Internal Revenue Bulletin 2003-8 (PDF rendition): IRS Revenue Rulings

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

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, first-
out 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 fac-
tor” 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 build-
ings 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 in-
dividual filed a late original return for the preceding year.
T.D. 9030, page 495.
Final regulations under section 121 of the Code provide rules re-
lating to the exclusion of gain from the sale or exchange of a prin-
cipal 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
for two of the preceding five years or when the taxpayer has ex-
cluded 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 Num-
ber (TIN) Matching Program and to information reporting require-
ments, information reporting penalties, and backup withholding
requirements for payment card transactions. The regulations pro-
vide that backup withholding does not apply to payment card
transactions if the reportable payments are made through a Quali-
fied Payment Card Agent (QPCA) and the payee is a qualified
payee. The regulations also provide special Taxpayer Identifica-
tion Number (TIN) solicitation rules under section 6724 for pay-
ments 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 re-
quest 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 Identifi-
cation Numbers (TINs), and corporate status, and on behalf of
merchant/payees in furnishing such information to cardholder/
payors.
(Continued on the next page)
Bulletin No. 2003–8
February 24, 2003
Findings Lists begin on page ii.

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 estab-
lished 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 par-
ticipants will be able to rely on a verified TIN/name match as rea-
sonable 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 aver-
age interest rate for February 2003 and the resulting permis-
sible 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, 20032003–8 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 rul-
ings and procedures of the Internal Revenue Service and for pub-
lishing Treasury Decisions, Executive Orders, Tax Conventions,
legislation, court decisions, and other items of general inter-
est. It is published weekly and may be obtained from the Super-
intendent 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 sub-
stantive 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 pub-
lished rulings apply retroactively unless otherwise indicated. Pro-
cedures relating solely to matters of internal management are
not published; however, statements of internal practices and pro-
cedures that affect the rights and duties of taxpayers are pub-
lished.
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 taxpay-
ers or technical advice to Service field offices, identifying de-
tails 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 re-
lied on, used, or cited as precedents by Service personnel in the
disposition of other cases. In applying published rulings and pro-
cedures, the effect of subsequent legislation, regulations, court
decisions, rulings, and procedures must be considered, and Ser-
vice personnel and others concerned are cautioned against reach-
ing 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, Legisla-
tion and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these sub-
jects are contained in the other Parts and Subparts. Also in-
cluded in this part are Bank Secrecy Act Administrative Rulings.
Bank Secrecy Act Administrative Rulings are issued by the De-
partment of the Treasury’s Office of the Assistant Secretary (En-
forcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index 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 pe-
riod, 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; satisfac-
tory 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 taxpay-
ers who dispose of qualified low-income
buildings or interests therein during the pe-
riod January through March 2003. It also
provides a list of the corrected bond fac-
tor 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 guid-
ance to taxpayers concerning the general
methodology used by the Treasury Depart-
ment in computing the bond factor amounts
used in calculating the amount of bond con-
sidered satisfactory by the Secretary un-
der § 42(j)(6) of the Internal Revenue Code.
It further announced that the Secretary
would publish in the Internal Revenue Bul-
letin a table of bond factor amounts for dis-
positions occurring during each calendar
month.
Rev. Proc. 99–11, 1999–1 C.B. 275, es-
tablished a collateral program as an alter-
native to providing a surety bond for
taxpayers to avoid or defer recapture of low-
income housing tax credits under § 42(j)(6).
Under this program, taxpayers may estab-
lish 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 un-
der § 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 low-
income buildings or interests therein dur-
ing the period January through March 2003.
Due to a miscalculation, Rev. Rul.
2003–2, 2003–2 I.R.B. 251, is in error re-
garding dispositions of qualified low-income
buildings or interests therein during the pe-
riod January through March 2003. The
present revenue ruling provides the cor-
rected bond factor amounts.
Under the authority of § 7805(b), tax-
payers that posted bonds and taxpayers that
established Treasury Direct Accounts un-
der Rev. Proc. 99–11, based upon the above
mentioned bond factor amounts may con-
tinue 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 Dis-
position Bond,to the Internal Revenue Ser-
vice 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 Trea-
sury Direct Account by using the corrected
bond factor amounts listed in this rev-
enue ruling should contact the Bureau of
Public Debt, Division of Customer Ser-
vice, IRS Collateral Desk at (304) 480–
6158 for further information.
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
Month of
Disposition
19891990199119921993199419951996199719981999
Jan ’0316.2330.0441.8351.9360.5060.2460.1260.1160.1860.3960.62
Feb ’0316.2330.0441.8351.9360.5060.0959.9759.9660.0360.2460.47
Mar ’0316.2330.0441.8351.9360.5059.9459.8259.8259.8960.1060.33
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
Month of
Disposition
2000200120022003
Jan ’0360.8961.5562.4962.68
Feb ’0360.7561.4162.3362.68
Mar ’0360.6261.2762.1962.68
2003–8 I.R.B.494February 24, 2003

For a list of bond factor amounts appli-
cable 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 rul-
ing is Gregory N. Doran of the Office of
Associate Chief Counsel (Passthroughs and
Special Industries). For further informa-
tion regarding this revenue ruling, con-
tact 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
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations relating to the exclusion of
gain from the sale or exchange of a tax-
payer’s principal residence. These regula-
tions reflect changes to the law made by the
Taxpayer Relief Act of 1997, as amended
by the Internal Revenue Service Restruc-
turing and Reform Act of 1998.
DATES:Effective Date:These regulations
are effective December 24, 2002.
Applicability Date:For dates of appli-
cability, 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 CON-
TACT: 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 theFed-
eral Registera notice of proposed rule-
making (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 cir-
cumstances should qualify as unforeseen for
purposes of the reduced maximum exclu-
sion under section 121(c). Written and elec-
tronic 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. Pro-
posed and temporary regulations regard-
ing the reduced maximum exclusion are
also published in this issue of the Federal
Register.
On September 9, 2002, the IRS pub-
lished Notice 2002–60, 2002–36 I.R.B. 482,
which provides that certain taxpayers af-
fected by the September 11, 2001, terror-
ist attacks may claim a reduced maximum
exclusion for a sale or exchange of the tax-
payer’s principal residence by reason of un-
foreseen circumstances.
Explanation and Summary of
Comments
1.Exclusion of Gain from the Sale or
Exchange of a Principal Residence
Under section 121 and the proposed
regulations, a taxpayer may exclude up to
$250,000 ($500,000 for certain joint re-
turns) of gain realized on the sale or ex-
change of the taxpayer’s principal residence
if the taxpayer owned and used the prop-
erty as the taxpayer’s principal residence for
at least two years during the five-year pe-
riod ending on the date of the sale or ex-
change.
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 princi-
pal residence, depends upon all the facts and
circumstances. The proposed regulations fur-
ther provide that if a taxpayer alternates be-
tween two properties, the property that the
taxpayer uses a majority of the time dur-
ing 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 resi-
dence, arguing that the determination of the
taxpayer’s principal residence should be
judged on a day-by-day, rather than a year-
by-year, basis.
The final regulations continue to pro-
vide that the residence that the taxpayer uses
a majority of the time during the year will
ordinarily be considered the taxpayer’s prin-
cipal residence. However, this test is not dis-
positive. The final regulations also include
a nonexclusive list of factors that are rel-
evant in identifying a property as a tax-
payer’s principal residence.
b.Vacant land
Commentators requested clarification of
the circumstances in which vacant land sur-
rounding a residential structure would be
treated as part of the residence for pur-
poses of section 121. Several commenta-
tors maintained that a taxpayer who sells
vacant land should be entitled to the sec-
tion 121 exclusion if the taxpayer used the
vacant land in conjunction with a dwell-
ing unit as the taxpayer’s principal resi-
dence for at least two years.
Under section 1034 and former sec-
tion 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. Com-
missioner,44 T.C. 501 (1965);Roy v. Com-
missioner, 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
February 24, 20034952003–8 I.R.B.

sale of the house, and the series of trans-
actions all occurred during the replace-
ment period provided by section 1034 (two
years before or after the date of the tax-
payer’s purchase of a replacement resi-
dence), 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, 1976–2C.B.
246.
Consequently, the final regulations pro-
vide that section 121 applies to the sale or
exchange of vacant land that the taxpayer
has owned and used as part of the taxpay-
er’s principal residence if the sale or ex-
change of the dwelling unit occurs within
two years before or after the sale or ex-
change 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 ex-
changes 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 cer-
tain 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 un-
der section 121(b)(1) or (2), is excluded
first, and each spouse is treated as exclud-
ing one-half of the gain from a sale or ex-
change to which section 121(b)(2)(A) and
§1.121–2(a)(3)(i) (relating to the limita-
tion for certain joint returns) apply. Sales
or exchanges of the dwelling unit and ad-
jacent vacant land in separate transactions
are disregarded in applying section
121(b)(3) (restricting the application of sec-
tion 121 to only 1 sale or exchange every
2 years) to each other but are taken into ac-
count as a sale or exchange of a principal
residence on the date of each transaction in
applying section 121(b)(3) to that transac-
tion and the sale or exchange of any other
principal residence.
2.Use as a Principal Residence
a.Occupancy requirement
Numerous commentators asserted that
the two-year use requirement of section 121
should not require actual occupancy. In-
stead, they argued for a facts and circum-
stances test similar to the test employed
under section 1034. Under that test, a tax-
payer’s non-occupancy of a residence would
count as use if the taxpayer did not in-
tend to abandon the property as the tax-
payer’s principal residence. The final
regulations do not adopt this suggestion be-
cause it is inconsistent with the statutory ap-
proach 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 resi-
dence and occupied it as a principal resi-
dence 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 ex-
ception to the occupancy requirement for
taxpayers who are absent from the home for
an extended period of time due to employ-
ment but have not purchased a replace-
ment residence. Other commentators
suggested that members of the uniformed
services and the United States Foreign Ser-
vice should be accorded a special excep-
tion because they are often away from home
for extended periods of time. A commen-
tator also requested that the home day-
care industry be exempted from the
occupancy requirement because calculat-
ing the days of actual occupancy presents
a particular difficulty for home daycare pro-
viders who often use the same space for
residential and business purposes.
The final regulations do not adopt these
comments because there is no specific au-
thority under section 121 to provide ex-
ceptions 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-of-
residence care (section 121(d)(7)). More-
over, section 1034 contained a special rule
for members of the Armed Forces, which
Congress did not include in enacting sec-
tion 121.
b.Short temporary absences
Commentators requested that the regu-
lations specify a maximum period of time
that would constitute a short temporary ab-
sence from the residence and be consid-
ered use for purposes of satisfying the two-
year use requirement. One commentator
suggested that periods of up to five years
away from home due to international em-
ployment assignments should be consid-
ered short temporary absences.
Because the determination of whether an
absence is short and temporary depends on
the facts and circumstances, the final regu-
lations 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 resi-
dential purposes and partially for busi-
ness purposes (mixed-use property), only
that part of the gain allocable to the resi-
dential portion is excludable under sec-
tion 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 ex-
ceed depreciation attributable to periods af-
ter May 6, 1997. Commentators suggested
that the enactment of section 121(d)(6) il-
lustrates legislative intent to eliminate the
allocation requirement for mixed-use prop-
erty that existed under prior law.
The IRS and Treasury Department have
reconsidered the allocation rules of the pro-
posed regulations. The final regulations pro-
vide 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 require-
ment if the non-residential portion is sepa-
rate from the dwelling unit. Additionally,
if the depreciation for periods after May 6,
1997, attributable to the non-residential por-
tion of the property exceeds the gain allo-
cable to the non-residential portion of the
property, the excess will not reduce the sec-
tion 121 exclusion applicable to gain allo-
cable 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 post-
May 6, 1997, depreciation adjustments. The
final regulations provide that the termdwell-
2003–8 I.R.B.496February 24, 2003

ing unithas the same meaning as in sec-
tion 280A(f)(1), but does not include
appurtenant structures or other property.
A commentator asked for clarification re-
garding 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 regula-
tions should require allocation on the same
basis used to determine previous deprecia-
tion 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 busi-
ness and residential portions of the prop-
erty as the taxpayer used to allocate the
basis for purposes of depreciation, if ap-
plicable.
3.Ownership by Trusts
Commentators suggested that the regu-
lations 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 resi-
dence qualifies under section 1034 for the
rollover of gain into a replacement resi-
dence. 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 sec-
tions 678 and 671, gain realized from the
sale of trust property used by the benefi-
ciary as the beneficiary’s principal resi-
dence qualifies for the one-time exclusion
of gain from the sale of a residence un-
der 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 sug-
gestions and provide that, if a residence is
held by a trust, a taxpayer is treated as the
owner and the seller of the residence dur-
ing the period that the taxpayer is treated
as the owner of the trust or the portion of
the trust that includes the residence under
sections 671 through 679. The regulations
provide similar treatment for certain single-
owner entities.
4.Dollar Limitations Applicable to
Jointly Owned Property
Commentators requested further clari-
fication of the application of the dollar limi-
tations of section 121(b) to non-married
taxpayers who are joint owners of a resi-
dence. In response, the final regulations pro-
vide 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 tax-
payers who have owned or used a princi-
pal residence for less than two of the five
years preceding the sale or exchange or who
have excluded gain from another sale or ex-
change during the last two years. Taxpay-
ers who fail to meet any of these conditions
may qualify for the reduced maximum ex-
clusion if the sale or exchange is by rea-
son of a change in place of employment,
health, or unforeseen circumstances.
The proposed regulations explain the
general rule and the computation of the re-
duced maximum exclusion but do not pro-
vide rules clarifying what is a sale or
exchange by reason of a change in place of
employment, health, or unforeseen circum-
stances. Comments were requested regard-
ing what circumstances should qualify as
unforeseen. Because the rules formulated
in response to the comments are exten-
sive, the IRS and Treasury Department have
concluded that it is appropriate to publish
proposed and temporary regulations to pro-
vide the public with adequate notice and op-
portunity to comment. These proposed and
temporary regulations are published else-
where in this issue of the Bulletin. The fi-
nal regulations provide guidance regarding
the computation of the reduced maximum
exclusion.
6.Property of Deceased Spouse
Commentators suggested that the regu-
lations allow a surviving spouse to ex-
clude 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
and the requirements of section 121 are oth-
erwise met. Under section 121(b)(2), the
$500,000 exclusion is only available to
spouses who file a joint return. A surviv-
ing 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 sug-
gestion.
Commentators also requested clarifica-
tion regarding the computation of basis and
gain for surviving spouses. They asked for
guidance regarding the advantages of ti-
tling the marital home in the names of both
spouses so that a surviving spouse can ob-
tain a step-up in basis and, consequently,
realize less gain from the disposition of the
marital home. Because the rules regard-
ing the computation of basis and gain are
outside the scope of these regulations, the
final regulations do not address these is-
sues.
7.Partial Interests
Commentators suggested that the regu-
lations 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 ex-
clusion for each sale.
The final regulations provide that a tax-
payer may exclude gain from the sale or ex-
change of partial interests (other than
interests remaining after the sale or ex-
change of a remainder interest) in the tax-
payer’s principal residence if the interest
sold or exchanged includes an interest in
the dwelling unit.
However, the IRS and Treasury Depart-
ment believe that allowing more than the
maximum limitation amount with respect
to the same principal residence is con-
trary to the language and intent of sec-
tion 121. Therefore, only one maximum
limitation amount of $250,000 ($500,000
for certain joint returns) applies to the com-
bined sales or exchanges of partial inter-
ests.
In this regard, for purposes of determin-
ing the maximum limitation amount un-
der 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-
February 24, 20034972003–8 I.R.B.

