Revenue Ruling 2003-109

Rev. Rul. 2003-109
Rev. Rul. 2003-109, 2003-42 I.R.B. 839, 2003-2 C.B. 839
                       Internal Revenue Service (I.R.S.)
                                 Revenue Ruling
      DISALLOWANCE OF CONVENTION EXPENSES; NORTH AMERICAN GEOGRAPHICAL AREA
                          Released: September 30, 2003
                           Published: October 20, 2003

 Section 274.–Disallowance of Certain Entertainment, etc., Expenses, 26 CFR 1.274-1: Disallowance of Certain Entertainment, etc., Expenses.

  Disallowance of convention expenses; North American geographical area. All geographical areas included in the North American area for purposes of section 274 of the Code are listed. Rev. Ruls. 87-95 and 94-56 superseded.

  Disallowance of convention expenses; North American geographical area. All geographical areas included in the North American area for purposes of section 274 of the Code are listed. Rev. Ruls. 87-95 and 94-56 superseded.

ISSUE

  Section 274(h) of the Internal Revenue Code limits deductions for expenses incurred in connection with a convention, seminar, or similar meeting held outside the “North American area.” This revenue ruling contains an updated list of all geographical areas currently included in the North American area for purposes of this section.

LAW AND ANALYSIS

  Section 274(h) disallows deductions under section 162 for expenses allocable to attendance of an individual at a convention, seminar, or similar meeting (a “convention”) held outside the “North American area.” However, the disallowance does not apply if

the taxpayer can demonstrate that the convention’s location satisfies specified standards of reasonableness.

  Geographical areas are included in the “North American area” for purposes of  section 274(h) under one of four provisions.

Section 274(h)(3)(A)

  Section 274(h)(3)(A) defines the term “North American area” as the United States, its possessions, the Trust Territory of the Pacific Islands, Canada, and Mexico. The United States consists of the fifty states of the United States and the District of Columbia. The possessions of the United States, for this purpose, are American Samoa, Baker Island, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, Guam, Howland Island, Jarvis Island, Johnston Island, Kingman Reef, the Midway Islands, Palmyra, the United States Virgin Islands, Wake Island, and other United States islands, cays, and reefs not part of the fifty states or the District of Columbia. The jurisdictions that formerly constituted the Trust Territory of the Pacific Islands — the Republic of the Marshall Islands, the Federated States of Micronesia, and the Republic of Palau — are now covered by the compacts with the United States described below.

The Compact of Free Association Act of 1985

  The Compact of Free Association Act of 1985, Pub. L. No. 99-239, 99 Stat. 1770 (1986) went into effect on October 21, 1986, with respect to the Republic of the Marshall Islands, and on November 3, 1986, with respect to the Federated States of Micronesia. Section 405 of Title IV of the Compact provides that, for purposes of section 274(h)(3)(A) of the Code, the Republic of the Marshall Islands and the Federated States of Micronesia are included in the North American area.

The Compact of Free Association Between the United States and the Republic of Palau

  The Compact of Free Association between the United States and the Republic of Palau, Pub. L. 99-658, 100 Stat. 3672 (1986) went into effect on October 1, 1994. Section 255(d) of Title II of the Compact with Palau provides that, for purposes of section 274(h)(3)(A) of the Code, Palau is included in the North American area.

Section 274(h)(6)

  Section 274(h)(6) provides that the term “North American area” also includes any “beneficiary country” if, as of the time a convention begins, (1) there is in effect an agreement described in section 274(h)(6)(C) providing for the exchange of tax information between the United States and the beneficiary country, and (2) there is not in effect a finding by the Secretary of the Treasury that the tax laws of the beneficiary country discriminate against conventions held in the United States.

  Section 274(h)(6)(B) defines the term, “beneficiary country” as meaning a beneficiary country as defined in section 212(a)(1)(A) of the Caribbean Basin Economic Recovery Act, Pub. L. No. 98-67, 97 Stat. 384 (1983), and Bermuda. An agreement described in section 274(h)(6)(C) providing for the exchange of information between the United States and a beneficiary country generally must provide:

    for the exchange of such information (not limited to information concerning nationals or residents of the United States or the beneficiary country) as may be necessary or appropriate to carry out and enforce the tax laws of the United States and the beneficiary country (whether criminal or civil proceedings), including information which may otherwise be subject to nondisclosure provisions of the local law of the beneficiary country such as provisions respecting bank secrecy and bearer shares. Section 274(h)(6)(C)(i).

  Rul. 94-56, 1994-2 C.B. 37, modifying Rev. Rul. 87-95, 1987-2 C.B. 79, identifies each of the following jurisdictions as a beneficiary country for which there is in effect an agreement with the United States described in section 274(h)(6)(C) and for which there is not in effect a finding by the Secretary of the Treasury that the tax laws of the beneficiary country discriminate against conventions held in the United States: Barbados, Bermuda, Costa Rica, Dominica, Dominican Republic, Grenada, Guyana, Honduras, Jamaica, Saint Lucia, and Trinidad and Tobago. Each of these jurisdictions continues to be considered as part of the North American area under section 274(h)(6) for purposes of claiming deductions for expenses incurred in connection with a convention beginning on or after the date on which the tax information exchange agreement between the jurisdiction and the United States came into effect.

  Since the publication of Rev. Rul. 94-56, the “Agreement Between the Government of the United States of America and the Government of Antigua and Barbuda for the Exchange of Information with Respect to Taxes” has come into effect. This agreement entered into force on February 10, 2003, and came into effect as of that date. See Treas. News Release JS-165 (April 8, 2003). Antigua and Barbuda is included within the North American area under section 274(h)(6) as of February 10, 2003.

