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Revenue Ruling 2003-111

Rev. Rul. 2003-111
Rev. Rul. 2003-111, 2003-45 I.R.B. 1009, 2003-2 C.B. 1009
                       Internal Revenue Service (I.R.S.)
                                 Revenue Ruling
                           2003 BASE PERIOD T-BILL RATE
                          Published: November 10, 2003

 Section 995.–Taxation of DISC Income to Shareholders

  2003 base period T-bill rate. The “base period T-bill rate” for the period ending September 30, 2003, is published as required by section 995(f) of the Code.

  2003 base period T-bill rate. The “base period T-bill rate” for the period ending September 30, 2003, is published as required by section 995(f) of the Code.

  Section 995(f)(1) of the Internal Revenue Code provides that a shareholder of a DISC shall pay interest each taxable year in an amount equal to the product of the shareholder’s DISC-related deferred tax liability for the year and the “base period T-bill rate.” Under section 995(f)(4), the base period T-bill rate is the annual rate of interest determined by the Secretary to be equivalent to the average of the 1-year constant maturity Treasury yields, as published by the Board of Governors of the Federal Reserve System, for the 1- year period ending on September 30 of the calendar year ending with (or of the most recent calendar year ending before) the close of the taxable year of the shareholder. The base period T-bill rate for the period ending September 30, 2003, is 1.30 percent.

  Pursuant to section 6222 of the Code, interest must be compounded daily. The table below provides factors for compounding the base period T-bill rate daily for any number of days in the shareholder’s taxable year (including a 52-53 week accounting period) for the 2003 base period T-bill rate. To compute the amount of the interest charge for the shareholder’s taxable year, multiply the amount of the shareholder’s DISC-related deferred tax liability (as defined in section 995(f)(2)) for that year by the base period T-bill rate factor corresponding to the number of days in the shareholder’s taxable year for which the interest charge is being computed. Generally, one would use the factor for 365 days. One would use a different factor only if the shareholder’s taxable year for which the interest charge being determined is a short taxable year, if the shareholder uses the 52-53 week taxable year, or if the shareholder’s taxable year is a leap year.

  For the base period T-bill rates for the periods ending in prior years, see  Rev. Rul. 2002-68, 2002-2 C.B. 808, Rev. Rul. 2001-56, 2001-2 C.B. 500, and Rev. Rul. 2000-52, 2000-2 C.B. 516.

DRAFTING INFORMATION

  The principal author of this revenue ruling is David Bergkuist of the Office of the Associate Chief Counsel (International). For further information about this revenue ruling, contact Mr. Bergkuist at (202) 622-3850 (not a toll-free call).

 2003 ANNUAL RATE, COMPOUNDED DAILY
     DAYS        1.30 PERCENT FACTOR
————————————
       1             .000035616
       2             .000071234
       3             .000106853
       4             .000142473
       5             .000178095
       6             .000213718
       7             .000249342
       8             .000284967
       9             .000320594
      10             .000356221
      11             .000391851
      12             .000427481
      13             .000463113
      14             .000498746
      15             .000534380
      16             .000570015
      17             .000605652
      18             .000641290
      19             .000676929
      20             .000712570
      21             .000748212
      22             .000783855
      23             .000819499
      24             .000855145
      25             .000890792
      26             .000926440
      27             .000962089
      28             .000997740
      29             .001033392
      30             .001069045
      31             .001104700
      32             .001140355
      33             .001176012
      34             .001211671
      35             .001247330
      36             .001282991
      37             .001318653
      38             .001354317
      39             .001389981
      40             .001425647
      41             .001461315
      42             .001496983
      43             .001532653
      44             .001568324
      45             .001603996
      46             .001639670
      47             .001675345
      48             .001711021
      49             .001746698
      50             .001782377
      51             .001818057
      52             .001853738
      53             .001889420
      54             .001925104
      55             .001960789
      56             .001996475
      57             .002032163
      58             .002067852
      59             .002103542
      60             .002139233
      61             .002174926
      62             .002210620
      63             .002246315
      64             .002282011
      65             .002317709
      66             .002353408
      67             .002389108
      68             .002424810
      69             .002460513
      70             .002496217
      71             .002531922
      72             .002567629
      73             .002603337
      74             .002639046
      75             .002674756
      76             .002710468
      77             .002746181
      78             .002781895
      79             .002817611
      80             .002853327
      81             .002889045
      82             .002924765
      83             .002960485
      84             .002996207
      85             .003031930
      86             .003067655
      87             .003103381
      88             .003139107
      89             .003174836
      90             .003210565
      91             .003246296
      92             .003282028
      93             .003317761
      94             .003353496
      95             .003389232
      96             .003424969
      97             .003460707
      98             .003496447
      99             .003532188
      100            .003567930
      101            .003603674
      102            .003639419
      103            .003675165
      104            .003710912
      105            .003746661
      106            .003782411
      107            .003818162
      108            .003853914
      109            .003889668
      110            .003925423
      111            .003961179
      112            .003996937
      113            .004032695
      114            .004068455
      115            .004104217
      116            .004139979
      117            .004175743
      118            .004211508
      119            .004247275
      120            .004283043
      121            .004318812
      122            .004354582
      123            .004390353
      124            .004426126
      125            .004461900
      126            .004497676
      127            .004533452
      128            .004569230
      129            .004605009
      130            .004640790
      131            .004676572
      132            .004712355
      133            .004748139
      134            .004783924
      135            .004819711
      136            .004855499
      137            .004891289
      138            .004927079
      139            .004962871
      140            .004998664
      141            .005034459
      142            .005070255
      143            .005106052
      144            .005141850
      145            .005177650
      146            .005213450
      147            .005249253
      148            .005285056
      149            .005320861
      150            .005356667
      151            .005392474
      152            .005428282
      153            .005464092
      154            .005499903
      155            .005535715
      156            .005571529
      157            .005607344
      158            .005643160
      159            .005678977
      160            .005714796
      161            .005750616
      162            .005786437
      163            .005822260
      164            .005858084
      165            .005893909
      166            .005929735
      167            .005965563
      168            .006001392
      169            .006037222
      170            .006073053
      171            .006108886
      172            .006144720
      173            .006180555
      174            .006216392
      175            .006252230
      176            .006288069
      177            .006323909
      178            .006359751
      179            .006395594
      180            .006431438
      181            .006467284
      182            .006503130
      183            .006538979
      184            .006574828
      185            .006610678
      186            .006646530
      187            .006682384
      188            .006718238
      189            .006754094
      190            .006789951
      191            .006825809
      192            .006861668
      193            .006897529
      194            .006933391
      195            .006969255
      196            .007005119
      197            .007040985
      198            .007076853
      199            .007112721
      200            .007148591
      201            .007184462
      202            .007220334
      203            .007256208
      204            .007292083
      205            .007327959
      206            .007363836
      207            .007399715
      208            .007435595
      209            .007471476
      210            .007507359
      211            .007543243
      212            .007579128
      213            .007615014
      214            .007650902
      215            .007686791
      216            .007722681
      217            .007758572
      218            .007794465
      219            .007830359
      220            .007866255
      221            .007902151
      222            .007938049
      223            .007973948
      224            .008009849
      225            .008045750
      226            .008081653
      227            .008117558
      228            .008153463
      229            .008189370
      230            .008225278
      231            .008261188
      232            .008297098
      233            .008333010
      234            .008368923
      235            .008404838
      236            .008440754
      237            .008476671
      238            .008512589
      239            .008548509
      240            .008584430
      241            .008620352
      242            .008656275
      243            .008692200
      244            .008728126
      245            .008764053
      246            .008799982
      247            .008835912
      248            .008871843
      249            .008907775
      250            .008943709
      251            .008979644
      252            .009015580
      253            .009051518
      254            .009087457
      255            .009123397
      256            .009159338
      257            .009195281
      258            .009231225
      259            .009267170
      260            .009303117
      261            .009339064
      262            .009375013
      263            .009410964
      264            .009446915
      265            .009482868
      266            .009518822
      267            .009554778
      268            .009590735
      269            .009626693
      270            .009662652
      271            .009698613
      272            .009734574
      273            .009770538
      274            .009806502
      275            .009842468
      276            .009878435
      277            .009914403
      278            .009950373
      279            .009986343
      280            .010022315
      281            .010058289
      282            .010094264
      283            .010130240
      284            .010166217
      285            .010202195
      286            .010238175
      287            .010274156
      288            .010310139
      289            .010346122
      290            .010382107
      291            .010418093
      292            .010454081
      293            .010490070
      294            .010526060
      295            .010562051
      296            .010598044
      297            .010634038
      298            .010670033
      299            .010706029
      300            .010742027
      301            .010778026
      302            .010814026
      303            .010850028
      304            .010886031
      305            .010922035
      306            .010958040
      307            .010994047
      308            .011030055
      309            .011066064
      310            .011102075
      311            .011138087
      312            .011174100
      313            .011210114
      314            .011246130
      315            .011282147
      316            .011318165
      317            .011354185
      318            .011390206
      319            .011426228
      320            .011462251
      321            .011498276
      322            .011534302
      323            .011570329
      324            .011606358
      325            .011642387
      326            .011678419
      327            .011714451
      328            .011750485
      329            .011786520
      330            .011822556
      331            .011858593
      332            .011894632
      333            .011930672
      334            .011966714
      335            .012002756
      336            .012038800
      337            .012074845
      338            .012110892
      339            .012146940
      340            .012182989
      341            .012219039
      342            .012255091
      343            .012291144
      344            .012327198
      345            .012363253
      346            .012399310
      347            .012435368
      348            .012471427
      349            .012507488
      350            .012543550
      351            .012579613
      352            .012615678
      353            .012651743
      354            .012687811
      355            .012723879
      356            .012759948
      357            .012796019
      358            .012832092
      359            .012868165
      360            .012904240
      361            .012940316
      362            .012976393
      363            .013012472
      364            .013048552
      365            .013084633
      366            .013120715
      367            .013156799
      368            .013192884
      369            .013228970
      370            .013265058
      371            .013301147

