bulletin no. 2005-2 january 10, 2005 highlights of this ...in rev. rul. 90–60, 1990–2 c.b. 3,...

Bulletin No. 2005-2January 10, 2005

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. 2005–1, page 258.Low-income housing credit; satisfactory bond; “bondfactor” amounts for the period January through March2005. This ruling announces the monthly bond factor amountsto be used by taxpayers who dispose of qualified low-incomebuildings or interests therein during the period January throughMarch 2005.

Rev. Rul. 2005–2, page 259.Federal rates; adjusted federal rates; adjusted federallong-term rate and the long-term exempt rate. For pur-poses of sections 382, 642, 1274, 1288, and other sectionsof the Code, tables set forth the rates for January 2005.

Notice 2005–1, page 274.This notice provides general and transitional guidance relatingto new section 409A of the Code, added as part of the Amer-ican Jobs Creation Act of 2004. Section 409A provides cer-tain rules relating to nonqualified deferred compensation plans,which generally are effective as of January 1, 2005. This no-tice provides general guidance with respect to what arrange-ments are covered by section 409A. In addition, this noticeprovides transitional guidance generally covering the calendaryear 2005.

EMPLOYEE PLANS

Notice 2005–1, page 274.This notice provides general and transitional guidance relatingto new section 409A of the Code, added as part of the Amer-ican Jobs Creation Act of 2004. Section 409A provides cer-

tain rules relating to nonqualified deferred compensation plans,which generally are effective as of January 1, 2005. This no-tice provides general guidance with respect to what arrange-ments are covered by section 409A. In addition, this noticeprovides transitional guidance generally covering the calendaryear 2005.

EMPLOYMENT TAX

T.D. 9167, page 261.Final regulations under sections 3121(b)(10) and3306(c)(10)(B) of the Code provide guidance on the studentservices exception from Federal Insurance ContributionsAct (FICA) and Federal Unemployment Tax Act (FUTA) taxes.The regulations provide guidance on whether an employeris considered a “school, college, or university,” and whetheran employee is considered a “student” for purposes of thestudent exceptions from FICA and FUTA taxes. Schools,colleges, and universities are affected by this regulation.

Rev. Proc. 2005–11, page 307.This procedure provides a safe harbor that certain institutionsof higher education and certain affiliated organizations can usein applying the exception for services performed by studentsprovided under section 3121(b)(10) of the Code. Rev. Proc.98–16 modified and superseded.

(Continued on the next page)

Announcements of Disbarments and Suspensions begin on page 319.Finding Lists begin on page ii.

EXCISE TAX

Notice 2005–4, page 289.This notice provides guidance on certain excise tax provisionsin section 4081 of the Code that were added or affected bythe American Jobs Creation Act of 2004. These provisions re-late to alcohol and biodiesel fuels, the definition of off-highwayvehicles, aviation-grade kerosene, claims related to diesel fuelused in certain buses, the display of registration on certainvessels, claims related to sales of gasoline to state and lo-cal governments and nonprofit educational organizations, twoparty exchanges of taxable fuel, and the classification of trans-mix and certain diesel fuel blendstocks as diesel fuel. Also,this notice requests comments from the public on these provi-sions, as well as other excise tax provisions, that were addedor affected by the Act. Notices 88–30, 88–132, 89–29, and89–38 obsoleted.

TAX CONVENTIONS

Announcement 2005–3, page 270.U.S. and Swiss pension plans for tax treaty benefits. Acopy of the news release issued by the Director, International(U.S. Competent Authority), on December 10, 2004, is setforth.

ADMINISTRATIVE

Rev. Proc. 2005–9, page 303.This document provides administrative procedures underwhich a taxpayer may obtain automatic consent to changeto a method of accounting provided in sections 1.263(a)–4,1.263(a)–5, and 1.167(a)–3(b) of the regulations for thetaxpayer’s second taxable year ending on or after December31, 2003. Rev. Proc. 2002–9 modified and amplified.

Rev. Proc. 2005–12, page 311.This procedure permits a taxpayer under the jurisdiction ofthe Large and Mid-Size Business Division (LMSB) to enter intoan LMSB Pre-Filing Agreement (PFA), an agreement that deter-mines certain issues before the taxpayer files any return relat-ing to those issues. This procedure expands the scope of thecurrent PFA program. Rev. Proc. 2001–22 superseded.

Announcement 2005–4, page 319.This document corrects a clerical error in Rev. Proc. 2004–35,2004–23 I.R.B. 1029. Specifically, the document changes theestimated total annual reporting burden under the PaperworkReduction Act to 200 hours. Rev. Proc. 2004–35 corrected.

January 10, 2005 2005–2 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 compiled semiannually into Cumulative Bulletins,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, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

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,Tax Conventions and Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.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 Sec-retary (Enforcement).

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

The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.

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.

2005–2 I.R.B. January 10, 2005

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 42.—Low-IncomeHousing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof January 2005. See Rev. Rul. 2005-2, page 259.

Low-income housing credit; satis-factory bond; “bond factor” amountsfor the period January through March2005. This ruling announces the monthlybond factor amounts to be used by taxpay-ers who dispose of qualified low-incomebuildings or interests therein during theperiod January through March 2005.

Rev. Rul. 2005–1

In Rev. Rul. 90–60, 1990–2 C.B.3, the Internal Revenue Service providedguidance to taxpayers concerning the gen-eral methodology used by the TreasuryDepartment in computing the bond factoramounts used in calculating the amount ofbond considered satisfactory by the Secre-tary under § 42(j)(6) of the Internal Rev-enue Code. It further announced that theSecretary would publish in the InternalRevenue Bulletin a table of bond factoramounts for dispositions occurring duringeach calendar month.

Rev. Proc. 99–11, 1999–1 C.B. 275,established a collateral program as an al-

ternative to providing a surety bond fortaxpayers to avoid or defer recapture ofthe low-income housing tax credits under§ 42(j)(6). Under this program, taxpayersmay establish a Treasury Direct Accountand pledge certain United States Treasurysecurities to the Internal Revenue Serviceas security.

This revenue ruling provides in Table1 the bond factor amounts for calculatingthe amount of bond considered satisfactoryunder § 42(j)(6) or the amount of UnitedStates Treasury securities to pledge in aTreasury Direct Account under Rev. Proc.99–11 for dispositions of qualified low-in-come buildings or interests therein duringthe period January through March 2005.

Table 1Rev. Rul. 2005–1

Monthly Bond Factor Amounts for Dispositions ExpressedAs a Percentage of Total Credits

Calendar Year Building Placed in Serviceor, if Section 42(f)(1) Election Was Made,

the Succeeding Calendar Year

Month ofDisposition

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Jan ’05 14.99 27.92 39.03 48.55 56.77 56.71 56.86 57.15 57.52 58.00 58.83Feb ’05 14.99 27.92 39.03 48.55 56.77 56.59 56.74 57.04 57.41 57.89 58.72Mar ’05 14.99 27.92 39.03 48.55 56.77 56.47 56.63 56.93 57.30 57.79 58.61

Table 1 (cont’d)Rev. Rul. 2005–1

Monthly Bond Factor Amounts for Dispositions ExpressedAs a Percentage of Total Credits

Calendar Year Building Placed in Serviceor, if Section 42(f)(1) Election Was Made,

the Succeeding Calendar Year

Month ofDisposition

2002 2003 2004 2005

Jan ’05 59.92 61.22 62.49 62.68Feb ’05 59.80 61.09 62.33 62.68Mar ’05 59.69 60.97 62.19 62.68

2005–2 I.R.B. 258 January 10, 2005

For a list of bond factor amounts ap-plicable to dispositions occurring duringother calendar years, see: Rev. Rul.98–3, 1998–1 C.B. 248; Rev. Rul.2001–2, 2001–1 C.B. 255; Rev. Rul.2001–53, 2001–2 C.B. 488; Rev. Rul.2002–72, 2002–2 C.B. 759; Rev. Rul.2003–117, 2003–2 C.B. 1051; and Rev.Rul. 2004–100, 2004–44 I.R.B. 718.

DRAFTING INFORMATION

The principal author of this revenueruling is David McDonnell of the Officeof Associate Chief Counsel (Passthroughsand Special Industries). For further in-formation regarding this revenue ruling,contact Mr. McDonnell at (202) 622–3040(not a toll-free call).

Section 280G.—GoldenParachute Payments

Federal short-term, mid-term, and long-term ratesare set forth for the month of January 2005. See Rev.Rul. 2005-2, page 259.

Section 382.—Limitationon Net Operating LossCarryforwards and CertainBuilt-In Losses FollowingOwnership Change

The adjusted applicable federal long-term rate isset forth for the month of January 2005. See Rev.Rul. 2005-2, page 259.