change of a partial interest up to the tax-
payer’s full maximum limitation amount
and may exclude gain from the sale or ex-
change 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 cer-
tain joint returns) apply.
For purposes of applying section
121(b)(3) (restricting the application of sec-
tion 121 to only 1 sale or exchange every
2 years), each sale or exchange of a par-
tial interest is disregarded with respect to
other sales or exchanges of partial inter-
ests 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 ex-
change of any other principal residence.
8.Elections Under Sections 121(d)(8)
and (f)
Commentators asked for clarification re-
garding when a taxpayer may make or re-
voke an election under section 121(d)(8)
(election to have the section 121 exclu-
sion apply to a sale or exchange of a re-
mainder 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 resi-
dence). The final regulations adopt and
clarify the provisions of the proposed regu-
lations and provide that a taxpayer may
make or revoke either election at any time
before the expiration of a three-year pe-
riod beginning on the last date prescribed
by law (determined without regard to ex-
tensions) 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 cre-
ation of a form for taxpayers to use to re-
port the sale or exchange of a principal
residence even if the gain is entirely ex-
cludable under section 121. The final regu-
lations do not adopt this suggestion because,
unlike sales or exchanges under section
1034, no tax attributes of the sold resi-
dence carry over to a new residence. There-
fore the reporting of excluded gain is
unnecessary and would be unduly burden-
some for taxpayers.
10.Election to Apply Regulations
Retroactively
The regulations provide that taxpayers
who would otherwise qualify under the pro-
visions of§§1.121–1 through 1.121–4of
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 un-
der section 6511 has not expired by filing
an amended return.
11.Audit Protection
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 exclu-
sion if the taxpayer has made a reason-
able, good faith effort to comply with the
requirements of section 121. Compliance
with the provisions of the proposed regu-
lations that preceded these final regula-
tions generally will be considered a
reasonable, good faith effort.
12.Section 121 Exclusion in Individuals’
Title 11 Cases
The regulations provide that the bank-
ruptcy 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 sec-
tion 121 exclusion if the individual satis-
fies the requirements of section 121.
Although the effective date for this provi-
sion is on or after publication of final regu-
lations in theFederal Register,inviewof
the IRS’s acquiescence in the case ofIn-
ternal 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-
fective date of these regulations that a bank-
ruptcy estate may use the section 121
exclusion if the debtor would otherwise sat-
isfy the section 121 requirements.
13.Effective Date
These regulations apply to sales or ex-
changes on or after December 24, 2002.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory 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 Regula-
tory 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 regu-
lations was submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on its im-
pact on small business.
Drafting Information
The principal author of these regula-
tions is Sara Paige Shepherd, Office of As-
sociate Chief Counsel (Income Tax and
Accounting). However, other personnel from
the IRS and the Treasury Department par-
ticipated in the development of the regu-
lations.
*****
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in nu-
merical 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:
2003–8 I.R.B.498February 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 prin-
cipal residence. Subject to the other pro-
visions of section 121, a taxpayer may
exclude gain only if, during the 5-year pe-
riod ending on the date of the sale or ex-
change, the taxpayer owned and used the
property as the taxpayer’s principal resi-
dence for periods aggregating 2 years or
more.
(b)Residence—(1)In general.Whether
property is used by the taxpayer as the tax-
payer’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 en-
titled 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 per-
sonal property that is not a fixture under lo-
cal 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 resi-
dence depends upon all the facts and cir-
cumstances. 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 dur-
ing the year ordinarily will be considered
the taxpayer’s principal residence. In ad-
dition to the taxpayer’s use of the prop-
erty, 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 taxpay-
er’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 organiza-
tions and recreational clubs with which the
taxpayer is affiliated.
(3)Vacant land—(i)In general.The sale
or exchange of vacant land is not a sale or
exchange of the taxpayer’s principal resi-
dence unless—
(A) The vacant land is adjacent to land
containing the dwelling unit of the taxpay-
er’s principal residence;
(B) The taxpayer owned and used the
vacant land as part of the taxpayer’s prin-
cipal residence;
(C) The taxpayer sells or exchanges the
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 limita-
tion amount.For purposes of section
121(b)(1) and (2) (relating to the maxi-
mum 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) ap-
plies to the combined sales or exchanges
of vacant land and the dwelling unit. In ap-
plying the maximum limitation amount to
sales or exchanges that occur in different
taxable years, gain from the sale or ex-
change of the dwelling unit, up to the maxi-
mum 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 un-
der this paragraph (b)(3), each of the trans-
actions is disregarded in applying section
121(b)(3) (restricting the application of sec-
tion 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.
(C)Sale or exchange of vacant land be-
fore dwelling unit.If the sale or exchange
of the dwelling unit occurs in a later tax-
able 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 taxpay-
er’s return for the taxable year of the sale
or exchange of the vacant land. If the tax-
payer has reported gain from the sale or ex-
change of the vacant land as taxable, after
satisfying the requirements of this para-
graph (b)(3) the taxpayer may claim the sec-
tion 121 exclusion with regard to the sale
or exchange of the vacant land (for any pe-
riod for which the period of limitation un-
der section 6511 has not expired) by filing
an amended return.
(4)Examples.The provisions of this
paragraph (b) are illustrated by the follow-
ing 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 resi-
dence. A would be eligible for the section 121 ex-
clusion 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 resi-
dence during 1999, 2000, and 2003 is the Virginia resi-
dence. 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 con-
sisting 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 oc-
curred 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 para-
graph (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
February 24, 20034992003–8 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.
(c)Ownership and use requirements—
(1)In general.The requirements of own-
ership and use for periods aggregating 2
years or more may be satisfied by estab-
lishing ownership and use for 24 full
months or for 730 days (365 x 2). The re-
quirements 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 tax-
payer has satisfied the 2-year use require-
ment, occupancy of the residence is
required. However, short temporary ab-
sences, such as for vacation or other sea-
sonal absence (although accompanied with
rental of the residence), are counted as pe-
riods of use.
(ii)Determination of use during peri-
ods of out-of-residence care.If a taxpayer
has become physically or mentally inca-
pable of self-care and the taxpayer sells or
exchanges property that the taxpayer owned
and used as the taxpayer’s principal resi-
dence for periods aggregating at least 1 year
during the 5-year period preceding the sale
or exchange, the taxpayer is treated as us-
ing the property as the taxpayer’s princi-
pal residence for any period of time during
the 5-year period in which the taxpayer
owns the property and resides in any fa-
cility (including a nursing home) licensed
by a State or political subdivision to care
for an individual in the taxpayer’s condi-
tion.
(3)Ownership—(i)Trusts.If a resi-
dence 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 own-
ers) as the owner of the trust or the por-
tion 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-
poses of satisfying the 2-year ownership re-
quirement 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 follow-
ing examples. The examples assume that
§1.121–3 (relating to the reduced maxi-
mum 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 Janu-
ary 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 ex-
clusion because he has owned and used the house as
his principal residence for at least 2 of the 5 years pre-
ceding 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 prop-
erty 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 ap-
ply to gain from the sale because C owned the town-
house 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 resi-
dence for at least 2 years during the 5-year period pre-
ceding the sale (from May 25, 1995, until February
1, 1998).
Example 4.Taxpayer D, a college professor, pur-
chases and moves into a house on May 1, 1997. He
uses the house as his principal residence continu-
ously 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 tem-
porary absence under paragraph (c)(2) of this sec-
tion, 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 pe-
riod ending on the date of the sale. Consequently, D
is not entitled to exclude gain under section 121 be-
cause he did not use the residence for the requisite pe-
riod.
Example 5.Taxpayer E purchases a house on Feb-
ruary 1, 1998, that he uses as his principal resi-
dence. 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 pre-
ceding the date of sale, the total time E used his resi-
dence is less than 2 years (21 months), the section 121
exclusion will apply to gain from the sale of the resi-
dence because, under paragraph (c)(2) of this sec-
tion, the 2-month vacations are short temporary
absences and are counted as periods of use in deter-
mining whether E used the residence for the requi-
site period.
(d)Depreciation taken after May 6,
1997—(1)In general.The section 121 ex-
clusion does not apply to so much of the
gain from the sale or exchange of prop-
erty as does not exceed the portion of the
depreciation adjustments (as defined in sec-
tion 1250(b)(3)) attributable to the prop-
erty for periods after May 6, 1997.
Depreciation adjustments allocable to any
portion of the property to which the sec-
tion 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 para-
graph (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 total-
ing $14,000 for the period that he rented the prop-
erty. 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 de-
preciation deductions) may be excluded under sec-
tion 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 mean-
ing of section 1(h).
(e)Property used in part as a princi-
pal residence—(1)Allocation required.Sec-
tion 121 will not apply to the gain allocable
to any portion (separate from the dwell-
ing unit) of property sold or exchanged with
respect to which a taxpayer does not sat-
isfy the use requirement. Thus, if a por-
tion 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 ex-
cludable under section 121. No allocation
is required if both the residential and non-
residential portions of the property are
within the same dwelling unit. However,
section 121 does not apply to the gain al-
locable to the residential portion of the prop-
erty to the extent provided by paragraph (d)
of this section.
(2)Dwelling unit.For purposes of this
paragraph (e), the termdwelling unithas 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 allo-
cable to the residential and non-residential
2003–8 I.R.B.500February 24, 2003

portions of the property, the taxpayer must
allocate the basis and the amount realized
between the residential and the non-
residential portions of the property using the
same method of allocation that the tax-
payer used to determine depreciation ad-
justments (as defined in section 1250(b)(3)),
if applicable.
(4)Examples.The provisions of this
paragraph (e) are illustrated by the follow-
ing examples:
Example 1. Non-residential use of property not
within the dwelling unit.(i) Taxpayer A owns a prop-
erty that consists of a house, a stable and 35 acres.
A uses the stable and 28 acres for non-residential pur-
poses for more than 3 years during the 5-year pe-
riod 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 depre-
ciation 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 al-
location 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 prin-
cipal 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-residential-
use 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 al-
locable to the non-residential-use portion of the prop-
erty ($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 prop-
erty.(i) In 1998, Taxpayer B buys a property that in-
cludes 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 at-
tributable to the antiques business. Between 2002 and
2004, B claims depreciation deductions of $3,000 at-
tributable 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 princi-
pal 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 allo-
cable 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
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 residen-
tial 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 dwell-
ing unit.(i) In 2002, Taxpayer C buys a 3-story town-
house and converts the basement level, which has a
separate entrance, into a separate apartment by in-
stalling a kitchen and bathroom and removing the in-
terior stairway that leads from the basement to the
upper floors. After the conversion, the property con-
stitutes 2 dwelling units within the meaning of para-
graph (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 up-
per 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 non-
residential purposes under paragraph (e) of this sec-
tion. 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 prop-
erty 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 non-
residential portion of the property ($2,000 of which
is unrecaptured section 1250 gain within the mean-
ing 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 resi-
dential use.The facts are the same as inExample 3
except that in 2007 C incorporates the basement of
the townhouse into his principal residence by elimi-
nating the kitchen and building a new interior stair-
way 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 mean-
ing 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 dwell-
ing unit, property depreciated.Taxpayer D, an attor-
ney, 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 mean-
ing of section 1(h). D may exclude the remaining
$11,000 of the gain from the sale of her house be-
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 dwell-
ing unit, property not depreciated.The facts are the
sameasinExample 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, un-
der paragraph (e)(1) of this section, she is not re-
quired to allocate gain to the business use within the
dwelling unit.
(f)Effective date.This section is appli-
cable for sales and exchanges on or after
December 24, 2002. For rules on electing
to apply the provisions of this section ret-
roactively, see§1.121–4(j).
§1.121–2 Limitations.
(a)Dollar limitations—(1)In general.
A taxpayer may exclude from gross in-
come up to $250,000 of gain from the sale
or exchange of the taxpayer’s principal resi-
dence. A taxpayer is eligible for only one
maximum exclusion per principal resi-
dence.
(2)Joint owners.If taxpayers jointly own
a principal residence but file separate re-
turns, 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 sec-
tion 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 ex-
change of a principal residence may ex-
clude up to $500,000 of gain if—
(A) Either spouse meets the 2-year own-
ership requirements of§1.121–1(a) and (c);
(B) Both spouses meet the 2-year use re-
quirements of§1.121–1(a) and (c); and
(C) Neither spouse excluded gain from
a prior sale or exchange of property un-
der section 121 within the last 2 years (as
determined under paragraph (b) of this sec-
tion).
(ii)Other joint returns.For taxpayers fil-
ing 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 mar-
ried. 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 follow-
ing examples. The examples assume that
February 24, 20035012003–8 I.R.B.