HOLDING

  For purposes of claiming deductions for expenses incurred in connection with a convention, seminar, or similar meeting, the following areas are included in the “North American area” as of the effective date of section 274(h) except as otherwise indicated:

1.   The fifty states of the United States and the District of Columbia;
2.   The possessions of the United States, which for this purpose are American
       Samoa, Baker Island, the Commonwealth of Puerto Rico, the Commonwealth
       of the Northern Mariana Islands, Guam, Howland Island, Jarvis Island,
       Johnston Island, Kingman Reef, the Midway Islands, Palmyra, the United
       States Virgin Islands, Wake Island, and other United States islands,
       cays, and reefs not part of the fifty states or the District of
       Columbia;
3.   Canada;
4.   Mexico;
5.   The Republic of the Marshall
       Islands;
6.   The Federated States of Micronesia;
7.   The Republic of Palau;
                                           For expenses incurred in attending a
                                             convention that began after.
8.   Antigua and Barbuda                   February 9, 2003
9.   Barbados                              November 2, 1984
10.  Bermuda                               December 1, 1988
11.  Costa Rica                            February 11, 1991
12.  Dominica                              May 7, 1988
13.  Dominican Republic                    October 11, 1989
14.  Grenada                               July 12, 1987
15.  Guyana                                August 26, 1992
16.  Honduras                              October 10, 1991
17.  Jamaica                               December 17, 1986
18.  Saint Lucia                           April 21, 1991
19.  Trinidad and Tobago                   February 8, 1990

  This revenue ruling will be updated as future developments result in the inclusion of other areas in, or the exclusion of areas from, the North American area.

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Revenue Ruling 2003-103

Rev. Rul. 2003-103
Rev. Rul. 2003-103, 2003-38 I.R.B. 568, 2003-2 C.B. 568
                       Internal Revenue Service (I.R.S.)
                                 Revenue Ruling
                     LIFO; PRICE INDEXES; DEPARTMENT STORES
                          Published: September 22, 2003

 Section 472.–Last-in, First-out Inventories, 26 CFR 1.472-1: Last-in, first-out inventories.

  LIFO; price indexes; department stores. The July 2003 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, July 31, 2003.

  LIFO; price indexes; department stores. The July 2003 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, July 31, 2003.

  The following Department Store Inventory Price Indexes for July 2003 were issued by the Bureau of Labor Statistics. The indexes are accepted by the Internal Revenue Service, under s 1.472-1(k) of the Income Tax Regulations and Rev. Proc. 86-46, 1986-2 C.B. 739, for appropriate application to inventories of department stores employing the retail inventory and last-in, first-out inventory methods for tax years ended on, or with reference to, July 31, 2003.

  The Department Store Inventory Price Indexes are prepared on a national basis and include (a) 23 major groups of departments, (b) three special combinations of the major groups — soft goods, durable goods, and miscellaneous goods, and (c) a store total, which covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.

    BUREAU OF LABOR STATISTICS, DEPARTMENT STORE INVENTORY PRICE INDEXES BY
                               DEPARTMENT GROUPS
                 (January 1941 = 100, unless otherwise noted)
                      Groups              July 2002    July 2003     Percent
                                                                      Change
                                                                    from July
                                                                     2002 to
                                                                    July 2003
                                                                      [FN1]
——————————————————————————-
       1.  Piece Goods ………………….. 486.4        487.0           0.1
       2.  Domestics and Draperies ……….. 577.3        570.0          -1.3
       3.  Women’s and Children’s Shoes …… 607.4        613.9           1.1
       4.  Men’s Shoes ………………….. 906.0        831.2          -8.3
       5.  Infants’ Wear ………………… 590.9        573.3          -3.0
       6.  Women’s Underwear …………….. 526.3        509.0          -3.3
       7.  Women’s Hosiery ………………. 345.2        346.9           0.5
       8.  Women’s and Girls’
             Accessories ………………… 517.0        537.8           4.0
       9.  Women’s Outerwear and Girls’
             Wear ………………………. 342.0        342.8           0.2
      10.  Men’s Clothing ……………….. 565.1        533.3          -5.6
      11.  Men’s Furnishings …………….. 573.1        562.7          -1.8
      12.  Boys’ Clothing and
             Furnishings ………………… 455.1        424.4          -6.7
      13.  Jewelry ……………………… 887.6        882.3          -0.6
      14.  Notions ……………………… 795.1        792.1          -0.4
      15.  Toilet Articles and Drugs ……… 970.8        992.0           2.2
      16.  Furniture and Bedding …………. 627.6        619.9          -1.2
      17.  Floor Coverings ………………. 617.6        587.3          -4.9
      18.  Housewares …………………… 752.9        722.5          -4.0
      19.  Major Appliances ……………… 221.4        213.3          -3.7
      20.  Radio and Television …………… 48.4         45.3          -6.4
      21.  Recreation and Education
             [FN2] ………………………. 86.3         82.8          -4.1
      22.  Home Improvements [FN2] ……….. 125.8        123.7          -1.7
      23.  Auto Accessories [FN2] ………… 111.6        111.4          -0.2
Groups 1-15: Soft Goods …………………. 555.9        549.6          -1.1
Groups 16-20: Durable Goods ……………… 409.9        394.3          -3.8
Groups 21-23: Misc. Goods [FN2] …………… 96.6         94.0          -2.7
           Store Total [FN3] …………….. 502.8        493.4          -1.9
FN1. Absence of a minus sign before the percentage change in this column
  signifies a price increase.
FN2. Indexes on a January 1986 = 100 base.
FN3. The store total index covers all departments, including some not listed
  separately, except for the following: candy, food, liquor, tobacco and
  contract departments.

