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Section 355 management ruling. Where two different businesses operate within the same corporate group, and senior management wishes to focus on only one, the separation of the businesses to enable the management of each to concentrate on its own business satisfies the business purpose requirement of section 1.355-2(b) of the regulations.

Section 355 capital allocation ruling. Where two different businesses within the same corporate group are competing for limited capital, the separation of these businesses to resolve the capital allocation problem satisfies the business purpose requirement of section 1.355-2(b) of the regulations.

Community service facility. This ruling describes the type of facility that qualifies as a community service facility under section 42(d)(4)(C)(iii) of the Code.

Advance refunding bonds. This ruling concludes that tax-exempt bonds are advance refunding bonds within the meaning of section 149(d)(5) of the Code if proceeds of the bonds are loaned to a governmental unit (the conduit borrower) that uses the proceeds to redeem an outstanding tax-exempt obligation on which the conduit borrower is the obligor (the prior obligation) more than 90 days after the issue date of the bonds.

Section 355 reverse Morris trust. The acquisition by an unrelated corporation of all the assets of a newly formed controlled corporation following distribution of the controlled corporation's stock under section 355 of the Code will satisfy the "substantially all" requirement of section 368(a)(1)(C) even though the acquired assets represent only half of the assets held by the distributing corporation before it formed the controlled corporation.

Statute of limitations, bankruptcy. This ruling explains the effect of a bankruptcy on the running of the statute of limitations on assessment set forth in section 6501 of the Code. The ruling illustrates that when the IRS issues a Notice of Deficiency less than 90 days before the taxpayer files a bankruptcy petition, the same day the taxpayer files a bankruptcy petition, or after the taxpayer files a bankruptcy petition, and before the termination of the automatic stay imposed by the bankruptcy, the assessment period is suspended not only by the 60-day period provided by section 6503(a), but also by the additional 60-day period provided by section 6213(f).

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

This announcement notifies the public of changes to Form 8873, Extraterritorial Income Exclusion, and its Instructions. This announcement also provides the reasons for these changes.

Depreciation, mid-quarter convention relief. This notice announces that a taxpayer qualifying under either Notice 2001-70 or Notice 2001-74 who filed a timely return for the taxable year that includes September 11, 2001, but failed to make the election provided under Notice 2001-70 or Notice 2001-74, is granted an automatic extension of time until December 31, 2003, to amend its tax return for the taxable year that includes September 11, 2001, and any subsequent taxable years, in order to make the election under Notice 2001-70 or Notice 2001-74 and reflect any necessary adjustments resulting from the election. Notices 2001-70 and 2001-74 amplified.

Section 355; update of section 355 checklist questionnaire. The Service will no longer determine whether a distribution of controlled corporation stock (1) satisfies the business purpose requirement, (2) is used principally as a device for the distribution of earnings and profits, or (3) is part of a plan under section 355(e) of the Code. Taxpayers will be required to address these factual issues by submitting appropriate representations. Rev. Proc. 96-30 modified and amplified, and Rev. Proc. 2003-3 modified.

This procedure corrects errors found in Rev. Proc. 2003-15, 2003-4 I.R.B. 321. This procedure provides issuers of qualified mortgage bonds, as defined in section 143(a) of the Code, and issuers of mortgage credit certificates, as defined in section 25(c), with a list of qualified census tracts for each state and the District of Columbia. The qualified census tracts are based on data from the 2000 census. Rev. Proc. 2003-15 modified and superseded.

Additional first year depreciation. This procedure provides additional time for any taxpayer that timely filed its federal tax return for the taxable year that included September 11, 2001, to deduct, or elect not to deduct, the 30-percent additional first year depreciation deduction for qualified property and qualified New York Liberty Zone property placed in service after September 11, 2001, during the taxable year that included September 11, 2001. This procedure also permits an automatic extension of time to allow certain taxpayers to change their selection of section 179 property for the taxable year that included September 11, 2001. Rev. Procs. 2002-9 and 2002-33 amplified and modified.

Inventories. Guidelines are provided for taxpayers and IRS personnel in making fair market value determinations for inventory items acquired when a taxpayer purchases the assets of a business for a lump sum or a corporation acquires the stock of another corporation and makes an election pursuant to section 338 of the Code. Rev. Proc. 77-12 amplified, modified, and superseded.

Does the facility described below qualify as a community service facility under ¡ì 42(d)(4)(C)(iii) of the Internal Revenue Code?

A qualified low-income building (the Building) received a housing credit allocation on October 1, 2002, and was placed in service in 2003. The Building is located in a qualified census tract (as defined in ¡ì 42(d)(5)(C)). A portion of the Building (the Facility) is used throughout the year to provide services to residents of the Building as well as nonresidents. The Facility consists of a meeting room, an administrative office, a storage room, and several multi-purpose rooms. The services provided at the Facility include day care, career counseling, literacy training, education (including tutorial services), recreation, and outpatient clinical health care. The services are provided free of charge or for a fee that is affordable to individuals whose income is 60 percent or less of area median income (within the meaning of ¡ì 42(g)(1)(B)). The adjusted basis of the property comprising the Facility (of a character subject to the allowance for depreciation and not otherwise taken into account in the adjusted basis of the Building) does not exceed 10 percent of the eligible basis of the Building.

As required by ¡ì 42(m)(1)(A)(iii), prior to the allocation of housing credit to the Building, a comprehensive market study was conducted to assess the housing needs of the low-income individuals in the area to be served by the Building. The study found, among other things, that providing day care, career counseling, literacy training, education (including tutorial services), recreation, and outpatient clinical health care services would be appropriate and helpful to individuals in the area of the Building whose income is 60 percent or less of area median income.

Section 42(a) provides that the amount of the low-income housing credit determined for any taxable year in the credit period is an amount equal to the applicable percentage of the qualified basis of each qualified low-income building.

Section 42(c)(1)(A) defines the qualified basis of any qualified low-income building for any taxable year as an amount equal to the applicable fraction (as defined in ¡ì 42(c)(1)(B)), determined as of the close of the taxable year, of the eligible basis of the building, determined under ¡ì 42(d)(5).

Section 42(d)(1) provides that the eligible basis of a new building is its adjusted basis as of the close of the first taxable year of the credit period. Section 42(d)(4)(A) provides that, except as provided in ¡ì 42(d)(4)(B) and (C), the adjusted basis of any building is determined without regard to the adjusted basis of any property that is not residential rental property. Section 42(d)(4)(B) provides that the adjusted basis of any building includes the adjusted basis of property (of a character subject to the allowance for depreciation) used in common areas or provided as comparable amenities to all residential rental units in the building.

Section 42(d)(4)(C)(i) provides that the adjusted basis of any building located in a qualified census tract is determined by taking into account the adjusted basis of property (of a character subject to the allowance for depreciation and not otherwise taken into account) used throughout the taxable year in providing any community service facility. Section 42(d)(5)(C)(ii)(I) defines the term ¡°qualified census tract¡± as any census tract which is designated by the Secretary of Housing and Urban Development (HUD) and, for the most recent year for which census data are available on household income in the tract, either in which 50 percent or more of the households have an income which is less than 60 percent of the area median gross income for the year or which has a poverty rate of at least 25 percent. See http://www.huduser.org/datasets/qct.html for census tracts designated by the Secretary of HUD.

Section 42(d)(4)(C)(ii) provides that the increase in the adjusted basis of any building which is taken into account by reason of ¡ì 42(d)(4)(C)(i) may not exceed 10 percent of the eligible basis of the qualified low-income housing project of which it is a part. For this purpose, ¡ì 42(d)(4)(C)(ii) provides that all community service facilities which are part of the same qualified low-income housing project are treated as one facility.

