HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 2002–38, page 4.REIT noncustomary service income. Guidance is providedunder sections 856 and 857(b)(7) of the Code for the situationwhen a REIT forms a taxable REIT subsidiary (TRS) to providenoncustomary services to tenants of the REIT and no servicecharges are separately stated from the rents paid by the ten-ants to the REIT.

T.D. 8997, page 6.REG–122564–02, page 25.Final and proposed regulations under section 1502 of the Codeprovide corporations filing consolidated returns with an elec-tion to waive the 5-year net operating loss carryback periodwith respect to certain acquired members.

T.D. 8998, page 1.REG–123305–02, page 26.Temporary and proposed regulations under sections 337(d)and 1502 of the Code clarify and amend certain aspects of thetemporary regulations relating to the deductibility of losses rec-ognized on dispositions of subsidiary stock by members of aconsolidated group. The regulations apply to corporations fil-ing consolidated returns, both during and after the period ofaffiliation, and also affect purchasers of the stock of membersof a consolidated group. A public hearing on the proposedregulations is scheduled for July 17, 2002.

Rev. Proc. 2002–44, page 10.Appeals mediation procedure. This document formallyestablishes the Appeals mediation procedure and modifies andexpands the availability of mediation for cases that are alreadyin the Appeals administrative process. Announcements 98–99and 2001–9 superseded.

REG–248110–96, page 19.Proposed regulations under section 817A of the Code affectinsurance companies that define the interest rate to be usedwith respect to certain insurance contracts that guaranteehigher returns for an initial, temporary period. Specifically, theproposed regulations define the appropriate interest rate to beused in the determination of tax reserves and required interestfor certain modified guaranteed contracts. The proposed regu-lations also address how temporary guarantee periods thatextend past the end of a taxable year are to be taken intoaccount. A public hearing is scheduled for August 27, 2002.

EXCISE TAX

REG–106457–00, page 23.Proposed regulations under section 4081 of the Code relate tothe definition of diesel fuel and the application of the tax onblended taxable fuel.

Finding Lists begin on page ii.Index for January through June begins on page vii.

Bulletin No. 2002–26July 1, 2002

ADMINISTRATIVE

Announcement 2002–59, page 28.New publications reflect tax law changes. The Serviceannounces that four new publications are available reflectingchanges enacted by the Job Creation and Worker AssistanceAct of 2002. The new publications are: Publication 3991,Highlights of the Job Creation and Worker Assistance Act;Supplement to Publication 463, Travel, Entertainment, Gift,and Car Expenses; Supplement to Publication 536, NetOperating Losses (NOLs) for Individuals, Estates, andTrusts; and Supplement to Publication 946, How To Depreci-ate Property.

Announcement 2002–60, page 28.Test of arbitration procedure for Appeals. This announce-ment extends the test of the arbitration procedures set forth inAnnouncement 2000–4, 2000–1 C.B. 317, for an additionalone-year period. Announcement 2000–4 modified.

July 1, 2002 2002–26 I.R.B.

The IRS MissionProvide America’s taxpayers top quality service by helpingthem understand and meet their tax responsibilities and by

applying the tax law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are consolidated semiannually into Cumulative Bulle-tins, which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in the Bul-letin. All published rulings apply retroactively unless otherwiseindicated. Procedures relating solely to matters of internalmanagement are not published; however, statements of inter-nal practices and procedures that affect the rights and dutiesof taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in the rev-enue ruling. In those based on positions taken in rulings to tax-payers or technical advice to Service field offices, identifyingdetails and information of a confidential nature are deleted toprevent unwarranted invasions of privacy and to comply withstatutory requirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A, TaxConventions and Other Related Items, and Subpart B, Legisla-tion and Related Committee Reports.

Part III.—Administrative, Procedural, andMiscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Secre-tary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The first Bulletin for each month includes a cumulative index forthe matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the first Bulletin of the succeeding semiannualperiod, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2002–26 I.R.B. July 1, 2002

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 337.—Nonrecognitionfor Property Distributed toParent in CompleteLiquidation of Subsidiary

26 CFR 1.337(d)–2T: Loss limitation window period(temporary).

T.D. 8998

Loss Limitation Rules

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document containsamendments to temporary regulationsissued under sections 337(d) and 1502.The amendments clarify certain aspectsof the temporary regulations relating tothe deductibility of losses recognized ondispositions of subsidiary stock by mem-bers of a consolidated group. The amend-ments in these temporary regulationsapply to corporations filing consolidatedreturns, both during and after the periodof affiliation, and also affect purchasersof the stock of members of a consolidatedgroup. The text of these temporary regu-lations also serves as the text of the pro-posed regulations (REG–123305–02) setforth in this issue of the Bulletin.

DATES: Effective Date: These regula-tions are effective May 31, 2002.

Applicability Date: For dates of appli-cability see § 1.337(d)–2T(g) and1.1502–20T(i).

FOR FURTHER INFORMATION CON-TACT: Sean P. Duffley (202) 622–7530or Lola L. Johnson (202) 622–7550 (nottoll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information con-tained in these regulations has been previ-ously reviewed and approved by theOffice of Management and Budget undercontrol number 1545–1774. Responses tothis collection of information are volun-

tary. No material changes to this collec-tion of information are made by theseregulations.

An agency may not conduct or spon-sor, and a person is not required torespond to, a collection of informationunless it displays a valid control numberassigned by the Office of Managementand Budget.

Books or records relating to the collec-tion of information must be retained aslong as their contents may become mate-rial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

Background

On March 12, 2002, the IRS and Trea-sury published in the Federal Register at67 FR 11034 (T.D. 8984, 2002–13 I.R.B.668) temporary regulations under sections337(d) and 1502 (the temporary regula-tions). The temporary regulations setforth rules that limit the deductibility ofloss recognized by a consolidated groupon the disposition of stock of a subsidiarymember and that require certain basisreductions on the deconsolidation ofstock of a subsidiary member. Section1.1502–20T(i) of the temporary regula-tions provides that, in the case of a dispo-sition or deconsolidation of a subsidiarybefore March 7, 2002, and for such trans-actions effected pursuant to a bindingwritten contract entered into beforeMarch 7, 2002, that was in continuouseffect until the disposition or deconsolida-tion, a consolidated group may determinethe amount of allowable stock loss orbasis reduction by applying § 1.1502–20in its entirety, § 1.1502–20 without regardto the duplicated loss component of theloss disallowance rule, or § 1.337(d)–2T.For dispositions and deconsolidations thatoccur on or after March 7, 2002, and thatare not within the scope of the bindingcontract rule, § 1.1502–20T(i) providesthat allowable loss and basis reduction aredetermined under § 1.337(d)–2T, not§ 1.1502–20.

Explanation of Provisions

Since the publication of the temporaryregulations, several questions have beenraised concerning the interpretation andapplication of the temporary regulations.In response to these questions, the IRSand Treasury are promulgating the regula-tions in this Treasury decision as tempo-rary regulations to clarify and amend thetemporary regulations as described belowin this preamble. The following para-graphs describe these amendments.

Netting Rule

Commentators requested that § 1.337(d)–2T be amended to provide a nettingrule similar to that set forth in§ 1.1502–20(a)(4), pursuant to whichgain and loss from certain dispositions ofstock may be netted. This Treasury deci-sion adds § 1.337(d)–2T(a)(4) to providesuch a rule and also adds § 1.337(d)–2T(b)(4), which provides a similar nettingrule for basis reductions on deconsolida-tions of subsidiary stock.

Time For Filing Election Described in§ 1.1502–20T(i)

Section 1.1502–20T(i) currently pro-vides that an election to determine allow-able loss by applying § 1.1502–20 (with-out regard to the duplicated losscomponent of the loss disallowance rule)or § 1.337(d)–2T must be made byincluding a statement with or as part ofthe original return for the taxable yearthat includes the later of March 7, 2002,and the date of the disposition or decon-solidation of the stock of the subsidiary,or with or as part of an amended returnfiled before the date the original returnfor the taxable year that includes March7, 2002, is due. Commentators noted thatthis provision may not permit the electionto be made on an original return for the2001 taxable year where the dispositionoccurs during the 2001 taxable year. TheIRS and Treasury believe that it is appro-priate to permit the election to be madeon such a return. Therefore, this Treasurydecision amends § 1.1502–20T(i) to pro-vide that the statement may be filed withor as part of a timely filed (including anyextensions) original return for any taxable

2002–26 I.R.B. 1 July 1, 2002

year that includes any date on or beforeMarch 7, 2002. In addition, if the date ofthe disposition or deconsolidation of thestock of the subsidiary is after March 7,2002, the statement may be filed with oras part of a timely filed (including anyextensions) original return for the taxableyear that includes such date. This latteralternative effectively permits the state-ment to be filed with the original returnthat includes the date of the disposition ordeconsolidation if, as of March 7, 2002,the disposition or deconsolidation wassubject to a binding written contractentered into before March 7, 2002, thatwas in continuous effect until the date ofthe disposition or deconsolidation.