 Rev. Rul. 2003-111, 2003-45 I.R.B. 1009, 2003-2 C.B. 1009

Revenue Ruling 2003-122

Rev. Rul. 2003-122
Rev. Rul. 2003-122, 2003-49 I.R.B. 1179, 2003-2 C.B. 1179
                       Internal Revenue Service (I.R.S.)
                                 Revenue Ruling
      FEDERAL RATES; ADJUSTED FEDERAL RATES; ADJUSTED FEDERAL LONG-TERM RATE
                          AND THE LONG-TERM EXEMPT RATE
                           Released: November 19, 2003
                           Published: December 8, 2003

 Section 42.–Low-Income Housing Credit

  The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of December 2003.

Section 280G.–Golden Parachute Payments

  Federal short-term, mid-term, and long-term rates are set forth for the month of December 2003.

Section 382.–Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change

  The adjusted applicable federal long-term rate is set forth for the month of December 2003.

Section 412.–Minimum Funding Standards

  The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of December 2003.

Section 467.–Certain Payments for the Use of Property or Services

  The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of December 2003.

Section 468.–Special Rules for Mining and Solid Waste Reclamation and Closing Costs

  The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of December 2003.

Section 482.–Allocation of Income and Deductions Among Taxpayers

  Federal short-term, mid-term, and long-term rates are set forth for the month of December 2003.

Section 483.–Interest on Certain Deferred Payments

  The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of December 2003.

Section 642.–Special Rules for Credits and Deductions

  Federal short-term, mid-term, and long-term rates are set forth for the month of December 2003.

Section 807.–Rules for Certain Reserves

  The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of December 2003.

Section 846.–Discounted Unpaid Losses Defined

  The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of December 2003.

Section 1288.–Treatment of Original Issue Discounts on Tax-Exempt Obligations

  The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of December 2003.

Section 7520.–Valuation Tables

  The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of December 2003.

Section 7872.–Treatment of Loans With Below-Market Interest Rates

  The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of December 2003.

Section 1274.–Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property

  Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 1274, 1288, and other sections of the Code, tables set forth the rates for December 2003.

  Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 1274, 1288, and other sections of the Code, tables set forth the rates for December 2003.

  This revenue ruling provides various prescribed rates for federal income tax purposes for December 2003 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(2) for buildings placed in service during the current month. Table 5 contains the federal rate for determining the present value of annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520. Finally, Table 6 contains the 2004 interest rate for sections 846 and 807.

——————————————————–
               REV. RUL. 2003-122 TABLE 1
    Applicable Federal Rates (AFR) for December 2003
                 Period for Compounding
            Annual      Semiannual  Quarterly  Monthly
Short-Term
       AFR  1.68%       1.67%       1.67%      1.66%
  110% AFR  1.85%       1.84%       1.84%      1.83%
  120% AFR  2.01%       2.00%       2.00%      1.99%
  130% AFR  2.18%       2.17%       2.16%      2.16%
  Mid-Term
       AFR  3.55%       3.52%       3.50%      3.49%
  110% AFR  3.91%       3.87%       3.85%      3.84%
  120% AFR  4.26%       4.22%       4.20%      4.18%
  130% AFR  4.63%       4.58%       4.55%      4.54%
  150% AFR  5.35%       5.28%       5.25%      5.22%
  175% AFR  6.25%       6.16%       6.11%      6.08%
 Long-Term
       AFR  5.12%       5.06%       5.03%      5.01%
  110% AFR  5.65%       5.57%       5.53%      5.51%
  120% AFR  6.16%       6.07%       6.02%      5.99%
  130% AFR  6.69%       6.58%       6.53%      6.49%
——————————————————–
—————————————————————
                  REV. RUL. 2003-122 TABLE 2
                Adjusted AFR for December 2003
                    Period for Compounding
                         Annual  Semiannual  Quarterly  Monthly
Short-term adjusted AFR  1.37%   1.37%       1.37%      1.37%
Mid-term adjusted AFR    2.75%   2.73%       2.72%      2.71%
Long-term adjusted AFR   4.58%   4.53%       4.50%      4.49%
—————————————————————
——————————————————————————-
                          REV. RUL. 2003-122 TABLE 3
                   Rates Under Section 382 for December 2003
Adjusted federal long-term rate for the current month                     4.58%
Long-term tax-exempt rate for ownership changes during the current month  4.74%
  (the highest of the adjusted federal long-term rates for the current
  month and the prior two months.)
——————————————————————————-
——————————————————————————-
                          REV. RUL. 2003-122 TABLE 4
       Appropriate Percentages Under Section 42(b)(2) for December 2003
Appropriate percentage for the 70% present value low-income housing       8.01%
  credit
Appropriate percentage for the 30% present value low-income housing       3.43%
  credit
——————————————————————————-
——————————————————————————-
                          REV. RUL. 2003-122 TABLE 5
                   Rate Under Section 7520 for December 2003
Applicable federal rate for determining the present value of an annuity,  4.2%
  an interest for life or a term of years, or a remainder or reversionary
  interest
——————————————————————————-
——————————————————————————-
                          REV. RUL. 2003-122 TABLE 6
Applicable rate of interest for 2004 for purposes of section 846 and 807  4.82%
——————————————————————————-

