IRS Revenue Procedure
2002-3

Code Sec. NONE

Status: Modified by 2002-3


<<FULL TEXT>>

26 CFR 601.201: Rulings and determination letters.


REV. PROC. 2002-3

SECTION 1. PURPOSE AND NATURE OF CHANGES

.01 The purpose of this revenue procedure is to update Rev. Proc.
2001-3, 2001-1 I.R.B. 111, as amplified and modified by subsequent revenue
procedures, by providing a revised list of those areas of the Internal
Revenue Code under the jurisdiction of the Associate Chief Counsel
(Corporate), the Associate Chief Counsel (Financial Institutions &
Products), the Associate Chief Counsel (Income Tax & Accounting), the
Associate Chief Counsel (Passthroughs & Special Industries), the Associate
Chief Counsel (Procedure and Administration), and the Division
Counsel/Associate Chief Counsel (Tax Exempt and Government Entities)
relating to issues on which the Internal Revenue Service will not issue
letter rulings or determination letters. For a list of areas under the
jurisdiction of the Associate Chief Counsel (International) relating to
international issues on which the Service will not issue letter rulings or
determination letters, see Rev. Proc. 2002-7, this Bulletin. For a list of
areas under the jurisdiction of the Commissioner, Tax Exempt and
Government Entities Division relating to issues, plans or plan amendments
on which the Service will not issue letter rulings and determination
letters, see, respectively, section 8 of Rev. Proc. 2002-4, this Bulletin,
and section 3.02 of Rev. Proc. 2002-6, this Bulletin.

.02 Changes.

(1) Section 3.01(9) has been revised to reflect the changes made by
Ann. 2001-25, 2001-11 I.R.B. 895.

(2) New section 3.01(10), which concerns section 115 and income of
states, municipalities, etc., has been moved from old section 3.01(9).

(3) Section 3.01(30) has been revised to reflect changes made by Ann.
2001-25, 2001-11 I.R.B. 895.

(4) New section 3.01(55) has been added, which concerns sections 3121,
3306 and 3401, and determination of worker status for purposes of federal
employment taxes and income tax withholding and Form SS-8.

(5) New section 3.02(9), which describes frivolous issues on which the
Service generally will not rule, has been moved from old section 4.02(8)
and amended to cross reference section 7.04 of Rev. Proc. 2002-1.

(6) Section 4.01(8) has been revised to reflect updated procedures
contained in Rev. Proc. 96-16, 1996-1 C.B. 630.

(7) Section 4.01(11) has been revised to reflect that Rev. Rul.
2001-31, 2001-26 I.R.B. 1348, superseded Rev. Rul. 77-316 and modified
Rev. Rul. 78-338.

(8) New section 5.01 has been added, reflecting that Rev. Proc.
2001-30, 2001-19 I.R.B. 1163, deleted old section 5.01.

(9) New section 5.06 has been added, reflecting that Rev. Proc.
2001-51, 2001-43 I.R.B. 369, deleted old section 5.06.

(10) Section 6.02 has been revised to reflect that recent publications
modified and amplified Rev. Proc. 99-49, 1999-2 C.B. 725.

(11) New section 6.06 has been added, which concerns requests from
Qualified Master-Feeder Structures, as described in section 4.02 of Rev.
Proc. 2001-36, 2001-23 I.R.B. 1326, for permission to aggregate built-in
gains and losses from contributed qualified financial assets.


SECTION 2. BACKGROUND AND SCOPE OF APPLICATION

.01 Background.

Whenever appropriate in the interest of sound tax administration, it is
the policy of the Service to answer inquiries of individuals and
organizations regarding their status for tax purposes and the tax effects
of their acts or transactions, prior to the filing of returns or reports
that are required by the revenue laws.

There are, however, certain areas in which, because of the inherently
factual nature of the problems involved, or for other reasons, the Service
will not issue rulings or determination letters. These areas are set forth
in four sections of this revenue procedure. Section 3 reflects those areas
in which rulings and determinations will not be issued. Section 4 sets
forth those areas in which they will not ordinarily be issued. "Not
ordinarily" means that unique and compelling reasons must be demonstrated
to justify the issuance of a ruling or determination letter. Those
sections reflect a number of specific questions and problems as well as
general areas. Section 5 lists specific areas for which the Service is
temporarily not issuing rulings and determinations because those matters
are under extensive study. Finally, section 6 of this revenue procedure
lists specific areas where the Service will not ordinarily issue rulings
because the Service has provided automatic approval procedures for these
matters.

See Rev. Proc. 2002-1, this Bulletin, particularly section 7 captioned
"Under What Circumstances Does the Service Have Discretion to Issue Letter
Rulings and Determination Letters?" for general instructions and other
situations in which the Service will not or ordinarily will not issue
letter rulings or determination letters.

With respect to the items listed, revenue rulings or revenue procedures
may be published in the Internal Revenue Bulletin from time to time to
provide general guidelines regarding the position of the Service.

Additions or deletions to this revenue procedure as well as
restatements of items listed will be made by modification of this revenue
procedure. Changes will be published as they occur throughout the year and
will be incorporated annually in a new revenue procedure published as the
third revenue procedure of the year. These lists should not be considered
all-inclusive. Decisions not to rule on individual cases (as contrasted
with those that present significant pattern issues) are not reported in
this revenue procedure and will not be added to subsequent revisions.

.02 Scope of Application.

This revenue procedure does not preclude the submission of requests for
technical advice to the National Office from other offices of the Service.

.03 No-Rule Issues Part of Larger Transactions.

If it is impossible for the Service to determine the tax consequences
of a larger transaction without knowing the resolution of an issue on
which the Service will not issue rulings and determinations under this
revenue procedure involving a part of the transaction or a related
transaction, the taxpayer must state in the request to the best of the
taxpayer's knowledge and belief the tax consequences of the no-rule issue.
The Service's ruling or determination letter will state that the Service
did not consider, and no opinion is expressed upon, that issue. In
appropriate cases the Service may decline to issue rulings or
determinations on such larger transactions due to the relevance of the
no-rule issue, despite the taxpayer's representation.


SECTION 3. AREAS IN WHICH RULINGS OR DETERMINATION LETTERS WILL NOT BE
ISSUED

.01 Specific questions and problems.

