Revenue Ruling 2005-30
Rev. Rul. 2005-30
Rev. Rul. 2005-30, 2005-20 I.R.B. 1015
                      Internal Revenue Service (I.R.S.)
                                Revenue Ruling
                           DEFERRED ANNUITY CONTRACT
                           Released: April 28, 2005
                            Published: May 16, 2005
 Section 72.–Annuities; Certain Proceeds of Endowment and Life Insurance Contracts, 26 CFR 1.72(d)-1: “Amounts not received as an annuity”.
 How a death benefit received by the beneficiary of a deferred annuity contract after the death of the owner-annuitant will be treated under section 72(e).
Section 1014.–Basis of Property Acquired From a Decedent, 26 CFR 1.1014-1: Basis of property acquired from a decedent.
 How a death benefit received by the beneficiary of a deferred annuity contract after the death of the owner-annuitant will be treated under section 1014.
Section 691.–Recipients of Income in Respect of Decedents, 26 CFR 1.691(a)- 1: Income in respect of a decedent.
 Deferred annuity contract. This ruling addresses the treatment of certain amounts received under a deferred annuity contract as income in respect of a decedent (IRD) under section 691 of the Code. Rev. Rul. 79-335 modified and superseded.
 Deferred annuity contract. This ruling addresses the treatment of certain amounts received under a deferred annuity contract as income in respect of a decedent (IRD) under section 691 of the Code. Rev. Rul. 79-335 modified and superseded.
ISSUE
 If the owner-annuitant of a deferred annuity contract dies before the annuity starting date, and the beneficiary receives a death benefit under the annuity contract (either in a lump sum or as periodic payments), is the amount received by the beneficiary in excess of the owner-annuitant’s investment in the contract includible in the beneficiary’s gross income as income in respect of a decedent (IRD) within the meaning of s 691 of the Internal Revenue Code?
FACTS
 A purchased a deferred annuity contract providing for annuity payments to A beginning as of a date specified in the annuity contract. A named B as beneficiary of the contract. The contract provides that A may surrender the contract during A’s life for its account value as determined by the formula provided under the contract. The contract further provides that if A dies before the annuity starting date, B will receive a death benefit equal to the account value as determined by the formula provided under the contract. At B’s election, the death benefit will be paid either in a lump sum or as periodic payments consistent with the provisions of s 72(s).
 A dies before the annuity starting date and B receives the death benefit under the contract, which exceeds A’s investment in the contract.
LAW AND ANALYSIS
 Section 72(a) provides that gross income includes any amount received as an annuity. Sections 72(b) through (d) provide rules for determining what portion of an annuity payment represents a non-taxable return of investment. Section 72(e) provides rules for amounts received under an annuity contract, but not received as an annuity (and therefore not described in s 72(b) through (d)). Specifically, amounts received before the annuity starting date are generally includible in gross income to the extent allocable to the income on the annuity contract. Section 72(s) provides rules regarding the period in which an interest in an annuity contract must be distributed after the holder’s death in order for the contract to qualify as an annuity contract within the meaning of s 72.
 Section 691(a)(1) provides that the amount of all items of gross IRD that are not properly includible in respect of the taxable period in which falls the date of the decedent’s death or a prior period (including the amount of all items of gross income in respect of a prior decedent, if the right to receive the amount was acquired by reason of the death of the prior decedent or by bequest, devise, or inheritance from the prior decedent) is included in the gross income, for the taxable year when received, of: (A) the estate of the decedent, if the right to receive the amount is acquired by the decedent’s estate from the decedent; (B) the person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the decedent’s estate from the decedent; or (C) the person who acquires from the decedent the right to receive the amount by bequest, devise, or inheritance, if the amount is received after a distribution by the decedent’s estate of the right.
 Section 691(c)(1) provides that a person who includes an amount of IRD in gross income under s 691(a) is allowed as a deduction, for the same taxable year, a portion of the estate tax paid by reason of the inclusion of that IRD in the decedent’s gross estate. Generally, the amount of the deduction is calculated using estate tax values, and is the amount that bears the same ratio to the estate tax attributable to the net value of all IRD items included in the decedent’s gross estate as the value of the IRD included in that person’s gross income for that taxable year bears to the value of all IRD items included in the decedent’s gross estate.
 Section 1014(a)(1) provides that the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent generally is the fair market value of the property at the date of the decedent’s death. This rule does not apply if the property is sold, exchanged, or otherwise disposed of before the decedent’s death by the person.
 Section 1014(b)(9) provides that, for purposes of s 1014(a), property acquired from the decedent by reason of death, form of ownership, or other conditions if by reason thereof the property is required to be included in determining the value of the decedent’s gross estate for estate tax purposes, is considered to have been acquired from, or to have passed from, the decedent.
 Section 1014(b)(9)(A) provides that s 1014(b)(9) does not apply to annuities described in s 72.
 Section 1014(c) provides that s 1014 does not apply to property that constitutes a right to receive an item of IRD under s 691.
