Internal Revenue Bulletin 2006-17 (PDF rendition): IRS Announcements

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Bulletin No. 200
6-17
April 24, 2006
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.
INCOME TAX
Rev. Rul. 2006–23, page 839.
LIFO; price indexes; department stores.The February
2006 Bureau of Labor Statistics price indexes are accepted
for use by department stores employing the retail inventory and
last-in, first-out inventory methods for valuing inventories for tax
years ended on, or with reference to, February 28, 2006.
T.D. 9257,
page 821.
REG–14638
4–05, page 843.
Final regu
lations under section 338 of the Code apply to a
deemed sal
e or acquisition of an insurance company’s assets,
to a sale or
acquisition of an insurance trade or business, and
to the acq
uisition of insurance contracts through assumption
reinsura
nce. It also contains final regulations concerning the
effect of
certain corporate liquidations and reorganizations on
certain t
ax attributes of insurance companies. This document
also con
tains temporary and proposed regulations relating to
the dete
rmination of adjusted basis of amortizable section 197
intangi
bles, increases in reserves after a deemed asset sale,
and the c
arryover of an election to use a company’s historical
loss pay
ment pattern.
EMPLOYEE PLANS
Notice 2006–39, page 841.
Weighted average interest rate update; 30-year Trea-
sury securities.The weighted average interest rate for April
2006 and the resulting permissible range of interest rates used
to calculate current liability and to determine the required con-
tribution are set forth.
ADMINISTRATIVE
Rev. Proc. 2006–20, page 841.
Qualified mortgage bonds; mortgage credit certificates;
national median gross income.Guidance is provided con-
cerning the use of the national and area median gross income
figures by issuers of qualified mortgage bonds and mortgage
credit certificates in determining the housing cost/income ratio
described in section 143(f) of the Code. Rev. Proc. 2005–22
obsoleted.
A
nnouncements of Disbarments and Suspensions begin on page 844.
Finding Lists begin on page ii.
Index for January through April begins on page vi.

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.
April 24, 20062006–17 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 338.—Certain
Stock Purchases Treated
as Asset Acquisitions
26 CFR 1.338–11: Effect of section 338 election on
insurance company targets.
T.D. 9257
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Application of Section 338 to
Insurance Companies
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains fi-
nal regulations that apply to a deemed sale
or acquisition of an insurance company’s
assets pursuant to an election under sec-
tion 338 of the Internal Revenue Code,
to a sale or acquisition of an insurance
trade or business subject to section 1060,
and to the acquisition of insurance con-
tracts through assumption reinsurance. It
also contains final regulations under sec-
tion 381 concerning the effect of certain
corporate liquidations and reorganizations
on certain tax attributes of insurance com-
panies. This document also contains tem-
porary regulations under section 197 re-
lating to the determination of adjusted ba-
sis of amortizable section 197 intangibles
with respect to insurance contracts, sec-
tion 338 relating to increases in reserves
after a deemed asset sale and sections 338
and 846 relating to the effect of a section
338 election on a section 846(e) election.
The text of the temporary regulations also
serves as the text of the proposed regu-
lations (REG–146384–05) set forth in the
notice of proposed rulemaking on this sub-
ject in this issue of the Bulletin. The final
and temporary regulations apply to insur-
ance companies.
DATES:Effective Date:The final and
temporary regulations are effective on
April 10, 2006.
Applicability Dates:For dates of
applicability of these regulations, see
§§1.197–2(g)(5)(iv), 1.338(i)–1(c), and
1.1060–1(a)(2). The applicability of
§§1.197–2T(g)(5)(ii), 1.338–11T(d), and
1.338–11T(e) will expire on April 7, 2009.
FOR FURTHER INFORMATION
CONTACT: Mark Weiss, (202) 622–7790
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information in these
final regulations was not proposed in the
preceding notice of proposed rulemaking.
The collection of information has been
reviewed in accordance with the Paper-
work Reduction Act (44 U.S.C. 3507)
and, pending receipt and evaluation of
public comments, approved by the Office
of Management and Budget under control
number 1545–1990.
The collection of information is
in §§1.338–11T(e)(2), 1.338(i)–1(c),
1.381(c)(22)–1(c), 1.1060–1(a)(2). This
informationisrequiredbytheIRStoallow
an insurance company permission to cease
using its historical loss payment pattern
andtoallowpartiesto a transaction under
section 338, to an applicable asset acquisi-
tion under section 1060, or to a distribution
or reorganization to which section 381 ap-
plies to file a retroactive election to apply
these regulations to transactions com-
pleted before the effective dates of these
regulations. The likely recordkeepers are
business or other for-profit institutions.
The estimated burden is as follows:
Estimated total annual reporting and/or
recordkeeping burden: 12 hours.
Estimated average annual burden per
respondent: 1 hour.
Estimated number of respondents: 12.
Estimated annual frequency of re-
sponses: once.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to the
Office of Management and Budget, Attn:
Desk Officer for the Department of the
Treasury, Office of Information and Reg-
ulatory Affairs, Washington DC 20503,
with copies to theInternal Revenue Ser-
vice, Attn: IRS Reports Clearance Offi-
cer, SE:W:CAR:MP:T:T:SP, Washington,
DC 20224. Any such comments should be
submitted not later than June 9, 2006.
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 and Explanation of
Provisions
On March 8, 2002, the IRS and the
Department of Treasury published a no-
tice of proposed rulemaking in theFederal
Register(REG–118861–00, 2002–1 C.B.
651 [67 FR 10640]) (the proposed regula-
tions) that sets forth rules applying to tax-
able acquisitions and dispositions of insur-
ance businesses, including those that are
deemed to occur when an election under
section 338 of the Internal Revenue Code
(Code) is made.
The proposed regulations generally
treat the transfer of insurance or annuity
contracts and the assumption of related
reserve liabilities that are deemed to oc-
cur when an election under section 338 is
made consistently with the treatment of as-
sumption reinsurance transactions entered
into in the ordinary course of business
under §1.817–4(d) (and other provisions
of subchapter L of chapter 1, subtitle A of
the Code and the regulations promulgated
thereunder). The proposed regulations
provide similar rules for acquisitions of
insurance businesses governed by section
1060, whether effected through assump-
tion or indemnity reinsurance. Thus, in the
case of both a deemed and an actual trans-
fer of an insurance business, the proposed
2006–17 I.R.B.821April 24, 2006

regulations provide that the ceding com-
pany (in the case of a section 338 election,
old target) is treated as having income in
the amount of the reduction in its reserves
and having a deduction for the considera-
tion paid for the reinsurer’s assumption of
those liabilities, and the reinsurer (in the
case of a section 338 election, new target)
is treated as receiving premium income
for its assumption of reserve liabilities
and having a deduction for its increase in
reserves (the latter usually offsetting in
amount the former). The proposed regu-
lations also provide that the consideration
allocated to the value of the insurance
contracts acquired in the assumption rein-
surance transaction is treated as an amount
paid by the reinsurer to purchase intangi-
ble assets and as ordinary income to the
ceding company.
The proposed regulations depart from
the rules governing assumption reinsur-
ance transactions effected in the ordinary
course of business in some circumstances
to account for differences that occur be-
cause the assumption reinsurance trans-
action occurs as part of a larger acquisi-
tive transaction. In an assumption rein-
surance transaction effected in the ordi-
nary course of business, the total consid-
eration paid for the transfer of insurance
contracts and assumption of related liabil-
itiesisknown. Furthermore,therulesin
§1.817–4(d) assume that the only intangi-
ble asset transferred in such an assump-
tion reinsurance transaction is the insur-
ance in force which can then be valued us-
ing the residual method. Thus, if premi-
ums and ceding commissions are not sepa-
rately stated, they canbe extrapolated from
the known elements with a reasonable de-
gree of accuracy. However, when the as-
sumption reinsurancetransaction occurs as
part of a larger acquisitive transaction, the
total consideration paid by the purchaser is
not solely for the acquisition of insurance
contracts and the liabilities assumed are
not solely for the risk on the insurance con-
tracts. In these circumstances, the extrap-
olated values would not accurately reflect
the amount of the items. Accordingly, the
proposed regulations modify the general
rules for assumption reinsurance transac-
tions to account for these differences.
Written comments were received in
response to the proposed regulations, and
a public hearing was held on September
18, 2002. Two commentators requested to
speak at the hearing. After consideration
of all the comments, the proposed regu-
lations are adopted as amended by this
Treasury decision. In general, the final
regulations follow the approach of the
proposed regulations with some revisions.
The more significant comments and revi-
sions are discussed in the order in which
they appear in the regulations. In addition
to the revisions discussed, the final regula-
tions revise the language of the proposed
regulations in some places to clarify the
intent of the IRS and Treasury Department
or to make the regulations better conform
to the terminology and usage of the gen-
eral section 338 regulations.
A.Determination of Adjusted Basis of
Amortizable Section 197 Intangibles with
Respect to Insurance Contracts under
Section 197(f)(5)
Section 197(f)(5) provides that, in the
case of any amortizable section 197 intan-
gible resulting from an assumption reinsur-
ance transaction, the amount taken into ac-
count as the adjusted basis of such intangi-
ble is the excess of (A) the amount paid or
incurred by the acquirer under the assump-
tion reinsurance transaction over (B) the
amount required to be capitalized under
section 848 in connection with the transac-
tion. Under section 848, an insurance com-
pany is required to capitalize an amount
of otherwise deductible expenses equal to
a percentage of the net premiums for the
taxable year for certain categories of insur-
ance contracts. The capitalized amounts,
commonly referred toas deferred acquisi-
tion costs, or “DAC,” are amortized on a
straight-line basis over 120 months.
Section 197(f)(5) is designed to ensure
that the DAC amounts attributable to an
assumption reinsurance transaction are
amortized over the period specified by
section 848 rather than the longer period
under section 197. To achieve this re-
sult, the adjusted basis of the amortizable
section 197 intangible resulting from an
assumption reinsurance transaction is rec-
ognized only to the extent that the amount
paid or incurred by the acquirer for the
relevant contracts exceeds the DAC taken
into account under section 848 as a result
of the transaction.
The proposed regulations provide rules
to determine the amounts paid or incurred
for amortizable section 197 intangibles
with respect to contracts acquired as a
result of assumption reinsurance trans-
actions occurring as part of transactions
governed by section 1060 or section 338.
The proposed regulations also provide
rules for purposes of determining the
DAC amounts for the transactions. See
proposed §1.197–2(g)(5).
Under the proposed regulations, the
amount paid or incurred by the acquirer
under the assumption reinsurance transac-
tion in a transaction governed by section
338 or 1060 is the amount of adjusted
grossed up basis (AGUB) or considera-
tion allocable to the insurance contracts
under the residual method. The amount
required to be capitalized under section
848 in connection with the assumption
reinsurance transaction is determined by
multiplying the acquirer’s specified policy
acquisition expenses for the taxable year
by a fraction, the numerator of which is
the total tentative positive capitalization
amount for the relevant group of acquired
insurance contracts and the denominator
of which is the total tentative required cap-
italization amount for the taxable year for
all specified insurance contracts. The ten-
tative positive capitalization amount for
the relevant group of acquired insurance
contracts is the net positive consideration
received for the contracts in the assump-
tion reinsurance transaction multiplied
by the percentage factor applicable to the
contracts under section 848(c).
An insurance company’s DAC amount
may not exceed the company’s general de-
ductions for the taxable year. See section
848(c). The amortization of intangibles
under section 197 is a general deduction
relevant in computing DAC. However,
the amount of amortization under section
197 cannot be calculated until section
197(f)(5) is applied. To avoid complex
calculations, for purposes of calculating
the basis of amortization, the proposed
regulations presume that one-half of the
consideration allocated to the insurance
contracts is amortizable under section 197.
See proposed §1.197–2(g)(5)(i)(D)(2).
Comments were requested regarding al-
ternative approachesto calculating the
basis for DAC amounts and section 197
amortization.
A number of comments were received
relating to the proposed regulations un-
der section 197(f)(5). Commentators
requested that the final regulations clar-
April 24, 20068222006–17 I.R.B.

ify that section 197(f)(5) applies only to
assumption reinsurance transactions, and
not to indemnity reinsurance transactions.
Commentators asked that the final reg-
ulations clarify that the full amount of
consideration allocable to the reinsured
contracts is currently deductible under
section 848(g) when the provisions of
section848applytoanindemnityrein-
surance transaction that occurs as part of
a section 1060 acquisition of an insurance
business. Commentators also expressed
concern that the proposed regulations
could cause an acquirer’s DAC under
section 848 to be subject to the general
deductions cap in section 848(c) despite
the existence of a substantial ceding com-
mission. Commentators requested that the
final regulations clarify that the election
under §1.848–2(g)(8) is available to allow
old target and new target in a deemed asset
sale governed by section 338(h)(10) to
determine the amount of DAC attributable
to the transaction without regard to the
general deductions limitation.
The temporary and proposed regula-
tions generally follow the proposed rules
under section 197(f)(5), subject to several
modifications. In particular, the tem-
porary and proposed rules build on the
method under §1.848–2(g) of the existing
regulations for determining the amounts
capitalized under section 848 for a reinsur-
ance agreement. Under the temporary and
proposed rules, the amount of expenses
capitalized under section 848 as a result
of an assumption reinsurance transaction
equals the lesser of (A) the required cap-
italization amount for the transaction, or
(B) the amount of general deductions al-
locable to the transaction. The temporary
and proposed rules also clarify that in the
event that the acquirer purchases more
than one category of specified insurance
contracts, the determination of the amount
capitalized under section 848 is made as if
each category were transferred in a sepa-
rate assumption reinsurance transaction.
The temporary and proposed regula-
tions also modify the special rule in the
proposed regulations with respect to the
interplay between section 197(f)(5) and
section 848 as regards the determination
of the acquirer’s general deductions under
section 848(c)(2). Under the temporary
and proposed rules, an acquirer will deter-
mine its general deductions as if the entire
amount paid or incurred for the acquired
contracts were allocable to an amortizable
section 197 intangible.
If the acquirer has a capitalization short-
fall (i.e., the amount of general deductions
allocable to the assumption reinsurance
transaction is less than the required capi-
talization amount for the transaction), the
temporary and proposed regulations per-
mit the acquirer and the ceding company
to elect under §1.848–2(g)(8) to determine
the amount capitalized under section 848
without regard to the general deductions
limitation. The additional amounts cap-
italized by the acquirer as a result of the
election are treated as first reducing the
adjusted basis of the amortizable section
197intangiblewithregardtotheinsur-
ance contracts acquired in the assumption
reinsurance transaction, before reducing
the acquirer’s otherwise deductible ex-
penses. The temporary and proposed rules
generally allow the acquirer to amortize a
larger amount over the period specified by
section 848 as compared to the proposed
regulations.
The temporary and proposed regula-
tions generally apply, on a cut-off basis,
to acquisitions and dispositions on or
after April 10, 2006. Thus, there is no
adjustment under section 481(a). Tax-
payers must make the change on their
income tax return and should not file
aForm3115,Application for Change
in Accounting Method. Taxpayers are
permitted, however, to apply the regula-
tions to acquisitions before that date on
a transaction-by-transaction basis, with
an adjustment under section 481(a). The
temporary and proposed regulations pro-
vide a procedure for taxpayers to obtain
automatic consent of the Commissioner to
do so.
B.Recovery of Basis on Dispositions of
Acquired Insurance Contracts
Proposed §1.197–2(g)(5)(ii)(A)(2)pro-
vides that basis recovery with respect to
a section 197(f)(5) intangible transferred
through indemnity reinsurance is per-
mitted when sufficient economic rights
relating to the insurance contracts that
gave rise to the section 197(f)(5) intan-
gible have been transferred. Sufficient
economic rights are treated as transferred
when the ceding company transfers the
right to future income on the contracts.
The proposed regulations also provide
rules governing the amount of loss rec-
ognized on the disposition of a section
197(f)(5) intangible. The proposed reg-
ulations requested comments whether
additional guidance should address other
situations or issues.
Several commentators requested that
the final regulations clarify when sufficient
economic rights in a section 197(f)(5) in-
tangible are transferred through indemnity
reinsurance as well as additional examples
to address situations relating to transfers
through indemnity reinsurance of less than
100 percent of the insurance contracts that
gave rise to the section 197(f)(5) intangi-
ble. The IRS and Treasury Department
continue to believe that the rules contained
in these regulations should refer to general
tax principles, and will as needed, address
these issues in future published guidance.
C.Reserve Increases by New Target After
the Deemed Asset Sale
When a section 338 election is made
for an insurance company, §1.338–11(d)
of the proposed regulations provides that
new target must capitalize its increases
in reserves for any acquired contracts in
the deemed asset sale. Similar principles
apply for an applicable asset acquisition
of an insurance business under section
1060. The proposed regulations generally
require capitalization of increases in re-
serves for the acquired contracts in excess
of cumulative annual increases of two
percent per year from the acquisition date
reserves. However, the proposed regula-
tions do not require capitalization to the
extent the increases in reserves reflect the
time value of money, to the extent the in-
creases in reserves occur while new target
is under state receivership, or to the extent
the deduction for the increases in reserves
is spread over the 10 succeeding taxable
years under section 807(f).
Many commentators objected to the
rule requiring capitalization for increases
in reserves after the transaction date. They
questioned the justification for the rule,
stating that the rule was inconsistent with,
and overrode, principles established under
subchapter L for determining losses in-
curred. Commentators argued that, under
subchapter L principles, reserve liabilities
are not treated like contingent liabilities
and that it was inappropriate to treat the
reserves as contingent liabilities even for
2006–17 I.R.B.823April 24, 2006

the limited purposes of the regulation.
Commentators also requested that the ap-
plication of the rulebe restricted to cases
of abuse because the ceding company’s
reserves assumed in the transaction are
fair and reasonable estimates under Sub-
chapter L as of the transaction date.
The commentators’ objections largely
ignore the fact that the proposed regula-
tions blend elements of the asset purchase
model common to most taxpayers that dis-
pose of or acquire assets for consideration
that includes the discharge of liabilities and
the services model that generally applies to
insurance companies. Treating increases
in reserves for acquired contracts similarly
to contingent liabilities under the asset pur-
chase model is just one aspect of that amal-
gam.
Under the asset purchase model, as-
sumed contingent liabilities are an element
of the consideration for which a buyer ac-
quires assets. Thus, a buyer includes the
contingent liability in its cost for the ac-
quired assets. However, a buyer may not
include the contingent liability in its cost
until the liability is incurred for Federal
income tax purposes. The buyer must
capitalize the liability in the cost of the
acquired assets even if the buyer could
have currently deducted the liability had
it arisen in the buyer’s historic business.
Under the asset purchase model, the buyer
does not realize any income for the as-
sumption of the contingent liability; the
buyer merely has bought assets. SeeCom-
missioner v. Oxford Paper, 194 F.2d 190
(2d Cir. 1951).
Under the services model, the seller (or
ceding company) is treated as paying a pre-
mium to the buyer (or reinsurer) to assume
the risk on its insurance contracts. The
reinsurer includes in income the receipt of
the premium and has a deduction for its in-
crease in reserves for the additional risks
assumed in the transaction. The amount of
the premium income is generally equal to
the consideration paid by the ceding com-
pany, that is, the fair market value of the
assets that the ceding company transfers
to the reinsurer in the transaction (though
it may not be less than the amount of the
reinsurer’s increase in tax reserves, see
§1.817–4(d)(2)(iii)). Thus, when the fair
market value of the assets that the ceding
company transfers exceeds the reinsurer’s
increase in tax reserves for the additional
risks assumed in the transaction, the rein-
surer has net income. See §1.817–4(d)(3)
Example 4. Under the services model, no
liabilities are treated as contingent liabili-
ties. The reserve rules effectively treat in-
creases to reserves for new risks as fixed
liabilities and increases to reserves for ex-
istingrisksasperiodexpenses(similarto
interest).
The proposed regulations blend the as-
set purchase model and the services model
by—
(1) Using the residual method of sec-
tions 338 and 1060 to determine the value
of goodwill and going concern value
(which assumes that the value of all assets
other than goodwill and going concern
value is readily determinable) rather than
the residual method of §1.817–4(d) to
determine the value of insurance in force
(which assumes that the value of all assets
other than insurance in force is readily
determinable);
(2) Treating the amount of old target’s
tax reserves as a fixed liability as of the
close of the acquisition date that is taken
into account in determining the seller’s ag-
gregate deemed sales price (ADSP) under
§1.338–4 and the buyer’s AGUB under
§1.338–5;
(3) Treating certain of new target’s in-
creases in reserves for any insurance con-
tracts acquired in the deemed asset sale as
a contingent liability as of the close of the
acquisition date that becomes fixed when
new target increases its reserves;
(4) Assuming that the amount of rein-
surance premium is equal to the amount
of old target’s tax reserves, even though
the ceding company would have to pay
the reinsuring company an amount greater
than the tax reserves in an arm’s length
reinsurance transaction. This rule ensures
that the acquirer of an insurance business
will not have immediate net taxable in-
come merely as a result of the acquisition;
and
(5) Not requiring capitalization for new
target’s increases in reserves due to the
time value of money for any insurance
contracts acquired in the deemed asset
sale.
The proposed regulations generally
treat an insurance company’s assump-
tion of contingent liabilities related to
insurance contracts more favorably than
a noninsurance company’s assumption of
a similar contingent liability. The pro-
posed regulations also treat an insurance
company’s assumption of contingent lia-
bilities related to insurance contracts more
favorably than subchapter L does. As
discussed previously, under subchapter L,
a reinsurer may have net income when
entering into an assumption reinsurance
transaction. The amount of the income
is the amount of the bargain, that is, the
excess of fair market value of the assets
the seller transfers over the amount of the
consideration the buyer pays at closing (in
an assumption reinsurance transaction, the
latter measured by the reinsurer’s increase
in tax reserves for the risks assumed in the
transaction). The proposed regulations,
unlike subchapter L, require income to
be recognized if there is an increase in
certain reserves for the acquired insurance
contracts.
The IRS and Treasury Department be-
lieve that a rule requiring capitalization of
increases to reserves is a necessary corol-
lary to the rule in the proposed regulations
linking the amount of reinsurance deemed
paid to the amount of old target’s tax re-
serves at the time of the assumption rein-
surance transaction (with the concomitant
result that new target has no income). The
logical implication of the commentators’
arguments would be that the buyer should
have premium income in a bargain pur-
chase. In addition, without requiring cap-
italization of at least some increases to re-
serves, there is an incentive for sellers to
defer increases in reserves. This incentive
results from the fact that while the seller
is generally indifferent to an increase in
reserves (the immediate deduction to the
seller would be offset by a corresponding
increase in amount realized of ADSP in
the sale), a buyer would be entitled to an
immediate deduction rather than increased
basis from an increase in the seller’s re-
serves.
In response to comments, the IRS and
Treasury Department have decided to is-
sue temporary regulations with these final
regulations that continue to require cap-
italization (and concomitant treatment as
premium) of certain reserve increases, but
further limit the capitalization rule of the
proposed regulations in a manner consis-
tent with the application of subchapter L
principles. See §1.338–11T(d). After the
deemed asset sale, the temporary regula-
tions apply subchapter L principles to new
target. Under the temporary regulations,
capitalization is required only for increases
April 24, 20068242006–17 I.R.B.