(1) Section 61. -- Gross Income Defined. -- Whether amounts voluntarily
deferred by a taxpayer under a deferred-compensation plan maintained by an
organization described in section 501 (other than a plan maintained by an
eligible employer pursuant to the provisions of section 457) are currently
includible in the taxpayer's gross income.

(2) Section 79. -- Group-Term Life Insurance Purchased for Employees.
-- Whether a group insurance plan for 10 or more employees qualifies as
group-term insurance, if the amount of insurance is not computed under a
formula that would meet the requirements of section 1.79-1(c)(2)(ii) of
the Income Tax Regulations if the group consisted of fewer than 10
employees.

(3) Section 83. -- Property Transferred in Connection with Performance
of Services. -- Whether a restriction constitutes a substantial risk of
forfeiture, if the employee is a controlling shareholder. Also, whether a
transfer has occurred, if the amount paid for the property involves a
nonrecourse obligation.

(4) Section 101. -- Certain Death Benefits. -- Whether there has been a
transfer for value for purposes of section 101(a) in situations involving
a grantor and a trust when (i) substantially all of the trust corpus
consists or will consist of insurance policies on the life of the grantor
or the grantor's spouse, (ii) the trustee or any other person has a power
to apply the trust's income or corpus to the payment of premiums on
policies of insurance on the life of the grantor or the grantor's spouse,
(iii) the trustee or any other person has a power to use the trust's
assets to make loans to the grantor's estate or to purchase assets from
the grantor's estate, and (iv) there is a right or power in any person
that would cause the grantor to be treated as the owner of all or a
portion of the trust under sections 673 to 677.

(5) Sections 101, 761, and 7701. -- Definitions. -- Whether, in
connection with the transfer of a life insurance policy to an
unincorporated organization, (i) the organization will be treated as a
partnership under sections 761 and 7701, or (ii) the transfer of the life
insurance policy to the organization will be exempt from the transfer for
value rules of section 101, when substantially all of the organization's
assets consists or will consist of life insurance policies on the lives of
the members.

(6) Section 105. -- Amounts Received Under Accident and Health Plans.
-- Whether a medical reimbursement plan, funded by employer contributions,
containing a provision allowing unused amounts to be carried over and
accumulated in an employee's account qualifies as an accident and health
plan under section 105.

(7) Section 105(h). -- Amount Paid to Highly Compensated Individuals
Under Discriminatory Self-Insured Medical Expense Reimbursement Plan. --
Whether, following a determination that a self-insured medical expense
reimbursement plan is discriminatory, that plan had previously made
reasonable efforts to comply with tax anti-discrimination rules.

(8) Section 107. -- Rental value of parsonages. -- Whether amounts
distributed to a retired minister from a pension or annuity plan should be
excludible from the minister's gross income as a parsonage allowance under
section 107.

(9) Section 115. -- Income of states, municipalities, etc. -- Whether
the results of transactions pursuant to a plan or arrangement created by
state statute a primary objective of which is to enable participants to
pay for the costs of a post-secondary education for themselves or a
designated beneficiary, including: (i) whether the plan or arrangement,
itself, is an entity separate from a state and, if so, how the plan or
arrangement is treated for federal tax purposes; and (ii) whether any
contract under the plan or arrangement is a debt instrument and, if so,
how interest or original issue discount attributable to the contract is
treated for federal tax purposes. (Also sections 61, 163, 1275, 2501, and
7701.)

(10) Section 115. -- Income of states, municipalities, etc. -- Whether
the income of membership organizations established by states exclusively
to reimburse members for losses arising from workmen's compensation claims
is excluded from gross income under section 115.

(11) Section 117. -- Qualified Scholarships. -- Whether an
employer-related scholarship or fellowship grant is excludible from the
employee's gross income, if there is no intermediary private foundation
distributing the grants, as there was in Rev. Proc. 76-47, 1976-2 C.B.
670.

(12) Section 119. -- Meals or Lodging Furnished for the Convenience of
the Employer. -- Whether the value of meals or lodging is excludible from
gross income by an employee who is a controlling shareholder of the
employer.

(13) Section 121 and former section 1034. -- Exclusion of Gain from
Sale of Principal Residence; Rollover of Gain on Sale of Principal
Residence. -- Whether property qualifies as the taxpayer's principal
residence.

(14) Section 125. -- Cafeteria Plans. -- Whether amounts used to
provide group-term life insurance under section 79, accident and health
benefits under sections 105 and 106, and dependent care assistance
programs under section 129 are includible in the gross income of
participants and considered "wages" for purposes of sections 3401, 3121,
and 3306 when the benefits are offered through a cafeteria plan.

(15) Section 162. -- Trade or Business Expenses. -- Whether
compensation is reasonable in amount.

(16) Section 163. -- Interest. -- The income tax consequences of
transactions involving "shared appreciation mortgage" (SAM) loans in which
a taxpayer, borrowing money to purchase real property, pays a fixed rate
of interest on the mortgage loan below the prevailing market rate and will
also pay the lender a percentage of the appreciation in value of the real
property upon termination of the mortgage. This applies to all SAM
arrangements where the loan proceeds are used for commercial or business
activities, or where used to finance a personal residence, if the facts
are not similar to those described in Rev. Rul. 83-51, 1983-1 C.B. 48.
(Also sections 61, 451, 461, 856, 1001, and 7701.)

(17) Section 170. -- Charitable, Etc., Contributions and Gifts. --
Whether a taxpayer who advances funds to a charitable organization and
receives therefor a promissory note may deduct as contributions, in one
taxable year or in each of several years, amounts forgiven by the taxpayer
in each of several years by endorsement on the note.

(18) Section 213. -- Medical, Dental, Etc., Expenses. -- Whether a
capital expenditure for an item that is ordinarily used for personal,
living, or family purposes, such as a swimming pool, has as its primary
purpose the medical care of the taxpayer or the taxpayer's spouse or
dependent, or is related directly to such medical care.

(19) Section 264(b). -- Certain Amounts Paid in Connection with
Insurance Contracts. -- Whether "substantially all" the premiums of a
contract of insurance are paid within a period of 4 years from the date on
which the contract is purchased. Also, whether an amount deposited is in
payment of a "substantial number" of future premiums on such a contract.

(20) Section 264(c)(1). -- Certain Amounts Paid in Connection with
Insurance Contracts. -- Whether section 264(c)(1) applies.