Section 42(d)(4)(C)(iii) provides that the term ¡°community service facility¡± means any facility designed to serve primarily individuals whose income is 60 percent or less of area median income (within the meaning of ¡ì 42(g)(1)(B)).

Section 42(m)(1)(A)(iii) provides that the housing credit dollar amount with respect to any building will be zero unless a comprehensive market study of the housing needs of low-income individuals in the area to be served by the project is conducted before the credit allocation is made and at the developer¡¯s expense by a disinterested party who is approved by the housing credit agency.

Under ¡ì 42(d)(4)(C)(iii), a community service facility must be designed to serve primarily individuals whose income is 60 percent or less of area median income. This requirement will be satisfied if the following conditions are met. First, the facility must be used to provide services that will improve the quality of life for community residents. Second, the taxpayer must demonstrate that the services provided at the facility will be appropriate and helpful to individuals in the area of the project whose income is 60 percent or less of area median income. This may, for example, be demonstrated in the market study required to be conducted under ¡ì 42(m)(1)(A)(iii), or another similar study. Third, the facility must be located on the same tract of land as one of the buildings that comprises the qualified low-income housing project. Finally, if fees are charged for services provided, they must be affordable to individuals whose income is 60 percent or less of area median income.

Under the facts presented, the Facility is designed to serve primarily individuals whose income is 60 percent or less of area median income for the following reasons:

(1) the services provided at the Facility¡ªday care, career counseling, literacy training, education (including tutorial services), recreation, and outpatient clinical health care¡ªare services that will help improve the quality of life for community residents; (2) the market study required to be conducted under ¡ì 42(m)(1)(A)(iii) found that the services provided at the Facility would be appropriate and helpful to individuals in the area of the Building whose income is 60 percent or less of area median income; (3) the Facility is located within the Building; and (4) the services provided at the Facility are affordable to individuals whose income is 60 percent or less of area median income.

The Facility qualifies as a community service facility under ¡ì 42(d)(4)(C)(iii). Because the other requirements set forth in ¡ì 42(d)(4)(C) are met, the adjusted basis of the Building will be determined by taking into account the adjusted basis of the Facility.

The principal author of this revenue ruling is Gregory N. Doran of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Mr. Doran at (202) 622-3040 (not a toll-free call).

Whether bonds are advance refunding bonds within the meaning of ¡ì 149(d)(5) of the Internal Revenue Code if the issuer loans proceeds of the bonds to a governmental unit, and within 90 days of the date the loan is made, but more than 90 days after the issue date of the bonds, the governmental unit uses the proceeds to redeem outstanding tax-exempt obligations of the governmental unit.

Issuer X, a governmental unit, issues bonds (Bonds) to make loans to other governmental units to finance or refinance governmental projects of those units. X loans a portion of the proceeds of the Bonds to a governmental unit (the Borrower) that uses the proceeds to redeem tax-exempt bonds (Prior Bonds) issued by the Borrower. The Borrower is the obligor of the Prior Bonds within the meaning of ¡ì 1.150-1(d)(2)(ii)(B) of the Income Tax Regulations. The redemption of the Prior Bonds occurs within 90 days of the date the loan to the Borrower is made, but more than 90 days after the issue date of the Bonds.

Section 103(a) provides that, except as otherwise provided, gross income does not include interest on any State or local bond. Section 103(b)(3) provides that this exclusion does not apply to any bond unless the bond meets the applicable requirements of ¡ì 149.

Section 149(d)(1) provides that nothing in ¡ì 103(a) or any other provision of the law shall be construed to provide an exemption from federal income tax for interest on any bond issued as part of an issue described in paragraph (2), (3), or (4) of ¡ì 149(d). Section 149(d)(3) provides, in part, that an issue is described in paragraph (3) of ¡ì 149(d) if any bond issued as part of the issue is issued to advance refund a bond, unless the refunding bond is only (a) the first advance refunding of the original bond if the original bond is issued after 1985, or (b) the first or second advance refunding of the original bond if the original bond is issued before 1986. Section 149(d)(5) provides that a bond is treated as issued to advance refund another bond if it is issued more than 90 days before the redemption of the refunded bond. See also ¡ì 1.150-1(d)(3), (d)(4).

Pursuant to ¡ì 1.150-1(a)(1), except as otherwise provided, the definitions in ¡ì 1.150-1 apply for all purposes of ¡ì¡ì 103 and 141 through 150.

Section 1.150-1(d)(1) provides that a refunding issue means an issue of obligations the proceeds of which are used to pay principal, interest, or redemption price on another issue, including issuance costs, accrued interest, capitalized interest on the refunding issue, a reserve or replacement fund, or similar costs, if any, properly allocable to that refunding issue. An issue is not a refunding issue, however, to the extent that the obligor of one issue is neither the obligor of the other issue nor a related party with respect to the obligor of the other issue. ¡ì 1.150-1(d)(2)(ii)(A).

In general, ¡ì 1.150-1(d)(2)(ii)(B) provides that the obligor of an issue means the actual issuer of the issue, except that the obligor of the portion of an issue properly allocable to an investment in a purpose investment means the conduit borrower under that purpose investment. Section 1.150-1(b) defines the term ¡°conduit borrower¡± as the obligor on a purpose investment (as defined in ¡ì 1.148-1). For example, if an issuer invests proceeds in a purpose investment in the form of a loan, lease, installment sale obligation, or similar obligation to another entity and the obligor uses the proceeds to carry out the governmental purpose of the issue, the obligor is a conduit borrower. The obligor of an issue used to finance qualified mortgage loans, qualified student loans, or similar program investments (as defined in ¡ì 1.148-1) does not include the ultimate recipient of the loan (e.g., the homeowner, the student). ¡ì 1.150-1(d)(2)(ii)(B).

Section 1.148-1(b) defines the terms ¡°purpose investment¡± and ¡°program investment¡±. A purpose investment is an investment that is acquired to carry out the governmental purpose of an issue. A program investment is a purpose investment that is part of a governmental program in which, among other requirements, at least 95 percent (90 percent for qualified student loans under ¡ì 144(b)(1)(A)) of the cost of the purpose investments acquired under the program represents one or more loans to a substantial number of persons representing the general public, states or political subdivisions, 501(c)(3) organizations, persons who provide housing and related facilities, or any combination of the foregoing.

Section 1.150-1(b) defines the issue date of an issue as the first date on which the issuer receives the purchase price in exchange for delivery of the evidence of indebtedness representing any bond included in the issue. In reference to a bond, the issue date is the date on which the issuer receives the purchase price in exchange for that bond. In no event is the issue date earlier than the first day on which interest begins to accrue on the bond or bonds for federal income tax purposes.

The proceeds of the Bonds loaned to the Borrower are used to pay principal, interest, or redemption price on another issue, the Prior Bonds. Thus, under the general definition of refunding issue contained in ¡ì 1.150-1(d)(1), the portion of the Bonds allocable to the loan to the Borrower constitutes a refunding issue. There is no change in obligor under ¡ì 1.150-1(d)(2)(ii) to alter this conclusion. The loan to the Borrower from proceeds of the Bonds is a purpose investment, and it is not a ¡°similar program investment¡± within the meaning of ¡ì 1.150-1(d)(2)(ii)(B). Although the loans of proceeds of the Bonds may be program investments, loans to governmental units to finance or refinance their governmental projects are not similar to qualified mortgage loans or qualified student loans for purposes of ¡ì 1.150-1(d)(2)(ii)(B) because they are not loans made to natural persons not engaged in a trade or business (with respect to the loans). Thus, the Borrower is an obligor of the Bonds. The Borrower is also the obligor of the Prior Bonds. Accordingly, the portion of the Bonds allocable to the loan to the Borrower constitutes a refunding issue. Because the redemption date of the Prior Bonds is more than 90 days after the issue date of the Bonds, the portion of the Bonds allocable to the loan to the Borrower are advance refunding bonds within the meaning of ¡ì 149(d)(5).