Requirements for Perfecting ElectionDescribed in § 1.1502–20T(i)

Commentators questioned whether anelection to determine allowable loss byapplying § 1.1502–20 (without regard tothe duplicated loss component of the lossdisallowance rule) or § 1.337(d)–2T wasvalid only if a statement of allowed lossdescribed in § 1.337(d)–2T(c) or 1.1502–20(c), as appropriate, was or is filed withrespect to the disposition or deconsolida-tion of subsidiary stock. The amendmentsto the temporary regulations in this Trea-sury decision clarify that no statementother than the one described in § 1.1502–20T(i)(4) is necessary to perfect an elec-tion to compute allowable loss or basisreduction by applying the provisionsdescribed in § 1.1502–20T(i)(2)(i) or (ii).Therefore, an election pursuant to§ 1.1502–20T(i) may be made regardlessof whether a statement of allowed lossdescribed in § 1.337(d)–2T(c) or 1.1502–20(c) was or is filed with respect to thedisposition or deconsolidation.

In addition, taxpayers determiningallowable loss under § 1.1502–20 in itsentirety will generally be treated as hav-ing satisfied the requirement to file astatement of allowed loss otherwiseimposed by § 1.1502–20(c) even if nosuch statement is filed. Nothing in thetemporary regulations or these amend-ments to the temporary regulations, how-ever, affects the filing requirementsregarding the election provided in§ 1.1502–20(g).

Effect of Election

Finally, a number of questions havebeen raised regarding the extent to whichthe election described in § 1.1502–20T(i)affects a taxpayer’s items of income,gain, deduction, or loss other than the lossallowed on a disposition of subsidiarystock. In response to these questions, thetemporary regulations are amended toexplain that if, pursuant to an electionunder § 1.1502–20T(i), the loss allowedwith respect to a disposition of subsidiarystock is increased, but the year of the dis-position (or the year to which such losswould have been carried back or carriedforward) is closed, to the extent that theabsorption of such excess loss in suchyear would have affected the tax treat-ment of another item (e.g., another lossthat was absorbed in such year) that hasan effect in an open year, the election willaffect the treatment of such other item.

In addition, the regulations provide aspecial rule for situations in which a sub-sidiary of the group (the disposing mem-ber) recognized a loss on the dispositionof stock of a lower-tier subsidiary mem-ber of the group, the loss was disallowedunder § 1.1502–20, and, as a result, agroup member’s basis in the stock of thedisposing member was reduced pursuantto § 1.1502–32 (because the disallowedloss was treated as a noncapital, nonde-ductible expense). In such cases, to theextent that all or some portion of the dis-allowed loss is allowed as a result of anelection under § 1.1502–20T(i), but suchloss would have been properly absorbedor expired in a closed year, the basis inthe stock of the disposing member maybe increased. This adjustment is to bemade for purposes of determining thegroup’s or the shareholder-member’s Fed-eral income tax liability for all openyears.

Special Analyses

In light of the Federal Circuit’s deci-sion in Rite Aid Corp. v. United States,255 F.3d 1357 (Fed. Cir. 2001), the tem-porary regulations were necessary to pro-vide taxpayers with immediate guidanceregarding allowable loss and basis reduc-tions in connection with dispositions anddeconsolidations of subsidiary stock andto carry out the principles of GeneralUtilities repeal pending the issuance of

further guidance. These amendments tothe temporary regulations clarify thoserules and simplify their application inorder to ease taxpayer compliance.Accordingly, good cause is found for dis-pensing with notice and public procedurepursuant to 5 U.S.C. 553(b)(B) and witha delayed effective date pursuant to 5U.S.C. 553(d)(1) and (3). It has beendetermined that this Treasury decision isnot a significant regulatory action asdefined in Executive Order 12866. There-fore, a regulatory assessment is notrequired.

Drafting Information

The principal authors of these regula-tions are Sean P. Duffley and Lola L.Johnson, Office of Associate Chief Coun-sel (Corporate). However, other personnelfrom the IRS and Treasury Departmentparticipated in their development.

* * * * *

Amendments to the Regulations

Accordingly, 26 CFR part 1 isamended as follows:

Paragraph 1. The authority citation forpart 1 is amended by removing the entryfor “Section 1.1502–20T(i)” and addingan entry in numerical order to read in partas follows:

Authority: 26 U.S.C. 7805 * * *Section 1.1502–20T also issued under

the authority of 26 U.S.C. 337(d) and1502.* * *

Par. 2. In § 1.337(d)–2T, paragraphs(a)(4) and (b)(4) are added to read as fol-lows:

§ 1.337(d)–2T Loss limitation windowperiod (temporary).

(a) * * *(4) Netting. Paragraph (a)(1) of this

section does not apply to loss with respectto the disposition of stock of a subsidiary,to the extent that, as a consequence of thesame plan or arrangement, gain is takeninto account by members with respect tostock of the same subsidiary having thesame material terms. If the gain to whichthis paragraph applies is less than theamount of the loss with respect to the dis-position of the subsidiary’s stock, the gainis applied to offset loss with respect to

July 1, 2002 2 2002–26 I.R.B.

each share disposed of as a consequenceof the same plan or arrangement in pro-portion to the amount of the loss deduc-tion that would have been disallowedunder paragraph (a)(1) of this sectionwith respect to such share before theapplication of this paragraph (a)(4). If thesame item of gain could be taken intoaccount more than once in limiting theapplication of paragraphs (a)(1) and(b)(1) of this section, the item is takeninto account only once.

(b) * * *(4) Netting. Paragraph (b)(1) of this

section does not apply to reduce the basisof stock of a subsidiary, to the extent that,as a consequence of the same plan orarrangement, gain is taken into accountby members with respect to stock of thesame subsidiary having the same materialterms. If the gain to which this paragraphapplies is less than the amount of basisreduction with respect to shares of thesubsidiary’s stock, the gain is applied tooffset basis reduction with respect to eachshare deconsolidated as a consequence ofthe same plan or arrangement in propor-tion to the amount of the reduction thatwould have been required under para-graph (b)(1) of this section with respect tosuch share before the application of thisparagraph (b)(4).

* * * * *Par. 3. Section 1.1502–20T is amended

by revising paragraphs (i)(3)(v) and (i)(4)to read as follows:

§ 1.1502–20T Disposition or deconsoli-dation of subsidiary stock (temporary).

* * * * *

(i) * * *(3) * * *(v) Items taken into account in open

years—(A) General rule. An electionunder paragraph (i)(2) of this sectionaffects a taxpayer’s items of income,gain, deduction, or loss only to the extentthat the election gives rise, directly orindirectly, to items or amounts that wouldproperly be taken into account in a yearfor which an assessment of deficiency ora refund of overpayment, as the case maybe, is not prevented by any law or rule oflaw. Under this paragraph, if the electionincreases the loss allowed with respect toa disposition of subsidiary stock, but the

year of the disposition (or the year towhich such loss would have been carriedback or carried forward) is a year forwhich a refund of overpayment is pre-vented by law, to the extent that theabsorption of such excess loss in suchyear would have affected the tax treat-ment of another item (e.g., another lossthat was absorbed in such year) that hasan effect in a year for which a refund ofoverpayment is not prevented by any lawor rule of law, the election will affect thetreatment of such other item. Therefore, ifthe absorption of the excess loss in theyear of the disposition (which is a yearfor which a refund of overpayment is pre-vented by law) would have prevented theabsorption of another loss (the secondloss) in such year and such loss wouldhave been carried to and used in a yearfor which a refund of overpayment is notprevented by any law or rule of law (theother year), the election makes the secondloss available for use in the other year.

(B) Special rule. If a member’s basisin stock of a subsidiary was reduced pur-suant to § 1.1502–32 because a loss withrespect to stock of a lower-tier subsidiarywas treated as disallowed under§ 1.1502–20, then, to the extent such dis-allowed loss is allowed as a result of anelection under paragraph (i) of this sec-tion but would have been properlyabsorbed or expired in a year for which arefund of overpayment is prevented bylaw or rule of law, the member’s basis inthe subsidiary stock may be increased forpurposes of determining the group’s orthe shareholder-member’s Federal incometax liability in all years for which arefund of overpayment is not preventedby law or rule of law.

* * * * *(4) Time and manner of making the

election. An election to determine allow-able loss or basis reduction by applyingthe provisions described in paragraph(i)(2)(i) or (ii) of this section is made byincluding the statement required by thisparagraph with or as part of any timelyfiled (including any extensions) originalreturn for a taxable year that includes anydate on or before March 7, 2002, or, if thedate of the disposition or deconsolidationof the stock of the subsidiary is afterMarch 7, 2002, then such date, or with oras part of an amended return filed beforethe date the original return for the taxable

year that includes March 7, 2002, is due(including any extensions). Filing a state-ment in accordance with the provisions ofthis paragraph satisfies the requirement tofile a “statement of allowed loss” other-wise imposed under § 1.1502–20(c)(3) or§ 1.337(d)–2T(c)(3). The statementrequired by this paragraph satisfies therequirement that a statement be filed inorder to claim allowable loss or basisreduction by applying the provisionsdescribed in paragraph (i)(2)(i) or (ii).The statement filed under this paragraphshall be entitled “Allowed Loss underSection [Specify Section under WhichAllowed Loss Is Determined] Pursuant toSection 1.1502–20T(i)” and must includethe following information—

(i) The name and employer identifica-tion number (E.I.N.) of the subsidiary andof the member(s) that disposed of thesubsidiary stock;

(ii) In the case of an election to deter-mine allowable loss or basis reduction byapplying the provisions described in para-graph (i)(2)(i) of this section, a statementthat the taxpayer elects to determineallowable loss or basis reduction byapplying such provisions;

(iii) In the case of an election to deter-mine allowable loss or basis reduction byapplying the provisions described in para-graph (i)(2)(ii) of this section, a statementthat the taxpayer elects to determineallowable loss or basis reduction byapplying such provisions;

(iv) If an election described in§ 1.1502–20(g) was made with respect tothe disposition of the stock of the subsid-iary, the amount of losses originallytreated as reattributed pursuant to suchelection and the amount of losses treatedas reattributed pursuant to paragraph(i)(3)(i) or (ii) of this section;

(v) If an apportionment of a separatesection 382 limitation, a subgroup section382 limitation, or a consolidated section382 limitation is adjusted pursuant toparagraph (i)(3)(iii)(A), (B), or (C) of thissection, the original and redeterminedapportionment of such limitation; and

(vi) If the application of paragraph(i)(3)(i) or (ii) of this section results in areduction of the amount of losses treatedas reattributed pursuant to an electiondescribed in § 1.1502–20(g), a statementthat the notification described in para-graph (i)(3)(iv) of this section was sent to

2002–26 I.R.B. 3 July 1, 2002

the subsidiary and, if the acquirer was amember of a consolidated group at thetime of the stock sale, to the person thatwas the common parent of such group atsuch time, as required by paragraph(i)(3)(iv) of this section.