DRAFTING INFORMATION

  The principal author of this revenue ruling is Michael Burkom of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Burkom at (202) 622- 7924 (not a toll-free call).

 Rev. Rul. 2003-103, 2003-38 I.R.B. 568, 2003-2 C.B. 568

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Revenue Ruling 2003-105

Rev. Rul. 2003-105
Rev. Rul. 2003-105, 2003-40 I.R.B. 696, 2003-2 C.B. 696
                       Internal Revenue Service (I.R.S.)
                                 Revenue Ruling
                     SPLIT-DOLLAR LIFE INSURANCE ARRANGEMENTS
                          Released: September 12, 2003
                           Published: October 6, 2003

 Section 83.–Property Transferred in Connection With Performance of Services, 26 CFR 1.83-3: Meaning and use of certain terms. 26 CFR 1.83-6: Deduction by employer.

  Certain previously published revenue rulings are obsolete with respect to the taxation of split-dollar life insurance arrangements entered into or materially modified after September 17, 2003.

Section 301.–Distributions of Property, 26 CFR 1.301-1: Rules applicable with respect to distributions of money and other property.

  Certain previously published revenue rulings are obsolete with respect to the taxation of split-dollar life insurance arrangements entered into or materially modified after September 17, 2003.

Section 316.–Dividend Defined, 26 CFR 1.316-1: Dividends.

  Certain previously published revenue rulings are obsolete with respect to the taxation of split-dollar life insurance arrangements entered into or materially modified after September 17, 2003.

Section 2503.–Taxable Gifts, 26 CFR 25.2503-1: General definitions of  “taxable gifts” and of “total amount of gifts.”

  Certain previously published revenue rulings are obsolete with respect to the taxation of split-dollar life insurance arrangements entered into or materially modified after September 17, 2003.

Section 2511.–Transfers in General, 26 CFR 25.2511-1: Transfers in general.

  Certain previously published revenue rulings are obsolete with respect to the taxation of split-dollar life insurance arrangements entered into or materially modified after September 17, 2003.

Section 2512.–Valuation of Gifts, 26 CFR 25.2512-6: Valuation of certain life insurance and annuity contracts; valuation of shares in an open-end investment company.

  Certain previously published revenue rulings are obsolete with respect to the taxation of split-dollar life insurance arrangements entered into or materially modified after September 17, 2003.

Section 6042.–Returns Regarding Payments of Dividends and Corporate Earnings and Profits

  The Service expects to revise Rev. Proc. 2003-28 to allow brokers to furnish composite substitute payee statements for Forms 1099-DIV, “Dividends and Distributions,” and Forms 1099-MISC, Miscellaneous Income.

Section 6721.–Failure to File Correct Information Returns

  The Service will exercise its authority under section 6724 to waive penalties under section 6721 for information returns for 2003 if a broker makes a good faith effort to satisfy its information reporting obligations consistent with the statutory changes effected by the Jobs and Growth Tax Relief Reconciliation Act of 2003.

Section 6722.–Failure to Furnish Correct Payee Statements

  The Service will exercise its authority under section 6724 to waive penalties under section 6722 for information returns for 2003 if a broker makes a good faith effort to satisfy its information reporting obligations consistent with the statutory changes effected by the Jobs and Growth Tax Relief Reconciliation Act of 2003.

Section 6724.–Waiver; Definitions and Special Rules

  The Service will exercise its authority under section 6724 to waive penalties under sections 6721 and 6722 for information returns for 2003 if a broker makes a good faith effort to satisfy its information reporting obligations consistent with the statutory changes effected by the Jobs and Growth Tax Relief Reconciliation Act of 2003.

Section 7805.–Rules and Regulations, 26 CFR 301.7805-1: Rules and regulations.

  Certain previously published revenue rulings are obsolete with respect to the taxation of split-dollar life insurance arrangements entered into or materially modified after September 17, 2003.

Section 7872.–Treatment of Loans With Below-Market Interest Rates, 26 CFR 1.7872-15: Split-dollar loans.

  Certain previously published revenue rulings are obsolete with respect to the taxation of split-dollar life insurance arrangements entered into or materially modified after September 17, 2003.

Section 61.–Gross Income Defined, 26 CFR 1.61-22: Taxation of split-dollar life insurance arrangements.

  Split-dollar life insurance arrangements. Certain previously published revenue rulings are obsoleted to the extent described in this ruling. The previously published rulings are obsoleted in light of T.D. 9092, which provides comprehensive final regulations regarding the federal income, gift, and employment taxation of split-dollar life insurance arrangements. Rev. Ruls. 78-420 and 79-50 obsoleted. Rev. Rul. 66-610 partially obsoleted.

  Split-dollar life insurance arrangements. Certain previously published revenue rulings are obsoleted to the extent described in this ruling. The previously published rulings are obsoleted in light of T.D. 9092, which provides comprehensive final regulations regarding the federal income, gift, and employment taxation of split-dollar life insurance arrangements. Rev. Ruls. 78-420 and 79-50 obsoleted. Rev. Rul. 66-610 partially obsoleted.

  Treasury Decision 9092 provides comprehensive final regulations (under  ss 1.61-22, 1.83-3(e), 1.83-6(a)(5), 1.301-1(q), and 1.7872-15 of the Income Tax Regulations) regarding the federal income, gift, and employment taxation of split-dollar life insurance arrangements (as defined in s 1.61-22(b)(1) or (2)). These regulations apply to any split-dollar life insurance arrangement that is entered into after September 17, 2003, and to any split-dollar life insurance arrangement entered into on or before September 17, 2003, that is materially modified after September 17, 2003. See s 1.61- 22(j).

  The revenue rulings listed below are obsolete to the extent described below.