The portion of the Bonds allocable to the loan to the Borrower are advance refunding bonds within the meaning of ¡ì 149(d)(5) if X loans proceeds of the Bonds to the Borrower, and within 90 days of the date the loan is made, but more than 90 days after the issue date of the Bonds, the Borrower uses the proceeds to redeem the Prior Bonds.

The principal authors of this revenue ruling are David White and Rebecca Harrigal of the Office of the Associate Chief Counsel (Tax-Exempt and Government Entities), Internal Revenue Service. For further information regarding this revenue ruling, contact David White at (202) 622-3980 (not a toll free call).

Whether, in the situation described below, the distribution of the stock of a controlled corporation by a distributing corporation to enable the management of each corporation to concentrate on its own business satisfies the business purpose requirement of ¡ì 1.355-2(b) of the Income Tax Regulations.

Distributing is a publicly traded corporation that conducts a software technology business. Controlled, a wholly owned subsidiary of Distributing, conducts a paper products business. One shareholder, who does not actively participate in the management or operations of Distributing or Controlled, owns eight percent of the outstanding Distributing stock.

The software business develops and markets software for various applications. It is a high-growth business that depends for its success on innovation and acquisitions of related businesses. It is the business around which Distributing originally developed and remains the core operation. The paper products business manufactures and distributes paper products. It was acquired five years ago to support the software business and is significantly smaller than the software business. The paper products business grows at a slow to moderate rate largely through increased efficiencies in productivity.

Distributing's senior management devotes more of its time to the software business because it believes that business presents better opportunities for growth. Indeed, it would like to concentrate solely on the software business but is prevented from doing so by the need to service the paper products business. The management of the paper products business, on the other hand, believes that the disproportionate attention paid the software business deprives the paper products business of the management resources needed for its full development.

To enable Distributing's senior management to concentrate on the software business and the management of the paper products business to concentrate on its own operation, Distributing distributes the Controlled stock to Distributing's shareholders, pro rata. Because Distributing's senior management would have continued responsibility for the paper products business as long as Distributing owns a controlling interest in the stock of the corporation operating the paper products business, there is no other nontaxable transaction that would permit Distributing's senior management to concentrate on the software business and permit the paper products business to have a senior management that adequately serves that business. Distributing's directors and senior management expect that each business will benefit in a real and substantial way from the separation.

Following the distribution, no officer will serve both Distributing and Controlled. However, two of Distributing's eight directors will also serve on Controlled's six-person board. Director A will help with administrative aspects of the transition. His term will expire after two years, and he cannot seek reelection. Director B is recognized as an expert in corporate finance. His presence on the Controlled board is intended to reassure the financial markets by providing a sense of continuity. His term will expire after six years, at which time he may seek reelection. Both directors are officers of Distributing, but neither will be an officer or employee of Controlled.

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

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

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

The distribution of Controlled stock by Distributing to Distributing's shareholders will enable Distributing's senior management to concentrate its efforts on the software business, which it believes presents better opportunities for growth, and allow the management of the paper products business to secure for that business the management resources needed for its full development. There is no other nontaxable transaction that would permit Distributing's senior management to concentrate on the software business and permit the paper products business to have a senior management that adequately serves that business, and it is expected that the separation of the two businesses will enhance the success of each business in a real and substantial way.

Although the continuing relationship between Distributing and Controlled evidenced by the two common directors appears inconsistent with the assertion that the software business and the paper products business require independent management teams, this relationship does not conflict with the business purpose for the separation. Director A will serve for only a short period and will further that purpose by aiding in the creation of two independently administered operations. Director B will assist the separation by calming market concerns that might otherwise adversely affect one or both businesses. Further, the two directors together constitute only a minority of each board.

Hence, the distribution of Controlled stock by Distributing to Distributing's shareholders is motivated in whole or substantial part by a real and substantial non-federal tax purpose germane to the businesses of Distributing and Controlled and satisfies the corporate business purpose requirement of ¡ì 1.355-2(b).

In the situation described above, the distribution of the stock of a controlled corporation by a distributing corporation to enable the management of each corporation to concentrate on its own business satisfies the business purpose requirement of ¡ì 1.355-2(b).

The principal author of this revenue ruling is Richard M. Heinecke of the Office of Associate Chief Counsel (Corporate). For further information regarding this revenue ruling, contact Mr. Heinecke at (202) 622-7930 (not a toll-free call).

Whether, in the situation described below, the distribution of the stock of a controlled corporation to resolve a capital allocation problem between the distributing and controlled corporations satisfies the business purpose requirement of ¡ì 1.355-2(b) of the Income Tax Regulations.

Distributing is a publicly traded corporation that conducts a pharmaceuticals business. Controlled, a wholly owned subsidiary of Distributing, conducts a cosmetics business. One shareholder, who does not actively participate in the management or operations of Distributing or Controlled, owns six percent of the outstanding Distributing stock.

The pharmaceuticals business develops, manufactures, and markets specialty drugs. It is a high-margin business that emphasizes rapid growth through innovation. The cosmetics business develops, manufactures, and markets cosmetics. It is a low-margin business that grows at a moderate rate by increasing its productivity and market share. Both businesses require substantial capital for reinvestment and research and development.

Distributing does all of the borrowing for both Distributing and Controlled and makes all decisions regarding the allocation of capital spending between the pharmaceuticals and cosmetics businesses. Because Distributing's capital spending in recent years for both the pharmaceuticals and cosmetics businesses has outpaced internally generated cash flow from the businesses, it has had to limit total expenditures to maintain its credit ratings. Although the decisions reached by Distributing's senior management regarding the allocation of capital spending usually favor the pharmaceuticals business due to its higher rate of growth and profit margin, the competition for capital prevents both businesses from consistently pursuing development strategies that the management of each business believes are appropriate.

To eliminate this competition for capital, Distributing distributes the Controlled stock to Distributing's shareholders, pro rata. Because the total capital available to the two businesses would continue to be limited as long as the two businesses remained within the same corporate group, there is no other nontaxable transaction that would solve the competition problem. It is expected that both businesses will benefit from the separation, and that the cosmetics business will benefit in a real and substantial way as a result of increased control over its capital spending and direct access to the capital markets.

To facilitate the separation, Distributing and Controlled will enter into transitional agreements that relate to information technology, benefits administration, and accounting and tax matters. Other than the tax matters agreement, each agreement will terminate after two years absent extraordinary circumstances, in which case the affected agreement may be extended on arm's-length terms for a limited period. Following the separation, there will be no cross-guarantee or cross-collateralization of debt between Distributing and Controlled, and an arm's-length loan from Distributing to Controlled for working capital will have a term of two years.

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

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

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

The operation of the pharmaceuticals business and the cosmetics business within the same corporate group causes capital allocation problems that prevent each business from pursuing the development strategies most appropriate to its operation. The separation of the two businesses is the only nontaxable transaction that will resolve these problems. It is expected that both businesses will benefit from the separation, and that the separation will enhance the success of the cosmetics business in a real and substantial way.

The limited continuing relationship between Distributing and Controlled evidenced by the various administrative agreements and the loan for working capital is not incompatible with the extent of separation contemplated by ¡ì 355. The administrative agreements, except for the tax matters agreement, and the loan are transitional and short-term, and all are designed to facilitate, rather than impede, the separation of the pharmaceuticals business from the cosmetics business.

