is within the safe harbor of paragraph (e)(2)(iii)(C) of

this section and H and W are entitled to claim a reduced maximum exclusion under section 121(c)(2).

Example 3. In 2003, H and W buy a two-bedroom

condominium that they use as their principal residence. In 2004, W gives birth to twins and H and W

sell their condominium and buy a four-bedroom house.

The sale is within the safe harbor of paragraph

(e)(2)(iii)(E) of this section, and H and W are entitled to claim a reduced maximum exclusion under

section 121(c)(2).

Example 4. B buys a condominium in 2003 and uses

it as his principal residence. B’s monthly condominium fee is $X. Three months after B moves into

the condominium, the condominium association decides to replace the building’s roof and heating system. Six months later, B’s monthly condominium fee

doubles. B sells the condominium in 2004 because B

is unable to pay the new condominium fee along with

the monthly mortgage payment. The safe harbors of

paragraph (e)(2) of this section do not apply. However, under the facts and circumstances, the primary

reason for the sale is unforeseen circumstances, and

B is entitled to claim a reduced maximum exclusion under section 121(c)(2).

Example 5. In 2003, C buys a house that he uses

as his principal residence. The property is located on

a heavily trafficked road. C sells the property in 2004

because the traffic is more disturbing than he expected. C is not entitled to claim a reduced maximum exclusion under section 121(c)(2) because the

safe harbors of paragraph (e)(2) of this section do not

apply and, under the facts and circumstances, the traffic is not an unforeseen circumstance.

Example 6. In 2003, D and her fiancé E buy a house

and live in it as their principal residence. In 2004, D

and E cancel their wedding plans and E moves out

of the house. Because D cannot afford to make the

monthly mortgage payments alone, D and E sell the

house in 2004. The safe harbors of paragraph (e)(2)

of this section do not apply. However, under the facts

and circumstances, the primary reason for the sale is

unforeseen circumstances, and D and E are each entitled to claim a reduced maximum exclusion under

section 121(c)(2).

(f) Qualified individual. For purposes of

this section, qualified individual means—

(1) The taxpayer;

(2) The taxpayer’s spouse;

(3) A co-owner of the residence;

(4) A person whose principal place of

abode is in the same household as the taxpayer; or

(5) For purposes of paragraph (d) of this

section, a person bearing a relationship

February 24, 2003

specified in sections 152(a)(1) through

152(a)(8) (without regard to qualification

as a dependent) to a qualified individual described in paragraphs (f)(1) through (4) of

this section, or a descendant of the taxpayer’s grandparent.

(g) [Reserved]. For further guidance, see

§ 1.121–3(g).

(h) Election to apply regulations retroactively. Taxpayers who would otherwise

qualify under this section to exclude gain

from a sale or exchange before December 24, 2002, but on or after May 7, 1997,

may elect to apply all of the provisions of

this section for any years for which the period of limitations under section 6511 has

not expired. The taxpayer makes the election under this paragraph (h) by filing a return for the taxable year of the sale or

exchange that does not include the gain

from the sale or exchange of the taxpayer’s principal residence in the taxpayer’s

gross income. Taxpayers who have filed a

return for the taxable year of the sale or exchange may elect to apply all the provisions of this section for any years for which

the period of limitations under section 6511

has not expired by filing an amended return.

(i) through (j) [Reserved]. See § 1.121–

3(i) through (j).

(k) Audit protection. The Internal Revenue Service will not challenge a taxpay-

er’s position that a sale or exchange of a

principal residence that occurred before December 24, 2002, but on or after May 7,

1997, qualifies for the reduced maximum

exclusion under section 121(c) if the taxpayer has made a reasonable, good faith effort to comply with the requirements of

section 121(c) and if the sale or exchange

otherwise qualifies under section 121.

(l) Effective date. For the applicability

of this section, see § 1.121–3(l).

Robert E. Wenzel,

Deputy Commissioner of

Internal Revenue.

Approved December 11, 2002.

Pamela F. Olson,

Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on December 23,

2002, 8:45 a.m., and published in the issue of the Federal Register for December 24, 2002, 67 F.R. 78367)

Section 472.—Last-in,

First-out Inventories

26 CFR 1.472–1: Last-in, first-out inventories.

LIFO; price indexes; department

stores. The December 2002 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, December 31, 2002.

Rev. Rul. 2003–21

The following Department Store Inventory Price Indexes for December 2002 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 lastin, first-out inventory methods for tax years

ended on, or with reference to, December

31, 2002.

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)

Groups

10.

11.

12.

13.

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 ......................................................................................