    Rev. Rul. 79-50, 1979-1 C.B. 139
    Rev. Rul. 78-420, 1978-2 C.B. 67
    Rev. Rul. 66-110, 1966-1 C.B. 12 (except as provided in Section III, Paragraph 3 of Notice 2002-8, 2002-1 C.B. 398, and Notice 2002-59, 2002-36 I.R.B. 481)
    Rev. Rul. 64-328, 1964-2 C.B. 11.

  In the case of any split-dollar life insurance arrangement entered into on or before September 17, 2003, taxpayers may continue to rely on these revenue rulings to the extent described in Notice 2002-8, but only if the arrangement is not materially modified after September 17, 2003.

DRAFTING INFORMATION

  The principal author of this revenue ruling is Elizabeth K. Kaye of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Elizabeth K. Kaye at (202) 622-4920 (not a toll-free call).

 Rev. Rul. 2003-105, 2003-40 I.R.B. 696, 2003-2 C.B. 696

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Revenue Ruling 2003-104

Rev. Rul. 2003-104
Rev. Rul. 2003-104, 2003-39 I.R.B. 636, 2003-2 C.B. 636
                       Internal Revenue Service (I.R.S.)
                                 Revenue Ruling
                 INTEREST RATES; UNDERPAYMENTS AND OVERPAYMENTS
                          Released: September 15, 2003
                          Published: September 29, 2003

 Section 6621.–Determination of Interest Rate, 26 CFR 301.6621-1: Interest Rate.

  Interest rates; underpayments and overpayments. The rate of interest determined under section 6621 of the Code for the calendar quarter beginning October 1, 2003, will be 4 percent for overpayments (3 percent in the case of a corporation), 4 percent for

underpayments, and 6 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 1.5 percent.

  Interest rates; underpayments and overpayments. The rate of interest determined under section 6621 of the Code for the calendar quarter beginning October 1, 2003, will be 4 percent for overpayments (3 percent in the case of a corporation), 4 percent for underpayments, and 6 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 1.5 percent.

  Section 6621 of the Internal Revenue Code establishes the rates for interest on tax overpayments and tax underpayments. Under section 6621(a)(1), the overpayment rate beginning October 1, 2003, is the sum of the federal short-term rate plus 3 percentage points (2 percentage points in the case of a corporation), except the rate for the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point for interest computations made after December 31, 1994. Under section 6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points.

  Section 6621(c) provides that for purposes of interest payable under section 6601 on any large corporate underpayment, the underpayment rate under section 6621(a)(2) is determined by substituting “5 percentage points” for “3 percentage points.” See section 6621(c) and section 301.6621-3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date. Section 6621(c) and section 301.6621-3 are generally effective for periods after December 31, 1990.

  Section 6621(b)(1) provides that the Secretary will determine the federal short-term rate for the first month in each calendar quarter.

  Section 6621(b)(2)(A) provides that the federal short-term rate determined under section 6621(b)(1) for any month applies during the first calendar quarter beginning after such month.

  Section 6621(b)(3) provides that the federal short-term rate for any month is the federal short-term rate determined during such month by the Secretary in accordance with s 1274(d), rounded to the nearest full percent (or, if a multiple of 1/2 of 1 percent, the rate is increased to the next highest full percent).

  Notice 88-59, 1988-1 C.B. 546, announced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under section 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with section 6621 which, pursuant to section 6622, is subject to daily compounding.

  Rounded to the nearest full percent, the federal short-term rate based on daily compounding determined during the month of July 2003 is I percent. Accordingly, an overpayment rate of 4 percent (3 percent in the case of a corporation) and an underpayment rate of 4 percent are established for the calendar quarter beginning October 1, 2003. The overpayment rate for the portion of a corporate overpayment exceeding $10,000 for the calendar quarter beginning October 1, 2003, is 1.5 percent. The underpayment rate for large corporate underpayments for the calendar quarter beginning October 1, 2003, is 6 percent. These rates apply to amounts bearing interest during that calendar quarter.

  Interest factors for daily compound interest for annual rates of 1.5 percent, 3 percent, 4 percent, and 6 percent are published in Tables 8, 11, 13, and 17 of Rev. Proc. 95-17, 1995-1 C.B. 556, 562, 565, 567, and 571.

  Annual interest rates to be compounded daily pursuant to section 6622 that apply for prior periods are set forth in the tables accompanying this revenue ruling.

DRAFTING INFORMATION

  The principal author of this revenue ruling is Crystal Foster of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue ruling, contact Ms. Foster at (202) 622- 7326 (not a toll-free call).