 Rev. Rul. 79-335, 1979-2 C.B. 292, addresses a situation in which the owner-annuitant purchases a deferred variable annuity
contract that provides that if the owner dies prior to the annuity starting date, the named beneficiary may elect to receive the present accumulated value of the contract either in the form of an annuity or a lump-sum payment. Rev. Rul. 79-335 concludes that, for purposes of s 1014, the contract is an annuity described in s 72 (as then in effect), and therefore receives no basis adjustment by reason of the owner’s death because it is governed by the annuity exception of s 1014(b)(9)(A). If the beneficiary elects a lump-sum payment, the excess of the amount received over the amount of consideration paid by the decedent is includable in the beneficiary’s gross income. Rev. Rul. 79-335 prospectively revokes Rev. Rul. 70-143, 1970-1 C.B. 167, which had concluded on substantially identical facts that such a contract, if surrendered by the beneficiary prior to the annuity starting date, is not an annuity described in s 72 and therefore is not governed by the rule of s 1014(b)(9)(A), and that the beneficiary receives the date of death value as the basis in the contract.
 Although Rev. Rul. 79-335 concludes that the annuity exception in s 1014(b)(9)(A) applies to the contract described in that ruling, it does not specifically address whether amounts received by a beneficiary under a deferred annuity contract in excess of the owner-annuitant’s investment in the contract would be subject to ss 691 and 1014(c). However, had the owner-annuitant surrendered the contract and received the amounts in excess of the owner-annuitant’s investment in the contract, those amounts would have been income to the owner-annuitant under s 72(e). Because those amounts would have been income to the owner-annuitant if the contract had been surrendered during life, those amounts are IRD under s 691.
 Likewise, in the present case, had A surrendered the contract and received the amounts at issue, those amounts would have been income to A under s 72(e) to the extent they exceeded A’s investment in the contract. Accordingly, amounts that B receives that exceed A’s investment in the contract are IRD under s 691(a). As provided in Rev. Rul. 79-335, those amounts are includible in B’s gross income and B does not receive a basis adjustment in the contract. However, B will be entitled to a deduction under s 691(c) if estate tax was due by reason of A’s death. The result would be the same whether B receives the death benefit in a lump sum or as periodic payments.
HOLDING
 If the owner-annuitant of a deferred annuity contract dies before the annuity starting date, and the beneficiary receives a death benefit under the annuity contract, the amount received by the beneficiary in a lump sum in excess of the owner-annuitant’s investment in the contract is includible in the beneficiary’s gross income as IRD within the meaning of s 691. If the death benefit is instead received in the form of a series of periodic payments in accordance with s 72(s), the amounts received are likewise includible in the beneficiary’s gross income (in an amount determined under s 72) as IRD within the meaning of s 691.
EFFECT ON OTHER DOCUMENTS
 Rev. Rul. 79-335 is modified and superseded for deferred annuity contracts purchased on or after October 21, 1979. The holding of Rev. Rul. 70-143 (which was revoked by Rev. Rul. 79-335) will continue to apply for deferred annuity contracts purchased before October 21, 1979, including any contributions applied to those contracts pursuant to a binding commitment entered into before that date.
DRAFTING INFORMATION
 The principal author of this revenue ruling is Bradford R. Poston of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this revenue ruling, contact Bradford R. Poston at (202) 622-3060 (not a toll-free call).
 Rev. Rul. 2005-30, 2005-20 I.R.B. 1015
Revenue Ruling 2005-26
Rev. Rul. 2005-26
Rev. Rul. 2005-26, 2005-17 I.R.B. 957
                      Internal Revenue Service (I.R.S.)
                                Revenue Ruling
                    LIFO; PRICE INDEXES; DEPARTMENT STORES
                           Published: April 25, 2005
 Section 472.–Last-in, First-out Inventories, 26 CFR 1.472-1: Last-in, first-out inventories.
 LIFO; price indexes; department stores. The February 2005 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, February 28, 2005.
 LIFO; price indexes; department stores. The February 2005 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, February 28, 2005.
 The following Department Store Inventory Price Indexes for February 2005 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, February 28, 2005.
 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             Feb. 2004   Feb. 2005    Percent
                                                                     Change
                                                                    from Feb.