in reserves that clearly reflect a so called
“bargain purchase” (that is, when the ap-
plication of the residual method clearly in-
dicates the initial understatement of the re-
serve). The amount of the bargain pur-
chase is the amount of income the reinsurer
would have otherwise recognized under
§1.817–4(d) if the final regulations (and
proposed regulations) had not adopted the
convention that the reinsurance premium
paid by the seller to the buyer is deemed to
equal the seller’s closing tax reserves, and
were it not necessary to employ a resid-
ual method to account for the presence of
non-insurance intangible assets.
Under the temporary regulations, new
target is required to capitalize any in-
creases in reserves for acquired contracts
if the AGUB allocated to assets in Class I
through Class V is less than the fair market
value of the assets in those classes. Any
deductions would continue to be capital-
ized until the basis of the assets in Class
I through Class V is equal to their fair
market value. This mechanism avoids the
problem of valuing Class VI and Class
VII intangibles. The approach of the tem-
porary regulations essentially treats the
ceding company as transferring no Class
VI or Class VII assets to the reinsurer for
the reinsurer’s assumption of the liabil-
ities on the acquired contracts. Because
the temporary regulations limit the total
amount of capitalization for increases in
reserves for acquired contracts, the IRS
and Treasury Department believe that it
is no longer necessary to provide a time
limit on when increases in reserves for
acquired contracts are to be capitalized or
to provide a floor below which increases
in reserves are not capitalized. However
the temporary regulations retain the other
limits on capitalization in the proposed
regulations.
D.Allocation of ADSP and AGUB to
Specific Insurance Contracts
Proposed §1.338–11(b)(2) provides a
rule that for purposes of allocating AGUB
and ADSP, the fair market value of a spe-
cific insurance contract or group of insur-
ance contracts is the amount of the ced-
ing commission a willing reinsurer would
pay a willing ceding company in an arm’s
length transaction for the reinsurance of
the contracts if the gross reinsurance pre-
mium for the contracts were equal to old
target’s tax reserves for the contracts.
Commentators questioned the reliance
of the proposed regulations upon tax re-
serves as a basis for valuing the contracts
and asked that the value of the contracts be
based on GAAP or statutory reserves, or
an amount upon which the parties agree.
The IRS and Treasury Department believe
that using tax reserves as a basis for valu-
ing the contracts is consistent with other
areas in which tax reserves, not GAAP
or statutory reserves, are used to compute
taxable income. See,e.g., section 807
(prescribing rules for taking life insurance
reserves and certain other reserves into
account for purposes of computing life in-
surance company taxable income); section
846 (prescribing a methodology for dis-
counting unpaid loss reserves for purposes
of computing insurance company taxable
income); and Rev. Proc. 90–36, 1990–2
C.B. 357 (computing up-front ceding com-
mission paid by a reinsurer as the increase
in the reinsurer’s tax reserve liabilities
resulting from the reinsurance transaction,
minus the value of the net assets received,
for purposes of capitalizing ceding com-
missions to comply with the Supreme
Court decision inColonial American Life
Insurance Company v. Commissioner,
491 U.S. 244 (1989), (1989–2 C.B. 110,
Ct. D. 2045). Moreover, in the context of
a transaction governed by section 338 or
1060, the use of old target’s tax reserves
as a means of valuing the contracts is con-
sistent with both (i) the treatment of old
target’s closing tax reserves as a liability in
the computation of the seller’s ADSP and
the buyer’s AGUB, and (ii) the general
rule of §1.817–4(d)(2)(iii), which treats
theassumingcompanyinanassumption
reinsurance transaction as receiving pre-
mium income equal to at least the increase
in its reserves.
E.Effect of Section 338 Election on
Section 846(e) Election by Old Target
The proposed regulations do not pro-
vide any special rules under section 846
for new target to apply old target’s histor-
ical loss payment pattern as a result of a
section 846(e) election made by old tar-
get because new target is generally treated
as a new corporation that may adopt its
own accounting methods without regard
to the methods used by old target. See
§1.338–1(b).
Commentators believed that this re-
sult was inconsistent with the purpose of
allowing a company to make a section
846(e) election. Commentators noted that
a section 846(e) election is made for all
eligible lines of business, determined by
reference to the accident years for the line
of business shown on the insurance com-
pany’s annual statement. Additionally,
commentators noted that the availability
of the election should not depend upon
the tax identity of new target after the
section 338 election because the historical
loss payment pattern is not a tax account,
the pattern is determined by reference to
nontax factors, and new target continues
to operate in the same manner and legal
form as old target.
In response to these comments, the
temporary regulations contain a new rule
that treats new target and old target as
the same corporation for purposes of a
section 846(e) election to use an insur-
ance company’s historical loss payment
pattern. See §1.338–1T(b)(2)(vii). There-
fore, if old target has a section 846(e)
election in effect, new target will con-
tinue to use the historical loss payment
pattern of old target to discount unpaid
losses, unless new target chooses to re-
voke the election. If new target revokes
old target’s section 846(e) election, new
target will use the industry-wide factors
determined by the Secretary to discount
unpaid losses incurred in accident years
beginning on or afterthe acquisition date.
See §1.338–11T(e)(2).
F.Treatment of Shareholders Surplus
Accounts, Policyholders Surplus
Accounts (PSA), and Other Accounts
in Transactions to Which Section 381
Applies
Section 1.381(c)(22)–1(b)(7)(i) of the
proposed regulations provides that if one
corporation distributes or transfers a sub-
stantial portion (50 percent or more) of
an insurance business to another corpo-
ration in a transaction to which section
381 applies, then the acquiring corpora-
tion succeeds to the distributor or trans-
feror corporation’s shareholders surplus
account, policyholders surplus account,
and other accounts. However, under
§1.381(c)(22)–1(b)(7)(ii) of the proposed
2006–17 I.R.B.825April 24, 2006

regulations, if an acquiring corporation in
the section 381 transaction acquires less
than 50 percent of the distributor or trans-
feror corporation’s insurance business,
then the acquiring corporation succeeds
only to a ratable portion (determined by
reference to reserves) of the distributor
or transferor corporation’s shareholders
surplus account, policyholders surplus ac-
count, and other accounts.
Commentators questioned whether the
IRS and Treasury Department have the au-
thority to relate the carryover of PSA to
the percentage of business that was trans-
ferred to the acquiring corporation in a sec-
tion 381 transaction. The IRS and Trea-
sury Department believe that the rule in
the proposed regulations is appropriate and
that there is sufficient authority for the pro-
posed rule. The legislative history to the
1984 Tax Reform Act indicates that the
termindirect distributionis to be inter-
preted broadly to include any use of PSA
funds for the indirect benefit of sharehold-
ers. H.R. Rep. No. 432, pt. 2, 98th Cong.,
2d Sess. at 1410–11; Staff of the Joint
Committee on Taxation, 98th Cong., 2d
Sess.,General Explanation of the Revenue
Provisions of the Tax Reform Act of 1984,
at 594 (1984), as well asBankers Life and
Casualty Co. v. United States,79AFTR2d
(RIA) 1726 (N.D. Ill. 1996), aff’d on other
grounds, 142 F.3d 973 (7th Cir. 1998),
cert denied, 525 U.S. 961 (1998) (sec-
tion 338(g) transaction results in an in-
direct distribution of old target’s PSA).
Accordingly, the final regulations adopt
the rule as proposed in §§1.338–11(f) and
1.381(c)(22)–1(b)(7).
G.Treatment of DAC in Transactions to
Which Section 381 Applies
Section 1.381(c)(22)–1(b)(13) of the
proposed regulations provides that any
remaining balances of DAC or excess
negative DAC carry over to a succes-
sor insurance company in a section 381
transaction. One commentator questioned
whether a nonlife insurance company
may succeed to DAC attributes under
§1.381(c)(22)–1. Another commentator
believed positive DAC should not be car-
ried over to a successor corporation in a
section 381 transaction.
The IRS and Treasury Department
believe that in a section 381 transaction,
positive DAC, like negative DAC, is an at-
tribute that is carried over to the acquiring
corporation. Thus, the final regulations
retain the rule in the proposed regulations
that the remaining balances of DAC or
excess negative DAC carry over to a suc-
cessor insurance company in a section 381
transaction. See §1.381(c)(22)–1(b)(13).
However, the IRS and Treasury Depart-
ment believe that a proportionality rule
similar to the one the final regulations
adopt at §1.381(c)(22)–1(b)(7) for poli-
cyholder surplus accounts is appropriate
because DAC is a tax accounting con-
vention that relates to a line of business.
Thus, the final regulations provide that
when the acquiring corporation acquires
50 percent or more of the distributor or
transferor corporation’s insurance busi-
ness (measured by its reserves for all of
its contracts immediately before the ear-
lier of the distribution or transfer or the
adoption of the plan of liquidation or re-
organization), the acquiring corporation
will succeed to the distributor or transferor
corporation’s entire positive or negative
DAC amount. To the extent an acquiring
corporation in the section 381 transaction
acquires less than 50 percent of the distrib-
utor or transferor corporation’s insurance
business, then only that percentage of
positive or negative DAC remains. In
addition, because some attributes under
section 381(c)(22) and §1.381(c)(22)–1
are equally relevant for life and nonlife
insurance companies, the final regulations
clarify that, except as otherwise provided,
the rules in §1.381(c)(22)–1 apply to any
insurance company, whether a life or a
nonlife company.
H.Effective Date of Regulations
The final and temporary regulations are
effective for transactions on or after April
10, 2006. Commentators asked for an elec-
tion to apply the final regulations to trans-
actions completed before April 10, 2006.
The IRS and Treasury Department believe
that the elective retroactivity of the final
regulations is warranted and administra-
ble. Thus, the final regulations permit new
target and old target an election to apply
the final regulations, in whole, to qualified
stock purchases occurring before April 10,
2006, if all taxable years for which the con-
sequences of the section 338 election af-
fect the computation of tax are open. In
the case of a section 338 election for which
a section 338(h)(10) election is made (or
a section 338 election for a foreign tar-
get), new target’s ability to elect to retroac-
tively apply the final regulations does not
depend upon old target making the elec-
tion. Similarly, old target’s ability to elect
to retroactively apply the final regulations
does not depend upon new target making
the election. However, in the case of a
section 338 election for a domestic target
for which no section338(h)(10) election
is made, the purchasing corporation gen-
erally controls both the filing of new tar-
get’s returns and old target’s final return.
Accordingly, when nosection 338(h)(10)
election is made and the target is a domes-
tic corporation, new target and old target
must both elect to retroactively apply the
final regulations. If one of new target or
old target cannot make the election, the
other is not permitted to make the election.
See §1.338(i)–1(c).
Special Analyses
It has been determined that the final reg-
ulations issued with respect to section 197
and section 338 are not a significant regu-
latory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It is hereby certified that
the collection of information requirement
in these regulations will not have a sig-
nificant economic impact on a substantial
number of small entities. This certification
is based on the fact that these regulations
do not have a substantial economic im-
pact because they merely provide guidance
about the operation of the tax law in the
context of acquisitions of insurance com-
panies and businesses. Moreover, they are
expected to apply predominantly to trans-
actions involving larger businesses. In ad-
dition, the collection of information re-
quirement merely requires a taxpayer to
prepare a written representation that con-
tains minimal information relating to the
making of an election. Therefore, a Regu-
latory Flexibility Analysis under the Reg-
ulatory Flexibility Act (5 U.S.C. chapter
6) is not required. Under section 7805(f)
of the Code, the notice of proposed rule-
making preceding this regulation was sub-
mitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.
The Chief Counsel for Advocacy did not
submit any comments on the regulations.
April 24, 20068262006–17 I.R.B.

It has been determined that the tem-
porary regulations issued with respect to
sections 197 and 338 are not a significant
regulatory action as defined in Executive
Order 12866. Therefore a regulatory as-
sessment is not required. These regula-
tions provide guidance relating to the tax-
able acquisition and disposition of insur-
ance companies. Additionally, these regu-
lations provide rules by which a party to
the transaction may elect to apply these
rules to transactions which occur prior to
April 10, 2006. Based on these consid-
erations, it is determined that these tem-
porary regulations will provide taxpayers
with the necessary guidance and authority
to ensure equitable administration of the
tax laws. Because of the need for imme-
diate guidance, notice and public proce-
dure are impracticable and contrary to the
public interest pursuant to 5 U.S.C. 533(b)
and the delayed effective date is not re-
quired pursuant to 5 U.S.C. 553(d). For
applicability of the Regulatory Flexibility
Act to these temporary regulations, please
refer to the cross-reference notice of pro-
posed rulemaking published elsewhere in
this Bulletin. Pursuant to section 7805(f)
of the Code, these temporary regulations
will be submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on their impact on
small business.
It has been determined that the final
regulations issued with respect to sections
381, 846 and 1060 are not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory
assessment is not required. It has also
been determined thatsection 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regu-
lations, and, because the regulations do
not impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility Anal-
ysis under the Regulatory Flexibility Act
(5 U.S.C. chapter 6) is not required. Under
section 7805(f) of the Code, the notice of
proposed rulemaking preceding this regu-
lation was submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact
on small business. The Chief Counsel for
Advocacy did not submit any comments
on the regulations.
Drafting Information
The principal author of the final regu-
lations is Mark J. Weiss, Office of Chief
Counsel (Corporate), IRS. However, other
personnel from the IRS and Treasury
Department participated in their develop-
ment.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part1isamendedbyaddingentriesinnu-
merical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section1.197–2alsoissuedunder26
U.S.C. 197.
Section 1.197–2T also issued under 26
U.S.C. 197. * * *
Section 1.338–11 also issued under 26
U.S.C. 338.
Section 1.338–11T also issued under 26
U.S.C. 338. * * *
Section 1.846–2(d) is also issued under
26 U.S.C. 846. * * *
Par. 2. In §1.197–0, the entries in the
table of contents for §1.197–2, paragraph
(g)(5) are revised and §1.197–2T is added
to read as follows:
§1.197–0 Table of contents.
This section lists the headings that ap-
pear in §§1.197–2 and 1.197–2T.
§1.197–2 Amortization of goodwill and
certain other intangibles.
*****
(g) * * *
(5) Treatment of certain insurance con-
tracts acquired in an assumption reinsur-
ance transaction.
(i) In general.
(ii) Determination of adjusted basis of
amortizable section 197 intangible result-
ing from an assumption reinsurance trans-
action.
(iii) Application of loss disallowance
rule upon a disposition of an insurance
contract acquired in an assumption reinsur-
ance transaction.
(A) Disposition.
(1) In general.
(2) Treatment of indemnity reinsurance
transactions.
(B) Loss.
(C) Examples.
(iv) Effective dates.
(A) In general.
(B) Application to pre-effective date ac-
quisitions and dispositions.
(C) Change in method of accounting.
(1) In general.
(2) Acquisitions and dispositions on or
after effective date.
(3) Acquisitions and dispositions before
the effective date.
*****
§1.197–2T Amortization of goodwill and
certain other intangibles (temporary).
(a) through (g)(5)(i) [Reserved].
(ii) Determination of adjusted basis of
amortizable section 197 intangible result-
ing from an assumption reinsurance trans-
action.
(A) In general.
(B) Amount paid or incurred by ac-
quirer (reinsurer) under the assumption
reinsurance transaction.
(C) Amount required to be capitalized
under section 848 in connection with the
transaction.
(1) In general.
(2) Required capitalization amount.
(3) General deductions allocable to the
assumption reinsurance transaction.
(4) Treatment of a capitalization short-
fall allocable to the reinsurance agreement.
(i) In general.
(ii) Treatment of additional capitalized
amounts as the result of an election under
§1.848–2(g)(8).
(5) Cross references and special rules.
(D) Examples.
(E) Effective date.
(g)(5)(iii) through (l) [Reserved].
Par. 3. Section 1.197–2 is amended
by revising paragraph (g)(5) to read as fol-
lows:
§1.197–2 Amortization of goodwill and
certain other intangibles.
*****
(g) * * *
(5)Treatment of certain insurance con-
tracts acquired in an assumption reinsur-
2006–17 I.R.B.827April 24, 2006