Section 412.—MinimumFunding Standards


Section 467.—CertainPayments for the Use ofProperty or Services


Section 468.—SpecialRules for Mining and SolidWaste Reclamation andClosing Costs


Section 482.—Allocationof Income and DeductionsAmong Taxpayers


Section 483.—Interest onCertain Deferred Payments


Section 642.—SpecialRules for Credits andDeductions


Section 807.—Rules forCertain Reserves


Section 846.—DiscountedUnpaid Losses Defined


Section 1274.—Determi-nation of Issue Price in theCase of Certain Debt Instru-ments Issued for Property(Also Sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates;adjusted federal long-term rate and thelong-term exempt rate. For purposes ofsections 382, 642, 1274, 1288, and othersections of the Code, tables set forth therates for January 2005.

Rev. Rul. 2005–2

This revenue ruling provides variousprescribed rates for federal income taxpurposes for January 2005 (the currentmonth). Table 1 contains the short-term,mid-term, and long-term applicable fed-eral rates (AFR) for the current monthfor purposes of section 1274(d) of theInternal Revenue Code. Table 2 containsthe short-term, mid-term, and long-termadjusted applicable federal rates (adjustedAFR) for the current month for purposesof section 1288(b). Table 3 sets forth theadjusted federal long-term rate and thelong-term tax-exempt rate described insection 382(f). Table 4 contains the ap-propriate percentages for determining thelow-income housing credit described insection 42(b)(2) for buildings placed inservice during the current month. Table5 contains the federal rate for determin-ing the present value of an annuity, aninterest for life or for a term of years, ora remainder or a reversionary interest forpurposes of section 7520. Finally, Ta-ble 6 contains the deemed rate of returnfor transfers made during calendar year2005 to pooled income funds describedin §642(c)(5) that have been in existencefor less than 3 taxable years immediatelypreceding the taxable year in which thetransfer was made.

January 10, 2005 259 2005–2 I.R.B.

REV. RUL. 2005–2 TABLE 1

Applicable Federal Rates (AFR) for January 2005

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term

AFR 2.78% 2.76% 2.75% 2.74%110% AFR 3.06% 3.04% 3.03% 3.02%120% AFR 3.34% 3.31% 3.30% 3.29%130% AFR 3.62% 3.59% 3.57% 3.56%

Mid-term

AFR 3.76% 3.73% 3.71% 3.70%110% AFR 4.14% 4.10% 4.08% 4.07%120% AFR 4.53% 4.48% 4.46% 4.44%130% AFR 4.91% 4.85% 4.82% 4.80%150% AFR 5.68% 5.60% 5.56% 5.54%175% AFR 6.64% 6.53% 6.48% 6.44%

Long-term

AFR 4.76% 4.70% 4.67% 4.65%110% AFR 5.24% 5.17% 5.14% 5.12%120% AFR 5.72% 5.64% 5.60% 5.57%130% AFR 6.20% 6.11% 6.06% 6.03%


Adjusted AFR for January 2005

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjustedAFR

2.01% 2.00% 2.00% 1.99%

Mid-term adjusted AFR 2.97% 2.95% 2.94% 2.93%

Long-term adjustedAFR

4.27% 4.23% 4.21% 4.19%


Rates Under Section 382 for January 2005

Adjusted federal long-term rate for the current month 4.27%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjustedfederal long-term rates for the current month and the prior two months.) 4.27%


Appropriate Percentages Under Section 42(b)(2) for January 2005Appropriate percentage for the 70% present value low-income housing credit 7.99%

Appropriate percentage for the 30% present value low-income housing credit 3.42%

2005–2 I.R.B. 260 January 10, 2005


Rate Under Section 7520 for January 2005

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,or a remainder or reversionary interest 4.60%


Deemed Rate for Transfers to New Pooled Income Funds During 2005

Deemed rate of return for transfers during 2005 to pooled income funds that have been in existence forless than 3 taxable years 4.0%

Section 1288.—Treatmentof Original Issue Discounton Tax-Exempt Obligations


Section 3121.—Definitions26 CFR 31.3121(b)(10)–2: Services performed bycertain students in the employ of a school, college,or university, or of a nonprofit organization auxiliaryto a school, college, or university.

T.D. 9167

DEPARTMENT OFTHE TREASURYInternal Revenue Service26 CFR Part 31

Student FICA Exception

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final Regulation.

SUMMARY: This document contains finalregulations providing guidance regardingthe employment tax exceptions for studentservices. These regulations affect schools,colleges, and universities and their em-ployees.

DATES: Effective Date: December 21,2004.

Applicability Date: These regulationsare applicable for services performed on orafter April 1, 2005.

FOR FURTHER INFORMATIONCONTACT: John Richards of the Office ofAssociate Chief Counsel (Tax Exempt andGovernment Entities), (202) 622–6040(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to26 CFR part 31 under sections 3121(b)(10)and 3306(c)(10)(B) of the Internal Rev-enue Code (Code). These sections exceptfrom “employment” for Federal InsuranceContributions Act (FICA) and Federal Un-employment Tax Act (FUTA) purposes,respectively, service performed in the em-ploy of a school, college, or university bya student who is enrolled and regularly at-tending classes at such school, college, oruniversity. In addition, this document con-tains amendments to 26 CFR part 31 undersection 3121(b)(2). This section exceptsfrom employment for FICA purposes do-mestic service performed in a local collegeclub, or local chapter of a college fraternityor sorority, by a student who is enrolledand is regularly attending cases at a school,college, or university.

Proposed regulations under sec-tions 3121(b)(2), 3121(b)(10), and3306(c)(10)(B) were published in theFederal Register on February 25, 2004(REG–156421–03, 2004–10 I.R.B. 571[69 FR 8604]). Written and electroniccomments responding to the notice ofproposed rulemaking were received. Apublic hearing was held on June 16, 2004.After consideration of all the comments,the proposed regulations are adopted asamended by this Treasury decision. Therevisions are discussed below.

Explanation of Provisions andSummary of Comments

The final regulations provide rules fordetermining whether an organization is aschool, college, or university (SCU) andwhether an employee is a student for pur-poses of sections 3121(b)(10), 3121(b)(2),and 3306(c)(10)(B) of the Code. Manycomments were received on the proposedregulations and several witnesses testifiedat the hearing which was held June 16,2004. After consideration of the com-ments and testimony, the Treasury depart-ment and the IRS decided to make severalsignificant changes described below.

1. School, College, or University

The exceptions from employment forstudent services apply only if the employeeis a student enrolled and regularly attend-ing classes at a SCU. Under the proposedregulations, whether an organization is aSCU is determined with reference to theorganization’s primary function. An or-ganization whose primary function is tocarry on educational activities qualifies asa SCU for purposes of the student excep-tions from employment.

A few commentators suggested that anorganization, such as a teaching hospital,that has embedded within it a division orfunction that carries on educational activ-ities should be treated as a SCU for pur-poses of the student exceptions from em-ployment.

The final regulations retain the primaryfunction standard as described in the pro-posed regulations. As discussed in the pre-amble to the proposed regulations, the pri-mary function standard is based upon theexisting statutory and regulatory languageunder section 3121(b)(10), as well as the

January 10, 2005 261 2005–2 I.R.B.

legislative history relating to the studentexception from employment under section3121(b)(10).

2. Enrolled and Regularly AttendingClasses

The exceptions from employment forstudent services require that an employeebe “enrolled and regularly attendingclasses” in order to have the status ofa student. Under the proposed regulations,“a class is an instructional activity led bya knowledgeable faculty member for iden-tified students following an establishedcurriculum.”

Commentators requested clarificationregarding whether an instructional activitymust be led by a regular faculty member inorder to be considered a class, or whetheran activity led by an adjunct faculty mem-ber, graduate teaching assistant, or otherqualified individual hired to lead the ac-tivity could be considered a class.

The final regulations clarify that a classis an instructional activity led by a fac-ulty member “or other qualified individ-ual” following an established curriculum.Thus, an instructional activity led by an ad-junct faculty member, graduate assistant,or other qualified individual can qualify asa class for purposes of the student excep-tions from employment.

3. Student Status

The existing student FICA regulationsprovide that an employee whose servicesare incident to and for the purpose of pur-suing a course of study has the status of astudent. §31.3121(b)(10)–2(c). The pro-posed regulations provide that in order foran employee’s services to be consideredincident to and for the purpose of pursuinga course of study, the educational aspectof the relationship between the employeeand the employer, as compared to the ser-vice aspect, must be predominant. Underthe proposed regulations, if an employee isa “career employee,” then the service as-pect of the employee’s relationship withthe employer is considered predominant,and thus the employee’s services are notconsidered incident to and for the purposeof pursuing a course of study. The pro-posed regulations provide that the follow-ing employees are considered career em-ployees: (1) employees who regularly per-form services 40 hours or more per week;

(2) professional employees; (3) employeeswho receive certain employment benefits;and (4) employees required to be licensedto work in the field in which the employ-ees are performing services. The IRS re-quested comments on the criteria used toidentify employees having the status of acareer employee.

