Notice 2001-55 & 2001-81

Part IN. Administrative, Procedural, and Miscellaneous
DC 2 W 4 . Submission may be hand-dethe program e~tahlishesnew jnvestmen~ livcrcd Monday ihrougl~Friday k t w e e n
Notice 2001-55
options.
the hours of S a.m. a n d 5 p.m. t o
CC:lTA:RU rNoiice 1001-55>,Courier's
The
Inrema1
Revenue
Service
and
the
T h ~ snotice provides guidance to qualiTreasury
Department
rccugl~izl:
thal there Desk. lnternal Kevenue S e r v ~ c e ,1111
fied tuition progmnb described rn $ 529
iun
NW, Washington
of the Internal Revenue Code and partici- are a nuinber of situat~onslhat rmght war- C o n ~ ~ i t u ~Avenue,
DC.
Alternat~vely.
taxpayers
may submit
rant
a
change
i
n
the
Inkestment
strategy
pants in 9 529 programs regarding the rew
~
t
h
respect
tu
a
S:
529
account.
Accordconunents
elec
tronically
via
the
Internet
striction on investment direction de~ngly.
the
Internal
Revenue
Service
and
hy
selecting
the
'
T
a
x
Regs"
option
on the
sc~ibedin $ 529rb)(5). This notice sets
the
Treasury
Deparrrnent
rxpecl
that
the
IRS
Hnnw
Page.
or
hy
subnutring
comforth a speciaI rule under which a profinal
regulations
under
529
will
provide
ments
directly
to
the
IRS
lntemet
sile
at
gram may pemtt investments m a $ 529
t
h
a
t
a
program
does
nor
violarr
hrrp:/'r$,b~,~:
ir~.g~~~/prod/lu.r-regS/Tegslisf
account to be changed annually. and upoil
l.
will bc available for
a change in the designated benefic~wyof 5 529(b1(5, if it pennits a change In the . i n r ~ ? ~Cuniri~rri~s
Investment
strategy
srlectcd
for
a
9
529
public
inspect~on.
the account.
Section !29(h)(5) states that a program accrwnt once per calendar year, and upon
shall not bc treatcd as a 8 529 prvgranl A change In thc dcsigndtcd h e n e f ~ c i qc ~ f
unless it provides that any contributor to. lhc account. I t is expected that the final
The p r i n c i ~ a lauthor of this notice is
or designated beneficiay under, such prc- regulaliels will also provide that. to qualify
uunder
this
specla1
rule.
a
program
must
Monjce
Rosenbaum of the Office of Dwigram may not directly or indirectlj, direct
(1,
ailou
panlcipants
to
select
ocly
from
sion
CnunseliAssociate
Chief Counsel
the investment of any contributions to the
among
broad-based
investment
strategies
(Tax
Fxempt
and
Governmen1
Entitics).
program (or any earnings thereon). The
de51gned
excluci~ely
hy
the
program:
and
For
further
information
regarding
this noproposed regulations under & 529. whlch
(
2
)
establish
procedures
and
maintam
aptice
ccr~tacl
hls.
Rosenbaum
a1
1202)
622were published in the Federal Register on
propriare
records
to
prevent
a
change
in
6070
(not
a
toll-frcc
nurnbcr).
August 24, 1998 163 F.R. 4SGl9),prnv~ile
that a program does not violate this re- investmznl opfions from ucuurnng more
quiremenr if it permits a person who es- frequently than once per calendar year or
tablishes a 8 529 account 10 sclect among llpnn a change i n the desj~natcdbcncfi- Weighted Average Interest Rate
d~fferenrInvestmen1 strakgies designed ciary of the accotlnt. The Inrertlal Rev- Update
exclusjvely by the program, only at the e n u e Service and he Treasurj- Departtimc W ~ I C Ithe
J
ir~itialcontribution IS made mcnt bclievc rt~atpcrrr~iiringa change in Notice 2001-58
establishing the account. Prop. Treas. investment options once per calendar
year. and upon a change in designated
Reg. 5 1.529-2(g).
Nnt~c'e88-73 provides guidelines for
Several commenters on the proposed brneficlary should prnvidc sufficient f i c x - deternunine the weighted average interest
I-epulationssuggested thar permitting a ihili ty to address concerns raised by corn- rate and the resulting permissible range of
participant in a § 529 program to select menters.
Section 529 programs and their part~ci- Interest rates used to caiculate currenl haamong various broad-based investment
bility for the purpose of the full funding
~ s pending the
strategies offered by a program, both at pants may rely on ~ h nolice
l ~ m i t a t ~ uof
n 8 412(c)(7) of rhe Internal
the rime that contributions are made. and is.;uanrc of final regulations undcr 3 529. Revenue Code as amended by the OmThe In~ernalRevenue S e r v ~ c rr n v ~ t r s
a1 certain other times, would be consistent
nibus Budge1 Recnncjljation Acl of 1987
comments
on the matter described in this and as further amended by thc Uruguay
w i t h $ 529(b)(5). For example. these
e any other commellts relating to
comrnenlers suggcstcd that it n u u l u tit. ~ j u ~ i ca11d
Round Agrecmcnis Acl. Pub. L. 103465
$
529,
including the amendments made
i~ppropriateto allow a change in the in(GATTI.
wstmenl strategy selected lor an account hj- he Economic Growth snd Tax Rcltef
The averape y e l d o n thc 30-year Trea~ I I C thcrr
~ F : taa been a significani change Keconu~liarionAct of 2Nl1 (Pub. L.No.
sury
Constant Maturities for August 2001
lCi-16.
115
Stdt.
!8}.
Please
send
writ111 market circumstances since the acccunt
1s
5-46
percenl.
Wit\ injlially established: where there :s a
ten comments by December 24. 700 I , to:
t-li;lt~ge
in the des~gnatedbeneficia~of an CC.IT.4 .RI! (h'a\lcc 71101-55). room
Thc tbllnwing rates were derermined
;kc c.nunl r as permitted under $ 529(cl(?)
5226. Internal Revenue Service. POB for the plan years beginn~ngJn the mnnth
i~
( ( ' I ) and ihe new henef~c~ary
ha< ii diflrr- 7604. Bzr, Franklin Station. W a s l ~ i r ~ g ~ oshown
bel~~w