* * * * *Robert E. Wenzel,

Deputy Commissioner ofInternal Revenue.

Approved May 20, 2002.

Pamela F. Olson,Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on May30, 2002, 8:45 a.m., and published in the issue ofthe Federal Register for May 31, 2002, 67 F.R.37998)

Section 856.—Definition ofReal Estate Investment Trust

(Also § 857.)

REIT noncustomary service income.Guidance is provided under sections 856and 857(b)(7) of the Code when a REITforms a taxable REIT subsidiary (TRS) toprovide noncustomary services to tenantsof the REIT and no service charges areseparately stated from the rents paid bythe tenants to the REIT.

Rev. Rul. 2002–38

ISSUE

If a real estate investment trust (REIT)forms a taxable REIT subsidiary (TRS) toprovide noncustomary services to tenantsof the REIT and no service charges areseparately stated from the rents paid bythe tenants to the REIT, how is theREIT’s income from the services treatedunder §§ 856 and 857(b)(7) of the Inter-nal Revenue Code?

FACTS

Situation 1

Corporation R, which has elected to bea REIT as defined in § 856, owns residen-tial apartment buildings. R forms awholly-owned subsidiary, corporation T,to provide housekeeping services to ten-

ants of R’s apartment buildings. The ser-vices do not qualify as customary servicesunder § 1.856–4(b)(1) of the Income TaxRegulations. R and T jointly elect under§ 856(l) to treat T as a TRS of R.

Employees of T perform all of thehousekeeping services received by R’stenants, including administration andmanagement of the services. T pays allcosts of providing the services, such as itsemployees’ salaries and the costs of theiruniforms, equipment, and supplies. Tocarry out the housekeeping operations, Talso rents space in R’s apartment build-ings in accordance with § 856(d)(8)(A). Tmakes no payments to R other than itsrental payments for that space. Theannual value of the housekeeping servicesprovided at each property exceeds onepercent of the total annual amountreceived by R from the property.

Charges to the tenants for the house-keeping services are not separately statedfrom the rents that the tenants pay to Rfor the use of their apartments. T does notenter into contracts with the tenants forthe performance of the housekeeping ser-vices. R compensates T for providing theservices by paying T an amount that is160 percent of T’s direct cost of providingthe services. T reports the full amount ofR’s payment as gross income on T’s fed-eral income tax return.

Situation 2

The facts are the same as in Situation1 except that R compensates T for provid-ing the services by paying T an amountthat is 125 percent of T’s direct cost ofproviding the services, and that paymentis less than the arm’s length charge under§ 482 for providing the services.

LAW

For taxable years beginning afterDecember 31, 2000, §§ 856 and 857(b)(7)provide special rules for a corporationthat is a TRS within the meaning of§ 856(l). Those rules, which allow a TRSto provide noncustomary services to ten-ants of its REIT, govern the relationshipbetween the REIT and the TRS.

To qualify as a REIT, an entity mustderive at least 95 percent of its grossincome from sources listed in § 856(c)(2)and at least 75 percent of its gross incomefrom sources listed in § 856(c)(3). “Rents

from real property” are among thesources listed in both of those sections.Section 856(d)(1) defines rents from realproperty to include rents from interests inreal property, charges for services cus-tomarily rendered in connection with therental of real property, and rent attribut-able to certain leased personal property.However, § 856(d)(2)(C) excludes“impermissible tenant service income”from the definition of rents from realproperty. Pursuant to § 856(d)(7)(A),impermissible tenant service incomemeans, with respect to any real property,any amount received by a REIT for ser-vices rendered by the REIT to tenants ofthe property. Section 856(d)(7)(C)(i) pro-vides that services rendered through aTRS are not treated as rendered by itsREIT for purposes of § 856(d)(7)(A).Thus, services rendered by a TRS do notgive rise to impermissible tenant serviceincome.

Section 857(b)(7)(A) imposes for eachtaxable year of a REIT a tax equal to 100percent of “redetermined rents.” Section857(b)(7)(B)(i) provides that redeter-mined rents mean rents from real property(as defined in § 856(d)) to the extent theamount of the rents would (but for§ 857(b)(7)(E)) be reduced on allocationunder § 482 to clearly reflect income as aresult of services rendered by a TRS to atenant of its REIT. Section 482 providesthat when two or more organizations,trades, or businesses are owned or con-trolled directly or indirectly by the sameinterests (controlled organizations), theSecretary may allocate gross incomebetween or among those controlled orga-nizations if the Secretary determines thatsuch allocation is necessary to clearlyreflect the income of any of those con-trolled organizations. Pursuant to§ 1.482–1(b)(1), the standard applied indetermining the true taxable income of acontrolled organization is that of an orga-nization dealing at arm’s length with anuncontrolled organization. Section 1.482–2(b)(3) defines an arm’s length charge forservices provided between controlledorganizations, regardless of whether theservices are an integral part of eitherorganization’s business activity (the § 482arm’s length charge). Section 857(b)(7)(E) provides that the imposition of taxunder § 857(b)(7)(A) is in lieu of alloca-tion under § 482.

July 1, 2002 4 2002–26 I.R.B.

Section 857(b)(7)(B)(ii) through (vii)contains exceptions, or safe harbors, fromthe 100 percent tax on redetermined rents.For example, pursuant to § 857(b)(7)(B)(vi), the definition of redetermined rentsdoes not apply to any service rendered bya TRS to a tenant of its REIT if the grossincome of the TRS from the service is atleast 150 percent of the TRS’s direct costin rendering the service. Other safe har-bors in § 857(b)(7)(B) cover customaryservices, services giving rise to de mini-mis amounts, services priced comparablyto those provided by the TRS to unrelatedpersons, certain services with separatelystated charges, and services excepted bythe Secretary.

ANALYSIS

If a REIT forms a TRS to provide non-customary services to the REIT’s tenantsand no service charges are separatelystated from the tenants’ rents, a primaryquestion in determining the treatment ofthe REIT’s income from the services iswhether they are considered to be ren-dered by the REIT, or by the TRS, forpurposes of § 856(d)(7). If rendered bythe TRS and hence described in§ 856(d)(7)(C)(i), the services do not giverise to impermissible tenant serviceincome. All relevant facts and circum-stances must be considered in determin-ing the provider of the services for thispurpose.

In Situations 1 and 2, charges to thetenants for the housekeeping services arenot separately stated from the rents thatthe tenants pay to R for the use of theirapartments. As a result, the amounts ofthe rents reflect the availability and use ofthose services. In other words, R receivesgreater rental payments than it wouldhave received if the services had not beenprovided to its tenants. However, thestructure of the 100 percent tax on rede-termined rents indicates that Congress didnot intend the lack of a separately statedservice charge, by itself, to cause servicesto be treated as rendered by a REIT,rather than its TRS. In Situations 1 and 2,employees of T perform all of the house-keeping services received by R’s tenants,including administration and managementof the services. T pays all costs of provid-ing the services, such as its employees’salaries and the costs of their uniforms,equipment, and supplies. T also rents

space to carry out the housekeepingoperations and makes no payments to Rother than its rental payments for thatspace. For purposes of § 856(d)(7)(C)(i),in those circumstances the services areconsidered to be rendered by T, ratherthan R, even though no service chargesare separately stated from the tenants’rents. Accordingly, the services do notgive rise to impermissible tenant serviceincome and thus do not cause any portionof the rents received by R to fail toqualify as rents from real property under§ 856(d).

As rents from real property, those rentsare subject to being treated as redeter-mined rents under § 857(b)(7)(B)(i). Thatsection provides that redetermined rentsmean rents from real property (as definedin § 856(d)) to the extent the amount ofthe rents would (but for § 857(b)(7)(E))be reduced on allocation under § 482 toclearly reflect income as a result of ser-vices rendered by a TRS to a tenant of itsREIT. Section 482 allows the Secretary toallocate income from a REIT to its TRSto reflect the § 482 arm’s length chargefor the TRS’s services. However, the 100percent tax on redetermined rents is notimposed with respect to servicesdescribed in a safe harbor of § 857(b)(7)(B).