February 24, 2003

509

Dec. 2001

Dec. 2002

Percent Change

from Dec. 2001 to

Dec. 20021

484.4

591.0

639.8

889.1

623.4

569.0

352.9

557.4

365.4

564.3

595.3

473.6

895.8

465.6

561.8

640.1

888.0

612.4

536.7

345.3

540.3

356.4

550.6

584.7

446.2

855.4

-3.9

-4.9

0.0

-0.1

-1.8

-5.7

-2.2

-3.1

-2.5

-2.4

-1.8

-5.8

-4.5

2003–8 I.R.B.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE

INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Dec. 2001

Dec. 2002

Percent Change

from Dec. 2001 to

Dec. 20021

Notions ......................................................................................

Toilet Articles and Drugs..........................................................

Furniture and Bedding ..............................................................

Floor Coverings ........................................................................

Housewares ...............................................................................

Major Appliances ......................................................................

Radio and Television ................................................................

Recreation and Education2 .......................................................

Home Improvements2 ...............................................................

Auto Accessories2 .....................................................................

817.8

975.7

625.9

625.2

758.9

226.7

51.9

87.9

124.2

110.4

793.2

967.5

623.8

596.3

734.4

219.4

47.3

84.3

125.8

111.3

-3.0

-0.8

-0.3

-4.6

-3.2

-8.9

-4.1

1.3

0.8

Groups 1 – 15: Soft Goods...................................................................

Groups 16 – 20: Durable Goods ..........................................................

Groups 21 – 23: Misc. Goods2 .............................................................

575.7

417.1

97.3

560.7

402.4

95.2

-2.6

-3.5

-2.2

Store Total3................................................................................

517.2

503.0

-2.7

Groups

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

Absence of a minus sign before the percentage change in this column signifies a price increase.

Indexes on a January 1986=100 base.

The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.

DRAFTING INFORMATION

T.D. 9041

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 tollfree call).

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 31

Section 3406.—Backup

Withholding

26 CFR 31.3406(j)–1T: Taxpayer Identification

Number (TIN) matching program (temporary).

Taxpayer Identification

Number (TIN) Matching

Program

AGENCY: Internal Revenue Service (IRS),

Treasury.

DATES: Effective Date: These regulations

are effective January 31, 2003.

Applicability Date: For dates of applicability, see §§ 31.3406(j)–1(f) and

31.3406(j)–1T(f).

FOR FURTHER INFORMATION CONTACT: Donna Welch at (202) 622–4910.

SUPPLEMENTARY INFORMATION:

Background

ACTION: Final and temporary regulations.

SUMMARY: This document contains final and temporary regulations under section 3406 relating to the IRS Taxpayer

Identification Number (TIN) Matching Program. These final and temporary regulations affect payors, and their authorized

agents, and provide guidance necessary to

comply with the law. The text of the temporary regulations also serves as the text of

2003–8 I.R.B.

the proposed regulations (REG–116641–

01) set forth on page 518 of this issue of

the Bulletin.

510

This document contains amendments to

the Employment Tax Regulations (26 CFR

part 31) relating to the IRS TIN Matching Program.

Section 3406(a)(1) requires a payor to

withhold on any reportable payment (as defined in section 3406(b)(1)) in certain situations, including if (1) the payee fails to

furnish his TIN to the payor as required or

(2) the Secretary notifies the payor that the

February 24, 2003

TIN furnished by the payee is incorrect.

Section 3406(i) provides that the Secretary shall prescribe such regulations as may

be necessary or appropriate to carry out the

purposes of section 3406.

Regulations under section 3406(i) provide that the Commissioner has the authority to establish TIN matching programs

through revenue procedures or other appropriate guidance. Under the regulations,

a payor participating in a TIN matching program may, before filing information returns with respect to reportable payments,

contact the IRS with respect to the TIN furnished by the payee. The regulations provide that the IRS will inform the payor

whether or not the name/TIN combination furnished by the payee matches a name/

TIN combination maintained for the TIN

matching program.

Pursuant to the authority in the regulations, the IRS issued Rev. Proc. 97–31,

1997–1 C.B. 703, and implemented a TIN

matching program for Federal agency payors. The IRS is now issuing a second revenue procedure pursuant to that authority

(as amended by these temporary regulations). This revenue procedure will expand the scope of the IRS TIN Matching

Program to allow all payors (and not merely

Federal agency payors), as well as payors’ authorized agents, to participate in TIN

matching. In addition, the IRS and the Treasury Department expect to issue additional

published guidance that will allow payment card organizations to act on behalf of

cardholder/payors for purposes of soliciting, collecting, and validating merchant/

payees’ names and TINs through TIN

matching if certain requirements are met.

Explanation of Provisions

These regulations specifically authorize a payor’s authorized agent to participate in TIN matching by providing that, for

purposes of the TIN matching program, the

term payor includes an agent designated by

the payor to participate in TIN matching on

behalf of the payor.

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

February 24, 2003

Procedure Act (5 U.S.C. chapter 5) does not

apply to these regulations. For the applicability of the Regulatory Flexibility Act (5

U.S.C. chapter 6) refer to the Special Analyses section of the preamble to the crossreference notice of proposed rulemaking

(REG–116641–01) published in this issue

of the Bulletin. Pursuant to section 7805(f),

the temporary regulations will be submitted 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 the regulations

is Donna Welch, Office of Associate Chief

Counsel (Procedure and Administration),

Administrative Provisions and Judicial Practice Division. However, other personnel

from the IRS and the Treasury Department participated in the development of the

regulations.

