Announcement 2004-43

paragraph (c)(6)(i) of this section to interest income with respect to certain intercompany obligations the interest deduction on which is disallowed under section
265(a)(2). * * *
*****
(iii) Effective date. The third sentence
of paragraph (c)(6)(ii)(A) of this section
shall apply to taxable years beginning on
or after the date these regulations are published as final regulations in the Federal
Register.
*****
(g) * * *
(5) * * *
Example 1 * * *
*****
(d) Tax-exempt income. The facts are
the same as in paragraph (a) of this Example 1, except that B’s borrowing from S
is allocable under section 265 to B’s purchase of state and local bonds to which section 103 applies and §1.265–2(c) does not
apply. * * *
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on May 6, 2004,
8:45 a.m., and published in the issue of the Federal Register
for May 7, 2004, 69 F.R. 25535)

Election of Alternative Deficit
Reduction Contribution
Announcement 2004–43
This announcement provides guidance
on the notices that must be given by an
employer to plan participants and their
beneficiaries and to the Pension Benefit
Guaranty Corporation (the “PBGC”) if
the employer elects the alternative deficit
reduction contribution under § 412(l)(12)
of the Internal Revenue Code (the “Code”)
and section 302(d)(12) of the Employee
Retirement Income Security Act of 1974
(“ERISA”), as added by section 102 of the
Pension Funding Equity Act of 2004, Pub.
L. 108–218 (“PFEA’04”). This announcement also sets forth timing requirements
for the election.

2004-21 I.R.B.

I. Background
Section 102 of PFEA’04, which
was enacted on April 10, 2004, added
§ 412(l)(12) to the Code and section
302(d)(12) to ERISA. Section 412(l)(12)
of the Code permits certain employers
who are required to make additional contributions under § 412(l) to elect a reduced
amount of those contributions (“alternative deficit reduction contributions”) for
certain plan years. An employer is eligible
to make such an election if it is (1) a commercial passenger airline, (2) primarily
engaged in the production or manufacture
of a steel mill product or the processing
of iron ore pellets, or (3) an organization
described in § 501(c)(5) that established a
plan on June 30, 1955, to which § 412 now
applies. On April 12, 2004, the Internal
Revenue Service (the “Service”) issued
Announcement 2004–38, 2004–18 I.R.B.
878, which provides guidance for making
the election for an alternative deficit reduction contribution.
Section 302 of ERISA contains minimum funding standard requirements that
are parallel to those under § 412 of the
Code, and section 302(d)(12) of ERISA
provides an election that is identical to
the election under § 412(l)(12) of the
Code. Moreover, section 302(d)(12)(E) of
ERISA requires an employer that elects an
alternative deficit reduction contribution
under section 302(d)(12) of ERISA and
§ 412(l)(12) of the Code for any year to
provide certain notices to the participants
and beneficiaries under the plan and to
the PBGC. The notices must be provided
within 30 days of the filing of the election
for such year, and the written notices of the
election must specify various information.
Section 302(d)(12)(F) of ERISA as
added by section 102(a) of PFEA’04 authorizes the Secretary of the Treasury to
prescribe the time and manner of making
an alternative deficit reduction contribution election. In addition, under section
101 of Reorganization Plan No. 4 of 1978,
1979–1 C.B. 480, the Secretary of the
Treasury has sole interpretive authority
(except for certain matters not relevant
here) over the subject matter addressed in
this announcement.
Section 102(d) of PFEA’04 amended
section 502(c)(3) of ERISA to provide that
if an employer fails to provide the required
notices on a timely basis to a participant or

955

beneficiary, or to the PBGC, that employer
may be liable to such participant or beneficiary or to the PBGC, in the discretion of
the court, for a penalty of up to $100 a day
from the date of the failure, or such other
relief as the court deems proper.
II. Required Notice to Participants and
Beneficiaries
A. Explanation of Context—Pursuant
to section 302(d)(12)(E)(i) of ERISA, an
employer that elects an alternative deficit
reduction contribution must provide written notice of the election to each participant and to each beneficiary under the plan
(“the participant notice”) and must explain
the context in which the information set
forth in section II.B. of this announcement
is being provided. This requirement to explain the context is satisfied if the notice
includes the following information:
“As permitted under a new law
called the Pension Funding Equity
Act of 2004, Pub.
L. 108–218
(“PFEA’04”), [enter name of corporation] has made a special election that
reduces the amount of contributions
that are required to be made for [enter
plan year] to [enter name of pension
plan]. The election was made on [enter date of election]. The following
information is being provided to you
pursuant to the new law.”
B. Information Required in Notice to
Participants and Beneficiaries—Pursuant
to section 302(d)(12)(E)(i) of ERISA, the
participant notice must also include the information described in this Section II.B.
1. Due Date of the Alternative Deficit
Reduction Contribution and Amount by
Which Required Contribution is Reduced
The participant notice must specify the
following information with respect to the
due date and the reduction in required
contributions resulting from the alternative deficit reduction contribution election
for the plan year:
a. The amount of the required minimum contribution under § 412 of the Code
for the plan year for which the alternative
deficit reduction contribution election was
made, calculated taking into account that
election;
b. The amount of the required minimum contribution under § 412 for the plan