In Situation 1, R compensates T forproviding the housekeeping services bypaying it an amount that is 160 percent ofT’s direct cost of providing the services,and T reports the full amount of R’s pay-ment as gross income on T’s federalincome tax return. Pursuant to the safeharbor of § 857(b)(7)(B)(vi), the defini-tion of redetermined rents does not applyto any service rendered by a TRS to atenant of its REIT if the TRS’s grossincome from the service is at least 150percent of its direct cost in rendering theservice. In Situation 1, that safe harborprotects R from imposition of the 100percent tax on redetermined rents. How-ever, if the amount paid by R to T is lessthan the § 482 arm’s length charge forproviding the services, income is allo-cable from R to T under § 482 to reflectthat charge. Section 857(b)(7)(E) does notpreclude allocation under § 482 ofincome on which the 100 percent tax isnot imposed. Income so allocated from Rto T under § 482 would be deductible byR under § 162 and thus would reduce R’s

taxable income, but not its gross income.Such allocation under § 482 would notcause any portion of the rents received byR to fail to qualify as rents from realproperty under § 856(d).

In Situation 2, R compensates T bypaying it an amount that is 125 percent ofT’s direct cost of providing the services,and that payment is less than the § 482arm’s length charge. In Situation 2, nosafe harbor protects R from imposition ofthe 100 percent tax on redetermined rents.As a result, § 857(b)(7)(A) imposes on Ra tax equal to the amount that would (butfor imposition of that tax) be allocatedunder § 482 from R to T to reflect the§ 482 arm’s length charge for providingthe services. In other words, the tax isequal to the amount by which the § 482arm’s length charge exceeds the paymentfrom R to T. Pursuant to § 857(b)(7)(E),imposition of that tax is in lieu of alloca-tion of the same amount from R to Tunder § 482. Imposition of that tax doesnot cause any portion of the rentsreceived by R to fail to qualify as rentsfrom real property under § 856(d).

HOLDINGS

(1) In Situation 1, the housekeepingservices are considered to be rendered byT, rather than R, for purposes of§ 856(d)(7)(C)(i). Accordingly, the ser-vices do not give rise to impermissibletenant service income and thus do notcause any portion of the rents received byR to fail to qualify as rents from realproperty under § 856(d). The safe harborof § 857(b)(7)(B)(vi) protects R fromimposition of the 100 percent tax on rede-termined rents. However, if the amountpaid by R to T represents less than the§ 482 arm’s length charge for providingthe services, income is allocable from Rto T under § 482. Income so allocatedfrom R to T under § 482 would bedeductible by R under § 162 and thuswould reduce R’s taxable income, but notits gross income. Such allocation under§ 482 would not cause any portion of therents received by R to fail to qualify asrents from real property under § 856(d).

(2) In Situation 2, the housekeepingservices are considered to be rendered byT for purposes of § 856(d)(7)(C)(i).Accordingly, the services do not give riseto impermissible tenant service incomeand thus do not cause any portion of the

2002–26 I.R.B. 5 July 1, 2002

rents received by R to fail to qualify asrents from real property under § 856(d).However, no safe harbor protects R fromimposition of the 100 percent tax on rede-termined rents. Section 857(b)(7)(A)imposes on R a tax equal to the amountby which the § 482 arm’s length chargefor providing the services exceeds thepayment from R to T. Imposition of thattax is in lieu of allocation of that amountfrom R to T under § 482 and does notcause any portion of the rents received byR to fail to qualify as rents from realproperty under § 856(d).

DRAFTING INFORMATION

The principal author of this revenueruling is Jonathan D. Silver of the Officeof Associate Chief Counsel (FinancialInstitutions and Products). For furtherinformation regarding this revenue ruling,contact Mr. Silver at (202) 622–3920 (nota toll-free call).

Section 857.—Taxation ofReal Estate Investment Trustsand Their Beneficiaries

If a REIT forms a taxable REIT subsidiary toprovide noncustomary services to tenants of theREIT and no service charges are separately statedfrom the rents paid by the tenants to the REIT, howis the REIT’s income from the services treated undersection 857(b)(7). See Rev. Rul. 2002–38, page 4.

Section 1502.— Regulations

26 CFR 1.1502–21: Net operating losses.

T.D. 8997

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Parts 1 and 602

Carryback of ConsolidatedNet Operating Losses toSeparate Return Years

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document containsregulations under section 1502 that affectcorporations filing consolidated returns.These regulations permit certain acquir-ing consolidated groups to elect to waiveall or a portion of the pre-acquisition por-tion of the 5-year carryback period undersection 172(b)(1)(H) for certain lossesattributable to certain acquired members.The text of these temporary regulationsalso serves as the text of the proposedregulations set forth in the notice of pro-posed rulemaking (REG–122564–02) onthis subject in this issue of the Bulletin.

DATES: Effective Date: These temporaryregulations are effective May 31, 2002.

Applicability Date: These regulationsapply to consolidated net operating lossesarising in taxable years ending during2001 and 2002.

FOR FURTHER INFORMATION CON-TACT: Marie Milnes-Vasquez of theOffice of Associate Chief Counsel (Cor-porate), (202) 622–7770 (not a toll-freenumber).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

These regulations are being issuedwithout prior notice and public procedurepursuant to the Administrative ProcedureAct (5 U.S.C. 553). For this reason, thecollection of information contained inthese regulations has been reviewed and,pending receipt and evaluation of publiccomments, approved by the Office ofManagement and Budget under controlnumber 1545–1790. Responses to thiscollection of information are required toobtain a benefit.

An agency may not conduct or spon-sor, and a person is not required torespond to, a collection of informationunless it displays a valid control numberassigned by the Office of Managementand Budget.

For further information concerningthis collection of information, and whereto submit comments on the collection ofinformation and the accuracy of the esti-mated burden, and suggestions for reduc-ing this burden, please refer to the pre-amble to the cross-referencing notice of

proposed rulemaking published in theProposed Rules section of the FederalRegister.

Books or records relating to the collec-tion of information must be retained aslong as their contents may become mate-rial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by 26 U.S.C. 6103.

Background

On July 2, 1999, the IRS and Treasurypublished in the Federal Register (64 FR36092 (T.D. 8823, 1999–2 C.B. 34)) finalregulations regarding certain deductionsand losses of members that join a consoli-dated group. These regulations added§ 1.1502–21(b)(3)(ii)(B), which permitsan acquiring consolidated group to electto waive, with respect to all consolidatednet operating losses attributable to certainacquired members, the portion of the car-ryback period for which the corporationwas a member of another group.

Section 172(b)(1) provides, in part,that a net operating loss for any taxableyear must generally be carried back toeach of the 2 taxable years preceding thetaxable year of the loss. Section 172(b)(3)provides that any taxpayer entitled to acarryback period under section 172(b)(1)may elect to relinquish the carrybackperiod with respect to a loss for any tax-able year. An election to relinquish thecarryback period under section 172(b)(3)must be made by the due date (includingextensions) of the taxpayer’s return forthe taxable year of the loss and in themanner prescribed by the Secretary. Nor-mally, this election is irrevocable.

Section 172(b)(1)(H), which wasenacted as part of the Job Creation andWorker Assistance Act of 2002 (the Act),extended the 2-year carryback period to 5years for losses arising in taxable yearsending during 2001 and 2002 (hereafter,2001 and 2002). Section 172(j), whichwas also enacted as part of the Act,allows a taxpayer entitled to the 5-yearcarryback period under sect ion172(b)(1)(H) to elect to relinquish thatcarryback period with respect to a loss forany taxable year. A taxpayer making thiselection generally must apply the 2-yearcarryback period set forth in section172(b)(1), unless the taxpayer also elects

July 1, 2002 6 2002–26 I.R.B.

to relinquish that carryback period undersection 172(b)(3).

As described in Revenue Procedure2002–40 (2002–23 I.R.B. 1096), in orderto give effect to the intent of Congress toallow taxpayers a 5-year carryback periodto the maximum extent possible, the Ser-vice is permitting any taxpayer that previ-ously elected under section 172(b)(3) toforgo the carryback period for losses aris-ing in 2001 or 2002 to revoke such elec-tion in order to take advantage of the5-year carryback period, provided the tax-payer revokes the election no later thanOctober 31, 2002. Revenue Procedure2002–40 also permits a taxpayer that filedan application for a tentative carrybackadjustment or an amended return usingthe 2-year carryback period for a netoperating loss arising in 2001 or 2002 tofile certain forms to claim the 5-year car-ryback period provided under section172(b)(1)(H).

Given the enactment of section172(b)(1)(H) and taxpayers’ ability torevoke prior elections under section172(b)(3) and to make certain other fil-ings in order to take advantage of the5-year carryback period, the IRS andTreasury believe that it is appropriate toafford certain acquiring consolidatedgroups that did not make an electiondescribed in § 1.1502–21(b)(3)(ii)(B)with respect to certain acquired membersan opportunity to waive the portion of theentire carryback period or the portion ofthe extended carryback period for 2001and 2002 losses attributable to theacquired members, for pre-acquisitionyears. In this regard, the regulations inthis Treasury decision add § 1.1502–21T(b)(3)(ii)(C), which sets forth twoelections.

Pursuant to the first election, anacquiring group may waive the portion ofthe 5-year carryback period for 2001 and2002 losses attributable to a memberacquired from another group after June25, 1999, for which the member was amember of another group. While thiselection effectively permits a waiver ofthe entire 5-year carryback period to theextent that it is prior to the acquisitionwith respect to a consolidated net operat-ing loss arising in a particular taxableyear, it is only available where none ofsuch losses have previously been carriedback to a taxable year of a group of

which the acquired member was previ-ously a member.