 Rev. Rul. 2003-122, 2003-49 I.R.B. 1179, 2003-2 C.B. 1179

Revenue Ruling 2003-115

Rev. Rul. 2003-115
Rev. Rul. 2003-115, 2003-46 I.R.B. 1052, 2003-2 C.B. 1052
                       Internal Revenue Service (I.R.S.)
                                 Revenue Ruling
      GROSS INCOME; COMPENSATION FOR INJURIES OR SICKNESS; DISASTER RELIEF
                                    PAYMENTS
                          Published: November 17, 2003
                           Released: October 29, 2003

 Section 104.–Compensation for Injuries or Sickness

  Taxpayers are informed of the tax treatment under sections 61, 104, 130, and 139 of periodic payments to claimants of the September 11th Victim Compensation Fund.

Section 130.–Certain Personal Injury Liability Assignments

  Taxpayers are informed of the tax treatment under sections 61, 104, 130, and 139 of periodic payments to claimants of the September 11th Victim Compensation Fund.

Section 139.–Disaster Relief Payments

  Taxpayers are informed of the tax treatment under sections 61, 104, 130, and 139 of periodic payments to claimants of the September 11th Victim Compensation Fund.

Section 451.–General Rule for Taxable Year of Inclusion, 26 CFR 1.451-2: Constructive receipt of income.

  Taxpayers are informed of the tax treatment under sections 61, 104, 130, and 139 of periodic payments to claimants of the September 11th Victim Compensation Fund.

Section 61.–Gross Income Defined, 26 CFR 1.61-1: Gross income.

  Gross income; compensation for injuries or sickness; disaster relief payments. Taxpayers are informed of the tax treatment under sections 61, 104, 130, and 139 of the Code of periodic payments to claimants of the September 11th Victim Compensation Fund.

  Gross income; compensation for injuries or sickness; disaster relief payments. Taxpayers are informed of the tax treatment under sections 61, 104, 130, and 139 of the Code of periodic payments to claimants of the September 11th Victim Compensation Fund.

ISSUES

  (1) Are periodic payments made to a claimant of the September 11th Victim Compensation Fund of 2001 (Fund) pursuant to an Award Determination Agreement among the claimant, the Special Master, and an assignment company (Agreement) excluded from the gross income of the claimant under ss 139(f) and 104(a)(2) of the Internal Revenue Code?

  (2) Is the amount transferred by the United States to an assignment company pursuant to an Agreement and in exchange for the assignment company’s assuming the United States’ obligation to make periodic payments to a claimant excluded from the gross income of the assignment company under s 130(a)?

FACTS

  On September 11, 2001, terrorist-related airline crashes occurred in New York, Virginia, and Pennsylvania. Following the attacks, the United States Government, under Title IV of the Air Transportation Safety and System Stabilization Act (Act), Pub. L. No. 107-42, 115 Stat. 230 (2001), created the Fund. The Act authorizes an award of compensation to any individual physically injured and to the personal representative of any individual killed as a result of the September 11th terrorist-related airline crashes.

  To receive an award, a claimant must file a claim with the Fund no later than December 22, 2003. The Special Master, appointed under section 404 of the Act to administer the Fund, reviews the claim and notifies the claimant of any additional information needed to process the claim. Once the Special Master receives sufficient information to make an initial evaluation of the claim, the Special Master determines the claim to be substantially complete and notifies the claimant by letter. When a claim is determined to be substantially complete, the claimant is deemed to have waived any right to file a civil action or be a party to an action in any federal or state court for damages sustained as a result of the September 11, 2001, airline crashes, except to recover collateral-source obligations or to recover from a person who is a knowing participant in a conspiracy to hijack an aircraft.

  The Special Master, within 120 days of his determination that the claimant’s application is substantially complete, must determine (1) whether the claimant is entitled to an award and (2) the amount of the award. Once the Special Master makes an award determination, the claimant is notified in writing. The claimant then has 21 days to either accept the award determination or appeal it by requesting a hearing before the Special Master. Alternatively, a claimant, following the submission of a claim, may proceed directly to a hearing process for purposes of determining the award amount.

  The amount of an award is affected by a number of factors including whether the claimant received an insurance or workers’ compensation award as a result of either injuries incurred by, or the death of, the victim from the attack; the income of the victim; the nature, severity and duration of the victim’s injuries resulting from the attack; the size of the victim’s household, including the number of surviving dependents; and the victim’s age. The particular needs of a claimant also may be taken into account in determining the award amount.

  The Special Master allows a claimant to make an election to receive an award in the form of periodic payments instead of a lump sum payment. The claimant, however, must elect periodic payments before the Special Master issues the letter notifying the claimant that his or her claim is substantially complete. If a claimant who applies for advance benefits as provided by the Fund desires periodic payments, the claimant must elect periodic payments when he or she files the form applying for advance benefits. An election may not be revoked by the claimant.

  When electing to receive periodic payments, the claimant may choose to receive the entire award in periodic payments, or only a portion of the award in periodic payments with the remainder to be received as a single payment. Further, at the time the claimant elects periodic payments, the claimant must choose the period of time over which the payments are to be made and the frequency of payments during that period. For example, a claimant may choose to receive his or her award in monthly payments over twenty years or in monthly payments over the claimant’s lifetime. Finally, all periodic payments must be of an equal amount unless the claimant specifies otherwise at the time he or she elects to receive periodic payments.

  If a claimant chooses to receive all or a portion of the award in periodic payments, and if the Special Master determines that the claimant is entitled to an award, then the terms of the award are set forth in an Agreement. Each Agreement sets forth the amount to be paid and the frequency and duration of the payments. In addition, an Agreement may state that, if the claimant dies before the entire interest is distributed, the remaining payments are payable to the claimant’s estate or to a secondary beneficiary duly designated by the claimant during the claimant’s lifetime. Each Agreement provides that no payee or beneficiary shall have the right or power to transfer, mortgage, encumber or anticipate the periodic payments, by assignment or otherwise.