Hence, the distribution of Controlled stock by Distributing to Distributing's shareholders is motivated in whole or substantial part by a real and substantial non-federal tax purpose germane to the business of Controlled and satisfies the corporate business purpose requirement of ¡ì 1.355-2(b).

In the situation described above, the distribution of the stock of a controlled corporation to resolve a capital allocation problem between the distributing and controlled corporations satisfies the business purpose requirement of ¡ì 1.355-2(b).

The principal author of this revenue ruling is Richard M. Heinecke of the Office of Associate Chief Counsel (Corporate). For further information regarding this revenue ruling, contact Mr. Heinecke at (202) 622-7930 (not a toll-free call).

Whether the acquisition by an unrelated corporation of all the assets of a newly formed controlled corporation following the distribution of the stock of the controlled corporation by a distributing corporation will satisfy the requirement of ¡ì 368(a)(1)(C) of the Internal Revenue Code that substantially all of the properties of the acquired corporation be acquired where the assets of the controlled corporation represent less than substantially all of the assets that the distributing corporation held before it formed the controlled corporation.

D, a domestic corporation, directly conducts Business X and Business Y. D's assets are equally divided between the two businesses. A, a domestic corporation unrelated to D, conducts Business X and wishes to acquire D's Business X, but not D's Business Y.

To accomplish the acquisition, D and A agree to undertake the following steps in the following order: (i) D will transfer its Business X assets to C, a newly formed domestic corporation, in exchange for 100 percent of the stock of C, (ii) D will distribute the C stock to D's shareholders, (iii) A will acquire all the assets of C in exchange solely for voting stock of A, and (iv) C will liquidate. Apart from the question of whether the acquisition of C's assets by A will satisfy the requirement of ¡ì 368(a)(1)(C) that the acquiring corporation acquire substantially all of the properties of the acquired corporation, steps (i) and (ii) together meet all the requirements of ¡ì 368(a)(1)(D), step (ii) meets all the requirements of ¡ì 355(a), and steps (iii) and (iv) together meet all the requirements of ¡ì 368(a)(1)(C).

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

Section 368(a)(1)(C) defines a reorganization to include the acquisition by one corporation, in exchange solely for all or a part of its voting stock, of substantially all of the properties of another corporation.

Section 368(a)(1)(D) defines a reorganization to include a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the corporation to which the assets are transferred; but only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction that qualifies under ¡ì 354, 355, or 356.

In Helvering v. Elkhorn Coal Co., 95 F.2d 732 (4^th Cir. 1937), cert. denied, 305 U.S. 605, reh'g denied, 305 U.S. 670 (1938), Elkhorn Coal, in anticipation of being acquired by Mill Creek, transferred part of its operating assets to a newly formed subsidiary and distributed the subsidiary's stock to Elkhorn Coal's shareholders. The court concluded that the distribution of subsidiary stock prevented the subsequent acquisition from qualifying under a predecessor of ¡ì 368(a)(1)(C) because, as a result of the distribution, Mill Creek did not acquire substantially all of Elkhorn Coal's historical assets.

In Commissioner v. Mary Archer W. Morris Trust, 367 F.2d 794 (4th Cir. 1966), aff'g 42 T.C. 779 (1964), the taxpayer, in anticipation of a merger with a national bank, contributed its insurance business to a new subsidiary and distributed the subsidiary's stock to its shareholders. The divestiture was necessary to comply with national banking laws. The court held that the distribution satisfied the requirements for nonrecognition under ¡ì 355(a) and, therefore, that the contribution qualified as a reorganization under ¡ì 368(a)(1)(D).

In Rev. Rul. 68-603, 1968-2 C.B. 148, the Internal Revenue Service announced that it would follow the decision in Mary Archer W. Morris Trust to the extent it held that (1) the active business requirements of ¡ì 355(b)(1)(A) were satisfied even though the distributing corporation, immediately after the spin-off, merged into the unrelated acquiring corporation, (2) the control immediately after requirement of ¡ì 368(a)(1)(D) implies no limitation upon a reorganization of the transferor corporation (the distributing corporation) after the distribution of the stock of the controlled corporation, and (3) there was a business purpose for the spin-off and the merger.

Rev. Rul. 98-27, 1998-1 C.B. 1159, states that the Service will not apply any formulation of the step transaction doctrine to determine whether the distributed corporation was a controlled corporation immediately before a distribution under ¡ì 355(a) solely because of any post-distribution acquisition or restructuring of the distributed corporation, whether prearranged or not. The holding of Rev. Rul. 98-27 is based on ¡ì 1012(a) and ¡ì 1012(c) of the Taxpayer Relief Act of 1997 (the ¡°1997 Act¡±), Pub. L. No. 105-34, 111 Stat. 788, 916-17. Section 1012(c) amended the control requirements of ¡ì¡ì 368(a)(1)(D) and 351 to provide that, generally for transactions seeking qualification after August 5, 1997, under either provision and ¡ì 355, the shareholders of the distributing corporation must own stock possessing more than 50 percent of the voting power and more than 50 percent of the total value of the controlled corporation's stock immediately after the distribution. See ¡ì¡ì 368(a)(2)(H) and 351(c). Section 1012(a) amended ¡ì 355 by adding subsection (e), which provides rules for the recognition of gain on certain distributions of stock or securities of a controlled corporation in connection with acquisitions of stock representing a 50 percent or greater interest in the distributing corporation or any controlled corporation.

The Conference Report accompanying the 1997 Act states, in part, that:

H.R. Rep. No. 105-220, at 529-30 (1997); 1997-4 C.B. 1457, at 1999-2000.

Section 6010(c)(2) of the Internal Revenue Service Restructuring and Reform Act of 1998 (the ¡°1998 Act¡±), P.L. 105-206, 1998-3 C.B. 145, amended ¡ì 1012(c) of the 1997 Act to provide that, in the case of a ¡ì 368(a)(1)(D) or ¡ì 351 transaction that is followed by a ¡ì 355 transaction, solely for purposes of determining the tax treatment of any transfer of property by the distributing corporation to the controlled corporation, the fact that the shareholders of the distributing corporation dispose of part or all of the controlled corporation's stock after the ¡ì 355 distribution shall not be taken into account in determining whether the control requirement of either ¡ì 368(a)(1)(D) or ¡ì 351 has been satisfied.

The Senate Report accompanying the 1998 Act contains three examples in which distributing corporation D transfers appreciated business X to newly created subsidiary C in exchange for at least 85 percent of the C stock and then distributes its C stock to the D shareholders. As part of the same plan, C then merges into unrelated acquiring corporation A. Each example concludes that if the distribution satisfies the requirements of ¡ì 355, the control immediately after requirement will be satisfied solely for purposes of determining the tax treatment of the transfer of business X by D to C. See S. Rep. No. 105-174, at 173-176 (1998); 1998-3 C.B. 537, at 709-712.

Section 1012 of the 1997 Act, as amended by ¡ì 6010(c) of the 1998 Act, evidences the intention of Congress that a corporation formed in connection with a distribution that qualifies for nonrecognition under ¡ì 355 will be respected as a separate corporation for purposes of determining (i) whether the corporation was a controlled corporation immediately before the distribution and (ii) whether a pre-distribution transfer of property to the controlled corporation satisfies the requirements of ¡ì 368(a)(1)(D) or ¡ì 351, even if a post-distribution restructuring causes the controlled corporation to cease to exist. See Rev. Rul. 98-44, 1998-2 C.B. 315; Rev. Rul. 98-27, supra; S. Rep. No. 105-174, supra. Therefore, the controlled corporation should also be considered independently from the distributing corporation in determining whether an acquisition of the controlled corporation will qualify as a reorganization under ¡ì 368. Accordingly, in determining under ¡ì 368(a)(1)(C) whether an acquiring corporation has acquired substantially all of the properties of a newly formed controlled corporation, reference should be made solely to the properties held by the controlled corporation immediately following the distributing corporation's transfer of properties to the controlled corporation, rather than to the properties held by the distributing corporation immediately before its formation of the controlled corporation.