§1.121–3 (relating to the reduced maxi-
mum 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 in-
terest in the house. They sell the house after own-
ing 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 taxpay-
er’s available limitation amount of $250,000.
Example 2.The facts are the same as inExample
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 real-
ized gain ($256,000) from gross income because the
gain realized from the sale does not exceed the limi-
tation amount of $500,000 available to A and B as tax-
payers 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 mar-
riage. 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 resi-
dence. H and W file a joint return for the year of the
sales. The gain realized from the sale of H’s resi-
dence 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 ex-
clude 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 limi-
tation amount. Therefore, H and W must recognize
$50,000 of the gain realized on the sale of W’s resi-
dence.
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 Feb-
ruary 16, 2001, H dies. On September 24, 2001, W
sells the residence and realizes a gain of $350,000. Pur-
suant 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 asExample 5,
except that W does not sell the residence until Janu-
ary 31, 2002. Because W’s filing status for the tax-
able 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 gen-
eral.Except as otherwise provided in
§1.121–3 (relating to the reduced maxi-
mum exclusion), a taxpayer may not ex-
clude from gross income gain from the sale
or exchange of a principal residence if, dur-
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 pur-
poses of this paragraph (b)(1), any sale or
exchange before May 7, 1997, is disre-
garded.
(2)Example.The following example il-
lustrates 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 sec-
tion 121. A sells the house in 2003. Although A meets
the 2-year ownership and use requirements of sec-
tion 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.
(c)Effective date.This section is appli-
cable for sales and exchanges on or after
December 24, 2002. For rules on electing
to apply the provisions of this section ret-
roactively, 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 re-
duced maximum exclusion limitation may
be available for a taxpayer who sells or ex-
changes 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 limi-
tation 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 ex-
clusion is computed by multiplying the
maximum dollar limitation of $250,000
($500,000 for certain joint filers) by a frac-
tion. The numerator of the fraction is the
shortest of the period of time that the tax-
payer owned the property during the 5-year
period ending on the date of the sale or ex-
change; the period of time that the tax-
payer used the property as the taxpayer’s
principal residence during the 5-year pe-
riod ending on the date of the sale or ex-
change; or the period of time between the
date of a prior sale or exchange of prop-
erty for which the taxpayer excluded gain
under section 121 and the date of the cur-
rent 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 sec-
tion 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 Janu-
ary 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 prop-
erty 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 dur-
ing the 5-year period preceding its sale, the maxi-
mum 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 sepa-
rate 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 limi-
tation amount. Instead, because the sale of the house
is due to a change in place of employment, W is eli-
gible to claim a reduced maximum exclusion of up
to $125,000 of the gain (365/730 x $250,000). There-
fore, 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 appli-
cable for sales and exchanges on or after
December 24, 2002. For rules on electing
to apply the provisions of this section ret-
roactively, see§1.121–4(j).
§1.121–4 Special rules.
(a)Property of deceased spouse—(1)In
general.For purposes of satisfying the own-
ership and use requirements of section 121,
a taxpayer is treated as owning and using
property as the taxpayer’s principal resi-
dence during any period that the taxpay-
er’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 prop-
erty; and
2003–8 I.R.B.502February 24, 2003

(ii) The taxpayer has not remarried at the
time of the sale or exchange of the prop-
erty.
(2)Example.The provisions of this para-
graph (a) are illustrated by the following ex-
ample. The example assumes that§1.121–3
(relating to the reduced maximum exclu-
sion) does not apply to the sale of the prop-
erty. 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 remar-
ried. Although W has owned and used the house for
less than 2 years, W will be considered to have sat-
isfied the ownership and use requirements of sec-
tion 121 because W’s period of ownership and use
includes the period that H owned and used the prop-
erty before death.
(b)Property owned by spouse or former
spouse—(1)Property transferred to indi-
vidual 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 tax-
payer owns the property will include the pe-
riod that the spouse or former spouse owned
the property.
(2)Property used by spouse or former
spouse.A taxpayer is treated as using prop-
erty as the taxpayer’s principal residence for
any period that the taxpayer has an own-
ership interest in the property and the tax-
payer’s spouse or former spouse is granted
use of the property under a divorce or sepa-
ration instrument (as defined in section
71(b)(2)), provided that the spouse or former
spouse uses the property as his or her prin-
cipal residence.
(c)Tenant-stockholder in cooperative
housing corporation.A taxpayer who holds
stock as a tenant-stockholder in a coopera-
tive 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 own-
ership requirements are applied to the hold-
ing of the stock and the use requirements
are applied to the house or apartment that
the taxpayer is entitled to occupy by rea-
son of the taxpayer’s stock ownership.
(d)Involuntary conversions—(1)In gen-
eral.For purposes of section 121, the de-
struction, theft, seizure, requisition, or
condemnation of property is treated as a sale
of the property.
(2)Application of section 1033.In ap-
plying section 1033 (relating to involun-
tary 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 re-
gard to section 121, reduced by the amount
of gain excluded from the taxpayer’s gross
income under section 121.
(3)Property acquired after involun-
tary conversion.If the basis of the prop-
erty 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 in-
voluntary 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 taxpay-
er’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 para-
graph (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 destruc-
tion. 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 ex-
clude $250,000 of the realized gain from A’s gross in-
come. 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 sec-
tion 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 pe-
riod 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.Ex-
cept as provided in paragraph (e)(2) of this
section (relating to sales or exchanges of
remainder interests), a taxpayer may ap-
ply 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 in-
terest sold or exchanged includes an inter-
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 limita-
tion amount.For purposes of section
121(b)(1) and (2) (relating to the maxi-
mum limitation amount of the section 121
exclusion), sales or exchanges of partial in-
terests in the same principal residence are
treated as one sale or exchange. There-
fore, only one maximum limitation amount
of $250,000 ($500,000 for certain joint re-
turns) applies to the combined sales or ex-
changes 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 limita-
tion amount and may exclude gain from the
sale or exchange of any other partial in-
terest in the same principal residence to the
extent of any remaining maximum limita-
tion 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 limi-
tation 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) (re-
stricting the application of section 121 to
only 1 sale or exchange every 2 years), each
sale or exchange of a partial interest is dis-
regarded with respect to other sales or ex-
changes of partial interests in the same
principal residence, but is taken into ac-
count 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 re-
mainder interest in the taxpayer’s princi-
pal 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 prin-
cipal 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 par-
ties.This paragraph (e)(2) will not apply to
a sale or exchange to any person that bears
February 24, 20035032003–8 I.R.B.

a relationship to the taxpayer that is de-
scribed in section 267(b) or 707(b).
(iii)Election.The taxpayer makes the
election under this paragraph (e)(2) by fil-
ing a return for the taxable year of the sale
or exchange that does not include the gain
from the sale or exchange of the remain-
der interest in the taxpayer’s gross income.
A taxpayer may make or revoke the elec-
tion at any time before the expiration of a
3-year period beginning on the last date pre-
scribed by law (determined without re-
gard 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 para-
graph (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 ex-
clude the $136,000 of gain. In 2005, A sells his re-
maining 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 sec-
tion 121 exclusion will not apply to any sale
or exchange by an individual if the provi-
sions of section 877(a) (relating to the treat-
ment 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 ex-
change 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 tax-
payer’s gross income. A taxpayer may make
an election under this paragraph (g) to have
section 121 not apply (or revoke an elec-
tion to have section 121 not apply) at any
time before the expiration of a 3-year pe-
riod beginning on the last date prescribed
by law (determined without regard to ex-
tensions) for the filing of the return for the
taxable year in which the sale or exchange
occurred.
(h)Residences acquired in rollovers un-
der section 1034.If a taxpayer acquires
property in a transaction that qualifies un-
der 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 de-
termining the period of the taxpayer’sown-
ership and use of the property under section
121 the taxpayer may include the periods
that the taxpayer owned and used the sec-
tion 1034 property as the taxpayer’s prin-
cipal residence (and each prior residence
taken into account under section 1223(7) in
determining the holding period of the sec-
tion 1034 property).
(i)[Reserved].
(j)Election to apply regulations retro-
actively.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 limi-
tation under section 6511 has not expired.
The taxpayer makes the election under this
paragraph (j) by filing a return for the tax-
able year of the sale or exchange that does
not include the gain from the sale or ex-
change of the taxpayer’s principal resi-
dence 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 regu-
lations for any years for which the period
of limitation under section 6511 has not ex-
pired by filing an amended return.
(k)Audit protection.The Internal Rev-
enue Service will not challenge a taxpay-
er’s position that a sale or exchange of a
principal residence occurring before De-
cember 24, 2002, but on or after May 7,
1997, qualifies for the section 121 exclu-
sion if the taxpayer has made a reason-
able, 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 con-
sidered a reasonable, good faith effort to
comply with the requirements of section
121.
(l)Effective date.This section is appli-
cable 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
the United States Code, but only if the
debtor is an individual.
(b)Definition and rules of general ap-
plication.For purposes of this section, sec-
tion 121 exclusion means the exclusion of
gain from the sale or exchange of a debt-
or’s principal residence available under sec-
tion 121.
(c)Estate succeeds to exclusion upon
commencement of case.The bankruptcy es-
tate 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 appli-
cable for sales or exchanges on or after De-
cember 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 Reg-
ister 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 tem-
porary regulations relating to the exclu-
sion 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 resi-
dence for two of the preceding five years
or who has excluded gain from the sale or
exchange of a principal residence within the
2003–8 I.R.B.504February 24, 2003

preceding two years. The text of these tem-
porary regulations also serves as the text of
the proposed regulations set forth in the no-
tice 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 appli-
cability, see§1.121–3T(l).
FOR FURTHER INFORMATION CON-
TACT: 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 ex-
clusion 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 princi-
pal residence within the preceding two
years.
Under section 121(a), a taxpayer may
exclude up to $250,000 ($500,000 for cer-
tain joint returns) of gain realized on the
sale or exchange of the taxpayer’s princi-
pal residence if the taxpayer owned and
used the property as the taxpayer’s princi-
pal residence for at least two years dur-
ing the five-year period ending on the date
of the sale or exchange. Section 121(b)(3)
allows the taxpayer to apply the maxi-
mum exclusion to only one sale or ex-
change during the two-year period ending
on the date of the sale or exchange. Sec-
tion 121(c) provides that a taxpayer who
fails to meet any of these conditions by rea-
son of a change in place of employment,
health, or, to the extent provided in regu-
lations, unforeseen circumstances, may be
entitled to an exclusion in a reduced maxi-
mum amount.
On October 10, 2000, a notice of pro-
posed rulemaking (REG–105235–99,
2000–44 I.R.B. 447) under section 121 was
published in theFederal Register(65 FR
60136). The proposed regulations did not
define change in place of employment,
health, or unforeseen circumstances for pur-
poses of the reduced maximum exclusion.
Comments were specifically requested re-
garding what circumstances should qualify
as unforeseen. A public hearing was held
on January 26, 2001.
The IRS and Treasury Department re-
ceived numerous comments regarding the
reduced maximum exclusion and have con-
cluded that many of these comments should
be adopted. However, because the rules for-
mulated in response to these comments are
extensive, the IRS and Treasury Depart-
ment have concluded that the rules relat-
ing to the reduced maximum exclusion
should be issued as proposed and tempo-
rary regulations to provide the public with
adequate notice and opportunity to com-
ment. Final regulations under section 121
addressing provisions other than the re-
duced 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 re-
duced maximum exclusion limitation is
available to a taxpayer who has sold or ex-
changed 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 preced-
ing two years. This reduced maximum ex-
clusion applies only if the sale or exchange
is by reason of a change in place of em-
ployment, health, or unforeseen circum-
stances. A sale or exchange is by reason of
a change in place of employment, health,
or unforeseen circumstances only if the tax-
payer’s primary reason for the sale or ex-
change is a change in place of employment,
health, or unforeseen circumstances. The
taxpayer’s primary reason for the sale or ex-
change is determined based on the facts and
circumstances. The temporary regulations
provide a list of factors that may be rel-
evant in determining the taxpayer’s pri-
mary reason. These factors are suggestive
only. No single fact or particular combi-
nation of facts is determinative of the tax-
payer’s entitlement to the reduced maximum
exclusion.
In addition, for each of the three grounds
for claiming a reduced maximum exclu-
sion, the temporary regulations provide a
general definition and one or more safe har-
bors. If a safe harbor applies, the taxpay-
er’s primary reason for the sale or exchange
is deemed to be a change in place of em-
ployment, health, or unforeseen circum-
stances.
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 employ-
ment of a qualified individual.Employ-
mentis defined as the commencement of
employment with a new employer, the con-
tinuation of employment with the same em-
ployer,orthecommencementor
continuation of self-employment. Aquali-
fied individualis 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 de-
duction. The safe harbor applies only if the
change in place of employment occurs dur-
ing the period of the taxpayer’s owner-
ship and use of the property as the
taxpayer’s principal residence. If a sale or
exchange does not satisfy this safe har-
bor, a taxpayer may still qualify for the re-
duced 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 rea-
son for the sale or exchange.
3.Sale or Exchange by Reason of
Health
Commentators proposed that, for pur-
poses of determining whether a sale or ex-
change is by reason of health, the
regulations adopt standards similar to those
for the deductibility of medical expenses un-
der section 213(a). Commentators also sug-
gested that the regulations provide that the
reduced maximum exclusion by reason of
February 24, 20035052003–8 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 tem-
porary 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, pro-
vide, or facilitate the diagnosis, cure, miti-
gation, or treatment of disease, illness, or
injury of a qualified individual, or (2) to ob-
tain or provide medical or personal care for
a qualified individual suffering from a dis-
ease, 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 allow-
ing a taxpayer to claim a reduced maxi-
mum exclusion if the taxpayer obtains
documentation of a specific medical con-
dition from a licensed physician. The tem-
porary regulations provide a safe harbor that
the primary reason for the sale or exchange
is deemed to be health if a physician (as de-
fined 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 individualincludes 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 quali-
fied 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 circum-
stances 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 unfore-
seen circumstances if the primary reason for
the sale or exchange is the occurrence of
an event that the taxpayer does not antici-
pate before purchasing and occupying the
residence.
Many commentators provided sugges-
tions regarding circumstances that should
qualify as unforeseen. A large number of
commentators suggested that unforeseen cir-
cumstances should encompass divorce or
the termination of a permanent residen-
tial relationship. Others suggested that un-
foreseen circumstances should include death,
birth, marriage, bankruptcy, the loss of em-
ployment, incarceration, admission to an in-
stitution of higher learning, natural and man-
made disasters, involuntary conversions, and
a substantial increase in medical or living
expenses leading to a significant change in
economic circumstances. One commenta-
tor suggested that any delay of over three
years in selling the residence due to a de-
cline in the real estate market should be
deemed an unforeseen circumstance. A few
commentators suggested that unforeseen cir-
cumstances 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 tax-
payer’s primary reason for the sale or ex-
change is deemed to be unforeseen
circumstances if one of the safe harbor
events occurs during the taxpayer’s own-
ership and use of the property. The safe har-
bor events include the involuntary
conversion of the residence, a natural or
man-made disaster or act of war or terror-
ism resulting in a casualty to the residence,
and, in the case of a qualified individual:
(1) death, (2) the cessation of employ-
ment as a result of which the individual is
eligible for unemployment compensation,
(3) a change in employment or self-
employment status that results in the tax-
payer’s inability to pay housing costs and
reasonable basic living expenses for the tax-
payer’s household, (4) divorce or legal sepa-
ration under a decree of divorce or separate
maintenance, and (5) multiple births re-
sulting from the same pregnancy. The Com-
missioner may designate other events or
situations as unforeseen circumstances in
published guidance of general applicabil-
ity or in a ruling directed to a specific tax-
payer. A taxpayer who does not qualify for
a safe harbor may demonstrate that the pri-
mary reason for the sale or exchange is un-
foreseen circumstances, under a facts and
circumstances test.
For purposes of the reduced maximum
exclusion by reason of unforeseen circum-
stances, aqualified individualincludes the
taxpayer, the taxpayer’s spouse, a co-owner
of the residence, and a person whose prin-
cipal place of abode is in the same house-
hold as the taxpayer.
The regulations include examples illus-
trating 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 regula-
tions 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 resi-
dence in the taxpayer’s gross income. Tax-
payers 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 pe-
riod 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 po-
sition that a sale or exchange before the ef-
fective date of these regulations but on or
after May 7, 1997, qualifies for the re-
duced maximum exclusion under section
121(c) if the taxpayer has made a reason-
able, good faith effort to comply with the
requirements of section 121(c) and if the
sale or exchange otherwise qualifies un-
der section 121.
7.Effective Date
These temporary regulations apply to
sales and exchanges on or after Decem-
ber 24, 2002.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory 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 appli-
cability of the Regulatory Flexibility Act (5
2003–8 I.R.B.506February 24, 2003