  Each Agreement also includes an assignment by the Special Master of the United States’ periodic payment obligation to, and an assumption of that obligation by, an assignment company in exchange for a payment from the United States to the assignment company. Each Agreement provides that the assignment company’s periodic payment obligation is equal to the periodic payment obligation of the United States prior to the assignment, and that the periodic payments cannot be accelerated, deferred, increased, or decreased by the claimant or any beneficiary or payee. Each Agreement allows the assignment company to fund its obligation to make periodic payments through the purchase of an annuity contract that complies with the requirements set forth in s 130(d) for a qualified funding asset. Under an Agreement, the assignment company is the owner of the annuity, which is subject to claims of the general creditors of the assignment company.

LAW AND ANALYSIS

Issue 1

  The first issue concerns whether periodic payments made to a claimant of the Fund pursuant to an Agreement are excluded from the gross income of the claimant under s 139(f) and s 104(a)(2).

  Section 61 provides that, except as otherwise provided by the Code, gross income includes all income from whatever source derived.

  Section 139(f) provides that gross income does not include “any amount received as payment under section 406 of the Air Transportation Safety and System Stabilization Act.” The s 139(f) exclusion applies to amounts paid to claimants in the form of a lump sum or periodic payments.

  Section 104(a)(2) provides that gross income does not include the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as a lump sum or as periodic payments) on account of personal physical injuries or physical sickness.

  Neither s 139(f) nor s 104(a)(2) excludes from gross income amounts that are earned from the investment by the claimant of a lump sum amount received as either payment under section 406 of the Act or damages on account of personal physical injuries or physical sickness, respectively. If such a lump sum payment is invested for the benefit of a claimant who has actual or constructive receipt, or the economic benefit, of the lump sum payment, only the lump sum payment is excluded from gross income, and none of the income from the investment of the lump sum payment is excludable from the claimant’s gross income. Rev. Rul. 65-29, 1965-1 C.B. 59.

  Section 1.451-2 of the Income Tax Regulations provides rules relating to constructive receipt. Under s 1.451-2(a), an amount is constructively received in the taxable year in which such amount is credited to a taxpayer’s account, set apart for the taxpayer, or otherwise made available so that the taxpayer may draw upon it at any time if notice of intention is given. Income is not constructively received if the taxpayer’s control of receipt of the amount is subject to substantial limitations or restrictions. Section 1.451- 2(a).

  The economic benefit doctrine, developed in case law, provides that if a promise to pay an amount is funded and secured by the payor, and the payee is not required to do anything other than wait for the payments, an economic benefit is considered to have been conferred on the payee and the amount of such benefit is considered to have been received. In Sproull v. Commissioner, 16 T.C. 244 (1951), aff’d., 194 F.2d 541 (6th Cir. 1952), the court found that an economic benefit had been conferred on a taxpayer when the taxpayer’s employer established a trust to compensate the taxpayer for past services. In 1945, the employer transferred money to the trust to be paid to the taxpayer in 1946 and 1947. The taxpayer was the trust’s sole beneficiary. The court held that the taxpayer received compensation in 1945 in an amount equal to the value of the amount transferred to the trust for the taxpayer’s benefit because such transfer to the trust provided the taxpayer with an economic benefit.

  Not all rights to receive periodic payments, however, trigger application of the economic benefit doctrine. Rev. Rul. 79-220, 1979-2 C.B. 74, concludes that a right to receive certain periodic payments under the facts of the ruling does not confer an economic benefit on the recipient. In Rev. Rul. 79-220, a taxpayer entered into a settlement with an insurance company for the periodic payment of nontaxable damages for an agreed period. The taxpayer was given no immediate right to a lump sum amount and no control of the investment of the amount set aside to fund the insurance company’s obligation. The insurance company funded its obligation with an annuity payable directly to the taxpayer. The insurance company, as owner of the annuity, had all rights to the annuity and the annuity was subject to the claims of the general creditors of the insurance company. The ruling concludes that all of the periodic payments are excluded from the taxpayer’s gross income under s 104(a)(2) because the taxpayer did not receive, or have the economic benefit of, the lump sum amount used to fund the annuity. Further, the ruling holds that if the taxpayer dies before the end of the agreed period, the payments made to the taxpayer’s estate under the settlement agreement are also excludable from the gross income of the estate under s 104(a)(2).

  With respect to a claimant of the Fund, the award claim procedure requires the claimant to make an irrevocable election relating to periodic payments while the claimant’s control of receipt of payments is subject to substantial limitations or restrictions. Consequently, the claimant is not in constructive receipt of a lump sum amount. Further, no economic benefit of a lump sum has been conferred on the claimant by the Agreement. The assignment company making the periodic payments to the claimant may fund its obligation with an annuity to which the assignment company has all rights and that it continues to own. The periodic payments under the Agreement are, therefore, amounts “received as payment under section 406 of the Air Transportation Safety and System Stabilization Act” and thus excluded from the claimant’s gross income under s 139(f). Moreover, the payments are excluded from the claimant’s gross income under s 104(a)(2) as damages received on account of personal physical injuries or physical sickness. Finally, any payments to a successor beneficiary pursuant to the Agreement are excludable from the gross income of the successor beneficiary under ss 104(a)(2) and 139(f).

Issue 2

  The second issue concerns whether the amount transferred by the United States to an assignment company in exchange for the assignment company assuming the United States’ obligation to make periodic payments to a claimant is excluded from the assignment company’s gross income under s 130(a). Section 130 provides tax-favored treatment to certain structured settlement arrangements. Under s 130(a), any amount received for agreeing to a qualified assignment is excluded from the gross income of the assignee to the extent such amount does not exceed the aggregate cost of any qualified funding assets. Section 130(c) defines a qualified assignment as any assignment of a liability to make periodic payments as damages (whether by suit or agreement) on account of personal injury or sickness (in a case involving physical injury or physical sickness), provided the liability is assumed from a person who is a party to the suit or agreement, and the terms of the assignment satisfy the following requirements–

    (1) the periodic payments must be fixed and determinable as to amount and time of payment;

    (2) the periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments;

    (3) the assignee’s obligation on account of the personal injuries or sickness must be no greater than the obligation of the person who assigned the liability; and

    (4) the periodic payments must be excludable from the gross income of the recipient under s 104(a)(1) or (2).

  Under s 130(d), a qualified funding asset means any annuity contract issued by an insurance company licensed in the United States, or any obligation of the United States, meeting the requirements set forth in s 130(d)(1) through (4).

  Each Agreement meets the requirements set forth in s 130(c)(1) through (4). Moreover, the Special Master is considered a person who is a party to a suit or agreement because the Fund was created to compensate the victims of the terrorist attack. Accordingly, any payment by the United States to the assignment company for agreeing to a qualified assignment is excluded from the assignment company’s gross income under s 130 to the extent such amount does not exceed the aggregate cost of any qualified funding assets purchased by the assignment company to fund the payment obligation assumed by it.