ance transaction—(i)In general. Sec-
tion 197 generally applies to insurance and
annuity contracts acquired from another
person through an assumption reinsurance
transaction. See §1.809–5(a)(7)(ii) for the
definition of assumption reinsurance. The
transfer of insurance or annuity contracts
and the assumption of related liabilities
deemed to occur by reason of a section
338 election for a target insurance com-
pany is treated as an assumption reinsur-
ance transaction. The transfer of a reinsur-
ance contract by a reinsurer (transferor) to
another reinsurer (acquirer) is treated as an
assumption reinsurance transaction if the
transferor’s obligations are extinguished
as a result of the transaction.
(ii)Determination of adjusted basis
of amortizable section 197 intangible re-
sulting from an assumption reinsurance
transaction. For further guidance, see
§1.197–2T(g)(5)(ii).
(iii)Application of loss disallowance
rule upon a disposition of an insurance
contract acquired in an assumption rein-
surance transaction. The following rules
apply for purposes of applying the loss dis-
allowance rules of section 197(f)(1)(A) to
the disposition of a section 197(f)(5) intan-
gible. For this purpose, a section 197(f)(5)
intangible is an amortizable section 197 in-
tangible the basis of which is determined
under section 197(f)(5).
(A)Disposition—(1)In general.Adis-
position of a section 197 intangible is any
event as a result of which, absent section
197, recovery of basis is otherwise allowed
for Federal income tax purposes.
(2)Treatment of indemnity reinsurance
transactions. The transfer through indem-
nity reinsurance of the right to the future
income from the insurance contracts to
which a section 197(f)(5) intangible relates
does not preclude the recovery of basis by
the ceding company, provided that suffi-
cient economic rights relating to the rein-
sured contracts are transferred to the rein-
surer. However, the ceding company is
not permitted to recover basis in an indem-
nity reinsurance transaction if it has a right
to experience refunds reflecting a signif-
icant portion of the future profits on the
reinsured contracts, or if it retains an op-
tion to reacquire a significant portion of
the future profits on the reinsured contracts
through the exercise of a recapture pro-
vision. In addition, the ceding company
is not permitted to recover basis in an in-
demnity reinsurance transaction if the rein-
surer assumes only a limited portion of the
ceding company’s risk relating to the rein-
sured contracts (excess loss reinsurance).
(B)Loss. Theloss,ifany,recog-
nized by a taxpayer on the disposition of
a section 197(f)(5) intangible equals the
amount by which the taxpayer’s adjusted
basis in the section 197(f)(5) intangible
immediately before the disposition ex-
ceeds the amount, if any, that the taxpayer
receives from another person for the future
income right from the insurance contracts
to which the section 197(f)(5) intangi-
ble relates. In determining the amount
of the taxpayer’s loss on the disposition
of a section 197(f)(5) intangible through
a reinsurance transaction, any effect of
the transaction on the amounts capital-
ized by the taxpayer as specified policy
acquisition expenses under section 848 is
disregarded.
(C)Examples. The following examples
illustrate the principles of this paragraph
(g)(5)(iii):
Example 1.(i)Facts. In a prior taxable year, as
a result of a section 338 election with respect to T,
new T was treated as purchasing all of old T’s in-
surance contracts that were in force on the acquisi-
tion date in an assumption reinsurance transaction.
Under §§1.338–6 and 1.338–11(b)(2), the amount of
AGUB allocable to the future income right from the
purchased insurance contracts was $15, net of the
amounts required to be capitalized under section 848
as a result of the assumption reinsurance transaction.
At the beginning of the current taxable year, as a re-
sult of amortization deductions allowed by section
197(a), new T’s adjusted basis in the section 197(f)(5)
intangible resulting from the assumption reinsurance
transaction is $12. During the current taxable year,
new T enters into an indemnity reinsurance agree-
ment with R, another insurance company, in which R
assumes 100 percent of the risk relating to the insur-
ance contracts to which the section 197(f)(5) intangi-
ble relates. In the indemnity reinsurance transaction,
R agrees to pay new T a ceding commission of $10
in exchange for the future profits on the underlying
reinsured policies. Under the indemnity reinsurance
agreement, new T continues to administer the rein-
sured policies, but transfers investment assets equal
to the required reserves for the reinsured policies to-
gether with all future premiums to R. The indemnity
reinsurance agreement does not contain an experi-
ence refund provision or a provision allowing new T
to terminate the reinsurance agreement at its sole op-
tion. New T retains the insurance licenses and other
amortizable section 197 intangibles acquired in the
deemed asset sale and continues to underwrite and is-
sue new insurance contracts.
(ii)Analysis. The indemnity reinsurance agree-
ment constitutes a disposition of the section 197(f)(5)
intangible because it involves the transfer of suffi-
cient economic rights attributable to the insurance
contracts to which the section 197(f)(5) intangible re-
lates such that recovery of basis is allowed. For pur-
poses of applying the loss disallowance rules of sec-
tion 197(f)(1) and paragraph (g) of this section, new
T’slossis$2(newT’sadjustedbasisinthesection
197(f)(5) intangible immediately before the disposi-
tion ($12) less the ceding commission ($10)). There-
fore, new T applies $10 of the adjusted basis in the
section 197(f)(5) intangible against the amount re-
ceived from R for the future income right on the rein-
sured policies and increases its basis in the amortiz-
able section 197 intangibles that it acquired and re-
tained from the deemed asset sale by $2, the amount
of the disallowed loss. The amount of new T’s disal-
lowed loss under section 197(f)(1)(A) is determined
without regard to the effect of the indemnity reinsur-
ance transaction on the amounts capitalized by new
T as specified policy acquisition expenses under sec-
tion 848.
Example 2.(i)Facts. Assume the same facts as in
Example 1, except that under the indemnity reinsur-
ance agreement R agreesto pay new T a ceding com-
mission of $5 with respect to the underlying reinsured
contracts. In addition, under the indemnity reinsur-
ance agreement, new T is entitled to an experience
refund equal to any future profits on the reinsured
contracts in excess of the ceding commission plus an
annual risk charge. New T also has a right to recap-
ture the business at any time after R has recovered an
amount equal to the ceding commission.
(ii)Analysis. The indemnity reinsurance agree-
ment between new T and R does not represent a dis-
position because it does not involve the transfer of
sufficient economic rights with respect to the future
income on the reinsured contracts. Therefore, new T
may not recover its basis in the section 197(f)(5) in-
tangible to which the contracts relate and must con-
tinue to amortize ratably the adjusted basis of the sec-
tion 197(f)(5) intangible over the remainder of the
15-year recovery period and cannot apply any portion
of this adjusted basis to offset the ceding commission
received from R in the indemnity reinsurance trans-
action.
(iv)Effective dates—(A)In gen-
eral—This paragraph (g)(5) applies to
acquisitions and dispositions on or after
April 10, 2006. For rules applicable to
acquisitions and dispositions before that
date, see §1.197–2 in effect before that
date (see 26 CFR part 1, revised April 1,
2001).
(B)Application to pre-effective date ac-
quisitions and dispositions. A taxpayer
may choose, on a transaction-by-transac-
tion basis, to apply the provisions of this
paragraph (g)(5) to property acquired and
disposed of before April 10, 2006.
(C)Change in method of account-
ing—(1)In general—A change in a tax-
payer’s treatment of all property acquired
and disposed under paragraph (g)(5) is a
change in method of accounting to which
the provisions of sections 446 and 481 and
the regulations thereunder apply.
April 24, 20068282006–17 I.R.B.

(2)Acquisitions and dispositions on or
after effective date. A Taxpayer is granted
the consent of the Commissioner under
section 446(e) to change its method of ac-
counting to comply with this paragraph
(g)(5) for acquisitions and dispositions on
or after April 10, 2006. The change must
be made on a cut-off basis with no sec-
tion 481(a) adjustment. Notwithstanding
§1.446–1(e)(3), a taxpayer should not file
a Form 3115, “Application for Change in
Accounting Method,” to obtain the con-
sent of the Commissioner to change its
method of accounting under this paragraph
(g)(5)(iv)(C)(2). Instead, a taxpayer must
make the change by using the new method
on its federal income tax returns.
(3)Acquisitions and dispositions be-
fore the effective date. For the first taxable
year ending after April 10, 2006, a tax-
payer is granted consent of the Commis-
sioner to change its method of accounting
for all property acquired in transactions
described in paragraph (g)(5)(iv)(B) to
comply with this paragraph (g)(5) unless
the proper treatment of any such property
is an issue under consideration in an ex-
amination, before an Appeals office, or
before a Federal Court. (For the definition
of when an issue is under consideration,
see, Rev. Proc. 97–27, 1997–1 C.B.
680; and, §601.601(d)(2) of this chap-
ter). A taxpayer changing its method of
accounting in accordance with this para-
graph (g)(5)(iv)(C)(3) must follow the
applicable administrative procedures for
obtaining the Commissioner’s automatic
consent to a change in method of account-
ing (for further guidance, see, for example,
Rev. Proc. 2002–9, 2002–1 C.B. 327, as
modified and clarified by Announcement
2002–17, 2002–1 C.B. 561, modified
andamplifiedbyRev. Proc. 2002–19,
2002–1 C.B. 696, and amplified, clarified
andmodifiedbyRev. Proc. 2002–54,
2002–2 C.B. 432; and, §601.601(d)(2)
of this chapter), except, for purposes of
this paragraph (g)(5)(iv)(C)(3), any limi-
tations in such administrative procedures
for obtaining the automatic consent of the
Commissioner shall not apply. However,
if the taxpayer is under examination, be-
fore an appeals office, or before a Federal
court, the taxpayer must provide a copy of
the application to the examining agent(s),
appeals officer, or counsel for the govern-
ment, as appropriate, at the same time that
it files the copy of the application with
the National Office. The application must
contain the name(s) and telephone num-
ber(s) of the examining agent(s), appeals
officer, or counsel for the government, as
appropriate. For purposes of From 3115,
“Application for Change in Accounting
Method,” the designated number for the
automatic accounting method change au-
thorized by this paragraph (g)(5)(iv)(C)(3)
is “98”. A change in method of account-
ing in accordance with this paragraph
(g)(5)(iv)(C)(3) requires an adjustment
under section 481(a).
*****
Par. 4. Section 1.197–2T is added to
read as follows:
§1.197–2T Amortization of goodwill and
certain other intangibles (temporary).
(a) through (g)(5)(i) [Reserved]. For
further guidance, see §1.197–2(a) through
(g)(5)(i).
(g)(5)(ii)Determination of adjusted ba-
sis of amortizable section 197 intangible
resulting from an assumption reinsurance
transaction—(A)In general. Section
197(f)(5) determines the basis of an amor-
tizable section 197 intangible for insur-
ance or annuity contracts acquired in an
assumption reinsurance transaction. The
basis of such intangible is the excess, if
any, of—
(1) The amount paid or incurred by the
acquirer (reinsurer) under the assumption
reinsurance transaction; over
(2) The amount, if any, required to be
capitalized under section 848 in connec-
tion with such transaction.
(B)Amount paid or incurred by ac-
quirer (reinsurer) under the assumption
reinsurance transaction. The amount paid
or incurred by the acquirer (reinsurer) un-
der the assumption reinsurance transaction
is —
(1) In a deemed asset sale resulting
from an election under section 338, the
amount of the AGUB allocable thereto
(see §§1.338–6 and 1.338–11(b)(2));
(2) In an applicable asset acquisition
within the meaning of section 1060, the
amount of the consideration allocable
thereto (see §§1.338–6, 1.338–11(b)(2),
and 1.1060–1(c)(5)); and
(3) In any other transaction, the ex-
cess of the increase in the reinsurer’s tax
reserves resulting from the transaction
(computed in accordance with sections
807, 832(b)(4)(B), and 846) over the value
of the net assets received from the ceding
company in the transaction.
(C)Amount required to be capitalized
under section 848 in connection with the
transaction—(1)In general. The amount
required to be capitalized under section
848 for specified insurance contracts (as
defined in section 848(e)) acquired in an
assumption reinsurance transaction is the
lesser of—
(i) The reinsurer’s required capitaliza-
tion amount for the assumption reinsur-
ance transaction; or
(ii) The reinsurer’s general deductions
(as defined in section 848(c)(2)) allocable
to the transaction.
(2)Required capitalization amount.
The reinsurer determines the required
capitalization amount for an assumption
reinsurance transaction by multiplying
the net positive or net negative considera-
tion for the transaction by the applicable
percentage set forth in section 848(c)(1)
for the category of specified insurance
contracts acquired in the transaction. See
§1.848–2(g)(5). If more than one category
of specified insurance contracts is acquired
in an assumption reinsurance transaction,
the required capitalization amount for each
category is determined as if the transfer of
the contracts in that category were made
under a separate assumption reinsurance
transaction. See §1.848–2(f)(7).
(3)General deductions allocable to the
assumption reinsurance transaction.The
reinsurer determines the general deduc-
tions allocable to the assumption reinsur-
ance transaction in accordance with the
procedure set forth in §1.848–2(g)(6). Ac-
cordingly, the reinsurer must allocate its
general deductions to the amount required
under section 848(c)(1) on specified insur-
ance contracts that the reinsurer has issued
directly before determining the general
deductions allocable to the assumption
reinsurance transaction. For purposes
of allocating its general deductions under
§1.848–2(g)(6), the reinsurer includes pre-
miums received on the acquired specified
insurance contracts after the assumption
reinsurance transaction in determining the
amount required under section 848(c)(1)
on specified insurance contracts that the
reinsurer has issued directly. If the rein-
surer has entered into multiple reinsur-
ance agreements during the taxable year,
the reinsurer determines the general de-
2006–17 I.R.B.829April 24, 2006

ductions allocable to each reinsurance
agreement (including the assumption rein-
surance transaction) by allocating the
general deductions allocable to reinsur-
ance agreements under §1.848–2(g)(6) to
each reinsurance agreement with a posi-
tive required capitalization amount.
(4)Treatment of a capitalization short-
fall allocable to the reinsurance agree-
ment—(i)In general. The reinsurer deter-
mines any capitalization shortfall allocable
to the assumption reinsurance transaction
in the manner provided in §§1.848–2(g)(4)
and 1.848–2(g)(7). If the reinsurer has a
capitalization shortfall allocable to the
assumption reinsurance transaction, the
ceding company must reduce the net neg-
ative consideration (as determined under
§1.848–2(f)(2)) for the transaction by
the amount described in §1.848–2(g)(3)
unless the parties make the election pro-
vided in §1.848–2(g)(8) to determine the
amounts capitalized under section 848 in
connection with the transaction without
regard to the general deductions limitation
of section 848(c)(2).
(ii)Treatment of additional capitalized
amounts as the result of an election under
§1.848–2(g)(8). The additional amounts
capitalized by the reinsurer as the result of
the election under §1.848–2(g)(8) reduce
the adjusted basis of any amortizable sec-
tion 197 intangible with respect to speci-
fied insurance contracts acquired in the as-
sumption reinsurancetransaction. If the
additional capitalizedamounts exceed the
adjusted basis of theamortizable section
197 intangible, the reinsurer must reduce
its deductions under section 805 or section
832 by the amount of such excess. The
additional capitalized amounts are treated
as specified policy acquisition expenses at-
tributable to the premiums and other con-
sideration on the assumption reinsurance
transaction and are deducted ratably over
a 120-month period as provided under sec-
tion 848(a)(2).
(5)Cross references and special rules.
In general, for rules applicable to the de-
termination of specified policy acquisition
expenses, net premiums, and net consid-
eration, see section 848(c) and (d), and
§1.848–2(a) and (f). However, the follow-
ing special rules apply for purposes of this
paragraph (g)(5)(ii)(C)—
(i) The amount required to be capital-
ized under section 848in connection with
the assumption reinsurance transaction
cannot be less than zero;
(ii) For purposes of determining the
company’s general deductions under sec-
tion 848(c)(2) forthe taxable year of
the assumption reinsurance transaction,
the reinsurer takes into account a tenta-
tive amortization deduction under section
197(a) as if the entire amount paid or in-
curred by the reinsurer for the specified
insurance contracts were allocated to an
amortizable section 197 intangible with
respect to insurance contracts acquired
in an assumption reinsurance transaction;
and
(iii) Any reduction of specified policy
acquisition expenses pursuant to an elec-
tion under §1.848–2(i)(4) (relating to an
assumption reinsurance transaction with
an insolvent insurance company) is disre-
garded.
(D)Examples. The following examples
illustrate the principles of this paragraph
(g)(5)(ii):
Example 1.(i)Facts. On January 15, 2006, P
acquires all of the stock of T, an insurance com-
pany, in a qualified stock purchase and makes a
section 338 election for T. T issues individual life
insurance contracts which are specified insurance
contracts as defined in section 848(e)(1). P and new
T are calendar year taxpayers. Under §§1.338–6
and 1.338–11(b)(2), the amount of AGUB allocated
to old T’s individual life insurance contracts is
$300,000. On the acquisition date, the tax reserves
for old T’s individual life insurance contracts are
$2,000,000. After the acquisition date, new T re-
ceives $1,000,000 of net premiums with respect to
new and renewal individual life insurance contracts
and incurs $100,000 of general deductions under
848(c)(2) through December 31, 2006. New T en-
gages in no other reinsurance transactions other than
the assumption reinsurancetransaction treated as
occurring by reason of the section 338 election.
(ii)Analysis. The transfer of insurance contracts
and the assumption of related liabilities deemed to
occur by reason of the election under section 338
is treated as an assumption reinsurance transaction.
New T determines the adjusted basis under section
197(f)(5) for the life insurance contracts acquired in
the assumption reinsurance transaction as follows.
The amount paid or incurred for the individual life
insurance contracts is $300,000. To determine the
amount required to be capitalized under section
848 in connection with theassumption reinsurance
transaction, new T compares the required capi-
talization amount for the assumption reinsurance
transaction with the general deductions alloca-
ble to the transaction. The required capitalization
amount for the assumption reinsurance transaction is
$130,900, which is determining by multiplying the
$1,700,000 net positive consideration for the transac-
tion ($2,000,000 reinsurance premium less $300,000
ceding commission) by the applicable percentage
under section 848(c)(1) for the acquired individual
life insurance contracts (7.7%). To determine its gen-
eral deductions, new T takesinto account a tentative
amortization deduction under section 197(a) as if the
entire amount paid or incurred for old T’s individual
life insurance contracts ($300,000) were allocable to
an amortizable section 197 intangible with respect
to insurance contracts acquired in the assumption
reinsurance transaction. Accordingly, for the year
of the assumption reinsurance transaction, new T is
treated as having general deductions under section
848(c)(2) of $120,000 ($100,000 + $300,000/15).
Under §1.848–2(g)(6), these general deductions
are first allocated to the $77,000 capitalization re-
quirement for new T’s directly written business
($1,000,000 x .077). Thus, $43,000 ($120,000
$77,000) of the general deductions are allocable to
the assumption reinsurance transaction. Because
the general deductions allocable to the assumption
reinsurance transaction ($43,000) are less than the
required capitalization amount for the transaction
($130,900), new T has a capitalization shortfall of
$87,900 ($130,900
$43,000) with regard to the
transaction. Under §1.848–2(g), this capitalization
shortfall would cause old T to reduce the net negative
consideration taken into account with respect to the
assumption reinsurance transaction by $1,141,558
($87,900 ÷ .077) unless the parties make the elec-
tion under §1.848–2(g)(8) to capitalize specified
policy acquisition expenses in connection with the
assumption reinsurance transaction without regard
to the general deductions limitation. If the parties
make the election, the amount capitalized by new T
under section 848 in connection with the assump-
tion reinsurance transaction would be $130,900.
The $130,900 capitalized by new T under section
848 would reduce new T’s adjusted basis of the
amortizable section 197 intangible with respect to
the specified insurance contracts acquired in the
assumption reinsurance transaction. Accordingly,
new T would have an adjusted basis under section
197(f)(5) with respect to the individual life insurance
contracts acquired from old T of $169,100 ($300,000
130,900). New T’s actual amortization deduction
under section 197(a) with respect to the amortiz-
able section 197 intangible for insurance contracts
acquired in the assumption reinsurance transaction
would be $11,273 ($169,100 ÷ 15).
Example 2.(i)Facts. The facts are the same
asExample 1, except that T only issues accident
and health insurance contracts that are qualified
long-term care contracts under section 7702B. Un-
der section 7702B(a)(5), T’s qualified long-term
care insurance contracts are treated as guaranteed
renewable accident and health insurance contracts,
and, therefore, are considered specified insurance
contracts under section 848(e)(1). Under §§1.338–6
and 1.338–11(b)(2), the amount of AGUB allocable
to T’s qualified long-termcare insurance contracts
is $250,000. The amount of T’s tax reserves for the
qualified long-term care contracts on the acquisition
date is $7,750,000. Following the acquisition, new
T’s receives net premiums of $500,000 with respect
to qualified long-term care contracts and incurs gen-
eral deductions of $75,000 through December 31,
2006.
(ii)Analysis. The transfer of insurance contracts
and the assumption of related liabilities deemed to
occur by reason of the election under section 338
is treated as an assumption reinsurance transaction.
April 24, 20068302006–17 I.R.B.