                                                                     2004 to
                                                                    Feb. 2005
                                                                      [FN1]
——————————————————————————-
1.         Piece Goods ………………….. 469.3       479.3         2.1
2.         Domestics and Draperies ……….. 536.5       533.5        -0.6
3.         Women’s and Children’s Shoes …… 609.9       663.6         8.8
4.         Men’s Shoes ………………….. 850.4       852.2         0.2
5.         Infants’ Wear ………………… 583.8       575.5        -1.4
6.         Women’s Underwear …………….. 506.7       527.1         4.0
7.         Women’s Hosiery ………………. 354.3       349.2        -1.4
8.         Women’s and Girls’
             Accessories ………………… 556.6       592.0         6.4
9.         Women’s Outerwear and Girls’
             Wear ………………………. 341.9       346.8         1.4
10.        Men’s Clothing ……………….. 534.0       550.9         3.2
11.        Men’s Furnishings …………….. 572.3       574.2         0.3
12.        Boys’ Clothing and
             Furnishings ………………… 436.6       423.5        -3.0
13.        Jewelry ……………………… 895.7       878.8        -1.9
14.        Notions ……………………… 793.9       780.0        -1.8
15.        Toilet Articles and Drugs ……… 984.6       998.7         1.4
16.        Furniture and Bedding …………. 624.2       601.8        -3.6
17.        Floor Coverings ………………. 592.6       602.4         1.7
18.        Housewares …………………… 715.2       713.8        -0.2
19.        Major Appliances ……………… 206.8       203.7        -1.5
20.        Radio and Television …………… 43.3        39.7        -8.3
21.        Recreation and Education
             [FN2] ………………………. 81.6        79.7        -2.3
22.        Home Improvements [FN2] ……….. 128.9       136.1         5.6
23.        Automotive Accessories [FN2] …… 112.1       113.9         1.6
Groups 1-15: Soft Goods ………………….. 549.5Â Â Â Â Â Â Â 556.7Â Â Â Â Â Â Â Â Â 1.3
Groups 16-20: Durable Goods ………………. 388.6Â Â Â Â Â Â Â 381.0Â Â Â Â Â Â Â Â -2.0
Groups 21-23: Misc. Goods [FN2] ……………. 93.9Â Â Â Â Â Â Â Â 93.8Â Â Â Â Â Â Â Â -0.1
    Store Total [FN3] …………………… 491.9       494.3         0.5
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. 2005-26, 2005-17 I.R.B. 957
Revenue Ruling 2005-28
Rev. Rul. 2005-28
Rev. Rul. 2005-28, 2005-19 I.R.B. 997
                      Internal Revenue Service (I.R.S.)
                                Revenue Ruling
                               MEDICAID REBATES
                           Released: April 25, 2005
                            Published: May 9, 2005
 Section 162.–Trade or Business Expenses, 26 CFR 1.162-1: Business expenses.
 Medicaid rebates incurred by a pharmaceutical manufacturer are not ordinary and necessary business expenses deductible from gross income under s 162 but are purchase price adjustments that are subtracted from gross receipts in determining gross income.
Section 61.–Gross Income Defined, 26 CFR 1.61-3: Gross income derived from business.
 Medicaid rebates. This ruling holds that Medicaid rebates incurred by a pharmaceutical manufacturer are purchase price adjustments that are subtracted from gross receipts in determining gross income. Rev. Rul. 76-96 suspended in part.
ISSUE
 Are Medicaid Rebates incurred by a pharmaceutical manufacturer purchase price adjustments that are subtracted from gross receipts in determining gross income, or ordinary and necessary business expenses that are deductible from gross income under s 162 of the Internal Revenue Code?
FACTS
 M, who uses an accrual method of accounting and files returns on a calendar year basis, manufactures and sells prescription drugs. In 1992, M entered into a “Rebate Agreement” with the Department of Health and Human Services (HHS) pursuant to the Medicaid Rebate Program established by the Omnibus Budget Reconciliation Act of 1990, Pub. L. No. 101-508, 104 Stat. 1388 (1990) (the Act).
 The Medicaid Rebate Program is designed to reduce the cost of drugs paid for by the Medicaid Program and to increase Medicaid beneficiaries’ access to prescription drugs. Under the Act, pharmaceutical manufacturers must sign a “Rebate Agreement” with HHS (who acts on behalf of each State Medicaid Agency) to gain access to the Medicaid-funded segment of the pharmaceutical market.
 The Rebate Agreements require pharmaceutical manufacturers to pay Medicaid Rebates directly to each State Medicaid Agency. A Medicaid Rebate is a portion of the price paid by State Medicaid Agencies to retailers for covered outpatient drugs dispensed to Medicaid beneficiaries. The amount of the Medicaid Rebate is designed to ensure that the Medicaid Program is charged no more for covered outpatient drugs than any other purchaser. See H.R. Rep. No. 101-881 at 96 (1990).
 In 2005, the following events occur: (1) M sells Product D, a prescription drug, to W, a wholesaler; (2) W sells Product D to R, a retail pharmacy; (3) R dispenses Product D to individual A, a Medicaid beneficiary, and then files a reimbursement claim with S, a State Medicaid Agency; (4) S approves the claim and then reimburses R for the cost of Product D plus a dispensing fee; and (5) M pays a Medicaid Rebate to S pursuant to the Rebate Agreement.
LAW AND ANALYSIS
 Section 61(a) provides that, except as otherwise provided, gross income means all income from whatever source derived. Section 1.61-3(a) of the Income Tax Regulations provides that in a manufacturing, merchandising, or mining business, “gross income” means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources.
 Section 162 allows as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 1.162-1(a) provides, in part, that business expenses deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade or business.