Section 529-Programs

ent expected mahculation date, or where

Weighred
.417erage

90'; to 1055
Permissible
Range

YO';(

to 1 j

u'.,;

Perrnissiblr
Ran~r

2001-2 C.B.

299

( 2 ) Automatic change ro section
1.162-3. A qualifying taxpayer that dms
not want to account for inventories under
4 471 of an eligible trade or business
must m&e any necessary change from
the taxpayer's current method of accounting for inventanable ilems in thal trade 01
business to treat s~rchinventoriable items
in the same manner as materials and supplies that are not incidental under section
1.162-3. For purposes of such a change,
the rules of section b.U2(1) of his revenue procedure apply. Taxpayers may file
a single Form 31 15 for both changes
described in sectinns 7.02(1) and 7.02(21.
.03Section 481(a) adjustment. The net
amount of the 481(a) acljusunenr computed under h s revenue procedure must
takt; i u t u account both increases and
decreases in the applicable account balances such as accounts receivabIe,
accounts payable, and inventory. For
example, the 481(a) adjusunenl may
l n c l ~ ~ dthe
e difference resulting from
changing from t&g jn~entovaccount5
under 8 471 to treating the goods as materials and supplies chat are not incidental
under $ 1.162-3.
-04Taxpayers not within the scope of
this revenue procedure. A taxpayer that
ceases to qualify for thc qualifying small
business taxpayer exception described in
section 4 UC this revenue prwedure for
any trade OT business and nherwise is

~eyulrsd to use an accrual method for
that trade or busmess must change lo

accrual method (and, if applicable
an inventory method that complies with
1 471) for that made or business using

bus~nessunder sectlon 4.01 of this revenue prmedure.

an

ellher the m ~ t n r n a ~ change
jc
in accounting
method provisions of section 5.01 of the
APPENDIX to Rcv. PIuc. 9949,if appbcabIe. or the advance consent provisions
af Rrv. Proc. 97-27 (IY97-I C.B.680)
(or its successor;.

CONTACT INFORMATlON

For furthcr information regarding this
revenue prwedure, contact Cheryl Lynn
Oseekey of the Oflice of Associate Chief
Counsel (Income Tax and Accounting) at
(202) 62T4970 (not a toll-free call).