(21) Section 269. -- Acquisitions Made to Evade or Avoid Income Tax. --
Whether an acquisition is within the meaning of section 269.

(22) Section 274. -- Disallowance of Certain Entertainment, Etc.,
Expenses. -- Whether a taxpayer who is traveling away from home on
business may, in lieu of substantiating the actual cost of meals, deduct a
fixed per-day amount for meal expenses that differs from the amount
prescribed in the revenue procedure providing optional rules for
substantiating the amount of travel expenses for the period in which the
expense was paid or incurred, such as Rev. Proc. 97-59, 1997-2 C.B. 594,
or its successor, Rev. Proc. 98-64, 1998-2 C.B. 825.

(23) Section 302. -- Distributions in Redemption of Stock. -- Whether
section 302(b) applies when the consideration given in redemption by a
corporation consists entirely or partly of its notes payable, and the
shareholder's stock is held in escrow or as security for payment of the
notes with the possibility that the stock may or will be returned to the
shareholder in the future, upon the happening of specific defaults by the
corporation.

(24) Section 302. -- Distributions in Redemption of Stock. -- Whether
section 302(b) applies when the consideration given in redemption by a
corporation in exchange for a shareholder's stock consists entirely or
partly of the corporation's promise to pay an amount based on, or
contingent on, future earnings of the corporation, when the promise to pay
is contingent on working capital being maintained at a certain level, or
any other similar contingency.

(25) Section 302. -- Distributions in Redemption of Stock. -- Whether
section 302(b) applies to a redemption of stock, if after the redemption
the distributing corporation uses property that is owned by the
shareholder from whom the stock is redeemed and the payments by the
corporation for the use of the property are dependent upon the
corporation's future earnings or are subordinate to the claims of the
corporation's general creditors. Payments for the use of property will not
be considered to be dependent upon future earnings merely because they are
based on a fixed percentage of receipts or sales.

(26) Section 302. -- Distributions in Redemption of Stock. -- Whether
the acquisition or disposition of stock described in section 302(c)(2)(B)
has, or does not have, as one of its principal purposes the avoidance of
federal income taxes within the meaning of that section, unless the facts
and circumstances are materially identical to those set forth in Rev. Rul.
85-19, 1985-1 C.B. 94, Rev. Rul. 79-67, 1979-1 C.B. 128, Rev. Rul. 77-293,
1977-2 C.B. 91, Rev. Rul. 57-387, 1957-2 C.B. 225, Rev. Rul. 56-584,
1956-2 C.B. 179, or Rev. Rul. 56-556, 1956-2 C.B. 177.

(27) Section 302(b)(4) and (e). -- Redemption from Noncorporate
Shareholder in Partial Liquidation; Partial Liquidation Defined. -- The
amount of working capital attributable to a business or portion of a
business terminated that may be distributed in partial liquidation.

(28) Section 312. -- Effect on Earnings and Profits. -- The
determination of the amount of earnings and profits of a corporation.

(29) Sections 331, 453, and 1239. -- The Tax Effects of Installment
Sales of Property Between Entities with Common Ownership. -- The tax
effects of a transaction in which there is a transfer of property by a
corporation to a partnership or other noncorporate entity (or the transfer
of stock to such entity followed by a liquidation of the corporation) when
more than a nominal amount of the stock of such corporation and the
capital or beneficial interests in the purchasing entity (that is, more
than 20 percent in value) is owned by the same persons, and the
consideration to be received by the selling corporation or the selling
shareholders includes an installment obligation of the purchasing entity.

(30) Sections 332, 351, 368(a)(1)(A), (B), (C), (E), and (F), and 1036.
Complete Liquidations of Subsidiaries; Transfer to Corporation Controlled
by Transferor; Definitions Relating to Corporate Reorganizations; and
Stock for Stock of Same Corporation. -- Whether a transaction qualifies
under section 332, section 351 or section 1036 for nonrecognition
treatment, or whether it constitutes a corporate reorganization within the
meaning of section 368(a)(1)(A) (including a transaction that qualifies
under section 368(a)(1)(A) by reason of section 368(a)(2)(D) or section
368(a)(2)(E)), section 368(a)(1)(B), section 368(a)(1)(C), section
368(a)(1)(E) or section 368(a)(1)(F), and whether various consequences
(such as nonrecognition and basis) result from the application of that
section, unless the Service determines that there is a significant issue
that must be resolved in order to decide those matters. Notwithstanding
the foregoing, and to the extent the transaction is not described in
another no-rule section: (1) the Service will rule on the entire
transaction, and not just the significant issue; and (2) the Service will
rule on the application of section 351 to a controlled corporation when
the transaction is undertaken prior to the distribution of the stock of
the controlled corporation in a transaction qualifying under section 355.

SIGNIFICANT ISSUE: A significant issue is an issue of law that meets
the three following tests: (1) the issue is not clearly and adequately
addressed by a statute, regulation, decision of a court, tax treaty,
revenue ruling, revenue procedure, notice, or other authority published in
the Internal Revenue Bulletin; (2) the resolution of the issue is not
essentially free from doubt; and (3) the issue is legally significant and
germane to determining the major tax consequences of the transaction.

OBTAINING A RULING: To obtain a ruling on a transaction involving a
significant issue, the taxpayer must in its ruling request explain the
significance of the issue, set forth the authorities most closely related
to the issue, and explain why the issue is not resolved by these
authorities.

As a pilot program to better serve taxpayers the No-Rule for sections
368(a)(1)(A), (B), (C), (E) and (F), and sections 332, 351, and 1036 were
combined, simplified and expanded. Our objective is to encourage taxpayers
to seek rulings on transactions involving these provisions where there are
significant issues that are not essentially free from doubt, and to
prevent expending limited Service resources on the tax consequences of
transactions that are clear under controlling authorities. In addition,
the Service will now rule on an entire transaction if there is a
significant issue, and the Service eliminated the overlap provision which
prohibited the Service from issuing rulings under any Code section if the
transaction qualifies under both one of the sections listed in this
revenue procedure and under a section not listed in this revenue
procedure.

<<END RULING>>


(31) Section 351. -- See section 3.01(30) above.

(32) Section 368. -- See section 3.01(30) above.