Hence, the acquisition by A of all the properties held by C immediately after the distribution will satisfy the requirement of ¡ì 368(a)(1)(C) that A acquire substantially all the properties of C. This result obtains even though an acquisition by A of the same properties from D would have failed this requirement if D had retained Business X, contributed Business Y to C, and distributed the stock of C. See Helvering v. Elkhorn Coal Co., supra.

The acquisition by an unrelated corporation of all the assets of a newly formed controlled corporation following the distribution of the stock of the controlled corporation by a distributing corporation will satisfy the requirement of ¡ì 368(a)(1)(C) that substantially all of the properties of the acquired corporation be acquired where the assets of the controlled corporation represent less than substantially all of the assets that the distributing corporation held before it formed the controlled corporation.

The principal author of this revenue ruling is Gene Raineri of the Office of Associate Chief Counsel (Corporate). For further information regarding this revenue ruling, please contact Mr. Raineri at (202) 622-7530 (not a toll-free call).

The following Department Store Inventory Price Indexes for May 2003 were issued by the Bureau of Labor Statistics. The indexes are accepted by the Internal Revenue Service, under ¡ì 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, May 31, 2003.

The Department Store Inventory Price Indexes are prepared on a national basis and include (a) 23 major groups of departments, (b) three special combinations of the major groups ¡ª 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.

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) 622-7718 (not a toll-free call).

How is the running of the period of limitations for assessing a deficiency affected when the Internal Revenue Service (Service) issues a Notice of Deficiency before or after the taxpayer files a bankruptcy petition?

The issue presented arises in the three different situations described below. In each situation, the taxpayer files a bankruptcy petition on Date 1, and the automatic stay terminates on Date 2, the 100th day after Date 1. Also, the Notice of Deficiency is not addressed to a person outside the United States, and the taxpayer does not file a Tax Court petition for redetermination of the deficiency.

Situation A. The Service issues a Notice of Deficiency on or after Date 1 and before the termination of the automatic stay on Date 2.

Situation B. The Service issues a Notice of Deficiency less than 90 days before Date 1.

Situation C. The Service issues a Notice of Deficiency 90 or more days before Date 1.

Section 362 of title 11 of the United States Code (Bankruptcy Code) provides that certain acts are automatically stayed upon the filing of a bankruptcy petition. Section 362 does not stay the issuance of a Notice of Deficiency or the assessment of a tax by the Service. 11 U.S.C. ¡ì 362(b)(9)(B), (D). Section 362 does, however, stay the commencement or continuation of a Tax Court proceeding concerning the debtor. 11 U.S.C. ¡ì 362(a)(8). Pursuant to section 362(c)(2), the stay terminates upon the earliest of the time the bankruptcy case is closed, the time the case is dismissed, or the time a discharge is granted or denied.

Section 6501(a) of the Internal Revenue Code generally affords the Service three years from the time a return is filed to assess the tax for the return period. Under section 6503(a)(1) of the Internal Revenue Code, the running of the section 6501(a) assessment period is suspended for any period during which the Service is prohibited from making an assessment (and in any event, if a proceeding in respect of the deficiency is placed on the docket of the Tax Court, until the decision of the Tax Court becomes final), and for 60 days thereafter.

Section 6213(a) generally affords the taxpayer 90 days from the time a Notice of Deficiency is issued to file a Tax Court petition for redetermination of the deficiency. In addition, section 6213(a) prohibits the Service from assessing the deficiency during the 90-day period. Section 6213(f) suspends the running of the 90-day period while the taxpayer is prohibited by reason of the bankruptcy case from filing a petition in the Tax Court with respect to the deficiency, and for 60 days thereafter.

Section 6503(h)(1) provides that the running of the period of limitations on assessment is suspended while the Service is prohibited by a bankruptcy case from making the assessment, and for 60 days thereafter. Prior to 1994, section 362(a)(6) of the Bankruptcy Code, which generally prohibits assessment of claims against a debtor, operated to prevent the Service from assessing taxes for the period the stay was in effect. Section 362(b)(9)(D), which provides that the filing of a bankruptcy petition does not stay the making of tax assessments, was added to the Bankruptcy Code by section 116 of the Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, 108 Stat. 4106 (1994), and is effective with regard to bankruptcy cases commenced on or after October 22, 1994. With the addition of section 362(b)(9)(D), the Service is no longer precluded solely by the automatic stay from assessing taxes during the pendency of bankruptcies. Thus, section 6503(h)(1) no longer has any impact on the running of the assessment period.

The following situations illustrate the application of these provisions.

Situation A. The Service issues a Notice of Deficiency on or after the day on which the bankruptcy petition is filed (Date 1) and before the termination of the automatic stay on Date 2.

Under section 362(a)(8) of the Bankruptcy Code, a Tax Court proceeding cannot be commenced while the automatic stay is in effect. Under section 6213(f), the running of the 90-day period for filing a Tax Court petition is suspended while the automatic stay prevents the filing of a Tax Court petition, and for 60 days thereafter. Thus, the 90-day period for filing a Tax Court petition begins to run 61 days after Date 2. The period for filing a Tax Court petition ends on Date 3A, 150 (60+90) days after Date 2.

Under section 6213(a), the Service is prohibited from making an assessment during the period from issuance of the Notice of Deficiency through Date 3A, the last day for filing a Tax Court petition. Under section 6503(a)(1), the running of the period of limitations on assessment is suspended during this period. Also, under section 6503(a)(1), because no Tax Court petition was filed, the running of the period of limitations on assessment is further suspended for an additional 60 days after Date 3A. On the next day, which is 61 days after Date 3A and 211 (60+90+61) days after Date 2, any portion of the assessment period that had not run when the Notice of Deficiency was issued begins to run.

Situation B. The Service issues a Notice of Deficiency less than 90 days before the day on which the bankruptcy petition is filed (Date 1). In the discussion below, assume that the Notice of Deficiency is issued 10 days before Date 1.

As in Situation A, a Tax Court proceeding cannot be commenced while the automatic stay is in effect, and the running of the period for filing a Tax Court petition is suspended under section 6213(f) while the automatic stay prevents the filing of a Tax Court petition, and for 60 days thereafter. Here, however, only 80 days of the 90-day period for filing a Tax Court petition remain as of Date 1. Thus, the 80-day period remaining for filing a Tax Court petition begins to run 61 days after the termination of the automatic stay on Date 2. The period for filing a Tax Court petition ends on Date 3B, 140 (60+80) days after Date 2. This is 240 (100+60+80) days after Date 1, the date on which the bankruptcy petition was filed.

Under section 6213(a), the Service is prohibited from making an assessment during the period from issuance of the Notice of Deficiency through Date 3B, the last day for filing a Tax Court petition. Under section 6503(a)(1), the running of the period of limitations on assessment is suspended during this period. Also, under section 6503(a)(1), because no Tax Court petition was filed, the running of the period of limitations on assessment is further suspended for an additional 60 days after Date 3B. On the next day, which is 61 days after Date 3B, 201 (60+80+61) days after Date 2, and 301 (100+60+80+61) days after Date 1, the portion of the assessment period that had not run when the Notice of Deficiency was issued begins to run.

Situation C. The Service issues a Notice of Deficiency 90 or more days before the day on which the bankruptcy petition is filed (Date 1).