*****

Amendments to the Regulations

Accordingly, 26 CFR part 31 is amended

as follows:

PART 31—EMPLOYMENT TAXES

AND COLLECTION OF INCOME TAX

AT SOURCE

Commissioner may prescribe in a revenue

procedure (see § 601.601(d)(2) of this chapter) or other appropriate guidance the scope

and the terms and conditions of participating in any TIN matching program. In general, under a matching program, prior to

filing information returns with respect to reportable payments as defined in section

3406(b)(1), a payor of those reportable payments who is entitled to participate in the

matching program may contact the Internal Revenue Service (IRS) with respect to

the TIN furnished by a payee who has received or is likely to receive a reportable

payment. The IRS will inform the payor

whether or not a name/TIN combination

furnished by the payee matches a name/

TIN combination maintained in the data

base utilized for the particular matching program. For purposes of this section, the term

payor includes an agent designated by the

payor to participate in TIN matching on the

payor’s behalf.

(b) through (e) [Reserved]. For further

guidance, see § 31.3406(j)–1(b) through (e).

(f) Effective date. The provisions of this

section are applicable on or after June, 18,

1997, except the last sentence in paragraph (a) of this section which is applicable on January 31, 2003. The applicability

of this section expires on January 30, 2006.

Paragraph 1. The authority citation for

part 31 is amended by adding an entry in

numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 31.3406(j)–1T also issued under 26 U.S.C. 3406(i). * * *

Par. 2. Section 31.3406(j)–1 is amended

by revising paragraphs (a) and (f) to read

as follows:

(a) [Reserved]. For further guidance, see

§ 31.3406(j)–1T(a).

(Filed by the Office of the Federal Register on January 30,

2003, 8:45 a.m., and published in the issue of the Federal Register for January 31, 2003, 68 F.R. 4922)

*****

(f) [Reserved]. For further guidance, see

§ 31.3406(j)–1T(f).

Par. 3. Section 31.3406(j)–1T is added

to read as follows:

Section 6654.—Failure by

Individual to Pay Estimated

Income Tax

§ 31.3406(j)–1T Taxpayer Identification

Number (TIN) matching program

(temporary).

(a) The matching program. Under section 3406(i), the Commissioner has the authority to establish Taxpayer Identification

Number (TIN) matching programs. The

511

David A. Mader,

Acting Deputy Commissioner of

Internal Revenue.

Approved January 17, 2003.

Pamela F. Olson,

Assistant Secretary of the Treasury.

26 CFR 1.6654–2:Exceptions to imposition of the

addition to the tax in the case of individuals.

Estimated tax penalty safe harbor.

This ruling addresses the application of section 6654(d)(1)(B)(ii) of the Code where an

individual filed a late original return for the

preceding year.

2003–8 I.R.B.

Rev. Rul. 2003–23

PURPOSE

This revenue ruling provides guidance

on whether the Internal Revenue Service

will impose an addition to tax for the underpayment of estimated tax under section 6654(a) of the Internal Revenue Code

as to an individual whose timely estimated

tax payments for the current taxable year

meet the requirement of section

6654(d)(1)(B)(ii) based on tax shown on a

late-filed return for the preceding taxable

year.

LAW AND ANALYSIS

Section 6654(a) provides for an addition to tax for the taxable year if there is

an underpayment of estimated tax by an individual.

Section 6654(b)(1) provides that the

amount of the underpayment shall be the

excess of the required installment over the

amount of the installment paid on or before the due date for the installment.

Section 6654(c)(1) provides that there

shall be four required installments for each

taxable year.

Section 6654(d)(1)(A) provides generally that the amount of any required installment shall be 25 percent of the required

annual payment. Section 6654(d)(1)(B) provides that the term “required annual payment” means the lesser of (i) 90 percent of

2003–8 I.R.B.

tax shown on the return for the taxable year

(or, if no return is filed, 90 percent of tax

for such year), or (ii) 100 percent of tax

shown on the return of the individual for

the preceding taxable year. If the adjusted

gross income shown on the return of the individual for the preceding taxable year exceeds $150,000, the required annual

payment is 110 percent of tax shown on

such return. See section 6654(d)(1)(C). If

the preceding taxable year was not a taxable year of 12 months or if the individual

did not file a return for such preceding taxable year, the required annual payment is

90 percent of tax shown on the return for

the current taxable year. See section

6654(d)(1)(B).

Section 1.6654–2(a) of the Income Tax

Regulations provides that the addition to tax

under section 6654 will not be imposed for

any underpayment of any installment of estimated tax if, on or before the date prescribed for payment of the installment, the

total amount of all payments of estimated

tax made equals or exceeds the least of the

amounts in § 1.6654–2(a).