May 24, 2004

year for which the alternative deficit reduction contribution election was made,
calculated without taking into account the
election;
c. The due date of the required minimum contribution under § 412 for the plan
year for which the alternative deficit reduction contribution election was made;
and
d. If the electing employer is required
to make quarterly contributions to the plan
for the plan year for which the election
is made, the aggregate amount of the required minimum contribution under § 412
for the plan year that is required to be paid
in quarterly installments (calculated taking
into account the election).
The employer may provide reasonable
estimates of the amounts described above,
and the participant notice may also specify
the amount and date of any contributions
that were made for the plan year prior to
the date of the participant notice.
2. Benefits Eligible for Guarantee and
Limitations on Guarantee
The participant notice must include
a description of the benefits under the
plan that are eligible for guarantee by
the PBGC, an explanation of the limitations on the PBGC’s guarantee and the
circumstances in which the limitations
apply, including the maximum guaranteed
monthly benefits that the PBGC would
pay if the plan terminated while underfunded. This requirement will be satisfied
if an employer includes in the participant
notice the text from the portion of the
model notice in Appendix A to 29 CFR
Part 4011 that is found under the heading
“PBGC Guarantees.”
C. Method of Delivery
The delivery requirement for the participant notice is treated as satisfied if the participant notice is mailed to the last known
address of each participant or beneficiary.
III. Required Notice to PBGC
Pursuant to section 302(d)(12)(E)(iii)
of ERISA an employer electing an alternative deficit reduction contribution must
provide the information described in this
section.

May 24, 2004

A. Due Date of the Alternative Deficit
Reduction Contribution and Amount
by Which Required Contribution Was
Reduced
This PBGC notice must include the
information regarding the contribution
amounts and due dates set forth in the
description of the participant notice in
section II.B.1. of this announcement.
B. Time to Restore Plan to Full Funding
The PBGC notice must include the
number of years it will take to restore
the plan to full funding if the employer
only makes the required minimum contributions. For this purpose, a plan will
be considered to be in full funding for a
plan year if, for the plan year, the plan is
subject to the full-funding limitation of
§ 412(c)(7), taking into account the 90%
override of § 412(c)(7)(E).
The projection of when the plan
will be in full funding must be based
on reasonable actuarial assumptions
and, for plan years beginning in 2006
and later years, must reflect the interest rate rules (§§ 412(b)(5)(ii)(III) and
412(l)(7)(C)(i)(II)) that are applicable for
plan years beginning after 2005. In addition, the PBGC notice must also include
the required minimum contributions that
form the basis of the projections for the
plan year of the election and each of the 4
subsequent plan years.
C. Comparison of Underfunded Amount
with Capitalization
The PBGC notice must include (1) the
amount by which the plan is underfunded
and (2) the capitalization of the employer
making the election.
For purposes of providing the amount
by which the plan is underfunded, the
PBGC notice must include the plan’s termination liability as of a date within the
most recently ended plan year and the
market value of plan assets as of that date.
In the case of an employer whose stock
is publicly traded, the capitalization of the
employer is the product of the number of
outstanding shares of stock and the market price per share. In the case of any
other employer, the capitalization information required to be shown is the following: (1) the fair market value of total as-

956

sets, (2) total liabilities, (3) stockholder equity (deficit), (4) paid-in capital, and (5) retained earnings (accumulated loss).
The capitalization information should
be shown as of the same date for which
the underfunded amount in the paragraph
above is specified. If, however, the capitalization information is not available as
of such date, capitalization information as
of the end of the most recently ended fiscal
year of the corporation may be substituted.
Method of Delivery
The delivery requirement for the PBGC
notice is set forth on the PBGC’s website
at www.pbgc.gov.
IV. Time For Making Election
Pursuant to the authority contained in
section 302(d)(12)(F) of ERISA, and subject to the transition rule in Section V of
this announcement, an election to make
the alternative deficit reduction contribution for any plan year must be made by the
end of the first quarter of that plan year.
V. Transition
Notwithstanding the requirement to
make an election by the end of the first
quarter of the plan year, the following
transitional rules are applicable. If an
employer makes an alternative deficit reduction contribution election on or before
June 30, 2004, that election will be deemed
timely for the plan year that begins during
calendar 2004. In addition, if an employer
issues a PBGC notice for a plan on or
before June 5, 2004, the PBGC will treat
the PBGC notice as timely issued.
VI. Paperwork Reduction Act
The collection of information contained
in this announcement has been reviewed
and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1884.
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
control number.
The collection of information in this
announcement is in sections II and III.
This information is required to meet the