Commentators expressed concernabout using these criteria to make cer-tain employees automatically ineligiblefor the student FICA exception. Rather,according to commentators, whether anemployee’s services are incident to and forthe purpose of pursuing a course of studyshould be based upon all the relevant factsand circumstances.

The final regulations provide that theeducational and service aspects of an em-ployee’s relationship with the employerare generally evaluated for an academicterm based upon all the relevant facts andcircumstances. Similar criteria to thoseidentified in the proposed regulations aredescribed in the final regulations as rele-vant factors, not dispositive criteria, in de-termining whether the educational or ser-vice aspect of an employee’s relationshipwith the employer is predominant. Nev-ertheless, under the final regulations, if anemployee is a “full-time employee,” thenthe employee’s services are not incident toand for the purpose of pursuing a course ofstudy. In addition, based upon commentsreceived, the criteria identified in the pro-posed regulations have been modified asdescribed below.

A. Full-Time Employee and Hours Worked

The proposed regulations provide thatan employee who “regularly performsservices 40 hours or more per week” is acareer employee, and is thus ineligible forthe student exception from employment.Commentators expressed concern that the40 hour criterion would be administra-tively impracticable because it would bedifficult to monitor an employee’s actualhours worked during an academic term. Inaddition, commentators expressed concernthat the meaning of “regularly” is unclear,making it difficult to assess the effect ofchanges in hours worked from week toweek. Commentators also requested clari-fication on whether an employee’s numberof hours worked during academic breaksis considered in determining whether the

employee is eligible for the student FICAexception.

The final regulations modify the hoursworked criterion. The final regulationsprovide that the services of a “full-timeemployee” are not incident to and for thepurpose of pursuing a course of study.Under the final regulations, a full-timeemployee is an employee who is con-sidered a full-time employee based uponthe employer’s standards and practices,except that an employee whose “normalwork schedule is 40 hours or more perweek” is considered a full-time employee.This standard is intended to improve ad-ministrability for employers. Whetheran employee is a full-time employeebased upon the employer’s standards andpractices, or based upon the employee’snormal work schedule, should be deter-minable by employers at the start of anacademic term, thus reducing instanceswhere an employee’s status shifts fromstudent to non-student during an academicterm. An employee’s normal work sched-ule does not change, for example, basedupon changes in work demands that areunforeseen at the start of an academic termcausing the employee to work additionalhours beyond his normal work schedule.In addition, time spent performing servicesthat have an educational or instructionalaspect is considered in determining anemployee’s normal work schedule. Fi-nally, the final regulations provide thatan employee’s work schedule during anacademic break is not considered in de-termining whether the employee’s normalwork schedule is 40 hours or more perweek.

The final regulations provide that if anemployee does not have the status of afull-time employee, then the employee’snormal work schedule and actual num-ber of hours worked per week are rele-vant factors in determining whether theservice aspect or educational aspect of theemployee’s relationship with the employeris predominant. Thus, if an employee isnormally scheduled to work 20 hours perweek, but consistently works more than 40hours per week, the amount of time actu-ally worked is taken into account in deter-mining whether or not the employee qual-ifies as a student.

2005–2 I.R.B. 262 January 10, 2005

B. Professional Employee and Licensure

1. Professional Employee

The proposed regulations provide thata “professional employee” is a career em-ployee, and is thus ineligible for the stu-dent exception from employment. Underthe proposed regulations, a professionalemployee is an employee who performswork: (1) requiring knowledge of an ad-vanced type in a field of science or learn-ing, (2) requiring the consistent exerciseof discretion and judgment, and (3) thatis predominantly intellectual and varied incharacter.

Commentators expressed concern thatthe professional employee criterion wouldinappropriately disqualify the services ofmany graduate research and teaching as-sistants from eligibility for the student ex-ceptions from employment. Commenta-tors maintained that graduate research andteaching assistants are primarily students,and thus their services should not auto-matically be ineligible for the student ex-ceptions based upon the professional em-ployee criterion.

The final regulations provide thatwhether an employee is a professionalemployee is a relevant factor, not a dis-positive criterion, in evaluating the serviceaspect of the employee’s relationship withthe employer. Under the final regulations,if an employee has the status of a profes-sional employee, then that suggests theservice aspect of the employee’s relation-ship with the employer is predominant.Whether a professional employee is a stu-dent will depend upon all the facts andcircumstances. Thus, under the final regu-lations, those graduate assistants and otheremployees whose work is described underthe professional employee standard arenot automatically ineligible for the studentexception.

2. Licensure

The proposed regulations provide thatan employee who is required to be licensedunder state or local law to work in the fieldin which the employee performs servicesis a career employee, and is thus ineligi-ble for the student exception. The pream-ble to the proposed regulations requestedcomments on the licensure criterion andwhether this criterion should be further re-fined or clarified.

Commentators expressed concern thatthe licensure criterion under the pro-posed regulations is overly broad becauseit would cause employees licensed forhealth and safety reasons, such as vandrivers and life guards, to be ineligible forstudent status.

Under the final regulations, an em-ployee’s licensure status is not a disposi-tive criterion. Instead, the final regulationsprovide if an employee is a professionalemployee, then whether the employee islicensed is a relevant factor in determiningwhether the service aspect of the em-ployee’s relationship with the employer ispredominant. The final regulations pro-vide that if an employee has the status ofa licensed, professional employee, thenthat fact further suggests that the serviceaspect of the employee’s relationship withthe employer is predominant. However,a worker who is a licensed, professionalemployee could be considered a studentbased upon all the relevant facts and cir-cumstances.

C. Employment Benefits

The proposed regulations provide thatan employee who is eligible to receive cer-tain employment benefits is considered acareer employee, and is thus ineligible forthe student exception.

Commentators expressed concern thateligibility to receive employment benefitsshould not disqualify an individual fromthe student exception. Commentatorsnoted that some state statutes make stu-dent employees eligible for retirement andother benefits, meaning that student em-ployees in those states could not qualify asstudents under the proposed regulations.In addition, commentators noted that manycolleges and universities permit studentemployees to make elective contributionsto section 403(b) arrangements. Under theproposed regulations, offering this benefitwould prohibit student employees fromqualifying as students for purposes of thestudent exceptions from employment.

The final regulations provide that eligi-bility to receive employment benefits is arelevant factor, not a dispositive criterion,in determining whether the service aspectof an employee’s relationship with the em-ployer is predominant. Thus, an employeewho is eligible for employment benefitscan still qualify as a student for purposes of

the student exceptions from employment.In addition, the final regulations providethat eligibility to receive health insurancebenefits is not considered in determiningwhether the service aspect is predominant,and eligibility for benefits mandated bystate or local law is given less weight indetermining whether the service aspect ispredominant.

4. Effective Date

Commentators objected to the proposedeffective date of February 25, 2004, assert-ing that it would take some time to adjust tothe new rules set forth in the proposed reg-ulations. In response to these comments,the final regulations are applicable withrespect to services performed on or afterApril 1, 2005.

5. Revenue Procedure Replacing Rev.Proc. 98–16

When the IRS issued the proposed reg-ulations, it also issued Notice 2004–12,2004–10 I.R.B. 556, suspending Rev.Proc. 98–16, 1998–1 C.B. 403, andproposing to replace it with a revenueprocedure that is consistent with the pro-posed regulations. The IRS solicited com-ments on the proposed revenue procedure.Comments were received and consideredin conjunction with the comments onthe proposed regulations. The proposedrevenue procedure has been modified inresponse to comments, and in order toprovide guidance that is consistent withthe final regulations, is being issued infinal form in Rev. Proc. 2005–11 (to bepublished in I.R.B. 2005–2) modifyingand superseding Rev. Proc. 98–16. Rev.Proc. 2005–11 is applicable with respectto services performed on or after April 1,2005. Taxpayers may rely upon Rev. Proc.98–16 with respect to services performedprior to April 1, 2005.

Special Analyses

It has been determined that these fi-nal regulations are not a significant regu-latory action as defined in Executive Or-der 12866. Therefore, a regulatory assess-ment is not required. It has also been de-termined that section 553(b) of the Admin-istrative Procedure Act (5 U.S.C. chapter5) does not apply to these regulations. In

January 10, 2005 263 2005–2 I.R.B.

addition, because no collection of informa-tion is imposed on small entities, the pro-visions of the Regulatory Flexibility Act (5U.S.C. chapter 6) do not apply, and, there-fore, a Regulatory Flexibility Analysis isnot required. Pursuant to section 7805(f)of the Code, the proposed regulations pre-ceding these regulations were submittedto the Chief Counsel for Advocacy of theSmall Business Administration for com-ment on the impact on small business.