Section 1.6654–2(a)(1) echoes section

6654(d)(1)(B)(ii) and describes the amount

that is required to be paid on or before the

date prescribed for payment if the required

annual installment is based on tax shown

on the return for the preceding taxable year,

provided that the preceding taxable year was

a year of 12 months and a return showing a liability for tax was filed for such year.

512

The only nonmonetary limitations on the

application of section 6654(d)(1)(B)(ii) are

the two stated above. Neither the Code nor

the regulations require that the individual

have filed the preceding taxable year’s return by the due date. Similarly, neither the

Code nor the regulations provide that section 6654(d)(1)(B)(ii) will not apply if the

individual filed the return for the preceding taxable year after the due date.

HOLDING

Accordingly, when an individual files a

late return for the preceding taxable year

and pays as required the installments properly predicated on tax shown on that return, the Service will not impose the

addition to tax under section 6654(a) for the

underpayment of estimated tax for the current taxable year.

EFFECT ON OTHER REVENUE

RULING(S)

None.

DRAFTING INFORMATION

The principal author of this revenue ruling is Tiffany P. Smith of the Office of the

Associate Chief Counsel (Procedure and

Administration), Administrative Provisions and Judicial Practice Division. For further information regarding this revenue

ruling, contact Tiffany P. Smith at (202)

622–4910 (not a toll-free call).

February 24, 2003

Part III. Administrative, Procedural, and Miscellaneous

Notice 2003–13

This notice provides a proposed revenue procedure that would establish a procedure for a payment card organization to

request a determination that it is a Qualified Payment Card Agent (QPCA) for purposes of §§ 3406 and 6724 of the Internal

Revenue Code. A QPCA could act on behalf of cardholder/payors in soliciting, collecting, and validating merchants’ names,

Taxpayer Identification Numbers (TINs) and

corporate status and on behalf of merchant/

payees in furnishing such information to

cardholder/payors. The proposed revenue

procedure describes the application procedures for a payment card organization to re-

quest a QPCA determination, the

requirements that a payment card organization must meet, including the TIN solicitation activities that a payment card

organization must undertake, to obtain a

QPCA determination and avoid revocation of the determination.

The IRS requests comments on this proposed revenue procedure. Written comments must be received by May 5, 2003.

Comments should be submitted to:

CC:PA:RU (NOT–122617–02), Room 5526,

Internal Revenue Service, Ben Franklin Station, Washington, DC 20224. Alternatively,

comments may be hand delivered between

the hours of 8:00 AM and 5:00 PM to

CC:PA:RU (NOT–122617–02), 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 2003–13” in the subject line of any electronic communications.

For further information regarding this notice, contact Donna Welch of the Office of

Associate Chief Counsel (Procedure and

Administration), Administrative Provisions and Judicial Practice Division. Ms.

Welch may be contacted at 202–622–4910

(not a toll-free call).

APPENDIX

(PROPOSED REVENUE PROCEDURE)

SECTION 1. PURPOSE

This revenue procedure establishes a procedure for a payment card organization to

request a determination that it is a Qualified Payment Card Agent (QPCA) for purposes of §§ 3406 and 6724 of the Internal

Revenue Code. A QPCA may act on behalf of cardholder/payors in soliciting, collecting, and validating merchants’ names,

TINs and corporate status and on behalf of

merchant/payees in furnishing such information to cardholder/payors. Proposed Procedure and Administration Regulations

would relieve cardholder/payors from certain TIN solicitation requirements for payments made through a QPCA. Proposed

Employment Tax Regulations would also

provide an exemption from the backup

withholding requirements for payments

made to certain merchant/payees through a

QPCA.

SECTION 2. BACKGROUND

.01 Payment card transactions. A payment card transaction is a transaction in

which a cardholder/payor uses a payment

card (as defined in section 4.03 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 4.04 of this revenue

February 24, 2003

procedure) sets the standards and provides

the mechanism, either directly or indirectly through members and affiliates, for

effecting the payment.

.02 Reporting requirements. In general, § 6041 requires a person engaged in

a trade or business and making a payment

in the course of the trade or business of

$600 or more during a calendar year of

fixed or determinable income to file an information return with the IRS and to furnish an information statement to the payee.

Section 1.6041–3(p) of the Income Tax

Regulations provides exceptions to these requirements, including, for example, exceptions for payments made to a payee that is

a corporation.

Section 6109(a)(2) provides that any

payee, with respect to whom a return is required to be made by another person or

whose identifying number is required to be

shown on a return of another person, must

furnish to the other person the identifying

number prescribed for securing the proper

identification of the payee. Section

6109(a)(3) provides that any person required to make a return with respect to a

payee must ask the payee for the identifying number prescribed for securing the

proper identification of the payee and must

include that number in the return.