U.S.C. chapter 6) refer to the Special Analy-
ses section of the preamble to the cross-
reference notice of proposed rulemaking,
REG–138882–02, on page 522 of this Bul-
letin. Pursuant to section 7805(f) of the In-
ternal Revenue Code, these temporary
regulations will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on their
impact on small business.
Drafting Information
The principal author of these regula-
tions is Sara Paige Shepherd, Office of As-
sociate Chief Counsel (Income Tax and
Accounting). However, other personnel from
the IRS and the Treasury Department par-
ticipated in the development of the regu-
lations.
*****
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PA RT 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 ex-
change is by reason of a change in place
of employment, health, or unforeseen cir-
cumstances only if the primary reason for
the sale or exchange is a change in place
of employment (within the meaning of para-
graph (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 cir-
cumstances. If the taxpayer qualifies for a
safe harbor described in this section, the tax-
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 tax-
payer’s primary reason for the sale or ex-
change include (but are not limited to) the
extent to which—
(1) The sale or exchange and the cir-
cumstances giving rise to the sale or ex-
change 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 fore-
seeable when the taxpayer begins using the
property as the taxpayer’s principal resi-
dence; 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 resi-
dence.
(c)Sale or exchange by reason of a
change in place of employment—(1)In gen-
eral.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 employ-
ment.
(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 taxpay-
er’s ownership and use of the property as
the taxpayer’s principal residence; and
(ii) The individual’s new place of em-
ployment 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),employmentincludes the
commencement of employment with a new
employer, the continuation of employment
with the same employer, and the com-
mencement or continuation of self-
employment.
(4)Examples.The following examples
illustrate the rules of this paragraph (c):
Example 1.A is unemployed and owns a town-
house 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 town-
house. 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 har-
bor of paragraph (c)(2) of this section and B is en-
titled 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 Febru-
ary 2001 that is 35 miles from R’s Philadelphia of-
fice. 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 re-
sult, 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 em-
ployment 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 pri-
mary 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 town-
house that is 4 miles from her new place of employ-
ment. 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. How-
ever, D is entitled to claim a reduced maximum ex-
clusion 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 rea-
son for the sale or exchange is to obtain,
February 24, 20035072003–8 I.R.B.

provide, or facilitate the diagnosis, cure,
mitigation, or treatment of disease, ill-
ness, or injury of a qualified individual de-
scribed 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 ex-
change that is merely beneficial to the gen-
eral health or well-being of the individual
is not a sale or exchange by reason of
health.
(2)Physician’s recommendation safe har-
bor.The primary reason for the sale or ex-
change is deemed to be health if a physician
(as defined in section 213(d)(4)) recom-
mends 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 acci-
dent and is unable to care for herself. As a result, A
sells her house in 2003 and moves in with her daugh-
ter 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 re-
duced 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 prin-
cipal 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 dis-
ease. 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 re-
duced 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 suf-
fers from a chronic illness that requires regular medi-
cal 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 resi-
dence. 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 prin-
cipal residence. B’s doctor tells B that moving to a
warm, dry climate would mitigate B’s asthma symp-
toms. In 2003, B sells his house and moves to Ari-
zona to relieve his asthma symptoms. The sale is
within the safe harbor of paragraph (d)(2) of this sec-
tion 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.
Because the sale of the house is merely beneficial to
H’s general health, the sale of the house is not by rea-
son 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 un-
foreseen circumstances—(1)In general.A
sale or exchange is by reason of unfore-
seen circumstances if the primary reason for
the sale or exchange is the occurrence of
an event that the taxpayer does not antici-
pate before purchasing and occupying the
residence.
(2)Specific event safe harbors.The pri-
mary 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 speci-
fied in paragraphs (e)(2)(i) through (iii) of
this section occur during the period of the
taxpayer’s ownership and use of the resi-
denceasthetaxpayer’sprincipal
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 deduct-
ibility 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));
(C) A change in employment or self-
employment status that results in the tax-
payer’s inability to pay housing costs and
reasonable basic living expenses for the tax-
payer’s household (including amounts for
food, clothing, medical expenses, taxes,
transportation, court-ordered payments, and
expenses reasonably necessary to the pro-
duction of income, but not for the main-
tenance of an affluent or luxurious standard
of living);
(D) Divorce or legal separation under a
decree of divorce or separate maintenance;
or
(E) Multiple births resulting from the
same pregnancy; or
(iv) An event determined by the Com-
missioner to be an unforeseen circumstance
to the extent provided in published guid-
ance of general applicability or in a rul-
ing directed to a specific taxpayer.
(3)Examples.The following examples
illustrate the rules of this paragraph (e):
Example 1.In 2003, A buys a house in Califor-
nia. 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 un-
der 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 fur-
loughed from her job for six months. H and W are un-
able 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 re-
duced 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 resi-
dence. 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 en-
titled 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 condo-
minium fee is $X. Three months after B moves into
the condominium, the condominium association de-
cides to replace the building’s roof and heating sys-
tem. 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. How-
ever, under the facts and circumstances, the primary
reason for the sale is unforeseen circumstances, and
B is entitled to claim a reduced maximum exclu-
sion 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 ex-
pected. C is not entitled to claim a reduced maxi-
mum 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 traf-
fic is not an unforeseen circumstance.
Example 6.In 2003, D and her fiancéEbuyahouse
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 en-
titled to claim a reduced maximum exclusion under
section 121(c)(2).
(f)Qualified individual.For purposes of
this section,qualified individualmeans—
(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 tax-
payer; or
(5) For purposes of paragraph (d) of this
section, a person bearing a relationship
2003–8 I.R.B.508February 24, 2003

specified in sections 152(a)(1) through
152(a)(8) (without regard to qualification
as a dependent) to a qualified individual de-
scribed in paragraphs (f)(1) through (4) of
this section, or a descendant of the taxpay-
er’s grandparent.
(g) [Reserved]. For further guidance, see
§1.121–3(g).
(h)Election to apply regulations retro-
actively.Taxpayers who would otherwise
qualify under this section to exclude gain
from a sale or exchange before Decem-
ber 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 pe-
riod of limitations under section 6511 has
not expired. The taxpayer makes the elec-
tion under this paragraph (h) by filing a re-
turn for the taxable year of the sale or
exchange that does not include the gain
from the sale or exchange of the taxpay-
er’s principal residence in the taxpayer’s
gross income. Taxpayers who have filed a
return for the taxable year of the sale or ex-
change may elect to apply all the provi-
sions of this section for any years for which
the period of limitations under section 6511
has not expired by filing an amended re-
turn.
(i) through (j) [Reserved]. See§1.121–
3(i) through (j).
(k)Audit protection.The Internal Rev-
enue Service will not challenge a taxpay-
er’s position that a sale or exchange of a
principal residence that occurred before De-
cember 24, 2002, but on or after May 7,
1997, qualifies for the reduced maximum
exclusion under section 121(c) if the tax-
payer has made a reasonable, good faith ef-
fort 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 Reg-
ister 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 La-
bor Statistics price indexes are accepted for
use by department stores employing the re-
tail inventory and last-in, first-out inven-
tory methods for valuing inventories for tax
years ended on, or with reference to, De-
cember 31, 2002.
Rev. Rul. 2003–21
The following Department Store Inven-
tory 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 ap-
plication to inventories of department stores
employing the retail inventory and last-
in, first-out inventory methods for tax years
ended on, or with reference to, December
31, 2002.
The Department Store Inventory Price
Indexes are prepared on a national basis and
include (a) 23 major groups of depart-
ments, (b) three special combinations of the
major groups—soft goods, durable goods,
and miscellaneous goods, and (c) a store to-
tal, which covers all departments, includ-
ing 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)
GroupsDec. 2001Dec. 2002
PercentChange
from Dec. 2001 to
Dec. 2002
1
1.Piece Goods ..............................................................................484.4465.6-3.9
2.Domestics and Draperies ..........................................................591.0561.8-4.9
3.Women’s and Children’s Shoes ...............................................639.8640.10.0
4.Men’s Shoes..............................................................................889.1888.0-0.1
5.Infants’Wear .............................................................................623.4612.4-1.8
6.Women’s Underwear.................................................................569.0536.7-5.7
7.Women’s Hosiery......................................................................352.9345.3-2.2
8.Women’s and Girls’Accessories..............................................557.4540.3-3.1
9.Women’s Outerwear and Girls’Wear ......................................365.4356.4-2.5
10.Men’s Clothing .........................................................................564.3550.6-2.4
11.Men’s Furnishings ....................................................................595.3584.7-1.8
12.Boys’Clothing and Furnishings...............................................473.6446.2-5.8
13.Jewelry ......................................................................................895.8855.4-4.5
February 24, 20035092003–8 I.R.B.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
GroupsDec. 2001Dec. 2002
PercentChange
from Dec. 2001 to
Dec. 2002
1
14.Notions ......................................................................................817.8793.2-3.0
15.Toilet Articles and Drugs..........................................................975.7967.5-0.8
16.Furniture and Bedding ..............................................................625.9623.8-0.3
17.Floor Coverings ........................................................................625.2596.3-4.6
18.Housewares ...............................................................................758.9734.4-3.2
19.Major Appliances ......................................................................226.7219.4-3.2
20.Radio and Television ................................................................51.947.3-8.9
21.Recreation and Education
2
.......................................................87.984.3-4.1
22.Home Improvements
2
...............................................................124.2125.81.3
23.Auto Accessories
2
.....................................................................110.4111.30.8
Groups 1–15: Soft Goods...................................................................575.7560.7-2.6
Groups 16–20: Durable Goods ..........................................................417.1402.4-3.5
Groups 21–23: Misc. Goods
2
.............................................................97.395.2-2.2
Store Total
3
................................................................................517.2503.0-2.7
1
Absence of a minus sign before the percentage change in this column signifies a price increase.
2
Indexes on a January 1986=100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract depart-
ments.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Michael Burkom of the Office of As-
sociate Chief Counsel (Income Tax and
Accounting). For further information re-
garding this revenue ruling, contact
Mr. Burkom at (202) 622–7718 (not a toll-
free call).
Section 3406.—Backup
Withholding
26 CFR 31.3406(j)–1T: Taxpayer Identification
Number (TIN) matching program (temporary).
T.D. 9041
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 31
Taxpayer Identification
Number (TIN) Matching
Program
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary regulations.
SUMMARY: This document contains fi-
nal and temporary regulations under sec-
tion 3406 relating to the IRS Taxpayer
Identification Number (TIN) Matching Pro-
gram. These final and temporary regula-
tions affect payors, and their authorized
agents, and provide guidance necessary to
comply with the law. The text of the tem-
porary regulations also serves as the text of
the proposed regulations (REG–116641–
01) set forth on page 518 of this issue of
the Bulletin.
DATES:Effective Date:These regulations
are effective January 31, 2003.
Applicability Date:For dates of appli-
cability, see§§31.3406(j)–1(f) and
31.3406(j)–1T(f).
FOR FURTHER INFORMATION CON-
TACT: Donna Welch at (202) 622–4910.
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to
the Employment Tax Regulations (26 CFR
part 31) relating to the IRS TIN Match-
ing Program.
Section 3406(a)(1) requires a payor to
withhold on any reportable payment (as de-
fined in section 3406(b)(1)) in certain situ-
ations, including if (1) the payee fails to
furnish his TIN to the payor as required or
(2) the Secretary notifies the payor that the
2003–8 I.R.B.510February 24, 2003