Pursuant to the second election, anacquiring group may waive the portion ofthe pre-acquisition carryback period for2001 and 2002 losses attributable to amember acquired from another group tothe extent that the Act increased the car-ryback period for such losses. This sec-ond election effectively permits a waiverof the third, fourth, and fifth carrybackyears to the extent that such years areprior to the acquisition and is availableeven where 2001 or 2002 losses havebeen carried back to the first or secondcarryback years of the acquired memberthat are pre-acquisition years. This secondelection, however, is only available withrespect to consolidated net operatinglosses arising in a particular taxable yearwhere none of such losses have been car-ried back to a taxable year of a group ofwhich the acquired member was previ-ously a member that is prior to the secondtaxable year preceding the taxable year ofthe loss.

Unlike the election under § 1.1502–21(b)(3)(ii)(B), the elections provided inthese regulations apply only to losses for2001 and 2002. In addition, the electionsare made on a year-by-basis. That is, oneelection may be made for 2001 losseswhile another election, or no election,may be made for 2002 losses. An electionthat relates to consolidated net operatinglosses attributable to a taxable year end-ing during 2001 must be filed with theacquiring consolidated group’s timelyfiled (including extensions) original oramended return for the taxable year end-ing during 2001, provided that such origi-nal or amended return is filed on orbefore October 31, 2002. An election thatrelates to consolidated net operatinglosses attributable to a taxable year end-ing during 2002 must be filed with theacquiring consolidated group’s timelyfiled (including extensions) original oramended return for the taxable year end-ing during 2001 or 2002, provided thatsuch original or amended return is filedon or before September 15, 2003.

If the acquiring consolidated groupfiles or filed a valid election described in§ 1.1502–21(b)(3)(ii)(B) with respect tothe acquisition of a member, no electionunder § 1.1502–21T(b)(3)(ii)(C) needs tobe (or should be) filed to ensure that 2001

or 2002 losses are not carried back to pre-acquisition years of the acquired member.

Special Analyses

These temporary regulations are neces-sary to provide taxpayers with immediateelective relief from section 172(b)(1)(H),which was enacted as the part of the JobCreation and Worker Assistance Act of2002. These regulations permit certainacquiring consolidated groups to elect towaive the 5-year carryback period withrespect to certain acquired members. Theregulations apply to losses arising in tax-able years ending in 2001 and 2002.Based on these considerations, it is deter-mined that this temporary regulation willprovide taxpayers with the necessaryguidance and authority to ensure equi-table administration of the tax laws.Because of the need for immediate guid-ance, notice and public procedure areimpracticable and contrary to the publicinterest pursuant to 5 USC 553(b)(B) anddelayed effective date is not required pur-suant to 5 USC 553(d)(1) and (3).

Further, it has been determined thatthis Treasury decision is not a significantregulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatoryassessment is not required. Pursuant tosection 7805(f) of the Internal RevenueCode, these regulations will be submittedto the Chief Counsel for Advocacy of theSmall Business Administration for com-ment on their impact on small business.

Drafting Information

The principal author of these tempo-rary regulations is Marie Milnes-Vasquez.However, other personnel from the IRSand Treasury Department participated intheir development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 1 isamended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 is amended by adding an entry innumerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

2002–26 I.R.B. 7 July 1, 2002

Section 1.1502–21T also issued under26 U.S.C. 1502. * * *

Par. 2. Section 1.1502–21 is amendedby adding paragraph (b)(3)(ii)(C) to readas follows:

§ 1.1502–21 Net operating losses.

* * * * *

(b) * * *(3) * * *(ii) * * *(C) [Reserved]. For further guidance,

see § 1.1502–21T(b)(3)(ii)(C).

* * * * *Par. 3. Section 1.1502–21T is added to

read as follows:

§ 1.1502–21T Net operating losses(temporary).

(a) through (b)(3)(ii)(B) [Reserved].For further guidance, see § 1.1502–21(a)through (b)(3)(ii)(B).

(C) Partial waiver of carryback periodfor 2001 and 2002 losses—(1) Applica-tion. The acquiring group may make theelections described in paragraphs(b)(3)(ii)(C)(2) and (3) of this sectionwith respect to an acquired member ormembers only if it did not file a validelection described in § 1.1502–21(b)(3)(ii)(B) with respect to such acquiredmember or members on or before May31, 2002.

(2) Partial waiver of entire pre-acquisition carryback period. If one ormore members of a consolidated groupbecome members of another consolidatedgroup after June 25, 1999, then, withrespect to all consolidated net operatinglosses attributable to the member for thetaxable year ending during either 2001 or2002, or both, the acquiring group maymake an irrevocable election to relinquishthe portion of the carryback period forsuch losses for which the corporation wasa member of another group, provided thatany other corporation joining the acquir-ing group that was affiliated with themember immediately before it joined theacquiring group is also included in thewaiver and that the conditions of thisparagraph are satisfied. The acquiringgroup cannot make the election describedin this paragraph with respect to any con-

solidated net operating losses arising in aparticular taxable year if any carryback isclaimed, as provided in paragraph(b)(3)(ii)(C)(4) of this section, withrespect to any such losses on a return orother filing by a group of which theacquired member was previously a mem-ber and such claim is filed on or beforethe date the election described in thisparagraph is filed. The election must bemade in a separate statement entitled“THIS IS AN ELECTION UNDER SEC-TION 1.1502–21T(b)(3)(ii)(C)(2) TOWAIVE THE PRE-[insert first day of thefirst taxable year for which the member(or members) was a member of theacquir ing group] CARRYBACKPERIOD FOR THE CNOLS ATTRIBUT-ABLE TO THE [insert taxable year oflosses] TAXABLE YEAR(S) OF [insertnames and employer identification num-bers of members].” Such statement mustbe filed as provided in paragraph(b)(3)(ii)(C)(5) of this section.

(3) Partial waiver of pre-acquisitionextended carryback period. If one ormore members of a consolidated groupbecome members of another consolidatedgroup, then, with respect to all consoli-dated net operating losses attributable tothe member for the taxable year endingduring either 2001 or 2002, or both, theacquiring group may make an irrevocableelection to relinquish the portion of thecarryback period for such losses forwhich the corporation was a member ofanother group to the extent that such car-ryback period includes one or more tax-able years that are prior to the taxableyear that is 2 taxable years preceding thetaxable year of the loss, provided that anyother corporation joining the acquiringgroup that was affiliated with the memberimmediately before it joined the acquiringgroup is also included in the waiver andthat the conditions of this paragraph aresatisfied. The acquiring group cannotmake the election described in this para-graph with respect to any consolidated netoperating losses arising in a particulartaxable year if a carryback to one or moretaxable years that are prior to the taxableyear that is 2 taxable years preceding thetaxable year of the loss is claimed, as pro-vided in paragraph (b)(3)(ii)(C)(4) of thissection, with respect to any such losseson a return or other filing by a group of

which the acquired member was previ-ously a member and such claim is filedon or before the date the electiondescribed in this paragraph is filed. Theelection must be made in a separate state-ment entitled “THIS IS AN ELECTIONUNDER SECTION 1.1502–21T(b)(3)(ii)(C)(3) TO WAIVE THE PRE-[insertfirst day of the first taxable year forwhich the member (or members) was amember of the acquir ing group]EXTENDED CARRYBACK PERIODFOR THE CNOLS ATTRIBUTABLE TOTHE [insert taxable year of losses] TAX-ABLE YEAR(S) OF [insert names andemployer identification numbers of mem-bers].” Such statement must be filed asprovided in paragraph (b)(3)(ii)(C)(5) ofthis section.

(4) Claim for a carryback. For pur-poses of paragraphs (b)(3)(ii)(C)(2) and(3) of this section, a carryback is claimedwith respect to a consolidated net operat-ing loss if there is a claim for refund, anamended return, an application for a ten-tative carryback adjustment, or any otherfiling that claims the benefit of the netoperating loss in a taxable year prior tothe taxable year of the loss, whether ornot subsequently revoked in favor of aclaim based on a 5-year carryback period.

(5) Time and manner for filing state-ment. A statement described in paragraph(b)(3)(ii)(C)(2) or (3) of this section thatrelates to consolidated net operatinglosses attributable to a taxable year end-ing during 2001 must be filed with theacquiring consolidated group’s timelyfiled (including extensions) original oramended return for the taxable year end-ing during 2001, provided that such origi-nal or amended return is filed on orbefore October 31, 2002. A statementdescribed in paragraph (b)(3)(ii)(C)(2) or(3) of this section that relates to consoli-dated net operating losses attributable to ataxable year ending during 2002 must befiled with the acquiring consolidatedgroup’s timely filed (including exten-sions) original or amended return for thetaxable year ending during 2001 or 2002,provided that such original or amendedreturn is filed on or before September 15,2003.

(iii) through (h) [Reserved]. For fur-ther guidance, see § 1.1502–21(b)(3)(iii)through (h).

July 1, 2002 8 2002–26 I.R.B.

PART 602—OMB CONTROL NUM-BERS UNDER THE PAPERWORKREDUCTION ACT

Par. 4. The authority citation for part602 continues to read as follows:

Authority: 26 U.S.C. 7805.Par. 5. In § 602.101, paragraph (b) is

amended by adding an entry to the tablein numerical order to read as follows:

§ 602.101 OMB Control numbers.

* * * * *(b) * * *

CFR part or section whereidentified and described

Current OMBcontrol No.

