Internal Revenue Bulletin 2005-16 (PDF rendition): IRS Announcements

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

Bulletin No. 200
5-16
April 18, 2005
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
SPECIAL ANNOUNCEMENT
Announcement 2005–27, page 918.
This document contains the annual report to the public con-
cerning Advance Pricing Agreements (APAs) and the experi-
ence of the APA program during calendar year 2004. This
document does not provide guidance regarding the application
of the arm’s length standard; rather, it reports on the structure
and activities of the APA program.
INCOME TAX
Rev. Rul. 2005–24, page 892.
Health reimbursement arrangements.This ruling ad-
dresses the income tax treatment under section 105 of the
Code of amounts received by employees from employer-pro-
vided reimbursement plans. Notice 2002–45 amplified.
REG–125443–01, page 912.
Proposed regulations under section 1441 of the Code would
implement certain changes announced in Notice 2001–4,
2001–1 C.B. 267; Notice 2001–11, 2001–1 C.B. 464;
and Notice 2001–43, 2001–2 C.B. 72. In addition, these
regulations would provide guidance under section 411 of the
American Jobs Creation Act of 2004. A public hearing is
scheduled for July 20, 2005.
Notice
2005–32, page 895.
This no
tice provides interim procedures for partnerships and
their p
artners to comply with the mandatory basis adjustment
provis
ions of sections 734 and 743 of the Code. This notice
also pr
ovides interim procedures for electing investment part-
nerships and their partners to comply with sections 743(e) and
6031(f).
Rev. Proc. 2005–21, page 899.
This procedure provides general rules and specifications from
the Service for paper and computer-generated substitutes of
the extensively revised January 2005 versions of Form 941,
Employer’s Quarterly Federal Tax Return,andScheduleB(Form
941),Report of Tax Liability for Semiweekly Schedule Depos-
itors. Rev. Proc. 2005–21 will be reproduced as Publication
4436,General Rules and Specifications for Substitute Form
941 and Schedule B (Form 941).
Rev. Proc. 2005–24, page 909.
This procedure provides a safe harbor procedure under which
the Service will disregard a spousal right of election for pur-
poses of determining whether the CRAT or CRUT meets the
requirements of section 664(d)(1)(B) or (d)(2)(B) of the Code
continuously since its creation if the spouse irrevocably waives
the right of election in the manner prescribed.
ESTATE TAX
Rev. Proc. 2005–24, page 909.
This procedure provides a safe harbor procedure under which
the Service will disregard a spousal right of election for pur-
poses of determining whether the CRAT or CRUT meets the
requirements of section 664(d)(1)(B) or (d)(2)(B) of the Code
continuously since its creation if the spouse irrevocably waives
the right of election in the manner prescribed.
(Continued on the next page)
Fi
nding Lists begin on page ii.

GIFT TAX
Rev. Proc. 2005–24, page 909.
This procedure provides a safe harbor procedure under which
the Service will disregard a spousal right of election for pur-
poses of determining whether the CRAT or CRUT meets the
requirements of section 664(d)(1)(B) or (d)(2)(B) of the Code
continuously since its creation if the spouse irrevocably waives
the right of election in the manner prescribed.
EMPLOYMENT TAX
Rev. Proc. 2005–21, page 899.
This procedure provides general rules and specifications from
the Service for paper and computer-generated substitutes of
the extensively revised January 2005 versions of Form 941,
Employer’s Quarterly Federal Tax Return, and Schedule B (Form
941),Report of Tax Liability for Semiweekly Schedule Depos-
itors. Rev. Proc. 2005–21 will be reproduced as Publication
4436,General Rules and Specifications for Substitute Form
941 and Schedule B (Form 941).
April 18, 20052005–16 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents 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 of
the 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 internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al 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 these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents 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.
2005–16 I.R.B.April 18, 2005

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 105.—Amounts
Received Under Accident
and Health Plans
(Also Section 106.)
Health reimbursement arrange-
ments.This ruling addresses the income
tax treatment under section 105 of the
Code of amounts received by employees
from employer-provided reimbursement
plans. Notice 2002–45 amplified.
Rev. Rul. 2005–24
ISSUE
Are amounts paid to an employee un-
der a reimbursement plan that provides
for the payment of unused reimbursement
amounts in cash or other benefits exclud-
able from gross income under § 105(b) of
the Internal Revenue Code (the Code)?
FACTS
Situation 1
Employer sponsors a reimbursement
plan (the Plan) that reimburses an em-
ployee solely for medical care expenses
(as defined in § 213(d)) that are sub-
stantiated before the reimbursements are
made. The Plan reimburses the medical
care expenses of both current and former
employees (including retired employees),
their spouses and dependents (as defined
in §152, determined without regard to
§ 152(b)(1), (b)(2), and (d)(1)(B)). The
Plan also reimburses the medical care
expenses of the surviving spouse and de-
pendents of a deceased employee. No
other person may receive reimbursements
from the Plan. Upon the death of the de-
ceased employee’s surviving spouse and
last dependent, or upon the death of the
employee if there is no surviving spouse
or dependents, any unused reimbursement
amount is forfeited.
ThePlanispaidforsolelybyEmployer
and is not provided pursuant to a salary-re-
duction election or otherwise under a § 125
cafeteria plan. The Plan provides reim-
bursements up to an annual maximum dol-
lar amount for the coverage period, which
is the plan year. The Plan reimburses med-
ical care expenses only to the extent that
the employee or the employee’s spouse or
dependents have not been reimbursed for
the expense from any other plan.
Under the Plan, a portion of each em-
ployee’s reimbursement amount available
at the end of each plan year is forfeited if
not used to reimburse medical expenses.
The remaining unused reimbursement
amount is carried forward for use in sub-
sequent plan years. Neither the employee
nor any other person has the right, cur-
rently or for any future year, to receive
cash or any taxable or nontaxable benefit
other than the reimbursement of medical
care expenses incurred by the employee
and his or her spouse and dependents.
When an employee retires, Employer
automatically and on amandatory basis (as
determined under the Plan) contributes an
amount to the reimbursement plan equal to
the value of all or a portion of the retired
employee’s accumulated unused vacation
and sick leave. Under no circumstances
may the retired employee or the retired em-
ployee’s spouse or dependents receive any
of the designated amount in cash or other
benefits.
The Plan satisfies the nondiscrimi-
nation requirements of § 105(h) for a
self-insured medical expense reimburse-
ment plan.
Situation 2
SamefactsasinSituation 1, except the
Plan provides that the employee will re-
ceive a cash payment equal to all or a por-
tion of the unused reimbursement amount
available to that employee at the end of
the plan year or upon termination of em-
ployment, if earlier. Employer treats the
cash payment as taxable compensation to
the employee.
Situation 3
SamefactsasinSituation 1, except the
Plan provides that upon the death of an em-
ployee all or a portion of the unused reim-
bursement amount is paid in cash to a ben-
eficiary or beneficiaries designated by the
employee, and if no beneficiary is desig-
nated, to the deceased employee’s estate.
Situation 4
SamefactsasinSituation 1, except the
Employer has an “option plan” which pur-
ports to be separate and apart from the
reimbursement plan. Under the “option
plan,” an employee elects, prior to the be-
ginning of the plan year, to participate in
the “option plan.” If an employee elects to
participate in the “option plan,” any un-
used reimbursement amount available at
the end of the plan year is “forfeited.”
However, the “option plan” provides that
the employee may elect to transfer all or a
portion of the “forfeited” amount to one of
several retirement plans or to receive the
amount as a cash payment. If an employee
does not elect to participate in the “option
plan,” any reimbursement amount unused
at the end of the plan year is carried for-
ward for use in future plan years.
LAW AND ANALYSIS
Section 61(a)(1) provides that, ex-
cept as otherwise provided in Subtitle A,
gross income includes compensation for
services, including fees, commissions,
fringe benefits, and similar items. Section
1.61–21(a)(3) and (4) of the Income Tax
Regulations state that a fringe benefit pro-
vided in connection with the performance
of services shall be considered to have
been provided as compensation to the per-
son performing such services.
Section 106 provides that the gross in-
come of an employee does not include em-
ployer-provided coverage under an acci-
dent or health plan. Section 1.106–1 of
the regulations provides that the gross in-
come of an employee does not include con-
tributions which the employee’s employer
makes to an accident or health plan for
compensation (through insurance or other-
wise) for personal injuries or sickness to
the employee or the employee’s spouse or
dependents.
Section 105(a) provides that, except as
otherwise provided in § 105, amounts re-
ceived by an employee through accident
or health insurance for personal injuries
or sickness shall be included in gross in-
come to the extent such amounts (1) are at-
tributable to contributions by the employer
which were not includible in the gross in-
2005–16 I.R.B.892April 18, 2005

come of the employee, or (2) are paid by
the employer.
Section 105(e) states that amounts re-
ceived under an accident or health plan for
employees are treated as amounts received
through accident or health insurance for
purposes of § 105. Section 1.105–5(a) of
the regulations states that an accident or
health plan is an arrangement for the pay-
ment of amounts to employees in the event
of personal injuries or sickness.
Section 105(b) states that except in the
case of amounts attributable to (and not in
excess of) deductions allowed under § 213
(relating to medical expenses) for any prior
taxable year, gross income does not in-
clude amounts referred to in § 105(a) if
such amounts are paid, directly or indi-
rectly, to the taxpayer to reimburse the tax-
payer for expenses incurred by the tax-
payer for the medical care (as defined in
§ 213(d)) of the taxpayer or the taxpayer’s
spouse or dependents (as defined in § 152,
determined without regard to § 152(b)(1),
(b)(2), and (d)(1)(B)).
Section 1.105–2 of the regulations
provides that only amounts that are paid
specifically to reimburse the taxpayer for
expenses incurred by the taxpayer for the
prescribed medical care are excludable
from gross income. Section 105(b) does
not apply to amounts that the taxpayer
would be entitled to receive irrespective
of whether or not the taxpayer incurs ex-
penses for medical care. Accordingly, if
an employee is not paid specifically to
reimburse medical care expenses but is
entitled to receive the payment irrespec-
tive of whether any medical expenses
have been incurred, none of the payments
are excludable from gross income under
§ 105(b) whether or not the employee has
incurred medical expenses during the year.
Part I of Notice 2002–45, 2002–2 C.B.
93, describes the tax treatment of health re-
imbursement arrangements (HRAs). The
notice explains that a tax-favored HRA is
an arrangement that is paid for solely by
the employer and not pursuant to a salary
reduction election or otherwise under a
§ 125 cafeteria plan, reimburses the em-
ployee for medical care expenses (as de-
finedin§213(d))incurredbytheem-
ployee and by the employee’s spouse and
dependents, and provides reimbursements
up to a maximum dollar amount with any
unused portion of that amount at the end
of the coverage period carried forward to
subsequent coverage periods.
Part II of Notice 2002–45 states that to
qualify for the exclusion from gross in-
come, an HRA may only provide benefits
that reimburse expenses for medical care
as defined in § 213(d). An HRA does not
qualify for the exclusion under § 105(b)
if any person has the right to receive cash
or any other taxable or non-taxable ben-
efit under the arrangement other than the
reimbursement of medical care expenses.
If any person has such a right, currently
or for any future year, all distributions to
all persons made from the arrangement
in the current year are included in gross
income, even amounts paid to reimburse
medical care expenses. The notice specif-
ically states that arrangements providing
for the payment of a death benefit, a bonus,
or a separation payment without regard to
medical care expenses do not qualify for
tax-favored treatment.
Notice 2002–45 notes that arrange-
ments formally outside the HRA that pro-
vide for the adjustment of an employee’s
compensation or an employee’s receipt
of any other benefit will be considered in
determining whether the arrangement is an
HRA and whether the benefits are eligible
for the exclusion from gross income.
Rev. Rul. 75–539, 1975–2 C.B. 45,
describes two labor contracts. Contract
A provides that upon retirement, an em-
ployee will receive a portion of accumu-
lated unused sick leave credits as a cash
payment or, at the election of the em-
ployee, the payment may be applied to
continue the employee’s participation in
the employer’s health plan. Contract B
provides that the value of a portion of the
accumulated unused sick leave credits will
be used to pay for continued participation
in the employer’s health plan. Under no
circumstances under Contract B may the
retired employee, the retired employee’s
spouse or dependents receive this payment
in cash.
Rev. Rul. 75–539 holds that, under
Contract A, the value of unused accumu-
lated sick leave credits used to continue
health coverage is constructively received
by the retired employee under § 451, and
therefore is includible in the retired em-
ployee’s gross income. Under Contract
A, the amount of premium payments is
considered an employee contribution out
of salary and not a contribution by the
employer under § 106. However, under
Contract B, the value of the unused ac-
cumulated sick leave credits, which may
not be received in cash, is not construc-
tively received by the retired employee,
but is a contribution by the employer to the
employer’s health plan that is excludable
from the retired employee’s gross income
under § 106.
The reimbursement plan described in
Situation 1is an HRA that meets the re-
quirements for tax-favored treatment un-
der §§ 106 and 105(b). The Plan inSitua-
tion 1is an employer-provided accident or
health plan under § 106 and payments are
limited solely to reimbursements of previ-
ously substantiated medical care expenses
incurred by current and former employees
and their spouses and dependents. No per-
son has the right, currently or in the future,
to receive cash or any other taxable or non-
taxable benefit under the Plan other than
the reimbursement of substantiated medi-
cal care expenses as required by § 105(b).
On the other hand, the reimbursement
plans described inSituations 2through4
do not meet the requirements for tax-fa-
vored treatment. The Plan inSituation 2
provides for a cash payment equal to all
or a portion of the unused reimbursement
amount available at the end of the plan year
or upon termination of employment, if ear-
lier. The Plan inSituation 3provides for
a death benefit upon the death of the em-
ployee of all or a portion of the unused
reimbursement amount without regard to
medical care expenses. The Plan inSitua-
tion 4permits conversion of unused reim-
bursement amounts to cash or other bene-
fits regardless of whether or not medical
expenses have been incurred. Although
the “option plan” inSituation 4purports
to be formally outside the reimbursement
arrangement, the option plan and the re-
imbursement arrangement constitute one
plan. Accordingly, because the Plans in
Situations 2through4pay amounts “ir-
respective” of whether medical care ex-
penses have been incurred, no amount paid
under the Plans to any person is excludable
from gross income under § 105(b).See
alsoRev. Rul. 2002–80, 2002–2 C.B. 925,
and Rev. Rul. 2003–43, 2003–1 C.B. 935.
HOLDINGS
Amounts paid to an employee under
a reimbursement plan that provides for
April 18, 20058932005–16 I.R.B.

the payment of unused reimbursement
amounts in cash or other benefits are
not excludable from gross income under
§ 105(b). Thus, amounts paid from plans
as described inSituations 2through4are
not excludable from gross income under
§ 105(b). InSituations 2through4, none
of the payments made from the arrange-
ments during the plan year to any person,
includingamountspaidtoreimbursemed-
ical expenses, are excluded from gross
income. On the other hand, contributions
to and amounts paid from a plan as de-
scribed inSituation 1are excludable from
the gross income of an employee under
§§ 106 and 105(b).
This ruling applies toany purported em-
ployer-provided medical reimbursement
arrangement, regardless of how the ar-
rangement is characterized, that provides
for the receipt by the employee or any
other person of cash or any other taxable
or nontaxable benefit or any combination
of such benefits (including, but not limited
to the benefits described inSituations 2
through4) other than the reimbursement of
medical care expenses of employees and
their spouses and dependents. Moreover,
this ruling applies to employer-provided
reimbursement arrangements that are lim-
ited only to retired employees, as well as
to employer-provided arrangements that
cover active employees or both active em-
ployees and retirees.
SCOPE
This revenue ruling addresses only re-
imbursement arrangements paid for solely
by an employer under the specific Code
sections mentioned and not pursuant to
salary reduction or otherwise under a § 125
cafeteria plan. No inference is intended as
to §§ 401, 403, 408, 409A, and 457 of the
Internal Revenue Code.
EFFECT ON OTHER DOCUMENTS
Notice 2002–45, 2002–2 C.B. 93, is
amplified.
EFFECTIVE DATE
For reimbursement arrangements
within the SCOPE of this revenue rul-
ing, the ruling is effective for plan years
beginning after December 31, 2005.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Barbara E. Pie of the Office of
Division Counsel/Associate Chief Coun-
sel (Tax Exempt and Government Enti-
ties). For further information regarding
this revenue ruling, contact Ms. Pie at
(202) 622–6080 (not a toll-free call).
Section 106.—Contri-
butions by Employer to
Accident and Health Plans
Are amounts paid to an employee under a reim-
bursement plan that provides for the payment of un-
used reimbursement amounts in cash or other benefits
excludable from gross income under § 105(b) of the
Internal Revenue Code (the Code)? See Rev. Rul.
2005-24, page 892.
Section 664.—Charitable
Remainder Trusts
26 CFR 1.664–1: Charitable remainder trusts.
Does a trust qualify under section 664 if a spouse’s
right of election under applicable state law includes
the assets of a CRAT or CRUT? See Rev. Proc. 2005-
24, page 909.
2005–16 I.R.B.894April 18, 2005

Part III. Administrative, Procedural, and Miscellaneous
Interim Rules and Procedures
for Partnerships Under
Section 833 of the American
Jobs Creation Act of 2004
Notice 2005–32
Section 1. PURPOSE
The American Jobs Creation Act of
2004, P.L. 108–357, 118 Stat. 1418 (the
Act), was enacted on October 22, 2004.
The Treasury Department and the Internal
Revenue Service intend to issue regula-
tions implementing §§ 833 and 834 of the
Act, which amended §§ 704, 734, 743,
and 6031 of the Internal Revenue Code.
This notice provides interim procedures
for partnerships and their partners to com-
ply with the mandatory basis provisions of
§§ 734 and 743, as amended by the Act.
This notice also provides interim proce-
dures for electing investment partnerships
(EIPs) and their partners to comply with
§§ 743(e) and 6031(f), as provided in
§833(b)oftheAct.
Section 2. BACKGROUND
Section 833(c) of the Act requires basis
adjustments to be made following certain
distributions from partnerships for which
no § 754 election is in effect. As amended
by § 833(c) of the Act, § 734(a) and (b)
requires a partnership to reduce its basis
in partnership property upon a distribution
of partnership property after October 22,
2004, if there is a “substantial basis reduc-
tion.” Under § 734(d), there is a substantial
basis reduction if a downward adjustment
of more than $250,000 would be made to
the basis of partnership assets if a section
754 election were in effect at the time of
the distribution. EIPs, like other partner-
ships, are required to make any basis ad-
justments that are required under § 734
upon the distribution of partnership prop-
erty.
Section 833(b) of the Act requires ba-
sis adjustments to be made following cer-
tain transfers of interests in partnerships
for which no § 754 election is in effect. As
amendedby§833(b)oftheAct,§743(a)
and (b) requires a partnership to reduce
the basis of partnership property upon a
transfer after October 22, 2004, of an inter-
est in the partnership by sale or exchange
or upon the death of a partner, if, at the
time of the relevant transfer, the partner-
ship has a “substantial built-in loss.” Sec-
tion 743(d)(1) provides that, for purposes
of § 743, a partnership has a substantial
built-in loss with respect to a transfer of a
partnership interest if the partnership’s ad-
justed basis in the partnership’s property
exceeds by more than $250,000 the fair
market value of the property.
Section 833(b) of the Act also pro-
vides that an EIP is not treated as having
a substantial built-in loss, and thus is not
required to make basis adjustments to
partnership property, with respect to any
transfer of a partnership interest occurring
while an election to be treated as an EIP
is in effect. In lieu of the partnership ba-
sis adjustments otherwise required under
§ 743, a partner-level loss disallowance
rule applies. Section 743(e)(2) provides
that, in the case of a transfer of an in-
terest in an EIP, the transferee partner’s
distributive share of the losses, without
regard to gains, from the sale or exchange
of partnership property is not allowed,
except to the extent that it is established
that the losses exceed the loss recognized
on the transfer of the partnership interest
by the transferor partner (or by a prior
transferor to the extent not fully offset by
a prior disallowance under § 743(e)(2)).
Under § 743(e)(3), losses disallowed un-
der this rule do not decrease the transferee
partner’s basis in its partnership interest.
Section 743(e) is to be applied without
regard to any termination of the partner-
ship under § 708(b)(1)(B). In the case of a
basis reduction to property distributed to
the transferee partner in a nonliquidating
distribution, § 743(e)(5) provides that the
amount of the transferor’s recognized loss
taken into account under § 743(e)(2) is re-
duced by the amount of the basis reduction
under § 732(a)(2).
Section 743(e)(6), as added by the
Act, provides that an EIP means any
partnership if (A) the partnership makes
an election to have § 743(e) apply, (B)
the partnership would be an investment
company under section 3(a)(1)(A) of the
Investment Company Act of 1940 but
for an exemption under paragraph (1) or
(7)ofsection3(c)ofsuchAct,(C)the
partnership has never been engaged in a
trade or business, (D) substantially all of
the assets of the partnership are held for
investment, (E) at least 95 percent of the
assets contributed to the partnership con-
sist of money, (F) no assets contributed
to the partnership had an adjusted basis
in excess of fair market value at the time
of contribution, (G) all partnership inter-
ests of the partnership are issued by the
partnership pursuant to a private offering
before the date which is 24 months after
the date of the first capital contribution to
the partnership, (H) the partnership agree-
ment of the partnership has substantive
restrictions on each partner’s ability to
cause a redemption of the partner’s inter-
est, and (I) the partnership agreement of
the partnership provides for a term that
is not in excess of 15 years. However, in
the case of an EIP which is in existence
on June 4, 2004, § 743(e)(6)(H) does not
apply to the partnership, and § 743(e)(6)(I)
is applied by substituting “20 years” for
“15 years”.
Section 743(e)(7) provides that the Sec-
retary shall prescribe regulations as may
be appropriate to carry out the purposes of
§ 743(e), including regulations for apply-
ing§743(e)totieredpartnerships.
Section 6031(f) provides that in the case
of any EIP, the information required under
§ 6031(b) to be furnished to any partner
to whom § 743(e)(2) applies shall include
information as is necessary to enable the
partner to compute the amount of losses
disallowed under § 743(e).
Section 3. INTERIM PROCEDURES
RELATING TO BASIS ADJUSTMENTS
REQUIRED UNDER § 833 OF THE
ACT
Sections 1.734–1(d) and 1.743–1(k) of
the Income Tax Regulations require part-
nerships and partners to provide certain
statements following distributions with re-
spect to partnership interests, and transfers
of partnership interests, in partnerships for
which an election under § 754 is in ef-
fect. The Treasury Department and the
Service intend to amend the regulations
under §§ 734 and 743 to require partner-
ships and partners to provide statements,
similar to those contained in §§ 1.734–1(d)
April 18, 20058952005–16 I.R.B.