(33) Section 368(a)(1)(B). -- Definitions Relating to Corporate
Reorganizations. -- The acceptability of an estimation procedure or the
acceptability of a specific sampling procedure to determine the basis of
stock acquired by an acquiring corporation in a reorganization described
in section 368(a)(1)(B).

(34) Section 425. -- Substitution or Assumption of Incentive Stock
Options. -- Whether the substitution of a new Incentive Stock Option
("ISO") for an old ISO, or the assumption of an old ISO, by an employer by
reason of a corporate transaction constitutes a modification which results
in the issuance of a new option by reason of failing to satisfy the spread
test requirement of section 425(a)(1) or the ratio test requirement of
section 1.425-1(a)(4). The Service will continue to rule on the issue of
whether the new ISO or the assumption of the old ISO gives the employee
additional benefits not present under the old option within the meaning of
section 425(a)(2).

(35) Section 451. -- General Rule for Taxable Year of Inclusion. -- The
tax consequences of a non-qualified unfunded deferred-compensation
arrangement with respect to a controlling shareholder-employee eligible to
participate in the arrangement.

(36) Section 451. -- General Rule for Taxable Year of Inclusion. -- The
tax consequences of unfunded deferred-compensation arrangements where the
arrangements fail to meet the requirements of Rev. Proc. 92-65, 1992-2
C.B. 428, and Rev. Proc. 71-19, 1971-1 C.B. 698.

(37) Sections 451 and 457. -- General Rule for Taxable Year of
Inclusion; Deferred Compensation Plans of State and Local Governments and
Tax-Exempt Organizations. -- The tax consequences to unidentified
independent contractors in nonqualified unfunded deferred-compensation
plans. This applies to plans established under section 451 by employers in
the private sector and to plans of state and local governments and
tax-exempt organizations under section 457. However, a ruling with respect
to a specific independent contractor's participation in such a plan may be
issued.

(38) Section 453. -- See section 3.01(29), above.

(39) Section 457. -- Deferred Compensation Plans of State and Local
Governments and Tax-Exempt Organizations. -- The tax effect of provisions
under the Small Business Job Protection Act affecting plans described in
section 457(b), if such provisions do not comply with section 4 of Rev.
Proc. 98-40, 1998-2 C.B. 134.

(40) Section 641. -- Imposition of Tax. -- Whether the period of
administration or settlement of an estate or a trust (other than a trust
described in section 664) is reasonable or unduly prolonged.

(41) Section 642(c). -- Deduction for Amounts Paid or Permanently Set
Aside for a Charitable Purpose. -- Allowance of an unlimited deduction for
amounts set aside by a trust or estate for charitable purposes when there
is a possibility that the corpus of the trust or estate may be invaded.

(42) Section 664. -- Charitable Remainder Trusts. -- Whether the
settlement of a charitable remainder trust upon the termination of the
noncharitable interest is made within a reasonable period of time.

(43) Section 671. -- Trust Income, Deductions, and Credits Attributable
to Grantors and Others as Substantial Owners. -- Whether the grantor will
be considered the owner of any portion of a trust when (i) substantially
all of the trust corpus consists or will consist of insurance policies on
the life of the grantor or the grantor's spouse, (ii) the trustee or any
other person has a power to apply the trust's income or corpus to the
payment of premiums on policies of insurance on the life of the grantor or
the grantor's spouse, (iii) the trustee or any other person has a power to
use the trust's assets to make loans to the grantor's estate or to
purchase assets from the grantor's estate, and (iv) there is a right or
power in any person that would cause the grantor to be treated as the
owner of all or a portion of the trust under sections 673 to 677.

(44) Section 704(e). -- Family Partnerships. -- Matters relating to the
validity of a family partnership when capital is not a material income
producing factor.

(45) Section 761. -- See section 3.01(5), above.

(46) Section 856. -- Definition of Real Estate Investment Trust. --
Whether a corporation whose stock is "paired" with or "stapled" to stock
of another corporation will qualify as a real estate investment trust
under section 856, if the activities of the corporations are integrated.

(47) Section 1034 (prior to TRA 1997). -- See section 3.01(13), above.

(48) Section 1221. -- Capital Asset Defined. -- Whether specialty stock
allocated to an investment account by a registered specialist on a
national securities exchange is a capital asset.

(49) Section 1239. -- See section 3.01(29), above.

(50) Section 1551. -- Disallowance of the Benefits of the Graduated
Corporate Rates and Accumulated Earnings Credit. -- Whether a transfer is
within section 1551.

(51) Section 2031. -- Definition of Gross Estate. -- Actuarial factors
for valuing interests in the prospective gross estate of a living person.

(52) Section 2512. -- Valuation of Gifts. -- Actuarial factors for
valuing prospective or hypothetical gifts of a donor.

(53) Sections 3121, 3306, and 3401. -- Definitions. -- For purposes of
determining prospective employment status, whether an individual will be
an employee or an independent contractor. A ruling with regard to prior
employment status may be issued.

(54) Sections 3121, 3306, and 3401. -- Definitions; Employment Taxes.
-- Who is the employer of an "employee-owner" as defined in section
269A(b)(2).

(55) Sections 3121, 3306, 3401. -- Definitions. -- For purposes of
determining employment classification pursuant to the filing of Form SS-8,
Determination of Worker Status for Purposes of Federal Employment Taxes
and Income Tax Withholding, whether a worker is a bona fide partner and,
therefore, not an employee of the business is at issue.

(56) Section 4980B. -- Failure to Satisfy Continuation Coverage
Requirements of Group Health Plans. -- Whether an action is "gross
misconduct" within the meaning of section 4980B(f)(3)(B). (See section
3.05 of Rev. Proc. 87-28, 1987-1 C.B. 770, 771.)

(57) Section 7701. -- Definitions. -- The classification of an
instrument that has certain voting and liquidation rights in an issuing
corporation but whose dividend rights are determined by reference to the
earnings of a segregated portion of the issuing corporation's assets,
including assets held by a subsidiary.

(58) Section 7701. -- See section 3.01(5), above.


.02 General Areas.

(1) The results of transactions that lack a bona fide business purpose
or have as their principal purpose the reduction of federal taxes.

(2) A matter upon which a court decision adverse to the Government has
been handed down and the question of following the decision or litigating
further has not yet been resolved.