New T determines the adjusted basis under section
197(f)(5) for the insurance contracts acquired in the
assumption reinsurance transaction as follows. The
amount paid or incurred for the insurance contracts
is $250,000. To determine the amount required
to be capitalized under section 848 in connection
with the assumption reinsurance transaction, new T
compares the required capitalization amount for the
assumption reinsurance transaction with the general
deductions allocable to the transaction. The required
capitalization amount for the assumption reinsurance
transaction is $577,500, which is determining by
multiplying the $7,500,000 net positive consider-
ation for the transaction ($7,750,000 reinsurance
premium less $250,000 ceding commission) by the
applicable percentage under section 848(c)(1) for the
acquired insurance contracts (7.7%). To determine
its general deductions, new T takes into account
a tentative amortization deduction under section
197(a) as if the entire amount paid or incurred for
old T’s insurance contracts ($250,000) were al-
locable to an amortizable section 197 intangible
with respect to insurance contracts acquired in the
assumption reinsurance transaction. Accordingly,
for the year of the assumption reinsurance transac-
tion, new T is treated as having general deductions
under section 848(c)(2) of $91,667 ($75,000 +
$250,000/15). Under §1.848–2(g)(6), these general
deductions are first allocated to the $38,500 capi-
talization requirement for new T’s directly written
business ($500,000 x .077). Thus, $53,167 ($91,667
$38,500) of general deductions are allocable to
the assumption reinsurance transaction. Because
the general deductions allocable to the assumption
reinsurance transaction ($53,167) are less than the
required capitalization amount for the transaction
($577,500), new T has a capitalization shortfall of
$524,333 ($577,500
$53,167) with regard to the
transaction. Under §1.848–2(g), this capitalization
shortfall would cause old T to reduce the net negative
consideration taken intoaccount with respect to the
assumption reinsurance transaction by $6,809,519
($524,333 ÷ .077) unless the parties make the elec-
tion under §1.848–2(g)(8) to capitalize specified
policy acquisition expenses in connection with the
assumption reinsurance transaction without regard
to the general deductions limitation. If the parties
make the election, the amount capitalized by new T
under section 848 in connection with the assumption
reinsurance transaction would increase from $53,167
to $577,500. Pursuant to §1.197–2(g)(5)(ii)(C)(4),
the additional $524,333 ($577,500
$53,167) cap-
italized by new T under section 848 would reduce
new T’s adjusted basis of the amortizable section
197 intangible with respect to the insurance contracts
acquired in the assumption reinsurance transaction.
Accordingly, new T’s adjusted basis of the section
197 intangible with regard to the insurance contracts
is reduced from $196,833 ($250,000
$53,167)
to $0. Because the additional $524,333 capitalized
pursuant to the §1.848–2(g)(8) election exceeds the
$196,833 adjusted basis of the section 197 intangible
before the reduction, new T is required to reduce
its deductions under section 805 by the $327,500
($524,333
196,833).
(E)Effective date. This section applies
to acquisitions and dispositions of insur-
ance contracts on or after April 10, 2006.
The applicability of this section expires on
or before April 7, 2009.
(g)(5)(iii) through (l) [Reserved]. For
further guidance, see §1.197–2(g)(5)(iii)
through (l).
Par. 5. Section 1.338–0 is amended by
adding entries to the outline of topics for
§1.338–11, §1.338–11T and §1.338(i)–1
to read as follows:
§1.338–0 Outline of topics.
*****
§1.338–11 Effect of section 338 election
on insurance company targets.
(a) In general.
(b) Computation of ADSP and AGUB.
(1) Reserves taken into account as a li-
ability.
(2)AllocationofADSPandAGUBto
specific insurance contracts.
(c) Application of assumption reinsur-
ance principles.
(1) In general.
(2) Reinsurance premium.
(3) Ceding commission.
(4) Examples.
(d) Reserve increases by new target af-
ter the deemed asset sale.
(e) Effect of section 338 election on sec-
tion 846(e) election.
(f) Effect of section 338 election on old
target’s capitalization amounts under sec-
tion 848.
(1) Determination of net consideration
for specified insurance contracts.
(2) Determination of capitalization
amount.
(3) Section 381 transactions.
(g) Effect of section 338 election on
policyholders surplus account.
(h) Effect of section 338 election on
section 847 special estimated tax pay-
ments.
§1.338–11T Effect of section 338
election on insurance company targets
(temporary).
(a) through (c) [Reserved].
(d) Reserve increases by new target af-
ter the deemed asset sale.
(1) In general.
(2) Exceptions.
(3) Amount of additional premium.
(i) In general.
(ii) Increases in unpaid loss reserves.
(iii) Increases in other reserves.
(4) Limitation on additional premium.
(5) Treatment of additional premium
under section 848.
(6) Examples.
(7) Effective dates.
(i) In general.
(ii) Application to pre-effective date in-
creases to reserves.
(e) Effect of section 338 election on sec-
tion 846(e) election.
(1) In general.
(2) Revocation of existing section
846(e) election.
(f ) through (h) [Reserved].
§1.338(i)–1 Effective dates.
(a) In general.
(b) Section 338(h)(10) elections for
S corporation targets.
(c) Section 338 elections for insurance
company targets.
(1) In general.
(2) New target election for retroactive
election.
(i) Availability of election.
(ii) Time and manner of making the
election for new target.
(3) Old target election for retroactive
election.
(i) Availability of election.
(ii) Time and manner of making the
election for old target.
Par. 6. Section 1.338–1 is amended by:
1. Revising the last two sentences of
paragraph (a)(2).
2. Adding a sentence before the last
sentence of paragraph (a)(3).
3. Redesignating existing paragraph
(b)(2)(vii) as paragraph (b)(2)(viii) and
adding new paragraph (b)(2)(vii).
The revisions read as follows:
§1.338–1 General principles; status of old
target and new target.
(a) * * *
(2)***Forexample,ifthetargetis
an insurance company for which a section
338 election is made, the deemed asset sale
results in an assumption reinsurance trans-
action for the insurance contracts deemed
transferred from old target to new target.
See, generally, §1.817–4(d), and for spe-
cial rules regarding the acquisition of in-
surance company targets, §1.338–11.
2006–17 I.R.B.831April 24, 2006

(3)***Section1.338–11providesspe-
cial rules for insurance company targets.
***
*****
(b) * * *
(2) * * *
(vii) [Reserved].
*****
Par. 7. Section 1.338–1T is added to
read as follows:
§1.338–1T General principles; status of
old target and new target (temporary).
(a) through (b)(2)(vi) For further guid-
ance, see §1.338–1(a) through (b)(2)(vi).
(b)(2)(vii) Section 846(e) (relating to
an election to use an insurance company’s
historical loss payment pattern).
Par. 8. Section 1.338–11 is added to
read as follows:
§1.338–11 Effect of section 338 election
on insurance company targets.
(a)In general. This section provides
rules that apply when an election under
section 338 is made for a target that is an
insurance company. The rules in this sec-
tion apply in addition to those generally
applicable upon the making of an election
under section 338. In the case of a conflict
between the provisions of this section and
other provisions of the Internal Revenue
Code or regulations, the rules set forth in
this section determine the Federal income
tax treatment of the parties and the trans-
action when a section 338 election is made
for an insurance company target.
(b)Computation of ADSP and
AGUB—(1)Reserves taken into account
as a liability.Old target’s tax reserves
are the reserves for Federal income tax
purposes for any insurance, annuity, and
reinsurance contracts deemed sold by old
target to new target in the deemed asset
sale. The amount of old target’s tax re-
serves is the amount that is properly taken
into account by old target for the contracts
at the close of the taxable year that in-
cludes the deemed sale tax consequences
(before giving effect to the deemed asset
sale and assumption reinsurance trans-
action). Old target’s tax reserves are a
liability of old target taken into account in
determining ADSP under §1.338–4 and a
liability of new target taken into account
in determining AGUB under §1.338–5.
(2)Allocation of ADSP and AGUB to
specific insurance contracts. For purposes
of allocating AGUB and ADSP under
§§1.338–6 and 1.338–7, the fair market
value of a specific insurance, reinsurance
or annuity contract or group of insurance,
reinsurance or annuity contracts (insur-
ance contracts) is the amount of the ced-
ing commission a willing reinsurer would
pay a willing ceding company in an arm’s
length transaction for the reinsurance of
the contracts if the gross reinsurance pre-
mium for the contracts were equal to old
target’s tax reserves for the contracts. See
§1.197–2(g)(5) for rules concerning the
treatment of the amount allocable to in-
surance contracts acquired in the deemed
asset sale.
(c)Application of assumption reinsur-
ance principles—(1)In general.Ifatarget
is an insurance company, the deemed sale
of insurance contracts is treated for Fed-
eral income tax purposes as an assumption
reinsurance transaction between old target,
as the reinsured or ceding company, and
new target, as the reinsurer or acquiring
company, at the closeof the acquisition
date. The Federal income tax treatment
of the assumption reinsurance transaction
is determined under the applicable provi-
sions of subchapter L, chapter 1, subtitle
A of the Internal Revenue Code, as modi-
fied by the rules set forth in this section.
(2)Reinsurance premium.Oldtarget
is deemed to pay a gross amount of pre-
mium in the assumption reinsurance trans-
action equal to the amount of old target’s
tax reserves for the insurance contracts that
are acquisition date assets (acquired con-
tracts). New target is deemed to receive
a reinsurance premium in the amount of
old target’s tax reserves for the acquired
contracts. See paragraph (d) of this sec-
tion for circumstances in which new tar-
get is deemed to receive additional pre-
mium. See §1.817–4(d)(2) for old target’s
and new target’s treatment of the premium.
(3)Ceding commission. Old target is
deemed to receive a ceding commission in
an amount equal to the amount of ADSP
allocated to the acquired contracts, as de-
termined under §§1.338–6 and 1.338–7
and paragraph (b) of this section. New
target is deemed to pay a ceding commis-
sion in an amount equal to the amount
of AGUB allocated to the acquired con-
tracts, as determined under §§1.338–6 and
1.338–7 and paragraph (b) of this section.
See §1.817–4(d)(2) for old target’s and
new target’s treatment of the ceding com-
mission.
(4)Examples. The following examples
illustrate this paragraph (c):
Example 1.(i)Facts. On January 1, 2003, T,
an insurance company, has the following assets with
the following fair market values: $10 cash, $30 of
securities, $10 of equipment, a life insurance contract
having a value, under paragraph (b)(2) of this section,
of $17, and goodwill and going concern value. T
has tax reserves of $50 and no other liabilities. On
January 1, 2003, P purchases all of the stock of T
for $16 and makes a section 338 election for T. For
purposes of the capitalization requirements of section
848, assume new T has $20 of general deductions in
its first taxable year ending on December 31, 2003,
and earns no other premiums during the year.
(ii)Analysis. (A) For Federal income tax pur-
poses, the section 338 election results in a deemed
sale of the assets of old T to new T. Old T’s ADSP
is $66 ($16 amount realized for the T stock plus $50
liabilities). New T’s AGUB also is $66 ($16 basis for
the T stock plus $50 liabilities). See paragraph (b)(1)
of this section. Each of the AGUB and ADSP is al-
located under the residual method of §1.338–6 to de-
termine the purchase or sale price of each asset trans-
ferred. Each of the AGUB and ADSP is allocated as
follows: $10 to cash (Class I), $30 to the securities
(Class II), $10 to equipment (Class V), $16 to the life
insurance contract (Class VI), and $0 to goodwill and
going concern value (Class VII).
(B) Under section 1001, old T’s amount realized
for the securities is $30 and for the equipment is $10.
As a result of the deemed asset sale, there is an as-
sumption reinsurance transaction between old T (as
ceding company) and new T (as reinsurer) at the close
of the acquisition date for the life insurance contract
issued by old T. See paragraph (c)(1) of this section.
Although the assumption reinsurance transaction re-
sults in a $50 decrease in old T’s reserves, which
is taxable income to old T, the reinsurance premium
paid by old T is deductible by old T. Under paragraph
(c)(2) of this section, old T is deemed to pay a reinsur-
ance premium equal to the reserve for the life insur-
ance contract immediately before the deemed asset
sale ($50) and is deemed to receive a ceding commis-
sion from new T. Under paragraph (c)(3) of this sec-
tion, the portion of the ADSP allocated to the life in-
surance contract is $16; thus, the ceding commission
is $16. Old T, therefore, is deemed to pay new T a
reinsurance premium of $34 ($50
$16 = $34). Old
T also has $34 of net negative consideration for pur-
poses of section 848. See paragraph (f) of this section
for rules relating to the effect of a section 338 election
on the capitalization of amounts under section 848.
(C) New T obtains an initial basis of $30 in the se-
curities and $10 in the equipment. New T is deemed
to receive a reinsurance premium from old T in an
amount equal to the $50 of reserves for the life insur-
ance contract and to pay old T a $16 ceding commis-
sion for the contract. See paragraphs (c)(2) and (3) of
this section. Accordingly, new T includes $50 of pre-
mium in income and deducts $50 for its increase in
reserves. For purposes of section 848, new T has $34
of net positive consideration for the deemed assump-
tion reinsurance transaction. Because the only con-
tract involved in the deemed assumption reinsurance
April 24, 20068322006–17 I.R.B.

transaction is a life insurance contract, new T must
capitalize $2.62 ($34 x 7.7% = $2.62) under section
848. New T will amortize the $2.62 as provided un-
der section 848. New T’s adjusted basis in the life
insurance contract, which is an amortizable section
197 intangible, is $13.38, the excess of the $16 ced-
ing commission over the $2.62 capitalized under sec-
tion 848. See section 197 and §1.197–2(g)(5). New
T deducts the $2.62 of the ceding commission that
is not amortizable under section 197 because it is re-
flected in the amount capitalized under section 848
and also deducts the remaining $17.38 of its general
deductions.
Example 2.(i)Facts. Assume the same facts as
inExample 1, except the life insurance contract has a
value of $0 and the fair market value of T’s securities
are $60. Thus, to reinsure the contract in an arm’s
length transaction, T would have to pay the reinsurer
a reinsurance premium in excess of T’s $50 of tax
reserves for the contract.
(ii)Analysis. (A) For Federal income tax pur-
poses, the section 338 election results in a deemed
sale of the assets of old T to new T. Old T’s ADSP
is $66 ($16 amount realized for the T stock plus $50
liabilities). New T’s AGUB also is $66 ($16 basis for
the T stock plus $50 liabilities). See paragraph (b)(1)
of this section. Each of the AGUB and ADSP is al-
located under the residual method of §1.338–6 to de-
termine the purchase or sale price of each asset trans-
ferred. Each of the AGUB and ADSP is allocated as
follows: $10 to cash (Class I), $56 to the securities
(Class II), $0 to the equipment (Class V), $0 to the
life insurance contract (Class VI), and $0 to goodwill
and going concern value (Class VII).
(B) Under section 1001, old T’s amount realized
for the securities is $56 and for the equipment is $0.
As a result of the deemed asset sale, there is an as-
sumption reinsurance transaction between old T (as
ceding company) and new T (as reinsurer) at the close
of the acquisition date for the life insurance contract
issued by old T. See paragraph (c)(1) of this section.
Although the assumption reinsurance transaction re-
sults in a $50 decrease in old T’s reserves, which
is taxable income to old T, the reinsurance premium
deemed paid by old T to new T is deductible by old
T. Under paragraph (c)(2) of this section, old T is
deemed to pay a reinsurance premium equal to the re-
serve for the life insurance contract immediately be-
fore the deemed asset sale ($50), and is deemed to
receive from new T a ceding commission equal to the
amount of AGUB allocated to the life insurance con-
tract ($0), as provided in paragraph (c)(3) of this sec-
tion. Old T also has $50 of net negative consideration
for purposes of section 848. See paragraph (f) of sec-
tion for rules relating to the effect of a section 338
election on capitalization amounts under section 848.
(C) New T obtains an initial basis of $56 in the
securities (with a fair market value of $60) and $0 in
the equipment (with a fair market value of $10). New
T is deemed to receive a reinsurance premium from
old T in an amount equal to the $50 of reserves for
the life insurance contract. Accordingly, new T in-
cludes $50 of premium in income and deducts $50
for its increase in reserves. For purposes of section
848, new T has $50 of net positive consideration for
the deemed assumption reinsurance transaction. Be-
cause the only contract involved in the assumption
reinsurance transaction is a life insurance contract,
new T must capitalize $3.85 ($50 x 7.7%) under sec-
tion 848 from the transaction and deducts the remain-
ing $16.15 of its general deductions. Because new T
allocates $0 of the AGUB to the insurance contract,
no amount is amortizable under section 197 with re-
spect to the insurance contract. See §1.338–11T(d)
for rules on adjustments required if new T increases
its reserves for, or reinsures at a loss, the acquired life
insurance contract.
(d)Reserve increases by new target af-
ter the deemed asset sale. For further guid-
ance, see §1.338–11T(d).
(e)Effect of section 338 election on sec-
tion 846(e) election. For further guidance,
see §1.338–11T(e)
(f)Effect of section 338 election on
old target’s capitalization amounts un-
der section 848—(1)Determination of
net consideration for specified insurance
contracts. For purposes of applying sec-
tion 848 and §1.848–2(f) to the deemed
assumption reinsurance transaction, old
target’s net consideration (either positive
or negative) for each category of specified
insurance contracts is an amount equal
to—
(i) The allocable portion of the ceding
commission (if any) relating to contracts in
that category; less
(ii) The amount by which old target’s
tax reserves for contracts in that category
has been reduced as a result of the deemed
assumption reinsurance transaction.
(2)Determination of capitaliza-
tion amount. Except as provided in
§1.381(c)(22)–1(b)(13)—
(i) If, after the deemed asset sale, old
target has an amount otherwise required
to be capitalized under section 848 for the
taxable year or an unamortized balance of
specified policy acquisition expenses from
prior taxable years, then old target deducts
such remaining amount or unamortized
balance as an expense incurred in the tax-
able year that includes the deemed sale tax
consequences; and
(ii) If, after the deemed asset sale, the
negative capitalization amount resulting
from the reinsurance transaction exceeds
the amount that old target can deduct un-
der section 848(f)(1), then old target’s
capitalization amount is treated as zero at
the close of the taxable year that includes
the deemed sale tax consequences.
(3)Section 381 transactions.For
transactions describedinsection381,see
§1.381(c)(22)–1(b)(13).
(g)Effect of section 338 election
on policyholders surplus account.
Except as specifically provided in
§1.381(c)(22)–1(b)(7), the deemed asset
sale effects a distribution of old target’s
policyholders surplus account to the extent
the grossed-up amountrealized on the sale
to the purchasing corporation of the pur-
chasing corporation’s recently purchased
target stock (as defined in §1.338–4(c))
exceeds old target’s shareholders surplus
account under section 815(c).
(h)Effect of section 338 election on sec-
tion 847 special estimated tax payments.
If old target had elected to claim an ad-
ditional deduction under section 847 for
the taxable year thatincludes the deemed
sale tax consequences or any earlier years,
the amount remaining in old target’s spe-
cial loss discount account under section
847(3) must be reduced to the extent it re-
lates to contracts transferred to new target
and the amount of such reduction must be
included in old target’s gross income for
the taxable year thatincludes the deemed
sale tax consequences. Old target may ap-
ply the balance of its special estimated tax
account as a credit against any tax result-
ing from such inclusion in gross income.
Any special estimated tax payments re-
maining after this credit are voided and,
therefore, are not available for credit or
refund. Under section 847(1), new target
is permitted to claim a section 847 deduc-
tion for losses incurred before the deemed
asset sale, subject to the general require-
ment that new target makes timely spe-
cial estimated tax payments equal to the
tax benefit resulting from this deduction.
See §1.381(c)(22)–1(c)(14) regarding the
carryover of the special loss discount ac-
count attributable to contracts transferred
in a section 381 transaction.
Par. 9. Section 1.338–11T is added to
read as follows:
§1.338–11T Effect of section 338
election on insurance company targets
(temporary).
(a) through (c) [Reserved]. For further
guidance, see §1.338–11(a) through (c).
(d)Reserve increases by new target
after the deemed asset sale—(1)In gen-
eral. If in new target’s first taxable year or
any subsequent year, new target increases
its reserves for any acquired contracts,
new target is treated as receiving an ad-
ditional premium, which is computed
under paragraph (d)(3), in the assump-
tion reinsurance transaction described in
2006–17 I.R.B.833April 24, 2006