HOLDINGS

  Under the facts of this revenue ruling:

  (1) Periodic payments made to a claimant of the Fund pursuant to an Agreement are excluded from the gross income of the claimant under ss 139(f) and 104(a)(2). Similarly, any payments to an estate or secondary beneficiary pursuant to an Agreement are excluded from the gross income of the successor beneficiary under ss 104(a)(2) and 139(f).

  (2) The amount transferred by the United States to an assignment company pursuant to an Agreement and in exchange for the assignment company’s assuming the United States’ obligation to make periodic payments to a claimant is excluded from the gross income of the assignment company under s 130(a) to the extent the amount transferred does not exceed the aggregate cost of any qualified funding asset purchased by the assignment company to fund the periodic payment obligation.

GRACE PERIODS FOR CERTAIN CLAIMANTS

  Any claimant of the Fund who has been notified by the Special Master that his or her claim is substantially complete (or who has applied to receive advance benefits) but who has not made an election relating to periodic payments (including specifying the period of time over which the payments are to be made, the frequency of such payments, and, if the claimant so desires, a periodic-payment stream other than equal payments) may make such election and rely on this revenue ruling provided the claimant makes his or her election before the earlier of (1) December 17, 2003, or (2) the date the Special Master issues the claimant’s award determination letter.

  In addition, a claimant may rely on this revenue ruling if: (1) before issuance of the claimant’s award determination letter, the claimant informed the Special Master of the claimant’s wish to receive periodic payments but provided no information regarding the period or frequency of such payments (and, if desired, a periodic-payment stream other than equal payments); (2) before October 28, 2003, the Special Master confirmed in writing that the claimant so informed the Special Master; and (3) the claimant provides the additional information required to perfect his or her election by December 2, 2003.

DRAFTING INFORMATION

  The author of the revenue ruling is Shareen S. Pflanz of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, please call Shareen Pflanz or Stephen Toomey at (202) 622-4920 (not a toll-free call).

 Rev. Rul. 2003-115, 2003-46 I.R.B. 1052, 2003-2 C.B. 1052

Revenue Ruling 2003-118

Rev. Rul. 2003-118
Rev. Rul. 2003-118, 2003-47 I.R.B. 1095, 2003-2 C.B. 1095
                       Internal Revenue Service (I.R.S.)
                                 Revenue Ruling
                  CPI ADJUSTMENT FOR BELOW-MARKET LOANS FOR 2004
                           Released: November 11, 2003
                          Published: November 24, 2003

 Section 7872.–Treatment of Loans With Below-Market Interest Rates

  CPI adjustment for below-market loans for 2004. The amount that section 7872(g) of the Code permits a taxpayer to lend to a qualified continuing care facility without incurring imputed interest is published and adjusted for inflation for years 1987-2004. Rev. Rul. 2002-78 supplemented and superseded.

  CPI adjustment for below-market loans for 2004. The amount that section 7872(g) of the Code permits a taxpayer to lend to a qualified continuing care facility without incurring imputed interest is published and adjusted for inflation for years 1987-2004. Rev. Rul. 2002-78 supplemented and superseded.

  This revenue ruling publishes the amount that s 7872(g) of the Internal Revenue Code permits a taxpayer to lend to a qualifying continuing care facility without incurring imputed interest. The amount is adjusted for inflation for the years after 1986.

  Section 7872 generally treats loans bearing a below-market interest rate as if they bore interest at the market rate.

  Section 7872(g)(1) provides that, in general, s 7872 does not apply for any calendar year to any below-market loan made by a lender to a qualified continuing care facility pursuant to a continuing care contract if the lender (or the lender’s spouse) attains age 65 before the close of the year.

  Section 7872(g)(2) provides that, in the case of loans made after October 11, 1985, and before 1987, s 7872(g)(1) applies only to the extent that the aggregate outstanding amount of any loan to which s 7872(g) applies (determined without regard to s 7872(g)(2)), when added to the aggregate outstanding amount of all other previous loans between the lender (or the lender’s spouse) and any qualified continuing care facility to which s 7872(g)(1) applies, does not exceed $90,000.

  Section 7872(g)(5) provides that, for loans made during any calendar year after 1986 to which s 7872(g)(1) applies, the $90,000 limit specified in  s 7872(g)(2) is increased by an inflation adjustment. The inflation adjustment for any calendar year is the percentage (if any) by which the Consumer Price Index (CPI) for the preceding calendar year exceeds the CPI for calendar year 1985. Section 7872(g)(5) states that the CPI for any calendar year is the average of the CPI as of the close of the 12-month period ending on September 30 of that calendar year.

  Table 1 sets forth the amount specified in s 7872(g)(2) of the Code. The amount is increased by the inflation adjustment for the years 1987-2004.

——————————————————————————-
                              REV. RUL. 2003-118
                                    TABLE 1
                           Limit under s 7872(g)(2)
              Year                                                       Amount
———————————  ——————————————–
           Before 1987                                                  $90,000
              1987                                                      $92,200
              1988                                                      $94,800
              1989                                                      $98,800
              1990                                                     $103,500
              1991                                                     $108,600
              1992                                                     $114,100
              1993                                                     $117,500
              1994                                                     $121,100
              1995                                                     $124,300
              1996                                                     $127,800
              1997                                                     $131,300
              1998                                                     $134,800
              1999                                                     $137,000
              2000                                                     $139,700
              2001                                                     $144,100
              2002                                                     $148,800
              2003                                                     $151,000
              2004                                                     $154,500
——————————————————————————-

Note: These inflation adjustments were computed using the All-Urban, Consumer

  Price Index 1982-1984 base, published by the Bureau of Labor Statistics.

——————————————————————————-

EFFECT ON OTHER DOCUMENTS

  Rev. Rul. 2002-78, 2002-2 C.B. 915, is supplemented and superseded.

DRAFTING INFORMATION

  The author of this revenue ruling is Avital Grunhaus of the Office of the Associate Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling, please contact Mrs. Grunhaus at (202) 622-3930 (not a toll-free call).

 Rev. Rul. 2003-118, 2003-47 I.R.B. 1095, 2003-2 C.B. 1095

Revenue Ruling 2003-119

Rev. Rul. 2003-119
Rev. Rul. 2003-119, 2003-47 I.R.B. 1094, 2003-2 C.B. 1094
                       Internal Revenue Service (I.R.S.)
                                 Revenue Ruling
               SECTION 1274A — INFLATION ADJUSTED NUMBERS FOR 2004
                           Released: November 11, 2003
                          Published: November 24, 2003

 Section 483.–Interest on Certain Deferred Payments, 26 CFR 1.483-1: Computation of interest on certain deferred payments.

  As defined by section 1274A, the definitions for both “qualified debt instruments” and “cash method debt instruments” have dollar ceilings on the stated principal amount. The limits to the stated principal amount are adjusted for inflation for sales or exchanges occurring in the 2004 calendar year.

Section 1274.–Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property, 26 CFR 1.1274A-1: Special rules for certain transactions where stated principal amount does not exceed $2,800,000.