 In Pittsburgh Milk Co. v. Commissioner, 26 T.C. 707 (1956), nonacq. 1959-2 C.B. 8-9, nonacq. withdrawn and acq. 1962-2 C.B. 5-6, acq. withdrawn and nonacq. 1976-2 C.B. 3-4, and nonacq. withdrawn in part and acq. in part 1982-2 C.B. 2, the Tax Court addressed whether allowances, discounts, or rebates paid by a milk producer to certain purchasers of its milk, in willful violation of state law, are adjustments to the purchase price of the milk resulting in a reduced sales price, or ordinary and necessary business expenses under s 162 (in which case no deduction would be allowed under the rules of s 162(c)). The court reasoned that for income derived from the sale of property, in determining gain, the amount realized must be based on the actual price or consideration for which the property was sold and not on some greater price for which it possibly should have been, but was not, sold. The court focused on the facts and circumstances of the transaction, what the parties intended, and the purpose or consideration for which the allowance was made. The court found that the allowances were part of the sales transaction and concluded that gross income must be computed with respect to the agreed net prices for which the milk was actually sold. Thus, under Pittsburgh Milk, where a payment is made from a seller to a purchaser, and the purpose and intent of the parties is to reach an agreed upon net selling price, the payment is properly viewed as an adjustment to the purchase price that reduces gross sales.
 In contrast, in United Draperies, Inc. v. Commissioner, 41 T.C. 457 (1964), aff’d, 340 F.2d 936 (7th Cir.), cert. denied, 382 U.S. 813 (1965), the Tax Court held that a drapery manufacturer could not exclude from income kickbacks paid to employees of the companies that purchased the taxpayer’s draperies. The court noted that the kickbacks were made to employees of its customers and were “independent of its agreement with its purchasers fixing the selling price of the products sold,” and that “[t]hese amounts were paid for a consideration separate from the selling price of its products, namely these employees sending the business of their employers to petitioner ….” United Draperies at 465.
 Rev. Rul. 76-96, 1976-1 C.B. 23, addresses the tax treatment of rebates paid by an automobile manufacturer to retail customers. The manufacturer offered rebates of a set amount to retail customers who independently negotiated at arm’s length with one of the manufacturer’s dealers to arrive at a purchase price for a new car. The ruling holds that the rebates reduce the purchase price of
the cars and are not includible in the retail customer’s gross income. The ruling further holds that the manufacturer may deduct the rebates as ordinary and necessary business expenses under s 162.
 The Medicaid Rebate is paid by M to S pursuant to the terms of the rebate agreement. Under the purpose and intent test of Pittsburgh Milk, the Medicaid Rebate is made with the purpose and intent of reaching an agreed upon net selling price, and is negotiated and agreed to before the sale to W takes place.
HOLDING
 Medicaid Rebates incurred by a pharmaceutical manufacturer are purchase price adjustments that are subtracted from gross receipts in determining gross income.
EFFECT ON OTHER DOCUMENTS
 Rev. Rul. 76-96 is suspended in part. Whether a rebate of the type described in Rev. Rul. 76-96 is an ordinary and necessary business expense or, alternatively, is a reduction of gross receipts in determining gross income, is an issue under reconsideration. Accordingly, the conclusion of Rev. Rul. 76-96 that rebates made by the manufacturer are ordinary and necessary business expenses deductible under s 162 is suspended pending the Service’s reconsideration of the issue and publication of subsequent guidance. Therefore, the Service will not apply, and taxpayers may not rely on, this conclusion while it is being reconsidered.
DRAFTING INFORMATION
 The principal author of this revenue ruling is Susie K. Bird of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Ms. Bird at (202) 622-4950 (not a toll-free call).
 Rev. Rul. 2005-28, 2005-19 I.R.B. 997
Revenue Ruling 2005-27
Rev. Rul. 2005-27
Rev. Rul. 2005-27, 2005-19 I.R.B. 998
                      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: April 18, 2005
                            Published: May 9, 2005
 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 May 2005.
Section 280G.–Golden Parachute Payments
 Federal short-term, mid-term, and long-term rates are set forth for the month of May 2005.
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 May 2005.
Section 412.–Minimum Funding Standards
 The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of May 2005.
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 May 2005.
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 May 2005.
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 May 2005.
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 May 2005.
Section 642.–Special Rules for Credits and Deductions
 Federal short-term, mid-term, and long-term rates are set forth for the month of May 2005.
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 May 2005.
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 May 2005.
Section 1288.–Treatment of Original Issue Discount on Tax-Exempt Obligations
 The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of May 2005.
Section 7520.–Valuation Tables
 The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the month of May 2005.
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 May 2005.
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, 642, 1274, 1288, and other sections of the Code, tables set forth the rates for May 2005.
 Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 642, 1274, 1288, and other sections of the Code, tables set forth the rates for May 2005.
 This revenue ruling provides various prescribed rates for federal income tax purposes for May 2005 (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. Finally, Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.