§1.338–11(c)(1). New target includes the
additional premium in gross income for
the taxable year in which new target in-
creases its reserves for acquired contracts.
New target’s increase in reserves for the
insurance contracts acquired in the deemed
asset sale is a liability of new target not
originally taken into account in deter-
mining AGUB that is subsequently taken
into account. Thus, AGUB is increased
by the amount of the additional premium
included in new target’s gross income.
See §§1.338–5(b)(2)(ii) and 1.338–7. Old
target has no deduction under this para-
graph (d) and makes no adjustments under
§§1.338–4(b)(2)(ii) and 1.338–7.
(2)Exceptions. New target is not
treated as receiving additional premium
under paragraph (d)(1) if—
(i) it is under state receivership as of
the close of the taxable year for which the
increase in reserves occurs; or
(ii) it is required by section 807(f) to
spread the reserve increase over the 10 suc-
ceeding taxable years.
(3)Amountofadditionalpremium—(i)
In general. The additional premium taken
into account under this paragraph (d) is an
amount equal to the sum of the positive
amounts described in paragraphs (d)(3)(ii)
and (d)(3)(iii). However, the additional
premium cannot exceed the limitation de-
scribed in paragraph (d)(4).
(ii)Increases in unpaid loss reserves.
The positive amount with respect to un-
paid loss reserves is computed using the
formula A/B x (C
[D + E]) where—
(1) A equals old target’s discounted un-
paid losses (determined under section 846)
included in AGUB under §1.338–11(b)(1);
(2) B equals old target’s undiscounted
unpaid losses (determined under section
846(b)(1) as of the close of the acquisition
date;
(3) C equals new target’s undiscounted
unpaid losses (determined under section
846(b)(1) at the end of the taxable year that
are attributable to losses incurred by old
target on or before the acquisition date; and
(4) D (which may be a negative num-
ber) equals old target’s undiscounted un-
paid losses as of the close of the acquisition
date, reduced by the cumulative amount
of losses, loss adjustment expenses, and
reinsurance premiums paid by new target
through the end of the taxable year for
losses incurred by old target on or before
the acquisition date; and
(5) E equals the amount obtained by
dividing the cumulative amount of reserve
increases taken into account under this
paragraph (d) in prior taxable years by
A/B.
(iii)Increases in other reserves.The
positive amount with respect to reserves
other than discounted unpaid loss reserves
is the net increase of those reserves due
to changes in estimate, methodology, or
other assumptions used to compute the re-
serves (including the adoption by new tar-
get of a methodology or assumptions dif-
ferent from those used by old target).
(4)Limitation on additional premium.
The additional premium taken into account
by new target under paragraph (d)(1) is
limited to the excess, if any, of—
(i) The fair market value of old tar-
get’s assets acquired by new target in the
deemed asset sale (other than Class VI and
Class VII assets), over
(ii) The AGUB allocated to those as-
sets (including increases in AGUB allo-
cated to those assets as the result of re-
serve increases by new target in prior tax-
able years).
(5)Treatment of additional premium
under section 848. If a portion of the
positive amounts described in paragraphs
(d)(3)(ii) and (iii) are attributable to an in-
crease in reserves for specified insurance
contracts (as defined in section 848(e)),
new target takes an allocable portion of
the additional premium in determining
its specified policyacquisition expenses
under section 848(c) for the taxable year
of the reserve increase.
(6)Examples. The following examples
illustrate this paragraph (d):
Example 1.(i)FactsOn January 1, 2006, P
purchases all of the stock of T, a non-life insurance
company, for $120 and makes a section 338 election
for T. On the acquisition date, old T has total reserve
liabilities under state law of $725, consisting of
undiscounted unpaid losses of $625 and unearned
premiums of $100. Old T’s tax reserves on the ac-
quisition date are $580, which consist of discounted
unpaid losses (as defined in section 846) of $500
and unearned premiums (as computed under section
832(b)(4)(B)) of $80. Old T has Class I through
Class V assets with a fair market value of $800. Old
T also has a Class VI asset with a fair market value of
$75, consisting of the future profit stream of certain
insurance contracts. During 2006, new T makes loss
and loss adjustment expense payments of $200 with
respect to the unpaid losses incurred by old T before
the acquisition date. As of December 31, 2006, new
T reports undiscounted unpaid losses of $475 attrib-
utable to losses incurred before the acquisition date.
The related amount of discounted unpaid losses (as
defined in section 846) for those losses is $390.
(ii)Computation and allocation of AGUB.Under
§1.338–5 and §1.338–11(b)(1), as of the acquisition
date, AGUB is $700, reflecting the sum of the amount
paid for old T’s stock ($120) and the tax reserves
assumed by new T in the transaction ($580). The fair
market value of old T’s Class I through V assets is
$800, whereas the AGUB available for such assets
under §1.338–6 is $700. There is no AGUB available
for old T’s Class VI assets, even though such assets
have a fair market value of $75 on the acquisition
date.
(iii)Adjustments for increases in reserves for un-
paid losses. Under paragraph (d) of this section, new
T must determine whether there are any amounts by
which it increased its unpaid loss reserves that will
be treated as an additional premium and an increase
in AGUB. New T applies the formula of paragraph
(d)(3) of this section, where A equals $500, B equals
$625, C equals $475, D equals $425 ($625
$200),
and E equals $0. Under this formula, new T is treated
as having increased its reserves for discounted unpaid
losses attributable to losses incurred by old T by $40
($500/$625 x ($475
[$425+0]). The limitation un-
der paragraph (d)(5) based on the difference between
the fair market value of old T’s Class I through Class
V assets and the AGUB allocated to such assets is
$100. Accordingly, new T includes an additional pre-
mium of $40 in gross income for 2006, and increases
the AGUB allocated to old T’s Class I through Class
V assets to reflect this additional premium.
Example 2.(i)Facts. Assume the same facts as in
Example 1. Further assume that during 2007 new T
deducts total loss and loss expense payments of $375
with respect to losses incurred by old T before the ac-
quisition date. On December 31, 2007, new T reports
undiscounted unpaid losses of $150 with respect to
losses incurred before the acquisition date. The re-
lated amount of discounted unpaid losses (as defined
in section 846) for those unpaid losses is $125.
(ii)Analysis. New T must determine whether any
amounts by which it increased its unpaid losses dur-
ing 2007 will be treated as an additional premium un-
der paragraph (d)(3) of this section. New T applies
the formula under paragraph (d)(3) of this section,
where A equals $500, B equals $625, C equals $150,
D equals $50 ($625
$575), and E equals $50 ($40
divided by .8). Under paragraph (d)(3) of this sec-
tion, new T is treated as increasing its reserves for
discounted unpaid losses by $40 during 2007 with re-
spect to losses incurred by old T ($500/$625 x ($150
[$50 + $50]). New T determines the limitation
of paragraph (d)(5) of this section by comparing the
$800 fair market value of the Class I through V as-
sets on the acquisition date to the $740 AGUB al-
located to such assets (which includes the $40 addi-
tion to AGUB included during 2006). Thus, new T
recognizes $40 of additional premium as a result of
the increase in reserves during 2007, and adjusts the
AGUB allocable to the Class I through V assets ac-
quired from old T to reflectsuch additional premium.
Example 3.(i)Facts. The facts are the same
asExample 2, except that on January 1, 2008, new
T reinsures the outstanding liability with respect to
losses incurred by old T before the acquisition date
through a portfolio reinsurance transaction with R,
another non-life insurance company. R agrees to as-
sume any remaining liability relating to losses in-
April 24, 20068342006–17 I.R.B.

curred by old T before the acquisition date in ex-
change for a reinsurance premium of $200. Accord-
ingly, as of December 31, 2008, new T reports no
undiscounted unpaid losses with respect to losses in-
curred by old T before the acquisition date.
(ii)Analysis. New T must determine whether any
amount by which it increased its unpaid loss reserves
will be treated as an additional premium under para-
graph (d) of this section. New T applies the formula
of paragraph (d)(3) of this section, where A equals
$500, B equals $625, C equals $0, and D equals -$150
($625
($575 + $200), and E equals $100 ($80 di-
vided by .8). Thus, new T is treated as having in-
creased its discounted unpaid losses by $40 in 2008
with respect to losses incurred by old T before the
acquisition date ($500/$625 x (0
[- -$150 +$100]).
New T includes this positive amount in gross income,
subject to the limitation of paragraph (d)(4). The lim-
itation of paragraph (d)(4) equals $20, which is com-
puted by comparing the $800 fair market value of the
Class I through V assets acquired from old T with the
$780 AGUB allocated to such assets (which includes
the $40 addition to AGUB in 2006 and the $40 addi-
tion to AGUB in 2007). Thus, New T includes $20
in additional premium, and increases the AGUB al-
located to the Class I through V assets acquired from
old T by $20. As a result of these adjustments, the
limitation under paragraph (d)(4) is reduced to zero.
(7)Effective dates—(i)In general.
This section applies to increases to re-
serves made by new target after a deemed
asset sale occurring on or after April 10,
2006. The applicability of the section
expires on or before April 7, 2009.
(ii)Application to pre-effective date
increases to reserves. If either new target
makes an election under §1.338(i)–1(c)(2)
or old target makes an election under
§1.338(i)–1(c)(3) to apply the rules of
§1.338–11, in whole, to a qualified stock
purchase occurring before April 10, 2006,
then the rules contained in this section
shall apply in whole to the qualified stock
purchase.
(e)Effect of section 338 election on sec-
tion 846(e) election—(1)In general.New
target and old target are treated as the same
corporation for purposes of an election by
old target to use its historical loss pay-
ment pattern under section 846(e). See
§1.338–1T(b)(2)(vii). Therefore, if old
target has a section 846(e) election in ef-
fect on the acquisition date, new target will
continue to use the historical loss payment
pattern of old target to discount unpaid
losses incurred in accident years covered
by the election, unless new target elects to
revoke the section 846(e) election. In addi-
tion, new target may consider old target’s
historical loss payment pattern when deter-
mining whether to make the section 846(e)
election for a determination year that in-
cludes or is subsequent to the acquisition
date.
(2)Revocation of existing section
846(e) election. New target may revoke
oldtarget’ssection846(e)electiontouse
its historical loss payment pattern to dis-
count unpaid losses. If new target elects
to revoke old target’s section 846(e) elec-
tion, new target will use the industry-wide
patterns determined by the Secretary to
discount unpaid losses incurred in ac-
cident years beginning on or after the
acquisition date through the subsequent
determination year. New target may re-
voke old target’s section 846(e) election
by attaching a statement to new target’s
original tax return for its first taxable year.
(f) through (h) [Reserved]. For further
guidance, see §1.338–11(f) through (h).
Par. 10. Section 1.338(i)–1 is amended
by adding new paragraph (c) to read as
follows:
§1.338(i)–1 Effective dates.
*****
(c)Section 338 elections for insur-
ance company targets—(1)In general.
The rules of §1.338–11 apply to qualified
stock purchases occurring on or after April
10, 2006.
(2)New target election for retroactive
application—(i)Availability of election.
New target may make an irrevocable elec-
tion to apply the rules in §§1.338–11
and 1.338–11T(d) (including the ap-
plicable provisions in §§1.197–2(g)(5),
1.197–2T(g)(5)(ii), 381(c)(22)–1, and
846) in whole, but not in part, to a quali-
fied stock purchase occurring before April
10, 2006, for which a section 338 election
is made, provided that new target’s first
taxable year and all subsequent affected
taxable years are years for which an as-
sessment of deficiency or a refund for
overpayment is not prevented by any law
or rule of law. In the case of a section 338
election for which a section 338(h)(10)
election is made (or a section 338 elec-
tion for a foreign target), new target may
make the election to apply the regulations
retroactively without regard to whether old
target makes the election. In the case of a
section 338 election for a domestic target
for which no section 338(h)(10) election
is made, new target may make the election
to apply the regulations retroactively only
if old target also makes the election. Para-
graph (c)(2)(ii) of this section prescribes
the time and manner of the election for
new target.
(ii)Time and manner of making the
election for new target. New target may
make an election described in paragraph
(c)(2)(i) of this section by attaching a state-
ment to its original or amended income
tax return for its first taxable year. The
statement must be entitled “ELECTION
TO RETROACTIVELY APPLY THE
RULES IN §§1.338–11 and 1.338–11T(d)
(INCLUDING THE APPLICABLE
PROVISIONS IN §§1.197–2(g)(5),
1.197–2T(g)(5)(ii), 1.381(c)(22)–1 and
846) IN WHOLE TO A TRANSAC-
TION COMPLETED BEFORE APRIL
10, 2006” and must include the following
information—
(A) The name and E.I.N. for new target;
and
(B) The following declaration (or
a substantially similar declaration):
NEW TARGET HAS AMENDED
ITS INCOME TAX RETURNS FOR
ITS FIRST TAXABLE YEAR AND
FOR ALL AFFECTED SUBSEQUENT
YEARS TO REFLECT THE RULES IN
§§1.338–11 and 1.338–11T(d) (INCLUD-
ING THE APPLICABLE PROVISIONS
IN §§1.197–2(g)(5), 1.197–2T(g)(5)(ii),
1.381(c)(22)–1 and 846). ALL OTHER
PARTIES WHOSE INCOME TAX
LIABILITIES ARE AFFECTED BY
NEW TARGET’S ELECTION HAVE
AMENDED THEIR INCOME TAX
RETURNS FOR ALL AFFECTED
YEARS TO REFLECT THE RULES IN
§§1.338–11 and 1.338–11T(d) (INCLUD-
ING THE APPLICABLE PROVISIONS
IN §§1.197–2(g)(5), 1.197–2T(g)(5)(ii),
1.381(c)(22)–1 and 846).
(3)Old target election for retroac-
tive application—(i)Availability of elec-
tion. Old target may make an irrevoca-
ble election to apply THE RULES IN
§§1.338–11 and 1.338–11T(d) (INCLUD-
ING THE APPLICABLE PROVISIONS
IN §§1.197–2(g)(5), 1.197–2T(g)(5)(ii),
1.381(c)(22)–1 and 846) in whole, but not
in part, to a qualified stock purchase oc-
curring before April 10, 2006, for which
a section 338 election is made, provided
that old target’s taxable year that includes
the deemed sale tax consequences and
all subsequent affected taxable years are
years for which an assessment of defi-
ciency or a refund for overpayment is not
2006–17 I.R.B.835April 24, 2006

prevented by any law or rule of law. In the
case of a section 338 election for which
a section 338(h)(10) election is made (or
a section 338 election for a foreign tar-
get), old target may make the election to
apply the regulations retroactively with-
out regard to whether new target makes
the election. In the case of a section 338
election for a domestic target for which
no section 338(h)(10) election is made,
old target may make the election to apply
the regulations retroactively only if new
target also makes the election. Paragraph
(c)(3)(ii) of this section prescribes the time
and manner of the election for old target.
(ii)Time and manner of making the
election for old target. Old target may
make an election described in paragraph
(c)(3)(i) of this section by attaching a
statement to each affected party’s origi-
nal or amended income tax return for the
taxable year that includes the deemed sale
tax consequences. The statement must be
entitled “ELECTION TO RETROAC-
TIVELY APPLY THE RULES IN
§§1.338–11 and 1.338–11T(d) (INCLUD-
ING THE APPLICABLE PROVISIONS
IN §§1.197–2(g)(5), 1.197–2T(g)(5)(ii),
1.381(c)(22)–1 and 846) TO A TRANS-
ACTION COMPLETED BEFORE
APRIL 10, 2006” and must include the
following information—
(A) The name and E.I.N. for old target;
and
(B) The following declaration (or a
substantially similar declaration): OLD
TARGET HAS AMENDED ITS IN-
COME TAX RETURNS FOR THE
TAXABLE YEAR THAT INCLUDES
THE DEEMED SALE TAX CON-
SEQUENCES AND FOR ALL AF-
FECTED SUBSEQUENT YEARS TO
REFLECT THE RULES IN §§1.338–11
and 1.338–11T(d) (INCLUDING THE
APPLICABLE PROVISIONS IN
§§1.197–2(g)(5),1.197–2T(g)(5)(ii),
1.381(c)(22)–1 and 846). ALL OTHER
PARTIES WHOSE INCOME TAX
LIABILITIES ARE AFFECTED BY
OLD TARGET’S ELECTION HAVE
AMENDED THEIR INCOME TAX
RETURNS FOR ALL AFFECTED
YEARS TO REFLECT THE RULES IN
§§1.338–11 and 1.338–11T(d) (INCLUD-
ING THE APPLICABLE PROVISIONS
IN §§1.197–2(g)(5), 1.197–2T(g)(5)(ii),
1.381(c)(22)–1 and 846).
Par. 11. Section 1.381(c)(22)–1 is
amended by:
1. Revising the first sentence of para-
graph (a).
2. Adding a sentence to the end of para-
graph (b)(7)(i).
3. Redesignating existing (b)(7)(ii) as
paragraph (b)(7)(iv) and adding new para-
graphs (b)(7)(ii) and (b)(7)(iii).
4.Adding paragraphs (b)(7)(v),
(b)(13), (b)(14), and (c).
The revisions read as follows:
§1.381(c)(22)–1 Successor insurance
company.
(a)Carryover requirement.Ifinatax-
able year beginning after December 31,
1957, a distributor or transferor corpo-
ration which is an insurance company is
acquired by a corporation which is an in-
surance company in a transaction to which
section 381(a) applies, section 381(c)(22)
provides that the acquiring corporation
shall take into account the appropriate
items which the distributor or transferor
corporation was required to take into ac-
count for purposes of part I, subchapter L,
chapter 1 of the Internal Revenue Code.
***
(b) * * *
(7)(i)***However,anyamountsat-
tributable to money or other property not
permitted to be received without the recog-
nition of gain (i.e., boot) distributed to a
person other than the acquiring corpora-
tion under section 381(a) shall be treated
as a distribution under section 815.
(ii) Notwithstanding paragraph (b)(7)(i)
of this section, if the distributor or trans-
feror corporation distributes or transfers
less than 50 percent of its insurance busi-
ness to the acquiring corporation, then the
acquiring corporation shall succeed to a
ratable portion of the dollar balances in the
distributor’s or transferor’s shareholders
surplus account, policyholders surplus ac-
count, and other accounts. The percentage
of the accounts to which the acquiring cor-
poration succeeds is determined by the ra-
tio of the distributor’s or transferor’s insur-
ance reserves for the contracts transferred
to the acquiring corporation, as maintained
under section 816(b), to the distributor’s
or transferor’s reserves for all of its con-
tracts maintained under section 816(b) im-
mediately before theearlier of the distri-
bution or transfer or the adoption of the
plan of liquidation or reorganization. For
transactions in which the distributor liqui-
dates pursuant to an election under section
338(h)(10), see §1.338–11(f) for the treat-
ment of its remaining policyholders sur-
plus account. For all other transactions
subject to this paragraph, the distributor
or transferor must take into account as in-
come its remaining policyholders surplus
account to the extent the fair market value
of its assets (net of liabilities) distributed
or transferred to the acquiring corporation
or to the transferor’s shareholders pursuant
to the plan of liquidation or reorganization
exceeds the distributor’s or transferor’s re-
maining shareholders surplus account.
(iii) If, pursuant to a plan in exis-
tence at the time of the liquidation or
reorganization, the acquiring corpora-
tion transfers any insurance or annuity
contract it received in the liquidation or
reorganization to another person, then, for
purposes of paragraph (b)(7)(ii) of this
section, that contract shall be deemed to
have been transferred by the transferor to
that other person after the adoption of the
plan of liquidation orreorganization. If
the transferor is an old target within the
meaning of §1.338(h)(10)–1(d)(2), any
transfer by the acquiring corporation to
the purchasing corporation (as defined in
§1.338–2(c)(11)) or to any person related
to the purchasing corporation within the
meaning of section 197(f)(9)(C) within
two years of the transfer described in sec-
tion 381(a) will be presumed to have been
pursuant to a plan in existence at the time
of the liquidation or reorganization.
*****
(v) The provisions of this paragraph
(b)(7) are illustrated by the following ex-
amples:
Example 1. P buys the stock of insurance com-
pany target, T, from S for $16, and P and S make a
section 338(h)(10) election for T. T transfers no in-
surance contracts to S, or any related party, in con-
nection with the transaction. Further, assume that T
had $10 in its policyholders surplus account and no
balance in its shareholders surplus account or other
accounts. Immediately before the deemed asset sale,
old T is required to include as ordinary income the
$10 in the policyholders surplus account.
Example 2.AssumethesamefactsasinExample
1, except that T holds a block of life insurance con-
tracts P does not wish to acquire, and, immediately
before the sale of T stock, S causes T to distribute the
unwanted block of insurance contracts to S. Further,
assume that S is an insurance company, that the distri-
bution of contracts is one of series of distributions in
complete cancellation or redemption of all of its stock
April 24, 20068362006–17 I.R.B.

(the others occurring under §1.338(h)(10)–1(d)(4)(i))
that qualifies as a complete liquidation under section
332, and that old T’s tax reserves with respect to the
distributed contracts represent one-tenth of old T’s
tax reserves with respect to all of its life insurance
contracts. Because T transfers less than 50 percent
of its life insurance business to S in a transaction to
which section 381(a) applies, S succeeds to a ratable
portion of old T’s policyholders surplus account ($1),
and old T includes as ordinary income the remaining
$9 of that account.
Example 3. Assume the same facts as inExam-
ple 2, except that 14 months after the deemed asset
sale, S and X, a person related to new T under sec-
tion 197(f)(9)(C), engage in an indemnity reinsurance
transaction involving the contracts transferred to S
from old T. Because X is related to the purchasing
corporation (P) under section 197(f)(9)(C), and X re-
ceives contracts from theacquiring corporation (S)
that S acquired from old T within two years of the
transfer from old T to S, the contracts are presumed to
have been transferred pursuant to a plan in existence
at the time of old T’s liquidation. If S cannot estab-
lish otherwise, old T is treated as having distributed
the remainder of its policyholders surplus account. In
that case, in the taxable year of the indemnity rein-
surance transaction, S takes into account as ordinary
income the portion of old T’s accounts ($9) that old T
or S has not previously taken into account as income.
*****
(13)(i) The transferor’s unamortized
policy acquisition expenses or positive or
negative capitalization requirements on its
specified insurance contracts.
(ii) Notwithstanding paragraph
(b)(13)(i) of this section, if the distribu-
tor or transferor corporation transfers less
than 50 percent of its insurance business to
the acquiring corporation, then the acquir-
ing corporation shall succeed to a ratable
portion of the transferor’s unamortized
policy acquisition expenses or positive
or negative capitalization requirements
on its specified insurance contracts. The
percentage of such acquisition expenses or
positive or negative capitalization require-
ments to which the acquiring corporation
succeeds is determined by the ratio of the
distributor’s or transferor’s insurance re-
serves for the contracts transferred to the
acquiring corporation, as maintained un-
der section 816(b), to the distributor’s or
transferor’s reservesfor all of its contracts
maintained under section 816(b) immedi-
ately before the earlier of the distribution
or transfer or the adoption of the plan of
liquidation or reorganization. For amounts
of the distributor’s or transferor’s un-
amortized policy acquisition expenses or
positive or negative capitalization require-
ments on its specified insurance contracts
to which the acquirer does not succeed to
under this paragraph, and, for transactions
in which the transferor liquidates pursuant
to an election under section 338(h)(10),
see §1.338–11(f) for the treatment of its
capitalized amounts under section 848.
(iii) If, pursuant to a plan in exis-
tence at the time of the liquidation or
reorganization, the acquiring corpora-
tion transfers any insurance or annuity
contract it received in the liquidation or
reorganization to another person, then, for
purposes of paragraph (b)(13)(ii) of this
section, that contract shall be deemed to
have been transferredbythetransferorto
that other person after the adoption of the
plan of liquidation or reorganization. If
the transferor is an old target within the
meaning of §1.338(h)(10)–1(d)(2), any
transfer by the acquiring corporation to
the purchasing corporation (as defined in
§1.338–2(c)(11)) or to any person related
to the purchasing corporation within the
meaning of section 197(f)(9)(C) within
two years of the transfer described in sec-
tion 381(a) will be presumed to have been
pursuant to a plan in existence at the time
of the liquidation or reorganization.
(14) The special loss discount account,
provided, however, that the acquiring cor-
poration will succeed to the special loss
discount account only to the extent that it
is attributable to the portion of the trans-
feror’s insurance business acquired by the
acquiring corporation in the section 381
transaction.
(c)Effective dates—(1)In general.
This section applies to the acquisition of
assets of an insurance company by an-
other insurance company in a transaction
to which section 381 applies for taxable
years beginning after December 31, 1957.
(2)Special rules for section 381 trans-
actions. Paragraphs (a), (b)(7), (b)(13),
and (b)(14) of this section apply to the ac-
quisition of assets of an insurance com-
pany by another insurance company in a
transaction to which section 381 applies on
or after April 10, 2006.
(3)Joint retroactive election. The dis-
tributor or transferor and the acquiring
corporation may jointly make an irrevo-
cable election to apply paragraphs (a),
(b)(7), (b)(13), and (b)(14) of this sec-
tion to a transaction to which section 381
applies occurring before April 10, 2006,
provided that the taxable year that includes
the acquisition and all subsequent affected
taxable years of both the distributor or
transferor and the acquiring corporation
are years for which an assessment of defi-
ciency or a refund for overpayment is not
prevented by any law or rule of law.
(4)Time and manner of making the
joint election. The distributor or trans-
feror and the acquiring corporation may
make an election described in paragraph
(c)(2) of this section by each attaching a
statement to its original or amended in-
come tax return for the taxable year that
includes the acquisition of assets in a trans-
action to which section 381 applies. The
statement must be entitled “ELECTION
TO RETROACTIVELY APPLY THE
RULES OF SECTION 1.381(c)(22)–1 TO
A TRANSACTION COMPLETED BE-
FORE APRIL 10, 2006” and must include
the following information—
(i) The name and E.I.N. of the distrib-
utor or transferor and the acquiring corpo-
ration; and
(ii) The following declaration (or a
substantially similar declaration): THE
DISTRIBUTOR OR TRANSFEROR
AND THE ACQUIRING CORPORA-
TION HAVE EACH AMENDED ITS
INCOME TAX RETURNS FOR THE
TAXABLE YEAR THAT INCLUDES
THE ACQUISITION OF ASSETS IN
A TRANSACTION TO WHICH SEC-
TION 381 APPLIES AND FOR ALL
AFFECTED SUBSEQUENT YEARS
TO REFLECT THE RULES IN PARA-
GRAPHS (a), (b)(7), (b)(13), and (b)(14)
OF SECTION 1.381(c)(22)–1.
*****
Par. 12. Section 1.846–0 is amended
by:
1. Adding a new entry in the table of
contents for §1.846–2(d).
2. Revising the entry in the table of
contents for §1.846–4.
3. Adding a new entry in the table of
contents for §1.846–4T.
The revisions and additions read as fol-
lows:
§1.846–0 Outline of provisions.
*****
§1.846–2 Election by taxpayer to use its
own historical loss payment pattern.
*****
(d) Effect of section 338 election on
section 846(e) election.
2006–17 I.R.B.837April 24, 2006