Weighted Average Interest
Rate Update

SECTION 8, EFFECT ON ( ~ I W R

DOCLMEJVTS
Rev. Proc. 99-49 I 1999-2 C-3.725) is
modified and amplified to include this
automatic change in sectinn 10 of the

APPENDLX.
SECTlON 9. EJTECTIVE DATE
This revenue procedure is effective for
taxable years ending on or after Decernbet 3 1 , 2 M 1 However. lhc Service will
noi challenge a taxpayer's use of the
cash method under $ 446, or a taxpayer's failure to account for inventories
u ~ l d r$~47 I , for a made or business in an
earlier y e s ii the taxpayer, for that year,
waq a qualifying small business taxpayer
as described In section 1 of this revenue
procedure and the laxpayer was eligible
to use thr cash method for such trade ol

Notice 2001- 80
Notice 88-73 provides guldehes for
determining the weighted average interest
rate and the resuhing permissible range of
interest rates used lo calculate current
liability for t h purpose
~
of the full funding Tim~tationof $ 412(c)(7) of thc I~Lc:I:
nal Revenue Code as amended by the
Omnibus Budget Reconciliation Act of
I987 and as hrther amended by the Uruguay Kound Agreements Acl. Pub. L.
103465 (GATT).
The average yieId on the 30-year
Treas~~ry
Constant Maturities fot Novet~lber 2001 is 5.1.2 percent.
Thc followir~gr a t s were determined
for the plan years beginning in the month
shown below.

90% to I UI%
Year

Average

Permissible
Range

2001

5.72

5 - 1 5 to 6.01

Weighted

Monrh
December

Section 529 Programs

90% 10 t 10%
Permissi hle
Range
5.15 to 6.29

5 529,
definition
of "qualified tuition program" to include
certain prepaid tuitior~ programs estabAmong olher changes 1 0

EGTRRA: ( I ) expand< the

?'he principal author of this notice is
Todd Newrnan of the Employee Plans,
Tax Exempt and Govtrnrnedt Entities
Division. For furthcr infor~uaticlnregarding this not~ce,please call Mr.Newman at
( 2 0 2 ) 283-9888 (not a toll-free number).

Notice 2001-8 1
Tius notjce provides guidance regardinp certain recordkecping. rcponing, and
other requlremenls applicable to qualified
tuition prugrams described in 529 of the

Internal Revenue Code. in light of certain
amendments made €0 3 5 2 9 by Ihe Econornic Grow~hand Tax Relief Reconciliation Act o f 2001 (Pub. L . r u ' ~ 107-16.

lished and maintained by one or more eef gible educat~onal instjtuirons; (?) provides an exclusion from gross income for
distributions from a State 3 2 9 program
(and. h e i n n i n g in 2004, a prepaid miliw~
propram established and maintained by
onc or m v ~ religible eciucalional jnstiru[ions) which are used to pay for qualifrd

I15 Srat. 18) (EGTRRA).

2001-2 C.B.

617

higher education expenses of the designated beneticiw: (3) repeals the requirement that a $ 529 program impose a more

than de minimis penalty on any refund of
earnings not used for qualified higher
educat~onexpenses of the beneficiary;
and (4) replaces that penalty with an additional lcpercent t a on
~ the amount of a
distribution from a 4 529 program that is
inctudible in gross income (with certain
exceptions). In general. there amendments are effective for taxable years
beginning after December 31, 2001.'
In light of these changes, and to
give $ 529 programs adequate time to
implement appropriate recordkeeping and
reporting procedures, the Internal Revenue Service and the Treasury Department are issuing this guidance, which
they intend to incorporate in final regulations under 529. Section 529 programs
and their participants may rely on this
notice penhng the issuance of final regulations un&r 4 529.

tinue to verify whether the distribution 1s
used for qualified higher education
expenses of the beneficiary and to collect
a more than de rninit~ispenalty on nonqualified disb5butions.

b. Reporting of distributions.

gross income under any other provision
of Chapter 1 of the Code. Section
529(~)(3)(D)(iii)provides that, except to
the extent provided by the Secretary, the
value of the contract. income on the contract. and the investment in the contract
arc to be computed as of the close of the
calendar year.