TIN furnished by the payee is incorrect.
Section 3406(i) provides that the Secre-
tary shall prescribe such regulations as may
be necessary or appropriate to carry out the
purposes of section 3406.
Regulations under section 3406(i) pro-
vide that the Commissioner has the author-
ity to establish TIN matching programs
through revenue procedures or other ap-
propriate guidance. Under the regulations,
a payor participating in a TIN matching pro-
gram may, before filing information re-
turns with respect to reportable payments,
contact the IRS with respect to the TIN fur-
nished by the payee. The regulations pro-
vide that the IRS will inform the payor
whether or not the name/TIN combina-
tion furnished by the payee matches a name/
TIN combination maintained for the TIN
matching program.
Pursuant to the authority in the regula-
tions, the IRS issued Rev. Proc. 97–31,
1997–1 C.B. 703, and implemented a TIN
matching program for Federal agency pay-
ors. The IRS is now issuing a second rev-
enue procedure pursuant to that authority
(as amended by these temporary regula-
tions). This revenue procedure will ex-
pand the scope of the IRS TIN Matching
Program to allow all payors (and not merely
Federal agency payors), as well as pay-
ors’authorized agents, to participate in TIN
matching. In addition, the IRS and the Trea-
sury Department expect to issue additional
published guidance that will allow pay-
ment card organizations to act on behalf of
cardholder/payors for purposes of solicit-
ing, collecting, and validating merchant/
payees’names and TINs through TIN
matching if certain requirements are met.
Explanation of Provisions
These regulations specifically autho-
rize a payor’s authorized agent to partici-
pate in TIN matching by providing that, for
purposes of the TIN matching program, the
termpayorincludes an agent designated by
the payor to participate in TIN matching on
behalf of the payor.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory 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 appli-
cability of the Regulatory Flexibility Act (5
U.S.C. chapter 6) refer to the Special Analy-
ses section of the preamble to the cross-
reference notice of proposed rulemaking
(REG–116641–01) published in this issue
of the Bulletin. Pursuant to section 7805(f),
the temporary regulations will be submit-
ted to the Chief Counsel for Advocacy of
the Small Business Administration for com-
ment 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 Prac-
tice Division. However, other personnel
from the IRS and the Treasury Depart-
ment participated in the development of the
regulations.
*****
Amendments to the Regulations
Accordingly, 26 CFR part 31 is amended
as follows:
PA RT 3 1—EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT SOURCE
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 un-
der 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).
*****
(f) [Reserved]. For further guidance, see
§31.3406(j)–1T(f).
Par. 3. Section 31.3406(j)–1T is added
to read as follows:
§31.3406(j)–1T Taxpayer Identification
Number (TIN) matching program
(temporary).
(a)The matching program.Under sec-
tion 3406(i), the Commissioner has the au-
thority to establish Taxpayer Identification
Number (TIN) matching programs. The
Commissioner may prescribe in a revenue
procedure (see§601.601(d)(2) of this chap-
ter) or other appropriate guidance the scope
and the terms and conditions of participat-
ing in any TIN matching program. In gen-
eral, under a matching program, prior to
filing information returns with respect to re-
portable payments as defined in section
3406(b)(1), a payor of those reportable pay-
ments who is entitled to participate in the
matching program may contact the Inter-
nal Revenue Service (IRS) with respect to
the TIN furnished by a payee who has re-
ceived 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 pro-
gram. For purposes of this section, the term
payorincludes 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 para-
graph (a) of this section which is appli-
cable on January 31, 2003. The applicability
of this section expires on January 30, 2006.
David A. Mader,
Acting Deputy Commissioner of
Internal Revenue.
Approved January 17, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on January 30,
2003, 8:45 a.m., and published in the issue of the Federal Reg-
ister for January 31, 2003, 68 F.R. 4922)
Section 6654.—Failure by
Individual to Pay Estimated
Income Tax
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 sec-
tion 6654(d)(1)(B)(ii) of the Code where an
individual filed a late original return for the
preceding year.
February 24, 20035112003–8 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 un-
derpayment of estimated tax under sec-
tion 6654(a) of the Internal Revenue Code
as to an individual whose timely estimated
tax payments for the current taxable year
meettherequirementofsection
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 addi-
tion to tax for the taxable year if there is
an underpayment of estimated tax by an in-
dividual.
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 be-
fore 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 gener-
ally that the amount of any required in-
stallment shall be 25 percent of the required
annual payment. Section 6654(d)(1)(B) pro-
vides that the term“required annual pay-
ment”means the lesser of (i) 90 percent of
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 in-
dividual for the preceding taxable year ex-
ceeds $150,000, the required annual
payment is 110 percent of tax shown on
such return.Seesection 6654(d)(1)(C). If
the preceding taxable year was not a tax-
able year of 12 months or if the individual
did not file a return for such preceding tax-
able year, the required annual payment is
90 percent of tax shown on the return for
the current taxable year.Seesection
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 es-
timated tax if, on or before the date pre-
scribed 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 show-
ing a liability for tax was filed for such year.
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 re-
turn by the due date. Similarly, neither the
Code nor the regulations provide that sec-
tion 6654(d)(1)(B)(ii) will not apply if the
individual filed the return for the preced-
ing 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 prop-
erly predicated on tax shown on that re-
turn, the Service will not impose the
addition to tax under section 6654(a) for the
underpayment of estimated tax for the cur-
rent taxable year.
EFFECT ON OTHER REVENUE
RULING(S)
None.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Tiffany P. Smith of the Office of the
Associate Chief Counsel (Procedure and
Administration), Administrative Provi-
sions and Judicial Practice Division. For fur-
ther information regarding this revenue
ruling, contact Tiffany P. Smith at (202)
622–4910 (not a toll-free call).
2003–8 I.R.B.512February 24, 2003

Part III. Administrative, Procedural, and Miscellaneous
Notice 2003–13
This notice provides a proposed rev-
enue procedure that would establish a pro-
cedure for a payment card organization to
request a determination that it is a Quali-
fied Payment Card Agent (QPCA) for pur-
poses of§§3406 and 6724 of the Internal
Revenue Code. A QPCA could act on be-
half of cardholder/payors in soliciting, col-
lecting, 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 proce-
dures for a payment card organization to re-
quest a QPCA determination, the
requirements that a payment card organi-
zation must meet, including the TIN so-
licitation activities that a payment card
organization must undertake, to obtain a
QPCA determination and avoid revoca-
tion of the determination.
The IRS requests comments on this pro-
posed revenue procedure. Written com-
ments 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 Sta-
tion, 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 Con-
stitution Ave., NW, Washington, DC. Com-
ments may also be transmitted electronically
via the following e-mail address:
Notice.Comments@irscounsel.treas.gov.
Please include“Notice 2003–13”in the sub-
ject line of any electronic communica-
tions.
For further information regarding this no-
tice, contact Donna Welch of the Office of
Associate Chief Counsel (Procedure and
Administration), Administrative Provi-
sions 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 pro-
cedure for a payment card organization to
request a determination that it is a Quali-
fied Payment Card Agent (QPCA) for pur-
poses of§§3406 and 6724 of the Internal
Revenue Code. A QPCA may act on be-
half of cardholder/payors in soliciting, col-
lecting, and validating merchants’names,
TINs and corporate status and on behalf of
merchant/payees in furnishing such infor-
mation to cardholder/payors. Proposed Pro-
cedure and Administration Regulations
would relieve cardholder/payors from cer-
tain TIN solicitation requirements for pay-
ments 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
.01Payment card transactions.A pay-
ment card transaction is a transaction in
which a cardholder/payor uses a payment
card (as defined in section 4.03 of this rev-
enue procedure) to purchase goods or ser-
vices and a merchant agrees to accept a
payment card as a means of obtaining pay-
ment. A payment card organization (as de-
fined in section 4.04 of this revenue
procedure) sets the standards and provides
the mechanism, either directly or indi-
rectly through members and affiliates, for
effecting the payment.
.02Reporting requirements.In gen-
eral,§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 in-
formation return with the IRS and to fur-
nish an information statement to the payee.
Section 1.6041–3(p) of the Income Tax
Regulations provides exceptions to these re-
quirements, including, for example, excep-
tions 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 re-
quired 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 re-
quired to make a return with respect to a
payee must ask the payee for the identify-
ing number prescribed for securing the
proper identification of the payee and must
include that number in the return.
.03Backup withholding.Section
3406(a)(1) requires a payor to withhold on
reportable payments (as defined in
§3406(b)(1)) if the payee does not pro-
vide a TIN to the payor in the manner re-
quired or if the Secretary notifies the payor
that the TIN furnished by the payee is in-
correct or in certain other circumstances.
Section 3406(i) provides that the Secre-
tary shall prescribe the regulations neces-
sary or appropriate to carry out the purposes
of§3406.
Section 31.3406(j)–1 of the Employ-
ment Tax Regulations provides that the
Commissioner has the authority to estab-
lish TIN matching programs through rev-
enue 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 infor-
mation returns with respect to reportable
payments to the payee. The regulations fur-
ther provide that the IRS will inform the
payor whether or not the name/TIN com-
bination furnished by the payee matches a
name/TIN combination maintained for the
TINmatchingprogram.Section
31.3406(j)–1T of the temporary Employ-
ment Tax Regulations provides that an au-
thorized agent, including a QPCA,
designated by a payor to participate in TIN
matching on the payor’s behalf is also per-
mitted to participate in TIN matching. Rev-
enue Procedure 2003–9 issued pursuant to
February 24, 20035132003–8 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 pro-
vide that the backup withholding require-
ments of section 3406 do not apply to
payments made through a QPCA if the pay-
ments are made to a qualified payee (as de-
fined in proposed§31.3406(g)–1(f)(2)(v))
or during a grace period for determining
whether the payee is a qualified payee. Sec-
tion 31.3406(g)–1(f)(3) of the proposed
regulations would require a QPCA to no-
tify the cardholder/payor when payments are
made to a merchant/payee who is not a
qualified payee.
.04Information 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 pen-
alties includes a failure to include correct
payee TINs.
Section 6724 provides that the penal-
ties under§§6721 and 6722 may be waived
if the filer shows that the failure was due
to reasonable cause and was not due to will-
ful neglect. Section 301.6724–1(e)(1)(vi)(H)
and (f)(5)(vii) of the proposed Procedure
and Administration Regulations would pro-
vide 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 pay-
ment 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 infor-
mation to cardholder/payors.
SECTION 4. DEFINITIONS
For purposes of this revenue procedure,
the following definitions apply:
.01Cardholder.A cardholder is the payor
for payments made to a merchant/payee
through a payment card.
.02Merchant.A merchant is a payee that
has entered into an agreement with a pay-
ment card organization, or a member or af-
filiate, to accept the organization’s payment
card as payment for goods and services.
.03Payment 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, repre-
sents an agreement of the cardholder to pay
the merchant through the payment card or-
ganization.
.04Payment card organization.A pay-
ment card organization is an entity that sets
the standards and provides the mechanism,
either directly or indirectly through mem-
bers and affiliates, for effectuating pay-
ment 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 ac-
ceptors of payment cards for payment for
goods or services, and ensuring the sys-
tem conducts the transactions in accor-
dance with prescribed standards.
.05Qualified Payment Card Agent
(QPCA). A QPCA is a payment card or-
ganization that has a current QPCA deter-
mination 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 au-
thority to hold itself out as an agent of the
IRS.
SECTION 5. APPLICATION AND
REQUIREMENTS FOR QPCA
DETERMINATION
.01Where to apply for QPCA determi-
nation.A person authorized to act on be-
half of a payment card organization may
submit a written request for a QPCA de-
termination to the following address:
Internal Revenue Service–
Martinsburg Computing Center
250 Murall Drive, Mail Stop 360
ATTN: TIN Matching Coordinator
Kearneysville, WV 25430
.02Content of QPCA application.A pay-
ment 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 busi-
ness.
(2) The name of the department or of-
fice 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 employ-
ees that will be responsible for the perfor-
mance 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 sec-
tion 6.
(5) An explanation of the account open-
ing procedures and documents the pay-
ment 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, corpora-
tions, etc.) enrolled by the payment card or-
ganization.
(7) An explanation of the payment card
organization’s systems and controls for—
(a) Obtaining merchant/payee data ei-
ther directly or indirectly through its mem-
bers or affiliates or from other sources;
(b) Validating the accuracy of the
merchant/payee data;
(c) Ensuring the accuracy and reliabil-
ity of the merchant/payee data;
(d) Maintaining the merchant/payee data;
and
(e) Supplying the merchant/payee data
to the cardholder/payor.
.03Requirements for QPCA determina-
tion.A payment card organization must
meet the following requirements to ob-
tain a QPCA determination:
(1)Express authorization to act on be-
half of cardholder/payors and on behalf of
merchant/payees.The payment card orga-
nization must establish that cardholder/
payors have expressly authorized it, or its
members or affiliates, to act on their be-
half in soliciting, collecting, and validat-
ing merchants’names and TINs and to
assist the cardholders in meeting their in-
formation reporting obligations under
§§6041 and 6041A. The payment card or-
ganization must also establish that merchant/
payees have expressly authorized it, or its
members or affiliates, to act on their be-
half 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 pay-
ment card organization must establish that
2003–8 I.R.B.514February 24, 2003

it has, or demonstrate that it will, under-
take 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 or-
ganization must participate in the IRS TIN
Matching Program and must demonstrate,
based on the TIN matching results, that its
merchant/payee data is sufficiently reli-
able.
SECTION 6. TIN SOLICITATION
ACTIVITIES
.01Notification and disclosure require-
ments.A QPCA must notify the merchant/
payees for which it acts as agent that it will
obtain the merchant/payees’TINs and cor-
porate status and will provide this infor-
mation to cardholder/payors to assist
cardholders in meeting their information re-
porting obligations.
A QPCA must notify the cardholder/
payors for which it acts as agent that any
merchant/payees’names, TINs, and corpo-
rate status that the QPCA may furnish may
be used by the cardholder solely for pur-
poses of meeting its information report-
ing 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.
.02TIN Matching participation.A
QPCA must participate in the IRS TIN
Matching Program and must match its
merchant/payee data relating to report-
able payments with IRS data at least an-
nually. The QPCA must transmit only
merchant/payee data that has not previ-
ously 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 Pro-
gram and that, if the merchant/payee pro-
vides a TIN to the payment card
organization, the TIN may be matched
against IRS data.
.03Providing 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 be-
fore 30 days after the transaction, which-
ever is later. The QPCA must provide
cardholder/payors with the results of its TIN
matching participation within 30 days af-
ter the payment card organization receives
the results.
SECTION 7. OTHER
REQUIREMENTS
.01Availability of records. A payment
card organization must respond to any rea-
sonable IRS request for inspection of any
books and records that relate to the opera-
tion of TIN solicitation activity, includ-
ing, but not limited to, reports, memoranda,
budgets, and computer printouts. The pay-
ment card organization must allow the IRS
reasonable access to the merchant/payee
TIN data system, including instruction
manuals describing the system.
.02Change in information. The QPCA
must promptly notify the IRS of any change
in the information described in section 5.
.03Confidentiality of information.The
payment card organization must maintain
the confidentiality of information obtained
through its TIN solicitation activities in ac-
cordance with the requirements of
§31.3406(f)–1 of the Employment Tax
Regulations. Except as permitted under
§31.3406(f)–1, the payment card organi-
zation may not disclose any merchant/
payee information to any person other than
the cardholder/payor without prior writ-
ten consent of the merchant/payee. The IRS
will treat all information provided by a
QPCA as confidential taxpayer return in-
formation under§6103.
SECTION 8. TERM, RENEWALS,
AND TERMINATION
.01Term and renewal.In general, a
QPCA determination will be effective for
three years from the date of the determi-
nation. A QPCA may request a renewal of
the QPCA determination by submitting an
application for renewal to the IRS no ear-
lier than six months and no later than three
months before the expiration of the three-
year term. In the application for renewal,
the QPCA must report any change in the
information in the original application. Be-
fore renewal of the determination, the IRS
may review the QPCA’s systems. In addi-
tion, the QPCA must demonstrate that the
merchant/payee data continues to be reli-
able. The application for renewal must in-
clude the results from participation in the
IRS TIN Matching Program during the cur-
rent three-year term. The IRS will make ev-
ery effort to issue a decision on a renewal
application at least 30 days before the ex-
piration of the current three-year term. In
the event that the IRS does not issue a de-
cision on a timely renewal application be-
fore the expiration of the existing QPCA
determination, the determination will re-
main in effect until the IRS issues a deci-
sion on the renewal application.
.02Revocation of determination.The
IRS may revoke a QPCA determination be-
fore 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 re-
quirements in section 5, 6, or 7.
SECTION 9. EFFECTIVE DATE
The procedures are proposed to be ef-
fective 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 four-
year period ending on the last day before
the beginning of the plan year.
Notice 88–73, 1988–2 C.B. 383, pro-
vides guidelines for determining the
weighted average interest rate and the re-
sulting permissible range of interest rates
used to calculate current liability for the pur-
pose 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 un-
der§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 pro-
vides that the applicable interest rate for a
February 24, 20035152003–8 I.R.B.