—————————————————
            REV. RUL. 2005-27 TABLE 1
   Applicable Federal Rates (AFR) for May 2005
             Period for Compounding
           Annual  Semiannual Quarterly Monthly
Short-term
      AFR 3.54%   3.51%      3.49%     3.48%
 110% AFR 3.90%   3.86%      3.84%     3.83%
 120% AFR 4.25%   4.21%      4.19%     4.17%
 130% AFR 4.61%   4.56%      4.53%     4.52%
 Mid-term
      AFR 4.28%   4.24%      4.22%     4.20%
 110% AFR 4.71%   4.66%      4.63%     4.62%
 120% AFR 5.15%   5.09%      5.06%     5.04%
 130% AFR 5.59%   5.51%      5.47%     5.45%
 150% AFR 6.46%   6.36%      6.31%     6.28%
 175% AFR 7.56%   7.42%      7.35%     7.31%
 Long-term
      AFR 4.83%   4.77%      4.74%     4.72%
 110% AFR 5.32%   5.25%      5.22%     5.19%
 120% AFR 5.80%   5.72%      5.68%     5.65%
 130% AFR 6.30%   6.20%      6.15%     6.12%
—————————————————
—————————————————————
                  REV. RUL. 2005-27 TABLE 2
                  Adjusted AFR for May 2005
                   Period for Compounding
                        Annual Semiannual Quarterly Monthly
Short-term adjusted AFRÂ 2.61%Â Â 2.59%Â Â Â Â Â Â 2.58%Â Â Â Â Â 2.58%
Mid-term adjusted AFRÂ Â Â 3.29%Â Â 3.26%Â Â Â Â Â Â 3.25%Â Â Â Â Â 3.24%
Long-term adjusted AFRÂ Â 4.37%Â Â 4.32%Â Â Â Â Â Â 4.30%Â Â Â Â Â 4.28%
—————————————————————
——————————————————————————-
                          REV. RUL. 2005-27 TABLE 3
                    Rates Under Section 382 for May 2005
Adjusted federal long-term rate for the current month                    4.37%
Long-term tax-exempt rate for ownership changes during the current month 4.37%
 (the highest of the adjusted federal long-term rates for the current
 month and the prior two months.)
——————————————————————————-
——————————————————————————-
                          REV. RUL. 2005-27 TABLE 4
         Appropriate Percentages Under Section 42(b)(2) for May 2005
Appropriate percentage for the 70% present value low-income housing      8.06%
 credit
Appropriate percentage for the 30% present value low-income housing      3.45%
 credit
——————————————————————————-
——————————————————————————-
                          REV. RUL. 2005-27 TABLE 5
                    Rate Under Section 7520 for May 2005
Applicable federal rate for determining the present value of an annuity,  5.2%
 an interest for life or a term of years, or a remainder or reversionary
 interest
——————————————————————————-
 Rev. Rul. 2005-27, 2005-19 I.R.B. 998
Revenue Ruling 2005-25
Rev. Rul. 2005-25
Rev. Rul. 2005-25, 2005-18 I.R.B. 971
                      Internal Revenue Service (I.R.S.)
                                Revenue Ruling
     HEALTH SAVINGS ACCOUNTS (HSAS); NON-HIGH DEDUCTIBLE HEALTH PLAN (HDHP)
                           Released: April 13, 2005
                            Published: May 2, 2005
 Section 223.–Health Savings Accounts
 Health Savings Accounts (HSAs); non-high deductible health plan (HDHP). This ruling provides guidance on eligibility and contribution rules under section 223 of the Code for a married individual whose spouse has non-high deductible health plan (HDHP) coverage. A married individual may contribute to a Health Savings Account (HSA) even though his or her spouse has non-HDHP coverage, so long as the individual is not covered by the spouse’s non-HDHP. The maximum amount that an eligible individual may contribute to an HSA is based on whether the individual has self-only or family HDHP coverage.
ISSUES
 1. Is a married individual who otherwise qualifies as an “eligible individual” eligible to contribute to a Health Savings Account (HSA) under section 223 of the Internal Revenue Code (the Code) if the individual’s spouse has non-HDHP family coverage that does not cover the individual?
 2. If the individual is eligible to contribute to an HSA, what is the maximum contribution limit?
FACTS
Situation 1
 H and W are a married couple and both are age 35. Throughout 2005, H has self-only coverage under a high deductible health plan (HDHP) as defined in section 223(c)(2) with an annual deductible of $2,000. H has no other health coverage, is not enrolled in Medicare and may not be claimed as a dependent on another taxpayer’s return. W has non-HDHP family coverage for W and H’s and W’s two dependents, but H is excluded from W’s coverage.
Situation 2
 The same facts as Situation 1, except that H has HDHP family coverage as defined in section 223(c)(2) for H and one of H’s and W’s dependents with an annual deductible of $5,000. W has non-HDHP family coverage for W and H’s and W’s other dependent. H is excluded from W’s coverage.
Situation 3
 The same facts as Situation 1, except that H has HDHP family coverage for H and H’s and W’s two dependents with an annual deductible of $5,000. W is not covered under H’s health plan and has no other health plan coverage.
LAW AND ANALYSIS
 Section 223(a) allows a deduction for contributions to an HSA for an “eligible individual.” Section 223(c)(1)(A) defines “eligible individual” with respect to any month, as an individual who, in addition to other requirements, is covered under an HDHP on the first day of such month and is not, while covered under an HDHP, “covered under any health plan which is not a high deductible health plan, and which provides coverage for any benefit which is covered under the high deductible health plan.” An eligible individual may also have permitted insurance, and certain disregarded coverage in addition to an HDHP. A plan does not fail to be treated as an HDHP merely because it covers preventive care without a deductible.
