Internal Revenue Bulletin 2002-21 (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. 2002–30, page 971.
Notional principal contract.This ruling provides that where
a nonperiodic payment made pursuant to a notional principal
contract is comprised of noncontingent and contingent compo-
nents, the parties must recognize the noncontingent compo-
nent of the nonperiodic payment over the term of the notional
principal contract.
T.D. 8992, page 981.
Final regulations under section 6050S relate to information
reporting, including magnetic media reporting requirements for
payments of interest on qualified education loans (Form
1098–E) and the continuation of Notice 98–7 for the calendar
year 2002.
REG–161424–01, page 1010.
Proposed regulations under section 6050S relate to informa-
tion reporting, including magnetic media reporting for qualified
tuition and related expenses (Form 1098–T) and the continua-
tion of Notice 97–73 for the calendar year 2002. A public hear-
ing is scheduled for August 13, 2002. REG–105316–98 with-
drawn.
Notice 2002–35, page 992.
Notional principal contract tax shelter. The Service may
challenge transactions using notional principal contracts to
claim current deductions for periodic payments made by a tax-
payer while disregarding the accrual of a right to receive offset-
ting payments in the future. These transactions are designated
as “listed transactions” for purposes of sections 1.6011–
4T(b)(2) and 301.6111–2T of the regulations.
Rev. Proc. 2002–36, page 993.
Methods of accounting; taxable year of inclusion; basis.
This procedure provides taxpayers that purchase vehicles sub-
ject to leases and assume the associated leases from motor
vehicle dealers with a safe harbor method of accounting for
capital cost reduction payments made by vehicle lessees, and
a procedure for taxpayers to obtain automatic consent of the
Commissioner to change to the safe harbor method of
accounting. Rev. Proc. 2002–9 modified and amplified.
EMPLOYEE PLANS
REG–136193–01, page 995.
Proposed regulations under section 4980F of the Code provide
guidance on the requirements for plan administrators to give
notice of plan amendments that provide for significant reduc-
tion in the rate of future benefit accrual or an early retirement
benefit or retirement-type subsidy. When finalized, the regula-
tions will affect businesses, nonprofit organizations, and indi-
viduals. A public hearing is scheduled for August 15, 2002.
Notice 2002–32, page 989.
Weighted average interest rate update. The weighted aver-
age interest rate for May 2002 and the resulting permissible
range of interest rates used to calculate current liability for pur-
poses of the full funding limitation of section 412(c)(7) of the
Code are set forth.
(Continued on the next page)
Finding Lists begin on page ii.
Bulletin No. 2002–21
May 28, 2002

EXEMPT ORGANIZATIONS
T.D. 8991, page 972.
Final regulations under section 513 of the Code provide guid-
ance concerning whether corporate sponsorship payments to
tax-exempt organizations are unrelated business taxable
income.
Notice 2002–34, page 990.
This notice announces and provides guidance for a voluntary
compliance program to promote disclosure for political organi-
zations that file Forms 8871, 8872, 1120–POL, 990, and
990–EZ by July 15, 2002.
ADMINISTRATIVE
Notice 2002–33, page 989.
Section 809 information return. This notice suspends the
requirement that mutual life insurance companies and the 50
largest stock life insurance companies file Form 8390,Infor-
mation Return for Determination of Life Insurance Com-
pany Earnings Rate Under Section 809,in 2002 and 2003
due to section 809(j) which was added to the Code by the Job
Creation and Workers Assistance Act of 2002.
May 28, 20022002–21 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are consolidated semiannually into Cumulative Bulle-
tins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the Bul-
letin. All published rulings apply retroactively unless otherwise
indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal practices and procedures that affect the rights and duties
of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the rev-
enue ruling. In those based on positions taken in rulings to tax-
payers or technical advice to Service field offices, identifying
details and information of a confidential nature are deleted to
prevent unwarranted invasions of privacy and to comply with
statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A, Tax
Conventions and Other Related Items, and Subpart B, Legisla-
tion and Related Committee Reports.
Part III.—Administrative, Procedural, and
Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index for
the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the first Bulletin of the succeeding semiannual
period, respectively.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
2002–21 I.R.B.May 28, 2002

This page is reserved for Austin Hernandez.
May 28, 20022002–21 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 61.—Gross Income
Defined
26 CFR 1.61–1: Gross income.
Under the CCR method of accounting, the
amount of a CCR payment is not includible in the
taxpayer’s gross income and may not be included in
the taxpayer’s basis in the purchased vehicle. See
Rev. Proc. 2002–36, page 993.
Section 446.—General Rule
for Methods of Accounting
26 CFR 1.446–1: General rule for methods of
accounting.
Under the CCR method of accounting, the
amount of a CCR payment is not includible in the
taxpayer’s gross income and may not be included in
the taxpayer’s basis in the purchased vehicle. See
Rev. Proc. 2002–36, page 993.
26 CFR 1.446–3: Notional Principal Contracts.
Notional Principal Contract. This
ruling provides that where a nonperiodic
payment made pursuant to a notional
principal contract is comprised of non-
contingent and contingent components,
the parties must recognize the noncontin-
gent component of the nonperiodic pay-
ment over the term of the notional princi-
pal contract.
Rev. Rul. 2002–30
ISSUE
What is the appropriate method for the
inclusion into income or deduction of a
nonperiodic payment made pursuant to a
notional principal contract where the pay-
ment is comprised of noncontingent and
contingent components?
FACTS
Tenters into a notional principal con-
tract (“NPC”) withCPon October 1,
2002, for a term of 18 months. Pursuant
to the terms of the NPC,Tagrees to make
quarterly payments toCPbased on three-
month LIBOR multiplied by a notional
principal amount of $100,000,000. In
exchange,CPagrees that upon expiration
of the NPC on March 31, 2004,CPwill
payT6 percent per year multiplied by a
notional principal amount of $92,000,000
(the fixed payment amount). In addition,
CPorTwill make a payment upon expi-
ration equal to the percentage change in
the value of the S&P 500 stock index
multiplied by a notional principal amount
of $8,000,000. If the change is positive
(an appreciation amount),CPwill make a
payment toT; if the change is negative (a
depreciation amount),Twill make a pay-
ment toCP. Any depreciation amount
payable byTwill be netted against the
fixed payment amount payable byCP.
LAW
Section 1.446–3 of the Income Tax
Regulations provides rules on the timing
of inclusion of income and deductions for
amounts paid or received pursuant to
NPCs.
Section 1.446–3(c)(1)(i) defines a
NPC as a financial instrument that pro-
vides for the payment of amounts by one
party to another at specified intervals cal-
culated by reference to a specified index
upon a notional principal amount, in
exchange for specified consideration or a
promise to pay similar amounts. Pay-
ments made pursuant to NPCs are divided
into three categories (periodic, nonperi-
odic, and termination payments), and the
regulations provide separate timing
regimes for each.
Section 1.446–3(e)(1) defines periodic
payments as payments made or received
pursuant to a NPC that are payable at
intervals of one year or less during the
entire term of the contract, that are based
on a specified index, and that are based
on a notional principal amount. Section
1.446–3(e)(2) provides that all taxpayers,
regardless of their methods of accounting,
must recognize the ratable daily portion
of a periodic payment for the taxable year
to which that portion relates.
Section 1.446–3(h)(1) defines a termi-
nation payment as a payment made or
received to extinguish or assign all or a
proportionate part of the remaining rights
and obligations of any party under a
NPC.
Section 1.446–3(f)(1) provides that a
nonperiodic payment is any payment
made or received with respect to a NPC
that is not a periodic payment or a termi-
nation payment. The recognition rules for
nonperiodic payments are set forth in
§ 1.446–3(f)(2). Section 1.446–3(f)(2)(i)
provides that all taxpayers, regardless of
their methods of accounting, must recog-
nize the ratable daily portion of a nonpe-
riodic payment for the taxable year to
which that portion relates. Generally, a
nonperiodic payment must be recognized
over the term of a NPC in a manner that
reflects the economic substance of the
contract.
Section 1.446–3(f)(2)(ii) provides gen-
erally that a nonperiodic payment must be
recognized over the term of the contract
by allocating it in accordance with the
forward rates of a series of cash-settled
forward contracts that reflect the speci-
fied index and the notional principal
amount.
Section 1.446–3(f)(2)(iii)(A) provides
that an upfront payment may be amor-
tized by assuming that the nonperiodic
payment represents the present value of a
series of equal payments made through-
out the term of the swap contract (the
level payment method).
Section 1.446–3(f)(2)(iii)(B) provides
that nonperiodic payments other than an
upfront payment may be amortized by
treating the contract as if it provided for a
single upfront payment (equal to the
present value of the nonperiodic pay-
ments) and a loan between the parties.
The single upfront payment is then amor-
tized under the level payment method
described in § 1.446–3(f)(2)(iii)(A). The
time value component of the loan is not
treated as interest, but together with the
amortized amount of the deemed upfront
payment, is recognized as a periodic pay-
ment.See§ 1.446–3(f)(4), Example 6, for
an illustration of these rules.
Section 1.446–3(g)(4) provides that a
swap with significant nonperiodic pay-
ments is treated as two separate transac-
tions consisting of an on-market, level
payment swap and a loan. The loan must
be accounted for by the parties to the con-
tract independently of the swap. The time
value component associated with the loan
is not included in the net income or net
deduction from the swap under § 1.446–
3(d) of this section, but is recognized as
2002–21 I.R.B.971May 28, 2002

interest for all purposes of the Internal
Revenue Code.
Section 1.446–3(d) provides that for
all purposes of the Code, the net income
or net deduction from a NPC for a taxable
year is included in, or deducted from,
gross income for that taxable year. The
net income or net deduction from a NPC
for a taxable year equals the total of all of
the periodic payments that are recognized
from that contract for the taxable year
under§1.446–3(e), and all of the nonpe-
riodic payments that are recognized from
that contract for the taxable year under
§1.446–3(f). Each party to the NPC
determines its payments and receipts
attributable to the taxable year and takes
into account, as net income or net deduc-
tion, the result of those payments and
receipts.See§1.446–3(e)(3), Example 1;
and§1.446–3(g)(6), Example 3.
ANALYSIS
The agreement betweenTandCPis a
NPC as defined in§1.446–3(c)(1)(i).
Pursuant to the terms of the contract,T
will pay toCPamounts based on LIBOR
quarterly, in exchange forCP’s promise
to pay specified consideration at expira-
tion.
The amounts thatTpays toCPare
periodic payments as defined in§1.446–
3(e)(1). These LIBOR-based payments
are payable at intervals of less than one
year and are calculated by reference to a
specified index upon a notional principal
amount of $100,000,000. Pursuant to
§1.446–3(e)(2),TandCPmust recognize
the ratable daily portion of each periodic
payment for the taxable year to which
that portion relates.
The amount payable on March 31,
2004, is a nonperiodic payment, whichT
andCPare required to recognize over the
term of the NPC in a manner that reflects
the economic substance of the NPC. In
substance, the nonperiodic payment that
CPmust payTon expiration equals the
sum of two independent components, one
noncontingent and the other contingent.
The noncontingent component (the fixed
payment amount) equals $8,280,000, that
is the product of 6 percent per year, or 9
percent for 18 months, and the notional
principal amount of $92,000,000. The
contingent component (the appreciation
or depreciation amount) equals the prod-
uct of the percentage appreciation or
depreciation in the value of the S&P 500
stock index and the notional principal
amount of $8,000,000. In order to reflect
the economic substance of the NPC, each
component must be treated separately for
purposes of applying the NPC rules in
§1.446–3. As a result, pursuant to
§1.446–3(f)(2)(i), the fixed payment
amount due on March 31, 2004, must be
recognized over the term of the NPC in a
manner consistent with§1.446–3(f)(2)(ii)
or (iii). This treatment of the fixed pay-
ment amount payable byCPis not
affected by the possibility thatTmay be
required to pay a depreciation amount to
CPthat, under the terms of the NPC, will
be netted againstCP’s obligation to pay
the fixed payment amount. Pursuant to
§1.446–3(g)(4),Tmust accrue interest
income andCPmay accrue interest
deductions.
HOLDING
TandCPmust recognize the noncon-
tingent component of the nonperiodic
payment over the term of the NPC, and
must also account for interest, in a man-
ner consistent with§§1.446–3(f)(2)(ii) or
(iii), and 1.446–3(g)(4).
DRAFTING INFORMATION
The principal author of this revenue
ruling is Elizabeth Handler of the Office
of Associate Chief Counsel (Financial
Institutions and Products). For further
information regarding this revenue ruling,
contact Ms. Handler at (202) 622–3930
(not a toll-free call).
Section 451.—General Rule
for Taxable Year of Inclusion
26 CFR 1.451–1: General rule for taxable year of
inclusion.
Under the CCR method of accounting, the
amount of a CCR payment is not includible in the
taxpayer’s gross income and may not be included in
the taxpayer’s basis in the purchased vehicle. See
Rev. Proc. 2002–36, page 993.
Section 481.—Adjustments
Required for Changes in
Method of Accounting
26 CFR 1.481–1: Adjustments in general.
26 CFR 1.481–4: Adjustments taken into account
with consent.
A purchaser of a motor vehicle that is subject to
a lease in connection with which a lessee has made
a CCR payment to the dealer from which the lessee
originally leased the vehicle may obtain automatic
consent to change to the CCR method of account-
ing. See Rev. Proc. 2002–36, page 993.
Section 513.—Unrelated
Trade or Business
26 CFR 1.513–4: Certain sponsorship not unrelated
trade or business.
T.D. 8991
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Taxation of Tax-Exempt
Organizations’Income From
Corporate Sponsorship
AGENCY: Internal Revenue Service
(IRS), Treasury Department.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the tax treat-
ment of corporate sponsorship payments
received by tax-exempt organizations.
The final regulations affect exempt orga-
nizations that receive sponsorship pay-
ments.
DATES:Effective Date: These regula-
tions are effective April 25, 2002.
Applicability Date: These regulations
are applicable for payments solicited or
received after December 31, 1997.
FOR FURTHER INFORMATION CON-
TACT: Stephanie Lucas Caden or Barbara
E. Beckman of Office of Associate Chief
Counsel (TE/GE), (202) 622–6080 (not a
toll-free number).
May 28, 20029722002–21 I.R.B.

SUPPLEMENTARY INFORMATION:
Background
Exempt organizations generally must
pay tax on unrelated business taxable
income, as defined in section 512. Section
512(a)(1) definesunrelated business tax-
able income(UBTI) as the gross income
derived by an organization from any
unrelated trade or business (as defined in
section 513) regularly carried on by it,
less the deductions that are directly con-
nected with the carrying on of the trade or
business, both computed with the modifi-
cations provided in section 512(b).
Section 513(a) definesunrelated trade
or businessas any trade or business the
conduct of which is not substantially
related (aside from the need of an organi-
zation for income or funds or the use it
makes of the profits derived) to the exer-
cise or performance by the organization
of its charitable, educational, or other pur-
pose or function constituting the basis for
its exemption under section 501. Section
513(c), captioned“Advertising, etc.,
activities,”provides that the termtrade or
businessincludes any activity carried on
for the production of income from the
sale of goods or the performance of ser-
vices, and that an activity does not lose
identity as a trade or business merely
because it is carried on within a larger
aggregate of similar activities or within a
larger complex of other endeavors which
may, or may not, be related to the exempt
purposes of the organization. See§1.
513–1(b).
The IRS first published a notice of
proposed rulemaking (EE–74–92, 1993–1
C.B. 708) (1993 proposed regulations) on
January 22, 1993 (58 F.R. 5687), propos-
ing that the regulations under section 513
be amended to provide guidance on the
proper tax treatment of sponsorship pay-
ments received by an exempt organiza-
tion. The 1993 proposed regulations
focused on the nature of the services pro-
vided by the exempt organization rather
than the benefit received by the sponsor,
and distinguished advertising, which is an
unrelated trade or business activity, from
acknowledgments, which are the mere
recognition of a sponsor’s payment and
therefore do not result in UBTI. In a
so-called“tainting rule,”the 1993 pro-
posed regulations provided that if any
activities, messages or programming
material constituted advertising with
respect to a sponsorship payment, then all
related activities, messages, or program-
ming material that might otherwise be
acknowledgments would be considered
advertising. The 1993 proposed regula-
tions also proposed to amend the regula-
tions under section 512(a) by adding
examples of the allocation rule governing
exploitation of exempt activities in cases
involving sponsorship income.
The Taxpayer Relief Act of 1997, Pub-
lic Law 105–34, section 965 (111 Stat.
788, 893–94), amended the Internal Rev-
enue Code (Code) by adding section
513(i). Section 513(i) governs the treat-
ment of certain sponsorship payments by
providing that qualified sponsorship pay-
ments are not subject to the unrelated
business income tax (UBIT). Section
513(i) definesqualified sponsorship pay-
mentsas payments made by a person
engaged in a trade or business with
respect to which there is no arrangement
or expectation that such person will
receive any substantial return benefit
other than the use or acknowledgment of
the name or logo (or product lines) of the
person’s trade or business in connection
with the exempt organization’s activities.
Section 513(i) further provides that use or
acknowledgment does not include adver-
tising (including messages containing
qualitative or comparative language, price
information or other indications of sav-
ings or value, or an endorsement or other
inducement to purchase, sell, or use a
sponsor’s products or services).
Section 513(i) specifically provides
that, to the extent a portion of a payment
would (if made as a separate payment) be
a qualified sponsorship payment, that por-
tion of such payment and the other por-
tion of such payment are treated as sepa-
rate payments. Whether a separate
transaction that falls outside of the section
513(i) safe harbor is subject to the UBIT
depends on the application of existing
rules under sections 512, 513, and 514.
Section 513(i) applies to payments
solicited or received after December 31,
1997. Section 513(i) does not apply to
qualified convention and trade show
activities (described in section
513(d)(3)(B)) or to the sale of an
acknowledgment or advertising in exempt
organization periodicals. For this purpose,
the termperiodicalsmeans regularly
scheduled and printed material published
by or on behalf of an exempt organization
that is not related to and primarily distrib-
uted in connection with a specific event
conducted by the exempt organization.
To reflect the differences between the
1993 proposed regulations and section
513(i), and in response to comments sub-
mitted on the 1993 proposed regulations,
new proposed regulations (REG–209601–
92, 2000–1 C.B. 829) (2000 proposed
regulations) were issued on March 1,
2000 (65 F.R. 11012).
The 2000 proposed regulations amend
the regulations under section 513, and
provide that qualified sponsorship pay-
ments within the meaning of section
513(i) are not UBTI. The 2000 proposed
regulations define the phrase“substantial
return benefit”to mean any benefit other
than (1) a use or acknowledgment of the
payor’s name or logo in connection with
the exempt organization’s activities, or
(2) certain goods or services that have an
insubstantial value under existing IRS
guidelines. Generally, according to the
2000 proposed regulations, benefits such
as complimentary tickets, pro-am playing
spots, and receptions for donors have an
insubstantial value only if they have a fair
market value of not more than 2% of the
payment, or $74 (adjusted for inflation
for tax years beginning after calendar
year 2000 pursuant to section 1(f)(3)),
whichever is less. See§1.170A–
13(f)(8)(i)(A); Rev. Proc. 90–12 (1990–1
C.B. 471), as adjusted for inflation (for
calendar year 2002, the amount is $79,
see Rev. Proc. 2001–59 (2001–52 I.R.B.
623) (December 26, 2001)).
The 2000 proposed regulations clarify
that for an exempt organization to avail
itself of the section 513(i) safe harbor, it
must establish that some portion of the
payment exceeds the fair market value of
any substantial return benefit received by
a payor in return for making the payment.
In a sponsorship arrangement, the fair
market value of the substantial return
benefit may equal the entire amount of
the sponsorship payment. The burden of
establishing the fair market value of any
substantial return benefit falls on the
exempt organization. The 2000 proposed
regulations state that the exempt organi-
zation’s determination of the fair market
value of a substantial return benefit pro-
vided to the payor will not be set aside
2002–21 I.R.B.973May 28, 2002

for purposes of applying the section
513(i) safe harbor so long as the organi-
zation makes a reasonable and good faith
valuation of the substantial return benefit
received by the payor.
The 2000 proposed regulations pro-
vide that the right to be the only sponsor
of an activity, or the only sponsor repre-
senting a particular trade, business, or
industry is generally not a substantial
return benefit. Any portion of the pay-
ment attributable to the exclusive spon-
sorship arrangement, therefore, may be a
qualified sponsorship payment. However,
if in return for a payment, the exempt
organization agrees that products or ser-
vices that compete with the payor’s prod-
ucts or services will not be sold or pro-
vided in connection with one or more
activities of the exempt organization, the
payor has received a substantial return
benefit and the portion of the payment
attributable to the exclusive provider
arrangement is not a qualified sponsor-
ship payment. Consistent with the alloca-
tion rule described above, when a payor
receives both exclusive sponsorship and
exclusive provider rights in exchange for
making a payment, the fair market value
of the exclusive provider arrangement
and any other substantial return benefit is
determined first (i.e., without regard to
the existence of the exclusive sponsorship
arrangement).
The 2000 proposed regulations clarify
that qualified sponsorship payments in
the form of money or property (but not
services) are treated as contributions
received by the exempt organization for
purposes of determining public support to
theorganizationundersection
170(b)(1)(A)(vi) or section 509(a)(2). The
exclusion of contributed services for pur-
poses of determining public support is
consistent with the general rule regarding
donated services. See§§1.509(a)–3(f),
1.170A–9(e)(7)(i) and 1.170A–1(g).
A public hearing was held on June 21,
2000. After consideration of all the com-
ments, the proposed regulations under
section 513(i) are revised as follows. The
major areas of the comments and revi-
sions are discussed below.
Explanation of Provisions and
Discussion of Comments
Like the 2000 proposed regulations,
the final regulations define the phrase
substantial return benefitto mean any
benefit other than (1) a use or acknowl-
edgment of the payor’s name or logo in
connection with the exempt organiza-
tion’s activities, or (2) certain goods or
services that have an insubstantial value.
If a payor receives a substantial return
benefit in exchange for a payment, the
section 513(i) safe harbor does not apply
to the payment (or portion thereof) attrib-
utable to the substantial return benefit. In
that case, whether the payment (or por-
tion thereof) is subject to UBIT must be
determined under existing principles and
rules. Thus, the payment may not be sub-
ject to UBIT because the exempt organi-
zation’s activity is not an unrelated trade
or business within the meaning of section
513(a) (for example, because substan-
tially all of the work in carrying on the
trade or business is performed by volun-
teers) or is not regularly carried on within
the meaning of section 512(a)(1), or
because one of the section 512(b) modifi-
cations applies. See also Rev. Rul.
77–367 (1977–2 C.B. 193) (inurement)
and Rev. Rul. 66–358 (1966–2 C.B. 218)
(private benefit).
Many comments were received regard-
ing the disregarded benefits standard con-
tained in the 2000 proposed regulations.
Commentators generally believe that
valuing insubstantial benefits places an
undue administrative burden on exempt
organizations. Commentators also believe
that the disregarded benefits standard in
the proposed regulation is too low and
significantly diminishes an exempt orga-
nization’s ability to appropriately thank
its sponsors. While the $79 ceiling (as
adjusted for 2002) is an appropriate
amount for exempt organizations to thank
individual donors, the Treasury Depart-
ment and IRS agree with the commenta-
tors that the $79 ceiling is too low with
respect to corporations or persons
engaged in a trade or business. In
response to these concerns, the final regu-
lations eliminate the $79 ceiling placed
on the fair market value of benefits that
may be disregarded for purposes of sec-
tion 513(i).
Several commentators suggest that in
addition to eliminating the $79 ceiling,
the final regulations should increase the
level of disregarded benefits to 10% or
15% of the amount of the payment. The
Treasury Department and IRS believe 2%
is an appropriate level for several reasons.
The 2% threshold is used in other areas of
the Code and regulations to describe
insubstantial amounts. The 2000 proposed
regulations allow the full amount of
qualified sponsorship payments (except
for payments in the form of services) to
be treated as contributions for purposes of
the public support test under sections
170(b)(1)(A)(vi) and 509(a)(2), without
reduction for the amount of disregarded
benefits. The 2% ceiling keeps the level
of disregarded benefits low enough so
that the entire amount of a qualified spon-
sorship payment may be treated as a con-
tribution for public support purposes.
Accordingly, the final regulations disre-
gard benefits having a fair market value
of not more than 2% of the payment.
Many commentators to the 2000 pro-
posed regulations object to a requirement
that exempt organizations must value
benefits provided to payors where the
payment does not affect the organiza-
tion’s tax liability,e.g., where the pay-
ment attributable to the benefit constitutes
income from a trade or business that is
substantially related to the organization’s
exempt purposes. The Treasury Depart-
ment and IRS note that organizations
described in section 170(c) (other than
section 170(c)(1)) are required to account
for benefits provided to donors under sec-
tion 6115. See Publication 1771,“Chari-
table Contributions—Substantiation and
Disclosure Requirements.”Pursuant to
section 6115, a section 170(c) organiza-
tion that receives a quid pro quo contribu-
tion in excess of $75 is required to inform
the donor that the amount of the contribu-
tion that is deductible for federal income
tax purposes is limited to the amount by
which the payment exceeds the value of
goods or services (except as provided in
§1.170A–13(f)(8)(i)) furnished by the
charity, and is required to provide a good
faith estimate of the value of those goods
or services. Therefore, for exempt organi-
zations eligible to receive tax deductible
contributions, there is no additional tax
administrative burden imposed by the dis-
regarded benefits provision of either the
2000 proposed regulations or the final
regulations.
The final regulations provide that in
determining whether the 2% threshold
has been exceeded in any year, all return
May 28, 20029742002–21 I.R.B.

benefits (other than use or acknowledg-
ment) must be considered. For example,
if in exchange for a payment the exempt
organization provides both a license and
advertising the combined fair market
value of which does not exceed 2% of the
total payment, the entire payment (even
the portion attributable to the advertising)
may be treated as a qualified sponsorship
payment, and the entire amount (except
any payment in the form of services) con-
stitutes public support under section 509.
Alternatively, if the combined fair market
value exceeds 2% of the total payment,
the value of both the license and advertis-
ing is not disregarded and constitutes a
substantial return benefit. In that case, the
portions of the payment attributable to the
license and advertising each must be ana-
lyzed separately under sections 512, 513,
and 514. Only the portion of the payment,
if any, that exceeds the fair market value
of the substantial return benefit consti-
tutes a qualified sponsorship payment.
Consistent with the 2000 proposed
regulations, the final regulations provide
that the right to be the only sponsor of an
activity, or the only sponsor representing
a particular trade, business or industry is
generally not a substantial return benefit.
The portion of any payment attributable
to the exclusive sponsorship arrangement,
therefore, may be a qualified sponsorship
payment. However, if in return for a pay-
ment, the exempt organization agrees that
products or services that compete with the
payor’s products or services will not be
sold or provided in connection with one
or more activities of the exempt organiza-
tion, the payor has received a substantial
return benefit and the portion of the pay-
ment attributable to the exclusive pro-
vider arrangement is not a qualified spon-
sorship payment.
Some commentators express concern
that the definition of exclusive provider
arrangements contained in the 2000 pro-
posed regulations may include vendor
contracts negotiated as part of a competi-
tive bidding process required by state law.
Both the 2000 proposed regulations and
the final regulations provide that unless
the exempt organization agrees to limit
distribution of competing products in
connection with the payment, the exempt
organization has not entered into an
exclusive provider arrangement. For
example, when the nature of the goods or
services to be provided necessitates the
use of only one provider because of lim-
ited space or because the competitive bid-
ding process requires only the lowest bid
be accepted, the exempt organization has
not entered into an exclusive provider
arrangement unless it agrees to limit dis-
tribution of competing products.
In particular, these commentators
express concern about the tax-treatment
of discounts and rebates negotiated with
vendors as part of the competitive bidding
process. Generally, discounts (and
rebates) are considered an adjustment to
the purchase price and do not constitute
gross income to the purchaser. See Rev.
Rul. 84–41 (1984–1 C.B. 130); Rev. Rul.
76–96 (1976–1 C.B. 23). For example,
when a university negotiates discounted
rates for the soft drinks it purchases for
its cafeterias, snack bars, and conces-
sions, the amount of the discount is not
includible in UBTI.
Many commentators suggest that the
exclusive provider provisions in the 2000
proposed regulations create an implica-
tion that exclusive provider arrangements
are automatically subject to UBIT
because they fall outside the scope of sec-
tion 513(i). This assumption is incorrect;
although the income from some exclusive
provider arrangements may be includible
in UBTI, not all contracts will meet the
criteria for inclusion in UBTI pursuant to
sections 511, 512, and 513. For example,
a university that enters into a multi-year
contract with a soft drink company to be
the exclusive provider of soft drinks on
campus in return for an annual payment is
not necessarily subject to UBIT on that
payment. If the company agrees to pro-
vide, stock, and maintain on-campus
vending machines as needed, leaving
little or no obligation on the university’s
part to perform any services or conduct
activities in connection with the enter-
prise, then based on this contract alone
the university may not have the requisite
level of activity to constitute a trade or
business under section 513(a). This
example assumes no agency relationship
exists between the company and the uni-
versity. In determining the level of activ-
ity, however, any promotional or market-
ing efforts by the university pursuant to
the contract should be considered. If the
contract grants the company a license to
market its products using the university’s
name and logo, the portion of the total
payment attributable to the value of the
license may be excludable as a royalty
under section 512(b)(2). In some cases,
payments in connection with the grant of
an exclusive concession, such as for the
operation of a campus bookstore or caf-
eteria, may be treated as rental income
under section 512(b)(3).
When an exempt organization agrees
to perform substantial services in connec-
tion with the exclusive provider arrange-
ment, income received by the organiza-
tion may be includible in UBTI. For
example, assume that a university enters
into a multi-year contract with a sports
drink company under which the company
will be the exclusive provider of sports
drinks for the university’s athletic depart-
ment and concessions. As part of the con-
tract, if the university agrees to perform
various services for the company, such as
guaranteeing that coaches make promo-
tional appearances on behalf of the com-
pany (e.g., attending photo shoots, filmed
commercials, and retail store appear-
ances), assisting the company in develop-
ing marketing plans, and participating in
joint promotional opportunities, then the
university’s activities are likely to consti-
tute a regularly carried on trade or busi-
ness. These activities are unlikely to be
substantially related to the university’s
exempt purposes. Furthermore, the
income received by the university for
those services is not excludable as a roy-
alty under section 512(b)(2). See Rev.
Rul. 81–178 (1981–2 C.B. 135), situation
2.
The 2000 proposed regulations solic-
ited comments on the application of the
rules governing periodicals and trade
shows to an exempt organization’s Inter-
net sites, and whether providing a link to
a sponsor’s Internet site is advertising
within the meaning of section 513(i). The
comments received generally suggest that
a link to a corporate sponsor’s Internet
site as part of a sponsorship arrangement
is not a message, but a convenient feature
of the Internet that can only be activated
by the viewer, and thus constitutes a per-
missible form of acknowledgment. With
regard to periodicals, most commentators
expressed the view that the term“periodi-
cal”, for purposes of the section 513(i)
exclusion, includes material published
2002–21 I.R.B.975May 28, 2002

electronically. Some commentators sug-
gest that an exempt organization’s Inter-
net site should not be treated as a periodi-
cal simply because it has text that
changes from time to time. Other com-
mentators suggest criteria for analyzing
whether an Internet site is a periodical.
Only a few comments were received
on the application of the trade show
exclusion in section 513(i) to an exempt
organization’s Internet site. These com-
ments generally suggest that trade shows
conducted over the Internet be treated the
same as trade shows conducted in person.
That is, payments made in connection
with Internet-based trade shows would
not be exempt from UBIT as qualified
sponsorship payments, but would be
exempt from UBIT as income generated
by qualified convention and trade show
activity.
Many options for addressing the Inter-
net in the final regulations were consid-
ered. The final regulations take the
approach that, where possible, answers
are provided. However, the Treasury
Department and IRS note that the analy-
sis of particular Internet issues, such as
the use of hyperlinks, may be different for
purposes of section 513(i) than other sec-
tions of the Code. The Treasury Depart-
ment and IRS also conclude that some
Internet issues addressed in comments are
beyond the scope of section 513(i).
For purposes of section 513(i), the
issue of whether a hyperlink constitutes
an acknowledgment or advertising is
addressed in the final regulations with
two new examples. In the first new
example, the exempt organization posts a
list of its sponsors on its website, includ-
ing the sponsor’s Internet address, which
appears as a hyperlink from the exempt
organization’s website to the sponsor’s
website. The example concludes that
posting the sponsor’s website address
constitutes an acknowledgment, even
though it appears as a hyperlink. In the
second new example, a charity maintains
a website that contains a hyperlink to a
sponsor’s website where an endorsement
by the charity for the sponsor’s product
appears. The charity approved the
endorsement before it was posted on the
sponsor’s website. The example con-
cludes that the endorsement is advertis-
ing. These two examples address hyper-
links for purposes of section 513(i) only,
and do not suggest how hyperlinks are
treated under other sections of the Code.
With respect to periodicals, section
513(i) mentions periodicals only in the
sense that the safe harbor does not apply
to any payment which entitles the payor
to the use or acknowledgment of the
name or logo (or product lines) of the
payor’s trade or business in exempt orga-
nization periodicals. Such payments are
analyzed instead under the existing UBIT
rules. Section§1.512(a)–1(f) provides
special rules for determining the amount
of UBTI attributable to the sale of adver-
tising in exempt organization periodicals.
After considering the comments, the
Treasury Department and IRS conclude
that the regulations under section 512 are
the more appropriate place for an analysis
of issues relating to electronic periodicals.
Nevertheless, the Treasury Department
and IRS clarify that periodicals may
include some forms of electronic publica-
tion. The final regulations state that the
termperiodicalmeans regularly sched-
uled and printed material published by or
on behalf of the exempt organization that
is not related to and primarily distributed
in connection with a specific event con-
ducted by the exempt organization, and
for this purpose, printed material includes
material that is published electronically.
As noted above, relatively few com-
ments were received on the trade show
exclusion. Because of the small sampling
of comments received, and because trade
show rules impact many different indus-
tries and typically involve large sums of
money, the final regulations do not
change the rules on what constitutes a
qualified convention and trade show
activity. Existing guidance on trade shows
is found in section 513(d) and§1.513–3,
and any reference to trade shows in the
final regulations under section 513(i) is
intended to be consistent with these rules.
Many commentators wrote regarding
the valuation of substantial return ben-
efits, and suggest that the 2000 proposed
regulations do not offer enough guidance
on how to make a reasonable and good
faith valuation of a substantial return ben-
efit. Commentators also assert that the
valuation provisions do not further
administrative convenience and simplic-
ity. The fair market value of any substan-
tial return benefit provided as part of a
sponsorship arrangement is the price at
which the benefit would be provided
between a willing recipient and a willing
provider of the benefit, neither being
under any compulsion to enter into the
arrangement and both having reasonable
knowledge of relevant facts, and without
regard to any other aspect of the sponsor-
ship arrangement. While the Treasury
Department and IRS appreciate the diffi-
culty an exempt organization has in valu-
ing substantial return benefits, the final
regulations retain the valuation standard
contained in the 2000 proposed regula-
tions. Several commentators suggest
incorporating safe harbors into the final
regulations to determine the value of a
substantial return benefit. For example,
one commentator suggests that a safe har-
bor be added to provide that an exempt
organization’s valuation would not be
challenged if it were determined based on
the face amount of the tickets, cost of the
dinner, or any reasonably comparable
measure. Another commentator suggests
that the fair market value be based on
data provided by the payor, or as agreed
by the parties. Another commentator
favors predicting values of yearly benefits
based on actual benefits provided over a
three-year period. After considering these
comments, the Treasury Department and
IRS conclude that the safe harbors sug-
gested by the commentators either are
inconsistent with the general rule, do not
provide any additional guidance, or are
prone to abuse. For this reason, no safe
harbors were added to the final regula-
tions with respect to valuation.
Clarification is provided, however,
with respect to the valuation date. The
2000 proposed regulations provide that in
allocating a sponsorship payment, the fair
market value of the substantial return
benefit is to be determined on the date the
parties enter into the sponsorship arrange-
ment. The final regulations take the same
approach for binding, written sponsorship
contracts. This rule, which is illustrated
by two new examples, provides exempt
organizations the advantage of only hav-
ing to value substantial return benefits
once, even if the value of the substantial
return benefit increases over the term of
the contract. If the parties make a mate-
rial change to a sponsorship contract, it is
treated as a new contract as of the date
the material change is effective. A mate-
rial change is defined as an extension or
May 28, 20029762002–21 I.R.B.