and 1.743–1(k), following any distribu-
tions and transfers that trigger basis adjust-
ments under § 833(b) or (c) of the Act.
Until further guidance is provided,
partnerships that are required to reduce
the bases of partnership properties under
§ 833(c) of the Act must comply with
§ 1.734–1(d) as if an election under § 754
were in effect at the time of the relevant
distribution. Partnerships that are required
to reduce the bases of partnership proper-
ties under § 833(b) of the Act must comply
with § 1.743–1(k)(1) as if an election un-
der § 754 were in effect at the time of
the relevant transfer. The transferee of an
interest in a partnership that is required to
reduce the bases of partnership properties
under § 833(b) of the Act must comply
with § 1.743–1(k)(2), within the time pre-
scribed under § 1.743–1(k)(2) (or, if later,
by May 19, 2005), as if an election under
§ 754 were in effect at the time of the
relevant transfer. In addition, partnerships
that are required to reduce the bases of
partnership properties under § 833(b) of
the Act may rely on, and must comply
with, § 1.743–1(k)(3), (4), and (5) as if an
election under § 754 were in effect at the
time of the relevant transfer.
Section 4. INTERIM PROCEDURES
FOR EIP ELECTION
Until further guidance is provided, a
partnership must make the election to
be treated as an EIP by attaching a writ-
ten statement to an original or amended
partnership return for the taxable year
for which the election is effective. The
statement must (i) set forth the name,
address, and tax identification number
of the partnership making the election,
(ii) contain a representation that the part-
nership is eligible to make the election
under § 743(e)(6)(A), and (iii) contain a
declaration that the partnership elects un-
der § 743(e) to be treated as an EIP. If a
partnership has filed a return with respect
to a taxable year that includes October 22,
2004, and desires to elect to be treated
as an EIP for transfers after October 22,
2004, but did not attach a statement satis-
fying the requirements of this paragraph,
then the partnership must file an amended
return with a statement satisfying those
requirements.
For the election to be valid, the orig-
inal or amended return must be filed not
later than six months after the time pre-
scribed by § 1.6031(a)–1(e) of the Proce-
dure and Administration Regulations (ex-
cluding extensions thereof) for filing the
return for the taxable year for which the
election is effective. Once an election is
made, it is effective for all succeeding tax-
able years, unless terminated or revoked,
as described below. In the case of an elec-
tion filed for the partnership’s taxable year
that includes October 22, 2004, the elec-
tion is effective for all transfers occurring
after October 22, 2004. In all other cases,
the election is effective for all transfers
during the partnership’s taxable year for
which the election is effective. A part-
nership that has an election under § 754
in effect is ineligible to make an election
to be treated as an EIP. If the partnership
is not otherwise required to file a partner-
ship return, the election to be an EIP shall
be made in accordance with the rules of
§ 1.6031(a)–1(b)(5).
The election to be treated as an EIP
shall terminate if the partnership fails to
meet the definition of an EIP. In this case,
the partnership will become subject to the
mandatory basis adjustment rules with re-
spect to the first transfer of a partnership
interest that occurs after the partnership
ceases to meet the definition of an EIP and
to each subsequent transfer. An EIP also
may terminate its election to be treated as
an EIP without the consent of the Commis-
sioner by filing an election under § 754.
In this case, the partnership will become
subject to the mandatory basis adjustment
rules with respect to the first transfer of a
partnership interest that occurs after the ef-
fective date of the election under § 754.
In all other cases, except as provided in
future guidance, a partnership having an
election in effect to be treated as an EIP
mayrevoketheelectiononlywiththecon-
sent of the Commissioner. The application
for consent to revoke the election must be
submitted to the Service in the form of a
letter ruling request. If an election to be
treated as an EIP is terminated, any losses
that are subsequently allocated to a partner
to whom a partnership interest was trans-
ferred while the EIP election was in effect
shall remain subject to disallowance under
§ 743(e)(2).
Section 5. INTERIM REPORTING
REQUIREMENTS
A.Transferor Partner Required to Provide
Information to Transferee Partner and
Partnership
Until further guidance is provided, if a
partnership interest in an EIP is transferred
in a sale or exchange or upon the death of
a partner, the transferor (or, in the case of
a partner who dies, the partner’s executor,
personal representative, or other successor
in interest) must notify the transferee and
the EIP in writing. The notice must be
provided within 30 days after the date on
which the transferor partner (or the execu-
tor, personal representative or other suc-
cessor in interest) receives Schedule K–1
from the EIP for the partnership’s taxable
year in which the transfer occurred (or, if
later, by May 19, 2005). The notice must
be signed under penalties of perjury and
must include (i) the name, address, and tax
identification number of the transferor, (ii)
the name, address, and tax identification
number of the transferee (if ascertainable),
(iii) the name of the partnership, (iv) the
date of the transfer (and, in the case of the
death of a partner, the date of the death of
the partner), (v) the amount of loss, if any,
recognized by the transferor on the transfer
of the interest, together with the computa-
tion of the loss, (vi) the amount of losses, if
any, recognized by any prior transferors to
the extent the losses were subject to disal-
lowance under § 743(e)(2) in the hands of a
prior transferee and have not been offset by
prior loss disallowances under § 743(e)(2),
and (vii) any other information necessary
for the transferee to compute the amount
of loss disallowed under § 743(e)(2). If the
transferor is a nominee (within the mean-
ing of § 1.6031(c)–1T), then the nominee,
and not the beneficial owner of the trans-
ferred interest, must supply the informa-
tion to the transferee of the interest and to
the EIP.
The transferee and the EIP shall retain
the notice described in this Section 5.A as
long as the contents thereof may become
material in the administration of any inter-
nal revenue law.
B.Distributive Shares of Partnership
Items of EIP
Because the amount of losses disal-
lowed under § 743(e) is determined with-
2005–16 I.R.B.896April 18, 2005

out regard to gains, an EIP is required to
separately state on Schedule K and K–1
of the partnership’s return (Form 1065) all
allocations of losses to all of its partners
under § 1.702–1(a)(8)(ii), including losses
that, in the absence of § 743(e), could
be netted against gains at the partnership
level. If a partnership has filed a return
with respect to a taxable year that includes
October 22, 2004, in which gain and losses
were not separately stated, the EIP must,
prior to the expiration of the period for
making an EIP election for that year, file
an amended return in which gains and
losses are separately stated. If a partner-
ship’s election to be treated as an EIP is
terminated, the partnership must continue
to state such gains and losses separately
in future returns relating to any period
during which the partnership has one or
more transferee partners that are subject
to § 743(e)(2). If an EIP is not required
to file a partnership return, the transferee
of a partnership interest in the EIP may be
required to provide to the Service similar
information regarding the partner’s dis-
tributive share of gross gains and losses of
the EIP under § 1.6031(a)–1(b)(4).
C.Partnership Required to Provide
Annual Statements to Partners
Until further guidance is provided, an
EIP must provide the following statement
to all of its partners. The statement shall
be attached to every statement provided to
a partner or nominee under § 6031(b) that
is issued with respect to any taxable year
for which an election to be treated as an
EIP is in effect (whether or not the elec-
tion is in effect for the entire taxable year).
If an EIP has provided statements under
§ 6031(b) with respect to a taxable year
that includes October 22, 2004, and elects
to be treated as an EIP for that year, but
did not include the statements required by
this section 5.C., then the EIP must provide
amended statements under § 6031(b), prior
to the expiration of the period for making
an EIP election for that year, which do in-
clude the required statements.
Notice of Election. This partnership
has elected to be treated as an electing
investment partnership under section
743(e) of the Internal Revenue Code.
Information for Transferors. If you
transfer an interest in this part-
nership to another person, Notice
2005–32, 2005–16 I.R.B. 895, pro-
vides that you must, within 30 days
after receiving a Schedule K–1 from
this partnership for the taxable year
that includes the date of the transfer,
provide the transferee with certain
information, including the amount,
if any, of loss that you recognized on
the transfer of the partnership inter-
est, and the amount of losses, if any,
recognized by prior transferors with
respect to the same interest. See No-
tice 2005–32 for more information.
Information for Transferees. If an
interest in this partnership is trans-
ferred to you, section 743(e)(2) re-
quires that you reduce your dis-
tributive share of losses from this
partnership, determined without re-
gard to gains from this partnership,
to the extent of any losses recognized
by the transferor partner when that
partner transferred the partnership
interest to you (and to the extent
of other losses recognized on prior
transfers of the same partnership
interest that have not been offset
by prior loss disallowances). Each
year, you must reduce your share of
losses as reported to you by this part-
nership by the amount of any loss
recognized by the transferor partner
(or any prior transferor to the extent
not already offset by prior loss dis-
allowances) until you have reduced
your share of partnership losses by
the total amount of losses required
to be disallowed. If the transferor
partner, or its legal representative
in the case of a transfer by death,
fails to provide you with the required
statement, you must treat all losses
allocated from the EIP as disallowed
under § 743(e)(2) unless you obtain,
from the EIP or otherwise, the in-
formation necessary to determine
theproperamountoflossesdisal-
lowed under § 743(e)(2). See Notice
2005–32 for more information.
D.Effects of Failure to Notify Transferee
Partner
If the transferor partner, or its legal rep-
resentative in the case of a transfer by
death, fails to provide the transferee part-
ner with the statement required by Section
5.A of this notice with respect to a trans-
fer of an interest in the EIP, the transferee
partner must treat all losses allocated from
the EIP as disallowed under § 743(e)(2)
unless the transferee partner obtains, from
the EIP or otherwise, the information nec-
essary to determine the proper amount of
losses disallowed under § 743(e)(2). If the
transferee does not have the information
necessary to determine the proper amount
of losses disallowed under § 743(e)(2), but
does have information sufficient to deter-
mine the maximum amount of losses that
could be disallowed, then the transferee
may treat the amount of losses disallowed
under § 743(e)(2) as being equal to that
maximum amount. For example, if the
transferee is able to ascertain the adjusted
basis that a prior transferor had in its part-
nership interest, but is not able to ascer-
tain the amount realized by that transferor,
the transferee may assume, for purposes
of calculating the amount of losses dis-
allowed under § 743(e)(2), that the sales
price when the prior transferor sold its in-
terest was zero. If, following the filing of
a return pursuant to the previous sentence,
the transferor partner or the EIP provides
the required information to the transferee
partner, the transferee partner should make
appropriate adjustments in an amended re-
turn for the year of the loss allocation from
the EIP in accordance with § 6511 or other
applicable rules.
Section 6. CHARACTER OF LOSSES
DISALLOWED UNDER § 743(e)(2)
Until further guidance is issued, if
an EIP allocates losses with a different
character from the sale or exchange of
property to the transferee (such as ordi-
nary or § 1231 losses and capital losses)
and the losses allocated to that partner are
limited by § 743(e)(2), then a proportion-
ate amount of the losses disallowed under
§ 743(e)(2) shall consist of each loss of a
separate character that is allocated to the
transferee partner.
Section 7. TRADES OR BUSINESSES
OF LOWER-TIER PARTNERSHIPS
As noted above, a partnership that is
engaged in a trade or business, or that has
previously engaged in a trade or business,
is not eligible to elect to be treated as an
April 18, 20058972005–16 I.R.B.

EIP. The Treasury Department and the
Service are studying the conditions under
which a partnership (“upper-tier partner-
ship”) that holds interests in one or more
partnerships (“lower-tier partnerships”)
that are engaged in a trade or business
should be treated as engaged in a trade or
business.
Until further guidance is issued, an up-
per-tier partnership will not be treated as
engaged in the trade or business of a lower-
tier partnership if, at all times during the
period in which the upper-tier partnership
owns an interest in the lower-tier partner-
ship, the adjusted basis of its interest in
the lower-tier partnership is less than 25
percent of the total capital that is required
to be contributed to the upper-tier partner-
ship by its partners during the entire term
of the upper-tier partnership. This notice
does not address the situation in which the
upper-tier partnership’s adjusted basis in
its lower-tier partnership interest is, at any
time, 25 percent or more of the total capi-
tal that is required to be contributed to the
upper-tier partnership by its partners dur-
ing the entire term of the upper-tier part-
nership.
The Treasury Department and the Ser-
vice specifically request comments on
rules that may be appropriate for future
guidance. Factors that may be relevant in
future guidance in determining whether an
upper-tier partnership is treated as engaged
in a trade or business that is conducted by a
lower-tier partnership include (i) the rela-
tive amount of the upper-tier partnership’s
investment in the lower-tier partnership
as compared to the total capital that is
required to be contributed to the upper-tier
partnership by its partners during the en-
tire term of the upper-tier partnership, (ii)
the degree to which the upper-tier part-
nership participates in the management of
the lower-tier partnership’s activities, and
(iii) the motivations for the formation of
the upper-tier partnership in making the
investments in the lower-tier partnership.
The Treasury Department and the Ser-
vice may adopt rules in future guidance
that are more restrictive than the safe har-
bor provided for above. If a partnership
that qualifies as an EIP under the safe har-
bor does not qualify as an EIP under future
guidance, the partnership’s election to be
treated as an EIP will terminate for trans-
fers occurring on or after the date on which
such future guidancebecomes effective.
Section 8. EXAMPLES
A.Transfer of Partnership Interest
PRSis a partnership which does not have an elec-
tionunder§754ineffect.PRShas no liabilities.
The fair market value ofPRS’s assets is $4 million
and the adjusted basis ofPRS’s assets is $4.3 million.
Under § 743(d),PRShas a substantial built-in loss
because the adjusted basis of the partnership prop-
erty exceeds the fair market value of the partnership
property by more than $250,000.A, a partner of
PRS, sells a 25 percent partnership interest inPRS
toBfor its fair market value of $1 million. Under
§ 743(b), an adjustment is required to the adjusted ba-
sis ofPRS’s assets with respect toB. Under Section
3 of this notice,Bmust provide the written notice de-
scribed in § 1.743–1(k)(2) toPRSwithin 30 days after
the sale, andPRSmust attach the statement described
in § 1.743–1(k)(1) to the partnership return for the
year of the transfer.
B.Distribution of Partnership Property
AandBeach contribute $2.5 million andCcon-
tributes $5 million to a newly formed partnership,
PRS, which does not have an election under § 754
in effect.PRShas no liabilities.PRSpurchasesLMN
stock for $3 million andXYZstock for $7 million.
The value of each stock declines to $1 million.PRS
distributesLMNstock toCin complete liquidation of
C’s interest inPRS. Under § 732(b), the basis ofLMN
stock inC’s hands is $5 million andCwould recog-
nize a loss of $4 million if theLMNstock were sold
for $1 million. There is a substantial basis reduction
within the meaning of § 734(d), because the $2 mil-
lion increase in the adjusted basis ofLMNstock (de-
scribed in § 734(b)(2)(B)) is greater than $250,000.
Under § 734(b), PRS is required to decrease the basis
ofXYZstock by $2 million (the amount by which the
basis ofLMNstock was increased), leaving a basis of
$5 million remaining in theXYZstock. Under Sec-
tion 3 of this notice,PRSmust attach the statement
described in § 1.734–1(d) to the partnership return for
the year of the distribution.
C.EIP
(i)PRSis a domestic partnership with a calendar
year taxable year that desires to elect to be treated
as an EIP for 2004 and all succeeding taxable years.
PRSand all of its partners have a calendar year tax-
able year.PRShas no liabilities. Other than the mak-
ing of the election, PRS meets all other requirements
to be an EIP under § 743(e)(6).PRSelects to be
treated as an EIP by attaching a statement to its in-
come tax return for 2004 in accordance with Section
4 of this notice.
(ii) Between October 22 and December 31, 2004,
the only transfer of a partnership interest inPRS
occurred on November 30, 2004, whenAtransferred
a 10 percent partnership interest toC. The purchase
price for the 10 percent partnership interest was
$3,000,000.A’s adjusted basis inA’s partnership
interest on December 31, 2003, was $3,000,000.
In 2004, the partnership’s only items of income,
gain, loss, and deduction are $3 million of long-term
capital gain and $2 million of long-term capital loss.
BecausePRShas elected to be treated as an EIP,PRS
must separately state this gain and loss on its return
in accordance with Section 5.B of this notice.
(iii) IfAhad remained a partner for the entire
year,A’s distributive share of the partnership’s items
would have been $300,000 of long-term capital gain
and $200,000 of long-term capital loss. Assume that
under § 706,A’s distributive share of these items
are properly determined to be 334/365 of each of
these amounts, or $274,521 of long-term capital
gain and $183,014 of long-term capital loss, and that
C’s distributive shares of these items are properly
determined to be 31/365 of each of these amounts,
or $25,479 of long-term capital gain and $16,986 of
long-term capital loss.
(iv)PRSmust provide a statement to all of its
partners in accordance with Section 5.C of this no-
tice. The statement must be attached to each partner’s
Schedule K–1 forPRS’s taxable year ending Decem-
ber 31, 2004. Assume thatAreceivesA’s Schedule
K–1 on March 12, 2005. Within 30 days after receiv-
ing this Schedule K–1,Amust provide statements to
Cand EIP as described in Section 5.A of this notice.
(v) The adjusted basis inA’s partnership inter-
est on November 30, 2004, $3,091,507, equalsA’s
adjusted basis on December 31, 2003, $3,000,000,
plusA’s distributive share of partnership gain in 2004,
$274,521, lessA’s distributive share of partnership
loss in 2004, $183,014. The amount of loss recog-
nized byAonthesaleofA’s partnership interest is
$91,507, which equals the adjusted basis inA’s part-
nership interest on the date of the sale, $3,091,507,
less the amount realized byA, $3,000,000. Thus,
the first $91,507 of gross loss allocated toCis dis-
allowed under § 743(e)(2). The entire amount ofC’s
long-term capital loss in 2004, $16,986, is disallowed
under § 743(e)(2). The first $74,521 of any gross loss
allocated toCin future years will also be disallowed
under § 743(e)(2), regardless of whether PRS is an
EIP in those future years.
(vi)C’s adjusted basis as of December 31, 2004,
is $3,025,479, the sum ofC’s purchase price paid for
A’s interest, $3,000,000, plus the distributive share
of gain allocated toC, $25,479. Under § 743(e)(3),
the $16,986 loss allocated toC, but disallowed under
§ 743(e)(2), does not reduce the basis ofC’s partner-
ship interest.
Section 9. REQUEST FOR COMMENTS
The Treasury Department and the Ser-
vice intend to issue further guidance im-
plementing §§ 833 and 834 of the Act,
including guidance addressing the ap-
plication of these provisions to tiered
partnership structures. Comments are re-
quested concerning the scope and content
of this guidance. In particular, comments
are requested concerning the application
of these provisions to tiered partnerships
and the reporting obligations that should
beimposedontieredpartnershipsand
their partners. As stated earlier, comments
are also requested on the rules provided in
Section 7 of this notice. Comments should
be submitted in writing on or before July
19, 2005, and should include a refer-
ence to Notice 2005–32. Comments may
be submitted to CC:PA:LPD:PR (Notice
2005–32), Room 5226, Internal Revenue
Service, PO Box 7604, Ben Franklin
2005–16 I.R.B.898April 18, 2005

Station, Washington, DC 20044. Alterna-
tively, comments may be submitted elec-
tronically via the following e-mail address:
Notice.Comments@irscounsel.treas.gov.
Please include “Notice 2005–32” in the
subject line of any electronic communica-
tions.
Submissions may be hand delivered
Monday through Friday between the hours
of8a.m. and5p.m. toCC:PA:LPD:PR
(Notice 2005–32), Courier’s Desk, Inter-
nal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC 20224.
PAPERWORK REDUCTION ACT
The collections of information con-
tained in this notice have been reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545–1939.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
The collections of information in this
notice are in Sections 3, 4, and 5. This
information is required, and will be used,
to assure compliance with the new provi-
sions of the American Jobs Creation Act of
2004. The collections of information are
required to obtain a benefit or are manda-
tory. The likely respondents are individu-
als and businesses or other for-profit insti-
tutions.
The estimated total annual reporting
burden and/or recordkeeping burden is
552,100 hours.
The estimated annual average burden
per respondent/recordkeeper varies from is
0.05 hours to 3 hours, depending on in-
dividual circumstances, with an estimated
average of 2.07 hours.
The estimated number of respondents
and/or recordkeepers is 266,400.
The estimated annual frequency of re-
sponses (used for reporting requirements
only) is various.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
DRAFTING INFORMATION
The principal author of this notice is
Sean I. Kahng of the Office of Associate
Chief Counsel (Passthroughs & Special In-
dustries). However, other personnel from
the Treasury Department and the Service
participated in its development. For fur-
ther information regarding this notice, con-
tact Mr. Kahng at (202) 622–3050 (not a
toll-free call).
NOTE:Thisrevenueprocedurewillbereproduced as IRS Publication 4436,General Rules and Specifications for Substitute
Form 941 and Schedule B (Form 941).
Rev. Proc. 2005–21
TABLE OF CONTENTS
SECTION 1 – PURPOSE
............................................................................................ 899
SECTION 2 – WHAT’S NEW........................................................................................ 900
SECTION 3 – GENERAL REQUIREMENTS FOR REPRODUCING IRS OFFICIAL FORM 941 AND
SCHEDULE B (FORM 941)
............................................................................. 900
SECTION 4 – REPRODUCING FORM 941 AND SCHEDULE B (FORM 941) FOR SOFTWARE-GENERATED
PAPER FORMS
........................................................................................ 901
SECTION 5 – OMB REQUIREMENTS FOR SUBSTITUTE FORMS...................................................... 901
SECTION 6 – REPRODUCIBLE COPIES OF FORMS.................................................................. 902
SECTION 7 – EXHIBITS........................................................................................... 902
Section 1 – Purpose
.01The purpose of this publication is to provide general rules and specifications from the Internal Revenue Service (IRS) for
paper and computer-generated substitutes for the newly revised January 2005 version of Form 941, Employer’s Quarterly Federal Tax
Return, and Schedule B (Form 941), Report of TaxLiability for Semiweekly Schedule Depositors.
.02This publication provides measurementsand printing specifications for substitute Form 941 and Schedule B (Form 941). If
you need more in-depth information on who must complete the forms and how to complete them, see the Instructions for Form 941
and Publication 15 (Circular E), Employer’s Tax Guide, or visit the IRS website atw
ww.irs.gov.
.03Forms should not be submitted to the IRS for specific approval.If you are uncertain of any specification and want it clarified,
you may submit a letter citing the specification and your understanding of the specification, and enclose an example of the form (if
appropriate) to:
April 18, 20058992005–16 I.R.B.

Internal Revenue Service
Attn: Substitute Forms Program
SE:W:CAR:MP:T:T:SP, IR-6406
1111 Constitution Avenue, NW
Washington, DC 20024
Note.Allow at least 30 days for the IRS to respond.
.04However, software developers and form producers should send ablank copy of their substitute Form 941 and Schedule B (Form
941) in pdf format toV
ictor.V.Martin@irs.gov. The purpose is not specifically for approval but to assist the IRS in preparing to scan
these forms. Submitters will only receive comments if a significant problem is discovered through this process. Submitters are not
expected to delay marketing their forms inorder to receive feedback. In no case should submitters include “live” taxpayer data.
Section 2 – What’s New
.01We extensively revised Form941 and Schedule B (Form 941) to enable the IRS to scan the forms and to make them easier to
complete. Optical scanning of tax returns enables the IRS to capture data more accurately and efficiently. This will reduce our need
to contact filers because of an error in recording amounts reported on their returns.
.02Because scanning requires conformity, we are publishing this revenue procedure to provide specifications for producing substi-
tutes for the new revisions of Form 941 and Schedule B (Form 941). It is acceptable to produce substitutes of Form 941 and Schedule
B (Form 941) using the official IRS form as posted on the IRS website or to produce substitutes based on the format developed by the
software industry, which uses a 6x10 grid. Either format must be precisely followed.
.03We now require filers to check a box at the top of Form 941 to indicate the tax period. We also require that line 1 (“number of
employees”) be completed for each quarter. We combined income and social security tax adjustments into a single line (line 7) and no
longer require a supporting statement for tips or group-term life insurance adjustments. Because Form 941 is now two pages, filers
must enter their name, Employer Identification Number (EIN), and signature on page 2.
.04There is a new form for reporting discrepancies between Forms 941 and Forms W-2. We recently developed Schedule D
(Form 941), Report of Discrepancies Caused by Acquisitions, Statutory Mergers, or Consolidations. You may use Schedule D (Form
941) to explain the discrepancies between what an employer reported to the Social Security Administration on Form W-2 and what
the employer reported to the IRS on Form 941, if the discrepancies are caused by acquisitions, statutory mergers, or consolidations.
Areas where discrepancies may occur include social security wages,social security tips, Medicare wages and tips, federal income tax
withheld, and advanced earned income payments. We did not include specifications for Schedule D (Form 941) in the exhibits (Section
7) because scanning of Schedule D (Form 941) is not available at this time. However, any substitute paper or computer-generated
paper forms should generally follow the specifications for Form 941.
Section 3 – General Requirements for Reproducing IRS Official Form 941 and Schedule B
(Form 941)
.01Donotsubmit substitute Form 941 and Schedule B (Form 941) to the IRS for approval. Substitute Form 941 and Schedule B
(Form 941) thatcompletely conformto the specifications contained in this revenue procedure do not require prior approval from the
IRS. Substitute forms filed with the IRS that do not conform may be returned.
.02Print the form on paper that is 8.5 inches wide by 11 inches deep.
.03Use white paper that meets generally-accepted weight, color, and quality standards (minimum 20lb. white bond paper).
Note.Reclaimed fiber in any percentage ispermitted provided that the requirements of this standard are met.
.04The IRS prefers printing Form 941 on both sides of a single sheet of paper, but it is acceptable to print on one side of each of
two separate sheets of paper.
.05Make substitute paper forms as identical to the official IRS-printed forms as possible.
.06Print using nonreflective black inks.
.07Use typefaces that are substantially identicalin size and shape to the official forms and use rules and shading that are substan-
tially identical to those on the official forms.
.08Print the form ID codes in the upper right-hand corner of each formusing nonreflective black, carbon-based, 12-point (minimum
10-point required) OCR-A font. Use the official paper over-the-counter IRS forms to develop your substitute paper forms. Print
“9501” on page 1 of Form 941, “9502” on page 2 of Form 941, and “9503” on Schedule B (Form 941). See Section 4 for form ID
codes for software-generated forms.
.09Print the OMB number in the same location as on the official forms.
.10Print all entry boxes and checkboxes exactly as shown on the official forms.
.11Print your IRS-issued three-letter substitute form printer source code in the middle at the bottom of page 1 of Form 941.
2005–16 I.R.B.900April 18, 2005

.12Print “For Privacy Act and Paperwork Reduction Act Notice, see the back of the Payment Voucher” at the bottom of page 1 of
Form 941.
.13Print “For Paperwork Reduction Act Notice, see separate instructions" at the bottom of Schedule B (Form 941).
.14Do not print the form catalog number (“Cat. No.”) at the bottom of the forms or instructions.
.15Do not print the Government Printing Office (GPO) symbol at the bottom of the forms or instructions.
.16See Exhibits A and B in Section 7.
Section 4 – Reproducing Form 941 and ScheduleB (Form 941) for Software-Generated Paper
Forms
.01You may use the 6x10 grid exhibits (C and D) at the end of this document to develop a software version of Form 941 and
Schedule B (Form 941). Please follow the specifications exactly to develop the fields.
.02If you are developing software that is designed using the 6x10 grid in the exhibits, you may make the following modifications.
See Exhibits C and D in Section 7.
•Use “9701” for page 1 of Form 941, “9702” for page 2 of Form 941, and “9703” for Schedule B (Form 941) as the form ID codes.
•Place all boxes and entry spaces in the same fields as indicated in the 6x10 grid exhibits.
•Use single lines for “Employer Identification Number” (EIN) and other entry areas in the entity section of page 1 of Form 941.
•You do not need to use reverse type as shown on the IRS official form.
•You do not need to pre-print decimal points in the data boxes. However, all amounts should be printed with decimal points and
place holders for cents.
•Use a single box for “state abbreviation” in line 14 of Form 941.
•Delete the pre-printed formatting in the “date” box for line 16 and in Parts 5 and 6 of Form 941.
•Delete the pre-printed formatting in the “Phone” box for Parts 4, 5, and 6.
•Use a single box for “Personal Identification Number (PIN)” in Part 4 of Form 941.
•You may delete all shading when using the 6x10 grid format.
.03If producing both the form and the data or the form only, print your 3-letter IRS-issued form printer source code in Row 63,
Columns 49–51 on page 1 of Form 941.
.04If producing only the data on the form, print your 4-digit software industry form code in Row 4, Columns 58–61 on page 1
of Form 941. See the National Association of Computerized Tax Processors (NACTP) website atw
ww.nactp.orgfor information on
these codes.
.05Print “For Privacy Act and Paperwork Reduction Act Notice,see the Payment Voucher” at the bottom of page 1 of Form 941.
.06Print “For Paperwork Reduction Act Notice, see separate instructions" at the bottom of Schedule B (Form 941).
.07Do not print the form catalog number (“Cat. No.”) at the bottom of the forms or instructions.
.08Do not print the Government Printing Office (GPO) symbol at the bottom of the forms or instructions.
.09To enable accurate scanning and processing, enter data on Form 941 and Schedule B (Form 941) as follows:
•Use 12-point (minimum 10-point) Courier font (if possible).
•Omit dollar signs, but use commas to show amounts.
•Except for line 10, leave blank any data field with a value of zero.
•Enter negative amounts in parentheses or with a minus sign.
•Show name and EIN on all pages and attachments.
Section 5 – OMB Requirements for Substitute Forms
.01The Paperwork Reduction Act (the Act) of1995 (Public Law 104-13) requires that:
•The OMB approves all IRS tax forms that are subject to the Act.
April 18, 20059012005–16 I.R.B.