Since the 90-day period for filing a Tax Court petition expired before the filing of the bankruptcy petition, the Service may assess the deficiency at any time after the expiration of the 90-day period, including while the automatic stay is in effect. See section 362(b)(9)(D) of the Bankruptcy Code. Section 6213(f) does not apply because the 90-day period for filing a Tax Court petition expired before the filing of the bankruptcy petition. The bankruptcy case has no effect on the running of the period of limitations on assessment or on the suspension of the running of this period under section 6503(a)(1).

The timing of the issuance of a Notice of Deficiency and the filing of a bankruptcy petition determines whether and how the running of the period of limitations on assessment is affected by the bankruptcy. When the Notice of Deficiency is issued on or after the day on which the bankruptcy commences and before the termination of the automatic stay, or is issued less than 90 days before the bankruptcy commences (Situations A and B, respectively), the bankruptcy has an effect on the running of the period of limitations on assessment because of the application of section 362(a)(8) of the Bankruptcy Code and section 6213(a) and (f) of the Internal Revenue Code. When the Notice of Deficiency is issued 90 or more days before the bankruptcy commences (Situation C), the running of the period of limitations on assessment is not affected by the bankruptcy.

The principal author of this revenue ruling is Debra A. Kohn of the Office of the Associate Chief Counsel (Procedure and Administration), Collection, Bankruptcy & Summonses Division. For further information regarding this revenue ruling, contact Branch 2 of Collection, Bankruptcy & Summonses at (202) 622-3620 (not a toll-free call).

This notice amplifies the tax relief granted in Notice 2001-70, 2001-2 C.B. 437 (November 5, 2001), and in Notice 2001-74, 2001-2 C.B. 551 (December 3, 2001), by permitting an automatic extension of time to make the election provided under Notice 2001-70 and Notice 2001-74.

Section 168(d)(3) of the Internal Revenue Code generally provides that, except as provided in regulations, if the aggregate basis of property placed in service during the last three months of the taxable year exceeds 40 percent of the aggregate basis of property (other than property described in ¡ì 168(d)(3)(B)) placed in service during the taxable year, the applicable depreciation convention is the mid-quarter convention for all property (other than property described in ¡ì 168(d)(2)) subject to ¡ì 168 that is placed in service during the taxable year.

In Notice 2001-70, the Treasury Department and the Internal Revenue Service announced their intention to issue regulations permitting taxpayers to elect not to apply the mid-quarter convention rules contained in ¡ì 168(d)(3) to property placed in service in the taxable year that included September 11, 2001, if the third quarter of the taxpayer's taxable year included September 11, 2001. Notice 2001-70 provided that, pending the issuance of the regulations, an eligible taxpayer that wished to elect not to apply the mid-quarter convention rules could make the election by writing ¡°Election Pursuant to Notice 2001-70¡± across the top of the taxpayer's Form 4562, Depreciation and Amortization, for the taxpayer's taxable year that included September 11, 2001. Notice 2001-74 expanded Notice 2001-70 by permitting taxpayers to elect not to apply the mid-quarter convention rules to property placed in service in the taxable year that included September 11, 2001, if the fourth quarter of the taxpayer's taxable year included September 11, 2001. Notice 2001-74 also provided guidance for taxpayers that file Form 2106, Employee Business Expenses, rather than Form 4562, or that file their tax returns electronically, to elect not to apply the mid-quarter convention rules. Under both notices, the election was required to be made on the taxpayer's tax return for the taxable year that included September 11, 2001. No provision was made for an eligible taxpayer wishing to amend its tax return to make the election.

Treasury and the Service have been made aware that certain taxpayers did not receive notice of the availability of this election until after the tax returns for their taxable year that included September 11, 2001, were filed. This notice is intended to relieve taxpayers of the burden of applying for an extension of time pursuant to ¡ì 301.9100-3 of the Procedure and Administration Regulations to make the election on an amended tax return for that year.

Accordingly, Notice 2001-70 and Notice 2001-74 are amplified to provide that a taxpayer qualifying under either notice who filed a timely tax return for the taxable year that includes September 11, 2001, but failed to make the election provided under Notice 2001-70 or Notice 2001-74, is granted an automatic extension of time until December 31, 2003, to amend its tax return for the taxable year that includes September 11, 2001, and any subsequent taxable years, in order to make the election under Notice 2001-70 or Notice 2001-74 and reflect any necessary adjustments resulting from the election. For example, a sole proprietor that timely filed its 2001 and 2002 twelve-month calendar year tax returns and qualified under Notice 2001-70 to elect not to apply the mid-quarter convention rules for its taxable year ending December 31, 2001, would be granted an automatic extension of time until December 31, 2003, to make the election on an amended 2001 tax return and reflect any necessary adjustments resulting from the election, as well as amend its 2002 tax return to reflect any necessary adjustments resulting from the election. The election on the amended tax return is made in the same manner provided in Notice 2001-70 and in Notice 2001-74.

Treasury and the Service intend to amend the regulations under ¡ì 168 to incorporate the guidance set forth in this notice. Until the regulations are amended, taxpayers may rely on the guidance set forth in this notice.

The principal author of this notice is Bernard P. Harvey of the Office of Associate Chief Counsel, Passthroughs and Special Industries. For further information regarding this notice, contact Mr. Harvey at (202) 622-3110 (not a toll-free call).

This revenue procedure modifies and amplifies Rev. Proc. 96-30, 1996-1 C.B. 696, which sets forth in a checklist questionnaire the information that must be included in a request for a ruling under ¡ì 355 of the Internal Revenue Code. In addition, this revenue procedure modifies Rev. Proc. 2003-3, 2003-1 I.R.B. 113, which sets forth the areas of the Internal Revenue Code under the jurisdiction of the Associate Chief Counsel (Corporate), the Associate Chief Counsel (Financial Institutions and Products), the Associate Chief Counsel (Income Tax and Accounting), the Associate Chief Counsel (Passthroughs and 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.

Section 355(a) applies to distributions of stock or securities of a corporation controlled by the distributing corporation if the requirements of ¡ì 355 are satisfied. Rev. Proc. 96-30 sets forth in a checklist questionnaire the information that must be included in a request for rulings under ¡ì 355.

Section 1.355-2(b) of the Income Tax Regulations provides that to qualify as a distribution described in ¡ì 355, a distribution must not only satisfy the statutory requirements of ¡ì 355, but also must satisfy certain requirements in the regulations, including the business purpose requirement. Section 1.355-2(b)(1) provides that a distribution must be motivated, in whole or substantial part, by one or more corporate business purposes. A corporate business purpose is a real and substantial non-federal tax purpose germane to the business of the distributing corporation, the controlled corporation, or the affiliated group to which the distributing corporation belongs. Section 1.355-2(b)(2). Section 4.04 and Appendix A of Rev. Proc. 96-30 provide guidelines and request certain information and representations regarding whether a distribution satisfies the business purpose requirement.

Section 355(a)(1)(B) provides that a distribution will not qualify for nonrecognition treatment under ¡ì 355 if it is used principally as a device for the distribution of the earnings and profits of the distributing corporation, the controlled corporation, or both. Generally, the determination of whether a transaction was used principally as a device will be made from all the facts and circumstances, including, but not limited to, the presence of certain device and nondevice factors. Section 1.355-2(d)(1). Section 4.05 of Rev. Proc. 96-30 requests certain information and representations regarding whether a distribution is used principally as a device.