renewal of the contract, or a more than
incidental change to any amount payable
(or other consideration) under the con-
tract. If there is no binding, written con-
tract, the fair market value of the substan-
tial return benefit is determined when the
benefit is provided. The reason for distin-
guishing between written and oral agree-
ments in the final regulations is to allow
smaller exempt organizations to arrange
sponsorship informally on a year-to-year
basis and value those benefits each year
as they occur.
Few comments were received on the
§1.512(a)–1(e) example relating to
expense allocation. Of the comments
received, most state that the 1993 pro-
posed regulations did not interpret the
exploitation exception too broadly, and
request that the prior examples be rein-
stated. The commentators also suggest
that the new example is factually unreal-
istic. Despite these comments, the final
regulations do not change the§1.512(a)–
1(e) example. The comments received
generally do not contain substantive sug-
gestions for change, and the Treasury
Department and IRS believe that the cur-
rent example in the final regulations cor-
rectly amplifies the technical provisions
of the regulation, which is very limited in
scope.
Special Analyses
It has been determined that this deci-
sion is not a significant regulatory action
as defined in Executive Order 12866.
Therefore, a regulatory assessment is not
required. It also has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because
the final rule does not impose a collection
of information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Therefore, a
Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f) of
the Code, these regulations were previ-
ously submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on their impact on
small business.
Drafting Information
The principal author of these regula-
tions is Stephanie Lucas Caden, Office of
Division Counsel/Associate Chief Coun-
sel (Tax Exempt/Government Entities),
Internal Revenue Service. However, per-
sonnel from other offices of the Service
and the Treasury Department participated
in their development.
*****
Adoption of 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.In§1.170A–9, a sentence is
added to the end of paragraph (e)(6)(i) to
read as follows:
§1.170A–9 Definition of section
170(b)(1)(A) organization.
*****
(e)***
(6)***(i)***Forpurposes of this
paragraph (e), the termcontributions
includes qualified sponsorship payments
(as defined in§1.513–4) in the form of
money or property (but not services).
*****
Par. 3. Section 1.509(a)–3 is amended
by:
1. Adding a sentence to the end of
paragraph (f)(1).
2. Revising the paragraph heading and
introductory text for paragraph (f)(3).
3. Redesignating the currentExample
in paragraph (f)(3) asExample 1and
revising the heading.
4. AddingExample 2andExample 3to
paragraph (f)(3).
The revisions and additions read as
follows;
§1.509(a)–3 Broadly, publicly supported
organizations.
*****
(f)***(1)***Forpurposes of sec-
tion 509(a)(2), the termcontributions
includes qualified sponsorship payments
(as defined in§1.513–4) in the form of
money or property (but not services).
*****
(3)Examples. The provisions of this
paragraph (f) may be illustrated by the
following examples:
Example 1.***
Example 2. Q, a performing arts center, enters
into a contract with a large company to be the exclu-
sive sponsor of the center’s theatrical events. The
company makes a payment of cash and products in
the amount of $100,000 to Q, and in return, Q
agrees to make a broadcast announcement thanking
the company before each show and to provide
$2,000 of advertising in the show’s program (2% of
$100,000 is $2,000). The announcement constitutes
use or acknowledgment pursuant to section
513(i)(2). Because the value of the advertising does
not exceed 2% of the total payment, the entire
$100,000 is a qualified sponsorship payment under
section 513(i), and $100,000 is treated as a contri-
bution for purposes of section 509(a)(2)(A)(i).
Example 3. R, a charity, enters into a contract
with a law firm to be the exclusive sponsor of the
charity’s outreach program. Instead of making a
cash payment, the law firm agrees to perform
$100,000 of legal services for the charity. In return,
R agrees to acknowledge the law firm in all its
informational materials. The total fair market value
of the legal services, or $100,000, is a qualified
sponsorship payment under section 513(i), but no
amount is treated as a contribution under section
509(a)(2)(A)(i) because the contribution is of ser-
vices.
******
Par. 4. Section 1.512(a)–1 is amended
by:
1. Revising the paragraph heading and
introductory text for paragraph (e).
2. Redesignating the currentExample
in paragraph (e) asExample 1and revis-
ing the heading.
3. AddingExample 2to paragraph (e).
The revisions and additions read as
follows:
§1.512(a)–1 Definition.
*****
(e)Examples. This section is illus-
trated by the following examples:
Example 1.***
Example 2. (i) P, a manufacturer of photographic
equipment, underwrites a photography exhibition
organized by M, an art museum described in section
501(c)(3). In return for a payment of $100,000, M
agrees that the exhibition catalog sold by M in con-
nection with the exhibit will advertise P’s product.
The exhibition catalog will also include educational
material, such as copies of photographs included in
the exhibition, interviews with photographers, and
2002–21 I.R.B.977May 28, 2002

an essay by the curator of M’s department of pho-
tography. For purposes of this example, assume that
none of the $100,000 is a qualified sponsorship pay-
ment within the meaning of section 513(i) and
§1.513–4, that M’s advertising activity is regularly
carried on, and that the entire amount of the pay-
ment is unrelated business taxable income to M.
Expenses directly connected with generating the
unrelated business taxable income (i.e., direct adver-
tising costs) total $25,000. Expenses directly con-
nected with the preparation and publication of the
exhibition catalog (other than direct advertising
costs) total $110,000. M receives $60,000 of gross
revenue from sales of the exhibition catalog.
Expenses directly connected with the conduct of the
exhibition total $500,000.
(ii) The computation of unrelated business tax-
able income is as follows:
(A) Unrelated trade or business (sale of advertising):
Income$100,000
Directly-connected expenses(25,000)
Subtotal75,000$75,000
(B) Exempt function (publication of exhibition catalog):
Income (from catalog sales)60,000
Directly-connected expenses(110,000)
Net exempt function income (loss)(50,000)(50,000)
Unrelated business taxable income25,000
(iii) Expenses related to publication of the exhi-
bition catalog exceed revenues by $50,000. Because
the unrelated business activity (the sale of advertis-
ing) exploits an exempt activity (the publication of
the exhibition catalog), and because the publication
of editorial material is an activity normally con-
ducted by taxable entities that sell advertising, the
net loss from the exempt publication activity is
allowed as a deduction from unrelated business
income under paragraph (d)(2) of this section. In
contrast, the presentation of an exhibition is not an
activity normally conducted by taxable entities
engaged in advertising and publication activity for
purposes of paragraph (d)(2) of this section. Conse-
quently, the $500,000 cost of presenting the exhibi-
tion is not directly connected with the conduct of the
unrelated advertising activity and does not have a
proximate and primary relationship to that activity.
Accordingly, M has unrelated business taxable
income of $25,000.
*****
Par. 5. Section 1.513–4 is added to
read as follows:
§1.513–4 Certain sponsorship not un-
related trade or business.
(a)In general. Under section 513(i),
the receipt of qualified sponsorship pay-
ments by an exempt organization which is
subject to the tax imposed by section 511
does not constitute receipt of income
from an unrelated trade or business.
(b)Exception. The provisions of this
section do not apply with respect to pay-
ments made in connection with qualified
convention and trade show activities. For
rules governing qualified convention and
trade show activity, see§1.513–3. The
provisions of this section also do not
apply to income derived from the sale of
advertising or acknowledgments in
exempt organization periodicals. For this
purpose, the termperiodicalmeans regu-
larly scheduled and printed material pub-
lished by or on behalf of the exempt orga-
nization that is not related to and
primarily distributed in connection with a
specific event conducted by the exempt
organization. For this purpose, printed
material includes material that is pub-
lished electronically. For rules governing
the sale of advertising in exempt organi-
zation periodicals, see§1.512(a)–1(f).
(c)Qualified sponsorship payment—
(1)Definition. The termqualified spon-
sorship paymentmeans any payment by
any person engaged in a trade or business
with respect to which there is no arrange-
ment or expectation that the person will
receive any substantial return benefit. In
determining whether a payment is a quali-
fied sponsorship payment, it is irrelevant
whether the sponsored activity is related
or unrelated to the recipient organiza-
tion’s exempt purpose. It is also irrelevant
whether the sponsored activity is tempo-
rary or permanent. For purposes of this
section, payment means the payment of
money, transfer of property, or perfor-
mance of services.
(2)Substantial return benefit—(i)In
general. For purposes of this section, a
substantial return benefitmeans any ben-
efit other than a use or acknowledgment
described in paragraph (c)(2)(iv) of this
section, or disregarded benefits described
in paragraph (c)(2)(ii) of this section.
(ii)Certain benefits disregarded. For
purposes of paragraph (c)(2)(i) of this
section, benefits are disregarded if the
aggregate fair market value of all the ben-
efits provided to the payor or persons des-
ignated by the payor in connection with
the payment during the organization’s
taxable year is not more than 2% of the
amount of the payment. If the aggregate
fair market value of the benefits exceeds
2% of the amount of the payment, then
(except as provided in paragraph
(c)(2)(iv) of this section) the entire fair
market value of such benefits, not merely
the excess amount, is a substantial return
benefit. Fair market value is determined
as provided in paragraph (d)(1) of this
section.
(iii)Benefits defined. For purposes of
this section, benefits provided to the
payor or persons designated by the payor
may include:
(A) Advertising as defined in para-
graph (c)(2)(v) of this section.
(B) Exclusive provider arrangements
as defined in paragraph (c)(2)(vi)(B) of
this section.
(C) Goods, facilities, services or other
privileges.
(D) Exclusive or nonexclusive rights
to use an intangible asset (e.g., trademark,
patent, logo, or designation) of the
exempt organization.
(iv)Use or acknowledgment. For pur-
poses of this section, a substantial return
May 28, 20029782002–21 I.R.B.

benefit does not include the use or
acknowledgment of the name or logo (or
product lines) of the payor’s trade or
business in connection with the activities
of the exempt organization. Use or
acknowledgment does not include adver-
tising as described in paragraph (c)(2)(v)
of this section, but may include the fol-
lowing: exclusive sponsorship arrange-
ments; logos and slogans that do not con-
tain qualitative or comparative
descriptions of the payor’s products, ser-
vices, facilities or company; a list of the
payor’s locations, telephone numbers, or
Internet address; value-neutral descrip-
tions, including displays or visual depic-
tions, of the payor’s product-line or ser-
vices; and the payor’s brand or trade
names and product or service listings.
Logos or slogans that are an established
part of a payor’s identity are not consid-
ered to contain qualitative or comparative
descriptions. Mere display or distribution,
whether for free or remuneration, of a
payor’s product by the payor or the
exempt organization to the general public
at the sponsored activity is not considered
an inducement to purchase, sell or use the
payor’s product for purposes of this sec-
tion and, thus, will not affect the determi-
nation of whether a payment is a qualified
sponsorship payment.
(v)Advertising. For purposes of this
section, the termadvertisingmeans any
message or other programming material
which is broadcast or otherwise transmit-
ted, published, displayed or distributed,
and which promotes or markets any trade
or business, or any service, facility or
product. Advertising includes messages
containing qualitative or comparative lan-
guage, price information or other indica-
tions of savings or value, an endorsement,
or an inducement to purchase, sell, or use
any company, service, facility or product.
A single message that contains both
advertising and an acknowledgment is
advertising. This section does not apply
to activities conducted by a payor on its
own. For example, if a payor purchases
broadcast time from a television station to
advertise its product during commercial
breaks in a sponsored program, the
exempt organization’s activities are not
thereby converted to advertising.
(vi)Exclusivity arrangements—(A)
Exclusive sponsor. An arrangement that
acknowledges the payor as the exclusive
sponsor of an exempt organization’s
activity, or the exclusive sponsor repre-
senting a particular trade, business or
industry, generally does not, by itself,
result in a substantial return benefit. For
example, if in exchange for a payment, an
organization announces that its event is
sponsored exclusively by the payor (and
does not provide any advertising or other
substantial return benefit to the payor),
the payor has not received a substantial
return benefit.
(B)Exclusive provider. An arrange-
ment that limits the sale, distribution,
availability, or use of competing products,
services, or facilities in connection with
an exempt organization’s activity gener-
ally results in a substantial return benefit.
For example, if in exchange for a pay-
ment, the exempt organization agrees to
allow only the payor’s products to be sold
in connection with an activity, the payor
has received a substantial return benefit.
(d)Allocation of payment—(1)In gen-
eral. If there is an arrangement or expec-
tation that the payor will receive a sub-
stantial return benefit with respect to any
payment, then only the portion, if any, of
the payment that exceeds the fair market
value of the substantial return benefit is a
qualified sponsorship payment. However,
if the exempt organization does not estab-
lish that the payment exceeds the fair
market value of any substantial return
benefit, then no portion of the payment
constitutes a qualified sponsorship pay-
ment.
(i)Treatment of payments other than
qualified sponsorship payments. The
unrelated business income tax (UBIT)
treatment of any payment (or portion
thereof) that is not a qualified sponsorship
payment is determined by application of
sections 512, 513, and 514. For example,
payments related to an exempt organiza-
tion’s providing facilities, services, or
other privileges to the payor or persons
designated by the payor, advertising,
exclusive provider arrangements
described in paragraph (c)(2)(vi)(B) of
this section, a license to use intangible
assets of the exempt organization, or
other substantial return benefits, are
evaluated separately in determining
whether the exempt organization realizes
unrelated business taxable income.
(ii)Fair market value. The fair market
value of any substantial return benefit
provided as part of a sponsorship arrange-
ment is the price at which the benefit
would be provided between a willing
recipient and a willing provider of the
benefit, neither being under any compul-
sion to enter into the arrangement and
both having reasonable knowledge of rel-
evant facts, and without regard to any
other aspect of the sponsorship arrange-
ment.
(iii)Valuation date. In general, the fair
market value of the substantial return
benefit is determined when the benefit is
provided. However, if the parties enter
into a binding, written sponsorship con-
tract, the fair market value of any sub-
stantial return benefit provided pursuant
to that contract is determined on the date
the parties enter into the sponsorship con-
tract. If the parties make a material
change to a sponsorship contract, it is
treated as a new sponsorship contract as
of the date the material change is effec-
tive. A material change includes an exten-
sion or renewal of the contract, or a more
than incidental change to any amount
payable (or other consideration) pursuant
to the contract.
(iv)Examples. The following
examples illustrate the provisions of this
section:
Example 1. On June 30, 2001, a national corpo-
ration and Z, a charitable organization, enter into a
five-year binding, written contract effective for
years 2002 through 2007. The contract provides that
the corporation will make an annual payment of
$5,000 to Z, and in return the corporation will
receive no benefit other than advertising. On June
30, 2001, the fair market value of the advertising to
be provided to the corporation in each year of the
agreement is $75, which is less than the disregarded
benefit amount provided for in paragraph (c)(2)(ii)
of this section (2% of $5,000 is $100). In 2002, pur-
suant to the sponsorship contract, the corporation
makes a payment to Z of $5,000, and receives the
specified benefit (advertising). As of January 1,
2002, the fair market value of the advertising to be
provided by Z each year has increased to $110.
However, for purposes of this section, the fair mar-
ket value of the advertising benefit is determined on
June 30, 2001, the date the parties entered into the
sponsorship contract. Therefore, the entire $5,000
payment received in 2002 is a qualified sponsorship
payment.
Example 2. The facts are the same asExample 1,
except that the contract provides for an initial pay-
ment by the corporation to Z of $5,000 in 2002, fol-
lowed by annual payments of $1,000 during each of
years 2003–2007. In 2003, pursuant to the sponsor-
ship contract, the corporation makes a payment to Z
of $1,000, and receives the specified advertising
benefit. In 2003, the fair market value of the benefit
provided ($75, as determined on June 30, 2001)
exceeds 2% of the total payment received (2% of
2002–21 I.R.B.979May 28, 2002

$1,000 is $20). Therefore, only $925 of the $1,000
payment received in 2003 is a qualified sponsorship
payment.
(2)Anti-abuse provision. To the extent
necessary to prevent avoidance of the rule
stated in paragraphs (d)(1) and (c)(2) of
this section, where the exempt organiza-
tion fails to make a reasonable and good
faith valuation of any substantial return
benefit, the Commissioner (or the Com-
missioner’s delegate) may determine the
portion of a payment allocable to such
substantial return benefit and may treat
two or more related payments as a single
payment.
(e)Special rules—(1)Written agree-
ments. The existence of a written sponsor-
ship agreement does not, in itself, cause a
payment to fail to be a qualified sponsor-
ship payment. The terms of the agree-
ment, not its existence or degree of detail,
are relevant to the determination of
whether a payment is a qualified sponsor-
ship payment. Similarly, the terms of the
agreement and not the title or responsi-
bilities of the individuals negotiating the
agreement determine whether a payment
(or any portion thereof) made pursuant to
the agreement is a qualified sponsorship
payment.
(2)Contingent payments. The term
qualified sponsorship paymentdoes not
include any payment the amount of which
is contingent, by contract or otherwise,
upon the level of attendance at one or
more events, broadcast ratings, or other
factors indicating the degree of public
exposure to the sponsored activity. The
fact that a payment is contingent upon
sponsored events or activities actually
being conducted does not, by itself, cause
the payment to fail to be a qualified spon-
sorship payment.
(3)Determining public support. Quali-
fied sponsorship payments in the form of
money or property (but not services) are
treated as contributions received by the
exempt organization for purposes of
determining public support to the organi-
zation under section 170(b)(1)(A)(vi) or
509(a)(2). See§§1.509(a)–3(f)(1) and
1.170A–9(e)(6)(i). The fact that a pay-
ment is a qualified sponsorship payment
that is treated as a contribution to the
payee organization does not determine
whether the payment is deductible by the
payor under section 162 or 170.
(f)Examples. The provisions of this
section are illustrated by the following
examples. The tax treatment of any pay-
ment (or portion of a payment) that does
not constitute a qualified sponsorship
payment is governed by general UBIT
principles. In these examples, the recipi-
ents of the payments at issue are section
501(c) organizations. The expectations or
arrangements of the parties are those spe-
cifically indicated in the example. The
examples are as follows:
Example 1. M, a local charity, organizes a mara-
thon and walkathon at which it serves to participants
drinks and other refreshments provided free of
charge by a national corporation. The corporation
also gives M prizes to be awarded to winners of the
event. M recognizes the assistance of the corpora-
tion by listing the corporation’s name in promo-
tional fliers, in newspaper advertisements of the
event and on T-shirts worn by participants. M
changes the name of its event to include the name of
the corporation. M’s activities constitute acknowl-
edgment of the sponsorship. The drinks, refresh-
ments and prizes provided by the corporation are a
qualified sponsorship payment, which is not income
from an unrelated trade or business.
Example 2. N, an art museum, organizes an
exhibition and receives a large payment from a cor-
poration to help fund the exhibition. N recognizes
the corporation’s support by using the corporate
name and established logo in materials publicizing
the exhibition, which include banners, posters, bro-
chures and public service announcements. N also
hosts a dinner for the corporation’s executives. The
fair market value of the dinner exceeds 2% of the
total payment. N’s use of the corporate name and
logo in connection with the exhibition constitutes
acknowledgment of the sponsorship. However,
because the fair market value of the dinner exceeds
2% of the total payment, the dinner is a substantial
return benefit. Only that portion of the payment, if
any, that N can demonstrate exceeds the fair market
value of the dinner is a qualified sponsorship pay-
ment.
Example 3. O coordinates sports tournaments for
local charities. An auto manufacturer agrees to
underwrite the expenses of the tournaments. O rec-
ognizes the auto manufacturer by including the
manufacturer’s name and established logo in the
title of each tournament as well as on signs, score-
boards and other printed material. The auto manu-
facturer receives complimentary admission passes
and pro-am playing spots for each tournament that
have a combined fair market value in excess of 2%
of the total payment. Additionally, O displays the
latest models of the manufacturer’s premier luxury
cars at each tournament. O’s use of the manufactur-
er’s name and logo and display of cars in the tour-
nament area constitute acknowledgment of the spon-
sorship. However, the admission passes and pro-am
playing spots are a substantial return benefit. Only
that portion of the payment, if any, that O can dem-
onstrate exceeds the fair market value of the admis-
sion passes and pro-am playing spots is a qualified
sponsorship payment.
Example 4. P conducts an annual college foot-
ball bowl game. P sells to commercial broadcasters
the right to broadcast the bowl game on television
and radio. A major corporation agrees to be the
exclusive sponsor of the bowl game. The detailed
contract between P and the corporation provides that
in exchange for a $1,000,000 payment, the name of
the bowl game will include the name of the corpo-
ration. In addition, the contract provides that the
corporation’s name and established logo will appear
on player’s helmets and uniforms, on the scoreboard
and stadium signs, on the playing field, on cups
used to serve drinks at the game, and on all related
printed material distributed in connection with the
game. P also agrees to give the corporation a block
of game passes for its employees and to provide
advertising in the bowl game program book. The
fair market value of the passes is $6,000, and the
fair market value of the program advertising is
$10,000. The agreement is contingent upon the
game being broadcast on television and radio, but
the amount of the payment is not contingent upon
the number of people attending the game or the tele-
vision ratings. The contract provides that television
cameras will focus on the corporation’s name and
logo on the field at certain intervals during the
game. P’s use of the corporation’s name and logo in
connection with the bowl game constitutes acknowl-
edgment of the sponsorship. The exclusive sponsor-
ship arrangement is not a substantial return benefit.
Because the fair market value of the game passes
and program advertising ($16,000) does not exceed
2% of the total payment (2% of $1,000,000 is
$20,000), these benefits are disregarded and the
entire payment is a qualified sponsorship payment,
which is not income from an unrelated trade or busi-
ness.
Example 5. Q organizes an amateur sports team.
A major pizza chain gives uniforms to players on
Q’s team, and also pays some of the team’s opera-
tional expenses. The uniforms bear the name and
established logo of the pizza chain. During the final
tournament series, Q distributes free of charge sou-
venir flags bearing Q’s name to employees of the
pizza chain who come out to support the team. The
flags are valued at less than 2% of the combined fair
market value of the uniforms and operational
expenses paid. Q’s use of the name and logo of the
pizza chain in connection with the tournament con-
stitutes acknowledgment of the sponsorship.
Because the fair market value of the flags does not
exceed 2% of the total payment, the entire amount
of the funding and supplied uniforms are a qualified
sponsorship payment, which is not income from an
unrelated trade or business.
Example 6. R is a liberal arts college. A soft
drink manufacturer enters into a binding, written
contract with R that provides for a large payment to
be made to the college’s English department in
exchange for R agreeing to name a writing compe-
tition after the soft drink manufacturer. The contract
also provides that R will allow the soft drink manu-
facturer to be the exclusive provider of all soft drink
sales on campus. The fair market value of the exclu-
sive provider component of the contract exceeds 2%
of the total payment. R’s use of the manufacturer’s
name in the writing competition constitutes
acknowledgment of the sponsorship. However, the
exclusive provider arrangement is a substantial
return benefit. Only that portion of the payment, if
any, that R can demonstrate exceeds the fair market
value of the exclusive provider arrangement is a
qualified sponsorship payment.
May 28, 20029802002–21 I.R.B.

Example 7. S is a noncommercial broadcast sta-
tion that airs a program funded by a local music
store. In exchange for the funding, S broadcasts the
following message:“This program has been brought
to you by the Music Shop, located at 123 Main
Street. For your music needs, give them a call today
at 555–1234. This station is proud to have the Music
Shop as a sponsor.”Because this single broadcast
message contains both advertising and an acknowl-
edgment, the entire message is advertising. The fair
market value of the advertising exceeds 2% of the
total payment. Thus, the advertising is a substantial
return benefit. Unless S establishes that the amount
of the payment exceeds the fair market value of the
advertising, none of the payment is a qualified spon-
sorship payment.
Example 8. T, a symphony orchestra, performs a
series of concerts. A program guide that contains
notes on guest conductors and other information
concerning the evening’s program is distributed by
T at each concert. The Music Shop makes a $1,000
payment to T in support of the concert series. As a
supporter of the event, the Music Shop receives
complimentary concert tickets with a fair market
value of $85, and is recognized in the program
guide and on a poster in the lobby of the concert
hall. The lobby poster states that,“The T concert is
sponsored by the Music Shop, located at 123 Main
Street, telephone number 555–1234.”The program
guide contains the same information and also states,
“Visit the Music Shop today for the finest selection
of music CDs and cassette tapes.”The fair market
value of the advertisement in the program guide is
$15. T’s use of the Music Shop’s name, address, and
telephone number in the lobby poster constitutes
acknowledgment of the sponsorship. However, the
combined fair market value of the advertisement in
the program guide and complimentary tickets is
$100 ($15 + $85), which exceeds 2% of the total
payment (2% of $1,000 is $20). The fair market
value of the advertising and complimentary tickets,
therefore, constitutes a substantial return benefit and
only that portion of the payment, or $900, that
exceeds the fair market value of the substantial
return benefit is a qualified sponsorship payment.
Example 9. U, a national charity dedicated to
promoting health, organizes a campaign to inform
the public about potential cures to fight a serious
disease. As part of the campaign, U sends represen-
tatives to community health fairs around the country
to answer questions about the disease and inform the
public about recent developments in the search for a
cure. A pharmaceutical company makes a payment
to U to fund U’s booth at a health fair. U places a
sign in the booth displaying the pharmaceutical
company’s name and slogan,“Better Research, Bet-
ter Health,”which is an established part of the com-
pany’s identity. In addition, U grants the pharmaceu-
tical company a license to use U’s logo in marketing
its products to health care providers around the
country. The fair market value of the license exceeds
2% of the total payment received from the company.
U’s display of the pharmaceutical company’s name
and slogan constitutes acknowledgment of the spon-
sorship. However, the license granted to the pharma-
ceutical company to use U’s logo is a substantial
return benefit. Only that portion of the payment, if
any, that U can demonstrate exceeds the fair market
value of the license granted to the pharmaceutical
company is a qualified sponsorship payment.
Example 10. V, a trade association, publishes a
monthly scientific magazine for its members con-
taining information about current issues and devel-
opments in the field. A textbook publisher makes a
large payment to V to have its name displayed on
the inside cover of the magazine each month.
Because the monthly magazine is a periodical
within the meaning of paragraph (b) of this section,
the section 513(i) safe harbor does not apply. See
§1.512(a)–1(f).
Example 11. W, a symphony orchestra, main-
tains a website containing pertinent information and
its performance schedule. The Music Shop makes a
payment to W to fund a concert series, and W posts
a list of its sponsors on its website, including the
Music Shop’s name and Internet address. W’s web-
site does not promote the Music Shop or advertise
its merchandise. The Music Shop’s Internet address
appears as a hyperlink from W’s website to the
Music Shop’s website. W’s posting of the Music
Shop’s name and Internet address on its website
constitutes acknowledgment of the sponsorship. The
entire payment is a qualified sponsorship payment,
which is not income from an unrelated trade or busi-
ness.
Example 12. X, a health-based charity, sponsors
a year-long initiative to educate the public about a
particular medical condition. A large pharmaceutical
company manufactures a drug that is used in treat-
ing the medical condition, and provides funding for
the initiative that helps X produce educational mate-
rials for distribution and post information on X’s
website. X’s website contains a hyperlink to the
pharmaceutical company’s website. On the pharma-
ceutical company’s website, the statement appears,
“X endorses the use of our drug, and suggests that
you ask your doctor for a prescription if you have
this medical condition.”X reviewed the endorse-
ment before it was posted on the pharmaceutical
company’s website and gave permission for the
endorsement to appear. The endorsement is advertis-
ing. The fair market value of the advertising exceeds
2% of the total payment received from the pharma-
ceutical company. Therefore, only the portion of the
payment, if any, that X can demonstrate exceeds the
fair market value of the advertising on the pharma-
ceutical company’s website is a qualified sponsor-
ship payment.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved April 12, 2002.
Mark Weinberger,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on April
24, 2002, 8:45 a.m., and published in the issue of
the Federal Register for April 25, 2002, 67 F.R.
20433)
Section 1012.—Basis of
Property—Cost
26 CFR 1.1012–1: Basis of property.
Under the CCR method of accounting, the
amount of a CCR payment is not includible in the
taxpayer’s gross income and may not be included in
the taxpayer’s basis in the purchased vehicle. See
Rev. Proc. 2002–36, page 993.
Section 6050S.—Returns
Relating to Higher Education
Tuition and Related Expenses
26 CFR 1.6050S–2T: Electronic furnishing of infor-
mation statements for qualified tuition and related
expenses (temporary).
T.D. 8992
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1, 301, and
602
Information Reporting for
Payments of Interest on
Qualified Education Loans;
Magnetic Media Filing
Requirements for Information
Returns
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
regulations relating to the information
reporting requirements under section
6050S for payments of interest on quali-
fied education loans, including the filing
of information returns on magnetic
media. The final regulations reflect
changes to the law made by the Taxpayer
Relief Act of 1997. The regulations pro-
vide guidance to payees receiving interest
payments on qualified education loans.
DATES:Effective date: These regulations
are effective April 29, 2002.
Applicability date: For date of applica-
bility, see§1.6050S–3(g).
2002–21 I.R.B.981May 28, 2002

FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
Donna Welch, (202) 622–4910; and con-
cerning the magnetic media filing specifi-
cations, waivers for filing on magnetic
media, and extensions of time, contact the
Internal Revenue Service, Martinsburg
Computing Center, (304) 263–8700 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)) under control
number 1545–1678. Responses to this
collection of information are mandatory.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless it displays a valid control number
assigned by the Office of Budget and
Management.
The estimated burden for the reporting
in these regulations is reflected in the bur-
den for Form 1098–E.
Estimated total annual reporting bur-
den for 2000 for Form 1098–E: 483,098
hours.
Estimated number of responses for
2000 for Form 1098–E: 9,661,965.
Estimated average annual burden
hours per response for Form 1098–E: 3
minutes.
Comments concerning the accuracy of
this burden and suggestions for reducing
this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports
Clearance Officer, W:CAR:MP:FP:S,
Washington, DC 20224, and to the Office
of Management and Budget, Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial 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
This document contains amendments
to the Income Tax Regulations (26 CFR
part 1) relating to information reporting
requirements under section 6050S. The
Taxpayer Relief Act of 1997 (Public Law
105–34 (111 Stat. 788) (TRA’97)) added
section 221 of the Internal Revenue Code
(Code) to allow certain taxpayers who
pay interest on qualified education loans
to claim a Federal income tax deduction
for their interest payments. In general, as
enacted by TRA’97, a deduction is
allowed for interest payments made dur-
ing the first 60 months in which interest
payments are required on a qualified edu-
cation loan. However, no interest deduc-
tion is allowed for any interest paid
before January 1, 1998. On January 21,
1999, the IRS issued proposed regulations
(REG–116826–97, 1999–1 C.B. 701)
under section 221. See 64 FR 3257
(1999). Section 221 was amended by the
Economic Growth and Tax Relief Recon-
ciliation Act of 2001 (Public Law 107–16
(115 Stat. 38)) to eliminate the limitation
on the number of months during which
interest paid on a qualified education loan
is deductible, effective for interest paid
after December 31, 2001, and to allow a
deduction for voluntary payments of
interest.
TRA’97 also added section 25A of the
Code to provide the Hope Scholarship
Credit and the Lifetime Learning Credit
(education tax credit). In general, the edu-
cation tax credit allows certain taxpayers
who pay qualified tuition and related
expenses to an eligible educational insti-
tution to claim a nonrefundable credit
against their Federal income tax liability.
On January 6, 1999, the IRS issued pro-
posed regulations (REG–106388–98,
1999–1 C.B. 756) under section 25A. See
64 FR 794 (1999).
In addition, TRA’97 added section
6050S of the Code. Section 6050S was
amended by the Internal Revenue Service
Restructuring and Reform Act of 1998
(Public Law 105–206 (112 Stat. 685)
(RRA’98)) and Public Law 107–131
(115 Stat. 2410). In general, section
6050S requires certain payees who
receive payments of interest on one or
more qualified education loans to file
information returns and to furnish written
information statements to assist taxpayers
and the IRS in determining any interest
deduction allowable under section 221. In
addition, section 6050S requires eligible
educational institutions to file information
returns and to furnish written information
statements to assist taxpayers and the IRS
in determining any education tax credit
allowable under section 25A (as well as
other tax benefits for higher education
expenses). See H.R. Conf. Rept. No. 599,
105th Cong., 2d Sess., pp. 319–320
(1998). Similarly, section 6050S requires
any person engaged in a trade or business
of making payments to any individual
under an insurance agreement as reim-
bursements or refunds of qualified tuition
and related expenses to file information
returns and to furnish written information
statements.
Section 6050S(b) provides that the
information return filed by payees who
receive payments of interest on qualified
education loans must contain: (1) the
name, address, and taxpayer identification
number (TIN) of the individual with
respect to whom payments of interest on
qualified education loans were received;
(2) the aggregate amount of interest
received for the calendar year from such
individual; and (3) such other information
as the Secretary may prescribe.
The IRS has published several notices
describing the information reporting
requirements for payees who receive
interest on qualified education loans dur-
ing the years 1998, 1999, 2000, and 2001.
See Notice 98–7 (1998–1 C.B. 339),
Notice 98–54 (1998–2 C.B. 641), Notice
99–37 (1999–2 C.B. 124), and Notice
2000–62 (2000–2 C.B. 587).
A notice of proposed rulemaking under
section 6050S (REG–105316–98, 2000–2
C.B. 98) was published in theFederal
Register(65 FR 37728) on June 16,
2000, addressing the information report-
ing requirements for eligible educational
institutions and insurers and payees who
receive interest on qualified education
loans. A public hearing was held on the
proposed regulations on February 13,
2001. The IRS received written and elec-
tronic comments responding to the notice
of proposed rulemaking.
The IRS and the Treasury Department
have determined that the proposed regula-
tions in§1.6050S–1 addressing the infor-
mation reporting requirements for eligible
educationalinstitutionsandinsurers
May 28, 20029822002–21 I.R.B.