•Each IRS form contains the OMB approval number, if required. (The official OMB numbers may be found on the official IRS
printed forms and are also shown in the exhibits.)
•Each IRS form (or its instructions) states:
(1) Why the IRS needs the information,
(2) How it will be used, and
(3) Whether or not the information is required to be furnished to the IRS.
.02This information must be provided to any users of official or substitute IRS forms or instructions.
.03The OMB requirements for substitute IRS forms are:
•Any substitute form or substitute statement to a recipient must show the OMB number as it appears on the official IRS form.
•For Form 941 and Schedule B (Form 941), the OMB numbermust appear exactly as shown on the official IRS form.
•For any form, the OMB number must use one of the following formats.
(1) OMB No. XXXX-XXXX (preferred) or
(2) OMB# XXXX-XXXX (acceptable).
.04If no instructions are provided to users on your forms, you must furnish to them the exact text of the Privacy Act and Paperwork
Reduction Act Notice.
Section 6 – Reproducible Copies of Forms
.01You can order official IRS forms and information copies of federal tax materials by calling the IRS National Distribution Center
at 1-800-829-3676. Other ways to get federal tax material include:
•The Internet atwww.irs.gov.
•GPO Superintendent of Documents Bookstores.
•CD-ROM.
.02The IRS also offers an alternative to downloading electronic files and provides current and prior year access to tax forms and
instructions through its Federal Tax Forms CD-ROM. Order Publication 1796, IRS Federal Tax Products CD-ROM, by using the IRS
website atw
ww.irs.gov/cdordersor by calling 1-877-CDFORMS (1-877-233-6767).
Section 7 – Exhibits
.01Please follow the specifications indicatedin the following exhibits to produce substitute Form 941 and Schedule B (Form 941).
.02These forms are subject to review and possible change as required. Therefore, employers are cautioned against overstocking
supplies of privately-printed substitutes.
.03Donotsubmit substitute Form 941 and Schedule B (Form 941) to the IRS for approval. Substitute Form 941 and Schedule B
(Form 941) thatcompletely conformto the specifications contained in this revenue procedure may be privately printed without prior
approval from the IRS. Substitute forms filed with the IRS that do not conform may be returned. See Section 3 of this publication.
2005–16 I.R.B.902April 18, 2005

April 18, 20059032005–16 I.R.B.

2005–16 I.R.B.904April 18, 2005

April 18, 20059052005–16 I.R.B.

2005–16 I.R.B.906April 18, 2005

April 18, 20059072005–16 I.R.B.

2005–16 I.R.B.908April 18, 2005

26 CFR § 601.105: Examination of returns and
claims for refund, credit, or abatement; determina-
tion of correct tax liability.
(Also Part I, §§ 664; 1.664–1, 1.664–2, 1.664–3.)
Rev. Proc. 2005–24
SECTION 1. PURPOSE AND SCOPE
.01 This revenue procedure applies
to any charitable remainder annuity trust
(CRAT) or charitable remainder unitrust
(CRUT) that is created by the grantor,G,
if, under applicable state law,G’s sur-
viving spouse,S, has a right of election
exercisable onG’s death to receive an
elective, statutory share ofG’s estate, and
such share could be satisfied in whole or
in part from assets of the CRAT or CRUT
in violation of § 664(d)(1)(B) or (d)(2)(B)
of the Internal Revenue Code. In general,
onlyinter vivosCRATs or CRUTs are
within the scope of this revenue proce-
dure.
.02 This revenue procedure provides
a safe harbor procedure under which the
Internal Revenue Service will disregard
the right of election for purposes of de-
termining whether the CRAT or CRUT
meets the requirements of § 664(d)(1)(B)
or (d)(2)(B) continuously since its creation
ifSirrevocably waives the right of elec-
tion in the manner prescribed in this rev-
enue procedure. For trusts created before
June 28, 2005, the Service will disregard
the right of election, even without a waiver,
but only ifSdoes not exercise the right of
election.
.03 The safe harbor procedure provided
by this revenue procedure is not available
to a CRAT or CRUT ifSexercises the right
of election.
SECTION 2. BACKGROUND
.01 In general, a testator is free to
dispose of property in accordance with
the testator’s own wishes. However, in
most jurisdictions, state statutes protect
Sfrom disinheritance. In most common
law jurisdictions, these statutes are in the
form of elective share provisions, many
of which are based on the elective share
provisions of the Uniform Probate Code
(UPC), §§ 2–201– 2–214 (amended 1993).
Elective share statutes provideSthe right
to elect to receive a statutory share ofG’s
estate, regardless of whetherGmade any
bequests toS. For purposes of this revenue
procedure,S’s statutory share ofG’s estate
will be referred to as an “elective share”
and the right to electto receive an elective
share will be referred to as a “right of elec-
tion”, regardless of what terms different
jurisdictions may use to describe these
concepts.
.02 In some states, the elective share is
based solely on the probate estate but, in
others,G’s estate is defined more broadly
for purposes of computing the elective
share and may include assets of the CRAT
or CRUT. In states that have adopted the
elective share provisions of the UPC,S
has the right of election to take a percent-
age (generally determined by the duration
of the marriage, but subject to a mini-
mum dollar amount in some cases) of the
“augmented estate” provided that certain
requirements are met. UPC § 2–202. The
augmented estate includesG’s net probate
estate, as well as certain nonprobate assets
ofG, certain property transferred byG
to others (including toS) during life, and
certain other property. UPC §§ 2–202 and
2–207. The assets of the CRAT or CRUT
maybeincludedintheaugmentedestate
and, therefore, may be used to determine
and satisfy the elective share amount.
UPC § 2–209. In some states, the CRAT
orCRUTassetsmaybeusedtosatisfy
the elective share only after other prop-
erty in the augmentedestate first has been
exhausted.
.03 Sections 664(d)(1)(B) (in the case
of a CRAT) and (d)(2)(B) (in the case of
a CRUT) provide that no amount other
than the annuity payments described in
§ 664(d)(1)(A) or the unitrust payments
described in § 664(d)(2)(A), respectively,
(other than qualified gratuitous pay-
ments described in §§ 664(d)(1)(C) and
(d)(2)(C))maybepaidtoorfortheuse
of any person other than an organization
described in § 170(c). The requirements
of §§ 664(d)(1)(B) and (d)(2)(B) are not
satisfied in situations in whichSmay ex-
ercise the right of election to receive an
elective share and the share could include
assets of the CRAT or CRUT, because
the mere existence of the right of election
under applicable law, whether or not ex-
ercised, and the resulting possibility that
the CRAT or CRUT may be invaded for
the benefit ofS, causes the trust to fail to
qualify under § 664(d).
.04 The Service believes that, in the in-
terest of sound tax administration and to
reduce the burden on taxpayers, it is ap-
propriate to provide a safe harbor proce-
dure that, if followed, will cause the right
of election to be disregarded for purposes
of determining whether a CRAT or CRUT
that is within the scope of this revenue pro-
cedure meets the requirements of § 664(d)
continuously from the date the trust is cre-
ated. This procedure generally requires
thatSirrevocably waive the right of elec-
tion with regard to the assets of the CRAT
or CRUT to ensure that no part of the trust
will be used to satisfy the elective share.
.05 No waiver of the right of election is
required if the applicable state law does not
provideSwith a right of election, exercis-
able at the time ofG’s death, to receive an
elective share ofG’s estate. For example,
in community property jurisdictions, elec-
tive share provisionsare generally unnec-
essary becauseStypically has vested own-
ership in one-half of the community prop-
erty. Additionally, no waiver is required
if, under applicable state law,S’s elective
share ofG’s estate may not include any
assets of the CRAT or CRUT (other than
the annuity or unitrust interest payable toS
as the named recipient). For example, no
waiver is required if, under applicable state
law, the trust’s property is excluded from
the base for computing the elective share
by reason ofG’s receipt of adequate and
full consideration for the transfer or the
written consent to or joinder in the trans-
fer bySand, in fact, the consideration is
paid or the consent or joinder is given.
SECTION 3. APPLICATION OF SAFE
HARBOR
.01In General. With respect to any
CRAT or CRUT within the scope of this
revenue procedure,S’s right of election
to receive an elective share ofG’s estate,
if the share could include any assets of a
CRAT or CRUT created or funded byG,
will be disregarded for purposes of deter-
mining whether the CRAT or CRUT has
met the requirements of § 664(d)(1)(B) or
(d)(2)(B) continuously since its creation
if all of the requirements of section 3 of
this revenue procedure are satisfied. For
CRATs and CRUTs within the scope of this
revenue procedure created byGon or af-
ter June 28, 2005, the failure ofSto waive
the right of election in accordance with
April 18, 20059092005–16 I.R.B.

the requirements of this revenue procedure
will result in the CRAT or CRUT failing to
qualify under § 664(d) continuously since
its creation, whether or notSexercises the
right of election. For CRATs and CRUTs
within the scope of this revenue procedure
created byGbefore June 28, 2005, the fail-
ure ofSto waive the right of election, com-
bined withS’s exercise of that right of elec-
tion, will result in the CRAT or CRUT fail-
ing to qualify under § 664(d) continuously
since its creation. Thus, for all CRATs
and CRUTs, regardless of when they were
created, a waiver under this revenue pro-
cedure ofS’s right of election will pro-
vide certainty that the right of election will
not cause the trust to fail to qualify under
§ 664(d) continuously since its creation.
.02Waiver Effective Under State Law.
Smust irrevocably waive the right of elec-
tion to whatever extent necessary to en-
sure that no part of the trust (other than
the annuity or unitrust interest of whichS
is the named recipient under the terms of
the trust) may be used to satisfy the elec-
tive share. A valid waiver of the elective
share or right of election will satisfy the
requirements of the preceding sentence if
the waiver is valid under applicable state
law, in writing, and signed and dated byS.
This revenue procedure does not require a
waiver ofS’s right as the named recipient
to receive the annuity or unitrust payment
from the CRAT or CRUT.
.03Timing of Waiver. For CRATs or
CRUTs created by G on or after June 28,
2005, section 3.02 of this revenue proce-
dure must be satisfied on or before the date
that is 6 months after the due date (ex-
cluding extensions of time to file actually
granted) of Form 5227,Split-Interest Trust
Information Return, for the year in which
the later of the following occurs:
(1) the creation of the trust;
(2) the date ofG’s marriage toS;
(3) the dateGfirst becomes domiciled
or resident in a jurisdiction whose law pro-
vides a right of election that could be sat-
isfied from assets of the trust; or
(4) the effective date of applicable state
law creating a right of election.
.04Trustee To Retain Copy.Acopy
of the signed waiver must be provided to
thetrusteeoftheCRATorCRUT.The
trustee must retain the copy in the official
records of the trust so long as the contents
thereof may become material in the admin-
istration of any internal revenue law.See
§ 1.6001–1(e) of the Income Tax Regula-
tions.
SECTION 4. EXAMPLES
In each of the following examples,G
created a CRAT that provides an annuity to
GforG’s life. UponG’s death, the remain-
der of the trust will pass to an organization
that meets the requirements of § 170(c). In
each example (exceptExample 3), at the
time the CRAT is created, applicable state
law providesSa right of election to re-
ceive an elective share ofG’s estate and
the share would include (and could be sat-
isfied from) assets of the trust.
.01Example 1.Gcreates the trust in
2007 while married toS. On or before the
date that is 6 months after the due date (ex-
cluding extensions oftime to file actually
granted) of the Form 5227 for the trust for
calendar year 2007,Sirrevocably waives
S’s right of election to receive an elective
share with regard to the assets in the trust
(but does not waive the right of election
with regard toG’s probate estate).
.02Example 2.Gcreates the trust in
2006, and is unmarried on the date the trust
is created. On May 1, 2007,Gmarries
S. On or before the date that is 6 months
after the due date (excluding extensions of
time to file actually granted) of the Form
5227 for the trust for calendar year 2007,S
irrevocably waives the right of election to
receive an elective share with regard to the
assets in the trust (but does not waive the
right of election with regard toG’s probate
estate).
.03Example 3.Gcreates the trust in
2008 while married toS. Under applica-
ble state law in effect on the date thatG
creates the trust, the elective share does
not include the assets in the trust. Effec-
tive on March 1, 2009, applicable state law
is amended to giveSthe right of election
to receive an elective share of the “aug-
mented estate,” which, by definition, in-
cludes the assets of the trust. On or be-
fore the date that is 6 months after the due
date (excluding extensions of time to file
actually granted) of the Form 5227 for the
trust for calendar year 2009,Sirrevocably
waives the right of election to receive an
elective share with regard to the assets in
the trust (but does not waive the right of
election with regard toG’s probate estate).
In each ofExamples 1through3,as-
suming thatS’s timely waiver of the right
of election is valid under applicable state
law and satisfies the other requirements of
this revenue procedure, the existence of
the right of election will be disregarded
for the purpose of determining whether the
trust has qualified continuously since its
creation as a CRAT under § 664(d)(1)(B).
Further, in each ofExamples 1through3,
the result would be the same if, instead
of executing only a partial waiver,Shad
waived the full right of election with re-
spect to all assets in G’s augmented estate.
.04Example 4.Gcreates the trust in
2007 while married toS. Under applicable
state law in effect on the date thatGcre-
ates the trust, the elective share includes
the assets in the trust. Later in the same
year, applicable state law is amended to
provide that the augmented estate does not
include the assets of a CRAT or CRUT and
the amendment applies retroactively to in-
clude the trust created byG. Accordingly,
no waiver of the right of election is re-
quired with respect to the assets of the trust
in order for the trust to continue to qualify
as a CRAT.
.05Example 5. The facts are the same
as inExample 2except that the waiver is
contained in, or is signed pursuant to the
requirements of, a prenuptial agreement.
Unless the agreement as a whole (or only
the waiver) is subsequently found to be in-
valid or unenforceable, the waiver will sat-
isfy the requirements of this revenue pro-
cedure.
.06Example 6. The facts are the same
as inExample 1, except thatSdies in
2010. In 2012,GmarriesS2.S2re-
fuses to waiveS2’s right to receive an elec-
tive share with regard to the assets in the
trust. The existence ofS’s right of elec-
tion will be disregarded for the purpose
of determining whether the trust has quali-
fied continuously since its creation up un-
tilG’s marriage toS2, as a CRAT under
§ 664(d)(1)(B). However, becauseS2did
not timely and irrevocably waiveS2’s right
to receive an elective share with regard to
the assets in the trust, the trust does not
qualify as a CRAT under § 664(d)(1)(B).
If, in these examples,Ghad instead cre-
ated a CRUT, the results would be the same
for purposes of § 664(d)(2)(B).
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective as
of March 30, 2005.
2005–16 I.R.B.910April 18, 2005

SECTION 6. PAPERWORK
REDUCTION ACT
The collection of information con-
tained in this revenue procedure has been
reviewed and approved by the Office
of Management and Budget in accor-
dance with the Paperwork Reduction Act
(44 U.S.C. 3507) under control number
1545–1936.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
The collection of information in this
revenue procedure is in section 3. This
information is required to be collected
and retained in order to ensure that a trust
meets the requirements of § 664(d)(1) or
(d)(2). This information will be used to
determine whether the eligibility require-
ments under those statutes for treatment
as a CRAT or CRUT have been met. The
collection of information is required to
obtain a benefit. The likely respondents
are individuals.
The estimated total annual reporting
burden is 150,000 hours.
The estimated annual burden per re-
spondent varies from 1 hour to 2 hours, de-
pending on individual circumstances, with
an estimated average burden of 1
1
/2hours
to complete the statements required un-
der this revenue procedure. The estimated
number of respondents is 100,000.
The estimated annual frequency of re-
sponses is on occasion.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any Internal Revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
SECTION 7. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Susan H. Levy. For fur-
ther information regarding this revenue
procedure, contact Susan H. Levy at
(202) 622–3090 (not a toll-free call) or
Bradford R. Poston at (202) 622–3060
(neither a toll-free call).
April 18, 20059112005–16 I.R.B.

Part IV. Items of General Interest
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Revisions to Regulations
Relating to Withholding of Tax
on Certain U.S. Source Income
Paid to Foreign Persons and
Revisions of Information
Reporting Regulations
REG–125443–01
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains
amendments to final regulations relating
to the withholding of income tax under
sections 1441 and 1442 on certain U.S.
source income paid to foreign persons and
related requirements governing collection,
deposit, refunds, and credits of withheld
amounts under sections 1461 through
1463. Additionally, this document con-
tains amendments to final regulations
under sections 6049 and 6114. These reg-
ulations affect persons making payments
of U.S. source income to foreign persons.
DATES: Written or electronic comments
must be received by June 27, 2005. Re-
quests to speak (with outlines of oral
comments to be discussed) at the public
hearing scheduled for July 20, 2005, at
10:00AM must be received by June 29,
2005.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–125443–01), room
5203, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions also may be
hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to: CC:PA:LPD:PR (REG–125443–01),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC, or sent electronically,
via the IRS internet sitewww.irs.gov/regs
or via the Federal eRulemaking Portal
site atwww.regulations.gov(IRS and
REG–125443–01). The public hearing
will be held in the IRS Auditorium, Sev-
enth Floor, Internal Revenue Building,
1111 Constitution Avenue, N.W., Wash-
ington, DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed reg-
ulations, Ethan Atticks, (202) 622–3840
(not a toll-free number); concerning sub-
missions of comments, the hearing, and/or
to be placed on the building access list
to attend the hearing, Robin Jones, (202)
622–7180 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in this notice of proposed rule-
making have been previously reviewed
and approved by the Office of Manage-
ment and Budget in accordance with the
Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)) under control number
1545–1484.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
control number assigned by the Office of
Management and Budget.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
In Treasury Decision 8734, 1997–2
C.B. 109 [62 FR 53387], the Treasury
Department and the IRS issued compre-
hensive regulations (final regulations)
under chapter 3 (sections 1441–1464)
and subpart G of Subchapter A of chap-
ter 61 (sections 6041 through 6050S) of
the Internal Revenue Code. Those final
regulations were amended by T.D. 8804,
1999–1 C.B. 793 [63 FR 72183], T.D.
8856, 2000–1 C.B. 298 [64 FR 73408],
T.D. 8881, 2000–1 C.B. 1158 [65 FR
32152], and T.D. 9023, 2002–2 C.B. 955
[67 FR 70310].
In Notice 2001–4, 2001–1 C.B. 267,
Notice 2001–11, 2001–1 C.B. 464, and
Notice 2001–43, 2001–2 C.B. 72, the
Treasury Department and the IRS an-
nounced the intention to amend the fi-
nal regulations to address the matters
discussed in those notices. These pro-
posed regulations would implement cer-
tain changes announced in those notices
and other changes.
Under section 1441 of the Internal
Revenue Code (Code), as amended by the
American Jobs Creation Act of 2004 (Pub-
lic Law 108–357, 118 Stat. 1418), “in-
terest-related dividends” and “short-term
capital gain dividends” paid by regulated
investment companies are exempt from
withholding. These proposed regulations
would amend the withholding rules in or-
der to reflect the treatment of these new
categories of dividends.
Explanation of Provisions
I. Notice 2001–4
A. TIN requirement for certain foreign
grantor trusts
The final regulations provide that a
withholding certificate that specifies cer-
tain payee information and that meets cer-
tain requirements may be used for a variety
of purposes, including certifying a payee’s
status as a foreign person or foreign inter-
mediary. Section 1.1441–1(e)(4)(vii)(G)
of the final regulations provides that a tax-
payer identification number (TIN) must be
stated on a withholding certificate from a
person representing to be a foreign grantor
trust with 5 or fewer grantors.
After the final regulations took effect,
some taxpayers requested documentation
and reporting relief for simple and grantor
trusts that hold an account with a quali-
fied intermediary (QI). In response to this
request, the Treasury Department and the
IRSprovidedinsectionIII.CofNotice
2001–4 that, if a foreign simple or grantor
trust provides a QI with a Form W–8IMY,
“Certificate of Foreign Intermediary, For-
eign Flow-Through Entity, or Certain U.S.
Branches for United States Tax Withhold-
ing,” and the trust has 5 or fewer owners,
the IRS will not require the trust to pro-
vide the QI with a TIN, notwithstanding
2005–16 I.R.B.912April 18, 2005

§1.1441–1(e)(4)(vii)(G). Section III.C of
Notice 2001–4 was superseded by Rev.
Proc. 2003–64, 2003–2 C.B. 306, which
provides comprehensive guidance for
withholding partnerships and withholding
trusts. However, Rev. Proc. 2003–64
does not provide any relief from the TIN
requirement of §1.1441–1(e)(4)(vii)(G) in
the QI context.
In addition to requesting reinstate-
ment of the previously granted relief from
the TIN requirement in the QI context,
withholding agents have requested relief
from the TIN requirement beyond the
QI context. In light of these requests,
the Treasury Department and the IRS
have reexamined the TIN requirement of
§1.1441–1(e)(4)(vii)(G) and have con-
cluded that the rule is not serving to en-
hance enforcement objectives. Therefore,
the proposed regulations would reinstate
the relief granted in section III.C of No-
tice 2001–4 for withholding certificates
provided to a QI by a foreign grantor trust
with 5 or fewer grantors. In addition, the
proposed regulations would grant relief
from the TIN requirement for withholding
certificates that are executed after Decem-
ber 31, 2003, and that are provided to a
withholding agent by a foreign grantor
trust with 5 or fewer grantors.
B. Reporting relief for U.S. payors in U.S.
possessions
U.S. payors that pay foreign source
income outside the United States to U.S.
non-exempt recipients generally must re-
port these payments on Form 1099 and,
if required, apply backup withholding.
After the final regulations became effec-
tive, withholding agents requested that the
Treasury Department and the IRS recon-
sider this rule to the extent it requires Form
1099 reporting and backup withholding
with respect to income from sources within
apossessionoftheUnitedStatespaidtoa
U.S. citizen even if the income is exempt
from tax under section 931, 932, or 933.
In response to this request, the Treasury
Department and the IRS provided in sec-
tion V.C of Notice 2001–4 that the final
regulations would be amended to provide
that income that is derived from sources
within a possession of the United States,
that is exempt from taxation under section
931, 932, or 933, and that a payor reason-
ably believes to be paid to a resident of a
possession of the United States is not re-
quired to be reported on Form 1099. Sec-
tion V.C of Notice 2001–4 also provides
that U.S payors will not be required to re-
port such income until the regulations are
amended.
These proposed regulations would
amend §1.6049–5(c) to implement section
V.C. of Notice 2001–4, with modifica-
tions. The proposed regulations would
provide that U.S. payors are not required
to report on Form 1099 income from
sources within a possession of the United
States that is exempt from tax under sec-
tion 931, section 932, or section 933.
Under the proposed regulations, this ex-
ception from Form 1099 reporting would
be applicable if the payor could reliably
associate the payment of such income with
valid documentation that supports a claim
that the beneficial owner of the payment
is a resident of the U.S. possession.
In addition, the proposed regulations
would add new §1.1441–1(c)(30), which
for these purposes would defineposses-
sions of the United Statesas Guam, Amer-
ican Samoa, the Nothern Mariana Islands,
Puerto Rico, and the Virgin Islands.
C. Use of documentary evidence in
possessions of the United States
The final regulations provide certain
exceptions from certain information re-
porting requirements. One such exception
applies in cases in which, among other
things, a payment is made outside the
United States and the payor can rely on
appropriate documentation to treat the
payment as made to a foreign person. Sec-
tion 1.6049–5(c)(1) allows a payor to rely
on documentary evidence instead of an ap-
plicable withholdingcertificate described
in §1.1441–1(c)(16) (Form W–8) in the
case of a payment made to an offshore ac-
count. For this purpose, the termoffshore
accountmeans an account maintained at
an office or branch of a U.S. or foreign
bank at any location outside the United
States and outside of possessions of the
United States.
When the final regulations took ef-
fect, taxpayers requested that the Treasury
Department and the IRS consider allow-
ing the use of documentary evidence for
an account in a possession of the United
States. In response to this request, the
Treasury Department and the IRS pro-
vided in section V.D of Notice 2001–4
that documentary evidence may be used
in lieu of Form W–8 in a possession of the
United States and announced the intention
to amend §1.6049–5(c)(1) accordingly.
These proposed regulations would im-
plement Section V.D of Notice 2001–4.
D. Information reporting of foreign source
services income
Under section 6041, a U.S. payor must
report certain payments made for ser-
vices performed outside the United States.
However, §1.6041–4 provides that infor-
mation reporting is not required if the
payee has provided documentation to es-
tablish its status as a foreign beneficial
owner or a foreign payee, or if the payee
is presumed to be a foreign payee under
the presumption rules. Under the pre-
sumption rules of §§1.6049–5(d)(2) and
1.1441–1(b)(3)(iii), a U.S. payor must
presume that the payee is a U.S. payee if
the payee is an individual.
When the final regulations took effect,
U.S. payors commented that these rules
were overly burdensome because they
require U.S. payors making payments for
services performed outside the United
States to ask all payees to represent that
such payees are not U.S. persons.
In response to this comment, the Trea-
sury Department and the IRS provided in
section V.E of Notice 2001–4 that a U.S.
payor will not be required to report, un-
der section 6041, income paid for services
performed outside the United States if (1)
the payee of the income is an individual,
(2) the U.S. payor does not know that the
payee is a U.S. citizen or resident, (3) the
payor does not know, and has no reason to
know, that the income is (or may be) ef-
fectively connectedwith the conduct of a
trade or business within the United States,
and (4) all of the services for which pay-
ment is made were performed by the payee
outside the United States.
The proposed regulations would im-
plement section V.E of Notice 2001–4.
The Treasury Department and the IRS are
considering whether there are appropriate
circumstances, and if so, an appropriate
manner, in which such an exception could
be extended to payments made to foreign
partnerships. Comments are requested on
this issue.
April 18, 20059132005–16 I.R.B.