Drafting Information

The principal author of these proposedregulations is John Richards of the Of-fice of Division Counsel/Associate ChiefCounsel (Tax Exempt and GovernmentEntities). However, other personnel fromthe IRS and Treasury Department partici-pated in their development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 31 isamended as follows:

Part 31—EMPLOYMENT TAXES

Paragraph 1. The authority citation forpart 31 continues to read in part, as fol-lows:

Authority: 26 U.S.C. 7805 * * *Par. 2. In § 31.3121(b)(2)–1, paragraph

(d) is revised to read as follows:

§ 31.3121(b)(2)–1 Domestic serviceperformed by students for certain collegeorganizations.

* * * * *(d) An organization is a school, college,

or university within the meaning of sec-tion 3121(b)(2) if its primary function isthe presentation of formal instruction, itnormally maintains a regular faculty andcurriculum, and it normally has a regu-larly enrolled body of students in atten-dance at the place where its educational ac-tivities are regularly carried on. See sec-tion 170(b)(1)(A)(ii) and the regulationsthereunder.

* * * * *Par. 3. Section 31.3121(b)(10)–2 is

amended by:1. Revising paragraphs (a), (b), (c) and

(d).

2. Redesignating paragraph (e) as (g).3. Adding paragraphs (e) and (f).The revisions and additions read as fol-

lows:

§ 31.3121(b)(10)–2 Services performedby certain students in the employ of aschool, college, or university, or of anonprofit organization auxiliary to aschool, college, or university.

(a) General rule. (1) Services per-formed in the employ of a school, college,or university within the meaning of para-graph (c) of this section (whether or notthe organization is exempt from incometax) are excepted from employment, ifthe services are performed by a studentwithin the meaning of paragraph (d) of thissection who is enrolled and is regularlyattending classes at the school, college, oruniversity.

(2) Services performed in the employ ofan organization which is—

(i) Described in section 509(a)(3) and§1.509(a)–4;

(ii) Organized, and at all times there-after operated, exclusively for the bene-fit of, to perform the functions of, or tocarry out the purposes of a school, college,or university within the meaning of para-graph (c) of this section; and

(iii) Operated, supervised, or controlledby or in connection with the school, col-lege, or university; are excepted from em-ployment, if the services are performedby a student who is enrolled and regu-larly attending classes within the mean-ing of paragraph (d) of this section at theschool, college, or university. The pre-ceding sentence shall not apply to servicesperformed in the employ of a school, col-lege, or university of a State or a politicalsubdivision thereof by a student referredto in section 218(c)(5) of the Social Secu-rity Act (42 U.S.C. 418(c)(5)) if such ser-vices are covered under the agreement be-tween the Commissioner of Social Secu-rity and such State entered into pursuantto section 218 of such Act. For the def-initions of “operated, supervised, or con-trolled by”, “supervised or controlled inconnection with”, and “operated in con-nection with”, see paragraphs (g), (h), and(i), respectively, of §1.509(a)–4.

(b) Statutory tests. For purposes of thissection, if an employee has the status of astudent within the meaning of paragraph

(d) of this section, the amount of remu-neration for services performed by the em-ployee, the type of services performed bythe employee, and the place where the ser-vices are performed are not material. Thestatutory tests are:

(1) The character of the organization inthe employ of which the services are per-formed as a school, college, or universitywithin the meaning of paragraph (c) of thissection, or as an organization described inparagraph (a)(2) of this section, and

(2) The status of the employee as astudent enrolled and regularly attendingclasses within the meaning of paragraph(d) of this section at the school, college,or university within the meaning of para-graph (c) of this section by which the em-ployee is employed or with which the em-ployee’s employer is affiliated within themeaning of paragraph (a)(2) of this sec-tion.

(c) School, College, or University.An organization is a school, college, oruniversity within the meaning of section3121(b)(10) if its primary function isthe presentation of formal instruction, itnormally maintains a regular faculty andcurriculum, and it normally has a regularlyenrolled body of students in attendance atthe place where its educational activi-ties are regularly carried on. See section170(b)(1)(A)(ii) and the regulations there-under.

(d) Student Status—general rule.Whether an employee has the status ofa student performing the services shall bedetermined based on the relationship ofthe employee with the organization em-ploying the employee. In order to have thestatus of a student, the employee must per-form services in the employ of a school,college, or university within the meaningof paragraph (c) of this section at whichthe employee is enrolled and regularlyattending classes in pursuit of a course ofstudy within the meaning of paragraphs(d)(1) and (2) of this section. In addition,the employee’s services must be incidentto and for the purpose of pursuing a courseof study within the meaning of paragraph(d)(3) of this section at such school, col-lege, or university. An employee whoperforms services in the employ of an af-filiated organization within the meaningof paragraph (a)(2) of this section must beenrolled and regularly attending classes atthe affiliated school, college, or university

2005–2 I.R.B. 264 January 10, 2005

within the meaning of paragraph (c) ofthis section in pursuit of a course of studywithin the meaning of paragraphs (d)(1)and (2) of this section. In addition, theemployee’s services must be incident toand for the purpose of pursuing a courseof study within the meaning of paragraph(d)(3) of this section at such school, col-lege, or university.

(1) Enrolled and regularly attendingclasses. An employee must be enrolledand regularly attending classes at a school,college, or university within the meaningof paragraph (c) of this section at which theemployee is employed to have the statusof a student within the meaning of section3121(b)(10). An employee is enrolledwithin the meaning of section 3121(b)(10)if the employee is registered for a course orcourses creditable toward an educationalcredential described in paragraph (d)(2)of this section. In addition, the employeemust be regularly attending classes to havethe status of a student. For purposes ofthis paragraph (d)(1), a class is an instruc-tional activity led by a faculty memberor other qualified individual hired by theschool, college, or university within themeaning of paragraph (c) of this sectionfor identified students following an estab-lished curriculum. Traditional classroomactivities are not the sole means of sat-isfying this requirement. For example,research activities under the supervisionof a faculty advisor necessary to completethe requirements for a Ph.D. degree mayconstitute classes within the meaning ofsection 3121(b)(10). The frequency ofthese and similar activities determineswhether an employee may be consideredto be regularly attending classes.

(2) Course of study. An employee mustbe pursuing a course of study in order tohave the status of a student. A course ofstudy is one or more courses the comple-tion of which fulfills the requirements nec-essary to receive an educational credentialgranted by a school, college, or univer-sity within the meaning of paragraph (c)of this section. For purposes of this para-graph, an educational credential is a de-gree, certificate, or other recognized ed-ucational credential granted by an organ-ization described in paragraph (c) of thissection. A course of study also includesone or more courses at a school, collegeor university within the meaning of para-graph (c) of this section the completion of

which fulfills the requirements necessaryfor the employee to sit for an examinationrequired to receive certification by a rec-ognized organization in a field.

(3) Incident to and for the purpose ofpursuing a course of study. (i) Generalrule. An employee’s services must be in-cident to and for the purpose of pursuing acourse of study in order for the employeeto have the status of a student. Whetheran employee’s services are incident to andfor the purpose of pursuing a course ofstudy shall be determined on the basis ofthe relationship of the employee with theorganization for which such services areperformed as an employee. The educa-tional aspect of the relationship betweenthe employer and the employee, as com-pared to the service aspect of the relation-ship, must be predominant in order for theemployee’s services to be incident to andfor the purpose of pursuing a course ofstudy. The educational aspect of the rela-tionship is evaluated based on all the rele-vant facts and circumstances related to theeducational aspect of the relationship. Theservice aspect of the relationship is evalu-ated based on all the relevant facts and cir-cumstances related to the employee’s em-ployment. The evaluation of the serviceaspect of the relationship is not affectedby the fact that the services performed bythe employee may have an educational,instructional, or training aspect. Exceptas provided in paragraph (d)(3)(iii) of thissection, whether the educational aspect orthe service aspect of an employee’s rela-tionship with the employer is predominantis determined by considering all the rel-evant facts and circumstances. Relevantfactors in evaluating the educational andservice aspects of an employee’s relation-ship with the employer are described inparagraphs (d)(3)(iv) and (v) of this sec-tion respectively. There may be facts andcircumstances that are relevant in evalu-ating the educational and service aspectsof the relationship in addition to those de-scribed in paragraphs (d)(3)(iv) and (v) ofthis section.