.03 Backup withholding. Section

3406(a)(1) requires a payor to withhold on

513

reportable payments (as defined in

§ 3406(b)(1)) if the payee does not provide a TIN to the payor in the manner required or if the Secretary notifies the payor

that the TIN furnished by the payee is incorrect or in certain other circumstances.

Section 3406(i) provides that the Secretary shall prescribe the regulations necessary or appropriate to carry out the purposes

of § 3406.

Section 31.3406(j)–1 of the Employment Tax Regulations provides that the

Commissioner has the authority to establish TIN matching programs through revenue procedures or other appropriate

guidance. Under the regulations, a payor

participating in a TIN matching program

may contact the IRS with respect to the TIN

furnished by a payee before filing information returns with respect to reportable

payments to the payee. The regulations further provide that the IRS will inform the

payor whether or not the name/TIN combination furnished by the payee matches a

name/TIN combination maintained for the

TIN matching program. Section

31.3406(j)–1T of the temporary Employment Tax Regulations provides that an authorized agent, including a QPCA,

designated by a payor to participate in TIN

matching on the payor’s behalf is also permitted to participate in TIN matching. Revenue Procedure 2003–9 issued pursuant to

2003–8 I.R.B.

the authority in § 31.3406(j)–1 permits all

payors (and authorized agents described in

§ 31.3406(j)–1T) to participate in TIN

matching.

Section 31.3406(g)–1(f) of the proposed

Employment Tax Regulations would provide that the backup withholding requirements of section 3406 do not apply to

payments made through a QPCA if the payments are made to a qualified payee (as defined in proposed § 31.3406(g)–1(f)(2)(v))

or during a grace period for determining

whether the payee is a qualified payee. Section 31.3406(g)–1(f)(3) of the proposed

regulations would require a QPCA to notify the cardholder/payor when payments are

made to a merchant/payee who is not a

qualified payee.

.04 Information reporting penalties and

waivers for reasonable cause. Section 6721

provides that a payor may be subject to a

penalty for failure to file a complete and

correct information return. Section 6722

provides that a payor may be subject to a

penalty for failure to furnish a complete and

correct information statement to a payee. A

failure subject to the §§ 6721 and 6722 penalties includes a failure to include correct

payee TINs.

Section 6724 provides that the penalties under §§ 6721 and 6722 may be waived

if the filer shows that the failure was due

to reasonable cause and was not due to willful neglect. Section 301.6724–1(e)(1)(vi)(H)

and (f)(5)(vii) of the proposed Procedure

and Administration Regulations would provide that a cardholder/payor in a payment

card transaction may establish reasonable

cause based on its reliance on a QPCA.

SECTION 3. SCOPE

This revenue procedure applies to payment card organizations seeking to act on

behalf of cardholder/payors in soliciting,

collecting, and validating merchants’ names,

TINs and corporate status and on behalf of

merchant/payees in furnishing such information to cardholder/payors.

SECTION 4. DEFINITIONS

For purposes of this revenue procedure,

the following definitions apply:

.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 pay-

2003–8 I.R.B.

ment card organization, or a member or affiliate, to accept the organization’s payment

card as payment for goods and services.

.03 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.

.04 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.

.05 Qualified Payment Card Agent

(QPCA). A QPCA is a payment card organization that has a current QPCA determination from the IRS. A person acting in

its capacity as a QPCA does not act as an

agent of the IRS, nor does it have the authority to hold itself out as an agent of the

IRS.

SECTION 5. APPLICATION AND

REQUIREMENTS FOR QPCA

DETERMINATION

.01 Where to apply for QPCA determination. A person authorized to act on behalf of a payment card organization may

submit a written request for a QPCA determination to the following address:

Internal Revenue Service –

Martinsburg Computing Center

250 Murall Drive, Mail Stop 360

ATTN: TIN Matching Coordinator

Kearneysville, WV 25430

.02 Content of QPCA application. A payment card organization requesting a QPCA

determination must include the following

in its application:

(1) The name, address, and employer

identification number of the payment card

organization and a description of its business.

514

(2) The name of the department or office of the payment card organization that

will serve as the information contact.

(3) The name of the department or the

names and titles of the officers or employees that will be responsible for the performance of the TIN solicitation activities

described in section 6.

(4) A list of the systems, business lines,

or card products that will be covered by the

TIN solicitation activities described in section 6.

(5) An explanation of the account opening procedures and documents the payment card organization uses, or requires its

members or affiliates to use, to establish

merchant account relationships.

(6) The approximate number and the

type of merchants (individuals, corporations, etc.) enrolled by the payment card organization.

(7) An explanation of the payment card

organization’s systems and controls for—

(a) Obtaining merchant/payee data either directly or indirectly through its members or affiliates or from other sources;

(b) Validating the accuracy of the

merchant/payee data;

(d) Maintaining the merchant/payee data;

and

(e) Supplying the merchant/payee data

to the cardholder/payor.