should be withdrawn and that new pro-
posed regulations should be issued. The
IRS will issue proposed regulations in
§1.6050S–1 in a separate document. The
proposed regulations in§1.6050S–2
addressing the information reporting
requirements for payees who receive pay-
ments of interest on qualified education
loans are adopted as amended by this
Treasury decision and redesignated as
§1.6050S–3. The comments received in
connection with these regulations and the
revisions are discussed in the“Explana-
tion of Provisions and Summary of Com-
ments”of this preamble.
Temporary regulations (66 FR 10191)
and a notice of proposed rulemaking by
cross reference (REG–107186–00,
2001–1 C.B. 973) (66 FR 10247) under
section 6050S were published in theFed-
eral Registeron February 14, 2001.
Those regulations allow eligible educa-
tional institutions and payees who receive
interest on qualified education loans to
furnish information statements electroni-
cally to students and borrowers, respec-
tively, if certain requirements are met.
The temporary regulations for eligible
educational institutions were designated
as§1.6050S–1T, and the temporary regu-
lations for payees were designated as
§1.6050S–2T. The IRS and the Treasury
Department have determined that those
regulations should be finalized in a sepa-
rate document. However, this Treasury
decision redesignates§1.6050S–1T and
§1.6050S–2T as§1.6050S–2T and
§1.6050S–4T, respectively.
Explanation of Provisions and
Summary of Comments
1. Information Reporting for Payments
of Interest on Qualified Education Loans
The proposed regulations require any
person engaged in a trade or business that
receives from any payor interest of $600
or more for any calendar year on one or
more qualified education loans (as
defined in section 221(e)(1) and the regu-
lations thereunder) (a payee) to file a
Form 1098–E,Student Loan Interest
Statement, with the IRS. Under the pro-
posed regulations, a payee must report the
name, address, and taxpayer identification
number (TIN) of the payee; the name,
address, and TIN of the payor; and the
aggregate amount of interest received
during the calendar year from the payor.
The final regulations retain these rules.
As explained in the preamble to the pro-
posed regulations, a payee may be the
lender, the holder of the loan, or the loan
servicer.
Consistent with TRA’97, the proposed
regulations provide that a payee is
required to report interest payments
received on a qualified education loan
during only the first 60 months in which
interest payments are required on the
loan. The Economic Growth and Tax
Relief Reconciliation Act of 2001
repealed the limitation on the number of
months during which interest paid on a
qualified education loan is deductible,
effective for interest paid after December
31, 2001. Therefore, the final regulations
eliminate the 60-month reporting period,
so that payees must continue to report
annually interest payments on qualified
education loans.
A.Section 221 comments
The proposed regulations provide that,
in determining the aggregate amount of
interest payments to be reported by a
payee, the terminterestincludes stated
interest, loan origination fees (other than
any fees for services), and capitalized
interest as described in the regulations
under section 221. Several commentators
requested that other fees, such as insur-
ance, be treated as deductible interest for
purposes of section 221. In addition, sev-
eral commentators requested clarification
of, or changes to, the manner in which
payments are allocated to interest, the
definition ofqualified education loans,
and the ability to estimate capitalized
interest. These comments were not con-
sidered in these regulations, which
address only the information reporting
requirements for interest payments on
qualified education loans under section
221, but the comments will be considered
in finalizing the regulations under section
221.
B.Reporting of interest received or
collected by one or more persons
Section 6050S(f) requires that, in the
case of any person who receives any
amount on behalf of another person, only
the first person receiving the amount is
required to comply with the information
reporting requirements. Based on section
6050S(f), the proposed regulations pro-
vide that if a payee contracts with another
person to receive or collect interest pay-
ments on a qualified education loan on its
behalf, the other person must comply
with the information reporting require-
ments. Commentators requested clarifica-
tion of how this rule would apply if a
payee contracts with multiple parties,
such as a billing service and a collection
agent. Other commentators requested
clarification of the rule for noncontractual
arrangements and how the rule would
apply if the person receiving the pay-
ments does not ordinarily possess the
payor information required to file infor-
mation returns (e.g., a lock-box agent, a
bankruptcy trustee, or a collection
agency). The commentators suggested
that the regulations provide that if a per-
son collects or receives payments on a
qualified loan on behalf of another person
(whether or not a formal contract exists),
the person collecting or receiving the pay-
ments must satisfy the reporting require-
ments, unless the other person does not
possess the information needed to comply
with the reporting requirements. This rec-
ommendation is consistent with the provi-
sions of section 6050H and the regula-
tions thereunder; therefore, the final
regulations adopt this recommendation.
C.Forms 1098–E filed by third-party
Several commentators requested that
the final regulations permit a payee to
contract with a third party to file Forms
1098–E,Student Loan Interest Statement,
and to furnish the information statements.
The general instructions to Form 1099
and Form 1098 allow a filing agent if cer-
tain requirements are met. Therefore, the
final regulations do not need to adopt this
recommendation.
D.Information statement
Several commentators requested that
the final regulations eliminate the require-
ment that a payee furnish certain instruc-
tions to a payor with the information
statement. The commentators explained
that the instructional language implies
that the payee is able to provide tax assis-
tance. The instructions that a payee is
required to furnish with the information
statement alert the payor to the limitations
2002–21 I.R.B.983May 28, 2002

on the deductibility of reported interest.
In addition, the instructions clearly state
that the payor should refer to the IRS
forms and publications for information
regarding the deductibility of reported
interest. Therefore, the final regulations
do not eliminate the required instructions;
however, the regulations clarify that the
payor should refer to the IRS forms and
publications, and not the payee, for tax
information.
The proposed regulations provide that
the information statement must include
the name, address, and phone number of
the individual who is the information con-
tact for the payee that filed the Form
1098–E. It is often not feasible for payees
to identify a specific individual as the
information contact. Therefore, the final
regulations provide that the information
statement must include the name, address,
and phone number of an office or depart-
ment of the payee as the information con-
tact.
E.Payment adjustments after returns
filed
Other commentators requested that the
final regulations provide specific rules for
reporting interest payment adjustments
made after information returns have been
filed with the IRS. The commentators
stated that requiring reporting of adjust-
ments to interest previously reported
would be overly burdensome. The final
regulations do not need to include spe-
cific rules because additional interest pay-
ments received in a subsequent year that
relate to interest payments reported in a
prior year are reportable in the year of
receipt. Further, a payee is not required to
report reimbursements or refunds of inter-
est payments previously reported. How-
ever, a payee should file corrected infor-
mation returns to report interest payments
that were incorrectly reported in a prior
year.
F.Effective date of regulations and
continuation of Notice 98–7 for the
calendar year 2002
The proposed regulations provide that
the regulations will apply to information
returns required to be filed, and informa-
tion statements required to be furnished,
after December 31, 2001. Several com-
ments were received on the proposed
effective date. Several commentators rec-
ommended that the final regulations
apply to new loans made on or after Janu-
ary 1 of the year that is 24 months after
publication of the final regulations and
that loans made before that date remain
subject to the requirements in Notice
98–7, as modified. Other comments
requested a period of at least 12 months
after publication of final regulations to
make programming changes to implement
required reporting with respect to loan
origination fees and capitalized interest.
Further comments requested that the
reporting requirements in Notice 98–7, as
modified, continue for information
returns required to be filed, and informa-
tion statements required to be furnished,
for interest payments received during cal-
endar year 2002 (for which the returns
and statements are required to be filed
and furnished in 2003). In general, the
final regulations do not impose any sig-
nificant reporting requirement beyond the
reporting currently required by Notice
98–7, as modified, and Form 1098–E.
However, in response to comments, the
IRS and the Treasury Department extend
Notice 98–7, as modified, for the calendar
year 2002. Therefore, the final regulations
apply to information returns required to
be filed, and information statements
required to be furnished, after December
31, 2003 (for interest payments received
during calendar year 2003). In addition,
in order to provide additional time for
payees to implement reporting of loan
origination fees and capitalized interest,
the final regulations provide that a payee
is not required to report payments of such
amounts as interest for qualified educa-
tion loans made before January 1, 2004.
2.Requirement to File Information
Returns on Magnetic Media
The final regulations amend the regu-
lations under section 6011(e) to require
payees who are required to file 250 or
more Forms 1098–E to file on magnetic
media.
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 assess-
ment is not required. It has also been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions. A final regulatory flexibility analy-
sis has been prepared for the collection of
information in this Treasury decision.
This analysis is set forth in this preamble
under the heading“Final Regulatory
Flexibility Analysis.”Pursuant to section
7805(f), the proposed regulations preced-
ing these regulations were submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Final Regulatory Flexibility Analysis
The collection of information con-
tained in§1.6050S–3 is needed to assist
the IRS and taxpayers in determining the
amount of any interest deduction allow-
able under section 221. The objectives of
these regulations are to provide uniform,
practicable, and administrable rules under
section 6050S. The types of small entities
to which the regulations may apply are
certain payees (e.g., a lender, a holder of
the loan, or a loan servicer) who receive
interest payments of $600 or more on
qualified education loans.
There are no known Federal rules that
duplicate, overlap, or conflict with these
regulations. The regulations are consid-
ered to have the least economic impact on
small entities of all alternatives consid-
ered.
Moreover, the regulations requiring fil-
ing Forms 1098–E on magnetic media
impose no additional reporting or record-
keeping and only prescribe the method of
filing information returns that are already
required to be filed. Further, these regula-
tions are consistent with the statutory
requirement that a payee is not required
to file Forms 1098–E on magnetic media
unless required to file at least 250 or
more returns during the year. Finally, the
economic impact caused by requiring
Forms 1098–E on magnetic media should
be minimal because most payee’s opera-
tions are computerized. Even if their
operations are not computerized, the
incremental cost of magnetic media
reporting should be minimal in most
cases because of the availability of com-
puter service bureaus. In addition, the
existing regulations under section 6011(e)
provide that the IRS may waive the mag-
netic media filing requirements on a
May 28, 20029842002–21 I.R.B.

showing of hardship. The waiver author-
ity will be exercised so as not to unduly
burden payees lacking both the necessary
data processing facilities and access at a
reasonable cost to computer service
bureaus.
Drafting Information
The principal author of the regulations
is Donna Welch, Office of Associate
Chief Counsel (Procedure and Adminis-
tration), Administrative Provisions and
Judicial Practice Division. However,
other personnel from the IRS and the
Treasury Department participated in the
development of the regulations.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 301, and
602 are amended as follows:
PA RT 1—INCOME TAX
Paragraph 1. The authority citation for
part 1 is amended by removing the entry
for“Section 1.6050S–1T”and by adding
entries in numerical order to read in part
as follows:
Authority: 26 U.S.C. 7805***
Section 1.6050S–3 also issued under
26 U.S.C. 6050S(g).
Section 1.6050S–4T also issued under
26 U.S.C. 6050S(g).***
Par. 2. Sections 1.6050–1T and
1.6050S–2Tareredesignatedas
§§1.6050S–2T and 1.6050S–4T, respec-
tively, and amended by revising the sec-
tion headings to read as follows:
§1.6050S–2T Electronic furnishing of
information statements for qualified
tuition and related expenses(temporary).
*****
§1.6050S–4T Electronic furnishing of
information statements for payments of
interest on qualified education loans
(temporary).
*****
Par. 3. Sections 1.6050S–0 and
1.6050S–3 are added to read as follows:
§1.6050S–0 Table of contents
This section lists captions contained in
section 6050S.
§1.6050S–2T Electronic furnishing of
information statements for qualified
tuition and related expenses.
(a) Electronic furnishing of statements.
(1) In general.
(2) Consent.
(i) In general.
(ii) Change in hardware or software
requirements.
(iii) Example.
(3) Required disclosures.
(i) In general.
(ii) Paper statement.
(iii) Scope and duration of consent.
(iv) Post-consent request for a paper
statement.
(v) Withdrawal of consent.
(vi) Notice of termination.
(vii) Updating information.
(viii) Hardware and software require-
ments.
(4) Format.
(5) Posting.
(6) Notice.
(i) In general.
(ii) Undeliverable electronic address.
(iii) Corrected statements.
(7) Retention.
(b) Effective date.
§1.6050S–3 Information reporting for
payments of interest on qualified
education loans.
(a) Information reporting requirement in
general.
(b) Definitions.
(1) Interest.
(2) Payor.
(c) Requirement to file return.
(1) Form of return.
(2) Information included on return.
(3) Time and place for filing return.
(i) In general.
(ii) Extensions of time.
(4) Use of magnetic media.
(d) Requirement to furnish statement.
(1) In general.
(2) Time and manner for furnishing state-
ment.
(i) In general.
(ii) Extensions of time.
(3) Copy of Form 1098–E.
(e) Special rules.
(1) Transitional rule for reporting of loan
origination fees and capitalized interest.
(2) Qualified education loan certification.
(3) Payments of interest received or col-
lected by one or more persons.
(i) In general.
(ii) Exception.
(4) Reporting by foreign persons.
(5) Governmental units.
(f) Penalty provisions.
(1) Failure to file correct returns.
(2) Failure to furnish correct information
statements.
(3) Waiver of penalties for failures to
include a correct TIN.
(i) In general.
(ii) Acting in a responsible manner.
(iii) Manner of soliciting TIN.
(4) Failure to furnish TIN.
(g) Effective date.
§1.6050S–4T Electronic furnishing of
information statements for payments of
interest on qualified education loans.
(a) Electronic furnishing of statements.
(1) In general.
(2) Consent.
(i) In general.
(ii) Change in hardware or software
requirements.
(iii) Example.
(3) Required disclosures.
(i) In general.
(ii) Paper statement.
(iii) Scope and duration of consent.
(iv) Post-consent request for a paper
statement.
(v) Withdrawal of consent.
(vi) Notice of termination.
(vii) Updating information.
(viii) Hardware and software require-
ments.
(4) Format.
(5) Posting.
(6) Notice.
(i) In general.
(ii) Undeliverable electronic address.
(iii) Corrected statements.
(7) Retention.
(b) Effective date.
§1.6050S–3 Information reporting for
payments of interest on qualified
education loans.
(a)Information reporting requirement
in general. Except as otherwise provided
2002–21 I.R.B.985May 28, 2002

in this section, any person engaged in a
trade or business that, in the course of
that trade or business, receives from any
payor (as defined in paragraph (b)(2) of
this section) interest payments that aggre-
gate $600 or more for any calendar year
on one or more qualified education loans
(as defined in section 221(e)(1) and the
regulations thereunder)(a payee) must—
(1) File an information return, as
described in paragraph (c) of this section,
with the Internal Revenue Service with
respect to the payor; and
(2) Furnish a statement, as described in
paragraph (d) of this section, to the payor.
(b)Definitions. The following defini-
tions apply for purposes of this section:
(1)Interest.Interestincludes stated
interest, loan origination fees (other than
fees for services), and capitalized interest
as described in the regulations under sec-
tion 221. See paragraph (e)(1) of this sec-
tion for a special transitional rule relating
to reporting of loan origination fees and
capitalized interest.
(2)Payor.Payormeans the individual
who is carried on the books and records
of the payee as the borrower on a quali-
fied education loan. If there are multiple
borrowers, the principal borrower on the
payee’s books and records is treated as
the payor for purposes of section 6050S
and this section.
(c)Requirement to file return—(1)
Form of return. A payee must file an
information return for the payor on Form
1098–E,Student Loan Interest Statement.
A payee may use a substitute for Form
1098–E if the substitute form complies
with the applicable revenue procedures
relating to substitute forms.
(2)Information included on return.A
payee must include on Form 1098–E—
(i) The name, address, and taxpayer
identification number (TIN)(as defined in
section 7701(a)(41)) of the payee;
(ii) The name, address, and TIN of the
payor;
(iii) The aggregate amount of interest
payments received during the calendar
year from the payor; and
(iv) Any other information required by
Form 1098–E and its instructions.
(3)Time and place for filing return—
(i)In general. Except as provided in para-
graph (c)(3)(ii) of this section, the Form
1098–E must be filed on or before Febru-
ary 28 (March 31 if filed electronically)
of the year following the calendar year in
which interest payments were received. A
payee must file Form 1098–E with the
Internal Revenue Service according to the
instructions to Form 1098–E.
(ii)Extensions of time. The Internal
Revenue Service may grant a payee an
extension of time to file returns required
in this section upon a showing of good
cause. See the instructions to Form
1098–E and applicable revenue proce-
dures for rules relating to extensions of
time to file.
(4)Use of magnetic media. See section
6011(e) and§301.6011–2 of this chapter
for rules relating to the requirement to file
Forms 1098–E on magnetic media.
(d)Requirement to furnish statement—
(1)In general. A payee must furnish a
statement to each payor for whom it is
required to file a Form 1098–E. The state-
ment must include—
(i) The information required under
paragraph (c)(2) of this section;
(ii) A legend that identifies the state-
ment as important tax information that is
being furnished to the Internal Revenue
Service;
(iii) Instructions that—
(A) State that, under section 221 and
the regulations thereunder, the payor may
not be able to deduct the full amount of
interest reported on the statement;
(B) In the case of qualified education
loans made before January 1, 2004, for
which the payee does not report payments
of interest other than stated interest, state
that the payor may be able to deduct addi-
tional amounts (such as certain loan origi-
nation fees and capitalized interest) not
reported on the statement;
(C) State that the payor should refer to
relevant Internal Revenue Service forms
and publications, and should not refer to
the payee, for explanations relating to the
eligibility requirements for, and calcula-
tion of, any allowable deduction for inter-
est paid on a qualified education loan;
and
(D) Include the name, address, and
phone number of the office or department
of the payee that is the information con-
tact for the payee that filed the Form
1098–E.
(2)Time and manner for furnishing
statement—(i)In general. Except as pro-
vided in paragraph (d)(2)(ii) of this sec-
tion, a payee must furnish the statement
described in paragraph (d)(1) of this sec-
tion to the payor on or before January 31
of the year following the calendar year in
which payments of interest on a qualified
education loan were received. If mailed,
the statement must be sent to the payor’s
last known address. If furnished electroni-
cally, the statement must be furnished in
accordance with the applicable regula-
tions.
(ii)Extensions of time. The Internal
Revenue Service may grant a payee an
extension of time to furnish statements
required in this section upon a showing of
good cause. See the instructions to Form
1098–E and applicable revenue proce-
dures for rules relating to extensions of
time to furnish statements.
(3)Copy of Form 1098–E. A payee
may satisfy the requirement of this para-
graph (d) by furnishing either a copy of
Form 1098–E and its instructions or
another document that contains all the
information filed with the Internal Rev-
enue Service and the information required
by paragraph (d)(1) of this section if the
document complies with applicable rev-
enue procedures relating to substitute
statements.
(e)Special rules—(1)Transitional
rule for reporting of loan origination fees
and capitalized interest. For qualified
education loans made before January 1,
2004, a payee is not required to report
payments of loan origination fees and
capitalized interest as interest under sec-
tion 6050S and this section.
(2)Qualified education loan certifica-
tion. If a loan is not subsidized, guaran-
teed, financed, or is not otherwise treated
as a student loan under a program of the
Federal, state, or local government or an
eligible educational institution, a payee
must request a certification from the
payor that the loan will be used solely to
pay for qualified higher education
expenses. A payee may use Form W–9S,
Request for Student’s or Borrower’s
Social Security Number and Certification,
to obtain the certification. A payee may
establish an electronic system for payors
to submit Forms W–9S electronically as
described in applicable forms and instruc-
tions. A payee may also develop a sepa-
rate form to obtain the payor certification
or may incorporate the certification into
other forms customarily used by the
payee, such as loan applications, provided
May 28, 20029862002–21 I.R.B.

the certification is clearly set forth. If the
certification is not received, the loan is
not a qualified education loan for pur-
poses of section 6050S and this section.
(3)Payments of interest received or
collected by one or more persons—(i)In
general. Except as otherwise provided in
paragraph (e)(3)(ii) of this section, if a
person collects or receives payments of
interest on a qualified education loan on
behalf of another person (e.g., a lender),
the person collecting or receiving the
interest must satisfy the information
reporting requirements of this section. In
this case, the reporting requirements do
not apply to the transfer of interest to the
other person.
(ii)Exception. If the person collecting
or receiving payments of interest on a
qualified education loan on behalf of
another person (e.g., a lender) does not
possess the information needed to comply
with the information reporting require-
ments of this section, the other person
must satisfy the information reporting
requirements of this section.
(4)Reporting by foreign persons.A
payee that is not a United States person
(as defined in section 7701(a)(30)) must
report payments of interest it receives on
a qualified education loan only if it
receives the payment—
(i) At a location in the United States;
or
(ii) At a location outside the United
States if the payee is—
(A) A controlled foreign corporation
(within the meaning of section 957(a)); or
(B) A person 50 percent or more of the
gross income of which, from all sources
for the three-year period ending with the
close of the taxable year preceding the
taxable year in which interest payments
were received (or for such part of the
period as the person was in existence),
was effectively connected with the con-
duct of a trade or business within the
United States.
(5)Governmental units. A governmen-
tal unit, or an agency or instrumentality
of a governmental unit, that receives from
any payor interest payments that aggre-
gate $600 or more for any calendar year
on one or more qualified education loans
is a payee, without regard to the require-
ment of paragraph (a) of this section that
the interest be received in the course of a
trade or business.
(f)Penalty provisions—(1)Failure to
file correct returns. The section 6721 pen-
alty may apply to a payee that fails to file
information returns required by section
6050S and this section on or before the
required filing date; that fails to include
all of the required information on the
return; or that includes incorrect informa-
tion on the return. See section 6721, and
the regulations thereunder, for rules relat-
ing to penalties for failure to file correct
returns. See section 6724, and the regula-
tions thereunder, for rules relating to
waivers of penalties for certain failures
due to reasonable cause.
(2)Failure to furnish correct informa-
tion statements. The section 6722 penalty
may apply to a payee that fails to furnish
statements required by section 6050S and
this section on or before the prescribed
date; that fails to include all the required
information on the statement; or that
includes incorrect information on the
statement. See section 6722, and the regu-
lations thereunder, for rules relating to
penalties for failure to furnish correct
statements. See section 6724, and the
regulations thereunder, for rules relating
to waivers of penalties for certain failures
due to reasonable cause.
(3)Waiver of penalties for failures to
include a correct TIN—(i)In general.In
the case of a failure to include a correct
TIN on Form 1098–E or a related infor-
mation statement, penalties may be
waived if the failure is due to reasonable
cause. Reasonable cause may be estab-
lished if the failure arose from events
beyond the payee’s control, such as a fail-
ure of the payor to furnish a correct TIN.
However, the payee must establish that it
acted in a responsible manner both before
and after the failure.
(ii)Acting in a responsible manner.A
payee must request the TIN of each payor
if it does not already have a record of the
payor’s correct TIN. If the payee does not
have a record of the payor’s correct TIN,
then it must solicit the TIN in the manner
described in paragraph (f)(3)(iii) of this
section on or before December 31 of each
year during which it receives payments of
interest. If a payor refuses to provide his
or her TIN upon request, the payee must
file the return and furnish the statement
required by this section without the pay-
or’s TIN, but with all other required
information. The specific solicitation
requirements of paragraph (f)(3)(iii) of
this section apply in lieu of the solicita-
tion requirements of§301.6724–1(e) and
(f) of this chapter for the purpose of
determining whether a payee acted in a
responsible manner in attempting to
obtain a correct TIN. A payee that com-
plies with the requirements of this para-
graph (f)(3) will be considered to have
acted in a responsible manner within the
meaning of§301.6724–1(d) of this chap-
ter with respect to any failure to include
the correct TIN of a payor on a return or
statement required by section 6050S and
this section.
(iii)Manner of soliciting TIN. A payee
must request the payor’s TIN in writing
and must clearly notify the payor that the
law requires the payor to furnish a TIN so
that it may be included on an information
return filed by the payee. A request for a
TIN made on Form W–9S,Request for
Student’s or Borrower’s Social Security
Number and Certification, satisfies the
requirements of this paragraph (f)(3)(iii).
A payee may establish a system for pay-
ors to submit Forms W–9S electronically
as described in applicable forms and
instructions. A payee may also develop a
separate form to request the payor’s TIN
or incorporate the request into other
forms customarily used by the payee,
such as loan applications.
(4)Failure to furnish TIN. The section
6723 penalty may apply to any payor who
is required (but fails) to furnish his or her
TIN to a payee. See section 6723, and the
regulations thereunder, for rules relating
to the penalty for failure to furnish a TIN.
(g)Effective date. The rules in this
section apply to information returns
required to be filed, and information
statements required to be furnished, after
December 31, 2003.
PART301—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 301.6011–2 is amended
by:
1. Revising the first sentence of para-
graph (b)(1).
2. Revising paragraph (g)(1).
3. Adding paragraph (g)(3).
The revisions and additions read as
follows:
2002–21 I.R.B.987May 28, 2002

§301.6011–2 Required use of magnetic
media.
*****
(b)Returns required on magnetic
media. (1) If the use of Forms 1042–S,
1098, 1098–E, 1099 series, 5498, 8027,
W–2G, or other form treated as a form
specified in this paragraph (b)(1) is
required by the applicable regulations or
revenue procedures for the purpose of
making an information return, the infor-
mation required by the form must be sub-
mitted on magnetic media, except as oth-
erwise provided in paragraph (c) of this
section.***
*****
(g)Effective dates. (1) Except as oth-
erwise provided in paragraph (g)(2) or (3)
of this section, this section applies to
returns required to be filed after Decem-
ber 31, 1986.
*****
(3) This section applies to returns on
Form 1098–E required to be filed after
December 31, 2003.
PART 602—OMB CONTROL NUM-
BERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 6. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par.7.In§602.101, paragraph (b) is
amended by removing the entry for
“1.6050S–1T”, and adding two new
entries in numerical order to the table to
read as follows:
§602.101 OMB Control numbers.
*****
(b)***
CFR part or section where
identified and described
Current OMB
control No.
*****
1.6050S–3.................................................................................................................................................................1545–1678
1.6050S–4T ..............................................................................................................................................................1545–1729
*****
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved April 8, 2002.
Mark Weinberger,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on April
26, 2002, 8:45 a.m., and published in the issue of
the Federal Register for April 29, 2002, 67 F.R.
20901)
May 28, 20029882002–21 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Weighted Average Interest
Rate Update
Notice 2002–32
Sections412(b)(5)(B)and412(l)
(7)(C)(i) of the Internal Revenue Code
provide that the interest rates used to cal-
culate current liability for purposes of
determining the full funding limitation
under§412(c)(7) and the required contri-
bution under§412(l) 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
resulting permissible range of interest
rates used to calculate current liability for
the purpose of the full funding limitation
of§412(c)(7) of the Code.
Section 417(e)(3)(A)(ii)(II) of the
Code defines the applicable interest rate,
which must be used for purposes of deter-
mining the minimum present value of a
participant’s benefit under§417(e)(1)
and (2), as the annual rate of interest on
30-year Treasury securities for the month
before the date of distribution or such
other time as the Secretary may by regu-
lations prescribe. Section 1.417(e)–
1(d)(3) of the Income Tax Regulations
provides that the applicable interest rate
for a 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
published in the Internal Revenue Bulle-
tin.
The rate of interest on 30-year Trea-
sury Securities for April 2002 is 5.68 per-
cent. Pursuant to Notice 2002–26
(2002–15 I.R.B. 743), the Service has
determined this rate as the monthly aver-
age of the daily determination of yield on
the 30-year Treasury bond maturing in
February 2031.
Section 405 of the Job Creation and
Worker Assistance Act of 2002 amended
§412(l)(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.
MonthYear
Weighted
Average
90% to 110%
Permissible
Range
90% to 120%
Permissible
Range
May20025.695.12 to 6.255.12 to 6.82
Drafting Information
The principal author of this notice is
Todd Newman of the Employee Plans,
Tax Exempt and Government Entities
Division. For further information regard-
ing this notice, please contact the
Employee Plans’taxpayer assistance tele-
phone 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. Newman may be
reached at 1–202–283–9888 (not a toll-
free number).
Suspension of Requirement to
File Form 8390(Information
Return for Determination of
Life Insurance Company
Earnings Rate Under Section
809)
Notice 2002–33
Section 809 of the Internal Revenue
Code reduces the policyholder dividends
that a mutual life insurance company is
permitted to deduct under section 808.
Each year, the Internal Revenue Service
publishes the differential earnings rate
(DER) and the recomputed differential
earnings rate (RDER) to be used in com-
puting the amount of the reduction. The
DER and RDER are determined by the
Service on the basis of information
reported by mutual life insurance compa-
nies and the 50 largest stock life insur-
ance companies (as determined by the
Service) on Form 8390,Information
Return for Determination of Life Insur-
ance Company Earnings Rate Under Sec-
tion 809.
The Job Creation and Worker Assis-
tance Act of 2002, Pub. L. No. 107–147,
§611, amended section 809 of the Code
by adding new paragraph (j). As
amended, section 809(j) provides that the
DER shall be treated as zero for purposes
of computing both the differential earn-
ings amount and the recomputed differen-
tial earnings amount for a mutual life
insurance company’s taxable years begin-
ning in 2001, 2002, or 2003.
As a result of this amendment to sec-
tion 809, the Service will not be comput-
ing the DER and RDER for 2001, 2002,
or 2003.
*
The determination of the 50
largest stock companies, however, will be
made for those years.
The suspension of section 809 by sec-
tion 809(j) expires in 2004. Accordingly,
life insurance companies will not be
required to file Form 8390 in either 2002
or 2003.
*
Notice 2002–19 (2002–10 I.R.B. 619) provided that the tentative DER for 2001 and RDER for 2000 are zero.
2002–21 I.R.B.989May 28, 2002

The Service will be required to com-
pute a 2004 DER and RDER using prior
year income information from both stock
and mutual life insurance companies.
Therefore, it is expected that the require-
ment that companies file Form 8390 will
be reinstated in 2004. Mutual life insur-
ance companies will be required to file a
Form 8390 with respect to calendar years
2002 and 2003. Any stock life insurance
company that is determined to be one of
the 50 largest stock life insurance compa-
nies during 2001, 2002, or 2003 will be
required to file a Form 8390 with respect
to that year. All life insurance companies
that may be required to report 2001,
2002, or 2003 information are obligated
to retain the records necessary to report
the appropriate information in 2004.
Life insurance companies that will be
required to file a Form 8390 with respect
to calendar years 2001 or 2002 will be
required to file such form no later than
July 1, 2004. Life insurance companies
that will be required to file a Form 8390
with respect to calendar year 2003 will be
required to file such form no later than
October 1, 2004.
When filing Form 1120–L(U.S. Life
Insurance Company Income Tax Return)
for 2001, mutual life insurance companies
should treat the DER as zero for purposes
of computing the differential earnings
amount in Schedule C (Differential Earn-
ings Amount). Appropriate changes will
be made to Form 1120–L for 2002.
For 2004 and years thereafter, the Ser-
vice will issue additional guidance
regarding the filing of Form 8390 by life
insurance companies as needed.
Comments are requested on the imple-
mentation of section 809(j), the require-
ment that information with respect to
2001 and 2002 and information with
respect to 2003 be filed separately, and
any required changes to Form 1120–L
(such as temporarily eliminating Schedule
C). Comments should be sent to CC:
ITA:RU (Notice 2002–33), room 5226,
Internal Revenue Service, POB 7604,
Ben Franklin Station, Washington, DC
20044. Comments may be hand delivered
between the hours of 8 a.m. and 5 p.m.
to: CC:ITA:RU (Notice 2002–33), Couri-
er’s Desk, Internal Revenue Service,1111
Constitution Avenue, NW, Washington,
DC. In the alternative, e-mail comments
toNotice.Comments@irscounsel.treas.gov.
DRAFTING INFORMATION
The principal author of this notice is
Katherine A. Hossofsky of the Office of
the Associate Chief Counsel (Financial
Institutions and Products). For further
information regarding this notice, contact
Ms. Hossofsky at 202–622–3477 (not a
toll-free call).
IRS Announces Voluntary
Compliance Program to
Promote Disclosure by
Political Organizations
Notice 2002–34
The Internal Revenue Service (IRS)
announces a voluntary compliance pro-
gram to promote disclosure by political
organizations described in§527 of the
Internal Revenue Code (political organi-
zations) that file certain forms byJuly
15, 2002.
BACKGROUND
On July 1, 2000, Pub. L. 106–230 was
enacted, imposing new reporting and dis-
closure requirements on political organi-
zations in connection with their tax-
exempt status. The IRS is aware that there
is a great deal of confusion concerning
the new filing requirements. Because of
this confusion, many political organiza-
tions have either failed to file or need to
correct previously filed forms. The IRS
believes that implementing this voluntary
compliance program for these political
organizations is most likely to achieve the
congressional goal of maximum disclo-
sure and is in the best interest of sound
tax administration.
FILING REQUIREMENTS
The law generally requires a tax-
exempt political organization to file:
•an initial notice of status on Form
8871,
•periodic reports of contributions and
expenditures on Form 8872,
•annual information returns on Form
990 or Form 990–EZ, and
•annual income tax returns on Form
1120–POL.
See Rev. Rul. 2000–49 (2000–2 C.B.
430), and the attachment below for more
information on the basic filing require-
ments. Forms may be downloaded from
the IRS Web site atwww.irs.gov. The IRS
Web site also describes filing require-
ments atwww.irs.gov/polorgs. To obtain
assistance from the IRS, please call877–
829–5500(a toll-free call).
VOLUNTARY COMPLIANCE
PROGRAM
The IRS will not assert any tax, pen-
alty or interest that arises solely because a
political organization failed to file a form
or filed an incorrect form,ifthe form is
filed or corrected byJuly 15, 2002. This
voluntary compliance program applies
with respect to the following forms:
•Any Form 8871,Political Organization
Notice of 527 Status, due on or before
July 15, 2002,
•Any Form 8872,Report of Contribu-
tions and Expenditures, due on or
before July 15, 2002,
•Any Form 1120–POL,U.S. Income Tax
Return for Certain Political Organiza-
tions, due on or before July 15, 2002,
including any applicable extensions,
•Any Form 990,Return of Organization
Exempt from Income Tax, or Form
990–EZ,Short Form Return of Organi-
zation Exempt from Income Tax, due on
or before July 15, 2002, including any
applicable extensions.
If a political organization does not
completely report its contributions and
expenditures on all applicable Forms
8872 filed by July 15, 2002, it remains
liablefortheamountdueunder
§527(j)(1) on the unreported amounts.
For any form described above that is filed
or correctedafterJuly 15, 2002, any
applicable taxes, penalties and interest
will be due from the original due date. In
addition, this voluntary compliance pro-
gram does not apply to any Form 1120–
POL required to be filed under rules in
effect before July 1, 2000, so a political
organization remains liable for the tax on
itsinvestmentincomedueunder
§527(b).
FILING INFORMATION
Any paper forms and correspondence
filed in accordance with this notice
May 28, 20029902002–21 I.R.B.

should contain the following information
at the top of the form and on the enve-
lope.
This is filed in accordance with Notice
2002–34.
Electronic versions of Forms 8871 and
8872 are not required to include this
information.
DRAFTING INFORMATION
The principal author of this notice is
Judith E. Kindell of the Exempt Organi-
zations Rulings and Agreements Division.
For further information regarding this
notice, please call TE/GE Customer Ser-
vice at 877–829–5500 (a toll-free call).
ATTACHMENT—POLITICAL
ORGANIZATION FILING
REQUIREMENTS
Tax-exempt political organizations, as
defined in§527 of the Internal Revenue
Code (political organizations), must file
some or all of four forms as a condition
of tax-exempt status. This attachment dis-
cusses the filing requirements for political
organizations without regard to the volun-
tary compliance program announced in
this notice.
Political organizations include parties,
committees, associations, funds or other
entities organized and operated“primarily
for the purpose of directly or indirectly
accepting contributions or making expen-
ditures.”Political organizations accept
contributions and make expenditures for
the purpose of influencing the“selection,
nomination, election, or appointment of
any individual to Federal, State, or local
public office or office in a political orga-
nization, or the election of Presidential
electors.”Political organizations include
political party committees, Federal, State
and local candidate committees and other
political committees such as political
action committees (PACs).
Who Has to File
The filing requirements in the chart
below apply to those political organiza-
tions that:
•wish to be exempt from federal income
tax provisions, and
•receive or expect to receive $25,000 or
more in gross receipts in any taxable
year
If You Are AYou File
Federal candidate committee, political party committee, or PAC
required to report to the Federal Election Commission (FEC)
➢Form 1120–POL; and
➢Form 990 or Form 990–EZ
State or local candidate committee or state or local committee of a
political party
➢Form 8871;
➢Form 1120–POL; and
➢Form 990 or Form 990–EZ
Any other political organization, including state or local PACs and fed-
eral political organizations that are not required to report to the FEC
➢Form 8871;
➢Form 8872;
➢Form 1120–POL; and
➢Form 990 or Form 990–EZ
NOTE: You still file a Form 1120–POL if
you are:
•A political organization that does not
seek tax-exemption, or
•A tax-exempt political organization that
does not have gross receipts of at least
$25,000, but does receive in excess of
$100 in taxable income in any taxable
year.
Form Filing Requirements
1. Form 8871—Notice of 527 Status
To be tax-exempt, a political organiza-
tion that expects to receive $25,000 or
more in gross receipts in any taxable year
must file Form 8871 with the IRS, unless
it is required to report as a political com-
mittee to the FEC. Form 8871,Political
Organization Notice of 527 Status, must
be filed both electronically and in writing,
within 24 hours of the political organiza-
tion’s establishment. Until the political
organization files the form, its income
(including contributions) is subject to
taxation and is reported on Form 1120–
POL.
2. Form 8872—Report of Contri-
butions and Expenditures
Political organizations file Form 8872,
Political Organization Report of Contri-
butions and Expenditures, to disclose
information concerning:
•persons receiving expenditures that
aggregate $500 or more per person, per
calendar year; and
•persons making contributions that
aggregate $200 or more per person, per
calendar year.
A political organization that does not
disclose this information must pay an
amount equal to the highest corporate tax
rate (35 percent) multiplied by the
amount of contributions and expenditures
not disclosed and report this on the Form
1120–POL. If a political organization
does not file Form 8871 and is subject to
tax on its income, it is not required to file
Form 8872.
For filing dates, see Q&A–28 through
Q&A–33 of Rev. Rul. 2000–49.
3. Form 1120–POL—U.S. Income
Tax Return for Certain Political
Organizations
Form 1120–POL,U.S. Income Tax
Return for Certain Political Organiza-
tions, is due by the 15th day of the 3rd
month after the end of the organization’s
taxable year. Political organizations may
request a six-month extension of the fil-
ing deadline by filing Form 7004,Appli-
cation for Automatic Extension of Time to
File Corporate Income Tax Return. This
extension must be filed by the due date of
2002–21 I.R.B.991May 28, 2002