 An HDHP is a health plan that satisfies certain requirements with respect to minimum annual deductibles and maximum annual out-of-pocket expenses. Section 223(c)(2)(A). Family coverage is any coverage other than self-only coverage (e.g., an HDHP covering one eligible individual and at least one other individual (whether or not the other individual is an eligible individual)). Section 223(c)(4); Q&A-12 of Notice 2004-50, 2004-33 I.R.B. 196.
 Only eligible individuals may contribute to an HSA. The maximum annual contribution limit is the sum of the limits determined separately for each month. For an individual who is eligible during the entire calendar year 2005, the contribution limit is the lesser of the annual deductible under the HDHP (minimum of $1,000 for self-only coverage and $2,000 for family coverage) or $2,650 for self-only coverage and $5,250 for family coverage. Rev. Proc. 2004-71, 2004-50 I.R.B. 970, s 3.22.
 Section 223(b)(5) provides special rules for married individuals. In general, if either spouse has family coverage, both spouses are treated as having only such family coverage. Also, if each spouse has family coverage under different health plans, both spouses are treated as having family coverage under the plan with the lowest deductible. However, if a spouse has HDHP family coverage and the other spouse has non-HDHP self-only coverage, the spouse with the HDHP family coverage is an eligible individual and may contribute to an HSA up to the amount of the annual contribution limit. Because the other spouse is covered by a non-HDHP and is therefore not an eligible individual, the other spouse may not contribute to an HSA, notwithstanding the special rule in section 223(b)(5) treating both spouses as having family coverage. Q&A-31 of Notice 2004-50.
 An eligible individual who attains age 55 before the close of the calendar year may make a catch-up HSA contribution (up to $600 in 2005). Section 223(b)(3).
 In Situation 1, H has HDHP self-only coverage and no other health coverage, is not enrolled in Medicare and may not be claimed as a dependent on another taxpayer’s return. Although W has non-HDHP family coverage, H is not covered under that health plan. H is therefore an eligible individual as defined in section 223(c)(1). The special rules for married individuals under section 223(b)(5) do not apply because W’s non-HDHP family coverage does not cover H. Thus, H remains an eligible individual and H may contribute up to $2,000 to an HSA (lesser of the HDHP deductible for self-only coverage or $2,650) for 2005. H may not make the catch-up contribution under section 223(b)(3) because H is not age 55 in 2005. W has non-HDHP coverage and is therefore not an eligible individual.
 In Situation 2, H has HDHP family coverage for one of H’s and W’s dependents and W has non-HDHP family coverage for W and H’s and W’s other dependent. Because the non-HDHP family coverage does not cover H, the special rules in section 223(b)(5) do not affect H’s eligibility to make HSA contributions up to H’s annual HSA contribution limit. H may therefore contribute up to $5,000 to an HSA (the lesser of the family HDHP deductible or $5,250). W has non-HDHP coverage and is therefore not an eligible individual.
 In Situation 3, H has HDHP family coverage for H and H’s and W’s two dependents. H may contribute to up to $5,000 to an HSA (the lesser of the family HDHP deductible or $5,250). Because H’s family coverage does not cover W, the special rules under section 223(b)(5) do not apply to treat W as having family coverage. W has no health plan coverage and is therefore not an eligible individual.
HOLDINGS
 1. An individual who otherwise qualifies as an eligible individual does not fail to be an eligible individual merely because the individual’s spouse has non-HDHP family coverage, if the spouse’s non-HDHP does not cover the individual. Accordingly, that individual may contribute to an HSA.
 2. The maximum amount under section 223(b) that an eligible individual may contribute to an HSA is based on whether the individual has self-only or family HDHP coverage.
DRAFTING INFORMATION
 The principal author of this revenue ruling is Elizabeth Purcell of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this revenue ruling, contact Ms. Purcell at (202) 622-6080 (not a toll-free call).
 Rev. Rul. 2005-25, 2005-18 I.R.B. 971
Revenue Ruling 2005-24
Rev. Rul. 2005-24
Rev. Rul. 2005-24, 2005-16 I.R.B. 892
                      Internal Revenue Service (I.R.S.)
                                Revenue Ruling
                       HEALTH REIMBURSEMENT ARRANGEMENTS
                            Released: April 5, 2005
                           Published: April 18, 2005
 Section 106.–Contributions by Employer to Accident and Health Plans
 Are amounts paid to an employee under a reimbursement plan that provides for the payment of unused reimbursement amounts in cash or other benefits excludable from gross income under s 105(b) of the Internal Revenue Code (the Code)?
Section 105.–Amounts Received Under Accident and Health Plans
 Health reimbursement arrangements. This ruling addresses the income tax treatment under section 105 of the Code of amounts received by employees from employer-provided reimbursement plans. Notice 2002-45 amplified.
ISSUE
 Are amounts paid to an employee under a reimbursement plan that provides for the payment of unused reimbursement amounts in cash or other benefits excludable from gross income under s 105(b) of the Internal Revenue Code (the Code)?