  As defined by section 1274A, the definitions for both “qualified debt instruments” and “cash method debt instruments” have dollar ceilings on the stated principal amount. The limits to the stated principal amount are adjusted for inflation for sales or exchanges occurring in the 2004 calendar year.

Section 1274A.–Special Rules for Certain Transactions Where Stated Principal Amount Does Not Exceed $2,800,000

  Section 1274A — inflation adjusted numbers for 2004. This ruling provides the dollar amounts, increased by the 2004 inflation adjustment, for section 1274A of the Code. Rev. Rul. 2002-79 supplemented and superseded.

  Section 1274A — inflation adjusted numbers for 2004. This ruling provides the dollar amounts, increased by the 2004 inflation adjustment, for section 1274A of the Code, Rev. Rul. 2002-79 supplemented and superseded.

  This revenue ruling provides the dollar amounts, increased by the 2004 inflation adjustment, for s 1274A of the Internal Revenue Code.

BACKGROUND

  In general, ss 483 and 1274 determine the principal amount of a debt instrument given in consideration for the sale or exchange of nonpublicly traded property. In addition, any interest on a debt instrument subject to s 1274 is taken into account under the original issue discount provisions of the Code. Section 1274A, however, modifies the rules under ss 483 and 1274 for certain types of debt instruments.

  In the case of a “qualified debt instrument,” the discount rate used for purposes of ss 483 and 1274 may not exceed 9 percent, compounded semiannually. Section 1274A(b) defines a qualified debt instrument as any debt instrument given in consideration for the sale or exchange of property (other than new s 38 property within the meaning of s 48(b), as in effect on the day before the date of enactment of the Revenue Reconciliation Act of 1990) if the stated principal amount of the instrument does not exceed the amount specified in s 1274A(b). For debt instruments arising out of sales or exchanges before January 1, 1990, this amount is $2,800,000.

  In the case of a “cash method debt instrument,” as defined in s 1274A(c), the borrower and lender may elect to use the cash receipts and disbursements method of accounting. In particular, for any cash method debt instrument, s 1274 does not apply, and interest on the instrument is accounted for by both the borrower and the lender under the cash method of accounting. A cash method debt instrument is a qualified debt instrument that meets the following additional requirements: (A) In the case of instruments arising out of sales or exchanges before January 1, 1990, the stated principal amount does not exceed $2,000,000; (B) the lender does not use an accrual method of accounting and is not a dealer with respect to the property sold or exchanged; (C) s 1274 would have applied to the debt instrument but for an election under s 1274A(c); and (D) an election under s 1274A(c) is jointly made with respect to the debt instrument by the borrower and lender. Section 1.1274A-1(c)(1) of the Income Tax Regulations provides rules concerning the time for, and manner of, making this election.

  Section 1274A(d)(2) provides that, for any debt instrument arising out of a sale or exchange during any calendar year after 1989, the dollar amounts stated in s 1274A(b) and s 1274A(c)(2)(A) are increased by the inflation adjustment for the calendar year. Any increase due to the inflation adjustment is rounded to the nearest multiple of $100 (or, if the increase is a multiple of $50 and not of $100, the increase is increased to the nearest multiple of $100). The inflation adjustment for any calendar year is the percentage (if any) by which the CPI for the preceding calendar year exceeds the CPI for calendar year 1988. Section 1274A(d)(2)(B) defines the CPI for any calendar year as the average of the Consumer Price Index as of the close of the 12-month period ending on September 30 of that calendar year.

INFLATION-ADJUSTED AMOUNTS

  For debt instruments arising out of sales or exchanges after December 31, 1989, the inflation-adjusted amounts under s 1274A are shown in Table 1.

——————————————————————————-
                          REV. RUL. 2003-119 TABLE 1
                   Inflation-Adjusted Amounts Under s 1274A
 Calendar Year of    1274A(b) Amount (qualified    1274A(c)(2)(A) Amount (cash
 Sale or Exchange         debt instrument)           method debt instrument)
——————————————————————————-
       1990                  $2,933,200                    $2,095,100
       1991                  $3,079,600                    $2,199,700
       1992                  $3,234,900                    $2,310,600
       1993                  $3,332,400                    $2,380,300
       1994                  $3,433,500                    $2,452,500
       1995                  $3,523,600                    $2,516,900
       1996                  $3,622,500                    $2,587,500
       1997                  $3,723,800                    $2,659,900
       1998                  $3,823,100                    $2,730,800
       1999                  $3,885,500                    $2,775,400
       2000                  $3,960,100                    $2,828,700
       2001                  $4,085,900                    $2,918,500
       2002                  $4,217,500                    $3,012,500
       2003                  $4,280,800                    $3,057,700
       2004                  $4,381,300                    $3,129,500
——————————————————————————-
Note: These inflation adjustments were computed using the All-Urban, Consumer
  Price Index, 1982-1984 base, published by the Bureau of Labor Statistics.
——————————————————————————-

EFFECT ON OTHER DOCUMENTS

  Rev. Rul. 2002-79, 2002-2 C.B. 908, is supplemented and superseded.

DRAFTING INFORMATION

  The author of this revenue ruling is Avital Grunhaus of the Office of the Associate Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling, please contact Mrs. Grunhaus at (202) 622-3930 (not a toll-free call).

 Rev. Rul. 2003-119, 2003-47 I.R.B. 1094, 2003-2 C.B. 1094

Revenue Ruling 2003-113

Rev. Rul. 2003-113
Rev. Rul. 2003-113, 2003-44 I.R.B. 962, 2003-2 C.B. 962
                       Internal Revenue Service (I.R.S.)
                                 Revenue Ruling
                     LIFO; PRICE INDEXES; DEPARTMENT STORES
                           Published: November 3, 2003

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

  LIFO; price indexes; department stores. The August 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, August 31, 2003.

  LIFO; price indexes; department stores. The August 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, August 31, 2003.

  The following Department Store Inventory Price Indexes for August 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, August 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              Aug. 2002    Aug. 2003     Percent
                                                                      Change
                                                                    from Aug.
                                                                     2002 to
                                                                    Aug. 2003
                                                                      [FN1]
——————————————————————————-
1.         Piece Goods ………………….. 481.8        488.9           1.5
2.         Domestics and Draperies ……….. 577.9        568.7          -1.6
3.         Women’s and Children’s Shoes …… 634.4        631.4          -0.5
4.         Men’s Shoes ………………….. 892.1        838.8          -6.0
5.         Infants’ Wear ………………… 600.1        589.1          -1.8
6.         Women’s Underwear …………….. 532.7        510.7          -4.1
7.         Women’s Hosiery ………………. 342.7        347.8           1.5
8.         Women’s and Girls’
             Accessories ………………… 523.9        551.0           5.2
9.         Women’s Outerwear and Girls’
             Wear ………………………. 361.5        350.2          -3.1
10.        Men’s Clothing ……………….. 563.8        528.7          -6.2
11.        Men’s Furnishings …………….. 589.4        565.6          -4.0
12.        Boys’ Clothing and
             Furnishings ………………… 439.2        423.3          -3.6
13.        Jewelry ……………………… 887.0        880.6          -0.7
14.        Notions ……………………… 793.2        787.1          -0.8
15.        Toilet Articles and Drugs ……… 969.2        979.8           1.1
16.        Furniture and Bedding …………. 623.9        619.8          -0.7
17.        Floor Coverings ………………. 621.3        588.7          -5.2
18.        Housewares …………………… 749.4        720.4          -3.9
19.        Major Appliances ……………… 221.8        209.7          -5.5
20.        Radio and Television …………… 47.9         45.0          -6.1
21.        Recreation and Education
             [FN2] ………………………. 85.7         82.3          -4.0
22.        Home Improvements [FN2] ……….. 125.4        124.2          -1.0
23.        Automotive Accessories [FN2] …… 111.8        111.7          -0.1
Groups 1-15: Soft Goods …………………. 565.9        553.5          -2.2
Groups 16-20: Durable Goods ……………… 408.4        392.1          -4.0
Groups 21-23: Misc. Goods [FN2] …………… 96.2         93.8          -2.5
           Store Total [FN3] …………….. 508.3        495.2          -2.6
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. 2003-113, 2003-44 I.R.B. 962, 2003-2 C.B. 962