Form 1120–POL. There is a penalty for
failure to file Form 1120–POL.
4. Form 990 or 990–EZ—Return of
Organization Exempt from Income
Ta x
Exempt political organizations with
gross receipts of less than $100,000 and
assets of less than $250,000 at the end of
the year may file a Form 990–EZ,Short
Form Return of Organization Exempt
From Income Tax. All other exempt
political organizations should file a Form
990,Return of Organization Exempt
From Income Tax.
Forms 990 or 990–EZ are due on the
15th day of the 5th month after the end of
the organization’s taxable year. There is a
penalty for failure to file this return.
Organizations may request a three-
month extension, without showing cause,
by filing Form 8868,Application for
Extension of Time to File an Exempt
Organization Return, by the due date. A
second three-month extension, with
cause, may also be requested through
Form 8868.
FormWhen filedExceptions to filing requirement
8871Within 24 hours of establishment➢Political committee required to report to the FEC;
➢Organization that reasonably expects annual gross receipts to
always be less than $25,000
8872A to rganization’s option,
quarterly/semiannuallyor
monthly, on same basis for entire
calendar year (see form instruc-
tions for detailed information)
➢Political committees required to report to the FEC;
➢State and local committees of political parties;
➢Campaign committees of state and local candidates;
➢Organizations that reasonably expect gross receipts to always be
less than $25,000
1120–POLDue the 15th day of the 3rd
month after the close of the tax-
able year
➢Political organizations whose annual gross receipts are less than
$25,000, and who have taxable income less than $100
990 or 990–EZDue the 15th day of the 5th
month after the close of the tax-
able year
➢Political organizations whose annual gross receipts are less than
$25,000
Tax Avoidance Using Notional
Principal Contracts
Notice 2002–35
The Internal Revenue Service and the
Treasury Department have become aware
of a type of transaction, described below,
that is used by taxpayers to generate tax
losses. This Notice alerts taxpayers and
their representatives that the tax benefits
purportedly generated by these transac-
tions are not allowable for federal income
tax purposes. This Notice also alerts tax-
payers, their representatives, and promot-
ers of these transactions of certain respon-
sibilities that may arise from participating
in these transactions.
FACTS
In general, the transaction involves the
use of a notional principal contract
(“NPC”) to claim current deductions for
periodic payments made by a taxpayer
(“T”) while disregarding the accrual of a
right to receive offsetting payments in the
future. The NPC has a term of more than
one year. Under the NPC,Tis required to
make periodic payments toCPat regular
intervals of one year or less based on a
fixed or floating rate index. In return,CP
is required to make a single payment at
the end of the term of the NPC that con-
sists of a noncontingent component and a
contingent component. The noncontingent
component, which is relatively large in
comparison to the contingent component,
may be based upon a fixed or floating
interest rate. The contingent component
may reflect changes in the value of a
stock index or currency.
Tmay fund its obligation to make
periodic payments in whole or in part by
borrowing funds from a lender, who may
beCP. In addition,Tmay engage in other
transactions, such as interest rate collars,
for purposes of limiting risk with respect
to the NPC transaction.Tmay engage in
short-term trading activity in securities
with a view to establishing a trade or
business.Tmay also engage in the trans-
action through a partnership, in which
case instead ofT, the partnership may
engage in some or all of the activities
described above.Twill likely enter into
an agreement withCPto terminate the
NPC prior to the scheduled payment date
ofCP’s payment.
Tdeducts the ratable daily portion of
each periodic payment for the taxable
year to which that portion relates. How-
ever,Tdoes not accrue income with
respect to the nonperiodic payment until
the year the payment is received.T
intends to report as capital any gain it
realizes upon the termination of the NPC.
ANALYSIS
The requirement of§1.446–3(f)(2)(i)
that a nonperiodic payment must be rec-
ognized over the term of a NPC in a man-
ner that reflects the economic substance
of the contract must be applied separately
to the noncontingent component of the
contract, whether that component is based
on a fixed or a floating interest rate.
For a discussion of the proper treat-
ment of the periodic and nonperiodic pay-
ments made pursuant to the interest rate
swap if the noncontingent component is
based on a fixed interest rate,seeRev.
Rul. 2002–30 (2002–21 I.R.B. 971), May
28, 2002 (holding that the nonperiodic
payment must be accrued ratably over the
May 28, 20029922002–21 I.R.B.

term of the NPC). In addition, depending
on the facts of the particular case, the Ser-
vice may challenge the purported tax
results of these transactions on other
grounds, including by: (i) recharacterizing
one or more of the transactions under
§§1.446–3(g)(2) or 1.446–3(i); (ii) deter-
mining that the swap expense, if any, was
not incurred in the course of a trade or
business and was therefore subject to the
2-percent floor limitation in section 67 of
the Internal Revenue Code; (iii) disre-
garding the combination of the loans and
the periodic payments as circular flows of
cash; or (iv) applying other variations of
the doctrine of substance-over-form.
The Service may impose penalties on
participants in these transactions or, as
applicable, on persons who participate in
the promotion or reporting of these trans-
actions, including the accuracy-related
penalty under section 6662, the return
preparer penalty under section 6694, the
promoter penalty under section 6700, and
the aiding and abetting penalty under sec-
tion 6701.
Transactions that are the same as, or
substantially similar to, the transaction
described in this Notice 2002–35 are
identified as“listed transactions”for pur-
poses of§1.6011–4T(b)(2) of the Tempo-
raryIncomeTaxRegulationsand
§301.6111–2T(b)(2) of the Temporary
Procedure and Administrative Regula-
tions.See also§301.6112–1T, A–4. It
should be noted that, independent of their
classification as“listed transactions”for
purposes of§§1.6011–4T(b)(2) and
301.6111–2T(b)(2), such transactions
may already be subject to the tax shelter
registration and list maintenance require-
ments of§§6111 and 6112 under the
regulations issued in February 2000
(§§301.6111–2T and 301.6112–1T, A–4),
as well as the regulations issued in 1984
and amended in 1986 (§§301.6111–1T
and 301.6112–1T, A–3). Persons required
to register these tax shelters who have
failed to register the shelters may be sub-
ject to the penalty under section 6707(a),
and to the penalty under section 6708(a)
if the requirements of section 6112 are
not satisfied.
The Service and the Treasury recog-
nize that some taxpayers may have filed
tax returns taking the position that they
were entitled to the purported tax benefits
of the type of transaction described in this
Notice. These taxpayers are advised to
take prompt action to file amended
returns.
The principal author of this Notice is
Elizabeth Handler of the Office of Asso-
ciate Chief Counsel (Financial Institu-
tions and Products). For further informa-
tion regarding this Notice, contact Ms.
Handler at (202) 622–3930 (not a toll-free
call).
26 CFR 601.204: Changes in accounting periods
and methods of accounting.
(Also Part I,§§61, 446, 451, 481, 1012; 1.61–1,
1.446–1, 1.451–1, 1.481–1, 1.1012–1.)
Rev. Proc. 2002–36
SECTION 1. PURPOSE
This revenue procedure provides tax-
payers that purchase vehicles subject to
leases and assume the associated leases
from motor vehicle dealers with a safe
harbor method of accounting for capital
cost reduction payments (“CCR pay-
ments”) made by vehicle lessees. This
revenue procedure also provides a proce-
dure for taxpayers to obtain automatic
consent of the Commissioner to change to
the safe harbor method of accounting.
SECTION 2. BACKGROUND
.01 Section 61(a) of the Internal Rev-
enue Code provides that, except as other-
wise provided, gross income means all
income from whatever source derived.
.02 Section 451(a) and§1.451–1(a) of
the Income Tax Regulations provide that
the amount of any item of gross income
should be included in a taxpayer’s gross
income for the taxable year in which
actually or constructively received by the
taxpayer, unless, under the taxpayer’s
method of accounting, such amount is
properly includible for a different year.
.03 Section 1012 provides that the
basis of property is the cost of the prop-
erty. In general, section 1.1012–1(a) pro-
vides that the cost is the amount paid for
the property in cash or other property.
.04 Under§446(e) and§1.446–
1(e)(2)(i), a taxpayer generally must
secure the consent of the Commissioner
before changing a method of accounting
for federal income tax purposes. Section
1.446–1(e)(3)(ii) authorizes the Commis-
sioner to prescribe administrative proce-
dures setting forth the terms and condi-
tions necessary to obtain consent to
change a method of accounting.
.05 The Treasury Department and the
Internal Revenue Service are aware that
the proper tax treatment of CCR pay-
ments by purchasers of leased vehicles
has become a source of significant con-
troversy. For reasons of administrative
convenience and to avoid further contro-
versy in this area, Treasury and the Ser-
vice have determined that it is appropriate
to provide purchasers with a safe harbor
method of accounting for CCR payments,
under which a CCR payment is excluded
from the purchaser’s basis in the pur-
chased vehicle (and is excluded from the
purchaser’s gross income). Treasury and
the Service believe the scope of the safe
harbor method provided in this revenue
procedure is appropriate given the current
vehicle lease market and lease financing
market. However, Treasury and the Ser-
vice may modify the scope of this safe
harbor method as necessary to respond to
changes in leasing market conditions.
SECTION 3. SCOPE
This revenue procedure applies to tax-
payers who purchase motor vehicles sub-
ject to leases in connection with which a
lessee has made a CCR payment, as
defined in section 4.01 of this revenue
procedure, to the dealer/lessor of the
vehicle at the inception of the lease.
SECTION 4. DEFINITIONS
.01CCR Payment. A CCR payment is
any payment made at the inception of a
motor vehicle lease by the lessee to the
dealer from which the vehicle is leased
that has the effect of reducing the total
amount of rent the lessee will pay after
inception of the lease. A CCR payment
may consist of a cash down payment, the
trade-in value of a lessee’s used vehicle, a
rebate or incentive supplied by the manu-
facturer to the lessee, credits earned under
a credit card reward program, or the first
or last monthly rental payment. A CCR
payment does not include refundable
security deposits; extended service plan
fees; insurance premiums; title, registra-
tion, or license fees; sales, lease, excise,
use, orad valoremtaxes paid in advance
2002–21 I.R.B.993May 28, 2002

or collected by the dealer; or administra-
tive fees; made by a lessee in connection
with a motor vehicle lease.
.02Taxpayer.A“taxpayer”for pur-
poses of this revenue procedure is a pur-
chaser of a motor vehicle that is subject
to a lease in connection with which a les-
see has made a CCR payment to the
dealer from which the lessee originally
leased the vehicle.
SECTION 5. CCR METHOD
Under the CCR method, the amount of
a CCR payment is not includible in the
taxpayer’s gross income and may not be
included in the taxpayer’s basis in the
purchased vehicle.
SECTION 6. AUDIT PROTECTION
FOR TAXPAYERS CURRENTLY
USING THE CCR METHOD
A taxpayer within the scope of this
revenue procedure that is using the CCR
method provided in section 5 of this rev-
enue procedure on May 3, 2002, may
continue to use this safe harbor method
for taxable years ending on or after May
3, 2002, without filing a Form 3115,
Application to Change a Method of
Accounting. Such taxpayer’s method of
excluding CCR payments from both its
gross income and its basis in the pur-
chased vehicle will not be raised as an
issue in a taxable year that ends before
May 3, 2002. Moreover, if such taxpay-
er’s method of excluding CCR payments
from both its gross income and its basis
in the purchased vehicle is already an
issue under consideration (within the
meaning of section 3.09 of Rev. Proc.
2002–9 (2002–3 I.R.B. 327)) in a taxable
year that ends before May 3, 2002, the
issue will not be further pursued.
SECTION 7. CHANGE IN METHOD
OF ACCOUNTING
.01Limitations, Terms, and Condi-
tions. A change to the CCR method pro-
vided by this revenue procedure will be
treated as a change in method of account-
ing to which the provisions of§§446 and
481 and the regulations thereunder apply.
Therefore, a taxpayer within the scope of
this revenue procedure that does not use
the CCR method provided in section 5 of
this revenue procedure on May 3, 2002,
but wants to use this safe harbor method
for taxable years ending on or after
December 31, 2001, must file a Form
3115.
.02AutomaticChangetoCCR
Method. A taxpayer within the scope of
this revenue procedure that wants to
change to the CCR method provided by
section 5 of this revenue procedure must
follow the automatic change in method of
accounting provisions of Rev. Proc.
2002–9 (or its successor), as modified by
Rev. Proc. 2002–19 (2002–13 I.R.B. 696)
with the following modifications:
(1) The scope limitations in section
4.02 of Rev. Proc. 2002–9 do not apply to
a taxpayer that wants to make the change
for its first or second taxable year ending
on or after December 31, 2001;
(2) When filing the Form 3115, tax-
payers must complete all applicable parts
of the form and, in lieu of the label
required by section 6.02(4) of Rev. Proc.
2002–9, are instructed to write“Filed
under Rev. Proc. 2002–36”at the top of
the form.
.03Section 481(a) Adjustment. As pro-
vided in section 2 of Rev. Proc. 2002–19,
the period for negative§481(a) adjust-
ments is one year, and the period for posi-
tive§481(a) adjustments is four years.
.04Audit Protection. If a taxpayer
complies with the requirements of this
revenue procedure and changes its
method of accounting for CCR payments
to the CCR method provided in section 5
of this revenue procedure, the treatment
of CCR payments will not be raised as an
issue in any taxable year before the year
of change and, if the treatment of CCR
payments is already an issue under con-
sideration (within the meaning of section
3.09 of Rev. Proc. 2002–9) in a taxable
year before the year of change, that issue
will not be further pursued.
SECTION 8. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2002–9 is modified and
amplified to include this automatic
change in section 5A of the APPENDIX.
SECTION 9. EFFECTIVE DATE
This revenue procedure is effective for
taxable years ending on or after Decem-
ber 31, 2001.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Joy Ruff of the Office of
Associate Chief Counsel (Income Tax and
Accounting). For further information
regarding this revenue procedure, contact
Ms. Ruff at (202) 622–5020 (not a toll-
free call).
May 28, 20029942002–21 I.R.B.

Part IV. Items of General Interest
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Notice of Significant
Reduction in the Rate of
Future Benefit Accrual
REG–136193–01
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains
proposed regulations relating to the
requirements of section 4980F of the
Internal Revenue Code (Code) and sec-
tion 204(h) of the Employee Retirement
Income Security Act of 1974 (ERISA), as
amended, which apply to defined benefit
plans and to individual account plans that
are subject to the funding standards of
section 412 of the Code and section 302
of ERISA. These regulations provide
guidance on the requirements for plan
administrators to give notice of plan
amendments to adversely affected plan
participants and other parties when those
amendments provide for a significant
reduction in the rate of future benefit
accrual or the elimination or significant
reduction in an early retirement benefit or
retirement-type subsidy. These regula-
tions will affect retirement plan sponsors
and administrators, participants in and
beneficiaries of retirement plans, and
employee organizations representing
retirement plan participants. This docu-
ment also provides a notice of public
hearing on these proposed regulations.
DATES: Written or electronic comments
must be received by July 22, 2002.
Requests to speak (with outlines of oral
comments to be discussed) at the public
hearing scheduled for August 15, 2002, at
10 a.m., must be received by July 22,
2002.
ADDRESSES: Send submissions to:
CC:ITA:RU (REG–136193–01), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand
delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m.
to: CC:ITA:RU (REG–136193–01), Cou-
rier’s Desk, Internal Revenue Service,
1111Constitution Avenue, NW, Washing-
ton, DC. Alternatively, taxpayers may
submit comments electronically directly
to the IRS Internet site atwww.irs.gov/
regs. The public hearing will be held in
the IRS Auditorium, Seventh Floor, Inter-
nal Revenue Service,1111Constitution
Ave., NW, Washington, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations, Janet
A. Laufer at (202) 622–6090 or Diane S.
Bloom at (202) 283–9888; concerning
submissions, Donna Poindexter at (202)
622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in this notice of proposed rulemak-
ing have been submitted to the Office of
Management and Budget for review in
accordance with the Paperwork Reduc-
tion Act of 1995 (44 U.S.C. 3507(d)).
Comments on the collections of informa-
tion should be sent to theOffice of Man-
agement and Budget, Attn: Desk Officer
for the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington, DC 20503, with copies to
the Internal Revenue Service, Attn: IRS
ReportsClearanceOfficer,W:CAR:
MP:FP:S Washington, DC 20224. Com-
ments on the collection of information
should be received by June 24, 2002.
Comments are specifically requested con-
cerning:
Whether the proposed collections of
information are necessary for the proper
performance of the functions of theInter-
nal Revenue Service, including whether
the information will have practical utility;
The accuracy of the estimated burden
associated with the proposed collection of
information (see below);
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with the
proposed collections of information may
be minimized, including through the
application of automated collection tech-
niques or other forms of information tech-
nology; and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of service to provide informa-
tion.
The collections of information in this
proposed regulation are in§54.4980F–1.
Responses to this collection of informa-
tion are required in order to obtain a ben-
efit. Specifically, this information is
required for a taxpayer who wants to
amend a plan that is subject to the
requirements of section 204(h) or section
4980F to significantly reduce the rate of
future benefit accrual or significantly
reduce an early retirement benefit or
retirement-type subsidy. This information
will be used to notify participants, alter-
nate payees, and employee organizations
of the amendment.
Estimated total annual reporting bur-
den: 40,000 hours
The estimated annual burden per
respondent varies from one hour to 80
hours, depending on individual circum-
stances, with an estimated average of 10
hours.
Estimated number of respondents:
4,000
Estimated annual frequency of
responses: Once
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless it displays a valid control number
assigned by the Office of Management
and Budget.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial 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
Section 204(h) was added to ERISA
by section 11006(a) of the Single-
Employer Pension Plan Amendments Act
of 1986, Title XI of Public Law 99–272
2002–21 I.R.B.995May 28, 2002

(100 Stat. 237) and was amended by sec-
tion 1879(u)(1) of the Tax Reform Act of
1986, Public Law 99–514 (100 Stat.
2913) (TRA’86). As amended by TRA
’86, section 204(h) of ERISA (section
204(h)) required a plan administrator to
provide notice to participants and other
interested persons after the date of adop-
tion and at least 15 days before the effec-
tive date of a plan amendment providing
for a significant reduction in the rate of
future benefit accrual.
Pursuant to section 101(a) of Reorga-
nization Plan No. 4 of 1978, 29 U.S.C.
1001nt, the Secretary of the Treasury gen-
erally has authority to issue regulations
under parts 2 and 3 of subtitle B of title I
of ERISA, including section 204 of
ERISA. Under section 104 of Reorgani-
zation Plan No. 4, the Secretary of Labor
retains enforcement authority with respect
to parts 2 and 3 of subtitle B of title I of
ERISA, but, in exercising such authority,
is bound by the regulations issued by the
Secretary of the Treasury. On December
15, 1995, temporary regulations (T.D.
8631, 1996–1 C.B. 54), under section 411
of the Internal Revenue Code (Code), 26
U.S.C. 411, were published in theFed-
eral Register(60 FR 64320), along with
a notice of proposed rulemaking (EE–34–
95, 1996–1 C.B. 761) cross-referencing
the temporary regulations (60 FR 64401).
Those temporary regulations addressed
the notice requirements of section 204(h).
On December 14, 1998, final regulations
(T.D. 8795, 1999–1 C.B. 459) addressing
the notice requirements of section 204(h)
were published in theFederal Register.
See§1.411(d)–6.
Section 659 of the Economic Growth
and Tax Relief Reconciliation Act of
2001, Public Law 107–16 (115 Stat. 38)
(EGTRRA) added section 4980F of the
Code, which imposes an excise tax when
a plan administrator fails to provide
timely notice of plan amendments that
provide for a significant reduction in the
rate of future benefit accrual, and, for this
purpose, treats the elimination or reduc-
tion of an early retirement benefit or
retirement-type subsidy as a reduction in
the rate of future benefit accrual.
EGTRRA also amended section 204(h) to
treat the elimination or reduction of an
early retirement benefit or retirement-type
subsidy as a reduction in the rate of future
benefit accrual. The requirement in sec-
tion 204(h)(1) that notice be given after
the date of adoption and at least 15 days
in advance of the amendment’s effective
date was replaced by a requirement con-
tained in both section 4980F(e)(3) and
section 204(h)(3) that, except as provided
in regulations, the notice be provided
within a“reasonable time”before the
effective date of the amendment. The
notice requirements in section 4980F of
the Code are essentially identical to the
notice requirements in section 204(h), as
amended by EGTRRA. In addition, sec-
tion 204(h) has been amended by
EGTRRA to provide that, in the case of
an egregious failure to meet the notice
requirements, the provisions of the plan
are applied as if the amendment entitled
applicable individuals to the greater of the
benefits to which they would have been
entitled without regard to the amendment
or the benefits under the plan as
amended.
The Job Creation and Worker Assis-
tance Act of 2002, Public Law 107–147
(116 Stat. 21) included certain technical
corrections to section 659 of EGTRRA.
These proposed regulations, when
finalized, would replace the Treasury
regulations currently at§1.411(d)–6to
reflect the EGTRRA changes outlined
above. Since the notice requirements of
section 204(h) are now also required
under section 4980F of the Code, these
proposed regulations are issued under
section 4980F, but apply for purposes of
section 204(h), as well as for purposes of
section 4980F.
Explanation of Provisions
Statutory Requirements After EGTRRA
Section 4980F(e) of the Code and sec-
tion 204(h) of ERISA require notice to be
provided when a defined benefit plan or a
money purchase pension or other indi-
vidual account plan that is subject to the
funding standards of section 412 of the
Code is amended to significantly reduce
the rate of future benefit accrual. This
notice must be provided to participants
and alternate payees for whom the
amendment is reasonably expected to sig-
nificantly reduce the rate of future benefit
accrual, and to employee organizations
representing such participants. For pur-
poses of these rules, an amendment that
eliminates or reduces an early retirement
benefit or retirement-type subsidy is
treated as an amendment that reduces the
rate of future benefit accrual. The notice
must contain sufficient information (as
determined in accordance with regula-
tions) to enable such individuals to under-
stand the effect of the amendment and,
except to the extent provided in regula-
tions, must be provided within a reason-
able time before the effective date of the
amendment. Additionally, section
4980F(e)(2) of the Code and section
204(h)(2) of ERISA authorize the Secre-
tary to provide special rules for plans
covering fewer than 100 participants and
for plans that offer participants the option
to choose between the new benefit for-
mula and the old benefit formula.
A plan amendment that is subject to
the notice requirements of section 4980F
of the Code and section 204(h) of ERISA
(section 204(h) amendment) may be sub-
ject to additional reporting and disclosure
requirements under title I of ERISA, such
as the requirement to provide a summary
of material modifications (SMM) describ-
ing the amendment. Notice under section
4980F of the Code and section 204(h) of
ERISA (referred to in the proposed regu-
lations as section 204(h) notice) must be
provided in accordance with the provi-
sions of these regulations even though
sections 102(a) and 104(b) of ERISA also
may require that an SMM describing the
plan amendment be furnished to partici-
pants covered under the plan and benefi-
ciaries receiving benefits under the plan.
The Department of Labor has advised the
IRS that, at least until the effective date
of final regulations under section 4980F
of the Code, a plan administrator that pro-
vides a section 204(h) notice to applicable
individuals in accordance with these pro-
posed regulations will be treated as hav-
ing furnished those individuals with an
SMM regarding the section 204(h)
amendment. The plan administrator is
required to satisfy any other requirements
regarding the furnishing of SMMs or
updated summary plan descriptions,
including, for example, satisfaction of the
requirement to furnish an SMM to any
other participants covered under the plan,
and to beneficiaries receiving benefits
under the plan, who are entitled to an
SMM regarding the amendment.
May 28, 20029962002–21 I.R.B.

Time for Providing Section 204(h) Notice
Under Proposed Regulations
The proposed regulations aim to strike
a balance between giving participants and
other affected parties section 204(h)
notice long enough in advance to enable
them to understand and consider the
information before the amendment goes
into effect, and allowing employers the
ability to effect changes to their plans for
business reasons (such as to facilitate
business reorganizations or to permit
small businesses the flexibility to reduce
costs promptly) within a reasonable time.
The Treasury Department and IRS have
concluded, based on the history of the
legislation, that the reason why the
15-day advance notice required under
section 204(h) as it existed prior to
EGTRRA was replaced by the“reason-
able time”standard is because the 15-day
standard was perceived as often being
insufficient. Accordingly, these proposed
regulations would provide that a reason-
able time generally means at least 45 days
before the effective date of the plan
amendment.
However, the proposed regulations
include certain special timing rules,
including rules that would allow section
204(h) notice to be provided as late as 15
days before the effective date of the
amendment in two types of cases. First,
the proposed regulations would generally
permit section 204(h) notice to be pro-
vided 15 days in advance for amendments
adopted in connection with business
mergers and acquisitions. Second, the
proposed regulations include a 15-day
advance notice requirement with respect
to amendments of small plans. Thus, the
15-day standard that was in section
204(h) before EGTRRA would generally
continue to apply for small plans and for
amendments adopted in connection with
business mergers and acquisitions for
which notice would have been required
under section 204(h) as in effect before
EGTRRA. The proposed regulations pro-
vide an additional special timing rule that
applies in the case of an amendment that
is adopted in connection with a business
merger or acquisition involving a plan-to-
plan transfer or merger and that affects
only an early retirement benefit or
retirement-type subsidy (but does not
reduce the rate of future benefit accrual).
In the case of such an amendment, the
notice must be provided no later than 30
days after the effective date of the amend-
ment.
In the case of a plan amendment which
offers participants the option to choose
between the new benefit formula and the
old benefit formula, the general timing
rules would apply, except that the pro-
posed regulations would allow certain
additional information to be provided at a
later date, as described inContent of Sec-
tion 204(h)Noticeof this preamble.
Content of Section 204(h) Notice
Section 4980F(e)(2) of the Code and
section 204(h)(2) of ERISA require sec-
tion 204(h) notice to be written in a man-
ner calculated to be understood by the
average plan participant and to provide
sufficient information (as determined in
accordance with regulations) to allow
applicable individuals to understand“the
effect of”the amendment.
The Conference report for EGTRRA
states that the changes to the section
204(h) of ERISA notice requirements
were expected to“provide for alternative
disclosures rather than a single disclosure
methodology that may not fit all situa-
tions,”and also notes“the need to con-
sider the complex actuarial calculations
and assumptions involved in providing
necessary disclosures.”H.R. Rep. 107–
84, at 266. In addition, particular concern
was expressed about the effects of con-
version of traditional defined benefit
plans to cash balance or hybrid formula
plans and the effects of“wear-away”pro-
visions under which participants earn no
additional benefits for a period of time
after conversion. H.R. Rep. 107–84, at
266.
The content requirements in these pro-
posed regulations take into account this
background and generally seek to ensure
that adversely affected participants
receive sufficient information to enable
them to understand the impact and mag-
nitude of the changes being made to their
pension plan, without imposing unduly
burdensome requirements on employers
and while permitting latitude to employ-
ers in diverse businesses with varying
employee demographics to determine
how to communicate plan changes in an
appropriately effective manner. Accord-
ingly, the proposed regulations provide
general standards for the content of a sec-
tion 204(h) notice, rather than containing
specific requirements for each type of
notice.
The proposed regulations require a
section 204(h) notice to include sufficient
information to allow applicable individu-
als to understand the effect of the plan
amendment, including the approximate
magnitude of the expected reduction. The
type and amount of information necessary
to satisfy this standard varies depending
on the nature of the change resulting from
the amendment. The information must be
written in a manner calculated to be
understood by the average plan partici-
pant. The notice must describe the
affected provisions prior to plan amend-
ment, describe these provisions as
amended, and state the effective date of
the amendment. This description of plan
provisions might be similar to the
description of a plan’s benefit accrual for-
mula in a summary plan description that
satisfiestherequirementsunder
§2520.102–3 of the Department of Labor
regulations. If the amendment applies by
its terms differently to various classes of
employees (such as where the amendment
applies differently depending on what
division an employee is in), the explana-
tion must include sufficient information
to allow an affected participant to under-
stand the general class or classes of par-
ticipants to whom the reduction applies.
Also, these proposed regulations clarify
that, in cases in which a plan amendment
affects different classes of applicable
individuals differently, the plan adminis-
trator may provide different section
204(h) notices. A section 204(h) notice
cannot include materially false or mis-
leading information (or omit information
so as to cause the information provided to
be misleading).
If a section 204(h) amendment reduces
an early retirement benefit or retirement-
type subsidy merely as a result of reduc-
ing the rate of future benefit accrual, the
section 204(h) notice need not contain a
separate description of that reduction in
the early retirement benefit or retirement-
type subsidy.
Additional information may be neces-
sary to make the approximate magnitude
of the reduction apparent. In cases in
which it is not reasonable to expect that
2002–21 I.R.B.997May 28, 2002

the approximate magnitude of the reduc-
tion will be reasonably apparent from a
narrative description, one or more illus-
trative examples are required to be
included in the notice. Thus, for example,
illustrative examples would be required
for a change from a traditional defined
benefit formula to a cash balance formula
or a change that results in a period of
time during which there are no accruals
with regard to normal retirement benefits
or an early retirement subsidy (a wear-
away period). However, examples are not
required to illustrate circumstances under
which a participant’s benefit may increase
as a result of the section 204(h) amend-
ment.
Where an amendment may result in
reductions that vary in their impact on
applicable individuals, the examples must
show the approximate range of the reduc-
tions. However, the range of reductions
need not include reductions that are likely
to occur in only ade minimisnumber of
cases if a narrative statement is included
to that effect (for example, such a narra-
tive might state that larger or smaller
reductions may occur in some other
cases) and examples are provided that
show the approximate range of the reduc-
tions in cases other than thisde minimis
number. For amendments for which the
maximum reduction occurs under identi-
fiable circumstances with proportionately
smaller reductions in other cases, the
range of reductions can be illustrated by
one example illustrating the maximum
reduction, with a statement that smaller
reductions also occur. Further, assuming
that the reduction varies from small to
large depending on service or other fac-
tors, as might occur for an amendment
that results in a wear-away, two illustra-
tive examples may be provided showing
the smallest likely reduction and the larg-
est likely reduction.
Examples are not required to be based
on any particular form of payment (such
as a life annuity or a single sum), but may
be based on whatever form appropriately
illustrates the reduction. The examples
may be based on any reasonable assump-
tions, such as assumptions relating to age,
service, and compensation (and salary
scale assumptions for amendments that
alter the compensation taken into account
under the plan, such as a change from a
final pay plan to a career average pay
plan), but the section 204(h) notice must
identify those assumptions. The proposed
regulations include special rules for deter-
mining whether an amendment is reason-
ably expected to result in a wear-away
period.
The proposed regulations include spe-
cial rules for any case in which an appli-
cable individual can choose between the
new formula and the old formula. Under
these rules, the individual must be pro-
vided sufficient information to enable the
individual to make an informed choice
between the new and old benefit formu-
las. The information to enable the indi-
vidual to make an informed choice is not
required to be provided at the same time
as section 204(h) notice is otherwise
required to be provided, as long as it is
provided within a period that is reason-
ably contemporaneous with the individu-
al’s choice and that allows sufficient
advance notice to enable the individual to
understand and consider the additional
information before making the choice.
A section 204(h) notice may include
more information than is required, but
cannot include any false or misleading
information and cannot include so much
additional information that the required
information fails to be provided in a man-
ner calculated to come to the attention of
applicable individuals. While a notice for
an amendment converting a traditional
final pay plan to a cash balance plan must
include an estimate of the future normal
retirement benefit of the participant in the
illustration even if that requires an esti-
mate of future wage increases, a section
204(h) notice could also include alterna-
tive estimates. For example, an alterna-
tive estimate could be based on an
assumption that there are no future wage
increases.
The proposed regulations include sev-
eral examples, including examples that
are intended to show the illustrations that
are required for a cash balance conversion
amendment that is based on a very sim-
plified form of conversion. For more
complex conversion amendments, it is
expected that more illustrations may be
appropriate. However, these regulations
do not require section 204(h) notice to
include different illustrative examples to
address the amount of the reduction for
every demographic variation (e.g., differ-
ences in compensation or years of ser-
vice).
Excise Tax Under Internal Revenue Code
Section 4980F(c)(1)
Section 4980F(c)(1) of the Code pro-
vides that no excise tax is imposed on a
failure for any period during which it is
established to the satisfaction of the Sec-
retary that the employer (or other person
responsible for the tax) did not know that
the failure existed and exercised reason-
able diligence to meet the notice require-
ments. The proposed regulations provide
that the requirements of section
4980F(c)(1) of the Code are satisfied if
and only if the person that would be
responsible for the tax exercised reason-
able diligence in attempting to deliver
timely section 204(h) notice to applicable
individuals (by the latest date permitted
under the regulations) and believed that
section 204(h) notice was actually and
timely delivered to each applicable indi-
vidual. An example of this illustrates that
section 4980F(c)(1) of the Code would
apply to a situation in which a plan
administrator relies on an overnight deliv-
ery service to send materials to the per-
sons who are expected to hand deliver
section 204(h) notice to participants, and
the overnight delivery service is late in
making that delivery.
ERISA Provisions Regarding Egregious
Failures
Section 204(h)(6)(A) of ERISA, as
amended by EGTRRA, provides that in
the case of an egregious failure to meet
the notice requirements, the provisions of
the plan are applied as if the plan amend-
ment entitled applicable individuals to the
greater of the benefits to which they
would have been entitled without regard
to the amendment or the benefits under
theplanasamended.Section
204(h)(6)(B) of ERISA provides that, for
this purpose, there is an egregious failure
to meet the section 204(h) notice require-
ments if such failure is within the control
of the plan sponsor and is an intentional
failure (including any failure to promptly
provide the required notice or information
after the plan administrator discovers an
May 28, 20029982002–21 I.R.B.

unintentional failure to meet notice
requirements) or a failure to provide most
of the individuals with most of the infor-
mation they are entitled to receive. The
proposed regulations provide that a fail-
ure is not egregious if the plan adminis-
trator reasonably determines, taking into
account the statute, administrative guid-
ance, and relevant facts and circum-
stances, that the reduction is not signifi-
cant. The proposed regulations clarify
that, in the case of a failure that is not
egregious, the failure will not preclude
the amendment from becoming effective.
However, where there is a failure,
whether or not egregious, recourse may
be available under ERISA section 502 to,
among other things, recover benefits due
under the plan, enforce rights under the
terms of the plan, clarify rights to future
benefits under the plan, obtain equitable
relief, or otherwise redress such violation.
This might occur, for example, if a par-
ticipant receives and thus uses materially
inadequate or misleading information in
making a choice between the new and the
old benefit formula.
Method of Delivery of Section 204(h)
Notice
As a general standard, the section
204(h) notice either must be provided
through a method that results in actual
receipt of the notice or the plan adminis-
trator must take appropriate and neces-
sary measures reasonably calculated to
ensure that the method for providing the
notice results in actual receipt. Therefore,
section 204(h) notice may not be pro-
vided by“posting.”
Section 4980F(g) of the Code and sec-
tion 204(h)(7) of ERISA, as amended by
EGTRRA, state that the Secretary of
Treasury may by regulation allow 204(h)
notice to be provided using new technolo-
gies. Because those provisions specifi-
cally relate to electronic delivery and
were enacted after enactment of the Elec-
tronic Signatures in Global and National
Commerce Act (114 Stat. 464) (2000)
(E-SIGN Act), the authority conferred by
those provisions on the Secretary to
decide whether to permit, and under what
conditions to permit, electronic delivery
of section 204(h) notice is not constrained
by the provisions of the E-SIGN Act.
Section 4980F(g) of the Code and sec-
tion 204(h)(7) of ERISA give the Secre-
tary of the Treasury authority to impose
appropriate criteria for the provision of
section 204(h) notice through electronic
methods to ensure that applicable indi-
viduals will receive section 204(h) notice
electronically and are able to access it
timely. As noted above, section 204(h)
notice either must be provided through a
method that results in actual receipt of the
notice or the plan administrator must take
appropriate and necessary measures rea-
sonably calculated to ensure that the
method for providing the notice results in
actual receipt. These proposed regulations
would apply the same standard to the
electronic delivery of section 204(h)
notice by requiring that the method used
result in actual receipt or that the plan
administrator take appropriate and neces-
sary measures to ensure that any provi-
sion of the notice in electronic format
results in actual receipt of the transmitted
information. Additionally, the plan
administrator must offer to provide each
applicable individual a paper version of
the notice free of charge. Of course, the
requirements of these regulations must
otherwise be satisfied when section
204(h) notice is provided in electronic
format. The proposed regulations include
a number of examples illustrating the
rules applicable to the electronic provi-
sion of a section 204(h) notice and also
include a safe harbor, which has condi-
tions similar to the consumer protection
provisions of section 101(c) of the
E-SIGN Act.
Under the proposed regulations, per-
mitted electronic means for furnishing
section 204(h) notice would include
e-mail, a site on the Internet, or other
electronic communications site, and a
DVD or CD that could generally be
accessed using a computer at an employ-
ee’s worksite. However, section 204(h)
notice information is not considered pro-
vided merely because it is available
through a computer kiosk, even when the
kiosk is at the individual’s workplace and
the individual is otherwise provided
notice of the availability of information at
the kiosk, because, like posting, providing
such information through a kiosk places a
burden on participants to seek out the
information. Nevertheless, information
made available through a kiosk is consid-
ered provided to those applicable indi-
viduals who actually access the informa-
tion through the kiosk.
Proposed Effective Date
These proposed regulations would
apply to amendments that go into effect
on or after the date that is 120 days after
publication of final regulations in the
Federal Register. The proposed regula-
tions also restate the general statutory
effective date and special effective date
rules that are in section 659(c) of
EGTRRA. Thus, the proposed regulations
include the transition rule of section
659(c)(2) of EGTRRA that provides that,
for amendments taking effect on or after
the date of enactment of EGTRRA (June
7, 2001) and prior to the effective date of
the final regulations, the notice require-
ments of section 4980F(e)(2) and (3) of
the Code, and of section 204(h) of ERISA
as amended by EGTRRA, are treated as
satisfied if the plan administrator makes a
reasonable, good faith effort to comply
with those requirements.
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 assess-
ment 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 regula-
tions.
It is hereby certified that the collection
of information in these proposed regula-
tions will not have a significant economic
impact on a substantial number of small
entities. This certification is based upon
the fact that small entities generally do
not have very complex benefit structures
in their plans, or many different classes of
participants who will be differently
affected by an amendment reducing the
rate of future benefit accrual. Small enti-
ties also have fewer employees, and so
those small entities that are required to
provide section 204(h) notice need to pro-
vide it to fewer individuals. Accordingly,
the time required for them to prepare and
provide section 204(h) notice will usually
be modest. Furthermore, because most
small entities will only be affected when
they amend the retirement plans they
sponsor to reduce or eliminate benefits,
2002–21 I.R.B.999May 28, 2002

and most small entities will not so amend
the retirement plans frequently, it is gen-
erally expected that most small entities
would be required to provide section
204(h) notice only once over the course
of several years. Therefore, a Regulatory
Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not
required. Pursuant to section 7805(f) of
the Code, this notice of proposed rule-
making will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment 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 comments (a
signed original and eight (8) copies) or
electronic comments that are submitted
timely to the IRS. The Treasury Depart-
ment and IRS specifically request com-
ments on the clarity of the proposed rules
and how they may be made easier to
understand. All comments will be avail-
able for public inspection and copying.
A public hearing has been scheduled
for August 15, 2002, beginning at 10
a.m., in the IRS Auditorium, Seventh
Floor, Internal Revenue Service,1111
Constitution Avenue, NW, Washington,
DC. Due to building security procedures,
visitors must enter at the main entrance,
located at1111Constitution Avenue, NW.
All visitors must present photo identifica-
tion to enter the building. Because of
access restrictions, visitors will not be
admitted beyond the immediate entrance
area more than 15 minutes before the
hearing starts. For information about hav-
ing your name placed on the building
access list to attend the hearing, see the
“For Further Information Contact”por-
tion of this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments must submit writ-
ten or electronic comments and an outline
of the topics to be discussed and time to
be devoted to each topic (preferably a
signed original and eight (8) copies) by
July 22, 2002. A period of 10 minutes
will be allotted to each person for making
comments. An agenda showing the sched-
uling of the speakers will be prepared
after the deadline for receiving outlines
has passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Janet A. Laufer, Office of Divi-
sion Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
However, other personnel from the IRS
and Treasury Department participated in
their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 54
are proposed to be 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***
§1.411(d)(6) [Removed]
Par. 2. Section 1.411(d)–6 is removed.
PA RT 5 4—PENSION EXCISE TAXES
Par. 3. The authority citation for part
54 is amended by adding the following
citation in numerical order to read as fol-
lows:
Authority: 26 U.S.C. 7805***
§54.4980F–1 is also issued under 26
U.S.C. 4980.* * *
Par. 4 Section 54.4980F–1 is added to
read as follows:
§54.4980F–1 Notice requirements for
certain pension plan amendments
significantly reducing benefit accruals.
(a)Table of contents. This paragraph
contains a list of the questions in§54.
4980F–1(b).
Q–1. What are the notice requirements of
section 4980F(e) of the Internal Revenue
Code and section 204(h) of ERISA?
Q–2. What are the differences between
section 4980F and section 204(h)?
Q–3. What is an“applicable pension
plan”to which section 4980F of the Inter-
nal Revenue Code and section 204(h)
apply?
Q–4. What is“section 204(h) notice”and
what is a“section 204(h) amendment”?
Q–5. For which amendments is section
204(h) notice required?
Q–6. What is an amendment that reduces
the rate of future benefit accrual or
reduces an early retirement benefit or
retirement-type subsidy for purposes of
determining whether section 204(h)
notice is required?
Q–7. What plan provisions are taken into
account in determining whether an
amendment is a section 204(h) amend-
ment?
Q–8. What is the basic principle used in
determining whether a reduction in the
rate of future benefit accrual or an early
retirement benefit or retirement-type sub-
sidy is significant for purposes of section
204(h)?
Q–9. When must section 204(h) notice be
provided?
Q–10. To whom must section 204(h)
notice be provided?
Q–11. What information is required to be
provided in a section 204(h) notice?
Q–12. What special rules apply if partici-
pants can choose between the old and
new benefit formulas?
Q–13. How may section 204(h) notice be
provided?
Q–14. What are the consequences if a
plan administrator fails to provide section
204(h) notice?
Q–15. What are some of the rules that
apply with respect to the excise tax under
section 4980F?
Q–16. How do section 4980F and section
204(h) apply when a business is sold?
Q–17. How are amendments to cease
accruals and terminate a plan treated
under section 4980F and section 204(h)?
Q–18. What is the effective date of sec-
tion 4980F of the Internal Revenue Code,
section 204(h) of ERISA, as amended by
EGTRRA, and these regulations?
(b)Questions and answers. The ques-
tions and answers are as follows:
Q–1. What are the notice requirements
of section 4980F(e) of the Internal Rev-
enue Code and section 204(h) of ERISA?
A–1. (a)Requirements of Internal Rev-
enue Code section 4980F(e) and ERISA
section 204(h). Section 4980F of the
Internal Revenue Code (section 4980F)
and section 204(h) of the Employee
Retirement Income Security Act of 1974,
as amended (ERISA), 29 U.S.C. 1054(h)
May 28, 200210002002–21 I.R.B.