FACTS
Situation 1
 Employer sponsors a reimbursement plan (the Plan) that reimburses an employee solely for medical care expenses (as defined in s 213(d)) that are substantiated before the reimbursements are made. The Plan reimburses the medical care expenses of both current and former employees (including retired employees), their spouses and dependents (as defined in s152, determined without regard to s 152(b)(1), (b)(2), and (d)(1)(B)). The Plan also reimburses the medical care expenses of the surviving spouse and dependents of a deceased employee. No other person may receive reimbursements from the Plan. Upon the death of the deceased employee’s surviving spouse and last dependent, or upon the death of the employee if there is no surviving spouse or dependents, any unused reimbursement amount is forfeited.
 The Plan is paid for solely by Employer and is not provided pursuant to a salary-reduction election or otherwise under a s 125 cafeteria plan. The Plan provides reimbursements up to an annual maximum dollar amount for the coverage period, which is the plan year. The Plan reimburses medical care expenses only to the extent that the employee or the employee’s spouse or dependents have not been reimbursed for the expense from any other plan.
 Under the Plan, a portion of each employee’s reimbursement amount available at the end of each plan year is forfeited if not used to reimburse medical expenses. The remaining unused reimbursement amount is carried forward for use in subsequent plan years. Neither the employee nor any other person has the right, currently or for any future year, to receive cash or any taxable or nontaxable benefit other than the reimbursement of medical care expenses incurred by the employee and his or her spouse and dependents.
 When an employee retires, Employer automatically and on a mandatory basis (as determined under the Plan) contributes an amount to the reimbursement plan equal to the value of all or a portion of the retired employee’s accumulated unused vacation and sick leave. Under no circumstances may the retired employee or the retired employee’s spouse or dependents receive any of the designated amount in cash or other benefits.
 The Plan satisfies the nondiscrimination requirements of s 105(h) for a self-insured medical expense reimbursement plan.
Situation 2
 Same facts as in Situation 1, except the Plan provides that the employee will receive a cash payment equal to all or a portion of the unused reimbursement amount available to that employee at the end of the plan year or upon termination of employment, if earlier. Employer treats the cash payment as taxable compensation to the employee.
Situation 3
 Same facts as in Situation 1, except the Plan provides that upon the death of an employee all or a portion of the unused reimbursement amount is paid in cash to a beneficiary or beneficiaries designated by the employee, and if no beneficiary is designated, to the deceased employee’s estate.
Situation 4
 Same facts as in Situation 1, except the Employer has an “option plan” which purports to be separate and apart from the reimbursement plan. Under the “option plan,” an employee elects, prior to the beginning of the plan year, to participate in the “option plan.” If an employee elects to participate in the “option plan,” any unused reimbursement amount available at the end of the plan year is “forfeited.” However, the “option plan” provides that the employee may elect to transfer all or a portion of the “forfeited” amount to one of several retirement plans or to receive the amount as a cash payment. If an employee does not elect to participate in the “option plan,” any reimbursement amount unused at the end of the plan year is carried forward for use in future plan years.
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 1.61-21(a)(3) and (4) of the Income Tax Regulations state that a fringe benefit provided in connection with the performance of services shall be considered to have been provided as compensation to the person performing such services.
 Section 106 provides that the gross income of an employee does not include employer-provided coverage under an accident or health plan. Section 1.106-1 of the regulations provides that the gross income of an employee does not include contributions which the
employee’s employer makes to an accident or health plan for compensation (through insurance or otherwise) for personal injuries or sickness to the employee or the employee’s spouse or dependents.
 Section 105(a) provides that, except as otherwise provided in s 105, amounts received by an employee through accident or health insurance for personal injuries or sickness shall be included in gross income to the extent such amounts (1) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (2) are paid by the employer.
 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 regulations states 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 105(b) states 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 referred to in s 105(a) if such amounts are 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, determined without regard to s 152(b)(1), (b)(2), and (d)(1)(B)).
 Section 1.105-2 of the regulations provides that only amounts that are paid specifically to reimburse the taxpayer for expenses incurred by the taxpayer for the prescribed medical care are excludable from gross income. Section 105(b) does not apply to amounts that the taxpayer would be entitled to receive irrespective of whether or not the taxpayer incurs expenses for medical care. Accordingly, if an employee is not paid specifically to reimburse medical care expenses but is entitled to receive the payment irrespective of whether any medical expenses have been incurred, none of the payments are excludable from gross income under s 105(b) whether or not the employee has incurred medical expenses during the year.
 Part I of Notice 2002-45, 2002-2 C.B. 93, describes the tax treatment of health reimbursement arrangements (HRAs). The notice
explains that a tax-favored HRA is an arrangement that is paid for solely by the employer and not pursuant to a salary reduction election or otherwise under a s 125 cafeteria plan, reimburses the employee for medical care expenses (as defined in s 213(d)) incurred by the employee and by the employee’s spouse and dependents, and provides reimbursements up to a maximum dollar amount with any unused portion of that amount at the end of the coverage period carried forward to subsequent coverage periods.