(ii) Student status determined with re-spect to each academic term. Whetheran employee’s services are incident to andfor the purpose of pursuing a course ofstudy is determined separately with respectto each academic term. If the relevantfacts and circumstances with respect to anemployee’s relationship with the employer

change significantly during an academicterm, whether the employee’s services areincident to and for the purpose of pursuinga course of study is reevaluated with re-spect to services performed during the re-mainder of the academic term.

(iii) Full-time employee. The servicesof a full-time employee are not incident toand for the purpose of pursuing a courseof study. The determination of whether anemployee is a full-time employee is basedon the employer’s standards and practices,except regardless of the employer’s clas-sification of the employee, an employeewhose normal work schedule is 40 hoursor more per week is considered a full-timeemployee. An employee’s normal workschedule is not affected by increases inhours worked caused by work demandsunforeseen at the start of an academicterm. However, whether an employee isa full-time employee is reevaluated forthe remainder of the academic term ifthe employee changes employment posi-tions with the employer. An employee’swork schedule during academic breaksis not considered in determining whetherthe employee’s normal work schedule is40 hours or more per week. The deter-mination of an employee’s normal workschedule is not affected by the fact thatthe services performed by the employeemay have an educational, instructional, ortraining aspect.

(iv) Evaluating educational aspect.The educational aspect of an employee’srelationship with the employer is evaluatedbased on all the relevant facts and circum-stances related to the educational aspect ofthe relationship. The educational aspect ofan employee’s relationship with the em-ployer is generally evaluated based on theemployee’s course workload. Whether anemployee’s course workload is sufficientin order for the employee’s employmentto be incident to and for the purpose ofpursuing a course of study depends on theparticular facts and circumstances. A rel-evant factor in evaluating an employee’scourse workload is the employee’s courseworkload relative to a full-time courseworkload at the school, college or univer-sity within the meaning of paragraph (c)of this section at which the employee isenrolled and regularly attending classes.

(v) Evaluating service aspect. The ser-vice aspect of an employee’s relationshipwith the employer is evaluated based on

January 10, 2005 265 2005–2 I.R.B.

the facts and circumstances related to theemployee’s employment. Services of anemployee with the status of a full-time em-ployee within the meaning of paragraph(d)(3)(iii) of this section are not incidentto and for the purpose of pursuing a courseof study. Relevant factors in evaluatingthe service aspect of an employee’s rela-tionship with the employer are describedin paragraphs (d)(3)(v)(A), (B), and (C) ofthis section.

(A) Normal work schedule and hoursworked. If an employee is not a full-timeemployee within the meaning of para-graph (d)(3)(iii) of this section, then theemployee’s normal work schedule andnumber of hours worked per week arerelevant factors in evaluating the serviceaspect of the employee’s relationship withthe employer. As an employee’s normalwork schedule or actual number of hoursworked approaches 40 hours per week, itis more likely that the service aspect of theemployee’s relationship with the employeris predominant. The determination of anemployee’s normal work schedule andactual number of hours worked is not af-fected by the fact that some of the servicesperformed by the employee may have aneducational, instructional, or training as-pect.

(B) Professional employee.(1) If an employee has the status of a

professional employee, then that suggeststhe service aspect of the employee’s rela-tionship with the employer is predominant.A professional employee is an employee—

(i) Whose primary duty consistsof the performance of work requiringknowledge of an advanced type in afield of science or learning custom-arily acquired by a prolonged courseof specialized intellectual instructionand study, as distinguished from ageneral academic education, from anapprenticeship, and from training in theperformance of routine mental, manual,or physical processes;

(ii) Whose work requires the consis-tent exercise of discretion and judgmentin its performance; and

(iii) Whose work is predominantlyintellectual and varied in character (asopposed to routine mental, manual, me-chanical, or physical work) and is ofsuch character that the output producedor the result accomplished cannot be

standardized in relation to a given pe-riod of time.(2) Licensed, professional employee. If

an employee is a licensed, professionalemployee, then that further suggests theservice aspect of the employee’s relation-ship with the employer is predominant. Anemployee is a licensed, professional em-ployee if the employee is required to be li-censed under state or local law to work inthe field in which the employee performsservices and the employee is a professionalemployee within the meaning of paragraph(d)(3)(v)(B)(1) of this section.

(C) Employment Benefits. Whetheran employee is eligible to receive one ormore employment benefits is a relevantfactor in evaluating the service aspect ofan employee’s relationship with the em-ployer. For example, eligibility to receivevacation, paid holiday, and paid sick leavebenefits; eligibility to participate in a re-tirement plan or arrangement described insections 401(a), 403(b), or 457(a); or eligi-bility to receive employment benefits suchas reduced tuition (other than qualifiedtuition reduction under section 117(d)(5)provided to a teaching or research assis-tant who is a graduate student), or benefitsunder sections 79 (life insurance), 127(qualified educational assistance), 129(dependent care assistance programs), or137 (adoption assistance) suggest that theservice aspect of an employee’s relation-ship with the employer is predominant.Eligibility to receive health insurance em-ployment benefits is not considered indetermining whether the service aspect ofan employee’s relationship with the em-ployer is predominant. The weight to begiven the fact that an employee is eligiblefor a particular employment benefit mayvary depending on the type of benefit. Forexample, eligibility to participate in a re-tirement plan is generally more significantthan eligibility to receive a dependent careemployment benefit. Additional weightis given to the fact that an employee iseligible to receive an employment benefitif the benefit is generally provided by theemployer to employees in positions gen-erally held by non-students. Less weightis given to the fact that an employee iseligible to receive an employment benefitif eligibility for the benefit is mandated bystate or local law.

(e) Examples. The following examplesillustrate the principles of paragraphs (a)through (d) of this section:

Example 1. (i) Employee C is employed by StateUniversity T to provide services as a clerk in T’s ad-ministrative offices, and is enrolled and regularly at-tending classes at T in pursuit of a B.S. degree in bi-ology. C has a course workload during the academicterm which constitutes a full-time course workload atT. C is considered a part-time employee by T duringthe academic term, and C’s normal work schedule is20 hours per week, but occasionally due to work de-mands unforeseen at the start of the academic term Cworks 40 hours or more during a week. C is compen-sated by hourly wages, and receives no other com-pensation or employment benefits.

(ii) In this example, C is employed by T, a school,college, or university within the meaning of para-graph (c) of this section. C is enrolled and regularlyattending classes at T in pursuit of a course of study.C is not a full-time employee based on T’s standards,and C’s normal work schedule does not cause C tohave the status of a full-time employee, even thoughC may occasionally work 40 hours or more during aweek due to unforeseen work demands. C’s part-timeemployment relative to C’s full-time course workloadindicates that the educational aspect of C’s relation-ship with T is predominant. Additional facts support-ing this conclusion are that C is not a professional em-ployee, and C does not receive any employment bene-fits. Thus, C’s services are incident to and for the pur-pose of pursuing a course of study. Accordingly, C’sservices are excepted from employment under section3121(b)(10).

Example 2. (i) Employee D is employed in the ac-counting department of University U, and is enrolledand regularly attending classes at U in pursuit of anM.B.A. degree. D has a course workload which con-stitutes a half-time course workload at U. D is consid-ered a full-time employee by U under U’s standardsand practices.

(ii) In this example, D is employed by U, a school,college, or university within the meaning of para-graph (c) of this section. In addition, D is enrolledand regularly attending classes at U in pursuit of acourse of study. However, because D is considereda full-time employee by U under its standards andpractices, D’s services are not incident to and for thepurpose of pursuing a course of study. Accordingly,D’s services are not excepted from employment un-der section 3121(b)(10).

Example 3. (i) The facts are the same as in Ex-ample 2, except that D is not considered a full-timeemployee by U, and D’s normal work schedule is 32hours per week. In addition, D’s work is repetitivein nature and does not require the consistent exerciseof discretion and judgment, and is not predominantlyintellectual and varied in character. However, D re-ceives vacation, sick leave, and paid holiday employ-ment benefits, and D is eligible to participate in a re-tirement plan maintained by U described in section401(a).

(ii) In this example, D’s half-time course work-load relative to D’s hours worked and eligibility foremployment benefits indicates that the service aspectof D’s relationship with U is predominant, and thusD’s services are not incident to and for the purposeof pursuing a course of study. Accordingly, D’s ser-

2005–2 I.R.B. 266 January 10, 2005

vices are not excepted from employment under sec-tion 3121(b)(10).

