Revenue Ruling 02-43

made a constructive sale of the appreciated financial position if the taxpayer
acquires the same or substantially identical property.
ANALYSIS
Situation 1
Pursuant to § 1.1233–1(a)(1), the Short
Sale is not consummated until the XYZ
stock is delivered to close the Short Sale.
Although T is treated as having acquired
the XYZ stock on the trade date (see Rev.
Rul. 66–97; see also Rev. Rul. 93–84),
the XYZ stock will not be delivered to
close the Short Sale until January 4 of
Year 2. Therefore, T does not realize the
loss on the Short Sale until January 4 of
Year 2.
Situation 2
As in Situation 1, T is treated as having acquired the XYZ stock on the trade
date, December 31 of Year 1. See Rev.
Rul. 66–97; see also Rev. Rul. 93–84. At
that time, unlike in Situation 1, the price
of XYZ stock has decreased. Therefore,
the value of T’s Short Sale has increased,
and T holds an appreciated financial position within the meaning of § 1259(b)(1),
that is, the short position. Section
1259(b)(3). Section 1259(c)(1)(D) provides that if a taxpayer holds an appreciated financial position that is a short sale,
the acquisition of the same or substantially identical stock is a constructive sale
transaction. Therefore, T has entered into
a constructive sale transaction by acquiring the same or substantially identical
stock as the stock underlying the Short
Sale. Pursuant to § 1259(a)(1), T realizes
gain on the Short Sale on December 31 of
Year 1.
HOLDING
(1) In Situation 1, T realizes the loss
on the Short Sale on January 4 of Year 2,
the date the Short Sale is closed by delivery of the stock.
(2) In Situation 2, T has constructively
sold the Short Sale on December 31 of
Year 1. T realizes gain in Year 1 as if T
had sold, assigned, or otherwise terminated the Short Sale at its fair market
value on December 31 of Year 1.

2002–28 I.R.B.

DRAFTING INFORMATION
The principal author of this revenue
ruling is Kate Sleeth of the Office of
Associate Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling, contact Ms. Sleeth at (202) 622–3920 (not a
toll-free call).

Section 1502.—Regulations
(Consolidated Returns).
26 CFR 1.1502–77.—Agent for the group.
26 CFR 1.1502–77A.—Common parent agent for
subsidiaries applicable for consolidated return
years beginning before June 28, 2002.
The revenue procedure provides instructions
relating to the determination of a substitute agent to
act on behalf of a consolidated group, pursuant to
section 1.1502–77(d) or section 1.1502–77A(d).
Procedures are provided for automatic approval of
requests by a terminating common parent to designate its qualifying successor as substitute agent. See
§§ 1.1502–77(d) and 1.1502–77A(d), and Rev. Proc.
2002–43, page 99.

Section 4975:—Tax On
Prohibited Transactions
26 CFR 54.4975–1: General rules relating to excise
tax on prohibited transactions.

Rev. Rul. 2002–43
ISSUE
When a loan from a qualified plan that
is a prohibited transaction spans successive taxable years, and thus constitutes
multiple prohibited transactions, and during those years the first tier prohibited
transaction excise tax rate under § 4975
of the Internal Revenue Code changes,
how is the excise tax computed?
FACTS
X, Inc., is a Subchapter C corporation
that sponsors Plan Y, a calendar year
profit sharing plan qualified under
§ 401(a) of the Internal Revenue Code.
Plan Y’s plan year is the calendar year.
On April 1, 1997, individual B, a disqualified person with respect to Plan Y,
obtained a two-year loan in the amount of
$10,000 from Plan Y’s tax-exempt trust.

85

The loan was secured solely by B’s
account balance in Plan Y. At the time of
the loan, B’s account balance was
$12,000. According to the terms of the
loan, B was to make substantially equal
payments of principal and interest to Plan
Y’s trust on the first business day of
every calendar quarter. The interest rate
of the loan was 11%, compounded annually, which was equal to or greater than a
fair market rate of interest for such a loan
at that time. B made no payments on the
loan until December 31, 1999, at which
time B repaid the loan, including principal and accrued interest. The repayment
constituted a “correction” within the
meaning of § 4975(f)(5) of the Code.
None of the Forms 5500 that were filed
for Plan Y for 1997, 1998, or 1999
reflected a loan to B.
LAW AND ANALYSIS
Section 4975(a) of the Internal Revenue Code provides that an excise tax is
imposed as a result of each prohibited
transaction on any disqualified person
who participates in the prohibited transaction (other than a fiduciary acting only as
such). Section 4975(c)(1)(B) of the Code
defines the term “prohibited transaction”
as including any direct or indirect lending
of money or other extension of credit
between a plan and a disqualified person.
Section 4975(d)(1) provides a statutory exemption for a loan made to a disqualified person who is a participant or
beneficiary of the plan if such loan (1) is
available to all such participants or beneficiaries on a reasonably equivalent
basis; (2) is not made available to highly
compensated employees (within the
meaning of § 414(q)) in an amount
greater than the amount made available to
other employees; (3) is made in accordance with specific provisions regarding
such loans set forth in the plan; (4) bears
a reasonable rate of interest; and (5) is
adequately secured.
Under section 102(a) of Reorganization Plan No. 4 of 1978 (43 F. R. 47713,
October 17, 1978, 1979–1 C.B. 480), the
Secretary of Labor has the authority to
issue regulations interpreting § 4975
(d)(1) of the Code and the parallel provision in section 408(b)(1) of the Employee
Retirement Income Security Act of 1974
(“ERISA”). Under 29 C.F.R. 2550.408b–
1(f)(2) of the Department of Labor’s