* * * * *

1.1502–21T .............................................................................................................................................................. 1545–1790

* * * * *

David A. Mader,Acting Deputy Commissioner

of Internal Revenue.

Approved May 20, 2002.

Pamela F. Olson,Acting Assistant Secretary

of the Treasury.

(Filed by the Office of the Federal Register on May30, 2002, 8:45 a.m., and published in the issue ofthe Federal Register for May 31, 2002, 67 F.R.38000)

Section 7123.—AppealsDispute ResolutionProcedures

The revenue procedure formally establishes theAppeals Mediation Procedure, and modifies andexpands the availability of mediation for cases thatare already in the Appeals administrative process.See section 7123(b)(1) and Rev. Proc. 2002–44,page 10.

The announcement extends the test of the arbi-tration procedures set forth in Announcement2000–4, 2000–1 C.B. 317, for an additional one-year period. See section 7123(b)(2) and Announce-ment 2002–60, page 28.

2002–26 I.R.B. 9 July 1, 2002

Part III. Administrative, Procedural, and Miscellaneous26 CFR 601.106: Appeals functions.(Also §§ 601.202, 601.203; and Part I,§ 7123(b)(1).)

Rev. Proc. 2002–44

CONTENTS

SECTION 1. PURPOSE

SECTION 2. BACKGROUND

SECTION 3. SIGNIFICANT CHANGES

SECTION 4. SCOPE OF MEDIATION

.01 In general.

.02 Applicability.

.03 Inapplicability.

SECTION 5. MEDIATION PROCESS

.01 Mediation is optional.

.02 Filing requirements.(1) Where to file.(2) Required information.

.03 Review of mediation request.(1) Request approved.(2) Request denied.

.04 Agreement to mediate.

.05 Participants.

.06 Selection of mediator and ex-penses.

.07 Appeals personnel as mediatorsand conflict statement.

.08 Criteria for selection of non-Internal Revenue Service co-mediator.

.09 Discussion summaries.

.10 Confidentiality.

.11 Ex Parte Contacts Prohibited

.12 Section 7214(a)(8) disclosure.

.13 Disqualification of the non-Internal Revenue Service co-mediator.

.14 Withdrawal.

.15 Mediator’s report.

.16 Appeals procedures apply.

.17 Use as precedent.

SECTION 6. EFFECTIVE DATE

SECTION 7. EFFECT ON OTHERDOCUMENTS

SECTION 1. PURPOSE

On January 15, 2002, Appeals com-pleted an additional one-year test of itsmediation procedure. See Announcement2001–9, 2001–1 C.B. 357. This revenueprocedure formally establishes the

Appeals mediation procedure; and modi-fies and expands the availability ofmediation for cases that are already in theAppeals administrative process.

This revenue procedure supersedesAnnouncement 98–99, 1998–2 C.B. 650,and Announcement 2001–9.

SECTION 2. BACKGROUND

The mission of Appeals is to resolvetax controversies, without litigation, on abasis which is fair and impartial to boththe Government and the taxpayer. Media-tion is an extension of the Appeals pro-cess and will enhance voluntary compli-ance. Mediation is a nonbinding processthat uses the services of a mediator, as aneutral third party, to help Appeals andthe taxpayer reach their own negotiatedsettlement. (References herein to “media-tor” include any non-Internal RevenueService co-mediator, as appropriate (seesections 5.06 and 5.08 of this revenueprocedure). To accomplish this goal, themediator will act as a facilitator, assist indefining the issues, and promote settle-ment negotiations between Appeals andthe taxpayer. The mediator will not havesettlement authority in the mediation pro-cess and will not render a decisionregarding any issue in dispute. Themediator should inform and discuss withAppeals and the taxpayer the rules andprocedures concerning the mediation pro-cess.

Section 7123(b)(1) of the Internal Rev-enue Code, as enacted by § 3465 of theInternal Revenue Service Restructuringand Reform Act of 1998, Pub. L. No.105–206, 112 Stat. 685, provides forexpansion of the Appeals mediation pro-gram. The Service previously allowedtaxpayers to request mediation for factualissues involving an adjustment of $1 mil-lion or more that were already in theAppeals administrative process. SeeAnnouncements 98–99 and 2001–9.

SECTION 3. SIGNIFICANT CHANGES

The mediation procedure has beenmodified, and expanded to allow for addi-tional cases in Appeals to be eligible formediation. Significant changes toAnnouncements 98–99 and 2001–9 madeby this revenue procedure include:

.01 Mediation is no longer limited toissues involving an adjustment of $1 mil-lion or more; it is now available for anyqualifying issues, as described in this rev-enue procedure, that are already in theAppeals administrative process;

.02 Section 4.02(1) provides that legalissues are now eligible for mediation;

.03 Section 4.02(3) provides thatIndustry Specialization Program (ISP)issues and Appeals Coordinated Issues(ACI) are now eligible for mediation;

.04 Section 4.02(5) provides thatmediation is now available for an issuefor which the taxpayer intends to seekcompetent authority assistance, provideda request for competent authority assis-tance has not as yet been filed;

.05 Section 4.02(6) provides thatmediation is now available after unsuc-cessful attempts to enter into a closingagreement under § 7121;

.06 Section 4.03(2) provides that Col-lection cases are excluded from media-tion;

.07 Section 4.03(3) provides thatissues for which mediation would not beconsistent with sound tax administrationare excluded from mediation;

.08 Section 4.03(4) provides that frivo-lous issues are excluded from mediation;

.09 Section 4.03(5) provides that caseswhere the taxpayer did not act in goodfaith during settlement negotiations areexcluded from mediation;

.10 Section 5.02(2) includes new filingrequirements;

.11 Section 5.04 includes express time-lines to complete the agreement to medi-ate and proceed to mediation. A taxpay-er’s inabil i ty to adhere to thesetimeframes, without reasonable cause,may result in Appeals’ withdrawal fromthe mediation process;

.12 Section 5.06 requires the use ofAppeals personnel who are trainedmediators. Headquarters Appeals will paythe expenses associated with Appealsmediators. Taxpayers may also elect touse a non-Internal Revenue Servicemediator, at taxpayers’ expense;

.13 Section 5.11 provides that therewill be no ex parte contacts with themediator outside the mediation session,except as provided by that section;

July 1, 2002 10 2002–26 I.R.B.

.14 Section 5.16 provides that if thetaxpayer and Appeals do not reach anagreement on an issue being mediated,they may then request arbitration for theissue provided the mediation issue meetsthe requirements for arbitration and thetaxpayer acted in good faith during themediation process.

SECTION 4. SCOPE OF MEDIATION

.01 In general. The mediation proce-dure will attempt to resolve issues incases that qualify under this revenue pro-cedure while they are in the jurisdictionof Appeals. This procedure may be usedonly after Appeals settlement discussionsare unsuccessful, and, generally, when allother issues are resolved but for theissue(s) for which mediation is beingrequested.

.02 Applicability. Mediation is avail-able for:

(1) Legal issues;(2) Factual issues;(3) An Industry Specialization Pro-

gram (ISP) issue or an Appeals Coordi-nated Issue (ACI). [ISP issues are listedin Exhibit 8.7.1–1, and ACI issues arelisted in section 8.7.1–3, of the InternalRevenue Manual.] However, an ISP orACI issue will not be eligible for media-tion when the taxpayer has declined theopportunity to discuss the ISP or ACIissue with the Appeals ISP or ACI coordi-nator during the course of the Appealssettlement discussions;

(4) An early referral issue when anagreement is not reached, provided theearly referral issue meets the require-ments for mediation (see section 2.16 ofRev. Proc. 99–28, 1999–2 C.B. 109, orany subsequent revenue procedure);

(5) Mediation is now available foran issue for which the taxpayer intends toseek competent authority assistance, pro-vided a request for competent authorityassistance has not as yet been filed. Insuch a case, the taxpayer may not requestcompetent authority assistance until themediation process is completed. How-ever, competent authority assistance maybe requested while mediation is pendingif such request is necessary to keep opena statute of limitations in the treaty coun-try. In such a case, the U.S. competentauthority will suspend action on the caseuntil mediation is competed. Mediation isnot available for an issue for which the

taxpayer has requested competent author-ity assistance or the simultaneousAppeals/Competent Authority proceduredescribed in section 8 of Rev. Proc.96–13, 1996–1 C.B. 616, or any subse-quent revenue procedure. Taxpayers arecautioned that if they enter into asettlement with Appeals (including anAppeals settlement through the media-tion process), and then request compe-tent authority assistance, the U.S. com-petent authority will endeavor only toobtain a correlative adjustment withthe treaty country and will not takeany actions that would otherwiseamend the settlement. See section 7.05of Rev. Proc. 96–13; and

(6) Unsuccessful attempts to enterinto a closing agreement under § 7121.

.03 Inapplicability. Mediation will notbe available for:

(1) An issue designated for litiga-tion or docketed in any court. [For theChief Counsel mediation program involv-ing issues in docketed cases, see ChiefCounsel Directives Manual (CCDM)(35)3(20)0];

(2) Collection cases;(3) Issues for which mediation

would not be consistent with sound taxadministration, e.g. issues governed byclosing agreements, by res judicata, orcontrolling Supreme Court precedent;

(4) Frivolous issues, such as, butnot limited to, those identified in Rev.Proc. 2001–41, 2001–33 I.R.B.173; and

(5) Cases where the taxpayer didnot act in good faith during settlementnegotiations, e.g., failure to respond todocument requests, failure to respondtimely to offers to settle, failure toaddress arguments and precedents raisedby Appeals.