II. Notice 2001–11 —
Reporting/Withholding on Payments
to Financial Institutions in U.S.
Possessions
Corporations and partnerships orga-
nized in a possession of the United States
generally are treated as foreign persons for
purposes of applying the final regulations.
Accordingly, under the final regulations,
a possessions financial institution acting
as an intermediary is treated as a non-
qualified intermediary that must provide
documentation and allocation information
for the beneficial owners on whose be-
half it acts. In contrast, a U.S. branch of
a foreign financial institution may agree
with a withholding agent to be treated as a
U.S. person. See §1.1441–1(b)(2)(iv)(A)
and (E). Under §1.1441–1(b)(1), if such a
U.S. branch agrees tobe treated as a U.S.
person, payments of U.S. source income
made to it will be treated as made to a U.S.
payee and therefore will not be subject to
withholding under section 1441. Posses-
sions financial institutions generally are
subject to all of the withholding and re-
porting obligations of a U.S. withholding
agent. Section 7651.
When the final regulations took ef-
fect, possessions financial institutions
commented that the requirement to pro-
vide a withholding agent with customer
informationshouldnotapplytothem,
because possessions financial institutions
are subject to all of the withholding and
information reporting requirements that
apply to U.S. withholding agents under
Chapters 3 and 61 and section 3406 of
the Code, and because they are subject
to direct audit supervision by the Internal
Revenue Service.
In response to these comments, the
Treasury Department and the IRS issued
Notice 2001–11, which provided that a
possessions financial institution will be
treated as a U.S. branch that is subject to
the rules of §1.1441–1(b)(2)(iv) and an-
nounced the intention to amend the final
regulations accordingly.
These proposed regulations would im-
plement Notice 2001–11.
III. Notice 2001–43
A. Reporting of treaty-based return
positions
Section 301.6114–1(a) of the final reg-
ulations provides that, if a taxpayer takes
a return position that a tax treaty overrules
or modifies any provision of the Internal
Revenue Code and thereby effects a reduc-
tion of any tax at any time, the taxpayer
must disclose that return position, either
on a statement attached to the return or on
a return filed for the purpose of making
such disclosure. Section 301.6114–1(b)
provides that reporting is required unless
it is expressly waived. It further provides
a nonexclusive list of particular positions
for which reporting is required. Section
301.6114–1(c) provides a list of specific
exceptions from the general reporting re-
quirements of §301.6114–1(a) and (b).
When the final regulations took effect,
taxpayers requested guidance regarding
the scope of the reporting required un-
der §301.6114–1(a) and (b) in the case
of claims for treaty-reduced withholding
made by foreign persons that are not indi-
viduals or States. In particular, taxpayers
requested the following clarification and
relief.
First, because §301.6114–1(c)(1)(i)
waives reporting only for individuals and
States, clarification was requested re-
garding whether taxpayers that are not
individuals or States and that do not
meet the requirements to report under
§301.6114–1(b)(4)(ii)(C) are nevertheless
required to disclose treaty-based return po-
sitions described in subparagraph (b)(4)(ii)
under the general rules of §301.6114–1(a)
and (b).
Second, because §301.6114–1(c)(2)
waives reporting only for individuals who
receive less than the threshold amount, a
de minimisexception was requested for
taxpayers that are not individuals.
Third, because the representation un-
der §1.1441–6(b)(1) (that the beneficial
owner will file the statement required
under §301.6114–1(d)) is required when
the beneficial owner is related to the
withholding agent within the meaning of
section 482, and because the filing under
§301.6114–1(b)(4)(ii)(C) is required when
the beneficial owner is related to the per-
son obligated to pay the income within the
meaning of sections 267(b) and 707(b),
clarification was requested regarding coor-
dination of the representation requirement
with the filing requirement.
Finally, because §1.1441–6(b)(1) states
that the filing requirement applies only
to amounts received during the calendar
year that exceed $500,000 in the aggre-
gate, and because §301.6114–1(a)(1) per-
mits a taxpayer to adopt a taxable year for
filing different from the calendar year, tax-
payers requested clarification regarding a
fiscal-year taxpayer’s obligation to report
such amounts.
In response to these and other com-
ments, Treasury and the IRS issued No-
tice 2001–43. Section 2 of Notice 2001–43
provided that the following rules would
apply, effective January 1, 2001.
First, reporting is waived for a
treaty-based return position described
in §301.6114–1(b)(4)(ii), unless the con-
ditions in paragraph (b)(4)(ii)(A) and (B)
of this section, paragraph (b)(4)(ii)(C) of
this section, or paragraph (b)(4)(ii) (D) of
this section are met.
Second, reporting under §301.6114–1
(b)(4)(ii)(D) is waived for taxpayers that
are not individuals or States and that re-
ceive amounts of income subject to with-
holding that do not exceed $10,000 in the
aggregate.
Third, the related-person test for pur-
poses of applying the representation re-
quirement of §1.1441–6(b)(i) was con-
formed to the related-person test that
applies for purposes of the filing require-
ment of §301.6114–1(b)(4)(ii)(C).
Fourth, the calendar-year rule in
§1.1441–6(b)(1) was replaced with
a taxable-year rule to conform to
§301.6114–1(a)(1).
These proposed regulations would im-
plement Section 2 of Notice 2001–43.
B. Conversion of foreign currency
amounts
Section 1.1441–3(e)(2) of the final reg-
ulations provides that if an amount subject
to tax is paid in a currency other than the
U.S. dollar, the amount of withholding un-
der section 1441 shall be determined by
applying the applicable rate of withhold-
ingtotheforeigncurrencyamountandby
converting the amount withheld into U.S.
dollars at the spot rate on the date of pay-
ment. A withholding agent that makes reg-
ular or frequent payments in foreign cur-
2005–16 I.R.B.914April 18, 2005

rency is permitted to use a month end spot
rate or a monthly average spot rate.
After the final regulations took effect,
some withholding agents that make regu-
lar and frequent payments in foreign cur-
rency commented that the permitted con-
version conventions can expose them to
currency risks that would require manage-
ment by means of hedging transactions.
Also, they commented that permitted con-
ventions can require multiple accounting
adjustments when payment amounts in the
base currency are adjusted or corrected in
the course of processing and settlement.
They requested that they be permitted to
use the spot rate on the date the amount of
tax is deposited.
In response to this comment, in Section
3 of Notice 2001–43, the Treasury Depart-
ment and the IRS provided that a withhold-
ing agent that makes regular or frequent
payments in foreign currency is permitted
to convert the amount withheld into U.S.
dollars at the spot rate on the day the tax
is deposited, provided that the deposit is
made within seven days of the date of pay-
ment. Section 3 of Notice 2001–43 also
provided that taxpayers using this alterna-
tive convention must do so consistently for
all nondollar amounts withheld and from
year to year. It also provided that such con-
vention could not be changed without the
consent of the Commissioner.
These proposed regulations would im-
plement Section 3 of Notice 2001–43.
IV. The American Jobs Creation Act of
2004
The final regulations provide gener-
ally that if the amount of distributions
designated by a regulated investment
company as being subject to 852(b)(3)(C)
(relating to capital-gain dividends) or
852(b)(5)(A) (relating to exempt-interest
dividends) exceeds the amount that may
be designated under those sections for
the taxable year, then no penalties will
be asserted for any resulting underwith-
holding if the designations were based on
a reasonable estimate, as defined in reg-
ulations, and the adjustments to amount
withheld are made in accordance with
regulations. §1.1441–3(c)(3)(i). These
proposed regulations would extend the
reasonable-estimate rule to cover distri-
butions designated as being subject to
new section 871(k)(1)(C) (relating to in-
terest-related dividends) or 871(k)(2)(C)
(relating to short-term capital gain divi-
dends).
Proposed Effective Date
These regulations are proposed to be
applicable when final regulations are pub-
lished in theFederal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It has also been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations,
and, because the regulations do not im-
pose a new collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Code,
this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
ness.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments (a
signed original and eight (8) copies) that
are submitted timely (in the manner de-
scribed in the “ADDRESSES” portion of
this preamble) to the IRS. The Treasury
Department and the IRS request comments
on the clarity of the proposed rules and
how they can be made easier to understand.
All comments will be available for public
inspection and copying.
A public hearing has been scheduled for
July 20, 2005, beginning at 10:00 a.m. in
the IRS Auditorium (7
th
Floor), Internal
Revenue Building, 1111 Constitution Av-
enue, NW, Washington, DC. Due to build-
ing security procedures, visitors must enter
at the 10
th
Street entrance, located between
Constitution and Pennsylvania Avenues,
NW. In addition, all visitors must present
photo identification to enter the building.
Because of access restrictions, visitors will
not be admitted beyond the immediate en-
trance area more than 30 minutes before
the hearing starts. For information about
having your name placed on the building
access list to attend the hearing, see the
“FOR FURTHER INFORMATION CON-
TACT” portion of this preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments must submit writ-
ten comments and an outline of the topics
to be discussed and the time to be devoted
to each topic (a signed original and eight
(8) copies) by Wednesday, June 29. A pe-
riod of 10 minutes will be allotted to each
person for making comments. An agenda
showing the scheduling of the speakers
will be prepared after the deadline for re-
viewing outlines has passed. Copies of the
agenda will be available free of charge at
the hearing.
Drafting Information
The principal author of the proposed
regulations is Ethan Atticks, Office of
Associate Chief Counsel (International).
However, other personnel from the IRS
and Treasury Department participated in
their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 301
are proposed to be amended as follows:
PART 1 — INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.1441–1 is amended as
follows:
1. Paragraph (b)(2)(iv)(A) is revised.
2. Paragraph (b)(3)(iii)(E) is added.
3. Paragraph (c)(30) is added.
4. Paragraph (e)(4)(vii)(G) is revised.
The revisions and additions read as fol-
lows:
§1.1441–1 Requirement for the deduction
and withholding of tax on payments to
foreign persons.
*****
(b) * * *
(2) * * *
(iv)Payments to a U.S. branch of cer-
tain foreign banks or foreign insurance
companies—(A)U.S. branch treated
April 18, 20059152005–16 I.R.B.

as a U.S. person in certain cases.A
payment to a U.S. branch of a foreign
person is a payment to a foreign person.
However, a U.S. branch described in this
paragraph (b)(2)(iv)(A) and a withhold-
ing agent (including another U.S. branch
described in this paragraph (b)(2)(iv)(A))
may agree to treat the branch as a U.S.
person for purposes of withholding on
specified payments to the U.S. branch.
Notwithstanding the preceding sentence,
a withholding agent making a payment
to a U.S. branch treated as a U.S. person
under this paragraph (b)(2)(iv)(A) shall
not treat the branch as a U.S. person for
purposes of reporting the payment made to
the branch. Therefore, a payment to such
U.S. branch shall be reported on Form
1042–S under §1.1461–1(c). Further, a
U.S. branch that is treated as a U.S. person
under this paragraph (b)(2)(iv)(A) shall
not be treated as a U.S. person for pur-
poses of the withholding certificate it may
provide to a withholding agent. There-
fore, the U.S. branch must furnish a U.S.
branch withholdingcertificate on Form
W–8 as provided in paragraph (e)(3)(v)
of this section and not a Form W–9. An
agreement to treat a U.S. branch as a U.S.
person must be evidenced by a U.S. branch
withholding certificate described in para-
graph (e)(3)(v) of this section furnished
by the U.S. branch to the withholding
agent. A U.S. branch described in this
paragraph (b)(2)(iv)(A) is any U.S. branch
of a foreign bank subject to regulatory
supervision by the Federal Reserve Board
or a U.S. branch of a foreign insurance
company required to file an annual state-
ment on a form approved by the National
Association of Insurance Commissioners
with the Insurance Department of a State,
aTerritory,ortheDistrictofColumbia.In
addition, a financial institution organized
in a possession of the United States will
be treated as a U.S. branch for purposes of
this paragraph (b)(2)(iv)(A). The Internal
Revenue Service (IRS) may approve a
list of U.S. branches that may qualify for
treatment as a U.S. person under this para-
graph (b)(2)(iv)(A) (see §601.601(d)(2)
of this chapter). See §1.6049–5(c)(5)(vi)
for the treatment of U.S. branches as
U.S. payors if they make a payment that
is subject to reporting under chapter 61
of the Internal Revenue Code. Also see
§1.6049–5(d)(1)(ii) for the treatment of
U.S. branches as foreign payees under
chapter 61 of the Internal Revenue Code.
*****
(3) * * *
(iii) * * *
(E)Certain payments for services.A
payment for services is presumed to be
made to a foreign person if —
(1) The payee is an individual;
(2) The withholding agent does not
know, or have reason to know, that the
payee is a U.S. citizen or resident;
(3) The withholding agent does not
know, or have reason to know, that the in-
come is (or may be) effectively connected
with the conduct of a trade or business
within the United States; and
(4) All of the services for which the
payment is made were performed by the
payee outside of the United States.
*****
(c) * * *
(30)Possessions of the United States.
For purposes of the regulations under
chapter 3 and 61 of the Internal Rev-
enue Code,possessions of the United
Statesmeans Guam, American Samoa, the
Northern Mariana Islands, Puerto Rico,
and the Virgin Islands.
*****
(e) * * *
(4) * * *
(vii)***
(G) A withholding certificate executed
on or before December 31, 2003, from a
person representing to be a grantor trust
with 5 or fewer grantors, except where
such withholding certificate is provided to
a qualified intermediary.
*****
Par. 3. Section 1.1441–3 is amended
by revising paragraphs (c)(3) and (e)(2) to
read as follows:
§1.1441–3 Determination of amounts to
be withheld.
*****
(c) * * *
(3)Special rules in the case of dis-
tributions from a regulated investment
company—(i)General rule.Ifthe
amount of any distributions designated
as being subject to section 852(b)(3)(C)
or 5(A), or 871(k)(1)(C) or (2)(C), ex-
ceeds the amount that may be designated
under those sections for the taxable year,
then no penalties will be asserted for any
resulting underwithholding if the designa-
tions were based on a reasonable estimate
(made pursuant to the same procedures
as described in paragraph (c)(2)(ii)(A) of
this section) and the adjustments to the
amount withheld are made within the time
period described in paragraph (c)(2)(ii)(B)
of this section. Any adjustment to the
amount of tax due and paid to the IRS by
the withholding agent as a result of under-
withholding shall not be treated as a distri-
bution for purposes of section 562(c) and
the regulations thereunder. Any amount
of U.S. tax that a foreign shareholder is
treated as having paid on the undistributed
capital gain of a regulated investment
company under section 852(b)(3)(D) may
be claimed by the foreign shareholder as a
credit or refund under §1.1464–1.
(ii)Reliance by intermediary on rea-
sonable estimate. For purposes of de-
termining whether a payment is a distri-
bution designated as subject to section
852(b)(3)(C) or (5)(A), or 871(k)(1)(C)
or (2)(C), a withholding agent that is not
the distributing regulated investment com-
pany may, absent actual knowledge or
reason to know otherwise, rely on the des-
ignations that the distributing company
represents have been made in accordance
with paragraph (c)(3)(i) of this section.
Failure by the withholding agent to with-
hold the required amount due to a failure
by the regulated investment company to
reasonably estimate the required amounts
or to properly communicate the relevant
information to the withholding agent shall
be imputed to the distributing company.
In such a case, the IRS may collect from
the distributing company any underwith-
held amount and subject the company to
applicable interest and penalties as a with-
holding agent.
*****
(e) * * *
(2)Payments in foreign currency.Ifthe
amount subject to withholding tax is paid
in a currency other than the U.S. dollar,
the amount of withholding under section
1441 shall be determined by applying the
applicable rate of withholding to the for-
eign currency amount and converting the
amount withheld into U.S. dollars on the
date of payment at the spot rate (as defined
in §1.988–1(d)(1)) in effect on that date. A
2005–16 I.R.B.916April 18, 2005

withholding agent making regular or fre-
quent payments in foreign currency may
use a month-end spot rate or a monthly av-
erage spot rate. In addition, such a with-
holding agent may use the spot rate on the
date the amount of tax is deposited (within
the meaning of §1.6302–2(a)), provided
that such deposit is made within seven
days of the date of the payment giving rise
to the obligation to withhold. A spot rate
convention must be used consistently for
all non-dollar amounts withheld and from
year to year. Such convention cannot be
changed without the consent of the Com-
missioner. The U.S. dollar amount so de-
termined shall be treated by the beneficial
owner as the amount of tax paid on the in-
come for purposes of determining the final
U.S. tax liability and, if applicable, claim-
ing a refund or credit of tax.
*****
Par. 4. In §1.1441–6, paragraph (b)(1)
is revised to read as follows:
§1.1441–6 Claim of reduced withholding
under an income tax treaty.
*****
(b)Reliance on claim of reduced with-
holding under an income tax treaty—
(1)In general. The withholding imposed
under section 1441, 1442, or 1443 on any
payment to a foreign person is eligible for
reduction under the terms of an income
tax treaty only to the extent that such pay-
ment is treated as derived by a resident
of an applicable treaty jurisdiction, such
resident is a beneficial owner, and all other
requirements for benefits under the treaty
are satisfied. See section 894 and the reg-
ulations thereunder to determine whether
a resident of a treaty country derives the
income. Absent actual knowledge or rea-
son to know otherwise, a withholding
agent may rely on a claim that a beneficial
owner is entitled to a reduced rate of with-
holding based upon an income tax treaty
if, prior to the payment, the withholding
agent can reliably associate the payment
with a beneficial owner withholding cer-
tificate, as described in §1.1441–1(e)(2),
that contains the information necessary
to support the claim, or, in the case of
a payment of income described in para-
graph (c)(2) of this section made outside
the United States with respect to an off-
shore account, documentary evidence
described in paragraphs (c)(3), (4), and (5)
of this section. See §1.6049–5(e) for the
definition of payments made outside the
United States and §1.6049–5(c)(1) for the
definition of offshore account. For pur-
poses of this paragraph (b)(1), a beneficial
owner withholding certificate described in
§1.1441–1(e)(2)(i) contains information
necessary to support the claim for a treaty
benefit only if it includes the beneficial
owner’s taxpayer identifying number (ex-
cept as otherwise provided in paragraph
(c)(1) of this section and §1.1441–6(g))
and the representationsthat the beneficial
owner derives the income under section
894 and the regulations thereunder, if
required, and meets the limitation on ben-
efits provisions of the treaty, if any. The
withholding certificate must also contain
any other representations required by this
section and any other information, certifi-
cations, or statements as may be required
by the form or accompanying instruc-
tions in addition to, or in place of, the
information and certifications described
in this section. Absent actual knowledge
or reason to know that the claims are
incorrect (and subject to the standards
of knowledge in §1.1441–7(b)), a with-
holdingagentmayrelyontheclaims
made on a withholding certificate or on
documentary evidence. A withholding
agent may also rely on the information
contained in a withholding statement pro-
vided under §§1.1441–1(e)(3)(iv) and
1.1441–5(c)(3)(iv) and (e)(5)(iv) to deter-
mine whether the appropriate statements
regarding section 894 and limitation on
benefits have been provided in connec-
tion with documentary evidence. If the
beneficial owner is related to the person
obligated to pay the income, within the
meaning of section 267(b) or 707(b), the
withholding certificate must also con-
tain a representation that the beneficial
owner will file the statement required
under §301.6114–1(d) of this chapter (if
applicable). The requirement to file an
information statement under section 6114
for income subject to withholding applies
only to amounts received during the tax-
payer’s taxable year that, in the aggregate,
exceed $500,000. See §301.6114–1(d) of
this chapter. The Internal Revenue Ser-
vice (IRS) may apply the provisions of
§1.1441–1(e)(1)(ii)(B) to notify the with-
holding agent that the certificate cannot be
relied upon to grant benefits under an in-
come tax treaty. See §1.1441–1(e)(4)(viii)
regarding reliance on a withholding cer-
tificate by a withholding agent. The
provisions of §1.1441–1(b)(3)(iv) dealing
with a 90-day grace period shall apply for
purposes of this section.
*****
Par. 5. Section 1.6049–5 is amended as
follows:
1. Paragraph (c)(1) is revised.
2. Paragraphs (c)(5)(i), (ii), (iii), (iv),
(v) and (vi) are redesignated as paragraphs
(c)(5)(i)(A),(B),(C),(D),(E),and(F),re-
spectively.
3. A new heading is added to paragraph
(c)(5)(i).
4. New paragraph (c)(5)(ii) is added.
The revisions and additions read as fol-
lows:
§1.6049–5 Interest and original issue
discount subject to reporting after
December 31, 1982.
*****
(c)Applicable rules—(1)Documen-
tary evidence for offshore accounts and for
possessions accounts.Apayormayrely
on documentary evidence described in this
paragraph (c)(1) instead of a beneficial
owner withholding certificate described
in §1.1441–1(e)(2)(i) in the case of a
payment made outside the United States
to an offshore account, in the case of a
payment made to a U.S. possessions ac-
count or, in the case of broker proceeds
described in §1.6045–1(c)(2), in the case
of a sale effected outside the United States
(as defined in §1.6045–1(g)(3)(iii)(A)).
For purposes of this paragraph (c)(1), an
offshore accountmeans an account main-
tained at an office or branch of a U.S. or
foreign bank or other financial institution
at any location outside the United States
(i.e., other than in any of the fifty States
or the District of Columbia) and outside
of possessions of the United States. Thus,
for example, an account maintained in a
foreign country at a branch of a U.S. bank
or of a foreign subsidiary of a U.S. bank
is an offshore account. For purposes of
this paragraph (c)(1), aU.S. possessions
accountmeans an account maintained
at an office or branch of a U.S. or for-
eign bank or other financial institution
located within a possession of the United
States. For the definition of a payment
made outside the United States, see para-
graph (e) of this section. A payor may
April 18, 20059172005–16 I.R.B.

rely on documentary evidence if the payor
has established procedures to obtain, re-
view, and maintain documentary evidence
sufficient to establish the identity of the
payee and the status of that person as a
foreign person (including, but not limited
to, documentary evidence described in
§1.1441–6(c)(3) or (4)); and the payor
obtains, reviews, and maintains such doc-
umentary evidence in accordance with
those procedures. A payor maintains the
documents reviewed by retaining the orig-
inal, certified copy, or a photocopy (or
microfiche or similar means of record re-
tention) of the documents reviewed and
noting in its records the date on which
and by whom the document was received
and reviewed. Documentary evidence
furnished for the payment of an amount
subject to withholding under chapter 3
of the Code must contain all of the in-
formation that is necessary to complete a
Form 1042–S for that payment. A payor
may also rely on documentary evidence
associated with a flow-through withhold-
ing certificate for payments treated as
made to foreign partners of a nonwith-
holding foreign partnership, as defined in
§1.1441–1(c)(28), the foreign beneficia-
ries of a foreign simple trust, as defined
in §1.1441–1(c)(24), or foreign owners
of a foreign grantor trust, as defined in
§1.1441–1(c)(26), even though the part-
nership or trust account is maintained in
the United States.
*****
(5) * * * (i)Definition.***
(ii)Reporting by U.S. payors in U.S.
possessions. U.S. payors are not required
to report on Form 1099 income that is
from sources within a possession of the
United States and that is exempt from tax-
ation under section 931, 932, or 933, each
of which sections exempts certain income
from sources within a possession of the
United States paid to abona fideresident of
that possession. For purposes of this para-
graph (c)(5)(ii), a U.S. payor may treat the
beneficial owner as abona fideresident of
the possession of the United States from
which the income is sourced if, prior to
payment of the income, the U.S. payor can
reliably associate the payment with valid
documentation that supports the claim of
residence in the possession of the United
States from which the income is sourced.
This paragraph (c)(5)(ii) shall not apply if
the U.S. payor has actual knowledge or
reason to know that the documentation is
unreliable or incorrect or that the income
does not satisfy the requirements for ex-
emption under section 931, 932, or 933.
For the rules determining whether income
is from sources within a possession of the
United States, see section 937(b) and the
regulations thereunder.
*****
PART 301 — PROCEDURE AND
ADMINISTRATION
Par. 6. The authority citation for part
301 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 7. In §301.6114–1 is amended as
follows:
1.Paragraphs (c)(1)(i) through
(c)(1)(vii) are redesignated as paragraphs
(c)(1)(ii) through (c)(1)(viii), respectively.
2. New paragraph (c)(1)(i) is added.
3. Paragraph (c)(7) is added.
The additions and revision read as fol-
lows:
§301.6114–1 Treaty-based return
positions.
*****
(c)***(1)***
(i) For amounts received on or after
January 1, 2001, return positions de-
scribed in paragraph (b)(4)(ii) of this sec-
tion, unless the conditions in paragraphs
(b)(4)(ii)(A) and (B) of this section, para-
graph (b)(4)(ii)(C) of this section, or
paragraph (b)(4)(ii)(D) of this section are
met;
*****
(7) Reporting under paragraph
(b)(4)(ii)(D) of this section is waived with
respect to a taxable year for taxpayers that
are not individuals or states and that, on or
after January 1, 2001, receive amounts of
income subject to withholding that do not
exceed $10,000 in the aggregate for such
taxable year.
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on March 29,
2005, 8:45 a.m., and published in the issue of the Federal
Register for March 30, 2005, 70 F.R. 16189)
Announcement and Report Concerning Advance Pricing Agreements
Announcement 2005–27
March 31, 2005
This Announcement is issued pursuant to § 521(b) of Pub. L. 106–170, the Ticket to Work and Work Incentives Improvement Act
of 1999, which requires the Secretary of the Treasury to report annually to the public concerning Advance Pricing Agreements
(APAs) and the APA Program. The first report covered calendar years 1991 through 1999. Subsequent reports covered calendar
years 2000, 2001, 2002, and 2003. This sixth report describes the experience, structure and activities of the APA Program during
calendar year 2004. It does not provide guidance regarding the application of the arm’s length standard.
Matthew W. Frank
Director, Advance Pricing Agreement Program
2005–16 I.R.B.918April 18, 2005