July 15, 2002

regulations, a loan secured solely by more
than 50 percent of the present value of a
participant’s vested accrued benefit is not
adequately secured for purposes of determining whether the loan is exempt from
the prohibited transaction excise tax.
Section 1453(a) of the Small Business
Job Protection Act of 1996 increased the
first tier excise tax rate of § 4975(a) of
the Code from 5% to 10% of the amount
involved for each year in the taxable
period for prohibited transactions occurring after August 20, 1996. Section
1074(a) of the Taxpayer Relief Act of
1997 increased the first tier excise tax
rate to 15% of the amount involved for
each year in the taxable period for prohibited transactions occurring after August 5,
1997. Section 4975(f)(2) of the Code
defines the term “taxable period” as the
period beginning with the date on which
the prohibited transaction occurs and ending on the earliest of (1) the date of the

mailing of a statutory notice of deficiency, (2) the date on which the first tier
excise tax is assessed, or (3) the date on
which correction of the prohibited transaction is completed. Section 4975(f)(4)
defines the term “amount involved,” with
respect to a prohibited transaction, as the
greater of (1) the amount of money and
the fair market value of the other property
given or (2) the amount of money and the
fair market value of the other property
received in such transaction. For purposes
of the first tier excise tax, the fair market
value is determined as of the date on
which the prohibited transaction occurs.
Section 141.4975–13 of the Temporary
Pension Excise Tax Regulations provides
that until superseded by permanent regulations under paragraphs (4) and (5) of
§ 4975(f) of the Code, § 53.4941(e)–1 of
the Foundation Excise Tax Regulations
will be controlling to the extent those
regulations describe terms appearing both

in § 4941(e) and § 4975(f). The term
“amount involved” appears in both
§ 4941(e) and § 4975(f).
Section 53.4941(e)–1(b)(2)(ii) of the
Foundation Excise Tax Regulations provides that, where the transaction involves
the use of money, the amount involved is
the greater of the amount paid for such
use or the fair market value of such use
for the period for which the money or
other property is used and the amount
involved is determined for the entire
period that the money is used. In addition,
§ 53.4941(e)–1(e)(1) provides that, in the
instance of a prohibited transaction that is
a loan, an additional prohibited transaction is deemed to occur on the first day of
each taxable year in the taxable period
after the taxable year in which the loan
occurred.
The interest amount for each year
under the facts described above is computed as follows:

Year

Principal

Rate

Time

Interest
Amount

1997 (4/1–12/31)

$10,000.00

11.00%

275/365 year

$ 828.77

1998

$10,828.77

11.00%

1 year

1,191.16

1999

12,019.93

11.00%

1 year

1,322.19

Under the facts described above, and applying the rule in § 53.4941(e)–1(e)(1), there are three prohibited transactions that result
from this loan. The first prohibited transaction occurs on the date of the loan (April 1, 1997), the second prohibited transaction
occurs on January 1,1998 (the first day of the next taxable year) and the third prohibited transaction occurs on January 1, 1999.
The taxable period for each of these prohibited transactions begins on the date that the prohibited transaction occurs (April 1, 1997,
for the first prohibited transaction, January 1, 1998, for the second prohibited transaction, and January 1, 1999, for the third prohibited transaction). The taxable periods for all three prohibited transactions end on the date on which the prohibited transactions
were corrected (December 31, 1999). The amount involved for each prohibited transaction is the interest amount, as computed in
the preceding table, for the first taxable year in the taxable period for that prohibited transaction. Therefore, the first-tier prohibited
transaction excise tax for each prohibited transaction is computed as follows:

Year

1st Prohibited Transaction
Excise Tax

2nd Prohibited Transaction
Excise Tax

3rd Prohibited Transaction
Excise Tax

1997
1998
1999
1st tier tax

$ 828.77 x .10 = $ 82.88
828.77 x .10 = 82.88
828.77 x .10 = 82.88
$248.64

--------------------------------$1,191.16 x .15 = $178.67
1,191.16 x .15 = 178.67
$357.34

--------------------------------------------------------------$1,322.19 x .15 = $198.33
$198.33

Total for All Prohibited Transactions = $804.31.