——————————————————————————-
 TABLE OF INTEREST RATES PERIODS BEFORE JUL. 1, 1975 - PERIODS ENDING DEC. 31,
                      1986 OVERPAYMENTS AND UNDERPAYMENTS
PERIOD                                    RATE      In 1995-1 C.B. DAILY RATE
                                                              TABLE
Before Jul. 1, 1975                        6%           Table 2, pg. 557
Jul. 1, 1975–Jan. 31, 1976                9%           Table 4, pg. 559
Feb. 1, 1976–Jan. 31, 1978                7%           Table 3, pg. 558
Feb. 1, 1978–Jan. 31, 1980                6%           Table 2, pg. 557
Feb. 1, 1980–Jan. 31, 1982               12%           Table 5, pg. 560
Feb. 1, 1982–Dec. 31, 1982               20%           Table 6, pg. 560
Jan. 1, 1983–Jun. 30, 1983               16%           Table 37, pg. 591
Jul. 1, 1983–Dec. 31, 1983               11%           Table 27, pg. 581
Jan. 1, 1984–Jun. 30, 1984               11%           Table 75, pg. 629
Jul. 1, 1984–Dec. 31, 1984               11%           Table 75, pg. 629
Jan. 1, 1985–Jun. 30, 1985               13%           Table 31, pg. 585
Jul. 1, 1985–Dec. 31, 1985               11%           Table 27, pg. 581
Jan. 1, 1986–Jun. 30, 1986               10%           Table 25, pg. 579
Jul. 1, 1986–Dec. 31, 1986                9%           Table 23, pg. 577
——————————————————————————-
—————————————————————————-
         TABLE OF INTEREST RATES FROM JAN. 1, 1987 - Dec. 31, 1998
                                  OVERPAYMENTS            UNDERPAYMENTS
                             ———————————————–
                                   1995-1 C.B.             1995-1 C.B.
                             RATE     TABLE     PG   RATE     TABLE     PAGE
Jan. 1, 1987–Mar. 31, 1987   8%       21       575   9%       23       577
Apr. 1, 1987–Jun. 30, 1987   8%       21       575   9%       23       577
Jul. 1, 1987–Sep. 30, 1987   8%       21       575   9%       23       577
Oct. 1, 1987–Dec. 31, 1987   9%       23       577  10%       25       579
Jan. 1, 1988–Mar. 31, 1988  10%       73       627  11%       75       629
Apr. 1, 1988–Jun. 30, 1988   9%       71       625  10%       73       627
Jul. 1, 1988–Sep. 30, 1988   9%       71       625  10%       73       627
Oct. 1, 1988–Dec. 31, 1988  10%       73       627  11%       75       629
Jan. 1, 1989–Mar. 31, 1989  10%       25       579  11%       27       581
Apr. 1, 1989–Jun. 30, 1989  11%       27       581  12%       29       583
Jul. 1, 1989–Sep. 30, 1989  11%       27       581  12%       29       583
Oct. 1, 1989–Dec. 31, 1989  10%       25       579  11%       27       581
Jan. 1, 1990–Mar. 31, 1990  10%       25       579  11%       27       581
Apr. 1, 1990–Jun. 30, 1990  10%       25       579  11%       27       581
Jul. 1, 1990–Sep. 30, 1990  10%       25       579  11%       27       581
Oct. 1, 1990–Dec. 31, 1990  10%       25       579  11%       27       581
Jan. 1, 1991–Mar. 31, 1991  10%       25       579  11%       27       581
Apr. 1, 1991–Jun. 30, 1991   9%       23       577  10%       25       579
Jul. 1, 1991–Sep. 30, 1991   9%       23       577  10%       25       579
Oct. 1, 1991–Dec. 31, 1991   9%       23       577  10%       25       579
Jan. 1, 1992–Mar. 31, 1992   8%       69       623   9%       71       625
Apr. 1, 1992–Jun. 30, 1992   7%       67       621   8%       69       623
Jul. 1, 1992–Sep. 30, 1992   7%       67       621   8%       69       623
Oct. 1, 1992–Dec. 31, 1992   6%       65       619   7%       67       621
Jan. 1, 1993–Mar. 31, 1993   6%       17       571   7%       19       573
Apr. 1, 1993–Jun. 30, 1993   6%       17       571   7%       19       573
Jul. 1, 1993–Sep. 30, 1993   6%       17       571   7%       19       573
Oct. 1, 1993–Dec. 31, 1993   6%       17       571   7%       19       573
Jan. 1, 1994–Mar. 31, 1994   6%       17       571   7%       19       573
Apr. 1, 1994–Jun. 30, 1994   6%       17       571   7%       19       573
Jul. 1, 1994–Sep. 30, 1994   7%       19       573   8%       21       575
Oct. 1, 1994–Dec. 31, 1994   8%       21       575   9%       23       577
Jan. 1, 1995–Mar. 31, 1995   8%       21       575   9%       23       577
Apr. 1, 1995–Jun. 30, 1995   9%       23       577  10%       25       579
Jul. 1, 1995–Sep. 30, 1995   8%       21       575   9%       23       577
Oct. 1, 1995–Dec. 31, 1995   8%       21       575   9%       23       577
Jan. 1, 1996–Mar. 31, 1996   8%       69       623   9%       71       625
Apr. 1, 1996–Jun. 30, 1996   7%       67       621   8%       69       623
Jul. 1, 1996–Sep. 30, 1996   8%       69       623   9%       71       625
Oct. 1, 1996–Dec. 31, 1996   8%       69       623   9%       71       625
Jan. 1, 1997–Mar. 31, 1997   8%       21       575   9%       23       577
Apr. 1, 1997–Jun. 30, 1997   8%       21       575   9%       23       577
Jul. 1, 1997–Sep. 30, 1997   8%       21       575   9%       23       577
Oct. 1, 1997–Dec. 31, 1997   8%       21       575   9%       23       577
Jan. 1, 1998–Mar. 31, 1998   8%       21       575   9%       23       577
Apr. 1, 1998–Jun. 30, 1998   7%       19       573   8%       21       575
Jul. 1, 1998–Sep. 30, 1998   7%       19       573   8%       21       575
Oct. 1, 1998–Dec. 31, 1998   7%       19       573   8%       21       575
—————————————————————————-
——————————————————————————-
      TABLE OF INTEREST RATES FROM JANUARY 1, 1999 - PRESENT NONCORPORATE