.03 Requirements for QPCA determination. A payment card organization must

meet the following requirements to obtain a QPCA determination:

(1) Express authorization to act on behalf of cardholder/payors and on behalf of

merchant/payees. The payment card organization must establish that cardholder/

payors have expressly authorized it, or its

members or affiliates, to act on their behalf in soliciting, collecting, and validating merchants’ names and TINs and to

assist the cardholders in meeting their information reporting obligations under

§§ 6041 and 6041A. The payment card organization must also establish that merchant/

payees have expressly authorized it, or its

members or affiliates, to act on their behalf in furnishing their names and TINs to

cardholders and to assist the merchants in

meeting their obligations under § 6109(a)(2).

(2) TIN solicitation activities. The payment card organization must establish that

February 24, 2003

it has, or demonstrate that it will, undertake the TIN solicitation activities described

in section 6.

(3) Reliability of merchant/payee data.

After obtaining the authorizations required

by section 5.03(1), the payment card organization must participate in the IRS TIN

Matching Program and must demonstrate,

based on the TIN matching results, that its

merchant/payee data is sufficiently reliable.

SECTION 6. TIN SOLICITATION

ACTIVITIES

.01 Notification and disclosure requirements. A QPCA must notify the merchant/

payees for which it acts as agent that it will

obtain the merchant/payees’ TINs and corporate status and will provide this information to cardholder/payors to assist

cardholders in meeting their information reporting obligations.

A QPCA must notify the cardholder/

payors for which it acts as agent that any

merchant/payees’ names, TINs, and corporate status that the QPCA may furnish may

be used by the cardholder solely for purposes of meeting its information reporting obligations.

A QPCA must disclose its status as a

QPCA, and any change in that status, to any

member or affiliate that issues payment

cards, as well as to the merchant/payees and

cardholder/payors for which it acts as agent.

.02 TIN Matching participation. A

QPCA must participate in the IRS TIN

Matching Program and must match its

merchant/payee data relating to reportable payments with IRS data at least annually. The QPCA must transmit only

merchant/payee data that has not previously been validated through IRS TIN

Matching.

The QPCA must notify the merchant/

payees for which it acts as agent that it will

participate in the IRS TIN Matching Program and that, if the merchant/payee provides a TIN to the payment card

organization, the TIN may be matched

against IRS data.

.03 Providing merchant/payee data to

cardholders. The QPCA must provide

cardholder/payors with merchant/payee data

on or before December 31 of the year in

which the transaction occurs, or on or before 30 days after the transaction, whichever is later. The QPCA must provide

cardholder/payors with the results of its TIN

February 24, 2003

matching participation within 30 days after the payment card organization receives

the results.

SECTION 7. OTHER

REQUIREMENTS

.01 Availability of records. A payment

card organization must respond to any reasonable IRS request for inspection of any

books and records that relate to the operation of TIN solicitation activity, including, but not limited to, reports, memoranda,

budgets, and computer printouts. The payment card organization must allow the IRS

reasonable access to the merchant/payee

TIN data system, including instruction

manuals describing the system.

.02 Change in information. The QPCA

must promptly notify the IRS of any change

in the information described in section 5.

.03 Confidentiality of information. The

payment card organization must maintain

the confidentiality of information obtained

through its TIN solicitation activities in accordance with the requirements of

§ 31.3406(f)–1 of the Employment Tax

Regulations. Except as permitted under

§ 31.3406(f)–1, the payment card organization may not disclose any merchant/

payee information to any person other than

the cardholder/payor without prior written consent of the merchant/payee. The IRS

will treat all information provided by a

QPCA as confidential taxpayer return information under § 6103.

SECTION 8. TERM, RENEWALS,

AND TERMINATION

.01 Term and renewal. In general, a

QPCA determination will be effective for

three years from the date of the determination. A QPCA may request a renewal of

the QPCA determination by submitting an

application for renewal to the IRS no earlier than six months and no later than three

months before the expiration of the threeyear term. In the application for renewal,

the QPCA must report any change in the

information in the original application. Before renewal of the determination, the IRS

may review the QPCA’s systems. In addition, the QPCA must demonstrate that the

merchant/payee data continues to be reliable. The application for renewal must include the results from participation in the

IRS TIN Matching Program during the current three-year term. The IRS will make every effort to issue a decision on a renewal

515

application at least 30 days before the expiration of the current three-year term. In

the event that the IRS does not issue a decision on a timely renewal application before the expiration of the existing QPCA

determination, the determination will remain in effect until the IRS issues a decision on the renewal application.

.02 Revocation of determination. The

IRS may revoke a QPCA determination before the expiration of its three-year term if

the IRS determines, based on the results of

the QPCA’s participation in the IRS TIN

Matching Program, that the merchant/payee

data is not reliable or if the payment card

organization fails to meet any of the requirements in section 5, 6, or 7.

SECTION 9. EFFECTIVE DATE

The procedures are proposed to be effective on the date they are published as a

final revenue procedure.