§1.846–2T Election by taxpayer to use
its own historical loss payment pattern
(temporary).
(a) through (c) [Reserved].
(d) Effect of section 338 election on
section 846(e) election.
*****
§1.846–4 Effective dates.
(a) In general.
(b) Section 338 election.
§1.846–4T Effective dates (temporary).
(a) [Reserved].
(b) Section 338 election.
*****
Par. 13. Section 1.846–2 is amended by
adding paragraph (d) to read as follows:
§1.846–2 Election by taxpayer to use its
own historical loss payment pattern.
*****
(d)Effect of section 338 election on sec-
tion 846(e) election. [Reserved]. For fur-
ther guidance, see §1.846–2T(d).
*****
Par. 14. Section 1.846–2T is added to
read as follows:
§1.846–2T Election by taxpayer to use
its own historical loss payment pattern
(temporary).
(a) through (c) [Reserved]. For further
guidance, see §1.846–2(a) through (c).
(d)Effect of section 338 election on
section 846(e) election.Forrulesre-
garding qualified stock purchases oc-
curring on or after April 10, 2006, see
§§1.338–1(b)(2)(vii) and 1.338–11T(e).
*****
Par. 15. Section 1.846–4 is revised to
read as follows:
§1.846–4 Effective dates.
(a)In general. Sections 1.846–1
through 1.846–3 apply to taxable years
beginning after December 31, 1986.
(b)Section 338 election.[Reserved].
For further guidance, see §1.846–2T(d).
*****
Par. 16. Section 1.846–4T is added to
read as follows:
1.846–4T Effective dates (temporary).
(a) [Reserved]. For further guidance,
see §1.846–2(a).
(b)Section 338 election. Section
1.846–2(d) applies to section 846(e) elec-
tions made with regard to a qualified stock
purchase made on or after April 10, 2006.
*****
Par. 17. Section 1.1060–1 is amended
by:
1. Revising paragraph (a)(2).
2. Adding new entries in paragraph
(a)(3) in the outline of topics for para-
graphs (b)(9) and (c)(5).
3. Adding new paragraphs (b)(9) and
(c)(5).
The revision and additions read as fol-
lows:
§1.1060–1 Special allocation rules for
certain asset acquisitions.
(a) * * *
(2)Effective dates—(i)In general.The
provisions of this section apply to any
asset acquisition occurring after March
15, 2001. However, paragraphs (b)(9) and
(c)(5) of this section apply only to applica-
ble asset acquisitions occurring on or after
April 10, 2006. A purchaser or a seller
may make an irrevocable election to apply
the rules in §§1.338–11 and 1.338–11T(d)
(including the applicable provisions in
§§1.197–2(g)(5),1.197–2T(g)(5)(ii),
1.381(c)(22)–1, 846 and 1060) to an ap-
plicable asset acquisition occurring before
April 10, 2006. Paragraph (a)(2)(ii) of this
section describes the time and manner of
the election for the purchaser and para-
graph (a)(2)(iii) of this section prescribes
the time and manner of the election for the
seller. The seller may make the election to
apply the regulations retroactively with-
out regard to whether the purchaser also
makes the election. For rules applicable
to asset acquisitions on or before March
15, 2001, see §1.1060–1T in effect before
March16,2001(see26CFRpart1revised
April 1, 2000).
(ii)Time and manner of making the
election for the purchaser. The purchaser
may make an election described in this
paragraph (a)(2) by attaching a statement
to its original or amended income tax re-
turn for the taxable year that includes the
applicable asset sale. The statement must
be entitled “ELECTION TO RETROAC-
TIVELY APPLY THE RULES IN
§§1.338–11 and 1.338–11T(d) (INCLUD-
ING THE APPLICABLE PROVISIONS
IN §§1.197–2(g)(5), 1.197–2T(g)(5)(ii),
1.381(c)(22)–1, 846 and 1060) TO AN
APPLICABLE ASSET ACQUISITION
COMPLETED BEFORE APRIL 10,
2006” and must include the following
information—
(A) The name and E.I.N. for the pur-
chaser; and
(B) The following declaration (or a
substantially similar declaration): THE
PURCHASER HAS AMENDED ITS IN-
COME TAX RETURNS FOR THE TAX-
ABLE YEAR THAT INCLUDES THE
APPLICABLE ASSET ACQUISITION
AND FOR ALL AFFECTED SUBSE-
QUENT YEARS TO REFLECT THE
RULES IN §§1.338–11 and 1.338–11T(d)
(INCLUDING THE APPLICABLE
PROVISIONS IN §§1.197–2(g)(5),
1.197–2T(g)(5)(ii), 1.381(c)(22)–1, 846
and 1060).
(iii)Time and manner of making the
election for the seller.Thesellermay
make an election described in this para-
graph (a)(2) by attaching a statement to
its original or amended income tax return
for the taxable year that includes the ap-
plicable asset sale. The statement must be
entitled “ELECTION TO RETROAC-
TIVELY APPLY THE RULES IN
§§1.338–11 and 1.338–11T(d) (INCLUD-
ING THE APPLICABLE PROVISIONS
IN §§1.197–2(g)(5), 1.197–2T(g)(5)(ii),
1.381(c)(22)–1, 846 and 1060) TO AN
APPLICABLE ASSET ACQUISITION
COMPLETED BEFORE APRIL 10,
2006” and must include the following
information—
(A) The name and E.I.N. for the seller;
and
(B) The following declaration (or a
substantially similar declaration): THE
SELLER HAS AMENDED ITS INCOME
TAX RETURNS FOR THE TAXABLE
YEAR THAT INCLUDES THE APPLI-
CABLE ASSET ACQUISITION AND
FOR ALL AFFECTED SUBSEQUENT
YEARS TO REFLECT THE RULES IN
§§1.338–11 and 1.338–11T(d) (INCLUD-
ING THE APPLICABLE PROVISIONS
IN §§1.197–2(g)(5), 1.197–2T(g)(5)(ii),
1.381(c)(22)–1, 846 and 1060).
(3) * * *
April 24, 20068382006–17 I.R.B.

*****
(b) * * *
(9) Insurance Business.
(c) * * *
(5) Insurance Business.
*****
(b) * * *
(9)Insurance business.Themererein-
surance of insurance contracts by an insur-
ance company is not an applicable asset ac-
quisition, even if it enables the reinsurer to
establish a customer relationship with the
owners of the reinsured contracts. How-
ever, a transfer of an insurance business is
an applicable asset acquisition if the pur-
chaser acquires significant business assets,
in addition to insurance contracts, to which
goodwill and going concern value could
attach. For rules regarding the treatment
of an applicable asset acquisition of an in-
surance business, see paragraph (c)(5) of
this section.
(c) * * *
(5)Insurance business.Ifthetradeor
business transferred is an insurance busi-
ness, the rules of this paragraph (c) are
modified by the principles of §1.338–11(a)
through (d). However, in transactions gov-
erned by section 1060, such principles ap-
ply even if the transfer of the trade or busi-
ness is effected in whole or in part through
indemnity reinsurance rather than assump-
tion reinsurance, and, for the insurer or
reinsurer, an insurance contract (includ-
ing an annuity or reinsurance contract) is
a Class VI asset regardless of whether it
is a section 197 intangible. In addition,
the principles of §1.338–11(f) through (h)
apply if the transferoccurs in connection
with the complete liquidation of the trans-
feror.
*****
PART 602—OMB CONTROL
NUMBERS UNDER PAPERWORK
REDUCTION ACT
Par. 18. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 19. In §602.101, paragraph (b)
is amended by revising the entry for
“1.1060–1” and adding the following en-
tries in numerical order to the table to read
as follows:
§602.101 OMB Control numbers.
*****
(b) * * *
CFR part or section where
identified and described
Current OMB
control No.
*****
1.338–11T........................................................... 1545–1990
*****
1.338(i)–1........................................................... 1545–1990
*****
1.381(c)(22)–1........................................................... 1545–1990
*****
1.1060–1........................................................... 1545–1658
1545–1990
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved March 7, 2006.
Eric Solomon,
Acting Deputy Assistant
Secretary of the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on April 7, 2006,
8:45 a.m., and published in the issue of the Federal Register
for April 10, 2006, 71 F.R. 17990)
Section 472.—Last-in,
First-out Inventories
26 CFR 1.472–1: Last-in, first-out inventories.
LIFO; price indexes; department
stores.The February 2006 Bureau of La-
bor Statistics price indexes are accepted
for use by department stores employing
the retail inventory and last-in, first-out
inventory methods for valuing inventories
for tax years ended on, or with reference
to, February 28, 2006.
Rev. Rul. 2006–23
The following Department Store Inven-
tory Price Indexes for February 2006 were
issued by the Bureau of Labor Statistics.
The indexes are accepted by the Inter-
nal Revenue Service, under § 1.472–1(k)
of the Income Tax Regulations and Rev.
Proc. 86–46, 1986–2 C.B. 739, for ap-
propriate application to inventories of
department stores employing the retail
inventory and last-in, first-out inventory
methods for tax years ended on, or with
reference to, February 28, 2006.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of depart-
ments, (b) three special combinations of
the major groups — soft goods, durable
goods, and miscellaneous goods, and (c) a
store total, which covers all departments,
including some not listed separately, ex-
cept for the following: candy, food, liquor,
tobacco, and contract departments.
2006–17 I.R.B.839April 24, 2006

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
Groups
Feb.
2005
Feb.
2006
Percent Change
from Feb. 2005
to Feb. 2006
1
1. PieceGoods .............................................479.3437.4-8.7
2. DomesticsandDraperies..................................533.5499.5-6.4
3. Women’sandChildren’sShoes ............................663.6678.82.3
4. Men’sShoes.............................................852.2869.82.1
5. Infants’Wear ............................................575.5563.8-2.0
6. Women’sUnderwear......................................527.1538.42.1
7. Women’sHosiery ........................................349.2346.1-0.9
8. Women’sandGirls’Accessories ...........................592.0570.3-3.7
9. Women’sOuterwearandGirls’Wear .......................346.8334.1-3.7
10. Men’sClothing ..........................................550.9519.4-5.7
11. Men’sFurnishings........................................574.2556.4-3.1
12. Boys’ClothingandFurnishings............................423.5400.2-5.5
13. Jewelry..................................................878.8857.6-2.4
14. Notions .................................................780.0793.61.7
15. ToiletArticlesandDrugs..................................998.71010.61.2
16. FurnitureandBedding ....................................601.8602.00.0
17. FloorCoverings..........................................602.4614.11.9
18. Housewares..............................................713.8698.0-2.2
19. MajorAppliances.........................................203.7204.30.3
20. RadioandTelevision......................................39.737.3-6.0
21. Recreation and Education
2
.................................79.777.3-3.0
22. Home Improvements
2
.....................................136.1139.22.3
23. Automotive Accessories
2
..................................113.9117.43.1
Groups1–15:SoftGoods .......................................556.7543.7-2.3
Groups16–20:DurableGoods...................................381.0375.1-1.5
Group
s 21–23: Misc. Goods
2
....................................
93.893.3-0.5
Store Total
3
..............................................494.3484.5-2.0
1
Absence of a minus sign before the percentage change in this column signifies a price increase.
2
In
dexes on a January 1986 = 100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor,
tobacco, and contract departments.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Michael Burkom of the Office
of Associate Chief Counsel (Income Tax
and Accounting). For further informa-
tion regarding this revenue ruling, contact
Mr. Burkom at (202) 622–7924 (not a
toll-free call).
April 24, 20068402006–17 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Weighted Average Interest
Rate Update
Notice 2006–39
Sections 412(b)(5)(B) and 412(l)(7)
(C)(i) of the Internal Revenue Code gen-
erally provide that the interest rates used
to calculate current liability for purposes
of determining the full funding limitation
under § 412(c)(7) and the required con-
tribution under § 412(l) must be within
a permissible range around the weighted
average of the rates of interest on 30-year
Treasury securities during the four-year
period ending on the last day before the
beginning of the plan year.
Notice 88–73, 1988–2 C.B. 383, pro-
vides guidelines for determining the
weighted average interest rate and the
resulting permissible range of interest
rates used to calculate current liability for
the purpose of the full funding limitation
of § 412(c)(7) of the Code.
Section 417(e)(3)(A)(ii)(II) defines
the applicable interest rate, which must
be used for purposes of determining the
minimum present value of a participant’s
benefit under § 417(e)(1) and (2), as the
annual rate of interest on 30-year Treasury
securities for the month before the date
of distribution or such other time as the
Secretary may by regulations prescribe.
Section 1.417(e)–1(d)(3) of the Income
Tax Regulations provides that the applica-
ble interest rate for a month is the annual
interest rate on 30-year Treasury securi-
ties as specified by the Commissioner for
that month in revenuerulings, notices or
other guidance published in the Internal
Revenue Bulletin.
The rate of interest on 30-year Treasury
securities for March 2006 is 4.73 percent.
The Service has determined this rate as the
monthly average of the daily determina-
tion of yield on the 30-year Treasury bond
maturing in February 2036.
The following 30-year Treasury rates
were determined for the plan years begin-
ning in the month shown below.
For Plan Years
30-Year
Treasury90% to 105%90% to 110%
Beginning in:WeightedPermissiblePermissible
MonthYearAverageRangeRange
April20064.824.34 to 5.064.34 to 5.30
Drafting Information
The principal authors of this notice
are Paul Stern and Tony Montanaro of
the Employee Plans, Tax Exempt and
Government Entities Division. For fur-
ther information regarding this notice,
please contact the Employee Plans’ tax-
payer assistance telephone service at
1–877–829–5500 (a toll-free number),
between the hours of 8:30 a.m. and
4:30 p.m. Eastern time, Monday through
Friday. Mr. Stern may be reached at
1–202–283–9703. Mr. Montanaro may
be reached at 1–202–283–9714. The tele-
phone numbers in the preceding sentences
are not toll-free.
26 CFR 601.601: Rules and regulations.
(Also Part I, §§ 25, 103, 143; 1.25–4T, 1.103–1,
6a.103A–2.)
Rev. Proc. 2006–20
SECTION 1. PURPOSE
This revenue procedure provides guid-
ance with respect to the United States and
area median gross income figures that are
to be used by issuers of qualified mortgage
bonds, as defined in § 143(a) of the Inter-
nal Revenue Code, and issuers of mortgage
credit certificates, as defined in § 25(c), in
computing the housing cost/income ratio
described in § 143(f)(5).
SECTION 2. BACKGROUND
.01 Section 103(a) provides that, ex-
cept as provided in § 103(b), gross income
does not include interest on any state or
local bond. Section 103(b)(1) provides
that § 103(a) shall not apply to any pri-
vate activity bond that is not a qualified
bond (within the meaning of § 141). Sec-
tion 141(e) provides that the term “qual-
ified bond” includes any private activity
bond that (1) is a qualified mortgage bond,
(2) meets the applicable volume cap re-
quirements under § 146, and (3) meets the
applicable requirements under § 147.
.02 Section 143(a)(1) provides that the
term “qualified mortgage bond” means a
bond that is issued as part of a “qualified
mortgage issue”. Section 143(a)(2)(A)
provides that the term “qualified mort-
gage issue” means an issue of one or more
bonds by a state or political subdivision
thereof, but only if (i) all proceeds of the
issue (exclusive of issuance costs and a
reasonably required reserve) are to be used
to finance owner-occupied residences; (ii)
the issue meets the requirements of sub-
sections (c), (d), (e), (f), (g), (h), (i), and
(m)(7) of § 143; (iii) the issue does not
meet the private business tests of para-
graphs (1) and (2) of § 141(b); and (iv)
with respect to amounts received more
than 10 years after the date of issuance,
repayments of $250,000 or more of prin-
cipal on financing provided by the issue
are used not later than the close of the first
semi-annual period beginning after the
date the prepayment (or complete repay-
ment) is received to redeem bonds that are
part of the issue.
.03 Section 143(f) imposes eligibility
requirements concerning the maximum
income of mortgagors for whom financing
may be provided by qualified mortgage
bonds. Section 25(c)(2)(A)(iii)(IV) pro-
vides that recipients of mortgage credit
certificates must meet the income re-
quirements of § 143(f). Generally, under
§§ 143(f)(1) and 25(c)(2)(A)(iii)(IV),
these income requirements are met only
if all owner-financing under a qualified
mortgage bond and all certified indebt-
edness amounts under a mortgage credit
certificate program are provided to mort-
gagors whose family income is 115 percent
2006–17 I.R.B.841April 24, 2006

or less of the applicable median family in-
come. Under § 143(f)(6), the income
limitation is reduced to 100 percent of the
applicable median family income if there
are fewer than three individuals in the
family of the mortgagor.
.04 Section 143(f)(4) provides that the
term “applicable median family income”
means the greater of (A) the area median
gross income for the area in which the res-
idence is located, or (B) the statewide me-
dian gross income for the state in which the
residence is located.
.05 Section 143(f)(5) provides for an
upward adjustment of the income limita-
tions in certain high housing cost areas.
Under § 143(f)(5)(C), a high housing
cost area is a statistical area for which
the housing cost/income ratio is greater
than 1.2. The housing cost/income ratio
is determined under § 143(f)(5)(D) by
dividing (a) the applicable housing price
ratio by (b) the ratio that the area median
gross income bears to the median gross
income for the United States. The applica-
ble housing price ratio is the new housing
price ratio (new housing average purchase
price for the area divided by the new hous-
ing average purchase price for the United
States) or the existing housing price ratio
(existing housing average area purchase
price divided by the existing housing aver-
age purchase price for the United States),
whichever results in the housing cost/in-
come ratio being closer to 1. This income
adjustment applies only to bonds issued,
and nonissued bond amounts elected, after
December 31, 1988.See§ 4005(h) of the
Technical and Miscellaneous Revenue Act
of 1988, 1988–3 C.B. 1, 311 (1988).
.06 The Department of Housing and
Urban Development (HUD) has com-
puted the median gross income for the
United States, the states, and statisti-
cal areas within the states. The income
information was released to the HUD
regional offices on March 8, 2006, and
may be obtained by calling the HUD
reference service at 1–800–245–2691.
The income information is also avail-
able at HUD’s World Wide Web site,
http:huduser.org/datasets/il.html,which
provides a menu from which you may
select the year and type of data of interest.
The Internal Revenue Service annually
publishes the median gross income for the
United States.
.07 The most recent nationwide aver-
age purchase prices and average area pur-
chase price safe harbor limitations were
published on April 3, 2006, in Rev. Proc.
2006–17, 2006–14 I.R.B. 709.
SECTION 3. APPLICATION
.01 When computing the housing
cost/income ratio under § 143(f)(5), is-
suers of qualified mortgage bonds and
mortgage credit certificates must use
$59,600 as the median gross income for
the United States.See§2.06ofthisrev-
enue procedure.
.02 When computing the housing
cost/income ratio under § 143(f)(5), is-
suers of qualified mortgage bonds and
mortgage credit certificates must use the
area median gross income figures released
by HUD on March 8, 2006.See§2.06of
this revenue procedure.
SECTION 4. EFFECT ON OTHER
REVENUE PROCEDURES
.01 Rev. Proc. 2005–22, 2005–15
I.R.B. 886, is obsolete except as provided
in § 5.02 of this revenue procedure.
.02 This revenue procedure does not af-
fect the effective date provisions of Rev.
Rul. 86–124, 1986–2 C.B. 27. Those ef-
fective date provisions will remain opera-
tive at least until the Service publishes a
new revenue ruling that conforms the ap-
proach to effective dates set forth in Rev.
Rul. 86–124 to the general approach taken
in this revenue procedure.
SECTION 5. EFFECTIVE DATES
.01 Issuers must use the United States
and area median gross income figures
specified in section 3 of this revenue
procedure for commitments to provide fi-
nancing that are made, or (if the purchase
precedes the financing commitment) for
residences that are purchased, in the period
that begins on March 8, 2006, and ends on
the date when these United States and area
median gross income figures are rendered
obsolete by a new revenue procedure.
.02 Notwithstanding section 5.01 of this
revenue procedure, issuers may continue
to rely on the United States and area me-
dian gross income figures specified in Rev.
Proc. 2005–22 with respect to bonds orig-
inally sold and nonissued bond amounts
elected not later than May 24, 2006, if
the commitments or purchases described
in § 5.01 are made not later than July 23,
2006.
DRAFTING INFORMATION
The principal author of this revenue
procedure is David White of the Office of
Assistant Chief Counsel (Exempt Organi-
zations/Employment Tax/Government En-
tities). For further information regarding
this revenue procedure, contact Mr. White
at (202) 622–3980 (not a toll-free call).
April 24, 20068422006–17 I.R.B.