                        OVERPAYMENTS AND UNDERPAYMENTS
                                             In 1995-1 C.B.
                                 RATE            TABLE              PAGE
Jan. 1, 1999–Mar. 31, 1999       7%               19                573
Apr. 1, 1999–Jun. 30, 1999       8%               21                575
Jul. 1, 1999–Sep. 30, 1999       8%               21                575
Oct. 1, 1999–Dec. 31, 1999       8%               21                575
Jan. 1, 2000–Mar. 31, 2000       8%               69                623
Apr. 1, 2000–Jun. 30, 2000       9%               71                625
Jul. 1, 2000–Sep. 30, 2000       9%               71                625
Oct. 1, 2000–Dec. 31, 2000       9%               71                625
Jan. 1, 2001–Mar. 31, 2001       9%               23                577
Apr. 1, 2001–Jun. 30, 2001       8%               21                575
Jul. 1, 2001–Sep. 30, 2001       7%               19                573
Oct. 1, 2001–Dec. 31, 2001       7%               19                573
Jan. 1, 2002–Mar. 31, 2002       6%               17                571
Apr. 1, 2002–Jun. 30, 2002       6%               17                571
Jul. 1, 2002–Sep. 30, 2002       6%               17                571
Oct. 1, 2002–Dec. 31, 2002       6%               17                571
Jan. 1, 2003–Mar. 31, 2003       5%               15                569
Apr. 1, 2003–Jun. 30, 2003       5%               15                569
Jul. 1, 2003–Sep. 30, 2003       5%               15                569
Oct. 1, 2003–Dec. 31, 2003       4%               13                567
——————————————————————————-
——————————————————————————-
 TABLE OF INTEREST RATES FROM JANUARY 1, 1999 - Present CORPORATE OVERPAYMENTS
                               AND UNDERPAYMENTS
                                   OVERPAYMENTS             UNDERPAYMENTS
                             ————————————————–
                                     1995-1                    1995-1
                                      C.B.                      C.B.
                             RATE    TABLE      PG     RATE    TABLE     PAGE
Jan. 1, 1999–Mar. 31, 1999   6%       17       571     7%       19       573
Apr. 1, 1999–Jun. 30, 1999   7%       19       573     8%       21       575
Jul. 1, 1999–Sep. 30, 1999   7%       19       573     8%       21       575
Oct. 1, 1999–Dec. 31, 1999   7%       19       573     8%       21       575
Jan. 1, 2000–Mar. 31, 2000   7%       67       621     8%       69       623
Apr. 1, 2000–Jun. 30, 2000   8%       69       623     9%       71       625
Jul. 1, 2000–Sep. 30, 2000   8%       69       623     9%       71       625
Oct. 1, 2000–Dec. 31, 2000   8%       69       623     9%       71       625
Jan. 1, 2001–Mar. 31, 2001   8%       21       575     9%       23       577
Apr. 1, 2001–Jun. 30, 2001   7%       19       573     8%       21       575
Jul. 1, 2001–Sep. 30, 2001   6%       17       571     7%       19       573
Oct. 1, 2001–Dec. 31, 2001   6%       17       571     7%       19       573
Jan. 1, 2002–Mar. 31, 2002   5%       15       569     6%       17       571
Apr. 1, 2002–Jun. 30, 2002   5%       15       569     6%       17       571
Jul. 1, 2002–Sep. 30, 2002   5%       15       569     6%       17       571
Oct. 1, 2002–Dec. 31, 2002   5%       15       569     6%       17       571
Jan. 1, 2003–Mar. 31, 2003   4%       13       567     5%       15       569
Apr. 1, 2003–Jun. 30, 2003   4%       13       567     5%       15       569
Jul. 1, 2003–Sep. 30, 2003   4%       13       567     5%       15       569
Oct. 1, 2003–Dec. 31, 2003   3%       11       565     4%       13       567
——————————————————————————-
——————————————————————————-
TABLE OF INTEREST RATES FOR LARGE CORPORATE UNDERPAYMENTS FROM JANUARY 1, 1991
                                   - PRESENT
                                              In 1995-1 C.B.
                                  RATE            TABLE             PAGE
Jan. 1, 1991–Mar. 31, 1991        13%              31               585
Apr. 1, 1991–Jun. 30, 1991        12%              29               583
Jul. 1, 1991–Sep. 30, 1991        12%              29               583
Oct. 1, 1991–Dec. 31, 1991        12%              29               583
Jan. 1, 1992–Mar. 31, 1992        11%              75               629
Apr. 1, 1992–Jun. 30, 1992        10%              73               627
Jul. 1, 1992–Sep. 30, 1992        10%              73               627
Oct. 1, 1992–Dec. 31, 1992        9%               71               625
Jan. 1, 1993–Mar. 31, 1993        9%               23               577
Apr. 1, 1993–Jun. 30, 1993        9%               23               577
Jul. 1, 1993–Sep. 30, 1993        9%               23               577
Oct. 1, 1993–Dec. 31, 1993        9%               23               577
Jan. 1, 1994–Mar. 31, 1994        9%               23               577
Apr. 1, 1994–Jun. 30, 1994        9%               23               577
Jul. 1, 1994–Sep. 30, 1994        10%              25               579
Oct. 1, 1994–Dec. 31, 1994        11%              27               581
Jan. 1, 1995–Mar. 31, 1995        11%              27               581
Apr. 1, 1995–Jun. 30, 1995        12%              29               583
Jul. 1, 1995–Sep. 30, 1995        11%              27               581