(3) A matter involving alternate plans of proposed transactions or
involving hypothetical situations.

(4) Whether under Subtitle F (Procedure and Administration) reasonable
cause, due diligence, good faith, clear and convincing evidence, or other
similar terms that require a factual determination exist.

(5) Whether a proposed transaction would subject the taxpayer to a
criminal penalty.

(6) A request that does not comply with the provisions of Rev. Proc.
2002-1.

(7) Whether, under the common law rules applicable in determining the
employer-employee relationship, a professional staffing corporation
(loan-out corporation) or the subscriber is the employer of individuals,
if:

(i) the loan-out corporation hires employees of the subscriber and
assigns the employees back to the subscriber, or

(ii) the loan-out corporation assigns individuals to subscribers for
more than a temporary period (1 year or longer).


(8) Questions that the Service determines, in its discretion, should
not be answered in the general interests of tax administration.

(9) Any frivolous issue, as that term is defined in section 7.04 of
Rev. Proc. 2002-1, this Bulletin.


SECTION 4. AREAS IN WHICH RULINGS OR DETERMINATION LETTERS WILL NOT
ORDINARILY BE ISSUED

.01 Specific questions and problems.

(1) Sections 38, 39, 46, and 48. -- General Business Credit; Carryback
and Carryforward of Unused Credits; Amount of Credit; Energy Credit;
Reforestation Credit. -- Application of these sections where the formal
ownership of property is in a party other than the taxpayer, except when
title is held merely as security.

(2) Section 61. -- Gross Income Defined. -- Determination as to who is
the true owner of property in cases involving the sale of securities, or
participation interests therein, where the purchaser has the contractual
right to cause the securities, or participation interests therein, to be
purchased by either the seller or a third party.

(3) Sections 61 and 163. -- Gross Income Defined; Interest. --
Determinations as to who is the true owner of property or the true
borrower of money in cases in which the formal ownership of the property,
or the liability for the indebtedness, is in another party.

(4) Sections 83 and 451. -- Property Transferred in Connection with
Performance of Services; General Rule for Taxable Year of Inclusion. --
When compensation is realized by a person who, in connection with the
performance of services, is granted a nonstatutory option without a
readily ascertainable fair market value to purchase stock at a price that
is less than the fair market value of the stock on the date the option is
granted.

(5) Section 103. -- Interest on State and Local Bonds. -- Whether the
interest on state or local bonds will be excludible from gross income
under section 103(a), if the proceeds of issues of bonds (other than
advance refunding issues) are placed in escrow or otherwise not expended
for a governmental purpose for an extended period of time even though the
proceeds are invested at a yield that will not exceed the yield on the
state or local bonds prior to their expenditure.

(6) Section 103. -- Interest on State and Local Bonds. -- Whether a
state or local governmental obligation that does not meet the criteria of
section 5 of Rev. Proc. 89-5, 1989-1 C.B. 774, is an "arbitrage bond"
within the meaning of former section 103(c)(2) solely by reason of the
investment of the bond proceeds in acquired nonpurpose obligations at a
materially higher yield more than 3 years after issuance of the bonds or 5
years after issuance of the bonds in the case of construction issues
described in former section 1.103-13(a)(2)(ii)(E).

(7) Sections 104(a)(2) and 3121. -- Compensation for Injuries or
Sickness; Definitions. -- Whether an allocation of the amount of a
settlement award (including a lump sum award) between back pay,
compensatory damages, punitive damages, etc., is a proper allocation for
federal tax purposes.

(8) Section 141. -- Private Activity Bond; Qualified Bond. -- With
respect to requests made pursuant to Rev. Proc. 96-16, 1996-1 C.B. 630,
whether state or local bonds will meet the "private business use test" and
the "private security or payment test" under section 141(b)(1) and (2) in
situations in which the proceeds are used to finance certain output
facilities and, pursuant to a contract to take, or take or pay for, a
nongovernmental person purchases 30 percent or more of the actual output
of the facility but 10 percent or less of the subparagraph (5) output of
the facility as defined in section 1.103-7(b)(5)(ii)(b) (issued under
former section 103(b)). In similar situations, the Service will not
ordinarily issue rulings or determination letters concerning questions
arising under paragraphs (3), (4), and (5) of section 141(b).

(9) Sections 142 and 144. -- Exempt Facility Bond; Qualified Small
Issue Bond. -- Whether an issue of private activity bonds meets the
requirements of section 142 or section 144(a), if the sum of--

(i) the portion of the proceeds used to finance a facility in which an
owner (or related person) or a lessee (or a related person) is a user of
the facility both after the bonds are issued and at any time before the
bonds were issued, and

(ii) the portion used to pay issuance costs and non-qualified costs,
equals more than 5 percent of the net proceeds, as defined in section
150(a)(3).


(10) Section 148. -- Arbitrage. -- Whether amounts received as proceeds
from the sale of municipal bond financed property and pledged to the
payment of debt service or pledged as collateral for the municipal bond
issue are sinking fund proceeds within the meaning of former section
1.103-13(g) (issued under former section 103(c)) or replaced proceeds
described in section 148(a)(2) (or former section 103(c)(2)(B)).

(11) Section 162. -- Trade or Business Expenses. -- Whether the
requisite risk shifting and risk distribution necessary to constitute
insurance are present for purposes of determining the deductibility under
section 162 of amounts paid (premiums) by a taxpayer for insurance.

(12) Sections 162 and 262. -- Trade or Business Expenses; Personal,
Living, and Family Expenses. -- Whether expenses are nondeductible
commuting expenses, except for situations governed by Rev. Rul. 99-7,
1999-1 C.B. 361.

(13) Section 163. -- See section 4.01(3), above.

(14) Section 167. -- Depreciation.

(i) Useful lives of assets.

(ii) Depreciation rates.

(iii) Salvage value of assets.


(15) Sections 167 and 168. -- Depreciation; Accelerated Cost Recovery
System. -- Application of those sections where the formal ownership of
property is in a party other than the taxpayer except when title is held
merely as security.

(16) Section 170. -- Charitable, Etc., Contributions and Gifts. --
Whether a transfer to a pooled income fund described in section 642(c)(5)
qualifies for a charitable contribution deduction under section
170(f)(2)(A).