Background
Internal Revenue Code (IRC) § 482 providesthat the Secretary may distribute, apportion, or allocate gross income, deductions,
credits, or allowances between or among two or more commonly controlled businesses if necessary to reflect clearly the income
of such businesses. Under the § 482 regulations, the standard to beapplied in determining the true taxable income of a controlled
business is that of a business dealing at arm’s length with an unrelated business. The arm’s length standard has also been
adopted by the international community and is incorporated intothe transfer pricing guidelines issued by the Organization for
Economic Cooperation and Development (OECD). OECD,TRANSFER PRICING GUIDELINES FOR MULTINATIONAL
ENTERPRISES AND TAX ADMINISTRATORS (1995). Transfer pricing issues by their nature are highly factual and have
traditionally been one of the largest issues identified by the IRS in its audits of multinational corporations. The APA Program
is designed to resolve actual or potential transfer pricing disputes in a principled, cooperative manner, as an alternative to the
traditional examination process. An APA is a binding contract between the IRS and a taxpayer by which the IRS agrees not to
seek a transfer pricing adjustment under IRC § 482 for a Covered Transaction if the taxpayer files its tax return for a covered year
consistent with the agreed transfer pricing method (TPM). In2004, the IRS and taxpayers executed 65 APAs and amended 4 APAs.
Since 1991, with the issuance of Rev. Proc. 91–22, 1991–1 C.B. 526, the IRS has offered taxpayers, through the APA Program,
the opportunity to reach an agreement in advance of filing a tax return on the appropriate TPM to be applied to related party
transactions. In 1996, the IRS issued internal procedures for processing APA requests. Chief Counsel Directives Manual
(CCDM), ¶¶ 42.10.10 – 42.10.16 (November 15, 1996). Also in1996, the IRS updated Rev. Proc. 91–22 with the release of
Rev. Proc. 96–53, 1996–2 C.B. 375. In 1998, the IRS published Notice 98–65, 1998–2 C.B. 803, which set forth streamlined
APA procedures for Small Business Taxpayers.
On July 1, 2004, the IRS updated the procedural rules for obtaining, processing, and administering APAs with the issuance of
Rev. Proc. 2004–40, 2004–29 I.R.B. 50 (July 19, 2004). Rev. Proc. 2004–40 supersedes Rev. Proc. 96–53 and Notice 98–65
and is effective for all APA requests (including requests for renewals) filed on or after August 19, 2004. Rev. Proc. 96–53
continues to apply to APA requests filed before August 19, 2004, although a taxpayer with an APA request pending on that date
may ask to apply Rev. Proc. 2004–40 to the pending APA.
Also in 2004, the APA Program published IRS Announcement 2004–98, 2004–50 I.R.B. 983 (December 13, 2004), announcing
its intention to hold public hearings in early 2005 requesting comments on the state of, and ideas for improving, the APA Program.
Advance Pricing Agreements
An APA generally combines an agreement between a taxpayer andthe IRS on an appropriate TPM for the transactions at issue
(Covered Transactions) with an agreement between the U.S. andone or more foreign tax authorities (under the authority of the
mutual agreement process of our income tax treaties) that the TPM is correct. With such a“bilateral” APA, the taxpayer ordinarily
is assured that the income associated with the Covered Transactions will not be subject to double taxation by the IRS and the
foreign tax authority. It is the policy of the United States, as reflected in §§ 2.08 and 6 of Rev. Proc. 2004–40, to encourage
taxpayers that enter the APA Program to seek bilateral or multilateral APAs when competent authority procedures are available
with respect to the foreign country or countries involved. However, the IRS may execute an APA with a taxpayer without
reaching a competent authority agreement (a “unilateral” APA).
A unilateral APA is an agreement between a taxpayer and the IRS establishing an approved TPM for U.S. tax purposes. A
unilateral APA binds the taxpayer and the IRS, but does not prevent foreign tax administrations fromtaking different positions on
the appropriate TPM for a transaction. As stated in § 6.07 of Rev. Proc. 2004–40, should a transaction covered by a unilateral
APA be subject to double taxation as the result of an adjustment by a foreign tax administration,the taxpayer may seek relief by
requesting that the U.S. Competent Authority consider initiating a mutual agreement proceeding,provided there is an applicable
income tax treaty in force with the other country.
When a unilateral APA involves taxpayers operating in a country that is a treaty partner, information relevant to the APA
(including a copy of the APA and APA annual reports) may be provided to the treaty partner under normal rules and principles
governing the exchange of information under income tax treaties.
The APA Program
An IRS team headed by an APA team leader is responsible for the consideration of each APA. As of December 31, 2004, the
APA program had 17 team leaders. The team leader is responsible for organizing the IRS APA team. The IRS APA team leader
arranges meetings with the taxpayer, secures whatever information is necessary from the taxpayer to analyze the taxpayer’s
related party transactions and the available facts under the arm’s length standard of IRC § 482 and the regulations thereunder
(Treas. Reg.), and leads the discussions with the taxpayer.
April 18, 20059192005–16 I.R.B.

The APA team generally includes an economist, an internationalexaminer, LMSB field counsel, and, in a bilateral case, a U.S.
Competent Authority analyst who leads the discussions with the treaty partner. The economist may be from the APA Program or
the IRS field organization. As of December 31, 2004, the APA Program had five economists. The APA team may also include an
LMSB International Technical Advisor, other LMSB exam personnel, and an Appeals Officer.
The APA Process
The APA process is voluntary. Taxpayers submit an application for an APA, together with a user fee as set forth in Rev. Proc.
2004–40, § 4.12. The APA process can be broken into five phases: (1) application; (2) due diligence; (3) analysis; (4) discussion
and agreement; and (5) drafting, review, and execution.
(1)A
pplication
In many APA cases, the taxpayer’s application is preceded by a pre-file conference with the APA staff in which the taxpayer
can solicit the informal views of the APA Program. Pre-file conferences can occur on an anonymous basis, although a taxpayer
must disclose its identity when it applies for an APA. Taxpayers must file the appropriate user fee on or before the due date
of the tax return for the first taxable year that the taxpayer proposes to be covered by the APA. Many taxpayers file a user
fee first and then follow up with a full application later. The procedures for pre-file conferences, user fees, and applications
canbefoundin§3ofRev. Proc. 2004–40.
The APA application can be a relatively modest document forsmall businesses. Section 8 of Rev. Proc. 2004–40 describes
the special APA procedures for Small Business Taxpayers. For most taxpayers, however, the APA application is a substantial
document filling several binders. The APA Program makes everyeffort to reach an agreement on the basis of the information
provided in the taxpayer’s application.
The application is assigned to an APA team leader who is responsible for the case. The APAteam leader’s first responsibility is to
organize the APA team. This involves contacting the appropriate LMSB International Territory Manager to secure the assignment
of an international examiner to the APA case and the LMSB Counsel’s office to secure a field counsel lawyer. In a bilateral case,
the U.S. Competent Authority will assign a U.S. Competent Authority analyst to the team. In a large APA case, the international
examiner may invite his or her manager and other LMSB personnel familiar with the taxpayer to join the team. When the APA
may affect taxable years in Appeals, the appropriate appellate conferee will be invited to join the team. In all cases, the APA team
leader contacts the Manager, LMSB International Technical Advisors, to determine whether to include a technical advisor on
the team. The IRS APA team will generally include a technical advisor if the APA requestconcerns cost-sharing, intangibles,
or services. The APA team leader then distributes copies of the APA application to all team members and sets up an opening
conference with the taxpayer. The APA office strives to hold this opening conference within 45 days of the assignment of the
case to a team leader. At the opening conference, the APA team leader proposes a case plan designed, if feasible, to complete a
unilateral APA or, in the case of a bilateral APA, the recommended U.S. negotiating position within 12 months from the date the
full application is filed. The actual median and average times for completing unilateral APAs, recommended negotiating positions
for bilateral APAs, and APAs for Small Business Taxpayers are shown below in Tables 2, 5, and 10, respectively.
(2)D
ueDiligence
The APA team must satisfy itself that the relevant facts submittedby the taxpayer are complete and accurate. This due diligence
aspect of the APA is vital to the process.It is because of this due diligence that the IRS can reachadvance agreements with
taxpayers in the highly factual setting of transfer pricing. Due diligence can proceed in a number of ways. Typically, the taxpayer
and the APA team will agree to dates for future meetings during theopening conference. In advance of the opening conference,
the APA team leader will submit a list of questions to the taxpayer for discussion. The opening conference may result in a second
set of questions. These questions are developed by the APA teamand provided to the taxpayer through the APA team leader. It is
important to note that this due diligence is not an audit and is focused on the transfer pricing issues associated with the transactions
in the taxpayer’s application, or such other transactions that the taxpayer and the IRS may agree to add.
(3)A
nalysis
A significant part of the analytical work associated with anAPA is done typically by the APA economist and/or an IRS field
economist assigned to the case. The analysis may result in the need for additional information. Once the IRS APA team has
completed its due diligence and analysis, it begins discussions with the taxpayer over the various aspects of the APA including the
selection of comparable transactions, asset intensity and other adjustments, the TPM, which transactions to cover, the appropriate
critical assumptions, the APA term, and other key issues. The APA team leader will discuss particularly difficult issues with his or
her managers, but generally the APA teamleader is empowered to negotiate the APA.
2005–16 I.R.B.920April 18, 2005

(4)DiscussionandAgreement
The discussion and agreement phase differs for bilateral and unilateral cases. In a bilateral case, the discussions proceed in two
parts and involve two IRS offices — the APA Program and the U.S. Competent Authority. In thefirst part, the APA team will
attempt to reach a consensus with the taxpayer regarding the recommended position that the U.S.Competent Authority should
take in negotiations with its treaty partner. This recommended U.S. negotiating position is a paper drafted by the APA team
leader and signed by the APA Director that provides the APA Program’s view of the best TPM for the Covered Transaction,
taking into account IRC § 482 and the regulations thereunder, the relevant tax treaty, and the U.S. Competent Authority’s
experience with the treaty partner.
The experience of the APA office and the U.S. Competent Authority is that APA negotiations are likely to proceed more rapidly
with a foreign competent authority if the U.S. negotiating position is fully supported by the taxpayer. Consequently, the APA
office works together with the taxpayer in developing the recommended U.S. negotiating position. On occasion, the APA team
will agree to disagree with a taxpayer. In these cases, the APA office will send a recommended U.S. negotiating position to the
U.S. Competent Authority thatincludes elements with which the taxpayer does not agree. This disagreement is noted in the
paper. The APA team leader also solicits the views of the field members of the APA team, and, in the vast majority of APA
cases, the international examiner, LMSB field counsel, and other IRS field team members concur in the position prepared by
the APA team leader.
Once the APA Program completes the recommended U.S. negotiating position, the APA process shifts from the APA Program
to the U.S. Competent Authority. The U.S. Competent Authority analyst assigned to theAPA takes the recommended U.S.
negotiating position and prepares the final U.S. negotiating position, which is then transmitted to the foreign competent authority.
The negotiations with the foreign competent authority are conducted by the U.S. Competent Authority analyst, most often in
face-to-face negotiating sessions conducted periodically throughout the year. At the request of the U.S. Competent Authority
analyst, the APA team leader may continue to assist the negotiations.
In unilateral APA cases, the discussions proceed solely betweenthe APA Program and the taxpayer. In a unilateral case, the
taxpayer and the APA Program must reach agreement to conclude an APA. Like the bilateral cases, the APA team leader almost
always will achieve a consensus with the IRS field personnel assigned to the APA team regarding the final APA. The APA
Program has a procedure in which the IRS field personnel are solicited formally for their concurrence in the final APA. This
concurrence, or any item in disagreement, is noted in a cover memorandum prepared by the APA team leader that accompanies
the final APA sent forwardfor review and execution.
(5)D
rafting,Review,andExecution
Once the IRS and the taxpayer reach agreement, the drafting of the final APA generally takes little time because the APA
Program has developed standard language that is incorporated into every APA. The current versions of this language are found
in Attachment A, with “Model 1” based on Rev. Proc. 96–53 and “Model 2” based on Rev. Proc. 2004–40. APAs are
reviewed by the Branch Chief and the APA Director. In addition, the team leader prepares a summary memorandum for the
Associate Chief Counsel (International) (ACC(I)). On March 1, 2001, the ACC(I) delegated to the APA Director the authority
to execute APAs on behalf of the IRS.SeeChief Counsel Notice CC–2001–016. The APA is executed for the taxpayer by an
appropriate corporate officer.
Model APA at Attachment A
[§ 521(b)(2)(B)]
Attachment A contains the current versions of the model APA language. As part of its continuing effort to improve its work
product, the APA Program has revised the model language to reflect the program’s collective experience with substantive
anddraftingissues.
The Current APA Office Structure, Composition, and Operation
In 2004, the APA office consisted of four branches with Branches 1 and 3 staffed with APA team leaders and Branch 2 staffed
with economists and a paralegal. Branch 4, the APA West Coast branch, is headquartered in Laguna Niguel, California, with an
additional office in San Francisco, and is presently staffed with both team leaders and an economist.
Overall, the APA staff declined in 2004 from 36 to 32. The number of APA team leaders fell from 18 to 17, the number of APA
economists fell from seven to five, and a temporary vacancy reduced the number of APA branch chiefs from four to three.
As of December 31, 2004, the APA staff was as follows:
April 18, 20059212005–16 I.R.B.

Director’s Office
1 Director
1 Special Counsel to the Director
1 Secretary to the Director
Branch 1Branch 2Branch 3Branch 4
1 Branch Chief1 Acting Branch Chief (also 1 Branch Chief1 Branch Chief
1 SecretarySpecial Counsel)1 Secretary1 Secretary
7 Team Leaders1 Paralegal7 Team Leaders3 Team Leaders
4 Economists1 Economist
APATraining
In 2004, the APA office continued to emphasize training as a priority. Training sessions addressed APA-related current
developments, new APA office practices and procedures, and international tax law issues. The APA New Hire Training materials
were updated, as necessary, throughout the year. The updated materials are available to the public through the APA internet
site athttp://www.irs.gov/businesses/corporations/article/0,,id=96221,00.html. These materials do not constitute guidance on
the application of the arm’s length standard.
APA Program Statistical Data
[§ 521(b)(2)(C) and (E)]
The statistical information required under § 521(b)(2)(C) is contained in Tables 1 and 9 below; the information required under
§ 521(b)(2)(E) is contained in Tables 2 and 3 below:
TABLE 1: APA APPLICATIONS, EXECUTED APAs, AND PENDING APAs
UnilateralBilateralMultilateral
Year
Total
Cumulative
Total
APA applications filed during year
2004
354580846
APAs executed
1
Year 20042737165557
1991–20032272587492
APA renewals executed during year
2004
81321129
Revised or Amended APAs executed
during year 2004
40429
Pending requests for APAs63163226
Pending requests for new
APAs
40112152
Pending requests for renewal
APAs
235174
APAs canceled or revoked0005
APAs withdrawn561194
1
Consistent with past practice, the “APAs executed” figures in this table include APA renewals, but exclude revised or amended APAs.
2005–16 I.R.B.922April 18, 2005

TABLE 2: MONTHS TO COMPLETE APAs
2
Months to Complete Advance Pricing Agreements in Year 2004
All NewAll RenewalsAll Combined
Average44.1Average30.1Average39.9
Median36.4Median33.9Median33.9
Unilateral
New
Unilateral
Renewals
Unilateral
Combined
Average25.7Average13.3Average22.3
Median21.0Median12.1Median18.4
Bilateral/Multilateral
New
Bilateral/Multilateral
Renewals
Bilateral/Multilateral
Combined
Average56.4Average40.4Average51.2
Median48.0Median35.0Median43.0
2
The one multilateral APA was treated as a bilateral APA for purposes of these calculations.
April 18, 20059232005–16 I.R.B.

TABLE 3: APA COMPLETION TIME – MONTHS PER APA
Months
Number
of APAsMonths
Number
of APAsMonths
Number
of APAsMonths
Number
of APAs
13116191
232162192
3336393
43446494
53526595
61361661961
737367197
81386898
93916999
101407011001
1114171101
12242272102
1314373103
143441741104
1524575105
16146276106
1714777107
18148278108
19491791109
2035080110
21251811111
22152182112
231538311131
245484114
255585115
2625686116
27157287117
285888118
29159891191
30260901120
TABLE 4: RECOMMENDED NEGOTIATING POSITIONS
Recommended Negotiating Positions Completed in Year 200425
2005–16 I.R.B.924April 18, 2005

TABLE 5: MONTHS TO COMPLETE RECOMMENDED NEGOTIATING POSITIONS
NewRenewalCombined
Average18.20Average14.71Average16.80
Median16.60Median15.31Median15.90
TABLE 6: RECOMMENDED NEGOTIATING POSITIONS COMPLETION TIME – MONTHS PER APA
MonthsNumberMonthsNumberMonthsNumberMonthsNumber
111122131
21222321
31322333
41424234
515325135
61642636
711722737
8182838
919229239
102203040
Tables 7 and 8 below are new from previous annual reports and show how long each APA request pending at the end of 2004 has
been in the system as measured from the filing date of the APA submission. We believe that reporting the age of both completed
cases and pending cases reflects more accurately the APA Program’s success or failure in movingcases and improves the public’s
ability to evaluate the current timeliness of the APA process. (Thenumbers in Tables 7 and 8 for pending unilateral and bilateral
cases differ from the numbers in Table 1 because whereas Table 1includes any case for which a user fee has been paid, Tables 7
and 8 reflect only cases for which submissions have been received.)
April 18, 20059252005–16 I.R.B.

TABLE 7: UNILATERAL APAs – TIME IN INVENTORY – MONTHS PER APA
Months
Number
of APAsMonths
Number
of APAsMonths
Number
of APAsMonths
Number
of APAs
12124161
222242162
3234363
422414464
54254565
632614666
712714767
86284868
91294969
103305070
111315171
1253215272
132335373
1413415474
15355575
1653656761
172375777
18385878
191395979
202406080
2005–16 I.R.B.926April 18, 2005

TABLE 8: BILATERAL APAs – TIME IN INVENTORY – MONTHS PER APA
Months
Number
of APAsMonths
Number
of APAsMonths
Number
of APAsMonths
Number
of APAs
11262511761
21276522771
342825378
45291541791
543035580
633145681
743225782
8233258183
943435984
1073546085
1163646186
1253762187
1373846388
143964189
1540165290
163416691
1764246792
1814326893
196441691941
204457095
2124671196
2224717297
2334817398
2414917499
2535075100
TABLE 9: SMALL BUSINESS TAXPAYER APAs
Small Business Taxpayer APAs Completed in Year 20049
New9
Renewals0
Unilateral7
Bilateral2
April 18, 20059272005–16 I.R.B.

TABLE 10: MONTHS TO COMPLETE SMALL BUSINESS TAXPAYER APAs
Months to Complete Small Business Taxpayer APAs in Year 2004
Average18.8
Median19.7
TABLE 11: INDUSTRIES COVERED
3
Industry Involved – NAICS CodesNumber
Computer and electronic product manufacturing – 33410–12
Wholesale trade, durable goods – 4217–9
Securities, commodity contracts and other intermediary and related activities – 5237–9
Machinery manufacturing – 3334–6
Transportation equipment manufacturing – 3364–6
Electronic equipment, appliance and component manufacturing – 3351–3
Wholesale trade, nondurable goods – 4221–3
Chemical manufacturing – 3251–3
Broadcasting and telecommunications – 5131–3
Information service and data processing services – 5141–3
Motor vehicle and parts dealers – 4411–3
Food manufacturing – 3111–3
Apparel manufacturing – 3151–3
Plastics and rubber products manufacturing – 3261–3
Miscellaneous manufacturing – 3391–3
Air transportation – 4811–3
Heavy construction – 2341–3
Mining (except oil and gas) – 2111–3
Beverage and tobacco manufacturing – 3121–3
Health and personal care stores – 4461–3
Clothing and clothing accessories stores – 4481–3
Insurance carriers and related activities – 5241–3
Professional, scientific and technical services – 5451–3
Trades or Businesses
[§ 521(b)(2)(D)(i)]
The nature of the relationships between the related organizations, trades, or businesses covered by APAs executed in 2004 is
set forth in Table 12 below:
3
The categories in this table are drawn from the North American Industry Classification System (NAICS), which has replaced the U.S. Standard Industrial Classification (SIC) system. NAICS
was developed jointly by the U.S., Canada, and Mexico to provide new comparability in statistics about business activity across North America.
2005–16 I.R.B.928April 18, 2005

TABLE 12: NATURE OF RELATIONSHIPS BETWEEN RELATED ENTITIES
RelationshipNumber of APAs
Foreign Parent – U.S. Subsidiary (-ies)40
U.S. Parent – Foreign Subsidiary (-ies)15
Foreign Company and U.S. Branch(es)6
Partnership and Related Entity (-ies)4
Covered Transactions
[§ 521(b)(2)(D)(ii)]
The controlled transactions covered by APAs executed in 2004 are set forth in Table 13 and Table 14 below:
TABLE 13: TYPES OF COVERED TRANSACTIONS
Transaction TypeNumber
Sale of tangible property into the U.S.42
Performance of services by U.S. entity28
Sale of tangible property from the U.S.11
Use of intangible property by Non-U.S. entity10
Performance of services by Non-U.S. entity10
Use of intangible property by U.S. entity6
Financial products - Non-U.S. parent5
Financial products - U.S. branch of foreign company5
Loans≤3
R&D cost sharing≤3
Commodity trading on globally integrated basis≤3
Other4
TABLE 14: TYPES OF SERVICES INCLUDED IN COVERED TRANSACTIONS
Intercompany Services Involved in the Covered TransactionsNumber
Distribution11
Technical support services11
Administrative10
Marketing9
Headquarters costs7
Accounting7
Sales support7
Management6
April 18, 20059292005–16 I.R.B.

Intercompany Services Involved in the Covered Transactions — ContinuedNumber
Product support6
Logistical support5
Legal5
Contract research & development4
Billing services4
Communication services≤3
Assembly≤3
Purchasing≤3
Research and development≤3
Testing and installation services≤3
Manufacturing services≤3
License administration services≤3
Warranty services≤3
Business Functions Performed and Risks Assumed
[§ 521(b)(2)(D)(ii)]
The general descriptions of the business functions performed and risks assumed by the organizations, trades, or businesses whose
results are tested in the Covered Transactions in the APAs executed in 2004 are set forth in Tables 15 and 16 below:
TABLE 15: FUNCTIONS PERFORMED BY THE TESTED PARTY
Functions PerformedNumber
Distribution functions58
Managerial, legal, accounting, finance, personnel, and other support services29
Marketing functions28
Manufacturing28
Transportation and warehousing18
Purchasing and materials management16
Research and development16
Product design and engineering15
Product assembly and/or packaging14
Product testing and quality control13
Product services (repairs, etc.)11
Trading and risk management of financial products10
Consulting services10
Technical training and tech support for salesstaff (including sub-distributors)9
Engineering and construction related services7
Licensing of intangibles7
Process engineering5
Telecom services≤3
2005–16 I.R.B.930April 18, 2005

TABLE 16: RISKS ASSUMED BY THE TESTED PARTY
Risks AssumedNumber
Market risks, including fluctuations incosts, demand, pricing, & inventory91
General business risks (e.g., related to ownership of PP&E)78
Credit and collection risks63
Financial risks, including interest rates & currency48
Product liability risks23
R&D risks14
Discussion
The vast majority of APAs have Covered Transactions that involve numerous business functions and risks. For instance, with
respect to functions, companies that manufacture products have typically conducted research and development, engaged in
product design and engineering, manufactured the product, marketed and distributed the product, and performed support functions
such as legal, finance, and human resources services. Regardingrisks, companies have been subject to market risks, R&D risks,
financial risks, credit and collection risks, product liability risks, and general business risks. Inthe APA evaluation process, a
significant amount of time and effort is devoted to understanding how the functions and risks are allocated among the controlled
group of companies that are party to the Covered Transactions.
In its APA submission, the taxpayer must provide a functional analysis. The functional analysis identifies the economic activities
performed, the assets employed, the economic costs incurred, and the risks assumed by each of the controlled parties. The
importance of the functional analysis derives from the fact that economic theory posits that there is a positive relationship between
risk and expected return and that different functions provide different value and have different opportunity costs associated with
them. It is important that the functional analysis go beyond simplycategorizing the tested party as,say, a distributor. It should
provide more specific information because, in theexample of distributors, not all distributors undertake similar functions and risks.
Thus, the functional analysis is critical in determining the TPM (including the selection of comparables). Although functional
comparability is an essential factor in evaluating the reliability of the TPM (including the selection of comparables), the APA
evaluation process also involves consideration of economic conditions such as the economic condition of the particular industry.
In evaluating the functional analysis, the APA Program considers contractual terms betweenthe controlled parties and the
consistency of the conduct of the parties with respect to the allocation of risk. In accordance withthe section 482 regulations, the
APA Program also gives consideration to the ability of controlled parties to fund losses that might be expected to occur as a
result of the assumption of risk. Another relevant factor considered in evaluating the functional analysis is the extent to which a
controlled party exercises managerial oroperational control over the business activities that directly influence the amount of
income or loss realized. The section 482 regulations posit thatparties at arm’s length will ordinarily bear a greater share of
those risks over which they have relatively more control.
Related Organizations, Trades, or Businesses Whose Prices or Results are Tested to Determine
Compliance with APA Transfer Pricing Methods
[§ 521(b)(2)(D)(iii)]
The related organizations, trades, or businesses whose prices orresults are tested to determine compliance with TPMs prescribed
in APAs executed in 2004 are set forth in Table 17 below:
April 18, 20059312005–16 I.R.B.