Part IV. Items of General Interest
Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulation
Application of Section 338 to
Insurance Companies
REG–146384–05
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tion.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing temporary regulations
(T.D. 9257) that provide guidance under
section 197 that apply to the treatment
of certain insurance contracts assumed in
an assumption reinsurance transaction and
section 338 that apply to a deemed sale
or acquisition of an insurance company’s
assets pursuant to an election under sec-
tion 338 of the Internal Revenue Code, to a
sale or acquisition of an insurance trade or
business subject to section 1060, and to the
acquisition of insurance contracts through
assumption reinsurance. The text of those
regulations also serve as the text of these
proposed regulations.
DATES: Written or electronic comments,
and a request for a public hearing, must be
received by July 10, 2006.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–146384–05), room
5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–146384–05),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC, or sent electronically, via
the IRS internet site atwww.irs.gov/regs
or via the Federal eRulemaking Por-
tal atwww.regulations.gov(IRS and
REG–146384–05).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed reg-
ulation, Mark J. Weiss, (202) 622–7790,
concerning submissions of comments,
Richard Hurst, (202) 622–7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
Temporary Regulations in this issue of
the Bulletin amend 26 CFR Part 1 relating
to section 338. The temporary regulations
add §§1.197–2T(g)(5)(ii), 1.338–11T(d),
and 1.338–11T(e). The texts of those reg-
ulations also serve as the text of these pro-
posed regulations. The preamble to the
temporary regulations explain the amend-
ments included in these proposed regula-
tions.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. Further,
it is hereby certified that these proposed
regulations will not have a significant eco-
nomic impact on a substantial number of
small entities. This certification is based
on the fact that these regulations do not
have a substantial economic impact be-
cause they merely provide guidance about
the operation of the tax law in the context
of acquisitions of insurance companies and
businesses. Moreover, they are expected
to apply predominantly to transactions in-
volving larger businesses. Accordingly, a
Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) is not required. Pursuant to section
7805(f) of the Code, this notice of pro-
posed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Comments and Requests for a P
ublic
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(a signed original and eight copies) that
are submitted timely to the IRS. Alterna-
tively, taxpayers may submit comments
electronically via the IRS Internet site at
www.irs.gov/regsor via the Federal eRule-
making Portal atwww.regulations.gov.
The IRS and Treasury Department request
comments on the clarity of the proposed
rules and how they can be made easier to
understand. All comments will be avail-
able for public inspection and copying.
A public hearing may be scheduled if
requested in writing by any person who
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place of the hearing will be
published in theFederal Register.
Drafting Information
The principal author of these regula-
tions is Mark J. Weiss of the Office of As-
sociate Chief Counsel (Corporate). Other
personnel from Treasury and the IRS par-
ticipated in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is 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 * * *
Section 1.197–2 also issued under 26
U.S.C. 197. * * *
Section 1.338–11 also issued under 26
U.S.C. 338. * * *
Par. 2. Section 1.197–2 is amended
by revising paragraph (g)(5)(ii) to read as
follows:
§1.197–2T Amortization of goodwill and
certain other intangibles (temporary).
*****
(g) * * *
(5)(ii)***[Thetextoftheproposed
§1.197–2(g)(5)(ii) is the same as the text
for §1.197–2T(g)(5)(ii) published else-
where in this issue of the Bulletin].
*****
Par. 3. Section 1.338–1 is amended
by redesignating existing paragraph
(b)(2)(vii) as paragraph (b)(2)(viii) and
2006–17 I.R.B.843April 24, 2006

adding new paragraph (b)(2)(vii) to read
as follows:
§1.338–1 General principles; status of old
target and new target.
*****
(b) * * *
(2) * * *
(vii)[Thetextoftheproposed
§1.338–1(b)(2)(vii) is the same as the
text for §1.338–1T(b)(2)(vii) published
elsewhere in this issue of the Bulletin].
*****
Par. 4. Section 1.338–11 is amended
by revising paragraphs (d) and (e) to read
as follows:
§1.338–11 Effect of section 338 election
on insurance company targets.
*****
(d)Reserve increases by new target af-
ter the deemed asset sale.
[The text of the proposed §1.338–11(d)
is the same as the text for §1.338–11T(d)
published elsewhere in this issue of the
Bulletin].
(e)Effect of section 338 election on sec-
tion 846(e) election.
[The text of the proposed §1.338–11(e)
is the same as the text for §1.338–11T(e)
published elsewhere in this issue of the
Bulletin].
*****
Par. 5. Section 1.846–2 is amended
by adding new paragraph (d) to read as
follows:
§1.846–2 Election by taxpayer to use its
own historical loss payment pattern.
*****
(d)Effect of section 338 election on sec-
tion 846(e) election.
[The text of the proposed §1.846–2(d)
is the same as the text for §1.846–2T(d)
published elsewhere in this issue of the
Bulletin].
*****
Par. 6. Section 1.846–4 is amended by:
1. The section heading is revised.
2. Redesignating the existing text as
paragraph (a).
3. Adding new paragraph (b).
The revision and addition read as fol-
lows:
§1.846–4 Effective dates.
*****
(b)Section 338 election.
[The text of the proposed §1.846–4(b)
is the same as the text for §1.846–4T(b)
published elsewhere in this issue of the
Bulletin].
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on April 7, 2006,
8:45 a.m., and published in the issue of the Federal Register
for April 10, 2006, 71 F.R. 18053)
Announcement of Disciplinary Actions Involving
Attorneys, Certified Public Accountants, Enrolled Agents,
and Enrolled Actuaries — Suspensions, Censures,
Disbarments, and Resignations
Announcement 2006-23
Under Title 31, Code of Federal Regu-
lations, Part 10, attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries may not accept assistance from,
or assist, any person who is under disbar-
ment or suspension from practice before
the Internal Revenue Service if the assis-
tance relates to a matter constituting prac-
tice before the Internal Revenue Service
and may not knowingly aid or abet another
person to practice before the Internal Rev-
enue Service during a period of suspen-
sion, disbarment, or ineligibility of such
other person.
To enable attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries to identify persons to whom
these restrictions apply, the Director, Of-
fice of Professional Responsibility, will
announce in the Internal Revenue Bulletin
their names, their city and state, their pro-
fessional designation, the effective date
of disciplinary action, and the period of
suspension. This announcement will ap-
pear in the weekly Bulletin at the earliest
practicable date after such action and will
continue to appear in the weekly Bulletins
for five successive weeks.
April 24, 20068442006–17 I.R.B.

Consent Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, an attorney, certified pub-
lic accountant, enrolled agent, or enrolled
actuary, in order to avoid the institution
or conclusion of a proceeding for his or
her disbarment or suspension from prac-
tice before the Internal Revenue Service,
may offer his or her consent to suspension
from such practice. The Director, Office
of Professional Responsibility, in his dis-
cretion, may suspend an attorney, certified
public accountant, enrolled agent, or en-
rolled actuary in accordance with the con-
sent offered.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue Ser-
vice:
NameAddressDesignationDate of Suspension
Hoft, James D.Nutley, NJCPAIndefinite
from
August 10, 2005
Salver, IsaacBay Harber Islands, FLCPASeptember 19, 2005
to
June 18, 2007
Woods, Dalton C.Carrollton, TXEnrolled AgentIndefinite
from
October 15, 2005
Morrissette, Doris G.Lowell,MAEnrolled AgentIndefinite
from
November 1, 2005
Dale, Edward R.Stockton, CACPAIndefinite
from
November 1, 2005
Grossman, Israel G.New York, NYAttorneyNovember 15, 2005
to
May 14, 2007
Edmonds, Joseph M.Charlotte, NCEnrolled ActuaryNovember 16, 2005
to
March 15, 2006
Rubin, Stuart L.Coral Springs, FLCPAIndefinite
from
December 7, 2005
Sanger, Brett D.Oklahoma City, OKAttorneyIndefinite
from
January 1, 2006
Berkowitz, Ira T.Simi Valley, CACPAIndefinite
from
January 9, 2006
Caylor, John D.Long Lake, MNCPAIndefinite
from
January 12, 2006
Saldana, Oscar M.Laredo, TXCPAIndefinite
from
January 15, 2006
2006–17 I.R.B.845April 24, 2006

NameAddressDesignationDate of Suspension
Bruck, Lawrence S.Newton, PACPAIndefinite
from
January 16, 2006
Sneathen, Lowell D.Orange, CACPAIndefinite
from
January 18, 2006
Roberson, GeorgeLeesburg, VACPAIndefinite
from
January 17, 2006
Dugan, Lawrence E.Alta, IAAttorneyIndefinite
from
February 1, 2006
Frascella, RussellPound Ridge, NYCPAIndefinite
from
February 1, 2006
Smith, David B.Kettering, OHEnrolled AgentIndefinite
from
February 13, 2006
Whiteside, Thomas L.Atlanta, GAAttorneyIndefinite
from
February 13, 2006
Bednarz, Jr., MichaelFramingham, MAAttorneyIndefinite
from
February 13, 2006
Alexander, Herald J.A.Atlanta, GAAttorneyIndefinite
from
February 20, 2006
Bartels, KyleNorth Salem, NYEnrolled AgentIndefinite
from
February 21, 2006
Baker, Jibade A.Indianapolis, INCPAMarch 13, 2006
to
March 12, 2008
Morris, R. ScottCorpus Christi, TXCPAIndefinite
from
March 16, 2006
Kenny, Stan M.Wichita, KSAttorneyIndefinite
from
May 1, 2006
April 24, 20068462006–17 I.R.B.

Expedited Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, the Director, Office of Pro-
fessional Responsibility, is authorized to
immediately suspend from practice before
the Internal RevenueService any practi-
tioner who, within five years from the date
the expedited proceeding is instituted (1)
has had a license to practice as an attor-
ney, certified public accountant, or actuary
suspended or revoked for cause or (2) has
been convicted of certain crimes.
The following individuals have been
placed under suspension from practice be-
fore the Internal Revenue Service by virtue
of the expedited proceeding provisions:
NameAddressDesignationDate of Suspension
Haugabrook, EarlUpper Montclair, NJCPAIndefinite
from
September 27, 2005
Patterson, Kenneth R.Plano, TXCPAIndefinite
from
October 19, 2005
Blackburn, Randall D.Laurinburg, NCCPAIndefinite
from
October 19, 2005
Coe, Sean M.Sahuarita,AZAttorneyIndefinite
from
October 12, 2005
Lim, Ricarda L.Sacramento, CAAttorneyIndefinite
from
November 1, 2005
Bridges, Lynden P.Golden, COCPAIndefinite
from
November 14, 2005
Curcio, Gregory J.New York, NYAttorneyIndefinite
from
November 14, 2005
Silverton, Ronald R.Pacific Palisades, CAAttorneyIndefinite
from
November 14, 2005
Hartigan, Seth P.Minneapolis, MNAttorneyIndefinite
from
November 14, 2005
Carlson, Richard E.Chappell, NEAttorneyIndefinite
from
November 14, 2005
Veres, Robert D.Phoenix, AZCPAIndefinite
from
November 14, 2005
Noble, Gregory P.Corvallis, ORAttorneyIndefinite
from
December 2, 2005
2006–17 I.R.B.847April 24, 2006

NameAddressDesignationDate of Suspension
Parker, Oscie K.Thomasville, NCAttorneyIndefinite
from
December 15, 2005
Connor, Jr. William J.Kernersville, NCAttorneyIndefinite
from
December 15, 2005
Cassidy, Maureen E.Murphy, IDAttorneyIndefinite
from
December 15, 2005
Harrison, Rodney L.Urbana, ILAttorneyIndefinite
from
December 15, 2005
Cagle, Carol L.Alton, ILAttorneyIndefinite
from
December 15, 2005
Knaff, Philip J.Burr Ridge, ILAttorneyIndefinite
from
December 15, 2005
Pence, Thomas R.Cedar Rapids, IAAttorneyIndefinite
from
December 15, 2005
Tunney, John A.Freehold, NJAttorneyIndefinite
from
December 15, 2005
Dasent, CarltonMattapoisett, MAAttorneyIndefinite
from
December 15, 2005
Robeznieks, John O.Palatine, ILAttorneyIndefinite
from
December 15, 2005
Landman, Nathaniel M.St. Peters, MOAttorneyIndefinite
from
December 15, 2005
Levin, Herbert M.Bolingbrook, ILAttorneyIndefinite
from
December 15, 2005
Wade, Jeffrey L.Louisville, KYAttorneyIndefinite
from
December 15, 2005
Cozzarelli, Frank J.North Caldwell, NJAttorneyIndefinite
from
December 15, 2005
Brooks, Jane E.St. Paul, MNAttorneyIndefinite
from
December 15, 2005
April 24, 20068482006–17 I.R.B.

NameAddressDesignationDate of Suspension
Mulvahill, James P.Plymouth, MNAttorneyIndefinite
from
December 15, 2005
Bernstein, RalphChicago, ILAttorneyIndefinite
from
December 15, 2005
Tousey, Robert R.Ellicott City, MDAttorneyIndefinite
from
December 15, 2005
Schatz, Allen E.Shorewood, WIAttorneyIndefinite
from
December 16, 2005
Olson, David E.New Port Richey, FLAttorneyIndefinite
from
December 16, 2005
Shagory, Edward J.Boston, MAAttorneyIndefinite
from
December 20, 2005
Wintroub, Edward L.Omaha, NEAttorneyIndefinite
from
December 20, 2005
Johnson, Jr. Walter T.Greensboro, NCAttorneyIndefinite
from
December 27, 2005
Szaro, Stanley J.New York, NYAttorneyIndefinite
from
December 27, 2005
Recchione, LouisWoodcliff Lake, NJAttorneyIndefinite
from
December 27, 2005
Pepper, LouisGreat Neck, NYAttorneyIndefinite
from
January 2, 2006
Fritzshall, Robert S.Skokie, ILAttorneyIndefinite
from
January 9, 2006
DiCaprio, Joseph A.Cherry Valley, ILAttorneyIndefinite
from
January 9, 2006
Rosenberg, Keith A.N. Bethesda, MDAttorneyIndefinite
from
January 9, 2006
Boudreau, Patricia L.Lexington, MAAttorneyIndefinite
from
January 9, 2006
Webb, Daniel F.Milwaukee, WIAttorneyIndefinite
from
January 9, 2006
2006–17 I.R.B.849April 24, 2006

NameAddressDesignationDate of Suspension
Miranda, Jesse R.Phoenix, AZAttorneyIndefinite
from
January 9, 2006
Kuzel, GaryPlainfield, ILCPAIndefinite
from
January 9, 2006
Nomura, Edmund Y.Phoenix, AZAttorneyIndefinite
from
January 9, 2006
Mason, Robert J.Colorado Springs, COAttorneyIndefinite
from
January 9, 2006
Land, Janet P.Stedman, NCAttorneyIndefinite
from
January 9, 2006
Fitzgerald, MauriceLexington, MAAttorneyIndefinite
from
January 9, 2006
Valadez, Librado R.San Antonio, TXCPAIndefinite
from
January 9, 2006
Williams, Frank C.Houston, TXAttorneyIndefinite
from
January 9, 2006
LaGrand, TaraNaples, FLCPAIndefinite
from
January 9, 2006
Harris, Susan L.Houston, TXAttorneyIndefinite
from
January 9, 2006
Hobbs, James B.Amherst, NHAttorneyIndefinite
from
January 9, 2006
Momsen, JoelNapa, CAAttorneyIndefinite
from
January 10, 2006
Lambert, Brett J.Fort Collins, COAttorneyIndefinite
from
January 10, 2006
Lefevre, Keith H.Longwood, FLAttorneyIndefinite
from
January 13, 2006
Bronner, BernardGreat Neck, NYAttorneyIndefinite
from
January 18, 2006
Kuhnreich, Robert M.New York, NYAttorneyIndefinite
from
January 20, 2006
April 24, 20068502006–17 I.R.B.

NameAddressDesignationDate of Suspension
Walser, Vicki L.Valencia, CAAttorneyIndefinite
from
January 20, 2006
Menter, JeffreyCentennial, COAttorneyIndefinite
from
January 23, 2006
Catagnus, Patricia A.Richardson, TXCPAIndefinite
from
January 23, 2006
Matthews, Elizabeth B.Denver, COAttorneyIndefinite
from
January 23, 2006
Sisselman, Barry A.Temecula, CAAttorneyIndefinite
from
January 23, 2006
Armstrong, Thomas I.Irvine, CAAttorneyIndefinite
from
January 23, 2006
Chestnut, A. JohnsonFayetteville, NCCPAIndefinite
from
January 24, 2006
Kerby, John C.Desoto, TXCPAIndefinite
from
February 2, 2006
Phillips, John D.Albuquerque, NMAttorneyIndefinite
from
February 2, 2006
Broomas, JamesBaytown, TXAttorneyIndefinite
from
February 2, 2006
Wilson, Joel M.Denver, NCCPAIndefinite
from
February 2, 2006
Olivieri Jr., Robert C.Bensalem, PACPAIndefinite
from
February 7, 2006
Scher, Robert A.Port Washington, NYAttorneyIndefinite
from
February 15, 2006
Mintz, David J.Evergreen, COAttorneyIndefinite
from
February 15, 2006
Abelson, Richard H.White Plains, NYAttorneyIndefinite
from
February 15, 2006
Drum, Joel A.Van Nuys, CAAttorneyIndefinite
from
February 17, 2006
2006–17 I.R.B.851April 24, 2006

NameAddressDesignationDate of Suspension
Nissenbaum, SusanGrafton, MAAttorneyIndefinite
from
February 22, 2006
Mahon, Edward J.Warenville, ILAttorneyIndefinite
from
February 22, 2006
Nash, BruceChicago, ILAttorneyIndefinite
from
February 22, 2006
Duru, Ike E.Powder Springs, GAAttorneyIndefinite
from
February 22, 2006
Hirth, Gary E.Phoenix, AZAttorneyIndefinite
from
February 22, 2006
Madden, James G.Hudson, ILAttorneyIndefinite
from
February 22, 2006
Thomas, Robert C.Chicago,ILAttorneyIndefinite
from
February 22, 2006
Moore, Jr. William D.Libertyville, ILAttorneyIndefinite
from
February 22, 2006
Weit Jr., John V.Homewood, ILAttorneyIndefinite
from
February 22, 2006
Berlin, Marc D.Chicago, ILAttorneyIndefinite
from
February 22, 2006
Lebensbaum, HenryAndover, MDAttorneyIndefinite
from
February 22, 2006
Leonhart, Georgia L.Ocean View, DEAttorneyIndefinite
from
February 22, 2006
Wolf, Marvin H.Boynton Beach, FLAttorneyIndefinite
from
February 22, 2006
Dorsa, Lawrence R.Oceanside, CAAttorneyIndefinite
from
February 23, 2006
Battista Jr., Gerard F.Norwell, MAAttorneyIndefinite
from
February 27, 2006
Koehn, Charles R.Green Bay, WIAttorneyIndefinite
from
February 28, 2006
April 24, 20068522006–17 I.R.B.