(17) Section 170(c). -- Charitable, Etc., Contributions and Gifts. --
Whether a taxpayer who transfers property to a charitable organization and
thereafter leases back all or a portion of the transferred property may
deduct the fair market value of the property transferred and leased back
as a charitable contribution.

(18) Section 170. -- Charitable, Etc., Contributions and Gifts. --
Whether a transfer to a charitable remainder trust described in section
664 that provides for annuity or unitrust payments for one or two
measuring lives qualifies for a charitable deduction under section
170(f)(2)(A).

(19) Section 216. -- Deduction of Taxes, Interest, and Business
Depreciation by Cooperative Housing Corporation Tenant-Stockholder. -- If
a cooperative housing corporation (CHC), as defined in section 216(b)(1),
transfers an interest in real property to a corporation (not a CHC) in
exchange for stock or securities of the transferee corporation, which
engages in commercial activity with respect to the real property interest
transferred, whether (i) the income of the transferee corporation derived
from the commercial activity, and (ii) any cash or property (attributable
to the real property interest transferred) distributed by the transferee
corporation to the CHC will be considered as gross income of the CHC for
the purpose of determining whether 80 percent or more of the gross income
of the CHC is derived from tenant-stockholders within the meaning of
section 216(b)(1)(D).

(20) Section 262. -- See section 4.01(12), above.

(21) Section 265(a)(2). -- Expenses and Interest Relating to Tax-Exempt
Income. -- Whether indebtedness is incurred or continued to purchase or
carry obligations the interest on which is wholly exempt from the taxes
imposed by subtitle A.

(22) Section 302. -- Distributions in Redemption of Stock. -- The tax
effect of the redemption of stock for notes, when the payments on the
notes are to be made over a period in excess of 15 years from the date of
issuance of such notes.

(23) Section 302(b)(4) and (e). -- Redemption from Noncorporate
Shareholder in Partial Liquidation; Partial Liquidation Defined. --
Whether a distribution will qualify as a distribution in partial
liquidation under section 302(b)(4) and (e)(1)(A), unless it results in a
20 percent or greater reduction in (i) gross revenue, (ii) net fair market
value of assets, and (iii) employees. (Partial liquidations that qualify
as section 302(e)(2) business terminations are not subject to this
provision.)

(24) Sections 302(b)(4) and (e), 331, 332, and 346(a). -- Effects on
Recipients of Distributions in Corporate Liquidations. -- The tax effect
of the liquidation of a corporation preceded or followed by the transfer
of all or a part of the business assets to another corporation (1) that is
the alter ego of the liquidating corporation, and (2) which, directly or
indirectly, is owned more than 20 percent in value by persons holding
directly or indirectly more than 20 percent in value of the liquidating
corporation's stock. For purposes of this section, ownership will be
determined by application of the constructive ownership rules of section
318(a) as modified by section 304(c)(3).

(25) Section 306. -- Dispositions of Certain Stock. -- Whether the
distribution, disposition, or redemption of "section 306 stock" in a
closely held corporation is in pursuance of a plan having as one of its
principal purposes the avoidance of federal income taxes within the
meaning of section 306(b)(4).

(26) Sections 331 and 332. -- See section 4.01(24), above.

(27) Sections 331 and 346(a). -- Gain or Loss to Shareholders in
Corporate Liquidations. -- The tax effect of the liquidation of a
corporation by a series of distributions, when the distributions in
liquidation are to be made over a period in excess of 3 years from the
adoption of the plan of liquidation.

(28) Section 346(a). -- See sections 4.01(24) and (27) above.

(29) Section 351. -- Transfer to Corporation Controlled by Transferor.
-- Whether section 351 applies to the transfer of an interest in real
property by a cooperative housing corporation (as described in section
216(b)(1)) to a corporation in exchange for stock or securities of the
transferee corporation, if the transferee engages in commercial activity
with respect to the real property interest transferred.

(30) Section 355. -- Distribution of Stock and Securities of a
Controlled Corporation. -- Whether the active business requirement of
section 355(b) is met when, within the 5-year period described in section
355(b)(2)(B), a distributing corporation acquired control of a controlled
corporation as a result of the distributing corporation transferring cash
or other liquid or inactive assets to the controlled corporation in a
transaction in which gain or loss was not recognized as a result of the
transfer meeting the requirements of section 351(a) or section
368(a)(1)(D).

(31) Section 355. -- Distribution of Stock and Securities of a
Controlled Corporation. -- Whether the active business requirement of
section 355(b) is met when the gross assets of the trades or businesses
relied on to satisfy that requirement will have a fair market value that
is less than 5 percent of the total fair market value of the gross assets
of the corporation directly conducting the trades or businesses. The
Service may rule that the trades or businesses satisfy the active trade or
business requirement of section 355(b) if it can be established that,
based upon all relevant facts and circumstances, the trades or businesses
are not de minimis compared with the other assets or activities of the
corporation and its subsidiaries.

(32) Section 441(i). -- Taxable Year of Personal Service Corporations.
-- Whether the principal activity of the taxpayer during the testing
period for the taxable year is the performance of personal services within
the meaning of section 1.441-4T(d)(1)(ii).

(33) Section 448(d)(2)(A). -- Limitation on Use of Cash Method of
Accounting; Qualified Personal Service Corporation. -- Whether 95 percent
or more of the time spent by employees of the corporation, serving in
their capacity as such, is devoted to the performance of services within
the meaning of section 1.448-1T(e)(4)(i).

(34) Section 451. -- General Rule for Taxable Year of Inclusion. -- The
tax consequences of a nonqualified deferred compensation arrangement using
a grantor trust where the trust fails to meet the requirements of Rev.
Proc. 92-64, 1992-2 C.B. 422.

(35) Section 451. -- See section 4.01(4), above.

(36) Section 584. -- Common Trust Funds. -- Whether a common trust fund
plan meets the requirements of section 584. (For section 584 plan drafting
guidance, see Rev. Proc. 92-51, 1992-1 C.B. 988.)

(37) Section 642. -- Special Rules for Credits and Deductions; Pooled
Income Fund. -- Whether a pooled income fund satisfies the requirements
described in section 642(c)(5).

(38) Section 664. -- Charitable Remainder Trusts. -- Whether a
charitable remainder trust that provides for annuity or unitrust payments
for one or two measuring lives satisfies the requirements described in
section 664.