Example 4. (i) Employee E is employed by Uni-versity V to provide patient care services at a teachinghospital that is an unincorporated division of V. Theseservices are performed as part of a medical residencyprogram in a medical specialty sponsored by V. Theresidency program in which E participates is accred-ited by the Accreditation Counsel for Graduate Med-ical Education. Upon completion of the program, Ewill receive a certificate of completion, and be eligi-ble to sit for an examination required to be certifiedby a recognized organization in the medical specialty.E’s normal work schedule, which includes serviceshaving an educational, instructional, or training as-pect, is 40 hours or more per week.

(ii) In this example, E is employed by V, a school,college, or university within the meaning of para-graph (c) of this section. However, E’s normal workschedule calls for E to perform services 40 or morehours per week. E is therefore a full-time employee,and the fact that some of E’s services have an educa-tional, instructional, or training aspect does not affectthat conclusion. Thus, E’s services are not incident toand for the purpose of pursuing a course of study. Ac-cordingly, E’s services are not excepted from employ-ment under section 3121(b)(10) and there is no needto consider other relevant factors, such as whether Eis a professional employee or whether E is eligible foremployment benefits.

Example 5. (i) Employee F is employed in thefacilities management department of University W. Fhas a B.S. degree in engineering, and is completingthe work experience required to sit for an examina-tion to become a professional engineer eligible for li-censure under state or local law. F is not attendingclasses at W.

(ii) In this example, F is employed by W, a school,college, or university within the meaning of para-graph (c) of this section. However, F is not enrolledand regularly attending classes at W in pursuit of acourse of study. F’s work experience required to sitfor the examination is not a course of study for pur-poses of paragraph (d)(2) of this section. Accord-ingly, F’s services are not excepted from employmentunder section 3121(b)(10).

Example 6. (i) Employee G is employed by Em-ployer X as an apprentice in a skilled trade. X is a sub-contractor providing services in the field in which Gwishes to specialize. G is pursuing a certificate in theskilled trade from Community College C. G is per-forming services for X pursuant to an internship pro-gram sponsored by C under which its students gainexperience, and receive credit toward a certificate inthe trade.

(ii) In this example, G is employed by X. X isnot a school, college or university within the meaningof paragraph (c) of this section. Thus, the exceptionfrom employment under section 3121(b)(10) is notavailable with respect to G’s services for X.

Example 7. (i) Employee H is employed by a cos-metology school Y at which H is enrolled and reg-ularly attending classes in pursuit of a certificate ofcompletion. Y’s primary function is to carry on ed-ucational activities to prepare its students to work inthe field of cosmetology. Prior to issuing a certificate,Y requires that its students gain experience in cosme-tology services by performing services for the gen-eral public on Y’s premises. H is scheduled to work

and in fact works significantly less than 30 hours perweek. H’s work does not require knowledge of anadvanced type in a field of science or learning, nor isit predominantly intellectual and varied in character.H receives remuneration in the form of hourly com-pensation from Y for providing cosmetology servicesto clients of Y, and does not receive any other com-pensation and is not eligible for employment benefitsprovided by Y.

(ii) In this example, H is employed by Y, a school,college or university within the meaning of paragraph(c) of this section, and is enrolled and regularly at-tending classes at Y in pursuit of a course of study.Factors indicating the educational aspect of H’s re-lationship with Y is predominant are that H’s hoursworked are significantly less than 30 per week, H isnot a professional employee, and H is not eligible foremployment benefits. Based on the relevant facts andcircumstances, the educational aspect of H’s relation-ship with Y is predominant. Thus, H’s services are in-cident to and for the purpose of pursuing a course ofstudy. Accordingly, H’s services are excepted fromemployment under section 3121(b)(10).

Example 8. (i) Employee J is a graduate teach-ing assistant at University Z. J is enrolled and reg-ularly attending classes at Z in pursuit of a gradu-ate degree. J has a course workload which consti-tutes a full-time course workload at Z. J’s normalwork schedule is 20 hours per week, but occasionallydue to work demands unforeseen at the start of theacademic term J works more than 40 hours during aweek. J’s duties include grading quizzes and examspursuant to guidelines set forth by the professor, pro-viding class and laboratory instruction pursuant to alesson plan developed by the professor, and preparinglaboratory equipment for demonstrations. J receivesa cash stipend and employment benefits in the formof eligibility to make elective employee contributionsto an arrangement described in section 403(b). In ad-dition, J receives qualified tuition reduction benefitswithin the meaning of section 117(d)(5) with respectto the tuition charged for the credits earned for beinga graduate teaching assistant.

(ii) In this example, J is employed by Z, a school,college, or university within the meaning of para-graph (c) of this section, and is enrolled and regu-larly attending classes at Z in pursuit of a course ofstudy. J’s full-time course workload relative to J’snormal work schedule of 20 hours per week indi-cates that the educational aspect of J’s relationshipwith Z is predominant. In addition, J is not a profes-sional employee because J’s work does not requirethe consistent exercise of discretion and judgment inits performance. On the other hand, the fact that Jreceives employment benefits in the form of eligibil-ity to make elective employee contributions to an ar-rangement described in section 403(b) indicates thatthe employment aspect of J’s relationship with Z ispredominant. Balancing the relevant facts and cir-cumstances, the educational aspect of J’s relationshipwith Z is predominant. Thus, J’s services are incidentto and for the purpose of pursuing a course of study.Accordingly, J services are excepted from employ-ment under section 3121(b)(10).

(f) Effective date. Paragraphs (a), (b),(c), (d) and (e) of this section apply to ser-vices performed on or after April 1, 2005.

* * * * *

Par. 4. In §31.3306(c)(10)–2:1. Paragraph (c) is revised.2. Paragraphs (d) and (e) are added.The revision and addition read as fol-

lows:

§ 31.3306(c)(10)–2 Services of student inemploy of a school, college, or university.

* * * * *(c) General rule. (1) For purposes of

this section, the tests are the character ofthe organization in the employ of whichthe services are performed and the statusof the employee as a student enrolled andregularly attending classes at the school,college, or university described in para-graph (c)(2) of this section, in the employof which the employee performs the ser-vices. If an employee has the status of astudent within the meaning of paragraph(d) of this section, the type of services per-formed by the employee, the place wherethe services are performed, and the amountof remuneration for services performed bythe employee are not material.

(2) School, college, or university. Anorganization is a school, college, or uni-versity within the meaning of section3306(c)(10)(B) if its primary function isthe presentation of formal instruction, itnormally maintains a regular faculty andcurriculum, and it normally has a regularlyenrolled body of students in attendance atthe place where its educational activi-ties are regularly carried on. See section170(b)(1)(A)(ii) and the regulations there-under.

(d) Student Status—general rule.Whether an employee has the status ofa student within the meaning of section3306(c)(10)(B) performing the servicesshall be determined based on the relation-ship of the employee with the organizationfor which the services are performed. Inorder to have the status of a student withinthe meaning of section 3306(c)(10)(B),the employee must perform services in theemploy of a school, college, or univer-sity described in paragraph (c)(2) of thissection at which the employee is enrolledand regularly attending classes in pursuitof a course of study within the meaningof paragraphs (d)(1) and (2) of this sec-tion. In addition, the employee’s servicesmust be incident to and for the purpose ofpursuing a course of study at such school,

January 10, 2005 267 2005–2 I.R.B.

college, or university within the meaningof paragraph (d)(3) of this section.

(1) Enrolled and regularly attendingclasses. An employee must be enrolledand regularly attending classes at a school,college, or university within the mean-ing of paragraph (c)(2) of this section atwhich the employee is employed to havethe status of a student within the meaningof section 3306(c)(10)(B). An employeeis enrolled within the meaning of section3306(c)(10)(B) if the employee is reg-istered for a course or courses creditabletoward an educational credential describedin paragraph (d)(2) of this section. In ad-dition, the employee must be regularlyattending classes to have the status of astudent. For purposes of this paragraph(d)(1), a class is an instructional activityled by a faculty member or other qualifiedindividual hired by the school, college,or university within the meaning of para-graph (c)(2) of this section for identifiedstudents following an established curricu-lum. The frequency of these and similaractivities determines whether an employeemay be considered to be regularly attend-ing classes.

(2) Course of study. An employee mustbe pursuing a course of study in orderto have the status of a student within themeaning of section 3306(c)(10)(B). Acourse of study is one or more courses thecompletion of which fulfills the require-ments necessary to receive an educationalcredential granted by a school, college,or university within the meaning of para-graph (c)(2) of this section. For purposesof this paragraph, an educational cre-dential is a degree, certificate, or otherrecognized educational credential grantedby an organization described in paragraph(c)(2) of this section. In addition, a courseof study is one or more courses at a school,college or university within the meaningof paragraph (c)(2) of this section the com-pletion of which fulfills the requirementsnecessary for the employee to sit for an ex-amination required to receive certificationby a recognized organization in a field.