TABLE 17: RELATED ORGANIZATIONS, TRADES,
OR BUSINESSES WHOSE PRICES OR RESULTS ARE TESTED
4
Type of OrganizationNumber
U.S. distributor44
Multiple tested parties19
U.S. provider of services19
U.S. manufacturer14
Non-U.S. distributor6
Non-U.S. provider of services6
Non-U.S. dealer in financial products5
Non-U.S. licensee of intangible property≤3
Non-U.S. manufacturer≤3
U.S. licensor of intangible property≤3
U.S. dealer in financial products≤3
Non-U.S. licensor of intangible property≤3
U.S. licensee of intangible property≤3
Other≤3
Transfer Pricing Methods and the Circumstances Leading to the Use of Those Methods
[§ 521(b)(2)(D)(iv)]
The TPMs used in APAs executed in 2004 are set forth in Tables 18–20 below:
TABLE 18: TRANSFER PRICING METHODS USED FOR TRANSFERS OF
TANGIBLE AND INTANGIBLE PROPERTY
5
TPM UsedNumber
CPM: PLI is operating margin20
CPM: PLI is gross margin15
CPM: PLI is Berry ratio14
Resale Price Method (tangibles only)11
Unspecified method8
CUT (intangibles only)8
CPM: PLI is markup on total costs5
Residual profit split≤3
Cost Plus Method (tangibles only)≤3
CPM: PLI is other PLI≤3
4
“Multiple tested parties” includes covered transactions that utilize profit splits, CUPs, and CUTs.
5
Profit Level Indicators (PLIs) used with the Comparable Profit Method ofTreas. Reg. § 1.482–5, and as used in these TPM tables, are as follows: (1) operating margin (ratio of operating
profit to sales); (2) gross margin (ratio of grossprofit to sales); (3) Berry ratio (gross profit tooperating expenses); (4) markup on total costs (percentage markup on total costs); and (5) rate
of return on assets or capital employed (ratio of operating profit to operating assets).
2005–16 I.R.B.932April 18, 2005

TPM Used — ContinuedNumber
CPM: PLI is return on assets or capital employed≤3
Comparable profit split≤3
Other4
TABLE 19: TRANSFER PRICING METHODS USED FOR SERVICES
TPM UsedNumber
CPM: PLI is markup on total costs10
Cost plus a markup10
Cost with no markup5
CPM: PLI is operating margin≤3
CPM:PLIisreturnonassets≤3
CPM: PLI is Berry ratio≤3
CUT≤3
Resale Price Method≤3
Profit split≤3
Other4
TABLE 20: TRANSFER PRICING METHODS USED FOR FINANCIAL PRODUCTS
TPM UsedNumber
Profit split9
Other≤3
Discussion
The TPMs used in APAs completed during 2004 were based on the section 482 regulations. Under Treas. Reg. § 1.482–3, the
arm’s length amount for controlled transfers of tangible property may be determinedusing the Comparable Uncontrolled Price
(CUP) method, the Resale Price Method, the Cost Plus Method, the Comparable Profits Method (CPM), or the Profit Split
Method. Under Treas. Reg. § 1.482–4, the arm’s length amount for controlled transfers of intangible property may be determined
using the Comparable Uncontrolled Transaction (CUT) method, CPM, or the Profit Split Method. An “Unspecified Method”
may be used for both tangible and intangible property if it provides a more reliable result than the enumerated methods under
the best method rule of Treas. Reg. § 1.482–1(c). For transfers involving the provision of services, Treas. Reg. § 1.482–2(b)
provides that services performed for the benefit of another member of a controlled group should bear an arm’s length charge,
either deemed to be equal to the cost of providing the services (when non-integral, see Treas. Reg. § 1.482–2(b)(3)) or which
should be an amount that would have been charged between independent parties.
In addition, Treas. Reg. § 1.482–2(a) provides rules concerning the proper treatment of loans or advances, and Treas. Reg.
§ 1.482–7 provides rules for qualified cost sharing arrangements under which the parties agree to share the costs of development
of intangibles in proportion to their shares of reasonably anticipated benefits. APAs involving cost sharing arrangements generally
address both the method of allocating costs among the parties as well as determining the appropriate amount of the “buy-in”
payment due for the transfer of pre-existing intangibles to the controlled participants.
April 18, 20059332005–16 I.R.B.

In reviewing the TPMs applicable to transfers of tangible and intangible property reflected in Table 18, the majority of the APAs
followed the specified methods. However, several points should be made. The § 482 regulations note that for transfers of
tangible property, the Comparable Uncontrolled Price (CUP) method will generally be the most direct and reliable measure of
an arm’s length price for the Controlled Transaction if sufficiently reliable comparable transactions can be identified. Treas.
Reg. § 1.482–3(b)(2)(ii)(A). It was the experience of the APA Program in 2003, that in the cases that came into the APA
Program, sufficiently reliable CUP transactions were difficult to find. In APAs executed in 2004, no Covered Transaction
used the CUP method.
Similar to the CUP method, for transfers of intangible property, the CUT method will generally provide the most reliable measure
of an arm’s length result if sufficiently reliable comparables may be found. Treas. Reg. § 1.482–4(c)(2)(ii). It has generally been
difficult to identify external comparables, and APAs using the CUT method tend to rely on internal transactions between the
taxpayer and unrelated parties. In 2004, eight Covered Transactions utilized the CUT TPM.
The Cost Plus Method (tangibles only) and Resale Price Method were applied in 2004 in three or fewer APAs and 11 APAs,
respectively. See Treas. Reg. § 1.482–3(c), (d).
The CPM is frequently applied in APAs. This is because reliablepublic data on comparable business activities of independent
companies may be more readily available than potential CUP data, and comparability of resources employed, functions, risks, and
other relevant considerations are more likely to exist than comparability of product. The CPM also tends to be less sensitive than
other methods to differences in accounting practices between the tested party and comparable companies,e.g., classification of
expenses as cost of goods sold or operating expenses. Treas. Reg. §1.482–3(c)(3)(iii)(B), and –3(d)(3)(iii)(B). In addition, the
degree of functional comparability required to obtain a reliable result under the CPM is generally less than required under the
Resale Price or Cost Plus methods, because differences in functions performed often are reflected in operating expenses, and
thus taxpayers performing different functions may have very different gross profit margins but earn similar levels of operating
profit. Treas. Reg. § 1.482–5(c)(2).
Table 18 reflects more than 54 uses of the CPM (with varying PLIs) in Covered Transactions involving tangible or intangible
property. In some APAs, the CPM was also used concurrently with other methods.
The CPM has proven to be versatile in partbecause of the various PLIs that can be used in connection with the method. Reaching
agreement on the appropriate PLI has beenthe subject of much discussion in many ofthe cases, and it depends heavily on the
facts and circumstances. Some APAs have called for different PLIs to apply to different parts of the Covered Transactions
or with one PLI used as a check against the primary PLI.
The CPM was also used regularly with services as the Covered Transactions in APAsexecuted in 2004. There were at least 13
services Covered Transactions using the CPM method with variousPLIs according to the specific facts of the taxpayers involved.
Table 19 reflects the methods used to determine the arm’s length results for APAs involving services transactions.
In 2004, three or fewer APAs involving tangible or intangible property used the Residual Profit Split Method, Treas. Reg.
§ 1.482–6(c)(3). In residual profit split cases, routine contributions by the controlled parties are allocated routine market returns,
and the residual income is allocated among the controlled taxpayers based upon the relative value of their contributions of
non-routine intangible property to the relevant business activity.
Profit splits have also been used in a number of financial product APAs in which the primary income-producing functions are
performed in more than one jurisdiction. Nine APAs executed in 2004 applied a profit split method.
Critical Assumptions
[§ 521(b)(2)(D)(v)]
Critical Assumptions used in APAs executed in 2004 are described in Table 21 below:
TABLE 21: CRITICAL ASSUMPTIONS
Critical Assumptions involving the following:Number of APAs
Material changes to the business65
Material changes to tax and/or financial accounting practices65
Other financial ratio5
Changes in affiliated companies4
2005–16 I.R.B.934April 18, 2005

Critical Assumptions involving the following: — ContinuedNumber of APAs
Material sales fluctuations4
Income and expense allocation and apportionment methods materially same4
Use of Mark-to-Market method≤3
Assets will remain substantially same≤3
Catastrophic events≤3
Major regulatory changes≤3
Marketing conditions substantially same≤3
Contracting practices to remain the same≤3
Minimum and maximum sales volume≤3
Interdesk and interbranch transactions/allocations done on arm’s length basis≤3
Responsibility of trading locations will not change materially≤3
Other5
Discussion
APAs include critical assumptions upon which their respective TPMs depend. A critical assumption is any fact (whether or not
within the control of the taxpayer) related to the taxpayer, a third party, an industry, or business and economic conditions, the
continued existence of which is material to the taxpayer’s proposed TPM. Critical assumptions might include, for example, a
particular mode of conducting business operations, a particularcorporate or business structure, or a range of expected business
volume. Rev. Proc. 2004–40, § 4.05. Failure to meet a critical assumption may render an APA inappropriate or unworkable.
A critical assumption may change (and/or fail to materialize) due to uncontrollable changes in economic circumstances, such as a
fundamental and dramatic change in the economic conditions of aparticular industry. In addition, a critical assumption may
change (and/or fail to materialize) due to a taxpayer’s actions thatare initiated for good faith business reasons, such as a change in
business strategy, mode of conducting operations, or the cessation or transfer of a business segment or entity covered by the APA.
If a critical assumption has not been met, the APA may be revisedby agreement of the parties. If such an agreement cannot be
achieved, the APA may be canceled. If a critical assumption has notbeen met, it requires taxpayer’s notice to and discussion with
the Service, and, in the case of a bilateral APA, competentauthority consideration. Rev. Proc. 2004–40, § 10.05.
Sources of Comparables, Selection Criteria, and the Nature of Adjustments to Comparables and Tested Parties
[§ 521(b)(2)(D)(v), (vi), and (vii)]
The sources of comparables, selection criteria, and rationale used in determining the selection criteria for APAs executed in
2004 are described in Tables 22 through 24 below. Various formulas for making adjustments to comparables are included as
Attachment B.
TABLE 22: SOURCES OF COMPARABLES
Comparable Sources
Number of Times This
Source Used
Compustat76
Disclosure37
Moody’s7
Worldscope7
Internal comparables4
Bureau Van Dijk’s JADE (Japan)≤3
April 18, 20059352005–16 I.R.B.

Comparable Sources — Continued
Number of Times This
Source Used
Global Vantage≤3
Mergent≤3
Japan Company Handbook≤3
Global Researcher’s SEC (database)≤3
Other10
TABLE 23: COMPARABLE SELECTION CRITERIA
Selection Criteria Considered
Number of Times This
Criterion Used
Comparable functions81
Comparable industry47
Comparable risks45
Comparable products33
Comparable intangibles32
Comparable terms7
TABLE 24: ADJUSTMENTS TO COMPARABLES OR TESTED PARTIES
AdjustmentNumber of Times Used
Balance sheet adjustments
Receivables48
Inventory46
Payables46
Property, plant, equipment7
Other non-interest bearing liabilities7
Accounting adjustments
LIFO to FIFO inventory accounting22
Accounting reclassifications (e.g., from COGS to operating expenses)≤3
Other≤3
Profit level indicator adjustments (used to “back into” one PLI from another)
Operating expense17
Return on investment backed into cost-plus≤3
Berry ratio backed into operating margin≤3
Other≤3
2005–16 I.R.B.936April 18, 2005

Adjustment — ContinuedNumber of Times Used
Miscellaneous adjustments
Goodwill value or amortization≤3
Working capital adjustment≤3
Research & development≤3
Sales shock≤3
Advertising≤3
Other≤3
Discussion
At the core of most APAs are comparables. The APA Program works closely with taxpayers to find the best and most reliable
comparables for each Covered Transaction. In some cases, CUPs or CUTs can be identified. In other cases, comparable business
activities of independent companies are utilized in applying the CPM or a profit split method. Generally, in the APA Program’s
experience since 1991, CUPs and CUTs have been most often derived from the internal transactions of the taxpayer.
For profit-based methods in which comparable business activities or functions of independent companies are sought, the APA
Program typically has applied a three-part process. First, a pool of potential comparables has been identified through broad
searches. From this pool, companies having transactions that are clearly not comparable to those of the tested party have
been eliminated through the use of quantitative and qualitative analyses,i.e., quantitative screens and business descriptions.
Then, based on a review of available descriptive and financialdata, a set of comparable transactions or business activities of
independent companies has been finalized. The comparability of the finalized set has then been enhanced through the application
of adjustments.
S
ourcesofComparables
Comparables used in APAs can be U.S. or foreign, depending on the relevant market, the type of transaction being evaluated, and
the results of the functional and risk analyses. In general, comparables have been located by searching a variety of databases that
provide data on U.S. publicly traded companies and on a combination of public and private non-U.S. companies. Table 22 shows
the various databases and other sources used in selecting comparables for the APAs executed in 2004.
Although comparables were most often identified from the databases cited in Table 22, in some cases comparables were found
from other sources, such as comparables derived internally from taxpayer transactions with third parties.
S
electingComparables
Initial pools of potential comparables generally are derived from the databases using a combination of industry and keyword
identifiers. Then, the pool is refined using a variety of selection criteria specific to the transaction or business activity being
tested and the TPM being used.
The listed databases allow for searches byindustrial classification, by keywords, or by both. These searches can yield a number of
companies whose business activities may or may not be comparable to those of the entity being tested. Therefore, comparables
based solely on industry classification or keyword searches are rarely used in APAs. Instead, the pool of comparables is examined
closely, and companies are selected based on a combination of screens, business descriptions, andotherinformationfoundinthe
companies’ Annual Reports to shareholders and filings with the U.S. Securities and Exchange Commission (SEC).
Business activities are required to meet certain basic comparability criteria to be considered comparables. Functions, risks,
economic conditions, and the property (product or intangible) and services associated with the transaction must be comparable.
Determining comparability can be difficult – the goal has been to use comparability criteria restrictive enough to eliminate
business activities that are not comparable, but yet not so restrictive as to have no comparables remaining. The APA Program
normally has begun with relatively strict comparability criteria and then has relaxed them slightly if necessary to derive a pool
of reliable comparables. A determination on the appropriate size of the comparables set, as well as the business activities that
comprise the set, is highly fact specific anddepends on the reliability of the results.
In addition, the APA Program, consistent with the section 482 regulations, generally has looked at the results of comparables over
a multi-year period. Sometimes this has beena three-year period, but it has been more or less, depending on the circumstances of
the controlled transaction. Using a shorter period might result inthe inclusion of comparables in different stages of economic
development or use of atypical years of a comparabledue to cyclical fluctuations in business conditions.
April 18, 20059372005–16 I.R.B.

Many Covered Transactions have been tested with comparables that have been chosen using additional criteria and/or screens.
These include sales level criteria and testsfor financial distress and product comparability. These common selection criteria and
screens have been used to increase the overall comparability of a group of companies and as a basis for further research. The sales
level screen, for example, has been used to remove companies that, due to their size, mightface fundamentally different economic
conditions from those of the transaction or business activities being tested. In addition, APA analyses have incorporated selection
criteria related to removing companies experiencing “financial distress” due to concerns that companies in financial distress often
have experienced unusual circumstances thatrender them not comparable to the business activity being tested. These criteria
include an unfavorable auditor’s opinion, bankruptcy, and, in certain circumstances, operating losses in a given number of years.
An additional important class of selection criteria is the development and ownership of intangible property. In some cases in
which the business activity being tested is a manufacturer, several criteria have been used to ensure, for example, that if the
controlled entity does not own significant manufacturing intangibles or conduct research and development (R&D), then neither
will the comparables. These selection criteria have included determining the importance of patents to a company or screening
for R&D expenditures as a percentage of sales. Again, quantitative screens related to identifying comparables with significant
intangible property generally have been used in conjunction with an understanding of the comparable derived from publicly
available business information.
Selection criteria relating to asset comparability and operating expense comparability have also been used at times. A screen of
property, plant, and equipment (PP&E) as a percentage of sales or assets, combined with a reading of a company’s SEC filings,
has been used to help ensure that distributors (generally lower PP&E) were not compared with manufacturers (generally higher
PP&E), regardless of their industry classification. Similarly, a test involving the ratio of operating expenses to sales has helped to
determine whether a company undertakes a significant marketing and distribution function.
Table 25 shows the number of times various screens were used in APAs executed in 2004:
TABLE 25: COMPARABILITY SCREENS
Comparability/Financial Distress ScreenTimes Used
Comparability screens used
Sales37
R&D/ sales17
SG&A/ sales9
Foreign sales/ total sales8
Operating expenses/ sales6
Retail Sales6
Advertising/ sales≤3
Non-startup or start-up≤3
PP&E/ sales≤3
Financial distress
Bankruptcy27
Losses in one or more years17
Unfavorable auditor’s opinion9
AdjustingComparables
After the comparables have been selected, theregulations require that “[i]f there are material differences between the controlled
and uncontrolled transactions, adjustments must be made if the effect of such differences on prices or profits can be ascertained
with sufficient accuracy to improve the reliability of the results.” Treas. Reg. § 1.482–1(d)(2). In almost all cases involving
income-statement-based PLIs, certain “asset intensity” or “balance sheet” adjustments for factors that have generally agreed-upon
effects on profits are calculated. In addition, in specific cases, additional adjustments are performed to improve reliability.
2005–16 I.R.B.938April 18, 2005

The most common balance sheet adjustments used in APAs are adjustments for differences in accounts receivable, inventories,
and accounts payable. The APA Program generally has required adjustments for receivables, inventory, and payables based on
the principle that there is an opportunity cost for holding assets. For these assets, it is generally assumed that the cost is a
short-term debt interest rate.
To compare the profits of two business activities with different relative levels of receivables, inventory, or payables, the APA
Program estimates the carrying costs of eachitem and adjusts profits accordingly. Although different formulas have been used in
specific APA cases, Attachment B presents one set of formulas used in many APAs. Underlying these formulas are the notions that
(1) balance sheet items should be expressed as mid-year averages, (2) formulas should try to avoid using data items that are being
tested by the TPM (for example, if sales are controlled, then thedenominator of the balance sheetratio should not be sales), (3) a
short term interest rate should be used, and (4) an interest factor should recognize the average holding period of the relevant asset.
The APA Program also requires that data be compared on a consistent accounting basis. For example, although financial
statements may be prepared on a first-in first-out (FIFO) basis, cross-company comparisons are less meaningful if one or more of
the comparables use last-in first-out (LIFO) inventory accounting methods. This adjustment directly affects costs of goods sold
and inventories, and therefore affects both profitability measures and inventory adjustments.
Still important in some cases is the adjustment for differences in relative levels of PP&E between a tested business activity and
the comparables. Ideally, comparables and the business activity being tested will have fairly similar relative levels of PP&E,
since major differences can be a sign of fundamentally different functions and risks. Typically, the PP&E adjustment is made
using a medium term interest rate.
Additional adjustments used less frequently include those for differences in other balance sheet items, operating expenses, R&D,
or currency risk. Accounting adjustments, such as reclassifying items from cost of goods sold to operating expenses, are also
made when warranted to increase reliability. Often, data is notavailable for both the controlled and uncontrolled transactions
in sufficient detail to allow for these types of adjustments.
The adjustments made to comparables or tested parties inAPAsexecutedin2004arereflectedinTable24above.
Nature of Ranges and Adjustment Mechanisms
[§ 521(b)(2)(D)(viii)-(ix)]
The types of ranges and adjustment mechanisms used in APAsexecuted in 2004 are described in Table 26 and 27 below.
TABLE 26: TYPES OF RANGES
6
Type of RangeNumber
Interquartile range58
Specific point (royalty)9
Specific point within CPM range (not floor or ceiling)9
Full range8
Other specific point7
Floor (i.e., result must be no less than x)≤3
Financial products - statistical confidenceinterval to test against internal CUPs≤3
Specific point (CUT)≤3
Other7
6
The numbers do not include TPMs with cost or cost-plus methodologies.
April 18, 20059392005–16 I.R.B.

TABLE 27: ADJUSTMENTS WHEN OUTSIDE OF THE RANGE
Adjustment mechanismNumber
Taxpayer makes an adjustment: to closest edge of single year25
Taxpayer makes an adjustment: to closest edge of multi-year average24
Taxpayer makes an adjustment: to specified point24
Taxpayer makes an adjustment:to median of multi-year average8
Taxpayer makes an adjustment: to median of current year7
Taxpayer makes an adjustment: to other4
Other≤3
Discussion
Treas. Reg. § 1.482–1(e)(1) states that sometimes a pricing method will yield “a single result that is the most reliable measure of
an arm’s length result.” Sometimes, however, a method may yield “a range of reliable results,” called the “arm’s length range.” A
taxpayer whose results fall within the arm’s length range will not be subject to adjustment.
Under Treas. Reg. § 1.482–1(e)(2)(i), such a range is normally derived by considering a set of more than one comparable
uncontrolled transaction of similar comparability and reliability. If these comparables are of very high quality, as defined in
the § 482 regulations, then under Treas. Reg. § 1.482–1(e)(2)(iii)(A), the arm’s length range includes the results of all of the
comparables (from the least to the greatest). However, the APA Program has only rarely identifiedcases meeting the requirements
for the full range. If the comparables are of lesser quality, then under Treas. Reg. § 1.482–1(e)(2)(iii)(B), “the reliability of the
analysis must be increased, when it is possible to do so, by adjusting the range through application of a valid statistical method to
the results of all of the uncontrolled comparables.” One such method, the “interquartile range,” is ordinarily acceptable, although
a different statistical method “may be applied if it provides a more reliable measure.” The “interquartile range” is defined as,
roughly, the range from the 25th to the 75th percentile of the comparables’ results. See Treas. Reg. § 1.482–1(e)(2)(iii)(C). The
interquartile range was used 58 times in 2004.
More than twenty-five Covered Transactions reflected on Table 26 specified a single, specific result. Nine of these Covered
Transactions involved a CPM in which the taxpayer agreed to a “point.” Some APAs specify not a point or a range, but a “floor”
or a “ceiling”. When a floor is used, the tested party’s result must be greater than or equal to some particular value. When a
ceiling is used, the tested party’s result must be less than or equal to some particular value. Three or fewer APAs executed
in 2004 used a floor and none used a ceiling.
Some APAs look to a tested party’s resultsover a period of years (multi-year averaging) to determine whether a taxpayer has
complied with the APA. In 2004, rolling multi-year averaging was used for 14 Covered Transactions. Twelve of those used
three-year averages and the other two used five-year averages. Five Covered Transactions used cumulative multi-year averages,
while 26 other Covered Transactions used term averages.
A
djustments
Under Treas. Reg. § 1.482–1(e)(3), if a taxpayer’s results fall outside the arm’s length range, the Service may adjust the result “to
any point within the arm’s length range.” Accordingly, an APA may permit or require a taxpayer and its related parties to make an
adjustment after the year’s end to put the year’s results within the range, or at the point specified by the APA. Similarly, to enforce
the terms of an APA, the Service may make such an adjustment.When the APA specifies a range, the adjustment is sometimes to
the closest edge of the range, and sometimes to another point suchas the median of the interquartile range. Depending on the facts
of each case, automatic adjustments are notalways permitted. APAs may specify that in such a case there will be a negotiation
between the competent authorities involved to determine whether and to what extent an adjustment should be made. APAs may
permit automatic adjustments unless the result is far outside the range specified in the APA. Thus, APAs provide flexibility and
efficiency, permitting adjustments when normal business fluctuations and uncertaintiespush the result somewhat outside the range.
Where a taxpayer’s actual transactions do not comply with the TPM, a taxpayer must nonetheless report its taxable income in an
amount consistent with the TPM (an APA primary adjustment), as further discussed in § 10.02 of Rev. Proc. 2004–40.
2005–16 I.R.B.940April 18, 2005

APA Term and Rollback Lengths
[§ 521(b)(2)(D)(x)]
The various term lengths for APAs executed in 2004 are set forth in Table 28 below:
TABLE 28: TERMS OF APAs
APA Term in YearsNumber of APAs
11
20
33
45
534
610
74
87
91
The number of rollback years to which an APA TPM was applied in 2004 is set forth in Table 29 below:
TABLE 29: NUMBER OF YEARS COVERED BY ROLLBACK OF APA TPM
Number of Rollback YearsNumber of APAs
13
28
33
40
5ormore4
Nature of Documentation Required
[§ 521(b)(2)(D)(xi)]
APAs executed in 2004 required that taxpayers provide various documents with their annual reports. These documents are
described in Table 30 below:
April 18, 20059412005–16 I.R.B.