(39) Section 664. -- Charitable Remainder Trusts. -- Whether a trust
that will calculate the unitrust amount under section 664(d)(3) qualifies
as a section 664 charitable remainder trust when a grantor, a trustee, a
beneficiary, or a person related or subordinate to a grantor, a trustee,
or a beneficiary can control the timing of the trust's receipt of trust
income from a partnership or a deferred annuity contract to take advantage
of the difference between trust income under section 643(b) and income for
federal income tax purposes for the benefit of the unitrust recipient.

(40) Sections 671 to 679. -- Grantors and Others Treated as Substantial
Owners. -- In a nonqualified, unfunded deferred compensation arrangement
described in Rev. Proc. 92-64, the tax consequences of the use of a trust,
other than the model trust described in that revenue procedure.

(41) Section 816. -- Life Insurance Company Defined. -- Whether the
requisite risk shifting and risk distribution necessary to constitute
insurance are present for purposes of determining if a company is an
"insurance company" under section 1.801-3(a), unless the facts of the
transaction are within the scope of Rev. Rul. 78-338, 1978-2 C.B. 107, or
Rev. Rul. 77-316, 1977-2 C.B. 53.

(42) Section 1362. -- Election; Revocation; Termination. -- All
situations in which an S corporation is eligible to obtain relief for late
S corporation, qualified subchapter S subsidiary, qualified subchapter S
trust, or electing small business trust elections under sections 4 and 5
of Rev. Proc. 98-55, 1998-2 C.B. 645. (For instructions on how to seek
this relief, see Rev. Proc. 98-55.)


(43) Section 1502. -- Regulations. -- Whether a parent cooperative
housing corporation (as defined in section 216(b)(1)) will be permitted to
file a consolidated income tax return with its transferee subsidiary, if
the transferee engages in commercial activity with respect to the real
property interest transferred to it by the parent.

(44) Section 2055. -- Transfers for Public, Charitable, and Religious
Uses. -- Whether a transfer to a pooled income fund described in section
642(c)(5) qualifies for a charitable deduction under section
2055(e)(2)(A).

(45) Section 2055. -- Transfers for Public, Charitable, and Religious
Uses. -- Whether a transfer to a charitable remainder trust described in
section 664 that provides for annuity or unitrust payments for one or two
measuring lives qualifies for a charitable deduction under section
2055(e)(2)(A).

(46) Section 2503. -- Taxable Gifts. -- Whether the transfer of
property to a trust will be a gift of a present interest in property when
(i) the trust corpus consists or will consist substantially of insurance
policies on the life of the grantor or the grantor's spouse, (ii) the
trustee or any other person has a power to apply the trust's income or
corpus to the payment of premiums on policies of insurance on the life of
the grantor or the grantor's spouse, (iii) the trustee or any other person
has a power to use the trust's assets to make loans to the grantor's
estate or to purchase assets from the grantor's estate, (iv) the trust
beneficiaries have the power to withdraw, on demand, any additional
transfers made to the trust, and (v) there is a right or power in any
person that would cause the grantor to be treated as the owner of all or a
portion of the trust under sections 673 to 677.

(47) Section 2514. -- Powers of Appointment. -- If the beneficiaries of
a trust permit a power of withdrawal to lapse, whether section 2514(e)
will be applicable to each beneficiary in regard to the power when (i) the
trust corpus consists or will consist substantially of insurance policies
on the life of the grantor or the grantor's spouse, (ii) the trustee or
any other person has a power to apply the trust's income or corpus to the
payment of premiums on policies of insurance on the life of the grantor or
the grantor's spouse, (iii) the trustee or any other person has a power to
use the trust's assets to make loans to the grantor's estate or to
purchase assets from the grantor's estate, (iv) the trust beneficiaries
have the power to withdraw, on demand, any additional transfers made to
the trust, and (v) there is a right or power in any person that would
cause the grantor to be treated as the owner of all or a portion of the
trust under sections 673 to 677.

(48) Section 2522. -- Charitable and Similar Gifts. -- Whether a
transfer to a pooled income fund described in section 642(c)(5) qualifies
for a charitable deduction under section 2522(c)(2)(A).

(49) Section 2522. -- Charitable and Similar Gifts. -- Whether a
transfer to a charitable remainder trust described in section 664 that
provides for annuity or unitrust payments for one or two measuring lives
qualifies for a charitable deduction under section 2522(c)(2)(A).

(50) Section 2601. -- Tax Imposed. -- Whether a trust that is excepted
from the application of the generation-skipping transfer tax because it
was irrevocable on September 25, 1985, will lose its excepted status if
the situs of the trust is changed from the United States to a situs
outside of the United States.

(51) Section 2702. -- Special Valuation Rules in Case of Transfers of
Interests in Trusts. -- Whether annuity interests are qualified annuity
interests under section 2702 if the amount of the annuity payable annually
is more than 50 percent of the initial net fair market value of the
property transferred to the trust, or if the value of the remainder
interest is less than 10 percent of the initial net fair market value of
the property transferred to the trust. For purposes of the 10 percent
test, the value of the remainder interest is the present value determined
under section 7520 of the right to receive the trust corpus at the
expiration of the term of the trust. The possibility that the grantor may
die prior to the expiration of the specified term is not taken into
account, nor is the value of any reversion retained by the grantor or the
grantor's estate.

(52) Section 3121. -- Definitions. -- Determinations as to which of two
entities, under common law rules applicable in determining the
employer-employee relationship, is the employer, when one entity is
treating the worker as an employee.

(53) Section 3121. -- See section 4.01(7), above.


.02 General areas.

(1) Any matter in which the determination requested is primarily one of
fact, e.g., market value of property, or whether an interest in a
corporation is to be treated as stock or indebtedness.

(2) Situations where the requested ruling deals with only part of an
integrated transaction. Generally, a letter ruling will not be issued on
only part of an integrated transaction. If, however, a part of a
transaction falls under a no-rule area, a letter ruling on other parts of
the transaction may be issued. Before preparing the letter ruling request,
a taxpayer should call the Office of the Associate Chief Counsel having
jurisdiction for the matters on which the taxpayer is seeking a letter
ruling to discuss whether a letter ruling will be issued on part of the
transaction.