 Part II of Notice 2002-45 states that to qualify for the exclusion from gross income, an HRA may only provide benefits that reimburse expenses for medical care as defined in s 213(d). An HRA does not qualify for the exclusion under s 105(b) if any person has the right to receive cash or any other taxable or non-taxable benefit under the arrangement other than the reimbursement of medical care expenses. If any person has such a right, currently or for any future year, all distributions to all persons made from the arrangement in the current year are included in gross income, even amounts paid to reimburse medical care expenses. The notice specifically states that arrangements providing for the payment of a death benefit, a bonus, or a separation payment without regard to medical care expenses do not qualify for tax-favored treatment.
 Notice 2002-45 notes that arrangements formally outside the HRA that provide for the adjustment of an employee’s compensation or an employee’s receipt of any other benefit will be considered in determining whether the arrangement is an HRA and whether the benefits are eligible for the exclusion from gross income.
 Rev. Rul. 75-539, 1975-2 C.B. 45, describes two labor contracts. Contract A provides that upon retirement, an employee will receive a portion of accumulated unused sick leave credits as a cash payment or, at the election of the employee, the payment may be applied to continue the employee’s participation in the employer’s health plan. Contract B provides that the value of a portion of the accumulated unused sick leave credits will be used to pay for continued participation in the employer’s health plan. Under no circumstances under Contract B may the retired employee, the retired employee’s spouse or dependents receive this payment in cash.
 Rev. Rul. 75-539 holds that, under Contract A, the value of unused accumulated sick leave credits used to continue health coverage is constructively received by the retired employee under s 451, and therefore is includible in the retired employee’s gross income. Under Contract A, the amount of premium payments is considered an employee contribution out of salary and not a contribution by the employer under s 106. However, under Contract B, the value of the unused accumulated sick leave credits, which may not be received in cash, is not constructively received by the retired employee, but is a contribution by the employer to the employer’s health plan that is excludable from the retired employee’s gross income under s 106.
 The reimbursement plan described in Situation 1 is an HRA that meets the requirements for tax-favored treatment under ss 106 and 105(b). The Plan in Situation 1 is an employer-provided accident or health plan under s 106 and payments are limited solely to reimbursements of previously substantiated medical care expenses incurred by current and former employees and their spouses and dependents. No person has the right, currently or in the future, to receive cash or any other taxable or nontaxable benefit under the Plan other than the reimbursement of substantiated medical care expenses as required by s 105(b).
 On the other hand, the reimbursement plans described in Situations 2 through 4 do not meet the requirements for tax-favored treatment. The Plan in Situation 2 provides for a cash payment equal to all or a portion of the unused reimbursement amount available at the end of the plan year or upon termination of employment, if earlier. The Plan in Situation 3 provides for a death benefit upon the death of the employee of all or a portion of the unused reimbursement amount without regard to medical care expenses. The Plan in Situation 4 permits conversion of unused reimbursement amounts to cash or other benefits regardless of whether or not medical expenses have been incurred. Although the “option plan” in Situation 4 purports to be formally outside the reimbursement arrangement, the option plan and the reimbursement arrangement constitute one plan. Accordingly, because the Plans in Situations 2 through 4 pay amounts “irrespective” of whether medical care expenses have been incurred, no amount paid under the Plans to any person is excludable from gross income under s 105(b). See also Rev. Rul. 2002-80, 2002-2 C.B. 925, and Rev. Rul. 2003- 43, 2003-1 C.B. 935.
HOLDINGS
 Amounts paid to an employee under a reimbursement plan that provides for the payment of unused reimbursement amounts in cash or other benefits are not excludable from gross income under s 105(b). Thus, amounts paid from plans as described in Situations 2 through 4 are not excludable from gross income under s 105(b). In Situations 2 through 4, none of the payments made from the arrangements during the plan year to any person, including amounts paid to reimburse medical expenses, are excluded from gross
income. On the other hand, contributions to and amounts paid from a plan as described in Situation 1 are excludable from the gross income of an employee under ss 106 and 105(b).
 This ruling applies to any purported employer-provided medical reimbursement arrangement, regardless of how the arrangement is characterized, that provides for the receipt by the employee or any other person of cash or any other taxable or nontaxable benefit or any combination of such benefits (including, but not limited to the benefits described in Situations 2 through 4) other than the reimbursement of medical care expenses of employees and their spouses and dependents. Moreover, this ruling applies to employer-provided reimbursement arrangements that are limited only to retired employees, as well as to employer-provided arrangements that cover active employees or both active employees and retirees.
SCOPE
 This revenue ruling addresses only reimbursement arrangements paid for solely by an employer under the specific Code sections mentioned and not pursuant to salary reduction or otherwise under a s 125 cafeteria plan. No inference is intended as to ss 401, 403, 408, 409A, and 457 of the Internal Revenue Code.
EFFECT ON OTHER DOCUMENTS
 Notice 2002-45, 2002-2 C.B. 93, is amplified.
EFFECTIVE DATE
 For reimbursement arrangements within the SCOPE of this revenue ruling, the ruling is effective for plan years beginning after December 31, 2005.
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. 2005-24, 2005-16 I.R.B. 892
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