Section 355(e) provides that the stock of a controlled corporation will not be qualified property under ¡ì 355(c)(2) or ¡ì 361(c)(2) if the stock is distributed as ¡°part of a plan (or series of related transactions) pursuant to which 1 or more persons acquire directly or indirectly stock representing a 50-percent or greater interest in the distributing corporation or any controlled corporation.¡± See ¡ì 355(e)(2)(A)(ii). For this purpose, a 50-percent or greater interest means stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock. See ¡ì 355(e)(4)(A) (referring to ¡ì 355(d)(4) for the definition of 50-percent or greater interest). Section 1.355-7T generally provides that whether a distribution and an acquisition are part of a plan (or series of related transactions) (hereinafter, plan) is determined based on all the facts and circumstances. That section provides a nonexclusive list of factors to consider in determining whether a plan exists, as well as a number of safe harbors that may be relied upon in determining whether a plan exists.

Ordinarily, the Service refrains from issuing letter rulings requesting determinations on issues that are primarily factual. See Rev. Proc. 2003-1, 2003-1 I.R.B. 1, section 7.01, and Rev. Proc. 2003-3, sections 2.01 and 4.02(1). Moreover, it generally is the policy of the Service not to issue ¡°comfort rulings¡± on transactions the treatment of which is clearly and adequately addressed in published guidance. See Rev. Proc. 2003-1, section 5.17, and Rev. Proc. 2003-3, section 4.02(9). Nonetheless, the Service has not strictly applied its policies of not ruling on factual issues and not issuing comfort rulings in the context of letter ruling requests regarding transactions intended to qualify under ¡ì 355.

The Service has concluded that it is appropriate to adhere more closely to its general policies in the context of requests for letter rulings under ¡ì 355 and that it can better serve taxpayers by dedicating its resources to increasing the amount of published guidance regarding ¡ì 355, including the business purpose requirement, and other legal questions. Thus, this revenue procedure provides that the National Office will not determine whether a proposed or completed distribution of the stock of a controlled corporation is being carried out for one or more corporate business purposes, whether the transaction is used principally as a device, or whether the distribution and an acquisition are part of a plan under ¡ì 355(e). Rather, these determinations may be made upon an examination of the taxpayer¡¯s return. Hence, sections 4.01, 4.02, and 4.03 of this revenue procedure require taxpayers seeking a ruling under ¡ì 355 to submit representations regarding the business purpose and device requirements and whether there is a plan under ¡ì 355(e)(2)(A)(ii). The request for a letter ruling, including representations, must be accompanied by a penalties of perjury statement signed and dated by the taxpayer indicating that the submission contains all the relevant facts relating to the request and such facts are true, correct, and complete. See Rev. Proc. 2003-1, sections 8.01(15) and 10.07(1).

This is a pilot program that applies to ruling requests postmarked or, if not mailed, received after August 8, 2003. This pilot program is intended to operate for at least one year. After that time, the Service may consider further changes, including ruling only on significant issues (as defined in Section 3.01(29) of Rev. Proc. 2003-3) under ¡ì 355.

Section 4.05 of this revenue procedure provides that the Service will decline a request for a ruling regarding a proposed or completed transaction if the Service has previously declined to rule on that transaction (or a similar transaction) because the Service was not satisfied that the distribution met the corporate business purpose requirement, was not a device for the distribution of earnings and profits, or was not part of a plan under ¡ì 355(e).

Section 4.06 of this revenue procedure provides that the Service will decline a request for a supplemental ruling, unless the request presents a significant issue (as defined in section 3.01(29) of Rev. Proc. 2003-3).

Section 4.01(30) of Rev. Proc. 2003-3 provides that a letter ruling ordinarily will not be issued regarding the issue of whether the active business requirement of ¡ì 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. Section 4.07 of this revenue procedure modifies Rev. Proc. 2003-3 by deleting section 4.01(30).

The Service requests comments regarding issues under ¡ì 355 that should be addressed in published guidance. Moreover, the Service continues to study language for, and requests comments regarding, ¡ì 355(e) representations. Comments should refer to Rev. Proc. 2003-48, and should be submitted to:

or electronically via the Service internet site at: [email protected] (the Service comments e-mail address). All comments will be available for public inspection and copying.

.01 Rev. Proc. 96-30 is modified by deleting section 4.04(1) through 4.04(7) and Appendices A and C, and amplified by adding new section 4.04(1) as follows:

(1) Detailed Description. Describe in narrative form each corporate business purpose for the distribution of the stock of Controlled. Do not provide any documentation or substantiation in support thereof. Submit the following REPRESENTATION : The distribution of the stock, or stock and securities, of the controlled corporation is carried out for the following corporate business purposes: [list these corporate business purposes]. The distribution of the stock, or stock and securities, of the controlled corporation is motivated, in whole or substantial part, by one or more of these corporate business purposes. The Service will decline to issue a letter ruling in all cases in which the taxpayer fails to submit the required representation. The National Office will not determine whether the distribution is being carried out for one or more corporate business purposes. This determination may be made upon an examination of the taxpayer¡¯s return.

.02 Rev. Proc. 96-30 is modified by deleting section 4.05(1) through 4.05(5) and amplified by adding new section 4.05(1) as follows:

(1) Dispositions of stock or securities. Submit the following REPRESENTATION : The transaction is not used principally as a device for the distribution of the earnings and profits of the distributing corporation or the controlled corporation or both. See ¡ì 355(a)(1)(B). The Service will decline to issue a letter ruling in all cases in which the taxpayer fails to submit the required representation. The National Office will not determine whether the transaction is used principally as a device for the distribution of the earnings and profits of the distributing corporation, the controlled corporation, or both. This determination may be made upon an examination of the taxpayer¡¯s return.

.03 Rev. Proc. 96-30 is amplified by adding new section 4.08(12) as follows:

(12) Distributions in Connection with Acquisitions. Regarding whether there is a plan (or series of related transactions) under ¡ì 355(e)(2)(A)(ii), submit one of the following REPRESENTATIONS: (i) There is no acquisition of stock of the distributing corporation or any controlled corporation (including any predecessor or successor of any such corporation) that is part of a plan or series of related transactions (within the meaning of ¡ì 1.355-7T) that includes the distribution of the controlled corporation stock; (ii) Each of the following acquisitions of stock of the distributing corporation or any controlled corporation (including any predecessor or successor of any such corporation) is or may be part of a plan or series of related transactions (within the meaning of ¡ì 1.355-7T) that includes the distribution of controlled corporation stock: [DESCRIBE ACQUISITIONS HERE]. Taking all of these acquisitions into account, stock representing a 50-percent or greater interest (within the meaning of ¡ì 355(d)(4)) in the distributing or controlled corporation (including any predecessor or successor of any such corporation) will not be acquired by any person or persons; or (iii) The distribution is not part of a plan or series of related transactions (within the meaning of ¡ì 1.355-7T) pursuant to which one or more persons will acquire directly or indirectly stock representing a 50-percent or greater interest (within the meaning of ¡ì 355(d)(4)) in Distributing or Controlled (including any predecessor or successor of any such corporation). If a representation cannot be submitted exactly as requested, an explanation must be given. The taxpayer must submit one of the three representations set forth above (as set forth above or in appropriately modified form to the satisfaction of the Service) before the Service will issue a letter ruling. While the National Office will not determine whether a distribution and an acquisition are part of a plan (or series of related transactions) under ¡ì 355(e)(2)(A)(ii), the Service may rule on related significant issues (as defined in section 3.01(29) of Rev. Proc. 2003-3, 2003-1 I.R.B. 113 at 115). The determination of whether a distribution and an acquisition are part of a plan (or series of related transactions) may be made upon an examination of the taxpayer¡¯s return.

.04 Rev. Proc. 96-30 is amplified by adding new section 4.08(13) as follows:

(13) Regulatory filings. Provide copies of any proxy statements, information statements, or prospectuses filed or prepared in connection with the distribution or any related transaction.