(3) Situations where two or more items or sub-methods of accounting are
interrelated. If two or more items or sub-methods of accounting are
interrelated, ordinarily a letter ruling will not be issued on a change in
accounting method involving only one of the items or sub-methods.

(4) The tax effect of any transaction to be consummated at some
indefinite future time.

(5) Any matter dealing with the question of whether property is held
primarily for sale to customers in the ordinary course of a trade or
business.

(6) The tax effect of a transaction if any part of the transaction is
involved in litigation among the parties affected by the transaction,
except for transactions involving bankruptcy reorganizations.

(7)(a) Situations where the taxpayer or a related party is domiciled or
organized in a foreign jurisdiction with which the United States does not
have an effective mechanism for obtaining tax information with respect to
civil tax examinations and criminal tax investigations, which would
preclude the Service from obtaining information located in such
jurisdiction that is relevant to the analysis or examination of the tax
issues involved in the ruling request.

(b) The provisions of subsection (a) above shall not apply if the
taxpayer or affected related party (i) consents to the disclosure of all
relevant information requested by the Service in processing the ruling
request or in the course of an examination in order to verify the accuracy
of the representations made and to otherwise analyze or examine the tax
issues involved in the ruling request, and (ii) waives all claims to
protection of bank or commercial secrecy laws in the foreign jurisdiction
with respect to the information requested by the Service. In the event the
taxpayer's or related party's consent to disclose relevant information or
to waive protection of bank or commercial secrecy is determined by the
Service to be ineffective or of no force and effect, then the Service may
retroactively rescind any ruling rendered in reliance on such consent.


(8) A matter involving the federal tax consequences of any proposed
federal, state, local, municipal, or foreign legislation. The Service may
provide general information in response to an inquiry. However, the Office
of Division Counsel/ Associate Chief Counsel (Tax Exempt and Government
Entities) may issue letter rulings regarding the effect of proposed state,
local, or municipal legislation upon an eligible deferred compensation
plan under section 457(b) provided that the letter ruling request relating
to the plan complies with the other requirements of Rev. Proc. 2002-1.


SECTION 5. AREAS UNDER EXTENSIVE STUDY IN WHICH RULINGS OR DETERMINATION
LETTERS WILL NOT BE ISSUED UNTIL THE SERVICE RESOLVES THE ISSUE THROUGH
PUBLICATION OF A REVENUE RULING, REVENUE PROCEDURE, REGULATIONS OR
OTHERWISE

.01 Section 62(c). -- Reimbursement Arrangements. -- Whether amounts
related to a salary reduction and paid under a purported reimbursement or
other expense allowance arrangement will be treated as paid under an
"accountable plan" in accordance with section 1.62-2(c)(2).

.02 Section 457. -- Deferred Compensation Plans of State and Local
Governments and Tax-Exempt Organizations. -- The tax treatment of any
section 457 plan that provides that a loan may be made from assets held by
such plan to any participants or beneficiaries under the plan.

.03 Section 1031. -- Exceptions. -- Whether an undivided fractional
interest in real property is an interest in an entity that is not eligible
for tax-free exchange under section 1031(a)(1).

.04 Section 1361. -- Definition of a Small Business Corporation. --
Whether a state law limited partnership electing under section 301.7701-3
to be classified as an association taxable as a corporation has more than
one class of stock for purposes of section 1361(b)(1)(D). The Service will
treat any request for a ruling on whether a state law limited partnership
is eligible to elect S corporation status as a request for a ruling on
whether the partnership complies with section 1361(b)(1)(D).

.05 Sections 3121, 3306, and 3401. -- Definitions; Employment Taxes. --
Who is the employer of employees of an entity that is disregarded under
section 1361(b)(3) or section 301.7701-2.

.06 Section 7701. -- Definitions. -- Whether arrangements where
taxpayers acquire undivided fractional interests in real property
constitute separate entities for federal tax purposes.


SECTION 6. AREAS COVERED BY AUTOMATIC APPROVAL PROCEDURES IN WHICH RULINGS
WILL NOT ORDINARILY BE ISSUED

.01 Section 442. -- Change of Annual Accounting Period. -- All requests
for change in annual accounting period where the Service has provided an
administrative procedure for obtaining a change in annual accounting
period. See Rev. Procs. 2000-11, 2000-1 C.B. 309 (certain corporations);
87-32, 1987-2 C.B. 396, as modified by section 301.9100-3 (partnership, S
corporation, or personal service corporation seeking a natural business
year or an ownership taxable year); 68-41, 1968-2 C.B. 943, as modified by
Rev. Proc. 81-40, 1981-2 C.B. 604 (trusts held by certain fiduciaries
needing a workload spread); and 66-50, 1966-2 C.B. 1260, as modified by
Rev. Proc. 81-40 (individual seeking a calendar year).

.02 Section 446. -- General Rule for Methods of Accounting. -- Except
as otherwise provided in the listed revenue procedures, all requests for
change in method of accounting where the Service has provided an
administrative procedure for obtaining a change in method of accounting.
See Rev. Proc. 99-49, 1999-2 C.B. 725 (accounting method changes described
in the Appendix to Rev. Proc. 99-49 involving sections 56, 162, 167, 168,
171, 174, 197, 263, 263A, 404, 446, 451, 454, 455, 461, 467, 471, 472,
475, 585, 1272, 1273, 1278, and 1281, and former section 168), as modified
and amplified by Rev. Proc. 2001-46, 2001-37 I.R.B. 263 (certain taxpayers
seeking to change their method of accounting for railroad track structure
expenditures to the track maintenance allowance method provided in Rev.
Proc. 2001-46), Rev. Proc. 2001-25, 2001-12 I.R.B. 913 (certain taxpayers
seeking to change their method of accounting for stated interest on
short-term loans made in the ordinary course of business), Rev. Proc.
2001-24, 2001-10 I.R.B. 788 (certain taxpayers seeking to change their
method of accounting for cash advances on commissions paid to their
agents), Rev. Proc. 2001-23, 2001-10 I.R.B. 784 (certain taxpayers seeking
to change their method of accounting to the Used Vehicle Alternative LIFO
Method provided in Rev. Proc. 2001-23), Rev. Proc. 2001-10, 2001-2 I.R.B.
272 (qualifying taxpayers with average annual gross receipts of $1 million
or less seeking to change from an accrual method to the cash method or
from an inventory method to a method complying with section