month is the annual interest rate on 30-
year Treasury securities as specified by the
Commissioner for that month in revenue
rulings, notices or other guidance pub-
lished in the Internal Revenue Bulletin.
The rate of interest on 30-year Trea-
sury 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 de-
termination of yield on the 30-year Trea-
sury 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.
MonthYearWeighted
Average
90% to 110%
Permissible
Range
90% to 120%
Permissible
Range
February20035.514.96 to 6.064.96 to 6.62
DRAFTING INFORMATION
The principal authors of this notice are
Tony Montanaro and Paul Stern of the Em-
ployee Plans, Tax Exempt and Govern-
ment Entities Division. For further
information regarding this notice, please
contact the Employee Plans’taxpayer as-
sistance 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 pre-
ceding 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 Num-
ber (TIN) Matching Program (The Pro-
gram). The Federal Agency TIN Matching
Program established by Rev. Proc. 97–31
was limited to Federal agencies and pro-
cessed data on tapes or cartridges. The Pro-
gram established by this revenue procedure
is an online system open to all payors of
“reportable payments”as defined in sec-
tion 3.06, and their authorized agents as de-
fined in section 3.02.
Until further notice, Federal agencies
may match TINs under the procedures of
either Rev. Proc. 97–31 or this revenue pro-
cedure. However, the Service encourages
Federal agencies to use the Program es-
tablished by this revenue procedure.
The Program permits payors to verify the
payee TINs required to be reported on in-
formation returns and payee statements.
Prior to filing an information return, a Pro-
gram participant may check the TIN fur-
nished 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 in-
form 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 inter-
active program will provide the results of
up to 25 requests in real time. A bulk file
containing up to 100,000 TIN match re-
quests can be processed overnight via a Se-
cure Mailbox. The matching details
provided to participating payors will help
avoid TIN errors and reduce the number of
backup withholding notices required un-
der 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 in-
come tax from a reportable payment if
either—
(1) the payee fails to furnish the pay-
ee’s TIN to the payor in the required man-
ner, or
(2) the Secretary of the Treasury noti-
fies the payor that the TIN furnished by the
payee is incorrect.
.02 Section 31.3406(j)–1(a) of the Em-
ployment Tax Regulations provides that the
Commissioner has the authority to estab-
lish TIN matching programs and may pre-
scribe by revenue procedure or other
guidance the scope of and terms and con-
ditions 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 with-
holding under§3406(a)(1)(B).
.04 Section 31.3406(j)–1(c) provides that
§3406(f), relating to confidentiality of in-
formation, applies to any matching de-
tails 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 ac-
count 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 re-
turn. Section 6722 provides that a payor
may be subject to a penalty for failure to
furnish a complete and correct informa-
tion 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 pen-
alties.
.06 Section 6724 provides that the Ser-
vice 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 es-
tablish 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 deci-
sion not to participate in the TIN Match-
ing Program as a basis to assert that the
payor lacks reasonable cause under
2003–8 I.R.B.516February 24, 2003

§6724(a) for failure to file a correct in-
formation return under§6721 or to fur-
nish a correct payee statement under§6722.
SECTION 3. DEFINITIONS
.01Participant.The term“participant”
means a person that is either a payor or a
payor’s authorized agent and that has ap-
plied and been accepted to participate in the
Program.
.02Authorized Agent.The term“autho-
rized agent”means a person that, with the
payor’s written authorization, matches name
and TIN combinations on behalf of the
payor.
.03Participating Payor.The term“par-
ticipating payor”means a payor that is par-
ticipating in the Program either on its own
behalf or through an authorized agent that
is a participant.
.04Payee. 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 partici-
pating payor.
.05Account.The term“account”means
any account, instrument, or other relation-
ship with a payee (such as a contract) with
respect to which a participating payor has
made or is likely to make a reportable pay-
ment. See§31.3406(j)–1(e).
.06Reportable Payment.The term“re-
portable payment”means interest and divi-
dend payments as defined in§3406(b)(2)
and other reportable payments as defined
in§3406(b)(3).
.07TIN.For the purposes of this rev-
enue 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 Num-
ber (EIN), a Social Security Number (SSN),
or an Internal Revenue Service Individual
Taxpayer Identification Number (ITIN). See
§6109.
.08User. The term“user”means an in-
dividual who has registered and received an
Internal Revenue Service user account num-
ber for the TIN Matching Program.
SECTION 4. SCOPE
This revenue procedure applies to par-
ticipants accepted in the Program under sec-
tion 5 of this procedure. Publication 2108,
Specifications for TIN Matching Program,
contains the format and processing speci-
fications for transmitting the name/TIN data
and procedures for operation of the Pro-
gram.
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
.01Application to Participate.A payor
or authorized agent may apply to partici-
pate in the Program by submitting an ap-
plication in the form and the manner
specified in Publication 2108,Specifica-
tions for TIN Matching Program.The ap-
plication must be signed by an individual
who can legally bind the applicant.
.02Registration.A participant in the Pro-
gram may designate one or more individu-
als 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 Ser-
vice 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 speci-
fied in Publication 2108. The registrant must
provide name, social security number, ad-
justed gross income from the current or
prior year’s tax return, and date of birth. The
registrant must self-select a user name, pass-
word, and PIN. After verifying the infor-
mation provided by the registrant, the
Service will mail a registration notice con-
taining a confirmation number to the reg-
istrant’s postal address of record.
.03Access to System.A newly regis-
tered individual will have limited system ac-
cess (e.g., to apply for e-file and maintain
his or her registration data) until the reg-
istrant receives and enters the confirma-
tion number. Upon entering the confirmation
number, the registrant may access the sys-
tem on behalf of a Program participant that
has authorized such access by a designa-
tion 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;
.02 Transmit only name/TIN combina-
tions relating to accounts (as defined in sec-
tion 3.05 of this revenue procedure) with
respect to which a reportable payment is
made, or is likely to be made, on or after
the effective date of this revenue proce-
dure;
.03 Transmit only name/TIN combina-
tions that have not been previously trans-
mitted by that participant to the Service for
matching;
.04 Maintain the confidentiality of in-
formation obtained through TIN solicita-
tion activities in accordance with the
requirements of§31.3406(f)–1 of the Em-
ployment Tax Regulations;
.05 Provide the Service with the infor-
mation necessary to monitor the effective-
ness of the Program.
SECTION 7. INQUIRIES
Questions about this TIN Matching Pro-
gram may be addressed to:
Internal Revenue Service
Martinsburg Computing Center
250 Murall Drive MS 360
Attn: TIN Matching Coordinator
Kearneysville, West Virginia 25430
SECTION 8. EFFECT ON OTHER
DOCUMENTS
This revenue procedure modifies Rev-
enue Procedure 97–31, 1997–1 C.B. 703,
to establish an expanded TIN Matching Pro-
gram open to all payors of reportable pay-
ments and their authorized agents. Until
notified otherwise, Federal agencies may
continue to match TINs under the proce-
dures set forth in Rev. Proc. 97–31.
SECTION 9. EFFECTIVE DATE
This revenue procedure will be effec-
tive upon the IRS issuing a notice announc-
ing the availability of E-Services.
SECTION 10. DRAFTING
INFORMATION
The principal author of this revenue pro-
cedure is Patricia Manasevit of the Office
of the Associate Chief Counsel, Proce-
dure and Administration. For further infor-
mation regarding this revenue procedure,
contact Ms. Manasevit at (202) 622–4910
(not a toll-free call).
February 24, 20035172003–8 I.R.B.

Part IV. Items of General Interest
Notice of Proposed Rulemak-
ing; Notice of Proposed Rule-
making by Cross-Reference
to Temporary Regulations;
and Notice of Public Hearing
Information Reporting and
Backup Withholding for
Payment Card Transactions
REG–116641–01
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemak-
ing; notice of proposed rulemaking by
cross-reference to temporary regulations;
and notice of public hearing.
SUMMARY: On page 510 of this issue of
the Bulletin, the IRS is issuing temporary
regulations (T.D. 9041) relating to the IRS
Taxpayer Identification Number (TIN)
Matching Program. The text of the tempo-
rary regulations published in this issue of
the Bulletin serves as the text of this por-
tion of the proposed regulations. This docu-
ment also contains proposed regulations
relating to the information reporting re-
quirements, information reporting penal-
ties, and backup withholding requirements
for payment card transactions. These regu-
lations affect payors (and their authorized
agents) and payees of certain reportable
payments and provide guidance neces-
sary to comply with the law. This docu-
ment also provides notice of a public
hearing on these proposed regulations.
DATES: Written or electronic comments
must be received by May 1, 2003. Out-
lines of topics to be discussed at the pub-
lic hearing scheduled for May 21, 2003,
must be received by April 30, 2003.
ADDRESSES: Send submissions to:
CC:PA:RU (REG–116641–01), room 5226,
Internal Revenue Service, POB 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand delivered Mon-
day through Friday between the hours of
8 a.m. and 4 p.m. to: CC:PA:RU (REG–
116641–01), Courier’s Desk, Internal Rev-
enue Service,1111Constitution Avenue,
NW, Washington, DC. Alternatively, tax-
payers may submit electronic comments di-
rectly to the IRS internet site atwww.irs.gov/
regs.The public hearing will be held in
room 6718, Internal Revenue Building,1111
Constitution Avenue, NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Donna
Welch, (202) 622–4910; concerning sub-
missions of comments, the hearing, and/or
to be placed on the building access list to
attend the hearing, Sonya Cruse, (202) 622–
7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained
in this notice of proposed rulemaking have
been submitted to the Office of Manage-
ment and Budget for review in accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)). Comments on the col-
lections of information should be sent to the
Office of Management and Budget,Attn:
Desk Officer for the Department of the
Treasury, Office of Information and Regu-
latory Affairs, Washington, DC 20503, with
copies to theInternal Revenue Service,
Attn: IRS Reports Clearance Officer,
W:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collection of in-
formation should be received by April 1,
2003. Comments are specifically requested
concerning:
Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the functions of the Internal
Revenue Service, including whether the in-
formation will have practical utility;
The accuracy of the estimated burden as-
sociated with the proposed collection of in-
formation (see below);
How the quality, utility, and clarity of the
information to be collected may be en-
hanced;
How the burden of complying with the
proposed collections of information may be
minimized, including through the applica-
tion of automated collection techniques or
other forms of information technology; and
Estimates of capital or start-up costs and
costs of operation, maintenance, and pur-
chase of service to provide information.
The collection of information in this pro-
posed regulation is in§31.3406(g)–1(f)(3).
This information is required in order for a
Qualified Payment Card Agent (QPCA) to
notify a cardholder/payor that a merchant/
payee is not a qualified payee for pur-
poses of the proposed regulations. This
information will alert a cardholder/payor that
backup withholding under 3406 may ap-
ply. The collection of information is vol-
untary to obtain a benefit. The likely
respondents are business or other for-profit
institutions.
Estimated total annual reporting burden:
11,750,000 hours.
Estimated average annual burden hours
per respondent: 5,875 hours.
Estimated number of respondents: 2,000.
Estimated annual frequency of responses:
monthly.
An agency may not conduct or spon-
sor, and a person is not required to re-
spond to, a collection of information unless
it displays a valid control number assigned
by the Office of Management and Bud-
get.
Books or records relating to a collec-
tion of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required by
26 U.S.C. 6103.
Background
1.Summary
This document contains proposed
amendments to 26 CFR part 31 relating to
backup withholding under section 3406 of
the Internal Revenue Code and proposed
amendments to 26 Part 301 relating to
waivers under section 6724 of informa-
tion reporting penalties under sections 6721
and 6722.
Temporary regulations in this issue of the
Bulletin provide that, for purposes of the
IRS TIN Matching Program, the termpayor
includes an agent designated by the payor
to participate in TIN matching on behalf of
the payor. The text of those temporary regu-
lations also serves as the text of proposed
amendments to§31.3406(j)–1(a) of the
regulations. The preamble to the tempo-
rary regulations explains the proposed
amendments to§31.3406(j)–1(a).
2.Information Reporting and Backup
Withholding Provisions
2003–8 I.R.B.518February 24, 2003