Oct. 1, 1995–Dec. 31, 1995        11%              27               581
Jan. 1, 1996–Mar. 31, 1996        11%              75               629
Apr. 1, 1996–Jun. 30, 1996        10%              73               627
Jul. 1, 1996–Sep. 30, 1996        11%              75               629
Oct. 1, 1996–Dec. 31, 1996        11%              75               629
Jan. 1, 1997–Mar. 31, 1997        11%              27               581
Apr. 1, 1997–Jun. 30, 1997        11%              27               581
Jul. 1, 1997–Sep. 30, 1997        11%              27               581
Oct. 1, 1997–Dec. 31, 1997        11%              27               581
Jan. 1, 1998–Mar. 31, 1998        11%              27               581
Apr. 1, 1998–Jun. 30, 1998        10%              25               579
Jul. 1, 1998–Sep. 30, 1998        10%              25               579
Oct. 1, 1998–Dec. 31, 1998        10%              25               579
Jan. 1, 1999–Mar. 31, 1999        9%               23               577
Apr. 1, 1999–Jun. 30, 1999        10%              25               579
Jul. 1, 1999–Sep. 30, 1999        10%              25               579
Oct. 1, 1999–Dec. 31, 1999        10%              25               579
Jan. 1, 2000–Mar. 31, 2000        10%              73               627
Apr. 1, 2000–Jun. 30, 2000        11%              75               629
Jul. 1, 2000–Sep. 30, 2000        11%              75               629
Oct. 1, 2000–Dec. 31, 2000        11%              75               629
Jan. 1, 2001–Mar. 31, 2001        11%              27               581
Apr. 1, 2001–Jun. 30, 2001        10%              25               579
Jul. 1, 2001–Sep. 30, 2001        9%               23               577
Oct. 1, 2001–Dec. 31, 2001        9%               23               577
Jan. 1, 2002–Mar. 31, 2002        8%               21               575
Apr. 1, 2002–Jun. 30, 2002        8%               21               575
Jul. 1, 2002–Sep. 30, 2002        8%               21               575
Oct. 1, 2002–Dec. 30, 2002        8%               21               575
Jan. 1, 2003–Mar. 31, 2003        7%               19               573
Apr. 1, 2003–Jun. 30, 2003        7%               19               573
Jul. 1, 2003–Sep. 30, 2003        7%               19               573
Oct. 1, 2003–Dec. 31, 2003        6%               17               571
——————————————————————————-
——————————————————————————-
   TABLE OF INTEREST RATES FOR CORPORATE OVERPAYMENTS EXCEEDING $10,000 FROM
                           JANUARY 1, 1995 - PRESENT
                                                   In 1995-1
                                                     C.B.
                                    RATE             TABLE           PAGE
Jan. 1, 1995–Mar. 31, 1995         6.5%              18              572
Apr. 1, 1995–Jun. 30, 1995         7.5%              20              574
Jul. 1, 1995–Sep. 30, 1995         6.5%              18              572
Oct. 1, 1995–Dec. 31, 1995         6.5%              18              572
Jan. 1, 1996–Mar. 31, 1996         6.5%              66              620
Apr. 1, 1996–Jun. 30, 1996         5.5%              64              618
Jul. 1, 1996–Sep. 30, 1996         6.5%              66              620
Oct. 1, 1996–Dec. 31, 1996         6.5%              66              620
Jan. 1, 1997–Mar. 31, 1997         6.5%              18              572
Apr. 1, 1997–Jun. 30, 1997         6.5%              18              572
Jul. 1, 1997–Sep. 30, 1997         6.5%              18              572
Oct. 1, 1997–Dec. 31, 1997         6.5%              18              572
Jan. 1, 1998–Mar. 31, 1998         6.5%              18              572
Apr. 1, 1998–Jun. 30, 1998         5.5%              16              570
Jul. 1, 1998–Sep. 30, 1998         5.5%              16              570
Oct. 1, 1998–Dec. 31, 1998         5.5%              16              570
Jan. 1, 1999–Mar. 31, 1999         4.5%              14              568
Apr. 1, 1999–Jun. 30, 1999         5.5%              16              570
Jul. 1, 1999–Sep. 30, 1999         5.5%              16              570
Oct. 1, 1999–Dec. 31, 1999         5.5%              16              570
Jan. 1, 2000–Mar. 31, 2000         5.5%              64              618
Apr. 1, 2000–Jun. 30, 2000         6.5%              66              620
Jul. 1, 2000–Sep. 30, 2000         6.5%              66              620
Oct. 1, 2000–Dec. 31, 2000         6.5%              66              620
Jan. 1, 2001–Mar. 31, 2001         6.5%              18              572
Apr. 1, 2001–Jun. 30, 2001         5.5%              16              570
Jul. 1, 2001–Sep. 30, 2001         4.5%              14              568
Oct. 1, 2001–Dec. 31, 2001         4.5%              14              568
Jan. 1, 2002–Mar. 31, 2002         3.5%              12              566
Apr. 1, 2002–Jun. 30, 2002         3.5%              12              566
Jul. 1, 2002–Sep. 30, 2002         3.5%              12              566
Oct. 1, 2002–Dec. 31, 2002         3.5%              12              566
Jan. 1, 2003–Mar. 31, 2003         2.5%              10              564
Apr. 1, 2003–Jun. 30, 2003         2.5%              10              564
Jul. 1, 2003–Sep. 30, 2003         2.5%              10              564
Oct. 1, 2003–Dec. 31, 2003         1.5%               8              562
——————————————————————————-