(3) Incident to and for the purpose ofpursuing a course of study. (i) Generalrule. An employee’s services must be in-cident to and for the purpose of pursuing acourse of study in order for the employeeto have the status of a student. Whetheran employee’s services are incident to andfor the purpose of pursuing a course of

study shall be determined on the basis ofthe relationship of the employee with theorganization for which such services areperformed as an employee. The educa-tional aspect of the relationship betweenthe employer and the employee, as com-pared to the service aspect of the relation-ship, must be predominant in order for theemployee’s services to be incident to andfor the purpose of pursuing a course ofstudy. The educational aspect of the rela-tionship is evaluated based on all the rele-vant facts and circumstances related to theeducational aspect of the relationship. Theservice aspect of the relationship is evalu-ated based on all the relevant facts and cir-cumstances related to the employee’s em-ployment. The evaluation of the serviceaspect of the relationship is not affectedby the fact that the services performed bythe employee may have an educational,instructional, or training aspect. Exceptas provided in paragraph (d)(3)(iii) of thissection, whether the educational aspect orthe service aspect of an employee’s rela-tionship with the employer is predominantis determined by considering all the rel-evant facts and circumstances. Relevantfactors in evaluating the educational andservice aspects of an employee’s relation-ship with the employer are described inparagraphs (d)(3)(iv) and (v) of this sec-tion respectively. There may be facts andcircumstances that are relevant in evalu-ating the educational and service aspectsof the relationship in addition to those de-scribed in paragraphs (d)(3)(iv) and (v) ofthis section.

(ii) Student status determined with re-spect to each academic term. Whetheran employee’s services are incident to andfor the purpose of pursuing a course ofstudy is determined separately with respectto each academic term. If the relevantfacts and circumstances with respect to anemployee’s relationship with the employerchange significantly during an academicterm, whether the employee’s services areincident to and for the purpose of pursuinga course of study is reevaluated with re-spect to services performed during the re-mainder of the academic term.

(iii) Full-time employee. The servicesof a full-time employee are not incident toand for the purpose of pursuing a courseof study. The determination of whether anemployee is a full-time employee is basedon the employer’s standards and practices,

except regardless of the employer’s clas-sification of the employee, an employeewhose normal work schedule is 40 hoursor more per week is considered a full-timeemployee. An employee’s normal workschedule is not affected by increases inhours worked caused by work demandsunforeseen at the start of an academicterm. However, whether an employee isa full-time employee is reevaluated forthe remainder of the academic term if theemployee changes employment positionswith the employer. An employee’s workschedule during academic breaks is notconsidered in determining whether theemployee’s normal work schedule is 40hours or more per week. The determi-nation of the employee’s normal workschedule is not affected by the fact thatthe services performed by the individualmay have an educational, instructional, ortraining aspect.

(iv) Evaluating educational aspect.The educational aspect of an employee’srelationship with the employer is evaluatedbased on all the relevant facts and circum-stances related to the educational aspect ofthe relationship. The educational aspect ofan employee’s relationship with the em-ployer is generally evaluated based on theemployee’s course workload. Whether anemployee’s course workload is sufficientin order for the employee’s employmentto be incident to and for the purpose ofpursuing a course of study depends on theparticular facts and circumstances. A rel-evant factor in evaluating an employee’scourse workload is the employee’s courseworkload relative to a full-time courseworkload at the school, college or univer-sity within the meaning of paragraph (c)(2)of this section at which the employee isenrolled and regularly attending classes.

(v) Evaluating service aspect. The ser-vice aspect of an employee’s relationshipwith the employer is evaluated based onthe facts and circumstances related to theemployee’s employment. Services of anemployee with the status of a full-time em-ployee within the meaning of paragraph(d)(3)(iii) of this section are not incidentto and for the purpose of pursuing a courseof study. Relevant factors in evaluatingthe service aspect of an employee’s rela-tionship with the employer are describedin paragraphs (d)(3)(v)(A), (B), and (C) ofthis section.

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(A) Normal work schedule and hoursworked. If an employee is not a full-timeemployee within the meaning of para-graph (d)(3)(iii) of this section, then theemployee’s normal work schedule andnumber of hours worked per week arerelevant factors in evaluating the serviceaspect of the employee’s relationship withthe employer. As an employee’s normalwork schedule or actual number of hoursworked approaches 40 hours per week, itis more likely that the service aspect ofthe employee’s relationship with the em-ployer is predominant. The determinationof the employee’s normal work sched-ule and actual number of hours workedis not affected by the fact that some ofthe services performed by the individualmay have an educational, instructional, ortraining aspect.

(B) Professional employee.(1) If an employee has the status of a

professional employee, then that suggeststhat the service aspect of the employee’srelationship with the employer is predom-inant. A professional employee is an em-ployee—

(i) Whose primary duty consistsof the performance of work requiringknowledge of an advanced type in afield of science or learning custom-arily acquired by a prolonged courseof specialized intellectual instructionand study, as distinguished from ageneral academic education, from anapprenticeship, and from training in theperformance of routine mental, manual,or physical processes;

(ii) Whose work requires the consis-tent exercise of discretion and judgmentin its performance; and

(iii) Whose work is predominantlyintellectual and varied in character (asopposed to routine mental, manual, me-chanical, or physical work) and is ofsuch character that the output producedor the result accomplished cannot bestandardized in relation to a given pe-riod of time.(2) Licensed, professional employee. If

an employee is a licensed, professionalemployee, then that further suggests theservice aspect of the employee’s relation-ship with the employer is predominant. Anemployee is a licensed, professional em-ployee if the employee is required to be li-censed under state or local law to work inthe field in which the employee performsservices and the employee is a professionalemployee within the meaning of paragraph(d)(3)(v)(B)(1) of this section.

(C) Employment Benefits. Whether anemployee is eligible to receive employ-ment benefits is a relevant factor in evalu-ating the service aspect of an employee’srelationship with the employer. For ex-ample, eligibility to receive vacation, paidholiday, and paid sick leave benefits; eli-gibility to participate in a retirement plandescribed in section 401(a); or eligibilityto receive employment benefits such as re-duced tuition, or benefits under section 79(life insurance), 127 (qualified educationalassistance), 129 (dependent care assistanceprograms), or 137 (adoption assistance)suggest that the service aspect of an em-ployee’s relationship with the employer ispredominant. Eligibility to receive healthinsurance employment benefits is not con-sidered in determining whether the serviceaspect of an employee’s relationship withthe employer is predominant. The weight

to be given the fact that an employee is el-igible for a particular benefit may vary de-pending on the type of employment ben-efit. For example, eligibility to partici-pate in a retirement plan is generally moresignificant than eligibility to receive a de-pendent care employment benefit. Addi-tional weight is given to the fact that anemployee is eligible to receive an employ-ment benefit if the benefit is generally pro-vided by the employer to employees in po-sitions generally held by non-students.

(e) Effective date. Paragraphs (c) and(d) of this section apply to services per-formed on or after April 1, 2005.

Mark E. Matthews,Deputy Commissioner forServices and Enforcement.

Approved December 15, 2004.

Gregory F. Jenner,Acting Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on December 20,2004, 8:45 a.m., and published in the issue of the FederalRegister for December 21, 2004, 69 F.R 76404)

Section 7520.—ValuationTables


Section 7872.—Treatmentof Loans With Below-MarketInterest Rates


January 10, 2005 269 2005–2 I.R.B.

Part II. Treaties and Tax LegislationSubpart A.—Tax Conventions and Other Related Items

Swiss Pension MAP Agreement

Announcement 2005–3

Following is a copy of the News Re-lease issued by the Director, International(U.S. Competent Authority) on December10, 2004 (IR–2004–146).

Agreement Identifies U.S. and SwissPension Plans for Tax Treaty Benefits

IR–2004–146, Dec. 10, 2004

WASHINGTON — The Competent Au-thorities of Switzerland and the UnitedStates have reached a mutual agreementon the qualification of certain Swiss andU.S. pensions for treaty benefits underparagraph 3 of Article 10 (Dividends) ofthe U.S.-Switzerland income tax treaty.The agreement also specifies the proce-dures for claiming treaty benefits in eachcountry and the methods each country usesto grant treaty benefits.

The agreement constitutes a MutualAgreement in accordance with the Con-vention Between the United States ofAmerica and the Swiss Confederation forthe Avoidance of Double Taxation withRespect to Taxes on Income signed atWashington, D.C., on October 2, 1996.