TABLE 30: NATURE OF DOCUMENTATION REQUIRED
7
Documentation
Number of
Times
Required
Description of any failure to meet Critical Assumptions or, if there have been none, a statement to
that effect
65
Statement identifying all material differences between Taxpayer’s business operations during APA Year
and description of Taxpayer’s business operations contained in Taxpayer’s request for APA, or if there
have been no such material differences, a statement to that effect
64
Statement identifying all material changes in Taxpayer’s accounting methods and classifications,
and methods of estimation, from those described or used in Taxpayer’s request for APA, or if there
have been none, statement to that effect
64
Financial analysis demonstrating Taxpayer’s compliance with TPM64
Description of, reason for, and financial analysis of, any Compensating Adjustments with respect to
APA Year, including means by which any Compensating Adjustment has been or will be satisfied
62
Organizational chart57
Financial statements as prepared in accordance with US GAAP56
Certified public accountant’s opinion that financial statements present fairly financial position of
Taxpayer and the results of its operations, in accordance with US GAAP
56
Financial statements as prepared in accordance with a foreign GAAP12
Various work papers9
Book to tax reconciliations8
Certified public accountant’s opinion that financial statements present fairly financial position of
Taxpayer and the results of its operations, in accordance with a foreign GAAP
8
Schedule of costs and expenses (e.g., intercompany allocations)5
Description of any changes in entity classification4
Description of any changes in Taxpayer’s financial accounting methods that were made to conform to
US GAAP
4
Description of differences between foreign GAAP and US GAAP and their impact on the financial
statements
4
Other11
Approaches for Sharing of Currency or Other Risks
[§ 521(b)(2)(D)(xii)]
During 2004, there were 48 tested parties that faced financial risks, including interest rate and currency risks. In appropriate cases,
APAs may provide specific approaches for dealing with currency risk, such as adjustment mechanisms and/or critical assumptions.
Efforts to Ensure Compliance with APAs
[§ 521(b)(2)(F)]
As described in Rev. Proc. 2004–40, § 10.01, APA taxpayers are required to file annual reports to demonstrate compliance with
the terms and conditions of the APA. The filing and review of annual reports is a critical part of the APA process. Through annual
report review, the APA program monitors taxpayer compliance with the APA on a contemporaneous basis. Annual report review
provides current information on the success or problems associated with the various TPMs adopted in the APA process.
7
The first eight categories of documentation listed in this table were drawn from the standard APA language used in 2004. The facts and circumstances ofsome APAs may eliminate the need
for some standard documentation requirements.
2005–16 I.R.B.942April 18, 2005

All reports received by the APA office are tracked by one designated APA team leader who also has the primary responsibility
for annual report review. Other APA team leaders and economists assist in this review, especially when the team leader who
negotiated the case is available, since that person will already be familiar with the relevant facts and terms of the agreement. Once
received by the APA office, the annual report is sent out to the district personnel with exam jurisdiction over the taxpayer.
The statistics for the review of APA annual reports are reflected in Table 31 below. As of December 31, 2004, there were 337
pending annual reports. In 2004, 143 reports were closed.
TABLE 31: STATISTICS OF ANNUAL REPORTS
Number of APA annual reports pending as of December 31, 2004337
Number of APA annual reports closed in Year 2004143
Number of APA annual reports requiring adjustment in Year 20045
Number of taxpayers involved in adjustments1
Number of APA annual reports required to be filed in Year 2004215
Number of APA annual reports actually filed in Year 2004162
Number of APA annual report cases over one year old101
April 18, 20059432005–16 I.R.B.

ATTACHMENT A
Model 1 (Based on Revenue Procedure 96–53)
ADVANCE PRICING AGREEMENT
between
[Insert Taxpayer’s Name]
and
THE INTERNAL REVENUE SERVICE
PARTIES
The Parties to
this Advance Pricing Agreement (APA) are the Internal Revenue Service (IRS) and [Insert Taxpayer’s Name],
EIN
(Taxpayer
).
RECITALS
Taxpayer’s principal place of business is [City, State]. [Insert general description of taxpayer and other relevant parties].
This APA cont
ains the Parties’ agreement on the best method for determining arm’s-length prices of the Covered Transactions
under I.R.C.
section 482, any applicable tax treaties, and the Treasury Regulations.
Unless otherwise specified, terms in the plural include the singular and vice versa. Appendix D contains definitions for
capitalized terms not elsewhere defined in this APA.
{If renewal, add}[Taxpayer and IRS previously entered into an APA covering taxable years ending
to,
executed on
.]
AGREEMENT
The Parties agree as follows:
1.C
overedTransactions. This APA applies to the Covered Transactions, as defined in Appendix A.
2.T
ransf
erPricingMethod. Appendix A sets forth the Transfer Pricing Method (TPM) for the Covered Transactions.
3.T
erm. This APA applies to Taxpayer’s taxable years endingthrough(APA Term).
4.O
peration.
a. Revenu
e Procedure 96–53 governs the interpretation,legal effect, and administration of this APA.
b. Nonfactual oral and written representations, within themeaning of sections 10.04 and 10.05 of Revenue Procedure 96–53
(including any proposals to use particular TPMs), made in conjunction with the APA Request constitute statements made in
compromise negotiations within the meaning of Rule 408 of the Federal Rules of Evidence.
5.C
ompliance.
a. For e
ach taxable year covered by this APA (APA Year), if Taxpayer complies with the terms and conditions of this APA,
then th
e IRS will not make or propose any allocation or adjustment under I.R.C. section 482 to the Covered Transactions.
b. If Taxpayer does not comply with the terms and conditions of this APA, then the IRS may:
i. enforce the terms and conditions of this APA and make or propose allocations or adjustments under I.R.C. section 482
consistent with this APA;
ii. cancel or revoke this APA under section 11.05 or 11.06 of Revenue Procedure 96–53; or
iii. revise this APA, if the Parties agree.
c. Taxpayer must timely file an Annual Report for each APA Year in accordance with Appendix C and section 11.01 of
Revenue Procedure 96–53. Taxpayer must file an original and four copies of the Annual Report by the later of (a) 90 days after
the time prescribed by law (including extensions) for filing its federal income tax return for the APA Year covered by the report,
or (b) 90 days after the effective date of this APA. [The Service and the Taxpayer may agree to alternative filing dates.] The IRS
may request additional information reasonably necessary to clarify or complete the Annual Report.Taxpayer will provide all
requested information within 30 days. Additional time may be allowed for good cause.
2005–16 I.R.B.944April 18, 2005

d. The IRS will determine whether Taxpayer has complied with this APA based on Taxpayer’s U.S. Returns, Financial
Statements, and other APA Records, for the APA Term and any other year necessary to verifycompliance. For Taxpayer to
comply with this APA, an independent certified public accountant must {use the following or an alternative} render an opinion
that the Taxpayer’s Financial Statements present fairly, in all material respects, Taxpayer’s financial position under U.S. GAAP.
e. In accordance with section 11.04 of Revenue Procedure 96–53, Taxpayer will (1) maintain its APA Records, and (2) make
them available to the IRS in connection with an examination under section 11.03. Compliance with this subparagraph constitutes
compliance with the record-maintenanceprovisions of I.R.C. sections 6038A and 6038C for the Covered Transactions for any
taxable year during the APA Term.
f. If Taxpayer’s actual transactions do not result in compliance with the TPM, Taxpayer:
i. Must report its taxable income in an amount that is consistent with the TPM and all other requirements of this APA on
its timely filed U.S. Return. However, for any APA Year, if Taxpayer’s timely filed U.S. Return is filed no later than
60 days after the effective date of this APA, then Taxpayer may instead report its taxable income in an amount that is
consistent with the TPM and all other requirements of this APA on an amended U.S. Return filed no later than 120 days
after the effective date of this APA.
ii. May make compensating adjustments under Revenue Procedure 96–53, section 11.02, subject to any modifications or
restrictions in Appendix A or elsewhere in this APA.
g. {Insert when U.S. Group or Foreign Group contains more than one member.} [This APA addresses the arm’s-length nature
of prices charged or received in the aggregate between Taxpayer[s] and Foreign Participants. Except as explicitly provided, this
APA does not address and does not bind theIRS with respect to prices charged or received, or the relative amounts of income or
loss realized, by particular legal entities that are members of U.S. Group or that are members of Foreign Group.]
h. The True Taxable Income within the meaning of Treasury Regulations sections 1.482–1(a)(1) and (i)(9) of a member of an
affiliated group filing a U.S. consolidated return will be determined under the I.R.C. section 1502 Treasury Regulations.
i.{Optional for US Parent Signatories}To the extent that Taxpayer’s compliance with this APA depends on certain acts of
Foreign Group members, Taxpayer will ensure thateach Foreign Group member will perform such acts.
6.C
riticalAssumptions. This APA’s critical assumptions, within the meaning of Revenue Procedure 96–53, section 5.07, appear
in Appendix B. Revenue Procedure 96–53, section 11.07, governs if any critical assumption has not been met.
7.D
isclosure. This APA, and any background information related to this APA or the APA Request, are: (1) considered “return
information” under I.R.C. section 6103(b)(2)(C); and (2) not subject to public inspection as a “written determination” under I.R.C.
section 6110(b)(1). Section 521(b) of Pub. L. 106–170 provides that the Secretary of the Treasury must prepare a report for public
disclosure that includes certain specifically designated information concerning all APAs, including this APA, in a form that does
not reveal taxpayers’ identities, trade secrets, and proprietary or confidential business or financial information.
8.D
isputes. If a dispute arises concerning the interpretation of this APA, the Parties will seek a resolution by the IRS Associate
Chief Counsel (International), to the extent reasonably practicable, before seeking alternative remedies. If any dispute arises
that is not related to interpreting this APA, the Parties will seek to resolve the dispute in a manner consistent with Revenue
Procedure 96–53, section 11.03(4).
9.M
ateriality. In this APA the terms “material” and “materially” will be interpreted consistently with the definition of “material
facts” in Revenue Procedure 96–53, section 11.05(1).
10.S
ectionCaptions. This APA’s section captions, which appear initalics, are for convenience and reference only. The captions
do not affect in any way the interpretation or application of this APA.
11.E
ntireAgreementandSeverability. This APA is the complete statement of the Parties’ agreement. The Parties will sever,
delete, or reform any invalid or unenforceable provision in this APA to approximate the Parties’ intent as nearly as possible.
12.S
uccessorinInterest. This contract binds, and inures to the benefit of, any successor in interest to Taxpayer.
13.N
otice. Any notices required by this APA or Revenue Procedure 96–53 must be in writing. Taxpayer will send notices to the
IRS at the address and in the manner set forth in Revenue Procedure 96–53, section 5.13(2). The IRS will send notices to:
April 18, 20059452005–16 I.R.B.

Taxpayer Corporation
Attn: Jane Doe, Sr. Vice President (Taxes)
1000 Any Road
Any City, USA 10000
(phone:
)
14.E
ffectiveDateandCounterparts. This APA is effective starting on the date, or later date of the dates, upon which all Parties
execute this APA. The Parties may execute this APA in counterparts, with each counterpart constituting an original.
WITNESS,
The Parties have executed this APA on the dates below.
[Taxpayer Name in all caps]
By:
Date:,20
Jane Doe
Sr. Vice President (Taxes)
IRS
By:
Date:,20
Matthew W. Frank
Director, Advance Pricing Agreement Program
APPENDIX A
COVERED TRANSACTIONS AND TRANSFER PRICING METHOD (TPM)
1. Cover
ed Transactions.
[Define the Covered Transactions.]
2. TPM.
{Note:
If appropriate, adapt language from the following examples.}
•CUP Method
The TPM is the comparable uncontrolled price (CUP) method. The price charged for
must equal between
and(the Arm’s Length Range). Taxpayer must realize,recognize, and report results on its U.S. Returns
that clearly reflect such pricing.
•Resa
le Price Method (RPM)
The TPM is the resale price method (RPM). Taxpayer must realize, recognize, and report results on its U.S. Returns that
clearly reflect a gross margin (defined as gross profit divided bysales revenue as those terms are defined in Treasury Regulations
sections 1.482–5(d)(1) and (2)) of between
%and% (the Arm’s Length Range) for the Covered Transactions.
•Cost Plus Method
The T
PM is the cost plus method. Taxpayer must realize, recognize, and report results on its U.S. Returns that clearly
refl
ect a ratio of gross profit to production costs (within the meaning of Treasury Regulations sections 1.482–3(d)(1) and (2)) of
betw
een
%and% (the Arm’s Length Range) for the Covered Transactions.
•CPM with Berry Ratio PLI
The TPM is the comparable profits method (CPM). Taxpayermust realize, recognize, and report results on its U.S.
Returns that clearly reflect a gross profit tooperating expenses ratio (as those terms aredefined in Treasury Regulations sections
1.482–5(d)(2) and (3)) of between
and(the Arm’s Length Range) for the Covered Transactions.
•CP
M using an Operating Margin PLI
2005–16 I.R.B.946April 18, 2005

The TPM is the comparable profits method (CPM). The profit level indicator is an operating margin. Taxpayer’s reported
operating profit (within the meaning of Treasury Regulations sections 1.482–5(d)(5)) must clearly reflect an operating margin
(defined as the ratio of operating profit to sales revenue as those terms are defined in Treasury Regulations section 1.482–5(d)(1)
and (4)) of between
%and% (the Arm’s Length Range) for the Covered Transactions.
•CPM using a Three-year Rolling Average Operating Margin PLI
The TPM is the comparable profits method (CPM). The profit level indicator is an operating margin. Taxpayer’s Three-Year
Rolling Average operating margin is defined as follows for any APA Year: the sum of Taxpayer’s reported operating profit
(within the meaning of Treasury Regulations section 1.482–5(d)(5)) for that APA Year and the two preceding years, divided
by the sum of Taxpayer’s sales revenue (within the meaning of Treasury Regulations section 1.482–5(d)(1)) for that APA Year
and the two preceding years. Taxpayer’s Three-Year Rolling Average operating margin must be between
%and%
(the Arm’s Length Range.)
•Residual Profit Split Method
The TPM is the residual profit split method. Taxpayer must realize, recognize, and report results on its U.S. Returns that
clearly reflect the following: [insert description of profit-split mechanism].
[Insert additional provisions as needed.]
3. Adjustments.
{For use with a CPM}
For each APA Year, if Taxpayer’s year-end [Three-Year Rolling Average]{specify PLI used}for the Covered Transactions
is not in compliance with the TPM, Taxpayer will make an adjustment that brings its [Three-Year Rolling Average]{specify PLI
used}to{if the TPM specifies a point value, use that; if the TPM specifies an Arm’s Length Range, use the nearest edge of the
Arm’s Length Range or a point such as the median within the Arm’s Length Range}.
[Insert additional provisions as needed.]
APPENDIX B
CRITIC
AL ASSUMPTIONS
This APA’s critical assumptions are:
1. The business activities, functions performed, risks assumed,assets employed, and financial and tax accounting methods and
classifications [and methods of estimation]of Taxpayer in relation to the Covered Transactions will remain materially the same as
described or used in Taxpayer’s APA Request. A mere change in business results will not be a material change.
[Inse
rt additional provisions as needed.]
APPENDIX C
APA RECORDS AND ANNUAL REPORT
APA R
ECORDS
The APA Records will consist of:
1. All documents listed below for inclusion in the Annual Report,as well as all documents, notes, work papers, records, or other
writings that support the information provided in such documents.
2. [
Insert here other records as required.]
ANNUAL REPORT
The Annual Report will include a cover sheet and atable of contents. The cover sheet will specify:
i.
the Parties to the APA;
ii. the APA Term (defined in section 3 of this APA);
iii. the APA’s effective date (defined in section 14 of this APA);
iv
. whether the APA is a renewal, and if so the term of the prior APA;
April 18, 20059472005–16 I.R.B.

v. whether the APA has been amended, and if so the amendment’s effective date;
vi. any information needed to distinguish the APA at issue from any other APAs involving the same parties;
vii. any changes to the Taxpayer notice information in section 13 of this APA.
The table of contents and the Annual Report will be organized as listed below. Taxpayer must include the following items in its
Annual Report for each APA Year.
1. Statements that fully identify,describe, analyze, and explain:
a. All material differences between any of Taxpayer’s business operations (including functions, risks assumed, markets,
contractual terms, economic conditions, property, services, and assets employed) during the APA Year and the description of
the business operations contained in the APA Request. If there have been no material differences, the Annual Report will
include a statement to that effect.
b. All material changes in Taxpayer’s accounting methods and classifications, and methods of estimation, from those
described or used in Taxpayer’s request for this APA. If there have been no such material changes, the Annual Report will
include a statement to that effect.
c. Any failure to meet any critical assumption. If there have been no failures, the Annual Report will include a statement
to that effect.
d. Any change to any entity classification for federal income tax purposes (including any change that causes an entity to be
disregarded for federal income tax purposes) of any Worldwide Group member that is a party to the Covered Transactions or
is otherwise relevant to the TPM.
e. Any changes to Taxpayer’s financialaccounting methods that were made to conform to U.S. GAAP changes and that affect
the Covered Transactions.
f. The amount, reason for, and financial analysis of any compensating adjustments under paragraph 5(f)(ii) of this APA
for the APA Year, including but not limited to:
i. the amounts paid or received by each affected entity;
ii. the character (such as capital, ordinary, income, expense) and country source of the funds transferred, and the specific
affected line item(s) of any affected U.S. Return; and
iii. the date(s) and means by which the payments are or will be made.
g. The amounts, description, reason for, and financial analysis of any book-tax differences relevant to the TPM for the APA
Year, as reflected on Schedule M–1 ofthe U.S. Return for the APA Year.
2. The Financial Statements, and any necessary account detailto show compliance with the TPM, with a copy of the independent
certified public accountant’s opinion required by paragraph 5(d) of this APA.
3. A financial analysis that reflects Taxpayer’s TPM calculations for the APA Year. The calculations must reconcile with and
reference the Financial Statements in sufficient account detail to allow the IRS to determine whether Taxpayer has complied
with the TPM.
4. An organizational chart for the Worldwide Group, revised annually to reflect all ownership or structural changes of entities
that are parties to the Covered Transactions or are otherwise relevant to the TPM.
2005–16 I.R.B.948April 18, 2005

APPENDIX D
DEFINITIONS
The following definitions control for all purposes of this APA. The definitions appear alphabetically below:
TermDefinition
Annual ReportA report within the meaning of Revenue Procedure 96–53, section 11.
APAThis Advance Pricing Agreement, which is an “advance pricing agreement” within the
meaning of Revenue Procedure 96–53, section 1.
APA RecordsThe records specified in Appendix C.
APA RequestTaxpayer’s request for this APA dated, including any amendments or
supplemental or additional information thereto.
Covered Transaction(s)This term is defined in Appendix A.
Financial StatementsFinancial statements preparedin accordance with U.S. GAAP and stated in U.S. dollars.
Foreign GroupWorldwide Group members that are not U.S. persons.
Foreign Participants[namethe foreign entities involved in Covered Transactions].
I.R.C.The Internal Revenue Code of 1986, 26 U.S.C., as amended.
Pub. L. 106–170The Ticket to Work and Work Incentives Improvement Act of 1999.
Revenue Procedure 96–53Rev. Proc. 96–53, 1996–2 C.B. 375.
Transfer Pricing Method (TPM)Atransfer pricing method within the meaning of Treasury Regulations section 1.482–1(b)
and Revenue Procedure 96–53, section 3.02.
U.S. GAAPU.S. generally-accepted accounting principles.
U.S. GroupWorldwide Group members that are U.S. persons.
U.S. ReturnFor each taxable year, the “returns with respect to income taxes under subtitle A” that
Taxpayer must “make” in accordance with I.R.C. section 6012. {Or substitute for
partnership:For each taxable year, the “return” that Taxpayer must “make” in accordance
with I.R.C. section 6031.}
Worldwide GroupTaxpayer and all organizations, trades, businesses, entities, or branches (whether or not
incorporated, organized in the United States,or affiliated) owned or controlled directly or
indirectly by the same interests.
April 18, 20059492005–16 I.R.B.

ATTACHMENT A
Model 2 (Based on Revenue Procedure 2004–40)
ADVANCE PRICING AGREEMENT
between
[Insert Taxpayer’s Name]
and
THE INTERNAL REVENUE SERVICE
PARTIES
The Parties to
this Advance Pricing Agreement (APA) are the Internal Revenue Service (IRS) and [Insert Taxpayer’s Name],
EIN
(Taxpayer
).
RECITALS
Taxpayer’s principal place of business is [City, State]. [Insert general description of taxpayer and other relevant parties].
This APA cont
ains the Parties’ agreement on the best method for determining arm’s-length prices of the Covered Transactions
under I.R.C.
section 482, any applicable tax treaties, and the Treasury Regulations.
Unless otherwise specified, terms in the plural include the singular and vice versa. Appendix D contains definitions for
capitalized terms not elsewhere defined in this APA.
{If renewal, add}[Taxpayer and IRS previously entered into an APA covering taxable years ending
to,
executed on
.]
AGREEMENT
The Parties agree as follows:
1.C
overedTransactions. This APA applies to the Covered Transactions, as defined in Appendix A.
2.T
ransf
erPricingMethod. Appendix A sets forth the Transfer Pricing Method (TPM) for the Covered Transactions.
3.T
erm. This APA applies to Taxpayer’s taxable years endingthrough(APA Term).
4.O
peration.
a. Revenu
e Procedure 2004–40 governs the interpretation, legal effect, and administration of this APA.
b. Nonfactual oral and written representations, within the meaning of sections 9.04 and 9.05 of Revenue Procedure 2004–40
(including any proposals to use particular TPMs), made in conjunction with the APA Request constitute statements made in
compromise negotiations within the meaning of Rule 408 of the Federal Rules of Evidence.
5.C
ompliance.
a. For e
ach taxable year covered by this APA (APA Year), if Taxpayer complies with the terms and conditions of this APA,
then th
e IRS will not make or propose any allocation or adjustment under I.R.C. section 482 to the Covered Transactions.
b. If Taxpayer does not comply with the terms and conditions of this APA, then the IRS may:
i. enforce the terms and conditions of this APA and make or propose allocations or adjustments under I.R.C. section 482
consistent with this APA;
ii. cancel or revoke this APA under section 10.06 or 10.07 of Revenue Procedure 2004–40; or
iii. revise this APA, if the Parties agree.
c. Taxpayer must timely file an Annual Report for each APA Year in accordance with Appendix C and section 10.01 of
Revenue Procedure 2004–40. Taxpayer must file an original and four copies of the Annual Report by the later of (a) 90 days after
the time prescribed by law (including extensions) for filing its federal income tax return for the APA Year covered by the report,
or (b) 90 days after the effective date of this APA. [The Service and the Taxpayer may agree to alternative filing dates.] The IRS
may request additional information reasonably necessary to clarify or complete the Annual Report.Taxpayer will provide all
requested information within 30 days. Additional time may be allowed for good cause.
2005–16 I.R.B.950April 18, 2005

d. The IRS will determine whether Taxpayer has complied with this APA based on Taxpayer’s U.S. Returns, Financial
Statements, and other APA Records, for the APA Term and any other year necessary to verifycompliance. For Taxpayer to
comply with this APA, an independent certified public accountant must {use the following or an alternative} render an opinion
that the Taxpayer’s Financial Statements present fairly, in all material respects, Taxpayer’s financial position under U.S. GAAP.
e. In accordance with section 10.04 of Revenue Procedure 2004–40, Taxpayer will (1) maintain its APA Records, and (2) make
them available to IRS in connection with an examination under section 10.03. Compliance with this subparagraph constitutes
compliance with the record-maintenanceprovisions of I.R.C. sections 6038A and 6038C for the Covered Transactions for any
taxable year during the APA Term.
f. If Taxpayer’s actual transactions do not result in compliance with the TPM, Taxpayer:
i. Must report its taxable income in an amount that is consistent with the TPM and all other requirements of this APA on
its timely filed U.S. Return. However, for any APA Year, if Taxpayer’s timely filed U.S. Return is filed no later than
60 days after the effective date of this APA, then Taxpayer may instead report its taxable income in an amount that is
consistent with the TPM and all other requirements of this APA on an amended U.S. Return filed no later than 120 days
after the effective date of this APA.
ii. May make compensating adjustments under Revenue Procedure 2004–40, section 10.02, subject to any modifications
or restrictions in Appendix A or elsewhere in this APA.
g. {Insert when U.S. Group or Foreign Group contains more than one member.} [This APA addresses the arm’s-length nature
of prices charged or received in the aggregate between Taxpayer[s] and Foreign Participants. Except as explicitly provided, this
APA does not address and does not bind theIRS with respect to prices charged or received, or the relative amounts of income or
loss realized, by particular legal entities that are members of U.S. Group or that are members of Foreign Group.]
h. The True Taxable Income within the meaning of Treasury Regulations section 1.482–1(a)(1) and (i)(9) of a member of an
affiliated group filing a U.S. consolidated return will be determined under the I.R.C. section 1502 Treasury Regulations.
i.{Optional for US Parent Signatories}To the extent that Taxpayer’s compliance with this APA depends on certain acts of
Foreign Group members, Taxpayer will ensure thateach Foreign Group member will perform such acts.
6.C
riticalAssumptions. This APA’s critical assumptions, within the meaning of Revenue Procedure 2004–40, section 4.05,
appear in Appendix B. Revenue Procedure 2004–40, section 10.05, governs if any critical assumption has not been met.
7.D
isclosure. This APA, and any background information related to this APA or the APA Request, are: (1) considered “return
information” under I.R.C. section 6103(b)(2)(C); and (2) not subject to public inspection as a “written determination” under I.R.C.
section 6110(b)(1). Section 521(b) of Pub. L. 106–170 provides that the Secretary of the Treasury must prepare a report for public
disclosure that includes certain specifically designated information concerning all APAs, including this APA, in a form that does
not reveal taxpayers’ identities, trade secrets, and proprietary or confidential business or financial information.
8.D
isputes. If a dispute arises concerning the interpretation of this APA, the Parties will seek a resolution by the IRS Associate
Chief Counsel (International), to the extent reasonably practicable, before seeking alternative remedies. If any dispute arises
that is not related to interpreting this APA, the Parties will seek to resolve the dispute in a manner consistent with Revenue
Procedure 2004–40, section 10.03(4).
9.M
ateriality. In this APA the terms “material” and “materially” will be interpreted consistently with the definition of “material
facts” in Revenue Procedure 2004–40, section 10.07(1).
10.S
ectionCaptions. This APA’s section captions, which appear initalics, are for convenience and reference only. The captions
do not affect in any way the interpretation or application of this APA.
11.E
ntireAgreementandSeverability. This APA is the complete statement of the Parties’ agreement. The Parties will sever,
delete, or reform any invalid or unenforceable provision in this APA to approximate the Parties’ intent as nearly as possible.
12.S
uccessorinInterest. This contract binds, and inures to the benefit of, any successor in interest to Taxpayer.
13.N
otice. Any notices required by this APA or Revenue Procedure 2004–40 must be in writing. Taxpayer will send notices to
the IRS at the address and in the manner set forth in Revenue Procedure 2004–40, section 4.11. The IRS will send notices to:
April 18, 20059512005–16 I.R.B.