(section 204(h)) each generally requires
notice of an amendment to an applicable
pension plan that either provides for a
significant reduction in the rate of future
benefit accrual or that eliminates or sig-
nificantly reduces an early retirement
benefit or retirement-type subsidy. The
notice is required to be provided to plan
participants or alternate payees who are
applicable individuals (as defined in
Q&A–10 of this section) and to certain
employee organizations. The plan admin-
istrator must generally provide the notice
before the effective date of the plan
amendment. Q&A–9 of this section sets
forth the time frames for providing
notice, Q&A–11 of this section sets forth
the content requirements for the notice,
and Q&A–12 of this section contains spe-
cial rules for cases in which participants
can choose between the old and new ben-
efit formulas.
(b)Other notice requirements. Other
provisions of law may require that certain
parties be notified of a plan amendment.
See, for example, sections 102 and 104 of
ERISA, and the regulations thereunder,
for requirements relating to summary
plan descriptions and summaries of mate-
rial modifications.
Q–2. What are the differences between
section 4980F and section 204(h)?
A–2. Section 4980F was added to the
Internal Revenue Code by the Economic
Growth and Tax Relief Reconciliation Act
of 2001, Public Law 107–16 (115 Stat.
38) (2001) (EGTRRA). EGTRRA also
amended section 204(h) to, among other
things, extend the notice requirement to a
plan amendment that eliminates or sig-
nificantly reduces an early retirement
benefit or retirement-type subsidy, even if
it does not significantly reduce the rate of
future benefit accrual. The notice require-
ments of section 4980F generally are par-
allel to the notice requirements of section
204(h), as amended by EGTRRA. How-
ever, the consequences of the two provi-
sions differ: section 4980F imposes an
excise tax on a failure to satisfy the notice
requirements, while section 204(h)(6), as
amended by EGTRRA, contains a special
rule with respect to egregious failures.
See Q&A–14 and Q&A–15 of this sec-
tion. Except to the extent specifically
indicated, these regulations apply both to
section 4980F and to section 204(h).
Q–3. What is an“applicable pension
plan”to which section 4980F and section
204(h) apply?
A–3. (a)In general. Section 4980F
and section 204(h) apply to an applicable
pension plan. For purposes of section
4980F, anapplicable pension planmeans
a defined benefit plan qualifying under
section 401(a) or 403(a) of the Internal
Revenue Code, or an individual account
plan that is subject to the funding stan-
dards of section 412 of the Internal Rev-
enue Code. For purposes of section
204(h), anapplicable pension planmeans
a defined benefit plan that is subject to
part 2 of subtitle B of title I of ERISA, or
an individual account plan that is subject
to such part 2 and to the funding stan-
dards of section 412 of the Internal Rev-
enue Code. Accordingly, individual
account plans that are not subject to the
funding standards of section 412 of the
Internal Revenue Code, such as profit-
sharing and stock bonus plans, are not
applicable pension plans to which section
4980F or section 204(h) apply . Similarly,
a defined benefit plan that neither quali-
fies under section 401(a) or 403(a) of the
Internal Revenue Code nor is subject to
part 2 of subtitle B of title I of ERISA is
not an applicable pension plan. Further,
neither a governmental plan (within the
meaning of section 414(d) of the Internal
Revenue Code), nor a church plan (within
the meaning of section 414(e) of the
Internal Revenue Code) with respect to
which no election has been made under
section 410(d) of the Internal Revenue
Code is an applicable pension plan.
(b)Section 204(h) notice not required
for small plans covering no employees.
Section 204(h) notice is not required for a
plan under which no employees are par-
ticipants covered under the plan, as
described in§2510.3–3(b) of the Depart-
ment of Labor regulations, and which has
fewer than 100 participants.
Q–4. What is“section 204(h) notice”
and what is a“section 204(h) amend-
ment”?
A–4.Section 204(h) noticeis notice
that complies with section 4980F(e), sec-
tion 204(h)(1), and this section. Asection
204(h) amendmentis an amendment for
which section 204(h) notice is required
under this section.
Q–5. For which amendments is section
204(h) notice required?
A–5. (a)Significant reduction in the
rate of future benefit accrual. Section
204(h) notice is required for an amend-
ment to an applicable pension plan that
provides for a significant reduction in the
rate of future benefit accrual, including a
cessation of benefit accrual.
(b)Early retirement benefits and
retirement-type subsidies. Section 204(h)
notice is required for an amendment to an
applicable pension plan that provides for
the significant reduction of an early
retirement benefit or retirement-type sub-
sidy. For purposes of this section,early
retirement benefitandretirement-type
subsidymean early retirement benefits
and retirement-type subsidies within the
meaning of section 411(d)(6)(B)(i).
(c)Elimination or cessation of ben-
efits. For purposes of this section, the
termsreduceorreductionincludeelimi-
nateorceaseoreliminationorcessation.
(d)Delegation of authority to Commis-
sioner. The Commissioner may provide
in revenue rulings, notices, or other guid-
ance published in the Internal Revenue
Bulletin (see§601.601(d)(2) of this
chapter) that section 204(h) notice need
not be provided for plan amendments oth-
erwise described in paragraph (a) or (b)
of this Q&A–5 that the Commissioner
determines to be necessary or appropriate,
as a result of changes in the law, to main-
tain compliance with the requirements of
the Internal Revenue Code (including
requirements for tax qualification),
ERISA, or other applicable federal law.
Q–6. What is an amendment that
reduces the rate of future benefit accrual
or reduces an early retirement benefit or
retirement-type subsidy for purposes of
determining whether section 204(h)
notice is required?
A–6. (a)In general. For purposes of
determining whether section 204(h)
notice is required, an amendment reduces
the rate of future benefit accrual or
reduces an early retirement benefit or
retirement-type subsidy only as provided
in paragraph (b) or (c) of this Q&A–6.
(b)Reduction in rate of future benefit
accrual—(1)Defined benefit plans. For
purposes of section 4980F and section
204(h), an amendment to a defined ben-
efit plan reduces the rate of future benefit
accrual only if it is reasonably expected
to reduce the amount of the future annual
benefit commencing at normal retirement
2002–21 I.R.B.1001May 28, 2002

age for benefits accruing for a year. For
this purpose, the annual benefit com-
mencing at normal retirement age is the
benefit payable in the form in which the
terms of the plan express the accrued ben-
efit (or, in the case of a plan in which the
accrued benefit is not expressed in the
form of an annual benefit commencing at
normal retirement age, the benefit pay-
able in the form of a single life annuity
commencing at normal retirement age
that is the actuarial equivalent of the
accrued benefit expressed under the terms
of the plan, as determined in accordance
with section 411(c)(3) of the Internal
Revenue Code).
(2)Individual account plans. For pur-
poses of section 4980F and section
204(h), an amendment to an individual
account plan reduces the rate of future
benefit accrual only if it is reasonably
expected to reduce the amounts allocated
in the future to participants’accounts for
a year. Changes in the investments or
investment options under an individual
account plan are not taken into account
for this purpose.
(3)Determination of rate of future
benefit accrual. The rate of future benefit
accrual for purposes of this paragraph (b)
is determined without regard to optional
forms of benefit within the meaning of
§1.411(d)–4, Q&A–1(b) of this chapter
(other than the annual benefit described in
paragraph (b)(1) of this Q&A–6). The
rate of future benefit accrual is also deter-
mined without regard to ancillary benefits
and other rights or features as defined in
§1.401(a)(4)–4(e) of this chapter.
(c)Reduction of early retirement ben-
efits or retirement-type subsidies. For pur-
poses of section 4980F and section
204(h), an amendment reduces an early
retirement benefit or retirement-type sub-
sidy only if it is reasonably expected to
eliminate or reduce an early retirement
benefit or retirement-type subsidy.
Q–7. What plan provisions are taken
into account in determining whether an
amendment is a section 204(h) amend-
ment?
A–7. (a)Plan provisions taken into
account. All plan provisions that may
affect the rate of future benefit accrual,
early retirement benefits, or retirement-
type subsidies of participants or alternate
payees must be taken into account in
determining whether an amendment is a
section 204(h) amendment. For example,
plan provisions that may affect the rate of
future benefit accrual include the dollar
amount or percentage of compensation on
which benefit accruals are based; the defi-
nition of service or compensation taken
into account in determining an employ-
ee’s benefit accrual; the method of deter-
mining average compensation for calcu-
lating benefit accruals; the definition of
normal retirement age in a defined benefit
plan; the exclusion of current participants
from future participation; benefit offset
provisions; minimum benefit provisions;
the formula for determining the amount
of contributions and forfeitures allocated
to participants’accounts in an individual
account plan; in the case of a plan using
permitted disparity under section 401(l)
of the Internal Revenue Code, the amount
of disparity between the excess benefit
percentage or excess contribution per-
centage and the base benefit percentage
or base contribution percentage (all as
defined in section 401(l) of the Internal
Revenue Code); and the actuarial
assumptions used to determine contribu-
tions under a target benefit plan (as
defined in§1.401(a)(4)–8(b)(3)(i) of this
chapter). Plan provisions that may affect
early retirement benefits or retirement-
type subsidies include the right to receive
payment of benefits after severance from
employment and before normal retire-
ment age and actuarial factors used in
determining optional forms for distribu-
tion of retirement benefits.
(b)Plan provisions not taken into
account. Plan provisions that do not
affect the rate of future benefit accrual of
participants or alternate payees are not
taken into account in determining
whether there has been a reduction in the
rate of future benefit accrual. Further, any
benefit that is not a section 411(d)(6) pro-
tected benefit as described in§1.
411(d)–4, Q&A–1(d) of this chapter, or
that is a section 411(d)(6) protected ben-
efit that may be eliminated or reduced as
permitted under§1.411(d)–4, Q&A–2(a)
or (b) of this chapter, is not taken into
account in determining whether an
amendment is a section 204(h) amend-
ment. Thus, for example, provisions relat-
ing to vesting schedules or the right to
make after-tax contributions or elective
deferrals are not taken into account.
(c)Example. The following example
illustrates the rules in this Q&A–7:
Example. (i)Facts. A defined benefit plan pro-
vides a normal retirement benefit equal to 50% of
final average compensation times a fraction (not in
excess of one), the numerator of which equals the
number of years of participation in the plan and the
denominator of which is 20. A plan amendment is
adopted that changes the numerator or denominator
of that fraction.
(ii)Conclusion. The plan amendment must be
taken into account in determining whether there has
been a reduction in the rate of future benefit accrual.
Q–8. What is the basic principle used
in determining whether a reduction in the
rate of future benefit accrual or a reduc-
tion in an early retirement benefit or
retirement-type subsidy is significant for
purposes of section 204(h)?
A–8. (a)General rule. Whether an
amendment reducing the rate of future
benefit accrual or reducing an early retire-
ment benefit or retirement-type subsidy
provides for a reduction that is significant
for purposes of section 204(h) is deter-
mined based on reasonable expectations
taking into account the relevant facts and
circumstances at the time the amendment
is adopted.
(b)Application for determining signifi-
cant reduction in the rate of future benefit
accrual. For a defined benefit plan, the
determination of whether an amendment
provides for a significant reduction in the
rate of future benefit accrual is made by
comparing the amount of the annual ben-
efit commencing at normal retirement
age, as determined under Q&A–6(b)(1) of
this section, under the terms of the plan as
amended with the amount of the annual
benefit commencing at normal retirement
age, as determined under Q&A–6(b)(1) of
this section, under the terms of the plan
prior to amendment. For an individual
account plan, the determination of
whether an amendment provides for a sig-
nificant reduction in the rate of future
benefit accrual is made in accordance
with Q&A–6(b)(2) of this section by
comparing the amounts to be allocated in
the future to participants’accounts under
the terms of the plan as amended with the
amounts to be allocated in the future to
participants’accounts under the terms of
the plan prior to amendment.
(c)Application to certain amendments
reducing early retirement benefits or
retirement-type subsidies. Because section
204(h) notice is required only for reduc-
tions that are significant, section 204(h)
May 28, 200210022002–21 I.R.B.

notice is not required for an amendment
that reduces an early retirement benefit or
retirement-type subsidy if the amendment
is permitted under the third sentence of
section 411(d)(6)(B) of the Internal Rev-
enue Code and regulations thereunder
(relating to the elimination or reduction of
benefits or subsidies which create signifi-
cant burdens or complexities for the plan
and plan participants unless the amend-
ment adversely affects the rights of any
participant in a more thande minimis
manner).
Q–9. When must section 204(h) notice
be provided?
A–9. (a)45-day general rule. Except
as described in paragraphs (b) and (c) of
this Q&A–9, section 204(h) notice must
be provided at least 45 days before the
effective date of any section 204(h)
amendment. See paragraph (d) of this
Q&A–9 for special rules for amendments
permitting participant choice.
(b)15-day rule for small plans. Except
for amendments described in paragraph
(c)(2) of this Q&A–9, in the case of a
small plan, section 204(h) notice must be
at least 15 days before the effective date
of any section 204(h) amendment. For
purposes of this section, a small plan is a
plan that the plan administrator reason-
ably expects to have, on the effective date
of the section 204(h) amendment, fewer
than 100 participants who have an
accrued benefit under the plan.
(c)Special timing rule for business
transactions—(1)15-day rule for section
204(h) amendment in connection with an
acquisition or disposition. Except for
amendments described in paragraph
(c)(2) of this Q&A–9, if a section 204(h)
amendment is adopted in connection with
an acquisition or disposition, section
204(h) notice must be provided at least 15
days before the effective date of the sec-
tion 204(h) amendment.
(2)Later notice permitted for section
204(h) amendment significantly reducing
early retirement benefit or retirement-type
subsidies in connection with certain plan
transfers, mergers, or consolidations.Ifa
section 204(h) amendment is adopted
with respect to liabilities that are trans-
ferred to another plan in connection with
a transfer, merger, or consolidation of
assets or liabilities as described in section
414(l) of the Internal Revenue Code and
§1.414(l)–1 of this chapter, the amend-
ment is adopted in connection with an
acquisition or disposition, and the amend-
ment significantly reduces an early retire-
ment benefit or retirement-type subsidy,
but does not significantly reduce the rate
of future benefit accrual, then section
204(h) notice must be provided no later
than 30 days after the effective date of the
section 204(h) amendment.
(3)Definition of acquisition or dispo-
sition. For purposes of this paragraph (c),
see§1.410(b)–2(f) of this chapter for the
definition of acquisition or disposition.
(d)Timing rule for amendments per-
mitting participant choice. In general,
section 204(h) notice of a section 204(h)
amendment that provides applicable indi-
viduals with a choice between the old and
the new benefit formulas (as described in
Q&A–12 of this section) must be pro-
vided in accordance with the time period
applicable under paragraphs (a) through
(c) of this Q&A–9. See Q&A–12 of this
section for additional guidance regarding
section 204(h) notice in connection with
participant choice.
Q–10. To whom must section 204(h)
notice be provided?
A–10. (a)In general. Section 204(h)
notice must be provided to each appli-
cable individual and to each employee
organization representing participants
who are applicable individuals. A special
rule is provided in paragraph (d) of this
Q&A–10.
(b)Applicable individual. Applicable
individual means each participant in the
plan, and any alternate payee, whose rate
of future benefit accrual under the plan
may reasonably be expected to be signifi-
cantly reduced, or for whom an early
retirement benefit or retirement-type sub-
sidy under the plan may reasonably be
expected to be significantly reduced, by
the section 204(h) amendment.
(c)Alternate payee. Alternate payee
means a beneficiary who is an alternate
payee (within the meaning of section
414(p)(8) of the Internal Revenue Code)
under an applicable qualified domestic
relations order (within the meaning of
section 414(p)(1)(A) of the Internal Rev-
enue Code).
(d)Designees. Section 204(h) notice
may be provided to a person designated
in writing by an applicable individual or
by an employee organization representing
participants who are applicable individu-
als, instead of being provided to that
applicable individual or employee organi-
zation. Any designation of a representa-
tive made through an electronic method
that satisfies standards similar to those of
Q&A–13(c)(1) of this section satisfies the
requirement that a designation be in writ-
ing.
(e)Facts and circumstances test.
Whether a participant or alternate payee
is an applicable individual is determined
based on all relevant facts and circum-
stances at the time the section 204(h)
notice must be provided (or is provided,
if earlier).
(f)Examples. The following examples
illustrate the rules in this Q&A–10:
Example 1. (i)Facts. A defined benefit plan
requires an individual to complete 1 year of service
to become a participant who can accrue benefits,
and participants cease to accrue benefits under the
plan at severance from employment with the
employer. There are no alternate payees and
employees are not represented by an employee orga-
nization. The plan is amended effective as of Janu-
ary 1, 2005, to significantly reduce the rate of future
benefit accrual.
(ii)Conclusion. Section 204(h) notice is only
required to be provided to individuals who, on Janu-
ary 1, 2005, have completed at least 1 year of ser-
vice and are employed by the employer.
Example 2. (i)Facts. The facts are the same as
inExample 1, except that the sole effect of the plan
amendment is to alter the pre-amendment plan pro-
visions under which benefits payable to an
employee who retires after 20 or more years of ser-
vice are unreduced for commencement before nor-
mal retirement age. The amendment requires 30 or
more years of service in order for benefits com-
mencing before normal retirement age to be unre-
duced, but the amendment only applies for future
benefit accruals.
(ii)Conclusion. Section 204(h) notice is only
required to be provided to individuals who, on Janu-
ary 1, 2005, have completed at least 1 year of ser-
vice but less than 30 years of service, are employed
by the employer, have not attained normal retire-
ment age, and will have completed 20 or more years
of service before normal retirement age if their
employment continues to normal retirement age.
Example 3. (i)Facts. A plan is amended to
reduce significantly the rate of future benefit accrual
for all current employees who are participants.
Based on the facts and circumstances, it is reason-
able to expect that the amendment will not reduce
the rate of future benefit accrual of former employ-
ees who are currently receiving benefits or of former
employees who are entitled to deferred vested ben-
efits.
(ii)Conclusion. The plan administrator is not
required to provide section 204(h) notice to any
former employees.
Example 4. (i)Facts. The facts are the same as
inExample 3, except that the plan covers two
groups of alternate payees. The alternate payees in
the first group are entitled to a certain percentage or
portion of the former spouse’s accrued benefit and,
2002–21 I.R.B.1003May 28, 2002

for this purpose, the accrued benefit is determined at
the time the former spouse begins receiving retire-
ment benefits under the plan. The alternate payees
in the second group are entitled to a certain percent-
age or portion of the former spouse’s accrued ben-
efit and, for this purpose, the accrued benefit was
determined at the time the qualified domestic rela-
tions order was issued by the court.
(ii)Conclusion. It is reasonable to expect that
the benefits to be received by the second group of
alternate payees will not be affected by any reduc-
tion in a former spouse’s rate of future benefit
accrual. Accordingly, the plan administrator is not
required to provide section 204(h) notice to the
alternate payees in the second group.
Example 5. (i)Facts. A plan covers hourly
employees and salaried employees. The plan pro-
vides the same rate of benefit accrual for both
groups. The employer amends the plan to reduce
significantly the rate of future benefit accrual of the
salaried employees only. At that time, it is reason-
able to expect that only a small percentage of hourly
employees will become salaried in the future.
(ii)Conclusion. The plan administrator is not
required to provide section 204(h) notice to the par-
ticipants who are currently hourly employees.
Example 6. (i)Facts. A plan covers employees
in Division M and employees in Division N. The
plan provides the same rate of benefit accrual for
both groups. The employer amends the plan to
reduce significantly the rate of future benefit accrual
of employees in Division M. At that time, it is rea-
sonable to expect that in the future only a small per-
centage of employees in Division N will be trans-
ferred to Division M.
(ii)Conclusion. The plan administrator is not
required to provide section 204(h) notice to the par-
ticipants who are employees in Division N.
Example 7. (i)Facts. The facts are the same
facts as inExample 6, except that at the time the
amendment is adopted, it is expected that thereafter
Division N will be merged into Division M in con-
nection with a corporate reorganization (and the
employees in Division N will become subject to the
plan’s amended benefit formula applicable to the
employees in Division M).
(ii)Conclusion. In this case, the plan administra-
tor must provide section 204(h) notice to the partici-
pants who are employees in Division M and to the
participants who are employees in Division N.
Q–11. What information is required to
be provided in section 204(h) notice?
A–11. (a)Explanation of amendment
—(1)In general. Section 204(h) notice
must include sufficient information to
allow applicable individuals to under-
stand the effect of the plan amendment,
including the approximate magnitude of
the expected reduction. To the extent any
expected reduction is not uniformly appli-
cable to all participants, the notice must
either identify the general classes of par-
ticipants to whom the reduction is
expected to apply, or by some other
method include sufficient information to
allow each applicable individual receiv-
ing the notice to determine which reduc-
tions are expected to apply to that indi-
vidual. The information must be written
in a manner calculated to be understood
by the average plan participant and to
apprise the applicable individual of the
significance of the notice. The type and
amount of information necessary to sat-
isfy these standards will vary depending
on the nature of the change resulting from
the amendment, as described further in
paragraphs (a)(2) and (3) of this Q&A–
11.
(2)Required narrative—(i)Reduction
in rate of future benefit accrual.Inthe
case of an amendment reducing the rate
of future benefit accrual, the notice must
include a description of the benefit or
allocation formula prior to the amend-
ment, a description of the benefit or allo-
cation formula under the plan as
amended, and the effective date of the
amendment.
(ii)Reduction in early retirement ben-
efit or retirement-type subsidy. In the case
of an amendment that reduces an early
retirement benefit or retirement-type sub-
sidy (other than as a result of an amend-
ment reducing the rate of future benefit
accrual), the notice must describe how the
early retirement benefit or retirement-type
subsidy is calculated from the accrued
benefit before the amendment, how the
early retirement benefit or retirement-type
subsidy is calculated from the accrued
benefit after the amendment, and the
effective date of the amendment. For
example, if, for a plan with a normal
retirement age of 65, the change is from
an unreduced normal retirement benefit at
age 55 to an unreduced normal retirement
benefit at age 60 for benefits accrued in
the future, with an actuarial reduction to
apply for benefits accrued in the future to
the extent that the early retirement benefit
begins before age 60, the notice must
state that and specify the factors that
apply in calculating the actuarial reduc-
tion (e.g., a 5% per year reduction applies
for early retirement before age 60).
(3)Additional required information—
(i)Standard for additional information.
In cases in which it is not reasonable to
expect that the approximate magnitude of
the reduction will be reasonably apparent
from the description provided in accor-
dance with in paragraph (a)(2) of this
Q&A–11, further information is required.
This requirement can be satisfied by fur-
nishing additional narrative information,
as described in paragraph (a)(3)(ii) of this
Q&A–11; by furnishing illustrative
examples, as described in paragraph
(a)(3)(iii) of this Q&A–11; or through a
combination of these.
(ii)Additional narrative information.
Further narrative explanation of the effect
of the difference between the old and new
formulas or benefit calculation may be
provided to make the approximate magni-
tude of the reduction apparent.
(iii)Illustrativeexamples—(A)
Requirement generally. In cases in which
it is not reasonable to expect that the
approximate magnitude of the reduction
will be reasonably apparent from the
description provided in accordance with
in paragraph (a)(2) of this Q&A–11 (plus
any additional narrative information pro-
vided in accordance with paragraph
(a)(3)(ii) of this Q&A–11), the notice
must include one or more illustrative
examples showing the approximate mag-
nitude of the reduction in the example.
Thus, illustrative examples are required
for a change from a traditional defined
benefit formula to a cash balance formula
or a change that results in a period of
time during which there are no accruals
(or minimal accruals) with regard to nor-
mal retirement benefits or an early retire-
ment subsidy (a wear-away period).
(B)Examples must bound the range of
reductions. Where an amendment results
in reductions that vary (as would occur
for an amendment converting a traditional
defined benefit formula to a cash balance
formula or an amendment that results in a
wear-away period), the illustrative
example(s) provided in accordance with
this paragraph (a)(3)(iii) must show the
approximate range of the reductions.
However, any reductions that are likely to
occur in only ade minimisnumber of
cases are not required to be taken into
account in determining the range of the
reductions if a narrative statement is
included to that effect and examples are
provided that show the approximate range
of the reductions in other cases. Amend-
ments for which the maximum reduction
occurs under identifiable circumstances,
with proportionately smaller reductions in
other cases, may be illustrated by one
example illustrating the maximum reduc-
tion, with a statement that smaller reduc-
tions also occur. Further, assuming that
May 28, 200210042002–21 I.R.B.

the reduction varies from small to large
depending on service or other factors, two
illustrative examples may be provided
showing the smallest likely reduction and
the largest likely reduction.
(C)Assumptions used in examples.
The examples required under this para-
graph (a)(3)(iii) are not required to be
based on any particular form of payment
(such as a life annuity or a single sum),
but may be based on whatever form
appropriately illustrates the reduction.
The examples generally may be based on
any reasonable assumptions (e.g.,
assumptions relating to the representative
participant’s age, years of service, and
compensation, along with any interest
rate and mortality table used in the illus-
trations, as well as salary scale assump-
tions used in the illustrations for amend-
ments that alter the compensation taken
into account under the plan), but the sec-
tion 204(h) notice must identify those
assumptions. However, if a plan’s benefit
provisions include a factor that varies
over time (such as a variable interest
rate), the determination of whether an
amendment is reasonably expected to
result in a wear-away period must be
based on the value of the factor appli-
cable under the plan at a time that is rea-
sonably close to the date section 204(h)
notice is provided, and any wear-away
period that is solely a result of a future
change in the variable factor may be dis-
regarded. For example, to determine
whether a wear-away occurs as a result of
a section 204(h) amendment that converts
a defined benefit plan to a cash balance
pension plan that will credit interest based
on a variable interest factor specified in
the plan, the future interest credits must
be projected based on the interest rate
applicable under the variable factor at the
time section 204(h) notice is provided.
(4)No false or misleading informa-
tion. A notice that includes materially
false or misleading information (or omits
information so as to cause the information
provided to be misleading) does not con-
stitute section 204(h) notice.
(b)Additional information when
reduction not uniform—(1)In general.If
an amendment by its terms affects differ-
ent classes of participants differently
(e.g., one new benefit formula will apply
to Division A and another to Division B),
then the requirements of paragraph (a) of
this Q&A–11 apply separately with
respect to each such general class of par-
ticipants. In addition, the notice must
include sufficient information to enable
an applicable individual who is a partici-
pant to understand which class he or she
is a member of.
(2)Option for different section 204(h)
notices. If a section 204(h) amendment
affects different classes of applicable
individuals differently, the plan adminis-
trator may provide to differently affected
classes of applicable individuals a section
204(h) notice appropriate to those indi-
viduals. Such section 204(h) notice may
omit information that does not apply to
the applicable individuals to whom it is
furnished, but must identify the class or
classes of applicable individuals to whom
it is provided.
(c)Examples. The following examples
illustrate the requirements of paragraph
(a) of this Q&A–11. In each example it is
assumed that the notice is written in a
manner calculated to be understood by
the average plan participant and to
apprise the applicable individual of the
significance of the notice.
Example 1. (i)Facts. Plan A provides that a par-
ticipant is entitled to a normal retirement benefit of
2% of the participant’s average pay over the 3 con-
secutive years for which the average is the highest
(highest average pay) multiplied by years of service.
Plan A is amended to provide that, effective January
1, 2004, the normal retirement benefit will be 2% of
the participant’s highest average pay multiplied by
years of service before the effective date, plus 1% of
the participant’s highest average pay multiplied by
years of service after the effective date. The plan
administrator provides notice that states:“Under the
Plan’s current benefit formula, a participant’s nor-
mal retirement benefit is 2% of the participant’s
average pay over the 3 consecutive years for which
the average is the highest multiplied by the partici-
pant’s years of service. This formula is being
changed by a plan amendment. Under the Plan as
amended, a participant’s normal retirement benefit
will be the sum of 2% of the participant’s average
pay over the 3 consecutive years for which the aver-
age is the highest multiplied by years of service
before the effective date, plus 1% of the partici-
pant’s average pay over the 3 consecutive years for
which the average is the highest multiplied by the
participant’s years of service after the effective date.
This change is effective on January 1, 2004.”The
notice does not contain any additional information.
(ii)Conclusion. The notice satisfies the require-
ments of paragraph (a) of this Q&A–11.
Example 2. (i)Facts. Plan B provides that a par-
ticipant is entitled to a normal retirement benefit at
age 64 of 2.2% of the participant’s career average
pay times years of service. Plan B is amended to
cease all accruals, effective January 1, 2004. The
plan administrator provides notice that includes a
description of the old benefit formula, a statement
that after December 31, 2003, no participant will
earn any further accruals, and the effective date of
the amendment.
(ii)Conclusion. The notice satisfies the require-
ments of paragraph (a) of this Q&A–11.
Example 3. (i)Facts. Plan C provides that a par-
ticipant is entitled to a normal retirement benefit at
age 65 of 2% of career average compensation times
years of service. Plan C is amended to provide that
the normal retirement benefit will be 1% of average
pay over the 3 consecutive years for which the aver-
age is the highest times years of service. The
amendment only applies to accruals for years of ser-
vice after the amendment, so that each employee’s
accrued benefit is equal to the sum of the benefit
accrued as of the effective date of the amendment
plus the accrued benefit equal to the new formula
applied to years of service beginning on or after the
effective date. The plan administrator provides
notice that describes the old and new benefit formu-
las and also explains that for an individual whose
compensation increases over the individual’s career
such that the individual’s highest 3-year average
exceeds the individual’s career average, the reduc-
tion will be less or there may be no reduction.
(ii)Conclusion. The notice satisfies the require-
ments of paragraph (a) of this Q&A–11.
Example 4. (i)Facts. (A) Plan D is a defined
benefit pension plan under which each participant
accrues a normal retirement benefit, as a life annu-
ity beginning at the normal retirement age of 65,
equal to the participant’s number of years of service
times 1.5 percent times the participant’s average pay
over the 3 consecutive years for which the average
is the highest. Plan D provides early retirement ben-
efits for former employees beginning at or after age
55 in the form of an early retirement annuity that is
actuarially equivalent to the normal retirement ben-
efit, with the reduction for early commencement
based on reasonable actuarial assumptions that are
specified in Plan D. Plan D provides for the suspen-
sion of benefits of participants who continue in
employment beyond normal retirement age, in
accordance with section 203(a)(3)(B) of ERISA and
regulations thereunder issued by the Department of
Labor. The pension of a participant who retires after
age 65 is calculated under the same normal retire-
ment benefit formula, but is based on the partici-
pant’s service credit and highest 3-year pay at the
time of late retirement with any appropriate actu-
arial increases.
(B) Plan D is amended, effective July 1, 2005, to
change the formula for all future accruals to a cash
balance formula under which the opening account
balance for each participant on July 1, 2005, is zero,
hypothetical pay credits equal to 5 percent of pay
are credited to the account thereafter, and hypotheti-
cal interest is credited monthly based on the appli-
cable interest rate under section 417(e)(3) of the
Internal Revenue Code at the beginning of the quar-
ter. Any participant who terminates employment
with vested benefits can receive an actuarially
equivalent annuity (based on the same reasonable
actuarial assumptions that are specified in Plan D)
commencing at any time after termination of
employment and before the plan’s normal retirement
age of 65. The benefit resulting from the hypotheti-
cal account balance is in addition to the benefit
accrued on June 30, 2005 (taking into account only
2002–21 I.R.B.1005May 28, 2002