Revenue Ruling 2003-110

Rev. Rul. 2003-110
Rev. Rul. 2003-110, 2003-46 I.R.B. 1083, 2003-2 C.B. 1083
                       Internal Revenue Service (I.R.S.)
                                 Revenue Ruling
                       STOCKS AND SECURITIES; DISTRIBUTION
                          Published: November 17, 2003
                           Released: October 24, 2003

 Section 355.–Distribution of Stock and Securities of a Controlled Corporation, 26 CFR 1.355-2: Business purpose.

  Stocks and securities; distribution. This ruling concludes that, in determining whether a distribution of controlled corporation stock satisfies the business purpose requirement of regulations section 1.355-2(b), the fact that the distribution avoids gain recognition under section 311(b) of the Code does not present a potential for avoidance of federal income tax.

  Stocks and securities; distribution. This ruling concludes that, in determining whether a distribution of controlled corporation stock satisfies the business purpose requirement of regulations section 1.355-2(b), the fact that the distribution avoids gain recognition under section 311(b) of the Code does not present a potential for avoidance of federal income tax.

ISSUE

  In determining whether a distribution of the stock of a controlled corporation satisfies the business purpose requirement of s 1.355-2(b) of the Income Tax Regulations that the distribution be motivated, in whole or substantial part, by one or more corporate business purposes, does the fact that s 355 of the Internal Revenue Code permits a distributing corporation to distribute the stock of a controlled corporation without recognition of gain present a potential for the avoidance of Federal taxes under s 1.355-2(b)?

FACTS

  Distributing is a publicly traded corporation that conducts a pesticides business. Controlled, a wholly owned subsidiary of Distributing, conducts a baby foods business. The pesticides business formulates, manufactures, and markets pesticides for agricultural use. The baby foods business processes and markets baby foods.

  A significant number of potential customers of the baby foods business refuse to buy from Controlled because of its affiliation with Distributing and its pesticides business. Distributing’s management consultant has advised Distributing that separating Controlled from Distributing would relieve the baby foods business of the adverse market perception caused by its association with the pesticides business.

  To solve the market perception problem, Distributing distributes the Controlled stock to Distributing’s shareholders, pro rata. There is no other nontaxable solution to the problem. Sale of the Controlled stock by Distributing would have resulted in recognition of gain. Distributing’s directors expect that the baby foods business will benefit in a real and substantial way from the improved market perception produced by the separation.

  Apart from the issue of whether the business purpose requirement of s 1.355-2(b) is satisfied, the distribution of the Controlled stock meets all the requirements of s 355.

LAW

  Section 355 provides that if certain requirements are met, a corporation may distribute stock and securities in a controlled corporation to its shareholders and security holders without causing the distributing corporation or the distributees to recognize gain or loss or include any amount in income.

  To qualify as a distribution described in s 355, a distribution must, in addition to satisfying the statutory requirements of s 355, satisfy certain requirements in the regulations, including the business purpose requirement. Section 1.355-2(b)(1) provides that a distribution must be motivated, in whole or substantial part, by one or more corporate business purposes. A corporate business purpose is a real and substantial non-Federal tax purpose germane to the business of the distributing corporation, the controlled corporation, or the affiliated group to which the distributing corporation belongs. Section 1.355-2(b)(2). The potential for the avoidance of Federal taxes by the distributing or controlled corporation (or a corporation controlled by either) is relevant in determining the extent to which an existing corporate business purpose motivated the distribution. Section 1.355-2(b)(1). The principal reason for the business purpose requirement is to provide nonrecognition treatment only to distributions that are incident to readjustments of corporate structures required by business exigencies and that effect only readjustments of continuing interests in property under modified corporate forms. Section 1.355-2(b)(1). If a corporate business purpose can be achieved through a nontaxable transaction that does not involve the distribution of stock of a controlled corporation and that is neither impractical nor unduly expensive, then the separation is not carried out for that corporate business purpose. Section 1.355-2(b)(3).

  Section 355(c) provides that no gain or loss will be recognized by a corporation on any distribution to which s 355 (or so much of s 356 as relates to s 355) applies. See also s 361(c) (to the same effect if the distribution is pursuant to a plan of reorganization). Absent s 355, such a distribution would be subject to s 311(b), which provides that, if the fair market value of the distributed property exceeds its adjusted basis, then gain will be recognized by the distributing corporation as if the property had been sold to the distributee at its fair market value. Section 355(c)(3).

ANALYSIS

  To satisfy the business purpose requirement, a distribution must be motivated, in whole or substantial part, by one or more corporate business purposes. Section 1.355-2(b)(1). The market perception business purpose motivates Distributing’s directors to approve the distribution, there is no other nontaxable transaction that would solve the market perception problem, and it is expected that the baby foods business will benefit in a real and substantial way from the improved market perception produced by the separation.

  Except as provided in s 355(d) and (e), the application of s 355(c) or  s 361(c) to distributions that qualify under s 355 is part of the statutory scheme of s 355 and implicit in all such distributions. Accordingly, the fact that s 355 permits a distributing corporation to distribute the stock of a controlled corporation without the recognition of gain does not present a potential for the avoidance of Federal taxes under s 1.355-2(b). This is further implied by s 1.355-2(b)(3), which provides that the business purpose requirement is not satisfied if the purpose can be achieved through a nontaxable alternative transaction. That is, the distributing corporation is entitled to reject a taxable disposition in favor of a tax-free distribution.

  Therefore, although the distribution of Controlled stock results in the nonrecognition of gain that otherwise would be recognized under s 311(b) if  s 355(c) did not apply, the distribution is motivated in whole by a real and substantial non-Federal tax purpose germane to the business of Distributing. Hence, the business purpose requirement of s 1.355-2(b) is satisfied.