Taxpayer Corporation
Attn: Jane Doe, Sr. Vice President (Taxes)
1000 Any Road
Any City, USA 10000
(phone:
)
14.E
ffectivedateandCounterparts. This APA is effective starting on the date, or later date of the dates, upon which all Parties
execute this APA. The Parties may execute this APA in counterparts, with each counterpart constituting an original.
WITNESS,
The Parties have executed this APA on the dates below.
[Taxpayer Name in all caps]
By:
Date:,20
Jane Doe
Sr. Vice President (Taxes)
IRS
By:
Date:,20
Matthew W. Frank
Director, Advance Pricing Agreement Program
APPENDIX A
COVERED TRANSACTIONS AND TRANSFER PRICING METHOD (TPM)
1. Covered Transactions.
[Define the Covered Transactions.]
2. TPM.
{Note: If appropriate, adapt language from the following examples.}
•CUP Method
The TPM is the comparable uncontrolled price (CUP) method. The price charged for
must equal between
and(the Arm’s Length Range). Taxpayer must realize,recognize, and report results on its U.S. Returns
that clearly reflect such pricing.
•Resale Price Method (RPM)
The TPM is the resale price method (RPM). Taxpayer must realize, recognize, and report results on its U.S. Returns that
clearly reflect a gross margin (defined as gross profit divided bysales revenue as those terms are defined in Treasury Regulations
sections 1.482–5(d)(1) and (2)) of between
%and% (the Arm’s Length Range) for the Covered Transactions.
•Cost Plus Method
The TPM is the cost plus method. Taxpayermust realize, recognize,and report results on its U.S. Returns that clearly
reflect a ratio of gross profit to production costs (within the meaning of Treasury Regulations sections 1.482–3(d)(1) and (2)) of
between
%and% (the Arm’s Length Range) for the Covered Transactions.
•CPM with Berry Ratio PLI
The TPM is the comparable profits method (CPM). Taxpayermust realize, recognize, and report results on its U.S.
Returns that clearly reflect a gross profit tooperating expenses ratio (as those terms aredefined in Treasury Regulations sections
1.482–5(d)(2) and (3)) of between
and(the Arm’s Length Range) for the Covered Transactions.
•CPM using an Operating Margin PLI
2005–16 I.R.B.952April 18, 2005

The TPM is the comparable profits method (CPM). The profit level indicator is an operating margin. Taxpayer’s reported
operating profit (within the meaning of Treasury Regulations sections 1.482–5(d)(5)) must clearly reflect an operating margin
(defined as the ratio of operating profit to sales revenue as those terms are defined in Treasury Regulations section 1.482–5(d)(1)
and (4)) of between
%and% (the Arm’s Length Range) for the Covered Transactions.
•CPM using a Three-year Rolling Average Operating Margin PLI
The TPM is the comparable profits method (CPM). The profit level indicator is an operating margin. Taxpayer’s Three-Year
Rolling Average operating margin is defined as follows for any APA Year: the sum of Taxpayer’s reported operating profit
(within the meaning of Treasury Regulations section 1.482–5(d)(5)) for that APA Year and the two preceding years, divided
by the sum of Taxpayer’s sales revenue (within the meaning of Treasury Regulations section 1.482–5(d)(1)) for that APA Year
and the two preceding years. Taxpayer’s Three-Year Rolling Average operating margin must be between
%and%
(the Arm’s Length Range.)
•Residual Profit Split Method
The TPM is the residual profit split method. Taxpayer must realize, recognize, and report results on its U.S. Returns that
clearly reflect the following: [insert description of profit-split mechanism].
[Insert additional provisions as needed.]
3. Adjustments.
{For use with a CPM}
For each APA Year, if Taxpayer’s year-end [Three-Year Rolling Average]{specify PLI used}for the Covered Transactions
is not in compliance with the TPM, Taxpayer will make an adjustment that brings its [Three-Year Rolling Average]{specify PLI
used}to{if the TPM specifies a point value, use that; if the TPM specifies an Arm’s Length Range, use the nearest edge of the
Arm’s Length Range or a point such as the median within the Arm’s Length Range}.
[Insert additional provisions as needed.]
APPENDIX B
CRITIC
AL ASSUMPTIONS
This APA’s critical assumptions are:
1. The business activities, functions performed, risks assumed,assets employed, and financial and tax accounting methods and
classifications [and methods of estimation]of Taxpayer in relation to the Covered Transactions will remain materially the same as
described or used in Taxpayer’s APA Request. A mere change in business results will not be a material change.
[Inse
rt additional provisions as needed.]
APPENDIX C
APA RECORDS AND ANNUAL REPORT
APA R
ECORDS
The APA Records will consist of:
1. All documents listed below for inclusion in the Annual Report,as well as all documents, notes, work papers, records, or other
writings that support the information provided in such documents.
2. [
Insert here other records as required.]
ANNUAL REPORT
The Annual Report will include a cover sheet and atable of contents. The cover sheet will specify:
i.
the Parties to the APA;
ii. the APA Term (defined in section 3 of this APA);
iii. the APA’s effective date (defined in section 14 of this APA);
iv
. whether the APA is a renewal, and if so the term of the prior APA;
April 18, 20059532005–16 I.R.B.

v. whether the APA has been amended, and if so the amendment’s effective date;
vi. any information needed to distinguish the APA at issue from any other APAs involving the same parties;
vii. any changes to the Taxpayer notice information in section 13 of this APA.
The table of contents and the Annual Report will be organized as listed below. Taxpayer must include the following items in its
Annual Report for each APA Year.
1. Statements that fully identify,describe, analyze, and explain:
a. All material differences between any of Taxpayer’s business operations (including functions, risks assumed, markets,
contractual terms, economic conditions, property, services, and assets employed) during the APA Year and the description of
the business operations contained in the APA Request. If there have been no material differences, the Annual Report will
include a statement to that effect.
b. All material changes in Taxpayer’s accounting methods and classifications, and methods of estimation, from those
described or used in Taxpayer’s request for this APA. If there have been no such material changes, the Annual Report will
include a statement to that effect.
c. Any failure to meet any critical assumption. If there have been no failures, the Annual Report will include a statement
to that effect.
d. Any change to any entity classification for federal income tax purposes (including any change that causes an entity to be
disregarded for federal income tax purposes) of any Worldwide Group member that is a party to the Covered Transactions or
is otherwise relevant to the TPM.
e. Any changes to Taxpayer’s financialaccounting methods that were made to conform to U.S. GAAP changes and that affect
the Covered Transactions.
f. The amount, reason for, and financial analysis of any compensating adjustments under paragraph 5(f)(ii) of this APA
for the APA Year, including but not limited to:
i. the amounts paid or received by each affected entity;
ii. the character (such as capital, ordinary, income, expense) and country source of the funds transferred, and the specific
affected line item(s) of any affected U.S. Return; and
iii. the date(s) and means by which the payments are or will be made.
g. The amounts, description, reason for, and financial analysis of any book-tax differences relevant to the TPM for the APA
Year, as reflected on Schedule M–1 ofthe U.S. Return for the APA Year.
2. The Financial Statements, and any necessary account detailto show compliance with the TPM, with a copy of the independent
certified public accountant’s opinion required by paragraph 5(d) of this APA.
3. A financial analysis that reflects Taxpayer’s TPM calculations for the APA Year. The calculations must reconcile with and
reference the Financial Statements in sufficient account detail to allow the IRS to determine whether Taxpayer has complied
with the TPM.
4. An organizational chart for the Worldwide Group, revised annually to reflect all ownership or structural changes of entities
that are parties to the Covered Transactions or are otherwise relevant to the TPM.
2005–16 I.R.B.954April 18, 2005

APPENDIX D
DEFINITIONS
The following definitions control for all purposes of this APA. The definitions appear alphabetically below:
TermDefinition
Annual ReportA report within the meaning of Revenue Procedure 2004–40, section 10.01.
APAThis Advance Pricing Agreement, which is an “advance pricing agreement” within the
meaning of Revenue Procedure 2004–40, section 2.04.
APA RecordsThe records specified in Appendix C.
APA RequestTaxpayer’s request for this APA dated, including any amendments or
supplemental or additional information thereto.
Covered Transaction(s)This term is defined in Appendix A.
Financial StatementsFinancial statements preparedin accordance with U.S. GAAP and stated in U.S. dollars.
Foreign GroupWorldwide Group members that are not U.S. persons.
Foreign Participants[namethe foreign entities involved in Covered Transactions].
I.R.C.The Internal Revenue Code of 1986, 26 U.S.C., as amended.
Pub. L. 106–170The Ticket to Work and Work Incentives Improvement Act of 1999.
Revenue Procedure 2004–40Rev. Proc. 2004–40, 2004–29 I.R.B. 50.
Transfer Pricing Method (TPM)Atransfer pricing method within the meaning of Treasury Regulations section 1.482–1(b)
and Revenue Procedure 2004–40, section 2.04.
U.S. GAAPU.S. generally-accepted accounting principles.
U.S. GroupWorldwide Group members that are U.S. persons.
U.S. ReturnFor each taxable year, the “returns with respect to income taxes under subtitle A” that
Taxpayer must “make” in accordance with I.R.C. section 6012. {Or substitute for
partnership:For each taxable year, the “return” that Taxpayer must “make” in accordance
with I.R.C. section 6031.}
Worldwide GroupTaxpayer and all organizations, trades, businesses, entities, or branches (whether or not
incorporated, organized in the United States,or affiliated) owned or controlled directly or
indirectly by the same interests.
April 18, 20059552005–16 I.R.B.

ATTACHMENT B
FORMULAS FOR B
ALANCE SHEET ADJUSTMENTS
D
efinitionsofVariables:
AP= average accounts payable
AR= average trade
accounts receivable, net of allowance for bad debt
cogs= cost of goods sold
INV= average inventory, stated on FIFO basis
opex= operating e
xpenses (general, sales, administrative, and depreciation expenses)
PPE= property, plant, and equipment,net of accumulated depreciation
sales= net sales
tc= total cost
(cogs + opex, as defined above)
h= average accounts payable or trade accounts receivable holding period, stated as a fraction of a year
i= interest rate
t= entity bei
ng tested
c= comparable
E
quations:
If Cost of Goods Sold is controlled (generally, sales in denominator of PLI):
Receivables Adjustment (“RA”):RA = {[(AR
t
/ sales
t
)xsales
c
]-AR
c
}x{i/[1+(ixh
c
)]}
Payables Adjustment (“PA”):PA = {[(AP
t
/ sales
t
)xsales
c
]-AP
c
}x{i/[1+(ixh
c
)]}
Inventory Adjustment (“IA”):IA = {[(INV
t
/ sales
t
)xsales
c
]-INV
c
}xi
PP&E Adjustment (“PPEA”):PPEA = {[(PPE
t
/ sales
t
)xsales
c
] - PPE
c
}xi
If Sales are controlled (generally,costs in the denominator of PLI):
8
Recei
vables Adjustment (“RA”):
RA = {[
(AR
t
/tc
t
)xtc
c
]-AR
c
} x {i/[1+(i x h
c
)]}
Payables Adjustment (“PA”):PA = {[(AP
t
/tc
t
)xtc
c
]-AP
c
} x {i/[1+(i x h
c
)]}
Inventory Adjustment (“IA”):IA = {[(INV
t
/tc
t
)xtc
c
]-INV
c
}xi
PP&E
Adjustment (“PPEA”):
PPEA
={[(PPE
t
/tc
t
)xtc
c
]-PPE
c
}xi
Then Adjust Comparables as Follows:
adjusted sales
c
= sales
c
+RA
adjusted cogs
c
= cogs
c
+PA-IA
adjusted opex
c
= opex
c
- PPEA
8
Depending on the specific facts, the equations below may use total costs (“tc”) or cost of goods sold (“cogs”).
2005–16 I.R.B.956April 18, 2005

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
April 18, 2005i2005–16 I.R.B.

Numerical Finding List
1
Bulletins 2005–1 through 2005–16
Announcements:
2005-1, 2005-1 I.R.B.257
2005-2, 2005-2 I.R.B.319
2005-3, 2005-2 I.R.B.270
2005-4, 2005-2 I.R.B.319
2005-5, 2005-3 I.R.B.353
2005-6, 2005-4 I.R.B.377
2005-7, 2005-4 I.R.B.377
2005-8, 2005-4 I.R.B.380
2005-9, 2005-4 I.R.B.380
2005-10, 2005-5 I.R.B.450
2005-11, 2005-5 I.R.B.451
2005-12, 2005-7 I.R.B.555
2005-13, 2005-8 I.R.B.627
2005-14, 2005-9 I.R.B.653
2005-15, 2005-9 I.R.B.654
2005-16, 2005-10 I.R.B.702
2005-17, 2005-10 I.R.B.673
2005-18, 2005-9 I.R.B.660
2005-19, 2005-11 I.R.B.744
2005-20, 2005-12 I.R.B.772
2005-21, 2005-12 I.R.B.776
2005-22, 2005-14 I.R.B.826
2005-23, 2005-14 I.R.B.845
2005-24, 2005-15 I.R.B.889
2005-25, 2005-15 I.R.B.891
2005-27, 2005-16 I.R.B.918
Court Decisions:
2080, 2005-15 I.R.B.850
Notices:
2005-1, 2005-2 I.R.B.274
2005-2, 2005-3 I.R.B.337
2005-3, 2005-5 I.R.B.447
2005-4, 2005-2 I.R.B.289
2005-5, 2005-3 I.R.B.337
2005-6, 2005-5 I.R.B.448
2005-7, 2005-3 I.R.B.340
2005-8, 2005-4 I.R.B.368
2005-9, 2005-4 I.R.B.369
2005-10, 2005-6 I.R.B.474
2005-11, 2005-7 I.R.B.493
2005-12, 2005-7 I.R.B.494
2005-13, 2005-9 I.R.B.630
2005-14, 2005-7 I.R.B.498
2005-15, 2005-7 I.R.B.527
2005-16, 2005-8 I.R.B.605
2005-17, 2005-8 I.R.B.606
2005-18, 2005-9 I.R.B.634
2005-19, 2005-9 I.R.B.634
2005-20, 2005-9 I.R.B.635
Notices— Continued:
2005-21, 2005-11 I.R.B.727
2005-22, 2005-12 I.R.B.756
2005-23, 2005-11 I.R.B.732
2005-24, 2005-12 I.R.B.757
2005-25, 2005-14 I.R.B.827
2005-26, 2005-12 I.R.B.758
2005-27, 2005-13 I.R.B.795
2005-28, 2005-13 I.R.B.796
2005-29, 2005-13 I.R.B.796
2005-30, 2005-14 I.R.B.827
2005-31, 2005-14 I.R.B.830
2005-32, 2005-16 I.R.B.895
Proposed Regulations:
REG-117969-00, 2005-7 I.R.B.533
REG-125443-01, 2005-16 I.R.B.912
REG-125628-01, 2005-7 I.R.B.536
REG-129709-03, 2005-3 I.R.B.351
REG-148701-03, 2005-13 I.R.B.802
REG-148867-03, 2005-9 I.R.B.646
REG-160315-03, 2005-14 I.R.B.833
REG-163314-03, 2005-14 I.R.B.835
REG-122847-04, 2005-13 I.R.B.804
REG-130370-04, 2005-8 I.R.B.608
REG-130671-04, 2005-10 I.R.B.694
REG-131128-04, 2005-11 I.R.B.733
REG-139683-04, 2005-4 I.R.B.371
REG-147195-04, 2005-15 I.R.B.888
REG-152354-04, 2005-13 I.R.B.805
REG-152914-04, 2005-9 I.R.B.650
REG-152945-04, 2005-6 I.R.B.484
REG-159824-04, 2005-4 I.R.B.372
Revenue Procedures:
2005-1, 2005-1 I.R.B.1
2005-2, 2005-1 I.R.B.86
2005-3, 2005-1 I.R.B.118
2005-4, 2005-1 I.R.B.128
2005-5, 2005-1 I.R.B.170
2005-6, 2005-1 I.R.B.200
2005-7, 2005-1 I.R.B.240
2005-8, 2005-1 I.R.B.243
2005-9, 2005-2 I.R.B.303
2005-10, 2005-3 I.R.B.341
2005-11, 2005-2 I.R.B.307
2005-12, 2005-2 I.R.B.311
2005-13, 2005-12 I.R.B.759
2005-14, 2005-7 I.R.B.528
2005-15, 2005-9 I.R.B.638
2005-16, 2005-10 I.R.B.674
2005-17, 2005-13 I.R.B.797
2005-18, 2005-13 I.R.B.798
2005-19, 2005-14 I.R.B.832
2005-21, 2005-16 I.R.B.899
2005-22, 2005-15 I.R.B.886
Revenue Procedures— Continued:
2005-24, 2005-16 I.R.B.909
Revenue Rulings:
2005-1, 2005-2 I.R.B.258
2005-2, 2005-2 I.R.B.259
2005-3, 2005-3 I.R.B.334
2005-4, 2005-4 I.R.B.366
2005-5, 2005-5 I.R.B.445
2005-6, 2005-6 I.R.B.471
2005-7, 2005-6 I.R.B.464
2005-8, 2005-6 I.R.B.466
2005-9, 2005-6 I.R.B.470
2005-10, 2005-7 I.R.B.492
2005-11, 2005-14 I.R.B.816
2005-12, 2005-9 I.R.B.628
2005-13, 2005-10 I.R.B.664
2005-14, 2005-12 I.R.B.749
2005-15, 2005-11 I.R.B.720
2005-16, 2005-13 I.R.B.777
2005-17, 2005-14 I.R.B.823
2005-18, 2005-14 I.R.B.817
2005-19, 2005-14 I.R.B.819
2005-20, 2005-14 I.R.B.821
2005-21, 2005-14 I.R.B.822
2005-22, 2005-13 I.R.B.787
2005-23, 2005-15 I.R.B.864
2005-24, 2005-16 I.R.B.892
Tax Conventions:
2005-3, 2005-2 I.R.B.270
2005-17, 2005-10 I.R.B.673
2005-22, 2005-14 I.R.B.826
Treasury Decisions:
9164, 2005-3 I.R.B.320
9165, 2005-4 I.R.B.357
9166, 2005-8 I.R.B.558
9167, 2005-2 I.R.B.261
9168, 2005-4 I.R.B.354
9169, 2005-5 I.R.B.381
9170, 2005-4 I.R.B.363
9171, 2005-6 I.R.B.452
9172, 2005-6 I.R.B.468
9173, 2005-8 I.R.B.557
9174, 2005-9 I.R.B.629
9175, 2005-10 I.R.B.665
9176, 2005-10 I.R.B.661
9177, 2005-10 I.R.B.671
9178, 2005-11 I.R.B.708
9179, 2005-11 I.R.B.707
9180, 2005-11 I.R.B.714
9181, 2005-11 I.R.B.717
9182, 2005-11 I.R.B.713
9183, 2005-12 I.R.B.754
9184, 2005-12 I.R.B.753
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin
2004–52, dated December 27, 2004.
2005–16 I.R.B.iiApril 18, 2005

Treasury Decisions— Continued:
9185, 2005-12 I.R.B.749
9186, 2005-13 I.R.B.790
9187, 2005-13 I.R.B.778
9188, 2005-15 I.R.B.883
9189, 2005-13 I.R.B.788
9190, 2005-15 I.R.B.855
9191, 2005-15 I.R.B.854
9192, 2005-15 I.R.B.866
9193, 2005-15 I.R.B.862
April 18, 2005iii2005–16 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2005–1 through 2005–16
Announcements:
2001-77
Modified by
Rev. Proc. 2005-16, 2005-10 I.R.B.674
Notices:
88-30
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
88-132
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
89-29
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
89-38
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
2002-45
Amplified by
Rev. Rul. 2005-24, 2005-16 I.R.B.892
2004-22
Modified and superseded by
Notice 2005-30, 2005-14 I.R.B.827
2004-38
Obsoleted by
T.D. 9186, 2005-13 I.R.B.790
2004-80
Clarified and modified by
Notice 2005-22, 2005-12 I.R.B.756
Updated by
Notice 2005-17, 2005-8 I.R.B.606
2005-4
Modified by
Notice 2005-24, 2005-12 I.R.B.757
2005-17
Clarified and modified by
Notice 2005-22, 2005-12 I.R.B.756
Proposed Regulations:
REG-149519-03
Corrected by
Ann. 2005-11, 2005-5 I.R.B.451
REG-114726-04
Corrected by
Ann. 2005-10, 2005-5 I.R.B.450
Revenue Procedures:
84-58
Superseded by
Rev. Proc. 2005-18, 2005-13 I.R.B.798
98-16
Modified and superseded by
Rev. Proc. 2005-11, 2005-2 I.R.B.307
2000-20
Modified and superseded by
Rev. Proc. 2005-16, 2005-10 I.R.B.674
2001-22
Superseded by
Rev. Proc. 2005-12, 2005-2 I.R.B.311
2002-9
Modified and amplified by
Rev. Proc. 2005-9, 2005-2 I.R.B.303
2004-1
Superseded by
Rev. Proc. 2005-1, 2005-1 I.R.B.1
2004-2
Superseded by
Rev. Proc. 2005-2, 2005-1 I.R.B.86
2004-3
Superseded by
Rev. Proc. 2005-3, 2005-1 I.R.B.118
2004-4
Superseded by
Rev. Proc. 2005-4, 2005-1 I.R.B.128
2004-5
Superseded by
Rev. Proc. 2005-5, 2005-1 I.R.B.170
2004-6
Superseded by
Rev. Proc. 2005-6, 2005-1 I.R.B.200
2004-7
Superseded by
Rev. Proc. 2005-7, 2005-1 I.R.B.240
2004-8
Superseded by
Rev. Proc. 2005-8, 2005-1 I.R.B.243
2004-18
Obsoleted in part by
Rev. Proc. 2005-15, 2005-9 I.R.B.638
2004-24
Obsoleted by
Rev. Proc. 2005-22, 2005-15 I.R.B.886
2004-35
Corrected by
Ann. 2005-4, 2005-2 I.R.B.319
Revenue Procedures— Continued:
2004-60
Superseded by
Rev. Proc. 2005-10, 2005-3 I.R.B.341
2005-6
Modified by
Rev. Proc. 2005-16, 2005-10 I.R.B.674
2005-8
Modified by
Rev. Proc. 2005-16, 2005-10 I.R.B.674
2005-9
Modified by
Rev. Proc. 2005-17, 2005-13 I.R.B.797
Revenue Rulings:
69-516
Obsoleted by
T.D. 9182, 2005-11 I.R.B.713
77-415
Obsoleted by
T.D. 9182, 2005-11 I.R.B.713
77-479
Obsoleted by
T.D. 9182, 2005-11 I.R.B.713
82-34
Obsoleted by
T.D. 9182, 2005-11 I.R.B.713
92-63
Modified and superseded by
Rev. Rul. 2005-3, 2005-3 I.R.B.334
95-63
Modified and superseded by
Rev. Rul. 2005-3, 2005-3 I.R.B.334
2004-43
Revoked by
Rev. Rul. 2005-10, 2005-7 I.R.B.492
2004-103
Superseded by
Rev. Rul. 2005-3, 2005-3 I.R.B.334
Treasury Decisions:
9170
Corrected by
Ann. 2005-13, 2005-8 I.R.B.627
9187
Corrected by
Ann. 2005-25, 2005-15 I.R.B.891
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin 2004–52, dated December 27,
2004.
2005–16 I.R.B.ivApril 18, 2005
*U.S.Government Printing Office: 2005—314–048/20001