service and highest 3-year pay before July 30,
2005), so that it is reasonably expected that no wear-
away period will result from the amendment. The
plan administrator expects that, as a general rule,
depending on future pay increases and future inter-
est rates, the rate of future benefit accrual after the
conversion is higher for participants who accrue
benefits before approximately age 50 and after
approximately age 70, but is lower for participants
who accrue benefits between approximately age 50
and age 70.
(C) The plan administrator of Plan D announces
the conversion to a cash balance formula on May
16, 2005. The announcement is delivered to all par-
ticipants and includes a written notice that describes
the old formula, the new formula, and the effective
date.
(D) In addition, the notice states that the Plan D
formula before the conversion provided a normal
retirement benefit equal to the product of a partici-
pant’s number of years of service times 1.5 percent
times the participant’s average pay over the 3 years
for which the average is the highest (highest 3-year
pay). The notice includes an example showing the
normal retirement benefit that will be accrued after
June 30, 2005, for a participant who is age 49 with
10 years of service at the time of the conversion.
The plan administrator believes that such a partici-
pant is representative of the participants whose rate
of future benefit accrual will be reduced as a result
of the amendment. The example estimates that, if
the participant continues employment to age 65, the
participant’s normal retirement benefit for service
from age 49 to age 65 will be $657 per month for
life. The example assumes that the participant’s pay
is $50,000 at age 49. The example states that the
estimated $657 monthly pension accrues over the
16-year period from age 49 to age 65 and that, based
on assumed future pay increases, this amount annu-
ally would be 9.1 percent of the participant’s high-
est 3-year pay at age 65, which over the 16 years
from age 49 to age 65 averages 0.57 percent per
year times the participant’s highest 3-year pay. The
example also states that the sum of the monthly
annuity accrued before the conversion in the 10-year
period from age 39 to age 49 plus the $657 monthly
annuity estimated to be accrued over the 16-year
period from age 49 to age 65 is $1,235 and that,
based on assumed future increases in pay, this
would be 17.1 percent of the participant’s highest
3-year pay at age 65, which over the employee’s
career from age 39 to age 65 averages 0.66 percent
per year times the participant’s highest 3-year pay.
The notice also includes two other examples with
similar information, one of which is intended to
show the circumstances in which a small reduction
may occur and the other of which shows the largest
reduction that the plan administrator thinks is likely
to occur. The notice states that the estimates are
based on the assumption that pay increases annually
after June 30, 2005, at a 4 percent rate. The notice
also specifies that the applicable interest rate under
section 417(e) for hypothetical interest credits after
June 30, 2005, is assumed to be 6 percent, which is
the section 417(e) of the Internal Revenue Code
applicable interest rate under the plan for 2005.
(ii)Conclusion. The information in the notice, as
described in paragraph (i)(C) of thisExample 4, sat-
isfies the requirements of paragraph (a)(2) of this
Q&A–11 with respect to applicable individuals who
are participants. The additional requirements of
paragraph (a)(3) of this Q&A–11 are satisfied
because, as noted in paragraph (i)(D) of this
Example 4, the notice describes the old formula and
describes the estimated future accruals under the
new formula in terms that can be readily compared
to the old formula,i.e., the notice states that the
estimated $657 monthly pension accrued over the
16-year period from age 49 to age 65 averages 0.57
percent of the participant’s highest 3-year pay at age
65. The requirement that the examples include suf-
ficient information to be able to determine the
approximate magnitude of the reduction would also
be satisfied if the notice instead directly stated the
amount of the monthly pension that would have
accrued over the 16-year period from age 49 to age
65 under the old formula.
Example 5. (i)Facts. The facts are the same as
inExample 4, except that, under the plan as in effect
before the amendment, the early retirement pension
for a participant who terminates employment after
age 55 with at least 20 years of service is equal to
the normal retirement benefit without reduction
from age 65 to age 62 and reduced by only 5 per-
cent per year for each year before age 62. As a
result, early retirement benefits for such a partici-
pant constitute a retirement-type subsidy. The plan
as in effect after the amendment provides an early
retirement benefit equal to the sum of the early
retirement benefit payable under the plan as in effect
before the amendment taking into account only ser-
vice and highest 3-year pay before July 1, 2005,
plus an early retirement annuity that is actuarially
equivalent to the account balance for service after
June 30, 2005. The notice provided by the plan
administrator describes the old early retirement
annuity, the new early retirement annuity, and the
effective date. The notice includes an estimate of the
early retirement annuity payable to the illustrated
participant for service after the conversion if the
participant were to retire at age 59 (which the plan
administrator believes is a typical early retirement
age) and elect to begin receiving an immediate early
retirement annuity. The example states that the nor-
mal retirement benefit expected to be payable at age
65 as a result of service from age 49 to age 59 is
$434 per month for life beginning at age 65 and that
the early retirement annuity expected to be payable
as a result of service from age 49 to age 59 is $270
per month for life beginning at age 59. The example
states that the monthly early retirement annuity of
$270 is 38 percent less than the monthly normal
retirement benefit of $434, whereas a 15 percent
reduction would have applied under the plan as in
effect before the amendment. The notice also
includes similar information for examples that show
the smallest and largest reduction that the plan
administrator thinks is likely to occur in the early
retirement benefit. The notice also specifies the
applicable interest rate, mortality table, and salary
scale used in the example to calculate the early
retirement reductions.
(ii)Conclusion. The information in the notice, as
described in paragraphs (i)(C) and (i)(D) of
Example 4and paragraph (i) of thisExample 5, sat-
isfies the requirements of paragraph (a) of this
Q&A–11 with respect to applicable individuals who
are participants. The requirements of paragraph
(a)(3) of this Q&A–11 are satisfied because, as
noted in paragraph (i) of thisExample 5, the notice
describes the early retirement subsidy under the old
formula and describes the estimated early retirement
pension under the new formula in terms that can be
readily compared to the old formula,i.e., the notice
states that the monthly early retirement pension of
$270 is 38 percent less than the monthly normal
retirement benefit of $434, whereas a 15 percent
reduction would have applied under the plan as in
effect before the amendment. The requirements of
paragraph (a)(1) of this Q&A–11 would also be sat-
isfied if the notice instead directly stated the amount
of the monthly early retirement pension that would
be payable at age 59 under the old formula.
Q–12. What special rules apply if par-
ticipants can choose between the old and
new benefit formulas?
A–12. In any case in which an appli-
cable individual can choose between the
benefit formula (including any early
retirement benefit or retirement-type sub-
sidy) in effect before the section 204(h)
amendment (old formula) or the benefit
formula in effect after the section 204(h)
amendment (new formula), section 204(h)
notice has not been provided unless the
applicable individual has been provided
the information required under Q&A–11
of this section, and has also been pro-
vided sufficient information to enable the
individual to make an informed choice
between the old and new benefit formu-
las. The information required under
Q&A–11 of this section must be provided
by the date otherwise required under
Q&A–9 of this section. The information
sufficient to enable the individual to make
an informed choice must be provided
within a period that is reasonably contem-
poraneous with the date by which the
individual is required to make his or her
choice and that allows sufficient advance
notice to enable the individual to under-
stand and consider the additional infor-
mation before making that choice.
Q–13. How may section 204(h) notice
be provided?
A–13. (a) A plan administrator (includ-
ing a person acting on behalf of the plan
administrator, such as the employer or
plan trustee) must provide section 204(h)
notice through a method that results in
actual receipt of the notice or the plan
administrator must take appropriate and
necessary measures reasonably calculated
to ensure that the method for providing
section 204(h) notice results in actual
receipt of the notice. Section 204(h)
notice must be provided either in the form
of a paper document or in an electronic
form that satisfies the requirements of
paragraph (c) of this Q&A–13. First class
May 28, 200210062002–21 I.R.B.

mail to the last known address of the
party is an acceptable delivery method.
Likewise, hand delivery is acceptable.
However, the posting of notice is not con-
sidered provision of section 204(h)
notice. Section 204(h) notice may be
enclosed with or combined with other
notice provided by the employer or plan
administrator (for example, a notice of
intent to terminate under title IV of
ERISA). Except as provided in paragraph
(c) of this Q&A–13, a section 204(h)
notice is deemed to have been provided
on a date if it has been provided by the
end of that day. When notice is delivered
by first class mail, the notice is consid-
ered provided as of the date of the United
States postmark stamped on the cover in
which the document is mailed.
(b)Example. The following example
illustrates the provisions of paragraph (a)
of this Q&A–13:
Example. (i)Facts. Plan A is amended to reduce
significantly the rate of future benefit accrual effec-
tive January 1, 2005. Under Q&A–9 of this section,
section 204(h) notice is required to be provided at
least 45 days before the effective date of the amend-
ment. The plan administrator causes section 204(h)
notice to be mailed to all affected participants. The
mailing is postmarked November 16, 2004.
(ii)Conclusion. Because section 204(h) notice is
given 45 days before the effective date of the plan
amendment, it satisfies the timing requirement of
Q&A–9 of this section.
(c)New technologies—(1)General rule. A sec-
tion 204(h) notice may be provided to an applicable
individual through an electronic method (other than
an oral communication or a recording of an oral
communication), provided that all of the following
requirements are satisfied:
(i) Either the notice is actually received by the
applicable individual or the plan administrator takes
appropriate and necessary measures reasonably cal-
culated to ensure that the method for providing sec-
tion 204(h) notice results in actual receipt of the
notice by the applicable individual.
(ii) The plan administrator provides the appli-
cable individual with a clear and conspicuous state-
ment, in electronic or non-electronic form, that the
applicable individual has a right to request and
obtain a paper version of the section 204(h) notice
without charge and, if such request is made, the
applicable individual is furnished with the paper
version without charge.
(iii) The requirements of this section must other-
wise be satisfied. Thus, for example, a section
204(h) notice provided through an electronic
method must be delivered on or before the date
required under Q&A–9 of this section and must sat-
isfy the requirements set forth in Q&A–11 of this
section, including the content requirements and the
requirements that it be written in a manner calcu-
lated to be understood by the average plan partici-
pant and to apprise the applicable individual of the
significance of the notice. Accordingly, when it is
not otherwise reasonably evident, the recipient
should be apprised (either in electronic or non-
electronic form), at the time the notice is furnished
electronically, of the significance of the notice.
(2)Examples. The following examples
illustrate the requirement in paragraph
(c)(1)(i) of this Q&A–13. In these
examples, it is assumed that the notice
satisfies the requirements in paragraph
(c)(1)(ii) and (iii) of this section. The
examples are as follows:
Example 1. (i)Facts. On July 1, 2003, M, a plan
administrator of Company N’s plan, sends notice
intended to satisfy section 204(h) of ERISA to A, an
employee of Company N and a participant in the
plan. The notice is sent through e-mail to A’s e-mail
address on Company N’s electronic information sys-
tem. Accessing Company N’s electronic information
system is not an integral part of A’s duties. M sends
the e-mail with a request for a computer-generated
notification that the message was received and
opened. M receives notification indicating that the
e-mail was received and opened by A on July 9,
2003.
(ii)Conclusion. With respect to A, although M
has failed to take appropriate and necessary mea-
sures reasonably calculated to ensure that the
method for providing section 204(h) notice results
in actual receipt of the notice, M satisfies the
requirement of paragraph (c)(1)(i) of this Q&A–13
on July 9, 2003, which is when A actually receives
the notice.
Example 2. (i)Facts. On August 1, 2003, O, a
plan administrator of Company P’s plan, sends a
notice intended to satisfy section 204(h) of ERISA
to B, who is an employee of Company P and a par-
ticipant in Company P’s plan. The notice is sent
through e-mail to B’s e-mail address on Company
P’s electronic information system. B has the ability
to effectively access electronic documents from B’s
e-mail address on Company P’s electronic informa-
tion system and accessing the system is an integral
part of B’s duties.
(ii)Conclusion. Because access to the system is
an integral part of B’s duties, O has taken appropri-
ate and necessary measures reasonably calculated to
ensure that the method for providing section 204(h)
notice results in actual receipt of the notice. Thus,
regardless of whether B actually accesses B’s email
on that date, O satisfies the requirement of para-
graph (c)(1)(i) of this Q&A–13 on August 1, 2003,
with respect to B.
(3)Safe harbor in case of consent. The
requirement of paragraph (c)(1)(i) of this
Q&A–13 is deemed to be satisfied with
respect to an applicable individual if the
section 204(h) notice is provided elec-
tronically to an applicable individual,
and—
(i) The applicable individual has affir-
matively consented electronically, or con-
firmed consent electronically, in a manner
that reasonably demonstrates the appli-
cable individual’s ability to access the
information in the electronic form in
which the notice will be provided, to
receiving section 204(h) notice electroni-
cally and has not withdrawn such con-
sent;
(ii) The applicable individual has pro-
vided, if applicable, in electronic or non-
electronic form, an address for the receipt
of electronically furnished documents;
(iii) Prior to consenting, the applicable
individual has been provided, in elec-
tronic or non-electronic form, a clear and
conspicuous statement indicating—
(A) That the consent can be withdrawn
at any time without charge;
(B) The procedures for withdrawing
consent and for updating the address or
other information needed to contact the
applicable individual;
(C) Any hardware and software
requirements for accessing and retaining
the documents; and
(D) The information required by para-
graph (c)(1)(ii) of this Q&A–13; and
(iv) After consenting, if a change in
hardware or software requirements
needed to access or retain electronic
records creates a material risk that the
applicable individual will be unable to
access or retain the section 204(h)
notice—
(A) The applicable individual is pro-
vided with a statement of the revised
hardware and software requirements for
access to and retention of the section
204(h) notice and is given the right to
withdraw consent without the imposition
of any fees for such withdrawal and with-
out the imposition of any condition or
consequence that was not disclosed at the
time of the initial consent; and
(B) The requirement of paragraph
(c)(3)(i) of this Q&A–13 is again com-
plied with.
Q–14. What are the consequences if a
plan administrator fails to provide section
204(h) notice?
A–14. (a)Egregious failures—(1)
Effect of egregious failure to provide sec-
tion 204(h) notice. Section 204(h)(6)(A)
of ERISA provides that, in the case of any
egregious failure to meet the notice
requirements with respect to any plan
amendment, the plan provisions are
applied so that all applicable individuals
are entitled to the greater of the benefit to
which they would have been entitled
without regard to the amendment, or the
benefit under the plan with regard to the
amendment. For a special rule applicable
2002–21 I.R.B.1007May 28, 2002

in the case of a plan termination, see
Q&A–17(b) of this section.
(2)Definition of egregious failure. For
purposes of section 204(h) of ERISA and
this Q&A–14, there is an egregious fail-
ure to meet the notice requirements if a
failure to provide required notice is
within the control of the plan sponsor and
is either an intentional failure or a failure,
whether or not intentional, to provide
most of the individuals with most of the
information they are entitled to receive.
For this purpose, an intentional failure
includes any failure to promptly provide
the required notice or information after
the plan administrator discovers an unin-
tentional failure to meet the requirements.
A failure to give section 204(h) notice is
deemed not to be egregious if the plan
administrator reasonably determines, tak-
ing into account section 204(h) of
ERISA, section 4980F of the Internal
Revenue Code, these regulations, other
administrative pronouncements, and rel-
evant facts and circumstances, that the
reduction in the rate of future benefit
accrual resulting from an amendment is
not significant (as described in Q&A–8of
this section), or that an amendment does
not significantly reduce an early retire-
ment benefit or retirement-type subsidy.
(3)Example. The following example
illustrates the provisions of this paragraph
(a):
Example. (i)Facts. Plan A is amended to reduce
significantly the rate of future benefit accrual effec-
tive January 1, 2003. Section 204(h) notice is
required to be provided 45 days before January 1,
2003. Timely section 204(h) notice is provided to all
applicable individuals (and to each employee orga-
nization representing participants who are applicable
individuals), except that the employer intentionally
fails to provide section 204(h) notice to certain par-
ticipants until May 16, 2003.
(ii)Conclusion. The failure to provide section
204(h) notice is egregious. Accordingly, for the
period from January 1, 2003, through June 30, 2003
(which is the date that is 45 days after May 16,
2003), all participants and alternate payees are
entitled to the greater of the benefit to which they
would have been entitled under Plan A as in effect
before the amendment or the benefit under the plan
as amended.
(b)Effect of non-egregious failure to
provide section 204(h) notice. If an egre-
gious failure has not occurred, the amend-
ment with respect to which section 204(h)
notice is required may become effective
with respect to all applicable individuals.
However, see section 502 of ERISA for
civil enforcement remedies. Thus, where
there is a failure, whether or not egre-
gious, to provide section 204(h) notice in
accordance with this section, individuals
may have recourse under section 502 of
ERISA.
(c)Excise taxes. See section 4980F of
the Internal Revenue Code and Q&A–15
of this section for excise taxes that may
apply to a failure to notify applicable
individuals of a pension plan amendment
that provides for a significant reduction in
the rate of future benefit accrual or elimi-
nates or significantly reduces an early
retirement benefit or retirement-type sub-
sidy, regardless of whether or not the fail-
ure is egregious.
Q–15. What are some of the rules that
apply with respect to the excise tax under
section 4980F?
A–15. (a)Person responsible for
excise tax. In the case of a plan other than
a multiemployer plan, the employer is
responsible for reporting and paying the
excise tax. In the case of a multiemployer
plan, the plan is responsible for reporting
and paying the excise tax.
(b)Excise tax inapplicable in certain
cases. Under section 4980F(c)(1) of the
Internal Revenue Code, no excise tax is
imposed on a failure for any period dur-
ing which it is established to the satisfac-
tion of the Commissioner that the
employer (or other person responsible for
the tax) exercised reasonable diligence,
but did not know that the failure existed.
Under section 4980F(c)(2) of the Internal
Revenue Code, no excise tax applies to a
failure to provide section 204(h) notice if
the employer (or other person responsible
for the tax) exercised reasonable dili-
gence and corrects the failure within 30
days after the employer (or other person
responsible for the tax) first knew, or
exercising reasonable diligence would
have known, that such failure existed. For
purposes of section 4980F(c)(1) of the
Internal Revenue Code, a person has
exercised reasonable diligence, but did
not know that the failure existed if and
only if—
(1) The person exercised reasonable
diligence in attempting to deliver section
204(h) notice to applicable individuals by
the latest date permitted under this sec-
tion; and
(2) At the latest date permitted for
delivery of section 204(h) notice, the per-
son reasonably believes that section
204(h) notice was actually delivered to
each applicable individual by that date.
(c)Example. The following example
illustrates the provisions of paragraph (b)
of this Q&A–15:
Example. (i)Facts. Plan A is amended to reduce
significantly the rate of future benefit accrual. The
employer sends out a section 204(h) notice to all
affected participants and other applicable individu-
als and to any employee organization representing
applicable individuals, including actual delivery by
hand to employees at worksites. However, although
the employer exercises reasonable diligence in seek-
ing to deliver the notice, the notice is not delivered
to any participants at one worksite due to a failure
of an overnight delivery service to provide the
notice to appropriate personnel at that site for them
to timely hand deliver the notice to affected employ-
ees. The error is discovered when the employer sub-
sequently calls to confirm delivery. Appropriate sec-
tion 204(h) notice is then promptly delivered to all
affected participants at the worksite.
(ii)Conclusion. Because the employer exercised
reasonable diligence, but did not know that a failure
existed, no excise tax applies, assuming that partici-
pants at the worksite receive section 204(h) notice
within 30 days after the employer first knew, or
exercising reasonable diligence would have known,
that the failure occurred.
Q–16. How do section 4980F and sec-
tion 204(h) apply when a business is
sold?
A–16. (a)Generally. Whether section
204(h) notice is required in connection
with the sale of a business depends on
whether a plan amendment is adopted that
significantly reduces the rate of future
benefit accrual or significantly reduces an
early retirement benefit or retirement-type
subsidy.
(b)Examples. The following examples
illustrate the rules of this Q&A–16:
Example 1. (i)Facts. Corporation Q maintains
Plan A, a defined benefit plan that covers all
employees of Corporation Q, including employees
in its Division M. Plan A provides that participating
employees cease to accrue benefits when they cease
to be employees of Corporation Q. On January 1,
2006, Corporation Q sells all of the assets of Divi-
sion M to Corporation R. Corporation R maintains
Plan B, which covers all of the employees of Cor-
poration R. Under the sale agreement, employees of
Division M become employees of Corporation R on
the date of the sale (and cease to be employees of
Corporation Q), Corporation Q continues to main-
tain Plan A following the sale, and the employees of
Division M become participants in Plan B.
(ii)Conclusion. No section 204(h) notice is
required because no plan amendment was adopted
that reduced the rate of future benefit accrual. The
employees of Division M who become employees
of Corporation R ceased to accrue benefits under
Plan A because their employment with Corporation
Q terminated.
Example 2. (i)Facts. Subsidiary Y is a wholly
owned subsidiary of Corporation S. Subsidiary Y
May 28, 200210082002–21 I.R.B.

maintains Plan C, a defined benefit plan that covers
employees of Subsidiary Y. Corporation S sells all
of the stock of Subsidiary Y to Corporation T. At the
effective date of the sale of the stock of Subsidiary
Y, in accordance with the sale agreement between
Corporation S and Corporation T, Subsidiary Y
amends Plan C so that all benefit accruals cease.
(ii)Conclusion. Section 204(h) notice is
required to be provided because Subsidiary Y
adopted a plan amendment that significantly
reduced the rate of future benefit accrual in Plan C.
Example 3. (i)Facts. As a result of an acquisi-
tion, Corporation U maintains two plans: Plan D
covers employees of Division N and Plan E covers
the rest of the employees of Corporation U. Plan E
provides a significantly lower rate of future benefit
accrual than Plan D. Plan D is merged with Plan E,
and all of the employees of Corporation U will
accrue benefits under the merged plan in accordance
with the benefit formula of former Plan E.
(ii)Conclusion. Section 204(h) notice is
required.
Example 4.—(i)Facts. The facts are the same
as inExample 3, except that the rate of future ben-
efit accrual in Plan E is not significantly lower. In
addition, Plan D has a retirement-type subsidy that
Plan E does not have and the Plan D employees’
rights to the subsidy under the merged plan are lim-
ited to benefits accrued before the merger.
(ii)Conclusion. Section 204(h) notice is
required for any participants or beneficiaries for
whom the reduction in the retirement-type subsidy
is significant (and for any employee organization
representing such participants).
Example 5. (i)Facts. Corporation V maintains
several plans, including Plan F, which covers
employees of Division P. Plan F provides that par-
ticipating employees cease to accrue further benefits
under the plan when they cease to be employees of
Corporation V. Corporation V sells all of the assets
of Division P to Corporation W, which maintains
Plan G for its employees. Plan G provides a signifi-
cantly lower rate of future benefit accrual than Plan
F. Plan F is merged with Plan G as part of the sale,
and employees of Division P who become employ-
ees of Corporation W will accrue benefits under the
merged plan in accordance with the benefit formula
of former Plan G.
(ii)Conclusion. No section 204(h) notice is
required because no plan amendment was adopted
that reduces the rate of future benefit accrual or
eliminates or significantly reduces an early retire-
ment benefit or retirement-type subsidy. Under the
terms of Plan F as in effect prior to the merger,
employees of Division P cease to accrue any further
benefits (including benefits with respect to early
retirement benefits and any retirement-type subsidy)
under Plan F after the date of the sale because their
employment with Corporation V terminated.
Q–17. How are amendments to cease
accruals and terminate a plan treated
under section 4980F of the Internal Rev-
enue Code and section 204(h) of ERISA?
A–17. (a)General rule—(1)Rule.An
amendment providing for the cessation of
benefit accruals on a specified future date
and for the termination of a plan is sub-
ject to section 4980F of the Internal Rev-
enue Code and section 204(h) of ERISA.
(2)Example. The following example
illustrates the rule of paragraph (a)(1) of
this Q&A–17:
Example. (i)Facts. An employer adopts an
amendment that provides for the cessation of benefit
accruals under a defined benefit plan on December
31, 2003, and for the termination of the plan pursu-
ant to title IV of ERISA as of a proposed termina-
tion date that is also December 31, 2003. As part of
the notice of intent to terminate required under title
IV in order to terminate the plan, the plan adminis-
trator gives section 204(h) notice of the amendment
ceasing accruals, which states that benefit accruals
will cease“on December 31, 2003.”However,
because all the requirements of title IV for a plan
termination are not satisfied, the plan cannot be ter-
minated until a date that is later than December 31,
2003.
(ii)Conclusion. Nonetheless, because section
204(h) notice was given stating that the plan was
amended to cease accruals on December 31, 2003,
section 204(h) does not prevent the amendment to
cease accruals from being effective on December
31, 2003. The result would be the same had the sec-
tion 204(h) notice informed the participants that the
plan was amended to provide for a proposed termi-
nation date of December 31, 2003, and to provide
that“benefit accruals will cease on the proposed
termination date whether or not the plan is termi-
nated on that date.”However, neither section 4980F
of the Internal Revenue Code nor section 204(h) of
ERISA would be satisfied with respect to the
December 31, 2003, effective date if the section
204(h) notice had merely stated that benefit accruals
would cease“on the termination date”or“on the
proposed termination date.”
(3)Additional requirements under title
IV of ERISA. See 29 CFR 4041.23(b)(4)
and 4041.43(b)(5) for special rules appli-
cable to plans terminating under title IV
of ERISA.
(b)Terminations in accordance with
title IV of ERISA. A plan that is termi-
nated in accordance with title IV of
ERISA is deemed to have satisfied sec-
tion 4980F of the Internal Revenue Code
and section 204(h) of ERISA not later
than the termination date (or date of ter-
mination, as applicable) established under
section 4048 of ERISA. Accordingly, nei-
ther section 4980F of the Internal Rev-
enue Code nor section 204(h) of ERISA
would in any event require that any addi-
tional benefits accrue after the effective
date of the termination.
(c)Amendment effective before termi-
nation date of a plan subject to title IV of
ERISA. To the extent that an amendment
providing for a significant reduction in
the rate of future benefit accrual or a sig-
nificant reduction in an early retirement
benefit or retirement-type subsidy has an
effective date that is earlier than the ter-
mination date (or date of termination, as
applicable) established under section
4048 of ERISA, that amendment is sub-
ject to section 4980F of the Internal Rev-
enue Code and section 204(h) of ERISA.
Accordingly, the plan administrator must
provide section 204(h) notice (either
separately, with, or as part of the notice of
intent to terminate) with respect to such
an amendment.
Q–18. What is the effective date of
section 4980F of the Internal Revenue
Code, section 204(h) of ERISA, as
amended by EGTRRA, and these regula-
tions?
A–18. (a)Statutory effective date—
(1)General rule. Section 4980F of the
Internal Revenue Code and section
204(h) of ERISA, as amended by
EGTRRA, apply to plan amendments tak-
ing effect on or after June 7, 2001 (statu-
tory effective date), which is the date of
enactment of EGTRRA.
(2)Transition rule. For amendments
applying after the statutory effective date
in paragraph (a)(1) of this Q&A–18 and
prior to the regulatory effective date in
paragraph (c) of this Q&A–18, the
requirements of section 4980F(e)(2) and
(3) of the Internal Revenue Code and sec-
tion 204(h) of ERISA, as amended by
EGTRRA, are treated as satisfied if the
plan administrator makes a reasonable,
good faith effort to comply with those
requirements.
(3)Special notice rule—(i)In general.
Notwithstanding Q&A–9 of this section,
section 204(h) notice is not required by
section 4980F(e) of the Internal Revenue
Code or section 204(h) of ERISA, as
amended by EGTRRA, to be provided
prior to September 7, 2001 (the date that
is three months after the date of enact-
ment of EGTRRA).
(ii)Reasonable notice. The require-
ments of section 4980F of the Internal
Revenue Code and section 204(h) of
ERISA, as amended by EGTRRA, do not
apply to any plan amendment that takes
effect on or after June 7, 2001, if, before
April 25, 2001, notice was provided to
participants and beneficiaries adversely
affected by the plan amendment (and
their representatives) which was reason-
ably expected to notify them of the nature
and effective date of the plan amendment.
For purposes of this paragraph (a)(3)(ii),
2002–21 I.R.B.1009May 28, 2002

notice that complies with§1.411(d)–6of
this chapter, as it appeared in the April 1,
2001, edition of 26 CFR part 1, is deemed
to be notice which was reasonably
expected to notify participants and ben-
eficiaries adversely affected by the plan
amendment (and their representatives) of
the nature and effective date of the plan
amendment.
(b)Amendments taking effect prior to
June 7, 2001. For rules applicable to
amendments taking effect prior to June 7,
2001, see§1.411(d)–6 of this chapter, as
it appeared in the April 1, 2001, edition of
26 CFR part 1.
(c)Regulatory effective date. Q&A–1
through Q&A–18 of this section apply to
amendments taking effect on or after the
date that is 120 days after publication of
final regulations under this section (regu-
latory effective date).
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on April
22, 2002, 8:45 a.m., and published in the issue of
the Federal Register for April 23, 2002, 67 F.R.
19713)
Partial Withdrawal of Previous
Proposed Rules; Notice of
Proposed Rulemaking and
Notice of Public Hearing
Information Reporting for
Qualified Tuition and Related
Expenses; Magnetic Media
Filing Requirements for
Information Returns
REG–161424–01
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Partial withdrawal of previous
proposed rules; notice of proposed rule-
making and notice of public hearing.
SUMMARY: This document withdraws
in part proposed regulations relating to
the information reporting requirements
under section 6050S. This document also
contains new proposed regulations relat-
ing to the information reporting require-
ments under section 6050S for qualified
tuition and related expenses. These pro-
posed regulations reflect changes to the
law made by the Taxpayer Relief Act of
1997 and the amendments made by the
Internal Revenue Service Restructuring
and Reform Act of 1998 and Public Law
107–131. The regulations provide guid-
ance to eligible educational institutions
that enroll any individual for any aca-
demic period. The regulations also pro-
vide guidance to insurers that make reim-
bursements or refunds of qualified tuition
and related expenses. This document pro-
vides notice of a public hearing on these
proposed regulations.
DATES: Written or electronic comments
must be received by July 29, 2002.
Requests to speak and outlines of topics
to be discussed at the public hearing
scheduled for August 13, 2002, at 10 a.m.
must be received by July 23, 2002.
ADDRESSES: Send submissions to:
CC:ITA:RU (REG–161424–01), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand
delivered Monday through Friday
between the hours of 8 a.m. and 5 p.m.
to: CC:ITA:RU (REG–161424–01), Cou-
rier’s Desk, Internal Revenue Service,
1111Constitution Avenue, NW, Washing-
ton, DC. Taxpayers may also submit com-
ments electronically via the internet by
selecting the“Tax Regs”option on the
IRS Home Page, or by submitting com-
ments directly to the IRS internet site at
www.irs.gov/regs.
FOR FURTHER INFORMATION CON-
TACT: Concerning the regulations,
Donna Welch, (202) 622–4910; concern-
ing submissions of comments, the hearing
and/or to be placed on the building access
list to attend the hearing, Donna Poindex-
ter, (202) 622–7180, and concerning the
magnetic media filing specifications,
waivers for filing on magnetic media, and
extensions of time, contact the Internal
Revenue Service, Martinsburg Computing
Center, (304) 263–8700 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in this notice of proposed rulemak-
ing has been previously reviewed and
approved by the Office of Management
and Budget in accordance with the Paper-
work Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545–
1678.
An agency may not conduct or spon-
sor, and a person is not required to
respond to, a collection of information
unless it displays a valid control number
assigned by the Office of Management
and Budget.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial 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 withdraws§1.6050S–1
of the notice of proposed rulemaking
(REG–105316–98, 2000–2 C.B. 98) relat-
ing to the information reporting require-
ments under section 6050S that was pub-
lished in theFederal Register(65 FR
37728) on June 16, 2000 (the 2000 pro-
posed regulations). This document also
contains new proposed amendments to 26
CFR part 1 in§1.6050S–1 relating to
information reporting requirements under
section 6050S for eligible educational
institutions and insurers (these proposed
regulations). The IRS and the Treasury
Department have determined that the
2000 proposed regulations addressing the
information reporting requirements for
payees who receive payments of interest
on qualified education loans will be final-
ized in a separate Treasury decision.
2.Effective Date of These Proposed
Regulations and Reporting Requirements
for the Calendar Year 2002
The information reporting require-
ments in these proposed regulations are
proposed to apply to information returns
required to be filed, and information
statements required to be furnished, after
December 31, 2003, for amounts report-
able for the calendar year 2003 and sub-
sequent years. These proposed regulations
will not be effective until they are final-
ized. Therefore, the information reporting
requirements in Notice 97–73 (1997–2
May 28, 200210102002–21 I.R.B.