.05 Rev. Proc. 96-30 is amplified by adding new section 4.08(14) as follows:

(14) Previously Declined Request for Ruling. The Service will not entertain any ruling request regarding a proposed or completed transaction if the Service has previously declined to rule on that transaction (or a similar transaction) because the Service was not satisfied that the distribution met the corporate business purpose requirement, was not a device for the distribution of earnings and profits, or was not part of a plan (or series of related transactions) under ¡ì 355(e).

.06 Rev. Proc. 96-30 is amplified by adding new section 4.08(15) as follows:

(15) Request for Supplemental Ruling. The Service will decline a request for a supplemental letter ruling, unless the request presents a significant issue (as defined in section 3.01(29) of Rev. Proc. 2003-3). A change in circumstances arising after the transaction ordinarily does not present a significant issue.

.07 Rev. Proc. 2003-3, 2003-1 I.R.B. 113, is modified by deleting section 4.01(30).

Rev. Proc. 96-30, 1996-1 C.B. 696, is modified and amplified and Rev. Proc. 2003-3, 2003-1 I.R.B. 113, is modified.

This revenue procedure applies to all ruling requests postmarked or, if not mailed, received after August 8, 2003. Ruling requests postmarked or received after June 24, 2003, and on or before August 8, 2003, that are not in compliance with Rev. Proc. 2003-1 and Rev. Proc. 96-30 will be, in the sole discretion of the Service, either returned to the taxpayer or treated as being subject to this revenue procedure. Taxpayers, however, may use the guidelines of this revenue procedure in ruling requests filed after June 24, 2003, and on or before August 8, 2003.

The collections of information in this revenue procedure have been reviewed and approved by the Office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) under control number 1545-1846.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number.

The collections of information in this revenue procedure are in section 4. This information is required to determine whether a taxpayer would qualify for nonrecognition treatment under this revenue procedure. The collections of information are required to obtain a benefit. The likely respondents are corporations that control another corporation, as well as the management of the corporation the stock of which is being distributed or that controls the corporation the stock of which is being distributed.

The estimated total annual reporting burden is 36,000 hours.

The estimated annual burden per respondent varies from 150 hours to 250 hours, depending on individual circumstances, with an estimated average of 200 hours. The estimated number of respondents is 180.

The estimated annual frequency of responses is on occasion.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue tax law. Generally tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

The principal author of this revenue procedure is Richard M. Heinecke of the Office of Associate Chief Counsel (Corporate). For further information regarding this revenue procedure, contact Mr. Heinecke at (202) 622-7930 (not a toll-free call).

This revenue procedure provides issuers of qualified mortgage bonds, as defined in section 143(a) of the Internal Revenue Code, and issuers of mortgage credit certificates, as defined in section 25(c), with a list of qualified census tracts for each state and the District of Columbia. It modifies and supersedes Rev. Proc. 2003-15, 2003-4 I.R.B. 321.

This revenue procedure corrects errors found in Rev. Proc. 2003-15, 2003-4 I.R.B. 321. On page 341 of the Internal Revenue Bulletin 2003-4 (¡°IRB¡±), census tract 000300 is now under Yellowstone County, Montana. On page 342 of the IRB, census tract 010302 is now under Sarpy County, Nebraska. On page 352 of the IRB, census tracts 000300, 001200, 001500, 001600, 001900, and 002000 are now under Hamilton County, Tennessee.

.01 Section 103(a) of the Code provides that, except as provided in section 103(b), gross income does not include interest on any state or local bond. Section 103(b)(1) provides that section 103(a) shall not apply to any private activity bond that is not a ¡°qualified bond¡± within the meaning of section 141. Section 141(e) provides that the term ¡°qualified bond¡± includes any private activity bond if that bond: (1) is a qualified mortgage bond; (2) meets the volume cap requirements under section 146; and (3) meets the applicable requirements under section 147.

.02 Section 143(a)(1) of the Code provides that the term ¡°qualified mortgage bond¡± means a bond which is issued as part of a ¡°qualified mortgage issue¡±. Section 143(a)(2)(A) provides that the term ¡°qualified mortgage issue¡± means an issue by a state or political subdivision thereof of one or more bonds but only if: (i) all proceeds of the issue (exclusive of issuance costs and a reasonably required reserve) are to be used to finance owner occupied residences; (ii) the issue meets the requirements of subsections (c), (d), (e), (f), (g), (h), (i), and (m)(7); (iii) the issue does not meet the private business tests of paragraphs (1) and (2) of section 141(b); and (iv) with respect to amounts received more than 10 years after the date of issuance, repayments of $250,000 or more of principal on financing provided by the issue are used not later than the close of the first semi-annual period beginning after the date the prepayment (or complete repayment) is received to redeem bonds that are part of the issue.

.03 An issue of bonds meets the requirements of subsection (h) of section 143 of the Code only if at least 20 percent of the proceeds of the issue is made available for owner financing of ¡°targeted area residences¡± for at least 1 year after the date on which owner financing is first made available with respect to targeted area residences. Subsection (h)(2) provides, however, that the amount made available need not exceed 40 percent of the average annual aggregate principal amount of mortgages executed during the immediately preceding 3 calendar years for single-family, owner-occupied residences located in targeted areas within the jurisdiction of the issuing authority.

.04 Targeted area residences are defined in section 143(j)(1)(A) to include residences in a qualified census tract. A ¡°qualified census tract¡±, according to section 143(j)(2)(A), is a census tract in which 70 percent or more of the families have income that is 80 percent or less of the statewide median family income. Section 143(j)(2)(B) of the Code provides that the determination that a census tract is a ¡°qualified census tract¡± must be based on the most recent decennial census for which data are available. The last list of qualified census tracts, published in Rev. Proc. 2003-15, 2003-4 I.R.B. 321, was based on the 2000 Census.

.05 Section 6a.103A-2(b)(4)(ii) of the Temporary Income Tax Regulations provides that, with respect to any particular bond issue, the determination that a census tract is a ¡°qualified census tract¡± may be based upon the decennial census data available 3 months prior to the date of issuance and shall not be affected by official changes to the data during or after that 3-month period.

.06 Section 143(k)(2)(A) of the Code provides that the term ¡°statistical area¡± means (i) a metropolitan statistical area (¡°MSA¡±), and (ii) any county (or the portion thereof) that is not within an MSA.

.07 An MSA is currently defined as an area containing at least one urbanized area with a population of at least 50,000, plus adjacent territory having a high degree of social and economic integration with the core as measured through commuting ties. See Office of Management and Budget (¡°OMB¡±), Standards for Defining Metropolitan and Micropolitan Statistical Areas; Notice, 65 FR 249 (December 27, 2000); OMB Bulletin No. 03-04 (June 6, 2003).

.08 A state or local government may elect to exchange all or part of its qualified mortgage bond authority for authority to issue mortgage credit certificates. In general, the recipient of a mortgage credit certificate may claim a federal income tax credit equal to the product of the certificate credit rate and the interest paid or accrued during the tax year on the remaining principal of the certified indebtedness amount. Section 25(c)(2)(A)(iii)(V) of the Code provides that the indebtedness certified by mortgage credit certificates must meet the requirements of section 143(h) concerning the portion of loans to be placed in targeted areas.

.09 The list of qualified census tracts is developed by HUD for publication by the service. HUD's determination is based upon decennial census data received by HUD from the Bureau of the Census.

The qualified census tracts for each state and the District of Columbia as listed below are based on the 2000 census. In 2000, the Bureau of the Census has provided data for all areas, not only the metropolitan statistical areas. Thus, the list of qualified census tracts includes tracts in Block Numbering Areas (BNA) in nonmetropolitan counties as well as tracts in Metropolitan Statistical Areas (MSA).