SECTION 5. MEDIATION PROCESS

.01 Mediation is optional. A taxpayerand an Appeals Team Case Leader orAppeals Officer may request mediationafter consultation with each other.

.02 Filing requirements.(1) Where to file. The taxpayer

seeks approval for mediation by sending awritten request to the appropriate AppealsTeam Manager. The taxpayer should alsosend a copy of the written request to theappropriate Appeals Area Director and tothe Chief Appeals, 1099 14th Street, NW,Suite 4200 — East, Washington, DC

20005, Attn: Appeals LBSP Operations.(See Exhibit 1 of this revenue procedurefor a listing of the addresses for eachAppeals Area Director.)

(2) Required information. Themediation request should:

(a) Provide the taxpayer’sname, TIN, address and the name, title,address and telephone number of a personto contact;

(b) Provide the Team CaseLeader’s or Appeals Officer’s name;

(c) Identify the taxable period(s)involved;

(d) Describe the issue for whichmediation is being requested, includingthe dollar amount of the adjustment indispute; and

(e) Contain a representation thatthe issue is not an excluded issue listed inthe “Scope of Mediation” section above.

.03 Review of Mediation Request. Gen-erally, the Appeals Team Manager willrespond to the taxpayer and the TeamCase Leader or Appeals Officer withintwo weeks after the Appeals Team Man-ager receives the taxpayer’s request formediation.

(1) Request approved. If Appealsapproves the mediation request, theAppeals Team Manager will inform thetaxpayer and the Team Case Leader orAppeals Officer, and schedule a confer-ence or conference call that may includea representative from Appeals LBSPOperations, Headquarters Appeals — todiscuss the mediation process.

(2) Request denied. If Appealsdenies the mediation request, the AppealsTeam Manager will promptly inform thetaxpayer and the Team Case Leader orAppeals Officer. Although no formalappeal procedure exists for the denial of amediation request, a taxpayer may requesta conference with the Appeals TeamManager to discuss the denial. The denialof a mediation request is not subject tojudicial review.

.04 Agreement to mediate. The tax-payer and Appeals will enter into a writ-ten agreement to mediate. See Exhibit 2of this revenue procedure for a modelagreement to mediate. This agreementwill be negotiated at an administrativeconference or conference call — that mayinclude a representative from Appeals

2002–26 I.R.B. 11 July 1, 2002

LBSP Operations, Headquarters Appeals.The agreement to mediate: (a) should beas concise as possible, (b) will specify theissue(s) that the parties have agreed tomediate, and (c) should identify the loca-tion and the proposed date of the media-tion session.

The Appeals Team Manager, in consul-tation with the Team Case Leader orAppeals Officer, will sign the agreementto mediate on behalf of Appeals.

Generally, it is expected that the par-ties will complete the agreement to medi-ate within three weeks after being notifiedthat Appeals approved the mediationrequest and proceed to mediation within60 days after signing the agreement tomediate. A taxpayer’s inability to adhereto these timeframes, without reasonablecause, may result in Appeals’ withdrawalfrom the mediation process.

.05 Participants. The parties to themediation process will be the taxpayerand Appeals. Absent an agreement to thecontrary, each party must have at leastone participant attending the mediationsession with decision-making authority.The mediation agreement will set forththe procedures by which the partiesinform the other party and the mediator ofthe participants in the mediation and willset forth any limitation on the number,identity or participation by such partici-pants. In general, the parties are encour-aged to include, in addition to therequired decision-makers, those personswith information and expertise that willbe useful to the decision-makers and themediator. In order to minimize the possi-bility of a last-minute disqualification ofthe mediator, each party must notify themediator and the other party no later thantwo weeks before the mediation, regard-ing the participants on their mediationteam. See Exhibit 3 of this revenue pro-cedure for a model participants list.

.06 Selection of mediator andexpenses. The taxpayer and the AppealsTeam Manager will select the mediator. Arepresentative from Appeals LBSP Opera-tions, Headquarters Appeals may partici-pate in an administrative conference orconference call to discuss the selection ofthe mediator by the parties. A mediatorshall have no official, financial, or per-sonal conflict of interest with respect tothe parties, unless such interest is fullydisclosed in writing to the taxpayer and

the Appeals Team Manager, and theyagree that the mediator may serve. See 5U.S.C. § 573.

This mediation procedure requires theuse of an Appeals employee who is atrained mediator. Headquarters Appealswill pay the expenses associated with theAppeals mediator. The taxpayer may alsoelect to use a non-Internal Revenue Ser-vice co-mediator, at the taxpayer’sexpense.

.07 Appeals personnel as mediatorsand conflict statement. The taxpayer andthe Appeals Team Manager will select anAppeals mediator from a list of eligibleindividuals who, generally, will be fromthe same Appeals office or geographicarea, but not the same group, where thecase is assigned.

Due to the inherent conflict that resultsbecause the Appeals mediator is anemployee of the IRS, the Appeals media-tor will provide to the taxpayer a state-ment confirming his/her proposed serviceas a mediator, that he/she is a currentemployee of the IRS, that a conflictresults from his/her continued status as anIRS employee, and that this conflict willnot interfere in the mediator’s ability toimpartially facilitate the case. The writtenagreement to mediate will include thisstatement.

.08 Criteria for selection of non-Internal Revenue Service co-mediator. Ifthe taxpayer elects to use a non-InternalRevenue Service co-mediator, the tax-payer and the Appeals Team Managershould make the selection from any localor national organization that provides aroster of neutrals. Criteria for selecting anon-Internal Revenue Service co-medi-ator may include: completion of media-tion training, previous mediation experi-ence, a substantive knowledge of tax law,or knowledge of industry practices.

.09 Discussion summaries. Each partywill prepare a discussion summary of theissues (including the party’s arguments infavor of the party’s position) for consid-eration by the mediator. The discussionsummaries should be submitted to themediator and the other party no later thantwo weeks before the mediation session isscheduled to begin.

.10 Confidentiality. The mediation pro-cess is confidential. Therefore, all infor-mation concerning any dispute resolutioncommunication is confidential and may

not be disclosed by any party, participant,observer or mediator except as providedby statute, such as in § 6103 of the Inter-nal Revenue Code and 5 U.S.C § 574. Adispute resolution communicationincludes all oral or written communica-tions prepared for the purposes of a dis-pute resolution proceeding. See 5 U.S.C.§ 571(5).

In executing the mediation agreement,the taxpayer consents under § 6103(c) tothe disclosure by the IRS of the taxpay-er’s returns and return information inci-dent to the mediation to any participant orobserver identified in the initial lists ofparticipants and observers and to any sub-sequent participants and observers identi-fied in writing by the parties. (See section5.05 of this revenue procedure.) If themediation agreement is executed by aperson pursuant to a power of attorneyexecuted by the taxpayer, that power ofattorney must clearly express the taxpay-er’s grant of authority to consent to dis-close the taxpayer’s returns and returninformation by the IRS to third parties,and a copy of that power of attorney mustbe attached to the agreement.

IRS and Treasury employees who par-ticipate in or observe the mediation pro-cess in any way, and any person undercontract to the IRS pursuant to § 6103(n)that the IRS invites to participate orobserve, will be subject to the confidenti-ality and disclosure provisions of theInternal Revenue Code, including§§ 6103, 7213, and 7431.

.11 Ex Parte Contacts Prohibited. Toensure that one party is not in a positionto exert undue influence on the mediator,there will be no ex parte contacts with themediator outside the mediation session.

The prohibition against ex parte com-munications is intended to apply only tounsolicited contacts from one of the par-ties outside the mediation session. Itensures the mediator does not receiveinformation or evidence the other party isunaware of and is unable to respond to orrebut.

This provision does not prevent themediator from contacting a party, or aparty from answering a question orrequest posed by the mediator.

.12 Section 7214(a)(8) disclosure.Under § 7214(a)(8), IRS employees mustreport information concerning violations

July 1, 2002 12 2002–26 I.R.B.

of any revenue law to the Secretary. Theagreement to mediate will state thisrequirement and the parties will acknowl-edge this duty.

.13 Disqualification of the non-Internal Revenue Service co-mediator.The non-Internal Revenue Serviceco-mediator will be disqualified from rep-resenting the taxpayer in any pending orfuture action that involves the transac-tions or issues that are the particular sub-ject matter of the mediation. This dis-qualification extends to representing anyother parties involved in the transactionsor issues that are the particular subjectmatter of the mediation. Moreover, themediator’s firm will be disqualified fromrepresenting the taxpayer or any otherparties involved in the transactions orissues that are the particular subject mat-ter of the mediation in any action thatinvolves the transactions or issues that arethe particular subject matter of the media-tion.

The mediator’s firm will not be dis-qualified from representing the taxpayeror any other parties in any future actionthat involves the same transactions orissues that are the particular subject mat-ter of the mediation, provided that (i) themediator disclosed the potential of suchrepresentation to the parties to the media-tion conducted by the mediator prior tothe parties’ acceptance of the mediator,(ii) such action relates to a taxable yearthat is different from the taxable year thatis the subject matter of the mediation, (iii)the firm’s internal controls preclude themediator from any form of participationin the matter, and (iv) the firm does notapportion to the mediator any part of thefee therefrom. In the event the mediatorhas been selected prior to the mediatorlearning of the identity of one or more ofthe parties involved in the mediation,requirement (i) will be deemed satisfied if

the mediator promptly notifies the partiesof the potential representation.