Weighted Average Interest

Rate Update

Notice 2003–14

Sections 412(b)(5)(B) and 412(1)(7)(C)(i)

of the Internal Revenue Code provide that

the interest rates used to calculate current

liability for purposes of determining the full

funding limitation under § 412(c)(7) and the

required contribution under § 412(1) must

be within a permissible range around the

weighted average of the rates of interest on

30-year Treasury securities during the fouryear period ending on the last day before

the beginning of the plan year.

Notice 88–73, 1988–2 C.B. 383, provides guidelines for determining the

weighted average interest rate and the resulting permissible range of interest rates

used to calculate current liability for the purpose of the full funding limitation of

§ 412(c)(7) of the Code.

Section 417(e)(3)(A)(ii)(II) defines the

applicable interest rate, which must be used

for purposes of determining the minimum

present value of a participant’s benefit under § 417(e)(1) and (2), as the annual rate

of interest on 30-year Treasury securities for

the month before the date of distribution or

such other time as the Secretary may by

regulations prescribe. Section 1.417(e)–

1(d)(3) of the Income Tax Regulations provides that the applicable interest rate for a

2003–8 I.R.B.

month is the annual interest rate on 30year Treasury securities as specified by the

Commissioner for that month in revenue

rulings, notices or other guidance published in the Internal Revenue Bulletin.

The rate of interest on 30-year Treasury Securities for January 2003 is 4.94 per-

cent. Pursuant to Notice 2002–26, 2002–15

I.R.B. 743, the Service has determined this

rate as the monthly average of the daily determination of yield on the 30-year Treasury bond maturing in February 2031.

Section 405 of the Job Creation and

Worker Assistance Act of 2002 amended

§ 412(1)(7)(C) of the Code to provide that

for plan years beginning in 2002 and 2003

the permissible range is extended to 120

percent.

The following rates were determined for

the plan years beginning in the month

shown below.

Month

Year

Weighted

Average

90% to 110%

Permissible

Range

90% to 120%

Permissible

Range

February

2003

5.51

4.96 to 6.06

4.96 to 6.62

DRAFTING INFORMATION

The principal authors of this notice are

Tony Montanaro and Paul Stern of the Employee Plans, Tax Exempt and Government Entities Division. For further

information regarding this notice, please

contact the Employee Plans’ taxpayer assistance telephone service at 1–877–829–

5500 (a toll-free number), between the hours

of 8:00 a.m. and 6:30 p.m. Eastern time,

Monday through Friday. Mr. Montanaro

may be reached at 1–202–283–9714 and

Mr. Stern may be reached at 1–202–283–

9703. The telephone numbers in the preceding sentence are not toll-free.

26 CFR 601.602: Tax Forms and Instructions.

(Also Part 1, §§ 3406; 6109; 31.3406(d)–5.)

Rev. Proc. 2003–9

SECTION 1. PURPOSE

This revenue procedure establishes an

expanded Taxpayer Identification Number (TIN) Matching Program (The Program). The Federal Agency TIN Matching

Program established by Rev. Proc. 97–31

was limited to Federal agencies and processed data on tapes or cartridges. The Program established by this revenue procedure

is an online system open to all payors of

“reportable payments” as defined in section 3.06, and their authorized agents as defined in section 3.02.

Until further notice, Federal agencies

may match TINs under the procedures of

either Rev. Proc. 97–31 or this revenue procedure. However, the Service encourages

Federal agencies to use the Program established by this revenue procedure.

2003–8 I.R.B.

The Program permits payors to verify the

payee TINs required to be reported on information returns and payee statements.

Prior to filing an information return, a Program participant may check the TIN furnished by the payee against the name/TIN

combination contained in the Service data

base maintained for the Program. The IRS

will maintain a separate name/TIN data base

specifically for the Program and will inform the payor whether or not the name/

TIN combination furnished by the payee

matches a name/TIN combination in the

data base. The TIN Matching online interactive program will provide the results of

up to 25 requests in real time. A bulk file

containing up to 100,000 TIN match requests can be processed overnight via a Secure Mailbox. The matching details

provided to participating payors will help

avoid TIN errors and reduce the number of

backup withholding notices required under section 3406(a)(1)(B) of the Internal

Revenue Code.

SECTION 2. BACKGROUND

.01 Section 3406(a)(1) provides, in part,

that the payor shall deduct and withhold income tax from a reportable payment if

either—

(1) the payee fails to furnish the payee’s TIN to the payor in the required manner, or

(2) the Secretary of the Treasury notifies the payor that the TIN furnished by the

payee is incorrect.

.02 Section 31.3406(j)–1(a) of the Employment Tax Regulations provides that the

Commissioner has the authority to establish TIN matching programs and may prescribe by revenue procedure or other

516

guidance the scope of and terms and conditions for participating in such programs.