Section 6041(a) requires persons en-
gaged in a trade or business and making
payment in the course of such trade or busi-
ness to another person of rent, salaries,
wages, premiums, annuities, compensa-
tions, remunerations, emoluments, or other
fixed or determinable gains, profits, and in-
come of $600 or more in any one taxable
year to file information returns with the IRS
and to furnish information statements to
payees. Among other items, the payor must
include the payee’s name and taxpayer iden-
tification number (TIN) on the informa-
tion return and the information statement.
Section 1.6041–3 of the Income Tax
Regulations provides that information re-
turns are not required for certain payments.
Section 1.6041–3(p)(1) provides that an in-
formation return is not required for pay-
ments made to a corporation. Section
1.6041–3(c) provides that an information re-
turn is not required for payments of bills
for merchandise, telegrams, telephone,
freight, storage, and similar charges.
Section 6109(a)(1) provides that a per-
son required to make a return must in-
clude that person’s identifying number in
the return. Section 6109(a)(2) provides that
a person (the payee) with respect to whom
a return is required to be made by another
person (the payor) or whose identifying
number is required to be shown on a re-
turn of another person must furnish to the
other person the identifying number pre-
scribed for securing the proper identifica-
tion of the payee. Section 6109(a)(3)
provides that a person (the payor) required
to make a return with respect to another per-
son (the payee) must ask the other person
for the identifying number prescribed for
securing the proper identification of the
payee and include that number in the re-
turn.
In general, section 6721(a)(1) imposes
a $50 penalty for each failure to file an in-
formation return on or before the required
filing date, for any failure to include all of
the information required to be shown on the
return, or for the inclusion of incorrect in-
formation.
Section 6724(a) provides that no pen-
alty will be imposed under section 6721 if
it is shown that the failure is due to rea-
sonable cause and not to willful neglect.
Section 3406(a)(1) requires a payor to
withhold on any reportable payment (as de-
fined in section 3406(b)(1)) in certain situ-
ations, including if (1) the payee fails to
furnish his TIN to the payor as required or
(2) the Secretary notifies the payor that the
TIN furnished by the payee is incorrect.
Section 3406(i) provides that the Sec-
retary shall prescribe the regulations nec-
essary or appropriate to carry out the
purposes of section 3406.
3.TIN Matching
Regulations issued under section 3406(i)
(§31.3406(j)–1 of the Employment Tax
Regulations) provide that the Commis-
sioner has the authority to establish TIN
matching programs through revenue pro-
cedures or other appropriate guidance. Un-
der 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 for
reportable payments. The regulations fur-
ther provide that the IRS will inform the
payor whether or not the name/TIN com-
bination furnished by the payee matches a
name/TIN combination maintained for the
TIN matching program.
Pursuant to the authority in§31.3406
(j)–1, the IRS issued Rev. Proc. 97–31,
1997–1 C.B. 703, and implemented TIN
matching for reportable payments by Fed-
eral agency payors. The IRS is issuing a
second TIN matching revenue procedure to
expand the scope of the TIN Matching Pro-
gram by allowing all payors (and not merely
Federal agency payors) to participate in TIN
matching for reportable payments. Under
the authority of the temporary regulations
discussed above, payors’authorized agents
will also be permitted to participate in TIN
matching.
4.Payment Card Transactions
Apayment card transactionis a trans-
action in which a cardholder/payor uses a
payment card to purchase goods or ser-
vices and a merchant agrees to accept a
payment card as a means of obtaining pay-
ment. Apayment cardis a card (or an ac-
count) issued by a payment card
organization, or one of its members or af-
filiates, to a cardholder/payor which, upon
presentation to a merchant/payee, repre-
sents an agreement of the cardholder to pay
the merchant through the payment card or-
ganization. Apayment card organizationis
an entity that sets the standards and pro-
vides the mechanism, either directly or in-
directly through members and affiliates, for
effectuating payment between a purchaser
and a merchant in a payment card trans-
action. A payment card organization gen-
erally provides this mechanism by issuing
payment cards, enrolling merchants as au-
thorized acceptors of payment cards for pay-
ment for goods or services, and ensuring the
system conducts the transactions in accor-
dance with prescribed standards of pay-
ment card transactions.
The parties involved in payment card
transactions may include the cardholder/
payor, the merchant/payee, a bank that is-
sues a payment card (issuing bank), a
merchant/payee’s bank (merchant bank, ac-
quiring bank, or acquirer), and the pay-
ment card organization.
Cash does not pass directly from the
cardholder/payor to the merchant/payee for
purchases made with a payment card.
Rather, in some situations, payment is made
by a credit from the issuing bank, through
the payment card organization, to the mer-
chant’s bank account. In turn, the card-
holder pays the issuing bank upon receipt
of the payment card monthly billing state-
ment. In other situations, payment is made
directly from the payment card organiza-
tion to the merchant. In turn, the card-
holder pays the payment card organization
upon receipt of the payment card monthly
billing statement.
5.Information Reporting and Backup
Withholding Difficulties for Payment
Card Transactions
Information reporting compliance is dif-
ficult in payment card transactions be-
cause an invoice may not be issued, and the
employee of the cardholder/payor may not
request and obtain the name/TIN combi-
nation of the merchant/payee at the time of
the transaction. In addition, backup with-
holding may be difficult because a mer-
chant receives payment from the payment
card organization within a few days after
the transaction, but the cardholder does not
pay the payment card organization until af-
ter it receives a payment card monthly bill-
ing statement from the payment card
organization.
Because of these difficulties, represen-
tatives of the payment card industry and the
Information Reporting Program Advisory
Committee (IRPAC) have proposed that the
IRS allow a payment card organization to
act on behalf of a cardholder/payor for pur-
poses of soliciting, collecting, and validat-
ing the names/TINs of the merchant/payees
February 24, 20035192003–8 I.R.B.

through TIN matching. In addition, they
suggest that the payment card organiza-
tion be allowed to inform the cardholder
about a merchant’s corporate status.
The IRS is issuing a proposed revenue
procedure that would allow a payment card
organization to obtain an IRS determina-
tion that it is aQualified Payment Card
Agent(QPCA). The proposed procedure
would permit a QPCA to act on behalf of
a payor for purposes of soliciting, collect-
ing, and validating merchants’names/TINs,
and providing merchants’corporate sta-
tus. To obtain a QPCA determination, the
payment card organization would be re-
quired, among other things, to demon-
strate the reliability of its data by
participating in the IRS TIN Matching Pro-
gram and matching its merchant name/
TIN data with IRS name/TIN data.
Certain payment card industry repre-
sentatives have suggested that, for pay-
ments made through a QPCA, the
information provided to the cardholder/
payor should be sufficiently reliable that
backup withholding should not apply. In ad-
dition, they have suggested that a
cardholder/payor who files incorrect infor-
mation returns should be considered to meet
the reasonable cause requirements for a
waiver under section 6724 if the cardholder/
payor relied on payee information pro-
vided by a QPCA.
The IRS and the Treasury Department
agree that QPCAs, by obtaining TINs and
participating in the IRS TIN Matching Pro-
gram, can enhance the accuracy of infor-
mation reporting by the cardholder/payors.
Accordingly, the IRS and the Treasury De-
partment agree that a limited exception to
the backup withholding requirements is ap-
propriate if cardholder/payors rely on a
QPCA to solicit, collect, and validate
merchant/payees’TINs. In addition, the IRS
and the Treasury Department agree that
cardholder/payors may establish reason-
able cause based on reliance on merchant/
payees’TINs supplied through a QPCA.
Explanation of Provisions
1.Backup Withholding
The proposed regulations provide that
backup withholding does not apply to pay-
ment card transactions if the reportable pay-
ments are made through a QPCA and the
payee is a qualified payee. The proposed
regulations provide that a payee is quali-
fied if, at the time of the payment, the
QPCA has validated the payee’sTIN
through the IRS TIN Matching Program or
if the payment is made during the 6-month
period following the date on which the
QPCA first obtained the payee’s TIN.
The proposed regulations provide that re-
portable payments made through a QPCA
are also exempt from backup withholding
if the payment is made within 60 days af-
ter the date of the first payment with re-
spect to which the QPCA is required to
provide notification to the payor that the
payee is not a qualified payee. Under the
proposed regulations, a QPCA must no-
tify a cardholder/payor of any merchant/
payees that are not qualified payees. The
notice must appear on the billing informa-
tion for the payment. The regulations clarify
that this notification does not constitute no-
tice by the IRS that the payee’s TIN is in-
correct for purposes of backup withholding.
2.Waiver Under Section 6724 for
Reasonable Cause
The proposed regulations provide that a
cardholder/payor may establish reason-
able cause based on its reliance on a QPCA.
Under the proposed regulations, special so-
licitation rules will apply if the cardholder/
payor relies on a QPCA. Under those rules,
a cardholder/payor is not required to make
the initial solicitation of a payee’s TIN at
the time of the transaction and generally is
not required to undertake the first and sec-
ond annual solicitations. Under the pro-
posed regulations, a cardholder/payor that
relies on a QPCA is required to solicit a
payee’s TIN only if the QPCA fails to pro-
vide, within a specified period, a TIN that
the cardholder/payor believes in good faith
to be the payee’s correct TIN.
3.Effective Dates
Section 31.3406(j)–1(a) and (f) are ap-
plicable January 31, 2003. The amend-
ments of§31.3406(g)–1 are proposed to be
applicable for payments on or after Janu-
ary 1, 2004. The amendments of
§301.6724–1 are proposed to be appli-
cable for information returns required to be
filed, and information statements required
to be furnished, after December 31, 2004.
The amendments to§§31.3406(g)–1 and
301.6724–1 will not be applicable until they
are finalized.
Special Analyses
It has been determined that these pro-
posed regulations are not a significant regu-
latory 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.
It is hereby certified pursuant to the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) that the collection of information con-
tained in these regulations will not have a
significant economic impact on a substan-
tial number of small entities. The report-
ing burden affects financial institution
members of the payment card network that
are affiliates of QPCAs. Most of these fi-
nancial institution members are large busi-
nesses. To the extent that small financial
institutions have a reporting burden, the bur-
den is expected to be insignificant. Ac-
cordingly, a Regulatory Flexibility Analysis
is not required.
Pursuant to section 7805(f), this notice
of proposed rulemaking will be submit-
ted to the Chief Counsel for Advocacy of
the Small Business Administration for com-
ment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written or electronic
comments that are submitted timely to the
IRS. The IRS and the Treasury Depart-
ment specifically request comments on the
clarity of the proposed regulations and how
they can be made easier to understand. All
comments will be available for public in-
spection and copying.
A public hearing has been scheduled for
May 21, 2003, beginning at 10 a.m. in room
6718 of the Internal Revenue Building,1111
Constitution Avenue, NW, Washington, DC.
Due to building security procedures, visi-
tors must enter at the Constitution Av-
enue entrance. In addition, all visitors must
present photo identification to enter the
building. Because of access restrictions, visi-
tors will not be permitted beyond the im-
mediate entrance area more than 30 minutes
before the hearing starts. For information
about having your name placed on the
building access list to attend the hearing,
see the“FOR FURTHER INFORMATION
CONTACT”section of this preamble.
2003–8 I.R.B.520February 24, 2003

The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written or electronic comments and
an outline of the topics to be discussed and
the time to be devoted to each topic (signed
original and eight (8) copies) by April 30,
2003. A period of 10 minutes will be al-
lotted to each person for making com-
ments. An agenda showing the schedule of
the speakers will be prepared after the dead-
line for receiving outlines has passed. Cop-
ies of the agenda will be available free of
charge at the hearing.
Drafting Information
The principal author of the regulations
is Donna Welch, Office of Associate Chief
Counsel (Procedure and Administration),
Administrative Provisions and Judicial Prac-
tice Division. However, other personnel
from the IRS and the Treasury Depart-
ment participated in the development of the
regulations.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 31 and 301
are proposed to be amended as follows:
PA RT 3 1—EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT THE SOURCE
Paragraph 1. The authority citation for
part 31 continues to read in part as follows:
Authority: 26 U.S.C. 7805.***
Par. 2. Section 31.3406(g)–1 is amended
by adding paragraph (f) to read as follows:
§31.3406(g)–1 Exceptions for payments
to certain payees and certain other
payments.
*****
(f)Special rule for certain payment card
transactions—(1)In general. No withhold-
ing under section 3406 is required for a re-
portable payment made through a payment
card organization if the payment is made
on or after January 1, 2004, the organiza-
tion is a Qualified Payment Card Agent
(QPCA), and—
(i) The payee is a qualified payee (as de-
fined in paragraph (f)(2)(v) of this sec-
tion) with respect to the payment; or
(ii) The payment is made during the 60-
day period following the date on which the
payor made the first payment with respect
to which the QPCA is required under para-
graph (f)(3) of this section to provide no-
tification that the payee is not a qualified
payee.
(2)Definitions—(i)Payment card de-
fined.For purposes of this section, apay-
ment cardis 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.
(ii)Payment card organization defined.
For purposes of this section, apayment card
organizationis an entity that sets the stan-
dards and provides the mechanism, either
directly or indirectly through members and
affiliates, for effectuating payment be-
tween a purchaser and a merchant in a pay-
ment card transaction. A payment card
organization generally provides such a pay-
ment mechanism by issuing payment cards,
enrolling merchants as authorized accep-
tors of payment cards for payment for goods
or services, and ensuring the system con-
ducts the transactions in accordance with
prescribed standards for payment card trans-
actions.
(iii)Payment card transaction defined.
For purposes of this section, apayment card
transactionis a transaction in which a
cardholder/payor uses a payment card to
purchase goods or services and a merchant
agrees to accept a payment card as a means
of obtaining payment.
(iv)Qualified Payment Card Agent
(QPCA) defined.For purposes of this sec-
tion, aQualified Payment Card Agent
(QPCA) is a payment card organization that
has a current QPCA determination from the
Internal Revenue Service (IRS) under ap-
plicable procedures (see§601.601(d)(2) of
this chapter).
(v)Qualified payee defined.For pur-
poses of this section, a payee is aquali-
fied payeewith respect to a reportable
payment if—
(A) At the time of the payment, the
QPCA has obtained the payee’s TIN and the
payee’s TIN has been validated through the
IRS TIN Matching Program; or
(B) The payment is made during the
6-month period following the date on which
the QPCA first obtained the payee’s TIN.
(3)Notification of payee status.In the
case of a reportable payment to a payee
other than a qualified payee (as defined in
paragraph (f)(2)(v) of this section) with re-
spect to the payment, the QPCA must no-
tify the payor on the billing information for
the payment that the payee is not a quali-
fied payee. The notification must appear on
the face of the bill in print size no smaller
than the print size used for the charge
amount relating to the purchase from the
payee. Notification may consist of an as-
terisk, footnote, or other mark next to the
payee’s name or the charge, with the text
of the notification at the bottom of the page
or at the end of the list of charges. Noti-
fication by the QPCA that a payee is not
a qualified payee does not constitute no-
tice by the IRS that the payee’s TIN is in-
correct for purposes of section 3406(a)(1)(B)
and§31.3406(d)–5.
Par.3.In§31.3406(j)–1, paragraphs (a)
and (f) are revised to read as follows:
§31.3406(j)–1 Taxpayer Identification
Number (TIN) matching program.
(a) [Section 31.3406(j)–1(a) is the same
as§31.3406(j)–1T(a) published elsewhere
in this issue of theFederal Register.]
*****
(f) [Section 31.3406(j)–1(f) is the same
as§31.3406(j)–1T(f) published elsewhere
in this issue of theFederal Register.]
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 4. The authority citation for part 301
continues to read in part as follows:
Authority: 26 U.S.C. 7805.***
Par. 5. Section 301.6724–1 is amended
by:
1. Revising the introductory language of
paragraph (c)(6).
2. Adding paragraphs (e)(1)(vi)(H) and
(f)(5)(vii).
The revision and additions read as
follows:
§301.6724–1 Reasonable cause.
*****
(c)* * *
(6)Actions of the payee or any other
person.In order to establish reasonable
cause under paragraph (c)(1) of this sec-
tion due to the actions of the payee or any
other person, such as a broker as defined
in section 6045(c) or a Qualified Payment
Card Agent (QPCA) as defined in
§31.3406(g)–1(f)(2)(iv) of this chapter, pro-
February 24, 20035212003–8 I.R.B.