HOLDING

  In determining whether a distribution of the stock of a controlled corporation satisfies the business purpose requirement of s 1.355-2(b) that the distribution be motivated, in whole or substantial part, by one or more corporate business purposes, the fact that s 355 permits a distributing corporation to distribute the stock of a controlled corporation without recognition of gain does not present a potential for the avoidance of Federal taxes under s 1.355-2(b).

DRAFTING INFORMATION

  The principal author of this revenue ruling is Wayne T. Murray of the Office of Associate Chief Counsel (Corporate). For further information regarding this revenue ruling, contact Mr. Murray at (202) 622-7700 (not a toll-free call).

 Rev. Rul. 2003-110, 2003-46 I.R.B. 1083, 2003-2 C.B. 1083

Revenue Ruling 2003-124

Rev. Rul. 2003-124
Rev. Rul. 2003-124, 2003-49 I.R.B. 1173, 2003-2 C.B. 1173
                       Internal Revenue Service (I.R.S.)
                                 Revenue Ruling
                        COVERED COMPENSATION TABLES; 2004
                           Released: November 21, 2003
                           Published: December 8, 2003

 Section 401.–Qualified Pension, Profit-Sharing, and Stock Bonus Plans, 26 CFR 1.401(l)-1: Permitted disparity in employer-provided contributions or benefits.

  Covered compensation tables; 2004. The covered compensation tables under section 401 of the Code for the year 2004 are provided for use in determining contributions to defined benefit plans and permitted disparity.

  Covered compensation tables; 2004. The covered compensation tables under section 401 of the Code for the year 2004 are provided for use in determining contributions to defined benefit plans and permitted disparity.

  This revenue ruling provides tables of covered compensation under s 401(l) (5)(E) of the Internal Revenue Code (the “Code”) and the Income Tax Regulations, thereunder, for the 2004 plan year.

  Section 401(l)(5)(E)(i) defines covered compensation with respect to an employee, as the average of the contribution and benefit bases in effect under section 230 of the Social Security Act (the “Act”) for each year in the 35-year period ending with the year in which the employee attains social security retirement age.

  Section 401(l)(5)(E)(ii) of the Code states that the determination for any year preceding the year in which the employee attains social security retirement age shall be made by assuming that there is no increase in covered compensation after the determination year and before the employee attains social security retirement age.

  Section 1.401(l)-1(c)(34) defines the taxable wage base as the contribution and benefit base under section 230 of the Act.

  Section 1.401(l)-1(c)(7)(i) defines covered compensation for an employee as the average (without indexing) of the taxable wage bases in effect for each calendar year during the 35-year period ending with the last day of the calendar year in which the employee attains (or will attain) social security retirement age. A 35-year period is used for all individuals regardless of the year of birth of the individual. In determining an employee’s covered compensation for a plan year, the taxable wage base for all calendar years beginning after the first day of the plan year is assumed to be the same as the taxable wage base in effect as of the beginning of the plan year. An employee’s covered compensation for a plan year beginning after the 35-year period applicable under s 1.401(l)-1(c)(7)(i) is the employee’s covered compensation for a plan year during which the 35-year period ends. An employee’s covered compensation for a plan year beginning before the 35-year period applicable under s 1.401(l)-1(c)(7)(i) is the taxable wage base in effect as of the beginning of the plan year.

  Section 1.401(l)-1(c)(7)(ii) provides that, for purposes of determining the amount of an employee’s covered compensation under s 1.401(l)-1(c)(7)(i), a plan may use tables, provided by the Commissioner, that are developed by rounding the actual amounts of covered compensation for different years of birth.

  For purposes of determining covered compensation for the 2004 year, the taxable wage base is $87,900.

  The following tables provide covered compensation for 2004:
                        2004 COVERED COMPENSATION TABLE
CALENDAR YEAR OF BIRTH  CALENDAR YEAR OF SOCIAL    2004 COVERED COMPENSATION
                          SECURITY RETIREMENT                TABLE
                                  AGE
         1907                    1972                                    $4,488
         1908                    1973                                     4,704
         1909                    1974                                     5,004
         1910                    1975                                     5,316
         1911                    1976                                     5,664
         1912                    1977                                     6,060
         1913                    1978                                     6,480
         1914                    1979                                     7,044
         1915                    1980                                     7,692
         1916                    1981                                     8,460
         1917                    1982                                     9,300
         1918                    1983                                    10,236
         1919                    1984                                    11,232
         1920                    1985                                    12,276
         1921                    1986                                    13,368
         1922                    1987                                    14,520
         1923                    1988                                    15,708
         1924                    1989                                    16,968
         1925                    1990                                    18,312
         1926                    1991                                    19,728
         1927                    1992                                    21,192
         1928                    1993                                    22,716
         1929                    1994                                    24,312
         1930                    1995                                    25,920
         1931                    1996                                    27,576
         1932                    1997                                    29,304
         1933                    1998                                    31,128
         1934                    1999                                    33,060
         1935                    2000                                    35,100
         1936                    2001                                    37,212
         1937                    2002                                    39,444
         1938                    2004                                    43,992
         1939                    2005                                    46,284
         1940                    2006                                    48,576
         1941                    2007                                    50,832
         1942                    2008                                    53,028
         1943                    2009                                    55,164
         1944                    2010                                    57,276
         1945                    2011                                    59,352
         1946                    2012                                    61,392
         1947                    2013                                    63,396
         1948                    2014                                    65,256
         1949                    2015                                    67,020
         1950                    2016                                    68,688
         1951                    2017                                    70,272
         1952                    2018                                    71,760
         1953                    2019                                    73,200
         1954                    2020                                    74,580
         1955                    2022                                    77,148
         1956                    2023                                    78,372
         1957                    2024                                    79,512
         1958                    2025                                    80,556
         1959                    2026                                    81,540
         1960                    2027                                    82,464
         1961                    2028                                    83,340
         1962                    2029                                    84,120
         1963                    2030                                    84,876
         1964                    2031                                    85,596
         1965                    2032                                    86,244
         1966                    2033                                    86,796
         1967                    2034                                    87,240
         1968                    2035                                    87,564
         1969                    2036                                    87,780
         1970                    2037                                    87,864
    1971 and later               2038                                    87,900
 2004 Rounded Covered Compensation Table
   Year of Birth     Covered Compensation
1937                 39,000
1938 - 1939          45,000
1940                 48,000
1941                 51,000
1942 - 1943          54,000
1944                 57,000
1945 - 1946          60,000
1947                 63,000
1948 - 1949          66,000
1950 - 1951          69,000
1952 - 1953          72,000
1954                 75,000
1955 - 1956          78,000
1957 - 1960          81,000
1961 - 1963          84,000
1964 - 1967          87,000
1968 and later       87,900

DRAFTING INFORMATION

  The principal author of this revenue ruling is Lawrence Isaacs of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this revenue ruling, please contact the Employee Plans taxpayer assistance telephone service at 1-877-829-5500, between the hours of 8:00 a.m. and 6:30 p.m. Eastern time, Monday through Friday (a toll-free number). Mr. Isaac’s number is (202) 283-9710 (not a toll-free number).

 Rev. Rul. 2003-124, 2003-49 I.R.B. 1173, 2003-2 C.B. 1173

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