C.B. 335), as modified, continue for
information returns required to be filed,
and information statements required to be
furnished, for amounts reportable for the
calendar year 2002 (for which the returns
and statements are required to be filed
and furnished in 2003). However, taxpay-
ers may rely on these proposed regula-
tions for guidance pending issuance of
final regulations. If, and to the extent,
future guidance is more restrictive than
the guidance in these proposed regula-
tions, the future guidance will be applied
without retroactive effect.
3.Current Statutory Provisions
The Taxpayer Relief Act of 1997 (Pub-
lic Law 105–34 (111 Stat. 788) (TRA
’97)) added section 25A of the Internal
Revenue Code (Code) to provide the
Hope Scholarship Credit and the Lifetime
Learning Credit (education tax credit). In
general, the education tax credit allows
certain taxpayers who pay qualified
tuition and related expenses (qualified
expenses) to an eligible educational insti-
tution (an institution) to claim a nonre-
fundable credit against their Federal
income tax liability. On January 6, 1999,
the IRS issued proposed regulations
under section 25A. See 64 FR 794
(1999).
In addition, TRA’97 added section
6050S of the Code. Section 6050S was
amended by the Internal Revenue Service
Restructuring and Reform Act of 1998
(Public Law 105–206 (112 Stat. 685)
(RRA’98)). In general, section 6050S
requires eligible educational institutions
who receive payments of qualified tuition
and related expenses to file information
returns and to furnish written information
statements to assist taxpayers and the IRS
in determining any education tax credit
allowable under section 25A (as well as
other tax benefits for higher education
expenses). See H.R. Conf. Rept. No. 599,
105th Cong., 2d Sess., pp. 319–320
(1998).
In addition, section 6050S requires any
person engaged in a trade or business of
making payments to any individual under
an insurance agreement as reimburse-
ments or refunds of qualified tuition and
related expenses (an insurer) to file infor-
mation returns and to furnish written
information statements. Lastly, section
6050S requires certain payees who
receive payments of interest on one or
more qualified education loans to file
information returns and to furnish written
information statements to assist taxpayers
and the IRS in determining any interest
deduction allowable under section 221.
As currently in effect, section
6050S(b) provides that the information
return filed by an eligible educational
institution or insurer must contain: (1) the
name, address, and taxpayer identification
number (TIN) of the individual with
respect to whom payments were received,
or the reimbursements or refunds were
made, of qualified tuition and related
expenses; (2) the name, address, and TIN
of any individual certified by the indi-
vidual as the taxpayer who will claim that
individual as a dependent for purposes of
the deduction allowable under section
151 for any taxable year ending with or
within the year for which the information
return is filed; (3) the aggregate amount
of payments of qualified tuition and
related expenses received by the eligible
educational institution during the calendar
year with respect to the individual; (4) the
aggregate amount of reimbursements or
refunds of qualified tuition and related
expenses paid by an institution or an
insurer during the calendar year with
respect to the individual; (5) the aggre-
gate amount of any scholarships or grants
that the eligible educational institution
processed during the calendar year for the
individual’s costs of attendance; and (6)
such other information as the Secretary
may prescribe.
4.Previous Guidance Under Section
6050S
The IRS has published several notices
prescribing limited information reporting
for eligible educational institutions for the
years 1998, 1999, 2000, and 2001. See
Notice 97–73 (1997–2 C.B. 335), Notice
98–46 (1998–2 C.B. 290), Notice 98–59
(1998–49 I.R.B. 16), Notice 99–37
(1999–2 C.B. 124), and Notice 2000–62
(2000–2 C.B. 587).
A notice of proposed rulemaking under
section 6050S (REG–105316–98) was
published in theFederal Register(65 FR
37728) on June 16, 2000. A public hear-
ing was held on the proposed regulations
on February 13, 2001. The IRS received
written and electronic comments respond-
ing to the 2000 notice of proposed rule-
making.
5.Recent Amendments to Section 6050S
Section 6050S was further amended by
Public Law 107–131 (115 Stat. 2410),
effective for qualified expenses paid or
billed after December 31, 2002, for aca-
demic periods beginning after December
31, 2002. For calendar years beginning
after December 31, 2002, eligible educa-
tional institutions may elect to report
either the aggregate amount of payments
received, or the aggregate amount billed,
for qualified tuition and related expenses
during the calendar year with respect to
individuals enrolled for any academic
period. Institutions will no longer be
required to report separately any refunds
or reimbursements of qualified expenses
made during the calendar year that relate
to payments received for qualified
expenses during the current calendar year.
Rather, institutions will be required to
report separately only adjustments made
during the calendar year to payments
received, or amounts billed, for qualified
expenses that were reported in a prior cal-
endar year. Institutions will be required to
report scholarships or grants received for
the individual’s costs of attendance that
the institution administered and processed
during the calendar year. In addition,
institutions will be required to report
separately adjustments made during the
calendar year to scholarships that were
reported in a prior calendar year. Section
6050S will no longer require institutions
to report the name, address, and TIN of
any individual certified by the individual
as the taxpayer who will claim that indi-
vidual as a dependent for purposes of the
deduction allowable under section 151 for
any taxable year ending with or within
the year for which the information return
is filed.
These proposed regulations reflect the
amendments to section 6050S by Public
Law 107–131 and address many of the
concerns raised by the educational com-
munity in their comments to the 2000
proposed regulations. These proposed
regulations for eligible educational insti-
tutions and insurers are discussed below.
2002–21 I.R.B.1011May 28, 2002

Explanation of Provisions
1.Information Reporting Relating to
Qualified Tuition and Related Expenses
A.Required reporting and exceptions to
reporting
Consistent with the amendments to
section 6050S by Public Law 107–131,
these proposed regulations require an eli-
gible educational institution (as defined in
section 25A(f)(2) and the regulations
thereunder) (an institution) to file a Form
1098–T,Tuition Payment Statement, with
respect to each individual who is or has
been enrolled for any academic period (as
defined in the regulations under section
25A) and for whom reportable transac-
tions are made during the calendar year.
In addition, these proposed regulations
require any person engaged in a trade or
business of making payments under an
insurance arrangement as reimbursements
or refunds (or other similar amounts) of
qualified tuition and related expenses (as
defined in section 25A(f)(1) and the regu-
lations thereunder) (an insurer) to file a
Form 1098–T with the IRS with respect
to each individual for whom it makes
reimbursements or refunds of qualified
expenses.
(i) Reporting Based on Academic Year
vs. Calendar Year
The commentators to the 2000 pro-
posed regulations requested that an insti-
tution be allowed to report financial data
based on an academic year, and not based
on a calendar year. Section 6050S
requires institutions to report on a calen-
dar year in order to assist taxpayers in
calculating the education tax credit that is
allowable for qualified expenses paid dur-
ing a calendar year. Therefore, these pro-
posed regulations do not adopt this rec-
ommendation.
(ii) Eligible Educational Institution for
Portion of Calendar Year
The commentators to the 2000 pro-
posed regulations requested clarification
of the rules for determining which institu-
tions are required to report under section
6050S and the exceptions to reporting.
One commentator asked whether an insti-
tution that is not aneligible educational
institutionwithin the meaning of section
25A(f)(2) at the beginning of the calendar
year, but becomes an eligible educational
institution during the calendar year, is
required to report under section 6050S,
and, if so, whether the institution must
report for the entire calendar year or only
the portion of the year in which it is an
eligible educational institution. An institu-
tion that is an eligible educational institu-
tion for any portion of a calendar year
must report under section 6050S. Further,
because the education tax credit is allow-
able only for payments made to an eli-
gible educational institution, the institu-
tion must report for only the portion of
the year in which it is an eligible educa-
tional institution.
(iii) Exception for Nonresident Aliens
Several commentators to the 2000 pro-
posed regulations requested clarification
of the exception to reporting for an indi-
vidual who is a nonresident alien. The
2000 proposed regulations provide that an
institution or insurer must report for the
year that the institution or insurer receives
a request from a nonresident alien indi-
vidual to report and all subsequent years.
The commentators recommended that
reporting be limited to the calendar year
for which the institution or insurer
receives the request. The commentators
explained that institutions would need to
create a new database to report automati-
cally for subsequent years. These pro-
posed regulations provide that any report-
ing for a nonresident alien individual is
limited to the calendar year for which the
institution or insurer receives a request.
(iv) Exception for Noncredit Courses
Several commentators to the 2000 pro-
posed regulations requested clarification
of the exception to reporting for an indi-
vidual who is enrolled during the calendar
year only in noncredit courses. The com-
mentators noted that the exception is
intended to cover students enrolled in
courses for which no academic credit is
offered, not students who do not receive
academic credit in a particular course.
Therefore, these proposed regulations
clarify that the exception applies to stu-
dents enrolled only in courses for which
academic credit is not offered. In addi-
tion, several commentators suggested that
the word“only”should be removed and
that the exception should apply to stu-
dents who are enrolled both in courses for
which no academic credit is offered and
in courses offered for credit that may lead
toward a postsecondary degree. The
exception is intended to cover nondegree
students enrolled in courses for which no
academic credit is offered, consistent with
the legislative history to section 6050S.
See H.R. Conf. Rep. No. 599, 105th
Cong., 2d Sess., p. 322 (1998). Therefore,
these proposed regulations do not adopt
this recommendation.
Several commentators to the 2000 pro-
posed regulations recommended that
institutions should have discretion to
define what constitutesacademic credit.
The 2000 proposed regulations define
academic credit as credit awarded by an
institution for the completion of course-
work leading toward a postsecondary
degree, certificate, or other recognized
postsecondary educational credential.
This definition provides a uniform test to
determine academic credit for informa-
tion reporting purposes. These proposed
regulations retain the definition of aca-
demic credit and do not adopt this recom-
mendation.
(v) No Exception for Small Institutions
or Small Amounts of Qualified Tuition
and Related Expenses
One commentator to the 2000 pro-
posed regulations suggested that the regu-
lations should provide an exception to
reporting for institutions with 500 or
fewer students, and another commentator
suggested that the regulations should pro-
vide an exception for qualified expenses
of $250 or less. The limited exceptions to
required reporting are based on the fact
that certain categories of students may not
be eligible to claim the education tax
credit (e.g., nondegree students enrolled
in noncredit courses cannot claim the
Hope Scholarship Credit and nonresident
alien students are generally not eligible to
claim the education tax credit). See H.R.
Conf. Rep. No. 599, 105th Cong., 2d
Sess., p. 322 (1998). Exceptions to report-
ing for small institutions or small
amounts of qualified expenses have no
relationship to a student’s eligibility to
claim the education tax credit. Therefore,
May 28, 200210122002–21 I.R.B.

these proposed regulations do not adopt
these recommendations.
(vi) Exception for Students Whose
Qualified Expenses Are Paid with
Scholarships
Several commentators to the 2000 pro-
posed regulations suggested that the regu-
lations should include an exception to
reporting for students whose qualified
expenses are waived in their entirety or
are paid entirely with scholarships. Notice
97–73 provides that institutions are not
required to report for such students
because the institutions will not have
received any payment of qualified
expenses on behalf of such students for
which the student could, in general, claim
the education tax credit. These proposed
regulations follow the rule in Notice
97–73 and provide that an institution is
not required to report on students whose
qualified expenses for the calendar year
are waived in their entirety or are paid
entirely with scholarships.
(vii) Exception for Students Whose
Qualified Expenses Are Covered by
Formal Billing Arrangement between
Institution and Student’s Employer
Several commentators to the 2000 pro-
posed regulations suggested that the regu-
lations should provide an exception to
reporting for students whose qualified
expenses are paid by a third party (such
as an employer) to the institution through
a formal billing arrangement. The com-
mentators explained that often an
employer and an institution enter into an
agreement in which employees attend the
institution, and the institution bills only
the employer. In this situation, the institu-
tion does not maintain a separate account
for each employee/student. These
arrangements often constitute employer-
provided educational assistance exclud-
able from the employee’s gross income
under section 127. Under section 25A and
the regulations thereunder, taxpayers can-
not claim the education tax credit for edu-
cation expenses paid by an employer
which are tax-free to the employee.
Therefore, these proposed regulations
provide an exception to reporting with
respect to any individual whose qualified
expenses are covered by a formal billing
arrangement between an institution and
the individual’s employer.
(viii) Family Educational Rights and
Privacy Act and Optional Reporting
Several commentators to the 2000 pro-
posed regulations requested clarification
as to whether an institution that chooses
to report on students otherwise covered
by an exception to required reporting
would violate the Family Educational
Rights and Privacy Act (FERPA) (20
U.S.C. section 1232g). The Department
of Education has previously determined
that reporting under section 6050S does
not violate FERPA. We have asked the
Department of Education to consider
whether this determination extends to
institutions that choose to report on stu-
dents otherwise covered by an exception
to required reporting in these proposed
regulations.
B.Required information for institutions
(i) Reporting of Payments Received vs.
Amounts Billed
Based on the provisions of section
6050S prior to the amendments by Public
Law 107–131, the 2000 proposed regula-
tions provide that an institution must
report the aggregate amount of payments
received for qualified expenses, and the
aggregate amount of reimbursements or
refunds made of qualified expenses, with
respect to any individual during the calen-
dar year. Numerous commentators
explained that their institutions cannot
report payments for, and reimbursements
or refunds of, qualified expenses, because
their financial systems do not apply pay-
ments and reimbursements or refunds to
specific charges. According to these insti-
tutions, a student’s account is a running
balance of undesignated payments and
reimbursements or refunds. These com-
mentators suggested that the regulations
should allow institutions that are unable
to report payments received for, and reim-
bursements or refunds made of, qualified
expenses, to report instead: (1) the
amount billed with respect to any indi-
vidual for qualified expenses during the
calendar year; and (2) the amount of any
reductions to the amounts billed with
respect to the individual.
Consistent with section 6050S as
amended by Public Law 107–131, these
proposed regulations provide that institu-
tions may elect to report either the pay-
ments received, or the amounts billed,
during the calendar year for qualified
tuition and related expenses with respect
to individuals enrolled for an academic
period beginning during the calendar year
or during a prior calendar year.
(ii) Reporting Adjustments to Payments
Received (or Amounts Billed) for a Prior
Calendar Year
The commentators to the 2000 pro-
posed regulations suggested that the regu-
lations should distinguish between reim-
bursements or refunds that relate to
payments received during the current cal-
endar year and those that relate to pay-
ments for prior calendar years. The com-
mentators suggested that, rather than
reporting separately aggregate payments
and aggregate reimbursements or refunds,
institutions should be permitted to net
current year payments of qualified
expenses against any refunds of such cur-
rent year payments, and to report only the
net payments received for qualified
expenses during the current calendar year.
These commentators suggested that insti-
tutions should be required to report sepa-
rately only the amount of any reimburse-
ments or refunds made in the current year
that relate to qualified expenses paid that
were reported in a prior calendar year.
Consistent with this approach, the
commentators also suggested that institu-
tions reporting amounts billed should be
permitted to net amounts billed for quali-
fied expenses for the current year against
any reductions in amounts billed for
qualified expenses for the current year,
and to report only the net amount billed
for qualified expenses during the current
calendar year. Similarly, the commenta-
tors suggested that these institutions
should be required to report separately
only those reductions made in the current
year that relate to amounts billed for
qualified expenses that were reported in a
prior calendar year.
Congress adopted this approach in the
amendments to section 6050S by Public
Law 107–131. As amended, section
6050S will require institutions to report
separately only adjustments made during
the calendar year to payments received,
2002–21 I.R.B.1013May 28, 2002

or amounts billed, that relate to amounts
that were reported for a prior calendar
year. For example, for institutions that
report based on payments received, sepa-
rate reporting will be required only for
refunds or reimbursements of qualified
expenses made during the calendar year
that relate to payments of qualified
expenses that were reported for a prior
calendar year. For institutions that report
based on amounts billed, separate report-
ing will be required only for reductions in
charges made during the calendar year
that relate to amounts billed for qualified
expenses that were reported for a prior
calendar year.
Therefore, for institutions that report
based on payments received, these pro-
posed regulations provide that, in deter-
mining the amounts to be reported under
section 6050S for a calendar year, pay-
ments received for qualified expenses
during the calendar year must be netted
against any reimbursements or refunds of
qualified expenses made during the calen-
dar year that relate to payments received
for qualified expenses during the same
calendar year. These regulations also pro-
vide that reimbursements or refunds made
during the calendar year that relate to
payments of qualified expenses that were
reported for a prior calendar year must be
reported separately.
Similarly, for institutions that report
based on amounts billed, these proposed
regulations provide that, in determining
the amounts to be reported under section
6050S for a calendar year, the amount
billed for qualified expenses during the
calendar year must be netted against any
reductions in charges for qualified
expenses made during the calendar year
that relate to amounts billed for qualified
expenses during the same calendar year.
These regulations also provide that any
reductions in charges made during the
calendar year that relate to amounts
reported as billed for a prior calendar year
must be reported separately.
These regulations are proposed to
apply to payments received, and amounts
billed, for qualified expenses beginning in
2003. Therefore, the first year for which
institutions may be required to collect
information regarding any reimburse-
ments or refunds of prior year reportable
payments (or any reductions in reportable
amounts billed for a prior year) is 2004.
The amount of any reimbursements or
refunds (or reductions) made in 2004 for
amounts paid (or billed) in 2003 would be
reported on the 2004 Forms 1098–T filed
in early 2005.
(iii) Reporting Adjustments to
Scholarships for a Prior Calendar Year
Consistent with section 6050S as
amended by Public Law 107–131, these
proposed regulations provide that all
institutions must report separately any
reductions in the amount of scholarships
or grant aid reported for a prior calendar
year.
(iv) Name, Address, and TIN of
Taxpayer
The 2000 proposed regulations reserve
the requirement in section 6050S(b)(2)(B)
that an institution or insurer obtain and
report the name, address, and TIN of any
taxpayer who will claim the individual as
a dependent for purposes of the deduction
allowable under section 151 for the tax-
able year. This statutory requirement will
be eliminated by the amendments to sec-
tion 6050S by Public Law 107–131.
Therefore, consistent with section 6050S
as amended, these proposed regulations
remove this requirement.
(v) Half-time Indicator
Several commentators to the 2000 pro-
posed regulations suggested that institu-
tions should not be required to indicate
whether a student was enrolled at least
half time. Another commentator sug-
gested that institutions should be required
to provide the half-time indicator only for
students enrolled in undergraduate stud-
ies. An indication as to whether a student
was enrolled at least half time for one
academic period is useful information for
the IRS to verify whether the student may
be eligible to claim the Hope Scholarship
Credit and certain other education tax
benefits, and this information is readily
available to institutions. Therefore, these
proposed regulations do not adopt these
recommendations.
(vi) Information Statement
The 2000 proposed regulations pro-
vide that an institution or insurer must
furnish an information statement to each
individual for whom it is required to file
a Form 1098–T. The statement must
include specific instructions to the tax-
payer. These proposed regulations pro-
vide that the instructions must state that a
taxpayer may claim an education tax
credit only for amounts actually paid dur-
ing the calendar year. These proposed
regulations also provide that the instruc-
tions must state that the amount of any
refunds or reimbursements of payments
received, or reductions in charges, for
qualified expenses or any reductions in
grant aid reported for a prior calendar
year may affect the amount of any educa-
tion tax credit allowable for the prior cal-
endar year.
The 2000 proposed regulations pro-
vide that the statement must include the
name, address, and phone number of the
individual who is the information contact
for the institution or insurer that filed the
Form 1098–T. Several commentators to
the 2000 proposed regulations requested
that the regulations should not require the
name of an individual. The commentators
explained that it is not feasible for institu-
tions to provide an individual as the infor-
mation contact and requested that institu-
tions be allowed to provide an office or
department of the institution as the infor-
mation contact. These proposed regula-
tions adopt this recommendation.
The 2000 proposed regulations reserve
the requirement in section 6050S(d) that
an institution or insurer furnish a state-
ment to any taxpayer who will claim the
individual as a dependent for purposes of
the deduction allowable under section
151 for the taxable year. This statutory
requirement will be eliminated by the
amendments to section 6050S by Public
Law 107–131. Therefore, consistent with
section 6050S as amended, these regula-
tions remove this requirement.
C.Required information for insurers
The information reporting require-
ments for insurers is not changed by the
amendments to section 6050S by Public
Law 107–131. Therefore, these proposed
regulations continue to provide that an
insurer must file an information return for
each individual with respect to whom
reimbursements or refunds of qualified
tuition and related expenses are made
during the calendar year. An insurer must
include: (1) the name, address, and TIN
May 28, 200210142002–21 I.R.B.

of the insurer; (2) the name, address, and
TIN of the individual with respect to
whom reimbursements or refunds of
qualified tuition and related expenses
were made; and (3) the aggregate amount
of reimbursements or refunds of qualified
tuition and related expenses that the
insurer made with respect to the indi-
vidual during the calendar year.
D.Information reporting penalties
(i) Penalty Notification
These proposed regulations, as well as
the 2000 proposed regulations, provide
that an institution or insurer may be sub-
ject to a penalty under section 6721 for
failure to file correct Forms 1098–T and a
penalty under section 6722 for failure to
furnish correct information statements.
The 2000 proposed regulations provide
that an institution or insurer must notify
the individual that the IRS may impose a
$50 penalty for failure to provide a TIN.
Several commentators to the 2000 pro-
posed regulations requested that the pen-
alty notification be removed. Section
6723 and the regulations thereunder
authorize the IRS to impose a $50 penalty
if an individual fails to provide his or her
TIN as required but do not require an
institution or insurer to give prior notifi-
cation of the penalty. Therefore, these
proposed regulations adopt this recom-
mendation.
(ii) Annual TIN Solicitation Requirement
Several commentators to the 2000 pro-
posed regulations recommended that
institutions not be required to request an
individual’s TIN annually if the institu-
tion does not have the individual’s TIN.
These proposed regulations continue to
provide that, in order to establish a
waiver of the information reporting pen-
alties for reasonable cause, an institution
or insurer must request an individual’s
TIN annually if it does not have the TIN.
The annual solicitation rule in these regu-
lations is consistent with the general
solicitation requirements in section
301.6724–1(e) and (f) that a filer must
meet in order to establish reasonable
cause. These proposed regulations clarify
that a separate solicitation is not neces-
sary if an institution requests an individu-
al’s TIN through admission or enrollment
forms or financial aid applications.
(iii) Filing Information Returns with
Missing TINs
Several commentators to the 2000 pro-
posed regulations requested that institu-
tions not be required to file information
returns and to furnish information state-
ments for individuals who refuse to pro-
vide their TINs. Information returns and
information statements with missing TINs
are useful to both the IRS and the indi-
vidual in verifying the amount of any
allowable education tax credit (as well as
other tax benefits for higher education
expenses). Therefore, these proposed
regulations do not adopt this recommen-
dation.
2.Requirement to File Information
Returns on Magnetic Media
These regulations propose to amend
the regulations under section 6011(e) to
require institutions and insurers who are
required to file 250 or more Forms
1098–T to file on magnetic media.
Special Analyses
It has been determined that these pro-
posed regulations are not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory
assessment is not required. It has also
been determined that section 553(b) of
the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations. An initial regulatory flexibil-
ity analysis has been prepared for this
notice of proposed rulemaking under sec-
tion 5 U.S.C. 603 and is set forth under
the heading“Initial Regulatory Flexibility
Analysis”in this preamble. Pursuant to
section 7805(f) of the Code, this notice of
proposed rulemaking will be submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Initial Regulatory Flexibility Analysis
The collection of information con-
tained in§1.6050S–1 is needed to assist
the IRS and taxpayers in determining the
amount of any education tax credit allow-
able under section 25A. The objectives of
these regulations are to provide uniform,
practicable, and administrable rules under
section 6050S. The types of small entities
to which the regulations may apply are
small eligible educational institutions
(such as colleges and universities) and
certain insurers who reimburse educa-
tional expenses. As of the end of 2001, a
total of 19,817,563 Forms 1098–T were
filed with the IRS for 2000. The esti-
mated reporting burden for 2001 is 9 min-
utes per Form 1098–T. No special profes-
sional skills are necessary for preparation
of the reports or records. There are no
known Federal rules that duplicate, over-
lap, or conflict with these proposed regu-
lations. The regulations proposed are con-
sidered to have the least economic impact
on small entities of all alternatives con-
sidered.
Moreover, the proposed regulations
requiring filing Forms 1098–T on mag-
netic media impose no additional report-
ing or recordkeeping and only prescribe
the method of filing information returns
that are already required to be filed. Fur-
ther, these regulations are consistent with
the statutory requirement that an institu-
tion or insurer is not required to file
Forms 1098–T on magnetic media unless
required to file at least 250 or more
returns during the year. Finally, the eco-
nomic impact caused by requiring Forms
1098–T on magnetic media should be
minimal because most institution’sor
insurer’s operations are computerized.
Even if their operations are not computer-
ized, the incremental cost of magnetic
media reporting should be minimal in
most cases because of the availability of
computer service bureaus. In addition, the
existing regulations under section 6011(e)
provide that the IRS may waive the mag-
netic media filing requirements on a
showing of hardship. The waiver author-
ity will be exercised so as not to unduly
burden institutions and insurers lacking
both the necessary data processing facili-
ties and access at a reasonable cost to
computer service bureaus.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed
original and eight (8) copies) or electronic
comments that are submitted timely to the
IRS. The IRS and Treasury Department
request comments on the clarity of the
2002–21 I.R.B.1015May 28, 2002

proposed rules and how they can be made
easier to understand. All comments will
be available for public inspection and
copying.
A public hearing has been scheduled
for August 13, 2002, beginning at 10 a.m.
in the auditorium of the Internal Revenue
Building,1111Constitution Avenue, NW,
Washington, DC. All visitors must present
photo identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the immedi-
ate 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 INFORMA-
TION CONTACT”section of this pre-
amble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish to
present oral comments at the hearing
must submit written or electronic com-
ments 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 July 23, 2002. A period of 10
minutes will be allotted to each person for
making comments. An agenda showing
the scheduling of the speakers will be
prepared after the deadline for receiving
outlines has passed. Copies 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 Adminis-
tration), Administrative Provisions and
Judicial Practice Division. However,
other personnel from the IRS and the
Treasury Department participated in the
development of the regulations.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 301
are proposed to be amended as follows:
PA RT 1—INCOME TAX
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805***
Section 1.6050S–1 also issued under sec-
tion 26 U.S.C. 6050S(g).***
Par. 2. Sections 1.6050S–0 is amended
by revising the introductory language and
adding new entries for§1.6050S–1to
read as follows:
§1.6050S–0 Table of contents
This section lists captions contained in
§§1.6050S–1, 1.6050S–2T, 1.6050S–3,
and 1.6050S–4T.
§1.6050S–1 Information reporting for
qualified tuition and related expenses.
(a) Information reporting requirement.
(1) In general.
(2) Exceptions.
(i) No reporting by institutions or insurers
for nonresident alien individuals.
(ii) No reporting by institutions for indi-
viduals enrolled only in noncredit
courses.
(A) In general.
(B) Academic credit defined.
(C) Example.
(iii) No reporting by institutions for indi-
viduals whose qualified tuition and
related expenses are waived or are paid
with scholarships.
(iv) No reporting by institutions for indi-
viduals whose qualified tuition and
related expenses are covered by a formal
billing arrangement.
(A) In general.
(B) Formal billing arrangement defined.
(b) Requirement to file return.
(1) In general.
(2) Information reporting requirements
for institutions that elect to report pay-
ments received for qualified tuition and
related expenses.
(i) In general.
(ii) Information included on return.
(iii) Reportable amount of payments
received for qualified tuition and related
expenses during calendar year deter-
mined.
(iv) Separate reporting of reimbursements
or refunds of payments of qualified
tuition and related expenses that were
reported for a prior calendar year.
(v) Payments received for qualified
tuition and related expenses determined.
(vi) Reimbursements or refunds of pay-
ments for qualified tuition and related
expenses determined.
(vii) Examples.
(3) Information reporting requirements
for institutions that elect to report
amounts billed for qualified tuition and
related expenses.
(i) In general.
(ii) Information included on return.
(iii) Reportable amounts billed for quali-
fied tuition and related expenses during
calendar year determined.
(iv) Separate reporting of reductions
made to amounts billed for qualified
tuition and related expenses that were
reported for a prior calendar year.
(v) Examples.
(4) Requirements for insurers.
(i) In general.
(ii) Information included on return.
(5) Time and place for filing return.
(i) In general.
(ii) Return for nonresident alien indi-
vidual.
(iii) Extensions of time.
(6) Use of magnetic media.
(c) Requirement to furnish statement.
(1) In general.
(2) Time and manner for furnishing state-
ment.
(i) In general.
(ii) Statement to nonresident alien indi-
vidual.
(iii) Extensions of time.
(3) Copy of Form 1098–T.
(d) Special rules.
(1) Enrollment determined.
(2) Payments of qualified tuition and
related expenses received or collected by
one or more persons.
(i) In general.
(ii) Exception.
(3) Governmental units.
(e) Penalty provisions.
(1) Failure to file correct returns.
(2) Failure to furnish correct information
statements.
(3) Waiver of penalties for failures to
include a correct TIN.
(i) In general.
(ii) Acting in a responsible manner.
(iii) Manner of soliciting TIN.
(4) Failure to furnish TIN.
(f) Effective date.
*****
Par. 3. Section 1.6050S–1 is added to
read as follows:
May 28, 200210162002–21 I.R.B.

§1.6050S–1 Information reporting for
qualified tuition and related expenses.
(a)Information reporting require-
ment—(1)In general. Except as provided
in paragraph (a)(2) of this section, any
eligible educational institution (as defined
in section 25A(f)(2) and the regulations
thereunder) (an institution) that enrolls
(as determined under paragraph (d)(1) of
this section) any individual for any aca-
demic period (as defined in the regula-
tions under section 25A), and any person
that is engaged in a trade or business of
making payments under an insurance
arrangement as reimbursements or
refunds (or other similar amounts) of
qualified tuition and related expenses (as
defined in section 25A(f)(1) and the regu-
lations thereunder) (an insurer) must—
(i) File an information return, as
described in paragraph (b) of this section,
with the Internal Revenue Service (IRS)
with respect to each individual described
in paragraph (b) of this section; and
(ii) Furnish a statement, as described
in paragraph (c) of this section, to each
individual described in paragraph (c) of
this section.
(2)Exceptions—(i)No reporting by
institution or insurer for nonresident alien
individuals. The information reporting
requirements of this section do not apply
with respect to any individual who is a
nonresident alien (as defined in section
7701(b) and§301.7701(b)–3 of this
chapter) during the calendar year, unless
the individual requests the institution or
insurer to report. If a nonresident alien
individual requests an institution or
insurer to report, the institution or insurer
must comply with the requirements of
this section for the calendar year with
respect to which the request is made.
(ii)No reporting by institutions for
individuals enrolled only in noncredit
courses—(A)In general. The information
reporting requirements of this section do
not apply with respect to any individual
who is enrolled during the calendar year
only in courses for which no academic
credit is offered by the institution.
(B)Academic credit defined.Academic
creditmeans credit offered by an institu-
tion for the completion of coursework
leading toward a post-secondary degree,
certificate, or other recognized post-
secondary educational credential.
(C)Example. The following example
illustrates the rules of this paragraph
(a)(2)(ii):
Example. Student A, a medical doctor, takes a
course at University X’s medical school. Student A
takes the course to fulfill State Y’s licensing require-
ment that medical doctors attend continuing medical
education courses each year. Student A is not
enrolled in a degree program at University X and
takes the medical course through University X’s
continuing professional education division. Univer-
sity X does not offer Student A credit toward a post-
secondary degree on an academic transcript for the
completion of the course but gives Student A a cer-
tificate of attendance upon completion. Under this
paragraph (a)(2)(ii), University X is not subject to
the information reporting requirements of section
6050S and this section for the medical education
course taken by Student A.
(iii)No reporting by institutions for
individuals whose qualified tuition and
related expenses are waived or are paid
with scholarships. The information
reporting requirements of this section do
not apply with respect to any individual
whose qualified tuition and related
expenses are waived in their entirety or
are paid entirely with scholarships.
(iv)No reporting by institutions for
individuals whose qualified tuition and
related expenses are covered by a formal
billing arrangement—(A)In general. The
information reporting requirements of this
section do not apply with respect to any
individual whose qualified tuition and
related expenses are covered by a formal
billing arrangement between an institu-
tion and the individual’s employer.
(B)Formalbillingarrangement
defined.Aformal billing arrangement
means an arrangement in which the insti-
tution bills only the employer for educa-
tion furnished by the institution to an
individual who is the employer’s
employee and the institution does not
maintain a separate financial account for
that individual.
(b)Requirement to file return—(1)In
general. Institutions may elect to report
either the information described in para-
graph (b)(2) of this section, or the infor-
mation described in paragraph (b)(3) of
this section. Once an institution elects to
report under either paragraph (b)(2) or (3)
of this section, the institution must use
the same reporting method for all calen-
dar years in which it is required to file
returns, unless permission is granted to
change reporting methods. Paragraph
(b)(2) requires institutions to report,
among other information, the amount of
payments received during the calendar
year for qualified tuition and related
expenses. Institutions must report sepa-
rately adjustments made during the calen-
dar year that relate to payments received
for qualified tuition and related expenses
that were reported for a prior calendar
year. For purposes of paragraph (b)(2), an
adjustment made to payments received
means a reimbursement or refund. Para-
graph (b)(3) requires institutions to
report, among other information, the
amounts billed during the calendar year
for qualified tuition and related expenses.
Institutions must report separately adjust-
ments made during the calendar year that
relate to amounts billed for qualified
tuition and related expenses that were
reported for a prior calendar year. For
purposes of paragraph (b)(3), an adjust-
ment made to amounts billed means a
reduction in charges. Insurers must report
the information described in paragraph
(b)(4) of this section.
(2)Information reporting requirements
for institutions that elect to report pay-
ments received for qualified tuition and
related expenses—(i)In general. Except
as provided in paragraph (a)(2) of this
section, an institution reporting payments
received for qualified tuition and related
expenses must file an information return
with the IRS on Form 1098–T,Tuition
Payments Statement, with respect to each
individual enrolled (as determined in
paragraph (d)(1) of this section) for an
academic period beginning during the
calendar year or during a prior calendar
year and for whom a reportable transac-
tion described in paragraph (b)(2)(ii) of
this section is made during the calendar
year. An institution may use a substitute
Form 1098–T if the substitute form com-
plies with applicable revenue procedures
relatingtosubstituteforms(see
§601.601(d)(2) of this chapter).
(ii)Information included on return.An
institution reporting payments received
for qualified tuition and related expenses
must include on Form 1098–T—
(A) The name, address, and taxpayer
identification number (TIN) (as defined
in section 7701(a)(41)) of the institution;
(B) The name, address, and TIN of the
individual who is, or has been, enrolled
by the institution;
(C) The amount of payments of quali-
fied tuition and related expenses from any
2002–21 I.R.B.1017May 28, 2002

source that the institution received with
respect to the individual during the calen-
dar year;
(D) An indication by the institution
whether any payments received for quali-
fied tuition and related expenses reported
for the calendar year relate to an aca-
demic period that begins during the first
three months of the next calendar year;
(E) The amount of any scholarships or
grants for the payment of the individual’s
costs of attendance that the institution
administered and processed during the
calendar year;
(F) The amount of any reimbursements
or refunds of qualified tuition and related
expenses made during the calendar year
with respect to the individual that relate
to payments of qualified tuition and
related expenses that were reported by the
institution for a prior calendar year;
(G) The amount of any reductions to
the amount of scholarships or grants for
the payment of the individual’s costs of
attendance that were reported by the insti-
tution with respect to the individual for a
prior calendar year;
(H) An indication by the institution
whether the individual was enrolled for at
least half of the normal full-time work
load for the course of study the individual
is pursuing for at least one academic
period that begins during the calendar
year (see section 25A and the regulations
thereunder);
(I) An indication by the institution
whether the individual was enrolled in a
program leading to a graduate-level
degree, graduate-level certificate, or other
recognized graduate-level educational
credential; and
(J) Any other information required by
Form 1098–T and its instructions.
(iii)Reportable amount of payments
received for qualified tuition and related
expenses during calendar year deter-
mined. The amount of payments received
for qualified tuition and related expenses
with respect to an individual during the
calendar year that is reportable on Form
1098–T is determined by netting the
amount of payments received (as defined
in paragraph (b)(2)(v) of this section) for
qualified tuition and related expenses dur-
ing the calendar year against any reim-
bursements or refunds (as defined in para-
graph (b)(2)(vi) of this section) made
during the calendar year that relate to
payments received for qualified tuition
and related expenses during the same cal-
endar year.
(iv)Separate reporting of reimburse-
ments or refunds of payments of qualified
tuition and related expenses that were
reported for a prior calendar year.An
institution must separately report on Form
1098–T any reimbursements or refunds
(as defined in paragraph (b)(2)(vi) of this
section) made during the current calendar
year that relate to payments of qualified
tuition and related expenses that were
reported by the institution for a prior cal-
endar year. Such reimbursements or
refunds shall not be netted against the
payments received for qualified tuition
and related expenses during the current
calendar year.
(v)Payments received for qualified
tuition and related expenses determined.
For purposes of determining the amount
of payments received for qualified tuition
and related expenses during a calendar
year, payments received with respect to
an individual during the calendar year
from any source (except for any scholar-
ship or grant that, by its terms, must be
applied to expenses other than qualified
tuition and related expenses, such as
room and board) are treated as payments
of qualified tuition and related expenses
up to the total amount billed by the insti-
tution for such expenses. For purposes of
this section, a payment includes any posi-
tive account balance (such as any reim-
bursement or refund credited to an indi-
vidual’s account) that an institution
applies toward current charges.
(vi)Reimbursements or refunds of
payments for qualified tuition and related
expenses determined. For purposes of
determining the amount of reimburse-
ments or refunds made of payments
received for qualified tuition and related
expenses, any reimbursement or refund
made with respect to an individual during
a calendar year (except for any refund of
scholarship or grant that, by its terms,
was required to be applied to expenses
other than qualified tuition and related
expenses, such as room and board), is
treated as a reimbursement or refund of
payments for qualified tuition and related
expenses up to the amount of any reduc-
tion in charges for such expenses. For
purposes of this section, a reimbursement
or refund includes amounts that an insti-
tution credits to an individual’s account,
as well as amounts disbursed to, or on
behalf of, the individual.
(vii)Examples. The following
examples illustrate the rules in this para-
graph (b)(2):
Example 1. (i) In early August 2003, University
X bills enrolled Student A $10,000 for tuition and
$6,000 for room and board for the 2003 Fall semes-
ter. In late August 2003, Student A pays $11,000 to
University X. In early September 2003, Student A
drops to half-time enrollment for the 2003 Fall
semester. In late September 2003, University X
credits $5,000 to Student A’s account, reflecting a
$5,000 reduction in charges for qualified tuition and
related expenses. In late September 2003, University
X applies the $5,000 positive account balance
toward current charges.
(ii) Under paragraph (b)(2)(v) of this section, the
$11,000 payment is treated as a payment of quali-
fied tuition and related expenses up to the $10,000
billed for qualified tuition and related expenses.
Under paragraph (b)(2)(vi) of this section, the
$5,000 credited to the student’s account is treated as
a reimbursement or refund of payments for qualified
tuition and related expenses, because the current
year charges for qualified tuition and related
expenses were reduced by $5,000. Under paragraph
(b)(2)(iii) of this section, University X is required to
net the $10,000 tuition payment received during
2003 against the $5,000 reimbursement or refund of
payments received for qualified tuition and related
expenses during 2003. Therefore, Institution X is
required to report $5,000 of payments received for
qualified tuition and related expenses during 2003.
Example 2. (i) The facts are the same as in
Example 1, except that Student A pays the full
$16,000 in late August 2003. In late September
2003, University X reduces the tuition charges by
$5,000 and issues a $5,000 refund to Student A.
(ii) Under paragraph (b)(2)(v) of this section, the
$16,000 payment is treated as a payment of quali-
fied tuition and related expenses up to the $10,000
billed for qualified tuition and related expenses.
Under paragraph (b)(2)(vi) of this section, the
$5,000 refund is treated as reimbursement or refund
of payments for qualified tuition and related
expenses, because the current year charges for quali-
fied tuition and related expenses were reduced by
$5,000. Under paragraph (b)(2)(iii) of this section,
University X is required to net the $10,000 tuition
payment received during 2003 against the $5,000
reimbursement or refund of payments received for
qualified tuition and related expenses during 2003.
Therefore, Institution X is required to report $5,000
of payments received for qualified tuition and
related expenses during 2003.
Example 3. (i) The facts are the same as in
Example 1, except that Student A is enrolled full-
time, and, in early September 2003, Student A
decides to live at home with her parents. In late
September 2003, University X adjusts Student A’s
account to eliminate room and board charges and
issues a $1,000 refund to Student A.
(ii) Under paragraph (b)(2)(v) of this section, the
$11,000 payment is treated as a payment of quali-
fied tuition and related expenses up to the $10,000
billed for qualified tuition and related expenses.
Under paragraph (b)(2)(vi) of this section, the
May 28, 200210182002–21 I.R.B.