2004-21 I.R.B.

requirements of section 102 of the Pension Funding Equity Act of 2004 to monitor and make valid determinations with respect to employers that elect an alternative deficit reduction contribution for certain plans. As a result of such elections, an
employer’s deficit reduction contribution
for certain plans will be based on amounts
specified under § 412(l)(12) of the Code.
If an employer does not give timely notice of an election to make a deficit reduction contribution (including all of the requirements described above), a court may
in its discretion impose a penalty. The
likely respondents are businesses or other
for-profit institutions, and nonprofit institutions.
The estimated total annual reporting
and/or recordkeeping burden is 12,000
hours.
The estimated annual burden per respondent/recordkeeper varies from 20 to
100 hours, depending on individual circumstances, with an estimated average of
60 hours. The estimated number of respondents and/or recordkeepers is 200.
The estimated frequency of responses is
occasional.
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
law. Generally tax returns and tax return
information are confidential, as required
by 26 U.S.C. § 6103.
VII. Effect on Other Documents
Announcement 2004–38,
I.R.B. 878, is modified.

2004–18

Drafting Information
The principal authors of this announcement are James E. Holland and
Michael Rubin of the Employee Plans,
Tax Exempt and Government Entities Division. Mr. Holland may be reached at
1–202–283–9699 and Mr. Rubin may be
reached at 1–202–283–9888 (not toll-free
numbers).

Application of Sections
265(a)(2) and 246A in
Multi-Party Financing
Arrangements; Request
for Comments
Announcement 2004–44
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Advance notice of proposed
rulemaking.
SUMMARY: The IRS and Treasury Department are soliciting comments and suggestions regarding the scope and details
of regulations (REG–128572–03) that may
be proposed under section 7701(f) of the
Internal Revenue Code to address the application of sections 265(a)(2) and 246A
in transactions involving related parties,
pass-through entities, or other intermediaries.
DATES: Written or electronic comments
must be submitted by August 5, 2004.
ADDRESSES: Send submissions to
CC:PA:LPD:PR (REG–128572–03), room
5203, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington, DC 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to: CC:PA:LPD:PR (REG–128572–03),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Washington, DC or sent electronically, via
the IRS Internet site at www.irs.gov/regs
or via the Federal eRulemaking Portal at www.regulations.gov (IRS and
REG–128572–03).
FOR
FURTHER
INFORMATION
CONTACT: Concerning submissions,
LaNita Van Dyke, (202) 622–7180; concerning the notice, Avital Grunhaus, (202)
622–3930 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 163(a) generally allows a deduction for all interest paid or accrued
within the taxable year on indebtedness.
Section 265(a)(2), however, provides that

2004-21 I.R.B.

957

no deduction shall be allowed for interest
on indebtedness incurred or continued to
purchase or carry obligations the interest
on which is wholly exempt from Federal
income taxes.
Generally, section 246A reduces the
dividends received deduction under section 243, 244, or 245(a) to the extent that
the portfolio stock, with respect to which
the dividends are received, is debt-financed. Stock is treated as debt-financed
if there is indebtedness directly attributable to the stock investment.
Section 7701(f) provides that the Secretary shall prescribe such regulations as
may be necessary or appropriate to prevent
the avoidance of the provisions of the Internal Revenue Code that deal with (1) the
linking of borrowing to investment, or (2)
diminishing risk, through the use of related
persons, pass-thru entities, or other intermediaries.
Concurrent with the publication of this
advance notice of proposed rulemaking in
the Federal Register, the IRS and Treasury are issuing Rev. Rul. 2004–47,
2004–21 I.R.B. 941, which provides
guidance on the application of section
265(a)(2) to disallow a portion of interest
incurred by one member of an affiliated
group when it transfers borrowed funds
to another member of the group that is a
dealer in tax-exempt bonds. In the circumstances described in Situations 1 and
2 of that ruling, the funds borrowed by one
member are directly traceable to the funds
the borrowing member transfers to the
dealer member. Under Rev. Proc. 72–18,
1972–1 C.B. 740, the application of section 265(a)(2) to these facts requires a
determination of the borrowing member’s
purpose for incurring or continuing each
item of indebtedness. The revenue ruling
holds that the purpose of the borrowing
member is determined by reference to the
use of the borrowed funds in the business
of the dealer member to whom the funds
are made available. This conclusion is
based on H Enterprises International v.
Commissioner, 75 T.C.M. 1948 (1998),
aff’d per curiam, 183 F.3d 907 (8th Cir.
1999). The result is a disallowance of
the borrowing member’s interest expense
under section 265(a)(2).
In H Enterprises, a parent and a subsidiary were members of the same consolidated group of corporations. The
subsidiary declared a dividend and, a few

May 24, 2004