The text of the Agreement is as follows:

COMPETENT AUTHORITY AGREEMENT

The competent authorities of the United States and Switzerland hereby enter into the following agreement (“the Agreement”)regarding the qualification of certain U.S. and Swiss pension or other retirement arrangements for benefits under paragraph 3 ofArticle 10 (Dividends) of the Convention Between the United States of America and the Swiss Confederation for the Avoidanceof Double Taxation with Respect to Taxes on Income signed at Washington on October 2, 1996 (“the Treaty”). The Agreementspecifies the procedures for claiming Treaty benefits in each country and the methods each country will use to grant Treatybenefits. The Agreement is entered into under paragraph 3 of Article 25 (Mutual Agreement Procedure).

1) Definitions

It is understood that for the purposes of this Agreement:

“Article” refers to an Article of the Treaty;

“Code section” refers to a section of the U.S. Internal Revenue Code of 1986, as amended;

“IRS” refers to the U.S. Internal Revenue Service; and

“trust” includes a custodial account treated as a trust for U.S. federal income tax purposes.

2) Qualification for benefits under Article 10(3)

Article 10(3) provides that dividends may not be taxed in the Contracting State of which the company paying the dividends is aresident if the beneficial owner of the dividends is a resident of the other Contracting State described in subparagraph 4(b) ofArticle 28 (Miscellaneous) that does not control the company paying the dividends.

Under subparagraph 1(c) of Article 4 (Resident), the term “resident of a Contracting State” includes a pension trust or otherorganization established in a Contracting State and maintained exclusively to administer or provide pensions, retirementor employee benefits, provided the pension trust or other organization is established or sponsored by a person resident inthat State under Article 4.

The residents described in Article 28(4)(b) are pension or other retirement arrangements that are established and maintained andrecognized for tax purposes in one Contracting State, provided that the competent authority of the other Contracting State hasagreed that such pension or other retirement arrangement generally corresponds to a pension or other retirement arrangementrecognized for tax purposes by that other State.

Paragraph 2 of Article 22 (Limitation on Benefits) provides that the entity described in Article 4(1)(c) may claim benefits under theTreaty only if more than half of its beneficiaries, members, or participants are persons that are entitled to benefits under Article 22.

3) Qualified U.S. pension or other retirement arrangements

Subject to the conditions of Article 22(2), the following types of U.S. pension or other retirement arrangements are treated as thebeneficial owners of dividends paid to them by Swiss corporations and are considered to qualify for benefits under Article 10(3):

a) a U.S. resident tax-exempt trust providing pension or retirement benefits under a Code section 401(a) qualifiedpension plan, profit sharing plan or stock bonus plan (including Code section 401(k) arrangements);

2005–2 I.R.B. 270 January 10, 2005

b) a U.S. resident tax-exempt trust described in Code section 457(g) providing pension or retirement benefitsunder a Code section 457(b) plan;

c) a U.S. resident tax-exempt trust providing pension or retirement benefits under a Code section 403(b) plan;

d) a group trust described in IRS Revenue Ruling 81–100 (as modified by IRS Revenue Ruling 2004–67), withrespect only to participants that are trusts mentioned under subparagraphs (a), (b) or (c) above;

e) a U.S. common trust fund (Code section 584), to the extent that the participants are trusts described undersubparagraphs (a), (b), (c) or (d) above; and

f) the Thrift Savings Fund (Code section 7701(j)).

As reflected in the U.S. Treasury Department Technical Explanation, the U.S. pension or other retirement arrangements thatare considered to qualify for benefits under Article 10(3) do not include individual retirement accounts under Code section408 or Roth IRAs under Code section 408A.

Above list is not exclusive. The listing of pension or other retirement arrangements described in subparagraphs (a) through (f)above is not intended to be exclusive. Any type of U.S. pension or other retirement arrangement not mentioned above, includingany such arrangement established pursuant to legislation enacted after the date of signature of this Agreement, that considers itselfto qualify for benefits under Article 10(3) must present its case to the Swiss competent authority under Article 28(4)(b) or seeka bilateral mutual agreement between the U.S. and Swiss competent authorities.

Verification. The status of any U.S. pension or other retirement arrangement claiming benefits under Article 10(3) is subjectto verification by the Swiss tax authorities. The Swiss tax authorities may, if they consider it necessary, request informationunder Article 26 (Exchange of Information).

4) Qualified Swiss pension or other retirement arrangements

Subject to the conditions of Article 22(2), the following types of Swiss pension or other retirement arrangements are treated as thebeneficial owners of dividends paid to them by U.S. corporations and are considered to qualify for benefits under Article 10(3):

a) a Swiss resident pension or other retirement arrangement that has been established in accordance with theSwiss Federal Act on Professional Old-Age, Survivors’ and Disabled Persons’ Pension Plans (Bundesgesetzüber die berufliche Alters-, Hinterlassenen- und Invalidenvorsorge), but not including any form of contributoryprivate savings plans or other individual savings plans; and

b) a Swiss resident investment foundation for pension funds (“Anlagestiftung”), if all of the participants in theinvestment foundation are pension or other retirement arrangements mentioned under subparagraph (a) above.

Above list is not exclusive. The listing of pension or other retirement arrangements described in subparagraphs (a) and (b) above isnot intended to be exclusive. Any type of Swiss pension or other retirement arrangement not mentioned above, including anysuch arrangement established pursuant to legislation enacted after the date of signature of this Agreement, that considers itselfto qualify for benefits under Article 10(3) must present its case to the U.S. competent authority under Article 28(4)(b) or seeka bilateral mutual agreement between the U.S. and Swiss competent authorities.

Verification. The status of any Swiss pension or other retirement arrangement claiming benefits under Article 10(3) is subjectto verification by the U.S. tax authorities. The U.S. tax authorities may, if they consider it necessary, request informationunder Article 26.

5) Appropriate procedure for filing a request with the United States for a grant of Treaty benefits by the United States

The United States has two methods for granting benefits under Article 10(3) with respect to dividends paid by U.S. companiesto Swiss pension or other retirement arrangements that qualify for benefits under this Agreement. These methods are the“at-source” method and the “refund” method.

a) At-source method. No tax will be withheld from a dividend paid by a U.S. company to a Swiss tax-exemptpension or other retirement arrangement described in this Agreement that provides any properly completedIRS Form W–8BEN to the withholding agent or payer of such dividend before the dividend is paid or creditedto the Swiss pension or other retirement arrangement. A Swiss pension or other retirement arrangement filingForm W–8BEN must cite Articles 10(3) and 28(4) on line 10 thereof, and state that it is a Swiss pension orother retirement arrangement described in this Agreement that does not control the company paying thedividend and that satisfies the requirement of Article 22(2).

January 10, 2005 271 2005–2 I.R.B.

b) Refund method. If the Swiss pension or other retirement arrangement does not provide a properly completedForm W–8BEN before the dividend is paid or credited, the U.S. company withholds at the full U.S. statutoryrate of withholding tax. Later, upon receiving a claim for refund from the Swiss pension or other retirementarrangement, the U.S. tax authorities refund the full amount of the tax that was withheld. The Swiss pension orother retirement arrangement must file its claim for refund on a Form 1120F U.S. income tax return. The Swisspension or other retirement arrangement must include with that income tax return adequate proof of paymentof the U.S. tax (e.g., IRS Form 1042–S or any other appropriate income statement issued by a bank containinga reference to such payment), and attach to such return an IRS Form 8833 (Treaty Based Return Position) that:

i) cites Articles 10(3) and 28(4);

ii) states that it is a Swiss tax-exempt pension or other retirement arrangement covered underthis Agreement; and

iii) states that it satisfies the requirements of Article 22(2).

A QI may act to recover over-withholding of payments on behalf of multiple Swiss pension or other retirement arrangementsentitled to the benefits of this Agreement, by using the appropriate procedure under the terms of Section 9 of its QualifiedIntermediary Withholding Agreement with the United States.

6) Appropriate procedure for filing a request with Switzerland for a grant of Treaty benefits by Switzerland

Switzerland has only one method for granting benefits under Article 10(3) with respect to dividends paid by Swiss companies toU.S. pension or other retirement arrangements that qualify for benefits under this Agreement. That method is the “refund” method.The Swiss company withholds at the full Swiss statutory rate of withholding tax. Later, upon receiving a claim for refund from theU.S. pension or other retirement arrangement, the Swiss tax authorities refund the full amount of the tax that was withheld.

The Swiss tax authority will grant benefits under Article 10(3) if the U.S. pension or other retirement arrangement provides:

a) a certification letter (Form 6166) issued by the IRS Philadelphia Service Center for the taxable year(s) inquestion (Example attached); and

b) a Swiss Form 82 E to which the U.S. pension or other retirement arrangement has attached a statementthat it does not control the company paying the dividends and that it satisfies the requirements of Articles10(3), 28(4) and 22(2).

7) Effective date

Upon signature by both competent authorities, this Agreement is effective retroactive to February 1, 1998, the date the Treaty iseffective for taxes withheld at sourc