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Revenue Ruling 2003-102

Rev. Rul. 2003-102
Rev. Rul. 2003-102, 2003-38 I.R.B. 559, 2003-2 C.B. 559
                       Internal Revenue Service (I.R.S.)
                                 Revenue Ruling
                     SELF-INSURED MEDICAL REIMBURSEMENT PLANS
                           Released: September 3, 2003
                          Published: September 22, 2003

 Section 105.–Amounts Received Under Accident and Health Plans

(Also Section 213: Medical, dental, etc., expenses.)

  Self-insured medical reimbursement plans. This ruling holds that employer reimbursements of amounts paid by an employee to purchase nonprescription medicines and drugs are excludable from gross income under section 105(b) of the Code. However, amounts paid by an employee for dietary supplements that are merely beneficial to the general health of the employee or the employee’s spouse or dependents are not reimbursable or excludable from gross income under section 105(b). Rev. Rul. 2003-58 distinquished.

  Self-insured medical reimbursement plans. This ruling holds that employer reimbursements of amounts paid by an employee to purchase nonprescription medicines and drugs are excludable from gross income under section 105(b) of the Code. However, amounts paid by an employee for dietary supplements that are merely beneficial to the general health of the employee or the employee’s spouse or dependents are not reimbursable or excludable from gross income under section 105(b). Rev. Rul. 2003-58 distinquished.

ISSUE

  Are reimbursements by an employer of amounts paid by an employee for medicines, drugs, or dietary supplements purchased by the employee without a physician’s prescription excludable from gross income under s 105(b) of the Internal Revenue Code?

FACTS

  Employer N sponsors a health flexible spending arrangement (health FSA). The health FSA provides for the reimbursement of participating employees’ medical care expenses that are not covered by other insurance. Employee A is a participating employee in Employer N’s health FSA.

  Employee A purchases an antacid, an allergy medicine, a pain reliever, and a cold medicine from a pharmacy, none of which are purchased with a physician’s prescription. Employee A purchases these items for personal use, or for the use of Employee A’s spouse or dependents, to alleviate or treat personal injuries or sickness. Employee A also purchases dietary supplements (e.g., vitamins) without a physician’s prescription to maintain the general health of Employee A, or Employee A’s spouse or dependents. Employee A submits substantiated claims for all of these expenses, which have been incurred during the current plan year, to Employer N’s health FSA for reimbursement. Employee A is not compensated for these expenses by insurance or otherwise.

LAW AND ANALYSIS

  Section 61(a)(1) provides that, except as otherwise provided in subtitle A, gross income includes compensation for services, including fees, commissions, fringe benefits, and similar items.

  Section 105(a) provides that amounts received by an employee through accident or health insurance for personal injuries or sickness are included in gross income to the extent such amounts (1) are attributable to contributions by the employer that were not includible in the gross income of the employee or (2) are paid by the employer.

  However, s 105(b) provides an exception to the general rule requiring inclusion in income. Section 105(b) provides that, except in the case of amounts attributable to (and not in excess of) deductions allowed under s 213 (relating to medical expenses) for any

prior taxable year, gross income does not include amounts paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by the taxpayer for the medical care (as defined in s 213(d)) of the taxpayer or the taxpayer’s spouse or dependents (as defined in s 152).

  Section 105(e) states that amounts received under an accident or health plan for employees are treated as amounts received through accident or health insurance for purposes of s 105. Section 1.105-5(a) of the Income Tax Regulations provides that an accident or health plan is an arrangement for the payment of amounts to employees in the event of personal injuries or sickness.

  Section 213(d)(1) defines “medical care” to include amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.

  Section 1.213-1(e)(1)(ii) states that an expenditure that is merely beneficial to the general health of an individual, such as an expenditure for a vacation, is not an expenditure for medical care. Section 1.213-1(e)(1)(ii) also states that expenditures for “medicines and drugs” are expenditures for medical care.

  Section 1.213-1(e)(2) states that the term “medicine and drugs” includes only items that are legally procured and generally accepted as falling within the category of medicine and drugs. Section 1.213-1(e)(2) further provides that toiletries (e.g., toothpaste), cosmetics (e.g., face creams) and sundry items are not “medicines and drugs” and that amounts expended for these items are not expenditures for “medical care.”

  Rev. Rul. 2003-58, 2003-22 I.R.B. 959, considers whether amounts paid by an individual for medicines that may be purchased without a prescription of a physician are deductible under s 213. The ruling notes that s 213(b) permits an amount paid for a medicine or drug to be taken into account for the purposes of the s 213 deduction for medical care expenses only if the medicine or drug is a prescribed drug or insulin. Section 213(d)(3) defines a “prescribed drug” as a drug or biological that requires a prescription of a physician for its use by an individual. The ruling concludes that amounts paid for medicines or drugs that may be purchased without a prescription of a physician are not taken into account pursuant to s 213(b) and are therefore not deductible under s 213.

  Section 105(b) specifically refers to “expenses incurred by the taxpayer for … medical care,” as defined in s 213(d). There is no requirement in s 105(b) that the expense be allowed as a deduction for medical care under s 213(a) or that only medicines or drugs that require a physician’s prescription be taken into account.

  Accordingly, the amount expended by Employee A to purchase the antacid, allergy medicine, pain reliever, and cold medicine without a physician’s prescription is an expenditure for medical care. Employer N’s health FSA reimbursement of Employee A’s cost for these items is therefore excludable under s 105(b), even though the cost would not have been deductible under s 213(a). However, the dietary supplements (e.g., the vitamins) are merely beneficial to Employee A or Employee A’s spouse or dependents’ general good health. Therefore, the cost of the dietary supplements is not an expense for medical care and is not reimbursable or excludable under s 105(b).

HOLDING

  Reimbursements by an employer of amounts paid by an employee for medicines and drugs purchased by the employee without a physician’s prescription are excludable from gross income under s 105(b). However, amounts paid by an employee for dietary supplements that are merely beneficial to the general health of the employee or the employee’s spouse or dependents, are not reimbursable or excludable from gross income under s 105(b).

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 2003-58 is distinguished.

DRAFTING INFORMATION

  The principal author of this revenue ruling is Barbara E. Pie of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this revenue ruling, contact Ms. Pie at (202) 622-6080 (not a toll-free call).

 Rev. Rul. 2003-102, 2003-38 I.R.B. 559, 2003-2 C.B. 559

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