.03 Section 31.3406(j)–1(b) provides that

none of the matching details received by a

payor through a TIN matching program will

constitute a notice regarding an incorrect

name/TIN combination under § 31.3406(d)–

5(c) for purposes of imposing backup withholding under § 3406(a)(1)(B).

.04 Section 31.3406(j)–1(c) provides that

§ 3406(f), relating to confidentiality of information, applies to any matching details received by a payor through a TIN

matching program. A payor may not take

into account any such matching details in

determining whether to open or close an account with a payee.

.05 Section 6721 provides that a payor

may be subject to a penalty for failure to

file a complete and correct information return. Section 6722 provides that a payor

may be subject to a penalty for failure to

furnish a complete and correct information statement (payee statement) to a payee.

Not including the correct payee TIN on an

information return or payee statement is a

failure subject to the §§ 6721 and 6722 penalties.

.06 Section 6724 provides that the Service may waive the penalties under §§ 6721

and 6722 if the filer (payor) shows that the

failure was due to reasonable cause and was

not due to willful neglect. The regulations

under § 6724 provide that a filer may establish reasonable cause by showing, among

other things, that the failure arose due to

an event beyond the filer’s control.

.07 Section 31.3406(j)–1(d) provides that

the Service will not use a payor’s decision not to participate in the TIN Matching Program as a basis to assert that the

payor lacks reasonable cause under

February 24, 2003

§ 6724(a) for failure to file a correct information return under § 6721 or to furnish a correct payee statement under § 6722.

SECTION 3. DEFINITIONS

.01 Participant. The term “participant”

means a person that is either a payor or a

payor’s authorized agent and that has applied and been accepted to participate in the

Program.

.02 Authorized Agent. The term “authorized agent” means a person that, with the

payor’s written authorization, matches name

and TIN combinations on behalf of the

payor.

.03 Participating Payor. The term “participating payor” means a payor that is participating in the Program either on its own

behalf or through an authorized agent that

is a participant.

.04 Payee. The term “payee” means a

person with respect to whom a reportable

payment, as defined in § 3406(b), has been

made or is likely to be made by a participating payor.

.05 Account. The term “account” means

any account, instrument, or other relationship with a payee (such as a contract) with

respect to which a participating payor has

made or is likely to make a reportable payment. See § 31.3406(j)–1(e).

.06 Reportable Payment. The term “reportable payment” means interest and dividend payments as defined in § 3406(b)(2)

and other reportable payments as defined

in § 3406(b)(3).

.07 TIN. For the purposes of this revenue procedure, the term “TIN” means the

taxpayer identification number that a payee

is required to furnish to a payor. The TIN

may be an Employer Identification Number (EIN), a Social Security Number (SSN),

or an Internal Revenue Service Individual

Taxpayer Identification Number (ITIN). See

§ 6109.

.08 User. The term “user” means an individual who has registered and received an

Internal Revenue Service user account number for the TIN Matching Program.

SECTION 4. SCOPE

This revenue procedure applies to participants accepted in the Program under section 5 of this procedure. Publication 2108,

Specifications for TIN Matching Program,

contains the format and processing speci-

February 24, 2003

fications for transmitting the name/TIN data

and procedures for operation of the Program.

Participating payors may cite a name and

TIN match as reasonable cause under

§ 6724(a), if the Service asserts a penalty

under § 6721 or § 6722. The Service will

waive the penalty if the participating payor

presents documentation of the match in a

manner set forth in Publication 2108.

SECTION 5. APPLICATION,

REGISTRATION, ACCEPTANCE

.01 Application to Participate. A payor

or authorized agent may apply to participate in the Program by submitting an application in the form and the manner

specified in Publication 2108, Specifications for TIN Matching Program. The application must be signed by an individual

who can legally bind the applicant.

.02 Registration. A participant in the Program may designate one or more individuals who are authorized to access the name/

TIN data base on behalf of the participant.

A designated individual may access the data

base only through an Internal Revenue Service user account and must register with the

Internal Revenue Service to obtain a user

account and become a user. Registration is

accomplished online in the manner specified in Publication 2108. The registrant must

provide name, social security number, adjusted gross income from the current or

prior year’s tax return, and date of birth. The

registrant must self-select a user name, password, and PIN. After verifying the information provided by the registrant, the

Service will mail a registration notice containing a confirmation number to the registrant’s postal address of record.

.03 Access to System. A newly registered individual will have limited system access (e.g., to apply for e-file and maintain

his or her registration data) until the registrant receives and enters the confirmation number. Upon entering the confirmation

number, the registrant may access the system on behalf of a Program participant that

has authorized such access by a designation of the registrant under section 5.02.

SECTION 6. REQUIREMENTS FOR

PARTICIPATION

Participants in the Program must—

.01 Comply with all requirements of this

revenue procedure and Publication 2108;

517

.02 Transmit only name/TIN combinations relating to accounts (as defined in section 3.05 of this revenue procedure) with

respect to which

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