Section 529cd) provides that a 4 529
program shall make reports regarding the 2. Recordkeeping requirements with
program to the Internal Revenue Service respect to rollover contributions.
and to designated beneficiaries regarding
Section 529(b)(312 states that a procontributions. distributions, and such
other rnatrers as the Internal Revenue gram must provide a separate accounting
Service may require. Prop. Treas. for each designated beneficiary. Prop.
Reg. 8 1 . 5 2 9 4 requires a State tuition Treas. Reg. § 1.529-2(f) requires a P 529
program to report on Form 10994, Cer- prograrn to maintain records with respect
tain Government Payments. the earnings to the designated beneficiary of each
ponion of any distribution made during account showing the total investment in
the year, together with other information the account and any earnings attributable
such as the name. address and TIN of che thereto.
distributee. A 4 529 program must furnish
In the case of a contribution to a 8 529
a statement to the dtstribuke on or before account that represents a ttansfer from a
January 31st of the year following the Covcrdell education savings account
calendar year in which the distribution is descrikd in I 53qb)(2)(B). a transfer of
made. In addition, a $ 529 program must proceeds of a qualified U.S. Savings
a. Impasition of a penalty and verificafile Form 1099-G on or before F e b w Bond described in 4 135(c)(2XC), or a
tion of purpose of a diiribution.
18th of the year following the calendar "rollover" of amounts from another $ 529
p r o w account (each, 3 "mIlover contiAs currently in effect (prior to the year in which the distribution is made.
These reporting requirements continue hution"), the recipient 5 529 program
effective date of EGTRRA), 5 529(b1(3)
provides that a program is not treated as in effect for distributions made in 2001. must determine the basis and earnings
a qualified 5 529 program unless it Thus. with respect to any dtstributions portions uf the mounts contributed. (See
imposes a more than de minimis penalty made in 2001, a 4 529 program must fur- Prop. Treas. Reg. 8 1.529-3(a)(2). which
on any refund of earnings that is not: (a) nish statements to the distributees on or provides that the earnings portion of the
used for qualified higher education M o r e January 3 1, 2002, and file returns rollover amount must be added to the
expenses of the designated beneficiary; on Form I 0 9 9 4 on or before February earnings of the account thar received the
contribution.)
(b) made on account of the death or dis- 28, 2002.
In light of the expansion of 5 529 to
Although this requirement was not
ability of the designated beneficiary; or
(c) made on account of certain scholar- include prepaid tuition programs estab- changed by EtiTRRA, $ 529 programs
ships or other educational assistance lished and maintained by one or more eli- have indicated that there is some confureceived by the beneficiary. Prop. Treas. gible educational instirutions (which may sion about the requirement that a 9 529
Reg, 5 I .53-9-2(e) provides rules on de be private institutions), the Internal Rev- program determine and maintain records
minimis penalties and procedures for veri- enue Service will issue a new form. Form thar reflect the basis and earnings portions
fying the use of distributions and impos- 1099-Q, for taxable years b e g i ~ i n gafter of any rollover contribution. Accordingly,
December 3 1. 2001. A copy of Form ~t is expected that final regulations will
ing and collecting penalties.
EGTRRA repeals 4 529(b)(3), effec- 1099-Q is available on the [RS website at clarify that, when accepting a c o n ~ b u tion, a 6 529 program must ask whether
tive for taxable years beginning after H'WW. irs,gov.
the contribution is a rollover contribution
December 3 1, 2001. Therefore, the final
c. Cdculation of earnings.
from a Coverdell education savings
regulations under 4 529 will provide that,
account. a qualified U.S. Savings Bond.
with respect to any distributions made 1. In general.
or another 4 529 program- Lf the contribuafter December 3 1, 2 0 1 , a P 529 proSection 5 2 9 ( c ) ( 3 ) ( ~ provides
)
that a tion is a rollover contribution, the $ 529
gram will no longer be required to verify
how hstributions are used or to collect distribution from a 5 529 program is program must determine the earnings porany penalty. However, with respect to any includibk in the gross income of the dis- tion of the contribution, and add that
dsbibutions made on or before Decem- tribute in the manner as provided under amount to the earnings recorded in the
ber 31,2001, a 5 529 program must con- 5 72, to the extent not excluded from account to which the rollover colrtrib~tion
--

'

Unless otherw~sei n d i d . mfcrcnces herein are to f 2 9 o l the lnternal Revenue Code, I
ScctiOn 529(b)(4) was renumberrd as 5 529(b)t3) by EGTRRA.

618

2001-2 C.B.

P ~amended by

EGTRRA.