viding information with respect to the re-
turn or payee statement, the filer must show
either—
*****
(e)***(1)***
(vi)***
(H) In the case of information returns re-
quired to be filed, and information state-
ments required to be furnished, after
December 31, 2004, the filer—
(1) Satisfies the solicitation require-
ments of paragraphs (e)(1)(i) and (ii) of this
section with respect to a payment made
through a QPCA if the filer relies in good
faith on the QPCA to solicit, record, vali-
date, and furnish the payee’s TIN; and
(2) Satisfies the solicitation require-
ment of paragraph (e)(1)(iii) of this sec-
tion with respect to such a payment if, on
or before December 31 of the year imme-
diately succeeding the calendar year in
which the payment is made, the filer un-
dertakes a solicitation of the payee’s TIN
or receives from the QPCA a TIN that the
filer believes in good faith to be the pay-
ee’s correct TIN.
*****
(f)***
(5)***
(vii) In the case of information returns
required to be filed, and information state-
ments required to be furnished, after De-
cember 31, 2004, the filer—
(A) Satisfies the solicitation require-
ment of paragraph (f)(1)(i) of this section
with respect to a payment made through a
QPCA if the filer relies in good faith on the
QPCA to solicit, record, validate, and fur-
nish the payee’s TIN; and
(B) Satisfies the solicitation require-
ment of paragraph (f)(1)(ii) or (iii) of this
section, whichever is applicable, with re-
spect to such a payment if, after the date
the filer is notified that the account of the
payee contains an incorrect TIN and on or
before the date by which the applicable re-
quirement must be satisfied, the filer so-
licits the payee’s correct TIN in a manner
that satisfies the applicable requirement or
receives from the QPCA a TIN that the filer
believes in good faith to be the payee’s cor-
rect TIN.
*****
David A. Mader,
Assistant Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on January 30,
2003, 8:45 a.m., and published in the issue of the Federal Reg-
ister for January 31, 2003, 68 F.R. 4970)
Notice of Proposed Rulemak-
ing by Cross-Reference to
Temporary Regulations
Reduced Maximum Exclusion
of Gain From Sale or
Exchange of Principal
Residence
REG–138882–02
AGENCY: Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemak-
ing by cross-reference to temporary regu-
lations.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing temporary regulations
(T.D. 9031) relating to the reduced maxi-
mum exclusion available to certain taxpay-
ers who sell or exchange their principal
residence but who have not owned and used
the property as their principal residence for
two years of the preceding five years or
who have excluded gain on a previous sale
or exchange within the last two years. The
text of those regulations also serves as the
text of these proposed regulations.
DATES: Written or electronic comments
and requests for a public hearing must be
received by March 24, 2003.
ADDRESSES: Send submissions to
CC:ITA:RU (REG–138882–02), room 5226,
Internal Revenue Service, POB 7604, Ben
Franklin Station, Washington, DC 20044.
Submissions may be hand delivered Mon-
day through Friday between the hours of
8 a.m. and 4 p.m. to: CC:ITA:RU (REG–
138882–02), Courier’s Desk, Internal Rev-
enue Service,1111Constitution Ave., NW,
Washington, DC. Alternatively, taxpayers
may submit electronic comments directly
to the IRS Internet site atwww.irs.gov/
regs.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Sara
Paige Shepherd, (202) 622–4960; concern-
ing submissions of comments and/or re-
quests for a hearing, LaNita Van Dyke,
(202) 622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
Temporary regulations (T.D. 9031) in this
issue of the Bulletin amend the Income Tax
Regulations (26 CFR part 1) under sec-
tion 121(c) of the Internal Revenue Code
(Code). The temporary regulations pro-
vide rules for a reduced maximum exclu-
sion of gain from the sale or exchange of
the principal residence of a taxpayer who
is not entitled to the full maximum exclu-
sion under section 121(a) because the tax-
payer has not owned and used the property
as the taxpayer’s principal residence for two
years of the preceding five years or has ex-
cluded gain under section 121 on a previ-
ous sale or exchange within the last two
years. The text of those temporary regula-
tions also serves as the text of these pro-
posed regulations. The preamble to the
temporary regulations explains the amend-
ments.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Ex-
ecutive Order 12866. Therefore, a regulatory
assessment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations.
It is hereby certified that these regula-
tions will not have a significant economic
impact on a substantial number of small en-
tities. This certification is based upon the
fact that the regulations do not impose a
collection of information and apply only to
individuals. Therefore, a Regulatory Flex-
ibility Analysis under the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) is not
required. Pursuant to section 7508(f) of the
Code, this notice of proposed rulemaking
will be submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on small
business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments (a
signed original and eight (8) copies) or elec-
tronic comments that are submitted timely
to the IRS. The IRS and Treasury Depart-
2003–8 I.R.B.522February 24, 2003

ment specifically request comments on the
clarity of the proposed rules and how they
may be made easier to understand. All com-
ments will be available for public inspec-
tion and copying. A public hearing may be
scheduled if requested by any person that
timely submits written comments. If a pub-
lic hearing is scheduled, notice of the date,
time, and place for the public hearing will
be published in theFederal Register.
Drafting Information
The principal author of these regula-
tions is Sara Paige Shepherd, Office of As-
sociate Chief Counsel (Income Tax and
Accounting). However, other personnel from
the IRS and the Treasury Department par-
ticipated in the development of the regu-
lations.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PA RT 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read as follows:
Authority: 26 U.S.C. 7805***
Par. 2. In§1.121–3, paragraphs (b)
through (f), (h), (k), and (l) are revised to
read as follows:
§1.121–3 Reduced maximum exclusion
for taxpayers failing to meet certain
requirements.
[The text of proposed paragraphs (b)
through (f), (h), (k), and (l) of§1.121–3
is the same as the text of paragraphs (b)
through (f), (h), (k), and (l) of§1.121–3T
published elsewhere in this issue of the
Federal Register.]
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on December 23,
2002, and published in the issue of the Federal Register for
December 24, 2002, 67 F.R. 78398)
February 24, 20035232003–8 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as“rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
withmodified, below).
Clarifiedis used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modifiedis used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it
applies to both A and B, the prior ruling
is modified because it corrects a pub-
lished position. (Compare withamplified
andclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revokeddescribes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Supersededdescribes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example,modified
andsupersededdescribes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case,
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current
use and formerly used will appear in
material published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F. R .—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
2003–8 I.R.B.iFebruary 24, 2003

Numerical Finding List
1
Bulletins 2003–1 through 2003–7
Announcements:
2003–1, 2003–2 I.R.B.281
2003–2, 2003–3 I.R.B.301
2003–3, 2003–4 I.R.B.361
2003–4, 2003–5 I.R.B.396
2003–5, 2003–5 I.R.B.397
2003–6, 2003–6 I.R.B.450
2003–7, 2003–6 I.R.B.450
2003–8, 2003–6 I.R.B.451
2003–9, 2003–7 I.R.B.490
2003–10, 2003–7 I.R.B.490
Notices:
2003–1, 2003–2 I.R.B.257
2003–2, 2003–2 I.R.B.257
2003–3, 2003–2 I.R.B.258
2003–4, 2003–3 I.R.B.294
2003–5, 2003–3 I.R.B.294
2003–6, 2003–3 I.R.B.298
2003–7, 2003–4 I.R.B.310
2003–8, 2003–4 I.R.B.310
2003–9, 2003–5 I.R.B.369
2003–10, 2003–5 I.R.B.369
2003–11, 2003–6 I.R.B.422
2003–12, 2003–6 I.R.B.422
Proposed Regulations:
REG–209500–86, 2003–2 I.R.B.262
REG–125638–01, 2003–5 I.R.B.373
REG–126016–01, 2003–7 I.R.B.486
REG–124069–02, 2003–7 I.R.B.488
REG–151043–02, 2003–3 I.R.B.300
REG–164464–02, 2003–2 I.R.B.262
Revenue Procedures:
2003–1, 2003–1, I.R.B.1
2003–2, 2003–1, I.R.B.76
2003–3, 2003–1, I.R.B.113
2003–4, 2003–1, I.R.B.123
2003–5, 2003–1, I.R.B.163
2003–6, 2003–1, I.R.B.191
2003–7, 2003–1, I.R.B.233
2003–8, 2003–1, I.R.B.236
2003–10, 2003–2 I.R.B.259
2003–11, 2003–4 I.R.B.311
2003–12, 2003–4 I.R.B.316
2003–13, 2003–4 I.R.B.317
2003–14, 2003–4 I.R.B.319
2003–15, 2003–4 I.R.B.321
2003–16, 2003–4 I.R.B.359
2003–17, 2003–6 I.R.B.427
2003–18, 2003–6 I.R.B.439
2003–19, 2003–5 I.R.B.371
2003–20, 2003–6 I.R.B.445
2003–21, 2003–6 I.R.B.448
Revenue Rulings:
2003–1, 2003–3 I.R.B.291
2003–2, 2003–2 I.R.B.251
2003–3, 2003–3 I.R.B.252
Revenue Rulings—Continued:
2003–4, 2003–4 I.R.B.253
2003–5, 2003–5 I.R.B.254
2003–6, 2003–3 I.R.B.286
2003–7, 2003–5 I.R.B.363
2003–8, 2003–3 I.R.B.290
2003–9, 2003–4 I.R.B.303
2003–10, 2003–3 I.R.B.288
2003–11, 2003–3 I.R.B.285
2003–12, 2003–3 I.R.B.283
2003–13, 2003–4 I.R.B.305
2003–14, 2003–4 I.R.B.302
2003–15, 2003–4 I.R.B.302
2003–16, 2003–6 I.R.B.401
2003–17, 2003–6 I.R.B.400
2003–18, 2003–7 I.R.B.467
2003–19, 2003–7 I.R.B.468
2003–20, 2003–7 I.R.B.465
Treasury Decisions:
9024, 2003–5 I.R.B.365
9025, 2003–5 I.R.B.362
9026, 2003–5 I.R.B.366
9027, 2003–6 I.R.B.413
9028, 2003–6 I.R.B.415
9029, 2003–6 I.R.B.403
9032, 2003–7 I.R.B.471
9033, 2003–7 I.R.B.483
9034, 2003–7 I.R.B.453
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2002–26 through 2002–52 is
in Internal Revenue Bulletin 2003–1, dated January 6, 2003.
February 24, 2003ii2003–8 I.R.B.

Finding List of Current Actions
on Previously Published Items
2
Bulletins 2003–1 through 2003–7
Notices:
97–19
Modified by
Rev. Proc. 2003–1, 2003–1 I.R.B.1
2001–26
Obsoleted by
T.D. 9032, 2003–7 I.R.B.471
2001–46
Modified by
Notice 2003–6, 2003–3 I.R.B.298
2001–69
Modified and superseded by
Notice 2003–1, 2003–2 I.R.B.257
2002–27
Clarified by
Notice 2003–3, 2003–2 I.R.B.258
2002–46
Modified by
Notice 2003–10, 2003–5 I.R.B.369
Proposed Regulations:
REG–209500–86
Corrected by
Ann. 2003–6, 2003–6 I.R.B.450
REG–164464–02
Corrected by
Ann. 2003–6, 2003–6 I.R.B.450
Revenue Procedures:
83–23
Supplemented by
Rev. Proc. 2003–21, 2003–6 I.R.B.448
84–37
Modified by
Rev. Proc. 2003–1, 2003–1 I.R.B.1
93–38
Obsoleted by
Rev. Proc. 2003–15, 2003–4 I.R.B.321
98–13
Obsoleted by
T.D. 9032, 2003–7 I.R.B.471
2002–1
Superseded by
Rev. Proc. 2003–1, 2003–1 I.R.B.1
2002–2
Superseded by
Rev. Proc. 2003–2, 2003–1 I.R.B.76
2002–3
Superseded by
Rev. Proc. 2003–3, 2003–1 I.R.B.113
Revenue Procedures—Continued:
2002–4
Superseded by
Rev. Proc. 2003–4, 2003–1 I.R.B.123
2002–5
Superseded by
Rev. Proc. 2003–5, 2003–1 I.R.B.163
2002–6
Superseded by
Rev. Proc. 2003–6, 2003–1 I.R.B.191
2002–7
Superseded by
Rev. Proc. 2003–7, 2003–1 I.R.B.233
2002–8
Superseded by
Rev. Proc. 2003–8, 2003–1 I.R.B.236
2002–9
Modified and amplified by
Rev. Proc. 2003–20, 2003–6 I.R.B.445
Rev. Rul. 2003–3, 2003–2 I.R.B.252
2002–22
Modified by
Rev. Proc. 2003–3, 2003–1 I.R.B.113
2002–29
Modified by
Rev. Proc. 2003–10, 2003–2 I.R.B.259
2002–52
Modified by
Rev. Proc. 2003–1, 2003–1 I.R.B.1
2002–67
Supplemented by
Ann. 2003–3, 2003–4 I.R.B.361
2002–75
Superseded by
Rev. Proc. 2003–3, 2003–1 I.R.B.113
2003–3
Amplified by
Rev. Proc. 2003–14, 2003–4 I.R.B.319
2003–7
Corrected by
Ann. 2003–4, 2003–5 I.R.B396
Revenue Rulings:
53–131
Modified by
Rev. Rul. 2003–12, 2003–3 I.R.B.283
57–190
Obsoleted by
Rev. Rul. 2003–18, 2003–7 I.R.B.467
65–190
Revoked by
Rev. Rul. 2003–3, 2003–2 I.R.B.252
69–372
Revoked by
Rev. Rul. 2003–3, 2003–2 I.R.B.252
Treasury Decisions:
9002
Corrected by
Ann. 2003–8, 2003–6 I.R.B.451
9022
Supplemented by
Ann. 2003–7, 2003–6 I.R.B.450
2
A cumulative list of current actions on previously
published items in Internal Revenue Bulletins
2002–26 through 2002–52 is in Internal Revenue
Bulletin 2003–1, dated January 6, 2003.
2003–8 I.R.B.iii*U.S. Government Printing Office: 2003—496-919/60071February 24, 2003