While the mediator may not receive adirect allocation of the fee from the tax-payer (or other party) in the matter forwhich the internal controls are in effect,the mediator will not be prohibited fromreceiving a salary, partnership share, orcorporate distribution established by priorindependent agreement. The mediator andhis or her firm are not disqualified fromrepresenting the taxpayer or any otherparties involved in the mediation in anymatters unrelated to the transactions orissues that are the particular subject mat-ter of the mediation.

This paragraph 12 only applies to rep-resentations on matters before the IRS.

The provisions of this paragraph 12are in addition to any other applicabledisqualification provisions including, forexample, the rules of the United StatesTax Court and applicable canons of eth-ics.

.14 Withdrawal. Either party maywithdraw from the process anytimebefore reaching a settlement of the issuesbeing mediated by notifying the otherparty and the mediator in writing.

.15 Mediator’s report. At the conclu-sion of the mediation process, the media-tor will prepare a brief written report andsubmit a copy to each party. See Exhibit4 of this revenue procedure for a modelmediator’s report.

.16 Appeals procedures apply. If theparties reach an agreement on all or someissues through the mediation process,Appeals will use established procedures,including preparation of a Form 906,Closing Agreement on Final Determina-tion Covering Specific Matters. See State-ment of Procedural Rules, 26 C.F.R.§ 601.106. Delegation Order 236 (Rev. 3)may apply to settlements resulting fromthe mediation process.

If the parties do not reach an agree-ment on an issue being mediated, theymay request arbitration for the issue, pro-vided the mediation issue meets therequirements for arbi t ra t ion. SeeAnnouncement 2002–60, 2002–26 I.R.B.28, or any subsequent procedure. If arbi-tration is not requested or approved,Appeals will not reconsider the mediatedissue(s), and a statutory notice of defi-ciency will be issued with respect to allunagreed issues; or for non-deficiencycases, they will be processed using estab-lished closing procedures.

.17 Use as precedent. A settlementreached by the parties through mediationwill not be binding on the parties (or beotherwise controlling) for taxable yearsnot covered by the agreement. Except asprovided in the agreement, any party maynot use such settlement as precedent.

SECTION 6. EFFECTIVE DATE

This procedure is effective July 1,2002, the date this revenue procedure ispublished in the Internal Revenue Bulle-tin.

SECTION 7. EFFECT ON OTHERDOCUMENTS

Announcement 98–99 and Announce-ment 2001–9 are superseded.

DRAFTING INFORMATION

The principal author of this revenueprocedure is Sandy Cohen, of the officeof Appeals Large Business and SpecialtyPrograms — Operations, HeadquartersAppeals. For further information regard-ing this revenue procedure, contact Mr.Cohen at (202) 694–1818 (not a toll-freecall).

2002–26 I.R.B. 13 July 1, 2002

Exhibit 1:

Addresses for Appeals Area Directors

Appeals Large Business and Specialty Programs (LBSP) Operating Unit

Director, Appeals LBSP Area 1290 BroadwayNew York, NY 10007

Director, Appeals LBSP Area 41650 Mission StreetSan Francisco, CA 94103

Director, Appeals LBSP Area 28701 South Gessner RoadHouston, TX 77074

Director, Appeals LBSP SpecialtyPrograms1222 Spruce StreetSt. Louis, MO 63103

Director, Appeals LBSP Area 3200 W. Adams StreetChicago, IL 60606

General Appeals Operating Unit

Director, General Appeals Area 1290 BroadwayNew York, NY 10007

Director, General Appeals Area 54050 Alpha RoadDallas, TX 75244

Director, General Appeals Area 231 Hopkins PlazaBaltimore, MD 21201

Director, General Appeals Area 6160 Spear StreetSan Francisco, CA 94105

Director, General Appeals Area 3575 North Pennsylvania StreetIndianapolis, IN 46204

Director, General Appeals Area 724000 Avila RoadLaguna Nigel, CA 92677

Director, General Appeals Area 4810 BroadwayNashville, TN 37203

July 1, 2002 14 2002–26 I.R.B.

Exhibit 2:

Model Agreement to Mediate

1. The Mediation Process.

The mediation will be an extension of the Appeals process to help [NAME OF TAXPAYER] and Internal Revenue Service(IRS)—Appeals (the PARTIES) reach their own negotiated settlement of the issues to be mediated. See (2) below for the partici-pants in the mediation process. To accomplish this goal, the mediator will act as a facilitator, assist in defining the issues and pro-mote settlement negotiations between the PARTIES. The mediator will inform and discuss with the PARTIES the rules and proce-dures pertaining to the mediation process. The mediator will not have settlement authority and will not render a decision regardingany issue in dispute. The PARTIES will continue to have settlement authority for all issues considered under the mediation process.

2. Nature of Process, Participants, Withdrawal.

(a) The mediation process is optional.

(b) Each PARTY must have at least one participant attending the mediation session with decision-making authority. No laterthan two weeks before the mediation, each PARTY will submit to the other PARTY and the mediator a list of the partici-pants who will attend the mediation session on behalf of or at the request of the PARTY, including a designation of theperson with decision-making authority who will represent the PARTY at the mediation session. Each PARTY’s list of par-ticipants will contain the participant’s name, the participant’s position with the PARTY or other affiliation (e.g., a mem-ber of the XYZ law firm, counsel to the taxpayer), and the participant’s address, [telephone number and fax number]. Allparticipants attending the mediation on behalf of or at the request of a PARTY will be listed on the PARTY’s list of par-ticipants, including witnesses, consultants, and attorneys.

[Insert limitations on the number or types of participants, if any.]

(c) Either PARTY may withdraw from the process at any time prior to reaching a settlement of the issues to be mediated bynotifying the other PARTY and the mediator in writing.

3. Selection of Mediator and Costs.

(a) [NAME OF TAXPAYER] and [NAME], Appeals Team Manager will select an Appeals mediator. If the taxpayer electsto use a non-IRS co-mediator, the taxpayer and the Appeals Team Manager should make the selection from any local ornational organization that provides a roster of neutrals. Criteria for selecting a non-IRS co-mediator may include: comple-tion of mediation training, previous mediation experience, a substantive knowledge of tax law, or knowledge of industrypractices. A potential mediator must disclose any official, financial, or personal conflict of interest with respect to thePARTIES. Any potential mediator with any such conflict of interest may not serve as a mediator, unless such interest isfully disclosed in writing to the PARTIES and they agree that the mediator may serve. See 5 U.S.C. § 573.

(b) Headquarters Appeals will pay the costs associated with the Appeals mediator. The taxpayer may elect to use a non-Internal Revenue Service co-mediator, at the taxpayer’s expense.

(c) Due to the inherent conflict that results because the Appeals mediator is an employee of the IRS, the Appeals mediatorwill provide to the taxpayer a statement confirming his/her proposed service as a mediator, that he/she is a currentemployee of the IRS, and that a conflict results from his/her continued status as an IRS employee.

4. Issues to be Mediated.

The mediation session will encompass the following issues in the IRS audit of [NAME OF TAXPAYER]’s federal tax returnsfor tax year(s) :

(a) Issue #1(b) Issue #2

5. Submission of Materials.

Each PARTY will present to the mediator a separate written summation not to exceed 20 pages (exclusive of exhibits consistingof pre-existing documents and reports) regarding each issue. The mediator will have the right to ask either PARTY for additionalinformation before the mediation session if deemed necessary for a full understanding of the issues to be mediated. Each PARTYwill simultaneously submit a copy of any submission that it gives to the mediator to the other party.

2002–26 I.R.B. 15 July 1, 2002

6. Place of Mediation.

The PARTIES should attempt to select a site at or near the mediator’s office, [NAME OF TAXPAYER]’s office, or an Appealsoffice.

7. Proposed Schedule.

Subject to the approval of the mediator, the mediation session will be conducted according to the following schedule:

Submission ofMaterials to Mediator: A DATE, WHICH IS NOT LATER THAN TWO WEEKS

BEFORE THE DATE OF MEDIATION SESSION

Mediation Session: By MONTH DAY, YEAR and TIME

8. Confidentiality.

IRS and Treasury employees who participate in or observe the mediation process in any way, and any person under contract tothe IRS pursuant to § 6103(n) of the Internal Revenue Code, including the mediator, that the IRS invites to participate or observe,will be subject to the confidentiality and disclosure provisions of the Internal Revenue Code, including §§ 6103, 7213, and 7431.See also 5 U.S.C § 574.

[NAME OF TAXPAYER] consents, under § 6103(c), to the disclosure by the IRS of the taxpayer’s returns and return informa-tion incident to the mediation to any participant or observer identified in the list of participants. If the mediation agreement isexecuted by a person pursuant to a power of attorney executed by [NAME OF TAXPAYER], that power of attorney must clearlyexpress the grant of authority by [NAME OF TAXPAYER] to consent to disclose the returns and return information of [NAMEOF TAXPAYER] by the IRS to third parties. A copy of that power of attorney must be attached to this agreement.

9. Ex Parte Contacts Prohibited.

There will be no ex parte contacts from a party to the mediator outside the mediation session. This provision is not intended toprevent the mediator from contacting a party, or a party from responding to the mediator’s request for information.

10. Section 7214(a)(8) Disclosure.

The PARTIES to this agreement acknowledge that IRS employees involved in this mediation are bound by the § 7214(a)(8) dis-closure requirements concerning violations of any revenue law.

11. No Record.