$1,000 refund is not treated as reimbursement or
refund of payments for qualified tuition and related
expenses, because there is no reduction in charges
for qualified tuition and related expenses. Therefore,
under paragraph (b)(2)(iii) of this section, Univer-
sity X is required to report $10,000 of payments
received for qualified tuition and related expenses
during 2003.
Example 4. (i) In early December 2003, College
Y bills enrolled Student B $10,000 for tuition and
$6,000 for room and board for the 2004 Spring
semester. In late December 2003, Student B pays
$16,000. In mid-January 2004, after the 2004 Spring
semester classes begin, Student B drops to half-time
enrollment. In mid-January 2004, College Y credits
Student B’s account with $5,000, reflecting a $5,000
reduction in charges for qualified tuition and related
expenses, but does not issue a refund to Student B.
In early August 2004, College Y bills Student B
$10,000 for tuition and $6,000 for room and board
for the 2004 Fall semester. In early September 2004,
College Y applies the $5,000 positive account bal-
ance toward Student B’s $16,000 bill for the 2004
Fall semester. In late September 2004, Student B
pays $6,000 towards the charges.
(ii) Reporting for calendar year 2003. Under
paragraph (b)(2)(v) of this section, the $16,000 pay-
ment in December 2003 is treated as a payment of
qualified tuition and related expenses up to the
$10,000 billed for qualified tuition and related
expenses. Under paragraph (b)(2)(iii) of this section,
College Y is required to report $10,000 of payments
received for qualified tuition and related expenses
during 2003. In addition, College Y is required to
indicate that the payments reported for 2003 relate
to an academic period that begins during the first
three months of the next calendar year.
(iii) Reporting for calendar year 2004. Under
paragraph (b)(2)(vi) of this section, the $5,000 cred-
ited to Student B’s account is treated as a reimburse-
ment or refund of qualified tuition and related
expenses, because the charges for qualified tuition
and related expenses were reduced by $5,000.
Under paragraph (b)(2)(iv) of this section, the
$5,000 reimbursement or refund of qualified tuition
and related expenses must be separately reported on
Form 1098–T because it relates to payments of
qualified tuition and related expenses reported by
College Y for 2003. Under paragraph (b)(2)(v) of
this section, the $5,000 positive account balance that
is applied toward charges for the 2004 Fall semester
is treated as a payment. Therefore, College Y
received total payments of $11,000 during 2004 (the
$5,000 credit plus the $6,000 payment). Under para-
graph (b)(2)(v) of this section, the $11,000 of total
payments are treated as a payment of qualified
tuition and related expenses up to the $10,000 billed
for such expenses. Therefore, for 2004, College Y is
required to report $10,000 of payments received for
qualified tuition and related expenses during 2004
and a $5,000 refund of payments of qualified tuition
and related expenses reported for 2003.
(3)Information reporting requirements
for institutions that elect to report
amounts billed for qualified tuition and
related expenses—(i)In general. Except
as provided in paragraph (a)(2) of this
section, an institution reporting amounts
billed for qualified tuition and related
expenses must file an information return
on Form 1098–T with respect to each
individual enrolled (as determined in
paragraph (d)(1) of this section) for an
academic period beginning during the
calendar year or during a prior calendar
year and for whom a reportable transac-
tion described in paragraph (b)(3)(ii) of
this section is made during the calendar
year. An institution may use a substitute
Form 1098–T if the substitute form com-
plies with applicable revenue procedures
relating to substitute forms.
(ii)Information included on return.An
institution reporting amounts billed for
qualified tuition and related expenses
must include on Form 1098–T—
(A) The name, address, and taxpayer
identification number (TIN) (as defined
in section 7701(a)(41)) of the institution;
(B) The name, address, and TIN of the
individual who is, or has been, enrolled
by the institution;
(C) The amount billed for qualified
tuition and related expenses with respect
to the individual during the calendar year;
(D) An indication by the institution
whether any amounts billed for qualified
tuition and related expenses reported for
the calendar year relate to an academic
period that begins during the first three
months of the next calendar year;
(E) The amount of any scholarships or
grants for the payment of the individual’s
costs of attendance that the institution
administered and processed during the
calendar year;
(F) The amount of any reductions in
charges made during the calendar year
with respect to the individual that relate
to amounts billed for qualified tuition and
related expenses that were reported by the
institution for a prior calendar year;
(G) The amount of any reductions to
the amount of scholarships or grants for
the payment of the individual’s costs of
attendance that were reported by the insti-
tution with respect to the individual for a
prior calendar year;
(H) An indication by the institution
whether the individual was enrolled for at
least half of the normal full-time work
load for the course of study the individual
is pursuing for at least one academic
period that begins during the calendar
year (see section 25A and the regulations
thereunder);
(I) An indication by the institution
whether the individual was enrolled in a
program leading to a graduate-level
degree, graduate-level certificate, or other
recognized graduate-level educational
credential; and
(J) Any other information required by
Form 1098–T and its instructions.
(iii)Reportable amounts billed for
qualified tuition and related expenses
during calendar year determined. The
amount billed for qualified tuition and
related expenses with respect to an indi-
vidual during the calendar year that is
reportable on Form 1098–T is determined
by netting the amounts billed for qualified
tuition and related expenses during the
calendar year against any reductions in
charges for qualified tuition and related
expenses made during the calendar year
that relate to amounts billed for qualified
tuition and related expenses during the
same calendar year.
(iv)Separate reporting of reductions
made to amounts billed for qualified
tuition and related expenses that were
reported for a prior calendar year.An
institution must separately report on Form
1098–T any reductions in charges made
during the current calendar year that
relate to amounts billed for qualified
tuition and related expenses that were
reported by the institution for a prior cal-
endar year. Such reductions shall not be
netted against amounts billed for quali-
fied tuition and related expenses during
the current calendar year.
(v)Examples. The following examples
illustrate the rules in this paragraph
(b)(3):
Example 1. (i) In early August 2003, University
X bills enrolled Student A $10,000 for tuition and
$6,000 for room and board for the 2003 Fall semes-
ter. In late August 2003, Student A pays $11,000 to
University X. In early September 2003, Student A
drops to half-time enrollment for the 2003 Fall
semester. In late September 2003, University X
adjusts Student A’s account and reduces the tuition
charges by $5,000 to reflect half-time enrollment. In
late September 2003, University X applies the
$5,000 account balance toward current charges.
(ii) Under paragraph (b)(3)(iii) of this section,
University X is required to net the $10,000 amount
of tuition billed during 2003 against the $5,000
reduction in charges for qualified tuition and related
expenses during 2003. Therefore, Institution X is
required to report $5,000 in amounts billed for
qualified tuition and related expenses during 2003.
Example 2. (i) The facts are the same as in
Example 1, except that, in addition, in early Decem-
ber 2003, College X bills Student A $10,000 for
tuition and $6,000 for room and board for the 2004
2002–21 I.R.B.1019May 28, 2002

Spring semester. In late December 2003, Student A
pays $16,000. In mid-January 2004, after the 2004
Spring semester classes begin, Student A drops to
half-time enrollment. In mid-January 2004, College
X credits $5,000 to Student A’s account, reflecting a
$5,000 reduction in charges for qualified tuition and
related expenses, but does not issue a refund check
to Student A. In early August 2004, College X bills
Student A $10,000 for tuition and $6,000 for room
and board for the 2004 Fall semester. In early Sep-
tember 2004, College X applies the $5,000 positive
account balance toward Student A’s $16,000 bill for
the 2004 Fall semester. In late September 2004, Stu-
dent A pays $6,000 toward the charges.
(ii) Reporting for calendar year 2003. Under
paragraph (b)(3)(iii) of this section, College X is
required to report $15,000 amounts billed for quali-
fied tuition and related expenses during 2003
($5,000 for the 2003 Fall semester and $10,000 for
the 2004 Spring semester). In addition, College X is
required to indicate that some of the amounts billed
for qualified tuition and related expenses reported
for 2003 relate to an academic period that begins
during the first three months of the next calendar
year.
(iii) Reporting for calendar year 2004. Under
paragraph (b)(3)(iv) of this section, the $5,000
reduction in charges for qualified tuition and related
expenses must be separately reported on Form
1098–T because it relates to amounts billed for
qualified tuition and related expenses that were
reported by College X for 2003. Under paragraph
(b)(3)(iii) of this section, College X is required to
report $10,000 in amounts billed for qualified
tuition and related expenses during 2004.
(4)Requirements for insurers—(i)In
general. Except as otherwise provided in
this section, an insurer must file an infor-
mation return for each individual with
respect to whom reimbursements or
refunds of qualified tuition and related
expenses are made during the calendar
year on Form 1098–T. An insurer may
use a substitute Form 1098–T if the sub-
stitute form complies with applicable rev-
enue procedures relating to substitute
forms (see§601.601(d)(2) of this chap-
ter).
(ii)Information included on return.An
insurer must include on Form 1098–T—
(A) The name, address, and taxpayer
identification number (TIN) (as defined
in section 7701(a)(41)) of the insurer;
(B) The name, address, and TIN of the
individual with respect to whom reim-
bursements or refunds of qualified tuition
and related expenses were made;
(C) The aggregate amount of reim-
bursements or refunds of qualified tuition
and related expenses that the insurer
made with respect to the individual dur-
ing the calendar year; and
(D) Any other information required by
Form 1098–T and its instructions.
(5)Time and place for filing return—
(i)In general. Except as provided in para-
graphs (b)(5)(ii) and (iii) of this section,
Form 1098–T must be filed on or before
February 28 (March 31 if filed electroni-
cally) of the year following the calendar
year in which payments were received, or
amounts were billed, for qualified tuition
or related expenses, or reimbursements,
refunds, or reductions of such amounts
were made. An institution or insurer must
file Form 1098–T with the IRS according
to the instructions to Form 1098–T.
(ii)Return for nonresident alien indi-
vidual. In general, an institution or insurer
is not required to file a return on behalf of
a nonresident alien individual. However,
if a nonresident alien individual requests
an institution or insurer to report, the
institution or insurer must file a return
described in paragraph (b) of this section
with the IRS on or before the date pre-
scribed in paragraph (b)(5)(i) of this sec-
tion, or on or before the thirtieth day after
the request, whichever is later.
(iii)Extensions of time. The IRS may
grant an institution or insurer an exten-
sion of time to file returns required in this
section upon a showing of good cause.
See the instructions to Form 1098–T and
applicable revenue procedures for rules
relating to extensions of time to file (see
§601.601(d)(2) of this chapter).
(6)Use of magnetic media. See section
6011(e) and§301.6011–2 of this chapter
for rules relating to the requirement to file
Forms 1098–T on magnetic media.
(c)Requirement to furnish statement—
(1)In general. An institution or insurer
must furnish a statement to each indi-
vidual for whom it is required to file a
Form 1098–T. The statement must
include—
(i) The information required under
paragraph (b) of this section;
(ii) A legend that identifies the state-
ment as important tax information that is
being furnished to the IRS;
(iii) Instructions that—
(A) State that the statement reports
either total payments received by the
institution for qualified tuition and related
expenses during the calendar year, or total
amounts billed by the institution for
qualified tuition and related expenses dur-
ing the calendar year, or the total reim-
bursements or refunds made by the
insurer;
(B) State that, under section 25A and
the regulations thereunder, the taxpayer
may claim an education tax credit only
with respect to qualified tuition and
related expenses actually paid during the
calendar year; and that the taxpayer may
not be able to claim an education tax
credit with respect to the entire amount of
payments received, or amounts billed, for
qualified tuition and related expenses
reported for the calendar year;
(C) State that the amount of any schol-
arships or grants reported for the calendar
year and other similar amounts not
reported (because they are not adminis-
tered and processed by the institution)
may reduce the amount of any allowable
education tax credit for the taxable year;
(D) State that the amount of any reim-
bursements or refunds of payments
received, or reductions in charges, for
qualified tuition and related expenses, or
any reductions to the amount of scholar-
ships or grants, reported by the institution
with respect to the individual for a prior
calendar year may affect the amount of
any allowable education tax credit for the
prior calendar year;
(E) State that the amount of any reim-
bursements or refunds of qualified tuition
and related expenses reported by an
insurer may reduce the amount of an
allowable education tax credit for a tax-
able year;
(F) State that the taxpayer should refer
to relevant IRS forms and publications,
and should not refer to the institution or
the insurer, for explanations relating to
the eligibility requirements for, and calcu-
lation of, any allowable education tax
credit; and
(G) Include the name, address, and
phone number of the office or department
within the institution or insurer that is the
information contact for the institution or
insurer that filed the Form 1098–T.
(2)Time and manner for furnishing
statement—(i)In general. Except as pro-
vided in paragraphs (c)(2)(ii) and (iii) of
this section, an institution or insurer must
furnish the statement described in para-
graph (c)(1) of this section to each indi-
vidual for whom it is required to file a
return, on or before January 31 of the
year following the calendar year in which
payments were received, or amounts were
billed, for qualified tuition and related
expenses, or reimbursements, refunds, or
May 28, 200210202002–21 I.R.B.

reductions of such amounts were made. If
mailed, the statement must be sent to the
individual’s permanent address, or the
individual’s temporary address if the
institution or insurer does not know the
individual’s permanent address. If fur-
nished electronically, the statement must
be furnished in accordance with the appli-
cable regulations.
(ii)Statement to nonresident alien
individual. If an information return is
filed for a nonresident alien individual,
the institution or insurer must furnish a
statement described in paragraph (c)(1) of
this section to the individual in the man-
ner and on or before the date prescribed
in paragraph (c)(2)(i) of this section, or
on or before the thirtieth day after the
nonresident alien’s request to report,
whichever is later.
(iii)Extensions of time. The IRS may
grant an institution or insurer an exten-
sion of time to furnish the statements
required in this section upon a showing of
good cause. See the instructions to Form
1098–T and applicable revenue proce-
dures for rules relating to extensions of
time to furnish statements (see§601.
601(d)(2) of this chapter).
(3)Copy of Form 1098–T. An institu-
tion or insurer may satisfy the require-
ment of this paragraph (c) by furnishing
either a copy of Form 1098–T and its
instructions or another document that
contains all of the information filed with
the IRS and the information required by
paragraph (c)(1) of this section if the
document complies with applicable rev-
enue procedures relating to substitute
statements (see§601.601(d)(2) of this
chapter).
(d)Special rules—(1)Enrollmentde-
termined. An institution may determine
its enrollment for each academic period
under its own rules and policies for deter-
mining enrollment or as of any of the fol-
lowing dates—
(i) 30 days after the first day of the
academic period;
(ii) A date during the academic period
on which enrollment data must be col-
lected for purposes of the Integrated Post
Secondary Education Data System
administered by the Department of Edu-
cation; or
(iii) A date during the academic period
on which the institution must report
enrollment data to the State, the institu-
tion’s governing body, or some other
external governing body.
(2)Payments of qualified tuition and
related expenses received or collected by
one or more persons—(i)In general.
Except as otherwise provided in para-
graph (d)(2)(ii) of this section, if a person
collects or receives payments of qualified
tuition and related expenses on behalf of
another person (e.g., an institution), the
person collecting or receiving payments
must satisfy the information reporting
requirements of this section. In this case,
the reporting requirements do not apply to
the transfer of the payments to the institu-
tion.
(ii)Exception. If the person collecting
or receiving payments of qualified tuition
and related expenses on behalf of another
person (e.g., an institution) does not pos-
sess the information needed to comply
with the information reporting require-
ments of this section, the other person
must satisfy the information reporting
requirements of this section.
(3)Governmental units. An institution
or insurer that is a governmental unit, or
an agency or instrumentality of a govern-
mental unit, is subject to the information
reporting requirements of this section and
an appropriately designated officer or
employee of the governmental entity
must satisfy the information reporting
requirements of this section.
(e)Penalty provisions—(1)Failure to
file correct returns. The section 6721 pen-
alty may apply to an institution or insurer
that fails to file information returns
required by section 6050S and this sec-
tion on or before the required filing date;
that fails to include all of the required
information on the return; or that includes
incorrect information on the return. See
section 6721, and the regulations thereun-
der, for rules relating to penalties for fail-
ure to file correct returns. See section
6724, and the regulations thereunder, for
rules relating to waivers of penalties for
certain failures due to reasonable cause.
(2)Failure to furnish correct informa-
tion statements. The section 6722 penalty
may apply to an institution or insurer that
fails to furnish statements required by
section 6050S and this section on or
before the prescribed date; that fails to
include all the required information on
the statement; or that includes incorrect
information on the statement. See section
6722, and the regulations thereunder, for
rules relating to penalties for failure to
furnish correct statements. See section
6724, and the regulations thereunder, for
rules relating to waivers of penalties for
certain failures due to reasonable cause.
(3)Waiver of penalties for failures to
include a correct TIN—(i)In general.In
the case of a failure to include a correct
TIN on Form 1098–T or a related infor-
mation statement, penalties may be
waived if the failure is due to reasonable
cause. Reasonable cause may be estab-
lished if the failure arose from events
beyond the institution’s or insurer’s con-
trol, such as a failure of the individual to
furnish a correct TIN. However, the insti-
tution or insurer must establish that it
acted in a responsible manner both before
and after the failure.
(ii)Acting in a responsible manner.An
institution or insurer must request the TIN
of each individual for whom it is required
to file a return if it does not already have
a record of the individual’s correct TIN. If
the institution or insurer does not have a
record of the individual’s correct TIN,
then it must solicit the TIN in the manner
described in paragraph (e)(3)(iii) of this
section on or before December 31 of each
year during which it receives payments,
or bills amounts, for qualified tuition and
related expenses or makes reimburse-
ments, refunds, or reductions of such
amounts with respect to the individual. If
an individual refuses to provide his or her
TIN upon request, the institution or
insurer must file the return and furnish
the statement required by this section
without the individual’s TIN, but with all
other required information. The specific
solicitation requirements of paragraph
(e)(3)(iii) of this section apply in lieu of
the solicitation requirements of§301.
6724–1(e) and (f) of this chapter for the
purpose of determining whether an insti-
tution or insurer acted in a responsible
manner in attempting to obtain a correct
TIN. An institution or insurer that com-
plies with the requirements of this para-
graph (e)(3) will be considered to have
acted in a responsible manner within the
meaning of§301.6724–1(d) of this chap-
ter with respect to any failure to include
the correct TIN of an individual on a
return or statement required by section
6050S and this section.
2002–21 I.R.B.1021May 28, 2002

(iii)Manner of soliciting TIN.An
institution or insurer must request the
individual’s TIN in writing and must
clearly notify the individual that the law
requires the individual to furnish a TIN so
that it may be included on an information
return filed by the institution or insurer. A
request for a TIN made on Form W–9S,
Request for Student’s or Borrower’s
Social Security Number and Certification,
satisfies the requirements of this para-
graph (e)(3)(iii). An institution or insurer
may establish a system for individuals to
submit Forms W–9S electronically as
described in applicable forms and instruc-
tions. An institution or insurer may also
develop a separate form to request the
individual’s TIN or incorporate the
request into other forms customarily used
by the institution or insurer, such as
admission or enrollment forms or finan-
cial aid applications.
(4)Failure to furnish TIN. The section
6723 penalty may apply to any individual
who is required (but fails) to furnish his
or her TIN to an institution or insurer. See
section 6723, and the regulations thereun-
der, for rules relating to the penalty for
failure to furnish a TIN.
(f)Effective date. The rules in this sec-
tion apply to information returns required
to be filed, and information statements
required to be furnished, after December
31, 2003.
PART301—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 301.6011–2 is amended
by:
1. In paragraph (b)(1), first sentence,
add the language“1098–T,”immediately
after the language“1098–E,”.
2. Revising paragraph (g)(3).
Therevisionreadsasfollows:
§301.6011–2 Required use of magnetic
media.
*****
(g)***
(3) This section applies to returns on
Forms 1098–E and 1098–T filed after
December 31, 2003.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on April
26, 2002, 8:45 a.m., and published in the issue of
the Federal Register for April 29, 2002, 67 F.R.
20923)
May 28, 200210222002–21 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.—Intemal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
2002–21 I.R.B.iMay 28, 2002

Numerical Finding List
1
Bulletins 2002–1 through 2002–20
Announcements:
2002–1, 2002–2 I.R.B.304
2002–2, 2002–2 I.R.B.304
2002–3, 2002–2 I.R.B.305
2002–4, 2002–2 I.R.B.306
2002–5, 2002–4 I.R.B.420
2002–6, 2002–5 I.R.B.458
2002–7, 2002–5 I.R.B.459
2002–8, 2002–6 I.R.B.494
2002–9, 2002–7 I.R.B.536
2002–10, 2002–7 I.R.B.539
2002–11, 2002–6 I.R.B.494
2002–12, 2002–8 I.R.B.553
2002–13, 2002–7 I.R.B.540
2002–14, 2002–7 I.R.B.540
2002–15, 2002–7 I.R.B.540
2002–16, 2002–7 I.R.B.541
2002–17, 2002–8 I.R.B.561
2002–18, 2002–10 I.R.B.621
2002–19, 2002–8 I.R.B.561
2002–20, 2002–8 I.R.B.561
2002–21, 2002–8 I.R.B.562
2002–22, 2002–8 I.R.B.562
2002–23, 2002–8 I.R.B.563
2002–24, 2002–9 I.R.B.606
2002–25, 2002–10 I.R.B.621
2002–26, 2002–11 I.R.B.629
2002–27, 2002–11 I.R.B.629
2002–28, 2002–11 I.R.B.630
2002–29, 2002–11 I.R.B.631
2002–30, 2002–11 I.R.B.632
2002–31, 2002–15 I.R.B.747
2002–32, 2002–12 I.R.B.664
2002–33, 2002–12 I.R.B.666
2002–34, 2002–13 I.R.B.702
2002–35, 2002–12 I.R.B.667
2002–36, 2002–13 I.R.B.703
2002–37, 2002–13 I.R.B.703
2002–38, 2002–14 I.R.B.738
2002–39, 2002–14 I.R.B.738
2002–40, 2002–15 I.R.B.747
2002–41, 2002–14 I.R.B.739
2002–42, 2002–14 I.R.B.739
2002–43, 2002–16 I.R.B.792
2002–44, 2002–17 I.R.B.809
2002–45, 2002–18 I.R.B.833
2002–46, 2002–18 I.R.B.834
2002–47, 2002–18 I.R.B.844
2002–48, 2002–17 I.R.B.809
2002–49, 2002–19 I.R.B.919
2002–50, 2002–18 I.R.B.845
2002–52, 2002–19 I.R.B.919
Court Decisions:
2073, 2002–14 I.R.B.718
2074, 2002–20 I.R.B.954
Notices:
2002–1, 2002–2 I.R.B.283
2002–2, 2002–2 I.R.B.285
2002–3, 2002–2 I.R.B.289
2002–4, 2002–2 I.R.B.298
2002–5, 2002–3 I.R.B.320
2002–6, 2002–3 I.R.B.326
2002–7, 2002–6 I.R.B.489
2002–8, 2002–4 I.R.B.398
2002–9, 2002–5 I.R.B.450
2002–10, 2002–6 I.R.B.490
2002–11, 2002–7 I.R.B.526
2002–12, 2002–7 I.R.B.526
2002–13, 2002–8 I.R.B.547
2002–14, 2002–8 I.R.B.548
2002–15, 2002–8 I.R.B.548
2002–16, 2002–9 I.R.B.567
2002–17, 2002–9 I.R.B.567
2002–18, 2002–12 I.R.B.644
2002–19, 2002–10 I.R.B.619
2002–20, 2002–17 I.R.B.796
2002–21, 2002–14 I.R.B.730
2002–22, 2002–14 I.R.B.731
2002–23, 2002–15 I.R.B.742
2002–24, 2002–16 I.R.B.785
2002–25, 2002–15 I.R.B.743
2002–26, 2002–15 I.R.B.743
2002–27, 2002–18 I.R.B.814
2002–28, 2002–16 I.R.B.785
2002–29, 2002–17 I.R.B.797
2002–30, 2002–17 I.R.B.797
2002–31, 2002–19 I.R.B.908
Proposed Regulations:
REG–209135–88, 2002–4 I.R.B.418
REG–209114–90, 2002–9 I.R.B.576
REG–104762–00, 2002–18 I.R.B.825
REG–105369–00, 2002–18 I.R.B.828
REG–107100–00, 2002–7 I.R.B.529
REG–107184–00, 2002–20 I.R.B.967
REG–107366–00, 2002–12 I.R.B.645
REG–118861–00, 2002–12 I.R.B.651
REG–105344–01, 2002–2 I.R.B.302
REG–112991–01, 2002–4 I.R.B.404
REG–115054–01, 2002–7 I.R.B.530
REG–119436–01, 2002–3 I.R.B.377
REG–120135–01, 2002–8 I.R.B.552
REG–125450–01, 2002–5 I.R.B.457
REG–125626–01, 2002–9 I.R.B.604
REG–142299–01, 2002–4 I.R.B.418
REG–159079–01, 2002–6 I.R.B.493
REG–163892–01, 2002–20 I.R.B.968
REG–165706–01, 2002–16 I.R.B.787
REG–167648–01, 2002–16 I.R.B.790
REG–102740–02, 2002–13 I.R.B.701
REG–108697–02, 2002–19 I.R.B.918
Revenue Procedures:
2002–1, 2002–1 I.R.B.1
2002–2, 2002–1 I.R.B.82
2002–3, 2002–1 I.R.B.117
Revenue Procedures—Continued:
2002–4, 2002–1 I.R.B.127
2002–5, 2002–1 I.R.B.173
2002–6, 2002–1 I.R.B.203
2002–7, 2002–1 I.R.B.249
2002–8, 2002–1 I.R.B.252
2002–9, 2002–3 I.R.B.327
2002–10, 2002–4 I.R.B.401
2002–11, 2002–7 I.R.B.526
2002–12, 2002–3 I.R.B.374
2002–13, 2002–8 I.R.B.549
2002–14, 2002–5 I.R.B.450
2002–15, 2002–6 I.R.B.490
2002–16, 2002–9 I.R.B.572
2002–17, 2002–13 I.R.B.676
2002–18, 2002–13 I.R.B.678
2002–19, 2002–13 I.R.B.696
2002–20, 2002–14 I.R.B.732
2002–21, 2002–19 I.R.B.911
2002–22, 2002–14 I.R.B.733
2002–23, 2002–15 I.R.B.744
2002–24, 2002–17 I.R.B.798
2002–25, 2002–17 I.R.B.800
2002–26, 2002–15 I.R.B.746
2002–27, 2002–17 I.R.B.802
2002–28, 2002–18 I.R.B.815
2002–31, 2002–19 I.R.B.916
2002–32, 2002–20 I.R.B.959
2002–33, 2002–20 I.R.B.963
Revenue Rulings:
2002–1, 2002–2 I.R.B.268
2002–2, 2002–2 I.R.B.271
2002–3, 2002–3 I.R.B.316
2002–4, 2002–4 I.R.B.389
2002–5, 2002–6 I.R.B.461
2002–6, 2002–6 I.R.B.460
2002–7, 2002–8 I.R.B.543
2002–8, 2002–9 I.R.B.564
2002–9, 2002–10 I.R.B.614
2002–10, 2002–10 I.R.B.616
2002–11, 2002–10 I.R.B.608
2002–12, 2002–11 I.R.B.624
2002–13, 2002–12 I.R.B.637
2002–14, 2002–12 I.R.B.636
2002–15, 2002–13 I.R.B.668
2002–16, 2002–15 I.R.B.740
2002–17, 2002–14 I.R.B.716
2002–18, 2002–16 I.R.B.779
2002–19, 2002–16 I.R.B.778
2002–20, 2002–17 I.R.B.794
2002–21, 2002–17 I.R.B.793
2002–22, 2002–19 I.R.B.849
2002–23, 2002–18 I.R.B.811
2002–24, 2002–19 I.R.B.848
2002–25, 2002–19 I.R.B.904
2002–26, 2002–19 I.R.B.906
2002–27, 2002–20 I.R.B.925
2002–28, 2002–20 I.R.B.941
2002–29, 2002–20 I.R.B.940
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 2001–27 through 2001–53 is
in Internal Revenue Bulletin 2002–1, dated January 7, 2002.
May 28, 2002ii2002–21 I.R.B.

Tax Conventions:
2002–14 I.R.B.725
Treasury Decisions:
8968, 2002–2 I.R.B.274
8969, 2002–2 I.R.B.276
8970, 2002–2 I.R.B.281
8971, 2002–3 I.R.B.308
8972, 2002–5 I.R.B.443
8973, 2002–4 I.R.B.391
8974, 2002–3 I.R.B.318
8975, 2002–4 I.R.B.379
8976, 2002–5 I.R.B.421
8977, 2002–6 I.R.B.463
8978, 2002–7 I.R.B.500
8979, 2002–6 I.R.B.466
8980, 2002–6 I.R.B.477
8981, 2002–7 I.R.B.496
8982, 2002–8 I.R.B.544
8983, 2002–9 I.R.B.565
8984, 2002–13 I.R.B.668
8985, 2002–14 I.R.B.707
8986, 2002–16 I.R.B.780
8987, 2002–19 I.R.B.852
8988, 2002–20 I.R.B.929
8989, 2002–20 I.R.B.920
8990, 2002–20 I.R.B.947
2002–21 I.R.B.iiiMay 28, 2002

Finding List of Current Actions
on Previously Published Items
2
Bulletins 2002–1 through 2002–20
Announcements:
2001–83
Modified by
Ann. 2002–36, 2002–13 I.R.B.703
2002–9
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
Ann. 2002–35, 2002–12 I.R.B.667
Notices:
90–24
Modified and superseded by
Notice 2002–24, 2002–16 I.R.B.785
98–31
Supplemented by
Ann. 2002–37, 2002–13 I.R.B.703
98–43
Modified and superseded by
Notice 2002–5, 2002–3 I.R.B.320
2000–11
Obsoleted by
Notice 2002–3, 2002–2 I.R.B.289
2001–10
Revoked by
Notice 2002–8, 2002–4 I.R.B.398
2001–61
Supplemented by
Notice 2002–15, 2002–8 I.R.B.548
2001–68
Supplemented by
Notice 2002–15, 2002–8 I.R.B.548
2002–14
Modified and superseded by
Rev. Proc. 2002–28, 2002–18 I.R.B.815
Proposed Regulations:
REG–209135–88
Corrected by
Ann. 2002–15, 2002–7 I.R.B.540
Ann. 2002–30, 2002–11 I.R.B.632
REG–251502–96
Withdrawn by
Ann. 2002–33, 2002–12 I.R.B.666
REG–113526–98
Withdrawn by
REG–105369–00, 2002–18 I.R.B.828
Proposed Regulations:—Continued
REG–107100–00
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–107566–00
Withdrawn by
REG–163892–01, 2002–20 I.R.B.968
REG–105344–01
Corrected by
Ann. 2002–7, 2002–5 I.R.B.459
REG–112991–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
Ann. 2002–38, 2002–14 I.R.B.738
REG–115054–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–119436–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–120135–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–125450–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–125626–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–126485–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–137519–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–142299–01
Corrected by
Ann. 2002–15, 2002–7 I.R.B.540
Ann. 2002–30, 2002–11 I.R.B.632
REG–142686–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
REG–159079–01
Corrected by
Ann. 2002–30, 2002–11 I.R.B.632
Revenue Procedures:
84–37
Modified by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
Revenue Procedures:—Continued
84–57
Obsoleted by
T.D. 8976, 2002–5 I.R.B.421
87–50
Modified by
Rev. Proc. 2002–10, 2002–4 I.R.B.401
89–45
Superseded by
Rev. Proc. 2002–23, 2002–15 I.R.B.744
91–71
Clarified and superseded by
Rev. Proc. 2002–32, 2002–20 I.R.B.959
96–13
Modified by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
97–27
Modified and amplified by
Rev. Proc. 2002–19, 2002–13 I.R.B.696
98–49
Obsoleted by
T.D. 8976, 2002–5 I.R.B.421
99–49
Modified and superseded by
Rev. Proc. 2002–9, 2002–3 I.R.B.327
2000–20
Modified by
Rev. Proc. 2002–6, 2002–1 I.R.B.203
2000–46
Superseded by
Rev. Proc. 2002–22, 2002–14 I.R.B.733
2001–1
Superseded by
Rev. Proc. 2002–1, 2002–1 I.R.B.1
2001–2
Superseded by
Rev. Proc. 2002–2, 2002–1 I.R.B.82
2001–3
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
2001–4
Superseded by
Rev. Proc. 2002–4, 2002–1 I.R.B.127
2001–5
Superseded by
Rev. Proc. 2002–5, 2002–1 I.R.B.173
2001–6
Superseded by
Rev. Proc. 2002–6, 2002–1 I.R.B.203
2
A cumulative list of current actions on previously published
items in Internal Revenue Bulletins 2001–27 through 2001–53 is
in Internal Revenue Bulletin 2002–1, dated January 7, 2002.
May 28, 2002iv2002–21 I.R.B.

Revenue Procedures:—Continued
2001–7
Superseded by
Rev. Proc. 2002–7, 2002–1 I.R.B.249
2001–8
Superseded by
Rev. Proc. 2002–8, 2002–1 I.R.B.252
2001–13
Corrected by
Ann. 2002–5, 2002–4 I.R.B.420
2001–16
Modified by
Ann. 2002–26, 2002–11 I.R.B.629
2001–27
Supplemented by
Rev. Proc. 2002–20, 2002–14 I.R.B.732
2001–35
Obsoleted, except as provided in section 5.02 by
Rev. Proc. 2002–24, 2002–17 I.R.B.798
2001–36
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
2001–41
Superseded by
Rev. Proc. 2002–2, 2002–1 I.R.B.82
2001–51
Superseded by
Rev. Proc. 2002–3, 2002–1 I.R.B.117
2002–3
Modified by
Rev. Proc. 2002–22, 2002–14 I.R.B.733
2002–6
Modified by
Notice 2002–1, 2002–2 I.R.B.283
Rev. Proc. 2002–21, 2002–19 I.R.B.911
2002–8
Modified by
Notice 2002–1, 2002–2 I.R.B.283
2002–9
Modified and clarified by
Ann. 2002–17, 2002–8 I.R.B.561
Modified and amplified by
Rev. Rul. 2002–9, 2002–10 I.R.B.614
Rev. Proc. 2002–17, 2002–13 I.R.B.676
Rev. Proc. 2002–19, 2002–13 I.R.B.696
Rev. Proc. 2002–27, 2002–17 I.R.B.802
Rev. Proc. 2002–28, 2002–18 I.R.B.815
Rev. Proc. 2002–33, 2002–20 I.R.B.963
2002–10
Modified by
Ann. 2002–49, 2002–19 I.R.B.919
Revenue Rulings:
55–261
Distinguished by
Rev. Rul. 2002–19, 2002–16 I.R.B.778
Revenue Rulings:—Continued
55–747
Revoked by
Notice 2002–8, 2002–4 I.R.B.398
61–146
Distinguished by
Rev. Rul. 2002–3, 2002–3 I.R.B.316
64–328
Modified by
Notice 2002–8, 2002–4 I.R.B.398
66–110
Modified by
Notice 2002–8, 2002–4 I.R.B.398
73–304
Superseded by
Rev. Proc. 2002–26, 2002–15 I.R.B.746
73–305
Superseded by
Rev. Proc. 2002–26, 2002–15 I.R.B.746
76–270
Amplified and superseded by
Rev. Rul. 2002–20, 2002–17 I.R.B.794
79–151
Distinguished by
Rev. Rul. 2002–19, 2002–16 I.R.B.778
79–284
Superseded by
Rev. Proc. 2002–26, 2002–15 I.R.B.746
80–218
Superseded by
Rev. Rul. 2002–23, 2002–18 I.R.B.811
87–112
Clarified by
Rev. Rul. 2002–22, 2002–19 I.R.B.849
89–29
Obsoleted by
T.D. 8976, 2002–5 I.R.B.421
92–19
Supplemented in part by
Rev. Rul. 2002–12, 2002–11 I.R.B.624
2002–7
Corrected by
Ann. 2002–13, 2002–7 I.R.B.540
Treasury Decisions:
8971
Corrected by
Ann. 2002–20, 2002–8 I.R.B.561
8972
Corrected by
Ann. 2002–23, 2002–8 I.R.B.563
Treasury Decisions:—Continued
8973
Corrected by
Ann. 2002–14, 2002–7 I.R.B.540
8975
Corrected by
Ann. 2002–21, 2002–8 I.R.B.562
8976
Corrected by
Ann. 2002–21, 2002–8 I.R.B.562
8978
Corrected by
Ann. 2002–39, 2002–14 I.R.B.738
2002–21 I.R.B.vMay 28, 2002

This page is reserved for Jesus De La Cruz
May 28, 20022002–21 I.R.B.