July 15, 2002

86

2002–28 I.R.B.

HOLDING

T.D. 9000

When a loan from a qualified plan that
is a prohibited transaction spans successive taxable years, and thus constitutes
multiple prohibited transactions, and during those years the first tier prohibited
transaction excise tax rate changes, the
first tier excise tax liability for each prohibited transaction is the sum of the products resulting from multiplying the
amount involved for each year in the taxable period for that prohibited transaction
by the excise tax rate in effect at the
beginning of that taxable period.

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301

Drafting Information
The principal author of this revenue
ruling is Michael Rubin of the Employee
Plans, Tax Exempt and Government Entities Division. For further information
regarding this revenue ruling, please contact the Employee Plans’ taxpayer assistance telephone service at 1–877–829–
5500 (a toll-free number), between the
hours of 8:00 a.m. and 6:30 p.m. Eastern
Time, Monday through Friday. Mr. Rubin
can be reached at 1–202–283–9888 (not a
toll-free number).

Section 4980F.—Failure of
Applicable Plans Reducing
Benefit Accruals to Satisfy
Notice Requirements
Whether the notice required by section 4980F of
the Code and section 204(h) ERISA, as amended,
must be provided to the affected individuals in a
money purchase pension plan that is merged or converted into a profit-sharing plan. See Rev. Rul.
2002–42, page 76.

Section 6011.—General
Requirement of Return,
Statement, or List
26 CFR 1.6011–4T: Requirement of statement disclosing participation in certain transactions by taxpayers (Temporary).

Modification of Tax Shelter
Rules III
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regulations.
SUMMARY: These regulations modify
the rules relating to the filing by certain
taxpayers of a statement with their Federal income tax returns under section
6011(a) and the registration of confidential corporate tax shelters under section
6111(d). These rules also affect the list
maintenance requirement under section
6112. These regulations affect taxpayers
participating in certain reportable transactions, persons responsible for registering
confidential corporate tax shelters, and
persons responsible for maintaining lists
of investors in potentially abusive tax
shelters. The text of these regulations also
serves as the text of the proposed regulations set forth in the notice of proposed
rulemaking (REG–103735–00; REG–
110311–98) on this subject on page 109
of this issue of the Bulletin.
DATES: Effective Date: These regulations are effective June 14, 2002.
Applicability Date: For dates of applicability, see § 1.6011–4T(g) and
§ 301.6111–2T(h).
FOR FURTHER INFORMATION CONTACT: Danielle M. Grimm or Tara P.
Volungis, 202–622–3080 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in these regulations have been previously reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduc-

2002–28 I.R.B.

87

tion Act of 1995 (44 U.S.C. 3507(d))
under control number 1545–1685.
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.
Books and 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 law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
This document amends 26 CFR parts 1
and 301 to provide modified rules relating
to the disclosure of reportable transactions by certain individuals, trusts, partnerships, S corporations, and other corporations on their Federal income tax
returns under section 6011 and the registration of confidential corporate tax shelters under section 6111.
On February 28, 2000, the IRS issued
temporary and proposed regulations
regarding section 6011 (T.D. 8877,
2000–1 C.B. 747; REG–103735–00,
2000–1 C.B. 770), section 6111 (T.D.
8876, 2000–1 C.B. 753; REG–110311–
98, 2000–1 C.B. 767), and section 6112
(T.D. 8875, 2000–1 C.B. 761; REG–
103736–00, 2000–1 C.B. 768) (collectively, the February regulations). The
February regulations were published in
the Federal Register (65 FR 11205, 65
FR 11215, 65 FR 11211) on March 2,
2000. On August 11, 2000, the IRS issued
temporary and proposed regulations
regarding sections 6011, 6111, and 6112
(T.D. 8896, 2000–2 C.B. 249; REG–
103735–00, REG–110311–98, REG–
103736–00, 2000–2 C.B. 258) (collectively, the August 2000 regulations). The
August 2000 regulations were published
in the Federal Register (65 FR 49909)
on August 16, 2000, modifying the February regulations. On August 2, 2001, the
IRS issued temporary and proposed regulations regarding sections 6011, 6111, and
6112 (T.D. 8961, 2001–35 I.R.B. 194;
REG–103735–00, REG–110311–98,
REG–103736–00, 2001–35 I.R.B. 204)
(collectively, the August 2001 regulations). The August 2001 regulations were
published in the Federal Register (66 FR

July 15, 2002