NameAddressDesignationDate of Suspension
Phillips, Claudia L.Oak Park, CAAttorneyIndefinite
from
March 9, 2006
Zarate, Gustavo A.Pasadena, CAAttorneyIndefinite
from
March 9, 2006
Schorling, Douglas D.Fresno, CAAttorneyIndefinite
from
March 9, 2006
Bowman Jr., John J.Gibsonia, PAEnrolled AgentIndefinite
from
March 9, 2006
Jordan, Richard W.Austin, TXCPAIndefinite
from
March 9, 2006
Rothenberg, Steven G.Kingston, NYAttorneyIndefinite
from
March 24, 2006
Osterloh, Douglas D.Boring, ORAttorneyIndefinite
from
March 24, 2006
Benevenia, EugeneTucson, AZAttorneyIndefinite
from
March 24, 2006
Krombach, CharlesBrookfield, WIAttorneyIndefinite
from
March 24, 2006
Caldwell, David G.Austin, TXAttorneyIndefinite
from
March 24, 2006
Zwibel, DavidLawrence, NYCPAIndefinite
from
March 31, 2006
Suspensions From Practice Before the Internal Revenue
Service After Notice and an Opportunity for a Proceeding
Under Title 31, Code of Federal Reg-
ulations, Part 10, after notice and an op-
portunity for a proceeding before an ad-
ministrative law judge, the following indi-
viduals have been placed under suspension
from practice before the Internal Revenue
Service:
NameAddressDesignationEffective Date
Fitzpatrick, PamelaArroyo Grande, CACPANovember 14, 2005
to
November 13, 2009
2006–17 I.R.B.853April 24, 2006

Disbarments From Practice Before the Internal Revenue
Service After Notice and an Opportunity for a Proceeding
Under Title 31, Code of Federal Regu-
lations, Part 10, after notice and an oppor-
tunity for a proceeding before an adminis-
trative law judge, the following individu-
als have been disbarred from practice be-
fore the Internal Revenue Service:
NameAddressDesignationEffective Date
Edgar, Richard A.Los Angeles, CACPAOctober 3, 2005
Censure Issued by Consent
Under Title 31, Code of Federal Reg-
ulations, Part 10, in lieu of a proceeding
being instituted or continued, an attorney,
certified public accountant, enrolled agent,
or enrolled actuary, may offer his or her
consent to the issuance of a censure. Cen-
sure is a public reprimand.
The following individuals have con-
sented to the issuance of a Censure:
NameAddressDesignationDate of Censure
Porter, Donald E.Burleson, TXCPAFebruary 10, 2006
Resignations of Enrolled Agents
Under Title 31, Code of Federal Regu-
lations, Part 10, an enrolled agent, in or-
der to avoid the institution or conclusion
of a proceeding for his or her disbarment
or suspension from practice before the In-
ternal Revenue Service, may offer his or
her resignation as an enrolled agent. The
Director, Office of Professional Responsi-
bility, in his discretion, may accept the of-
fered resignation.
The Director, Office of Professional
Responsibility, has accepted offers of res-
ignation as an enrolled agent from the
following individuals:
NameAddressDate of Resignation
Casagna, Ronald M.Tustin, CANovember 25, 2005
April 24, 20068542006–17 I.R.B.

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.
2006–17 I.R.B.iApril 24, 2006

Numerical Finding List
1
Bulletin 2006–1 through 2006–17
Announcements:
2006-1, 2006-1 I.R.B.260
2006-2, 2006-2 I.R.B.300
2006-3, 2006-3 I.R.B.327
2006-4, 2006-3 I.R.B.328
2006-5, 2006-4 I.R.B.378
2006-6, 2006-4 I.R.B.340
2006-7, 2006-4 I.R.B.342
2006-8, 2006-4 I.R.B.344
2006-9, 2006-5 I.R.B.392
2006-10, 2006-5 I.R.B.393
2006-11, 2006-6 I.R.B.420
2006-12, 2006-6 I.R.B.421
2006-13, 2006-7 I.R.B.462
2006-14, 2006-8 I.R.B.516
2006-15, 2006-11 I.R.B.632
2006-16, 2006-12 I.R.B.653
2006-17, 2006-12 I.R.B.653
2006-18, 2006-12 I.R.B.654
2006-19, 2006-13 I.R.B.674
2006-20, 2006-13 I.R.B.675
2006-21, 2006-14 I.R.B.703
2006-22, 2006-16 I.R.B.779
2006-23, 2006-14 I.R.B.729
2006-24, 2006-16 I.R.B.820
Court Decisions:
2081, 2006-13 I.R.B.656
2082, 2006-14 I.R.B.697
Notices:
2006-1, 2006-4 I.R.B.347
2006-2, 2006-2 I.R.B.278
2006-3, 2006-3 I.R.B.306
2006-4, 2006-3 I.R.B.307
2006-5, 2006-4 I.R.B.348
2006-6, 2006-5 I.R.B.385
2006-7, 2006-10 I.R.B.559
2006-8, 2006-5 I.R.B.386
2006-9, 2006-6 I.R.B.413
2006-10, 2006-5 I.R.B.386
2006-11, 2006-7 I.R.B.457
2006-12, 2006-7 I.R.B.458
2006-13, 2006-8 I.R.B.496
2006-14, 2006-8 I.R.B.498
2006-15, 2006-8 I.R.B.501
2006-16, 2006-9 I.R.B.538
2006-17, 2006-10 I.R.B.559
2006-18, 2006-8 I.R.B.502
2006-19, 2006-9 I.R.B.539
2006-20, 2006-10 I.R.B.560
2006-21, 2006-12 I.R.B.643
Notices— Continued:
2006-22, 2006-11 I.R.B.593
2006-23, 2006-11 I.R.B.594
2006-24, 2006-11 I.R.B.595
2006-25, 2006-11 I.R.B.609
2006-26, 2006-11 I.R.B.622
2006-27, 2006-11 I.R.B.626
2006-28, 2006-11 I.R.B.628
2006-29, 2006-12 I.R.B.644
2006-31, 2006-15 I.R.B.751
2006-32, 2006-13 I.R.B.677
2006-33, 2006-15 I.R.B.754
2006-34, 2006-14 I.R.B.705
2006-35, 2006-14 I.R.B.708
2006-36, 2006-15 I.R.B.756
2006-38, 2006-16 I.R.B.777
2006-39, 2006-17 I.R.B.841
Proposed Regulations:
REG-107722-00, 2006-4 I.R.B.354
REG-104385-01, 2006-5 I.R.B.389
REG-122380-02, 2006-10 I.R.B.563
REG-137243-02, 2006-3 I.R.B.317
REG-133446-03, 2006-2 I.R.B.299
REG-113365-04, 2006-10 I.R.B.580
REG-148568-04, 2006-6 I.R.B.417
REG-106418-05, 2006-7 I.R.B.461
REG-138879-05, 2006-8 I.R.B.503
REG-143244-05, 2006-6 I.R.B.419
REG-146384-05, 2006-17 I.R.B.843
REG-146459-05, 2006-8 I.R.B.504
REG-157271-05, 2006-12 I.R.B.652
REG-164247-05, 2006-15 I.R.B.758
Revenue Procedures:
2006-1, 2006-1 I.R.B.1
2006-2, 2006-1 I.R.B.89
2006-3, 2006-1 I.R.B.122
2006-4, 2006-1 I.R.B.132
2006-5, 2006-1 I.R.B.174
2006-6, 2006-1 I.R.B.204
2006-7, 2006-1 I.R.B.242
2006-8, 2006-1 I.R.B.245
2006-9, 2006-2 I.R.B.278
2006-10, 2006-2 I.R.B.293
2006-11, 2006-3 I.R.B.309
2006-12, 2006-3 I.R.B.310
2006-13, 2006-3 I.R.B.315
2006-14, 2006-4 I.R.B.350
2006-15, 2006-5 I.R.B.387
2006-16, 2006-9 I.R.B.539
2006-17, 2006-14 I.R.B.709
2006-18, 2006-12 I.R.B.645
2006-19, 2006-13 I.R.B.677
2006-20, 2006-17 I.R.B.841
Revenue Rulings:
2006-1, 2006-2 I.R.B.261
2006-2, 2006-2 I.R.B.261
2006-3, 2006-2 I.R.B.276
2006-4, 2006-2 I.R.B.264
2006-5, 2006-3 I.R.B.302
2006-6, 2006-5 I.R.B.381
2006-7, 2006-6 I.R.B.399
2006-8, 2006-9 I.R.B.520
2006-9, 2006-9 I.R.B.519
2006-10, 2006-10 I.R.B.557
2006-11, 2006-12 I.R.B.635
2006-12, 2006-12 I.R.B.637
2006-13, 2006-13 I.R.B.656
2006-14, 2006-15 I.R.B.740
2006-15, 2006-13 I.R.B.661
2006-16, 2006-14 I.R.B.694
2006-17, 2006-15 I.R.B.748
2006-18, 2006-15 I.R.B.743
2006-19, 2006-15 I.R.B.749
2006-20, 2006-15 I.R.B.746
2006-21, 2006-15 I.R.B.745
2006-22, 2006-14 I.R.B.687
2006-23, 2006-17 I.R.B.839
Tax Conventions:
2006-6, 2006-4 I.R.B.340
2006-7, 2006-4 I.R.B.342
2006-8, 2006-4 I.R.B.344
2006-19, 2006-13 I.R.B.674
2006-20, 2006-13 I.R.B.675
2006-21, 2006-14 I.R.B.703
Treasury Decisions:
9231, 2006-2 I.R.B.272
9232, 2006-2 I.R.B.266
9233, 2006-3 I.R.B.303
9234, 2006-4 I.R.B.329
9235, 2006-4 I.R.B.338
9236, 2006-5 I.R.B.382
9237, 2006-6 I.R.B.394
9238, 2006-6 I.R.B.408
9239, 2006-6 I.R.B.401
9240, 2006-7 I.R.B.454
9241, 2006-7 I.R.B.427
9242, 2006-7 I.R.B.422
9243, 2006-8 I.R.B.475
9244, 2006-8 I.R.B.463
9245, 2006-14 I.R.B.696
9246, 2006-9 I.R.B.534
9247, 2006-9 I.R.B.521
9248, 2006-9 I.R.B.524
9249, 2006-10 I.R.B.546
9250, 2006-11 I.R.B.588
9251, 2006-11 I.R.B.590
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2005–27 through 2005–52 is in Internal Revenue Bulletin
2005–52, dated December 27, 2005.
April 24, 2006ii2006–17 I.R.B.

Treasury Decisions— Continued:
9252, 2006-12 I.R.B.633
9253, 2006-14 I.R.B.689
9254, 2006-13 I.R.B.662
9255, 2006-15 I.R.B.741
9256, 2006-16 I.R.B.770
9257, 2006-17 I.R.B.821
2006–17 I.R.B.iiiApril 24, 2006

Finding List of Current Actions on
Previously Published Items
1
Bulletin 2006–1 through 2006–17
Announcements:
2000-48
Modified by
Notice 2006-35, 2006-14 I.R.B.708
Notices:
2001-4
Sections (V)(C), (D), and (E) superseded by
T.D. 9253, 2006-14 I.R.B.689
2001-11
Superseded by
T.D. 9253, 2006-14 I.R.B.689
2001-43
Modified by
Notice 2006-35, 2006-14 I.R.B.708
Sections 2 and 3 superseded by
T.D. 9253, 2006-14 I.R.B.689
2002-35
Clarified and modified by
Notice 2006-16, 2006-9 I.R.B.538
2005-30
Modified and superseded by
Notice 2006-31, 2006-15 I.R.B.751
2005-44
Supplemented by
Notice 2006-1, 2006-4 I.R.B.347
2005-66
Supplemented by
Notice 2006-20, 2006-10 I.R.B.560
2005-73
Supplemented by
Notice 2006-20, 2006-10 I.R.B.560
2005-81
Supplemented by
Notice 2006-20, 2006-10 I.R.B.560
2005-98
Supplemented by
Notice 2006-7, 2006-10 I.R.B.559
Proposed Regulations:
REG-103829-99
Withdrawn by
Ann. 2006-16, 2006-12 I.R.B.653
REG-131739-03
Corrected by
Ann. 2006-10, 2006-5 I.R.B.393
Proposed Regulations— Continued:
REG-138647-04
Corrected by
Ann. 2006-4, 2006-3 I.R.B.328
REG-158080-04
Corrected by
Ann. 2006-11, 2006-6 I.R.B.420
Revenue Procedures:
96-52
Superseded by
Rev. Proc. 2006-10, 2006-2 I.R.B.293
97-27
Modified by
Rev. Proc. 2006-11, 2006-3 I.R.B.309
Modified and amplified by
Rev. Proc. 2006-12, 2006-3 I.R.B.310
2002-9
Modified by
Rev. Proc. 2006-11, 2006-3 I.R.B.309
Modified and amplified by
Rev. Proc. 2006-12, 2006-3 I.R.B.310
Rev. Proc. 2006-14, 2006-4 I.R.B.350
Rev. Proc. 2006-16, 2006-9 I.R.B.539
2002-17
Modified by
Rev. Proc. 2006-14, 2006-4 I.R.B.350
2003-31
Superseded by
Rev. Proc. 2006-19, 2006-13 I.R.B.677
2003-38
Modified by
Rev. Proc. 2006-16, 2006-9 I.R.B.539
2004-23
Superseded for certain taxable years by
Rev. Proc. 2006-12, 2006-3 I.R.B.310
2004-40
Superseded by
Rev. Proc. 2006-9, 2006-2 I.R.B.278
2005-1
Superseded by
Rev. Proc. 2006-1, 2006-1 I.R.B.1
2005-2
Superseded by
Rev. Proc. 2006-2, 2006-1 I.R.B.89
2005-3
Superseded by
Rev. Proc. 2006-3, 2006-1 I.R.B.122
2005-4
Superseded by
Rev. Proc. 2006-4, 2006-1 I.R.B.132
Revenue Procedures— Continued:
2005-5
Superseded by
Rev. Proc. 2006-5, 2006-1 I.R.B.174
2005-6
Superseded by
Rev. Proc. 2006-6, 2006-1 I.R.B.204
2005-7
Superseded by
Rev. Proc. 2006-7, 2006-1 I.R.B.242
2005-8
Superseded by
Rev. Proc. 2006-8, 2006-1 I.R.B.245
2005-9
Superseded for certain taxable years by
Rev. Proc. 2006-12, 2006-3 I.R.B.310
2005-12
Section 10 modified and superseded by
Rev. Proc. 2006-1, 2006-1 I.R.B.1
2005-15
Obsoleted in part by
Rev. Proc. 2006-17, 2006-14 I.R.B.709
2005-22
Obsoleted by
Rev. Proc. 2006-20, 2006-17 I.R.B.841
2005-24
Modified by
Notice 2006-15, 2006-8 I.R.B.501
2005-61
Superseded by
Rev. Proc. 2006-3, 2006-1 I.R.B.122
2005-68
Superseded by
Rev. Proc. 2006-1, 2006-1 I.R.B.1
Rev. Proc. 2006-3, 2006-1 I.R.B.122
Revenue Rulings:
55-355
Obsoleted by
T.D. 9244, 2006-8 I.R.B.463
74-503
Revoked by
Rev. Rul. 2006-2, 2006-2 I.R.B.261
77-230
Obsoleted by
T.D. 9249, 2006-10 I.R.B.546
91-5
Modified by
T.D. 9250, 2006-11 I.R.B.588
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2005–27 through 2005–52 is in Internal Revenue Bulletin 2005–52, dated December 27,
2005.
April 24, 2006iv2006–17 I.R.B.

Revenue Rulings— Continued:
92-86
Modified by
T.D. 9250, 2006-11 I.R.B.588
Treasury Decisions:
9192
Corrected by
Ann. 2006-15, 2006-11 I.R.B.632
9203
Corrected by
Ann. 2006-12, 2006-6 I.R.B.421
2006–17 I.R.B.vApril 24, 2006

INDEX
Internal Revenue Bulletins 2006–1 through
2006–17
The abbreviation and number in parenthesis following the index entry
refer to the specific item; numbers in roman and italic type following
the parentheses refer to the Internal Revenue Bulletin in which the item
may be found and the page number on which it appears.
Key to Abbreviations:
AnnAnnouncement
CDCourt Decision
DODelegation Order
EOExecutive Order
PLPublic Law
PTEProhibited Transaction Exemption
RPRevenue Procedure
RRRevenue Ruling
SPRStatement of Procedural Rules
TCTax Convention
TDTreasury Decision
TDOTreasury Department Order
EMPLOYEE PLANS
Determination letters, issuing procedures (RP 6) 1,204
Disaster relief, expanded postponement of deadlines for certain
acts under section 7508A with respect to taxpayers affected by
Hurricane Katrina (Notice 20) 10,560
Disclosure of relative values of optional forms of benefit (TD
9256) 16,770
Full funding limitations, weighted average interest rate for:
January 2006 (Notice 8) 5,386
February 2006 (Notice 19) 9,539
March 2006 (Notice 32) 13,677
April 2006 (Notice 39) 17,841
Letter rulings:
And determination letters, areas which will not be issued
from:
Associates Chief Counsel and Division Counsel (TE/GE)
(RP 3) 1,122
Associate Chief Counsel (International) (RP 7) 1,242
And information letters, procedures (RP 4) 1,132
User fees, request for letter rulings (RP 8) 1,245
Proposed regulations:
26 CFR 1.402(g)–1, amended; 1.402A–1, –2, added;
1.403(b)–2, –3, –5, –7, amended; 1.408A–10,
added; designated Roth accounts under section 402A
(REG–146459–05) 8,504
Regulations:
26 CFR 1.401(a)–20, amended; 1.417(a)(3)–1, amended; dis-
closure of relative values of optional forms of benefit (TD
9256) 16,770
26 CFR 1.401(k)–0, –2, –6, amended; 1.401(k)–1(f), revised;
1.401(m)–0, –2, –5, amended; 602.101, amended; desig-
nated Roth contributions to cash or deferred arrangements
under section 401(k) (TD 9237) 6,394
EMPLOYEE PLANS—Cont.
Roth IRAs:
Designated Roth contributionsto cash or deferred arrange-
ments under section 401(k) (TD 9237) 6,394
Distributions of designated Roth contributions
(REG–146459–05) 8,504
Reporting requirements, fair market value, Roth IRA conver-
sion (RP 13) 3,315
Technical advice to IRS employees (RP 5) 1,174
EMPLOYMENT TAX
Disaster relief:
Backup withholding, postponement of deadlines for certain
acts due to Hurricanes Katrina and Rita (Notice 12) 7,458
Expanded postponement of deadlines for certain acts under
section 7508A with respect to taxpayers affected by Hurri-
cane Katrina (Notice 20) 10,560
Hurricane Katrina, treatment of special evacuation al-
lowances (Notice 10) 5,386
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1
Proposed regulations:
26 CFR 31.6011(a)–1, –4, amended; 31.6302–1, amended;
time for filing employment tax returns and modifications
to the deposit rules (REG–148568–04) 6,417
Publication 1223, General Rules and Specifications for Substi-
tute Forms W-2c and W-3c, revised (RP 19) 13,677
Regulations:
26 CFR 1.6302–1, –2, amended; 31.6011(a)–1, –4, amended;
31.6011(a)–1T, –4T, added; 31.6071(a)–1, amended;
31.6302–0, –1, amended; 31.6302–1T, added; time for
filing employment tax returns and modifications to the
deposit rules (TD 9239) 6,401
26 CFR 31.3121(a)(2)–1, amended; 32.1, amended; sickness
or accident disability payments (TD 9233) 3,303
Substitute Forms W-2c and W-3c,general rules and specifica-
tions (RP 19) 13,677
Technical Advice Memoranda (TAMs) and Technical Expedited
Advice Memoranda (TEAMs) (RP 2) 1,89
Time for filing employment tax returns and modifications to the
deposit rules (TD 9239) 6,401; (REG–148568–04) 6,417
Treatment of sickness or accident disability payments (TD 9233)
3,303
ESTATE TAX
Disaster relief, expanded postponement of deadlines for certain
acts under section 7508A with respect to taxpayers affected by
Hurricane Katrina (Notice 20) 10,560
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1
Technical Advice Memoranda (TAMs) and Technical Expedited
Advice Memoranda (TEAMs) (RP 2) 1,89
April 24, 2006vi2006–17 I.R.B.

EXCISE TAX
Disaster relief, expanded postponement of deadlines for certain
acts under section 7508A with respect to taxpayers affected by
Hurricane Katrina (Notice 20) 10,560
Health Savings Accounts (HSAs), employer comparable contri-
butions, public hearing on REG–138647–04 (Ann 4) 3,328
Highway vehicle, definition, withdrawal of REG–103829–99
(Ann 16) 12,653
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1
Technical Advice Memoranda (TAMs) and Technical Expedited
Advice Memoranda (TEAMs) (RP 2) 1,89
EXEMPT ORGANIZATIONS
Annual notice to donors regarding pending and settled declara-
tory judgment suits (Ann 1) 1,260
Disaster relief, expanded postponement of deadlines for certain
acts under section 7508A with respect to taxpayers affected by
Hurricane Katrina (Notice 20) 10,560
Information reporting by organizations that receive charitable
contributions of certain motor vehicles, boats, and airplanes
(Notice 1) 4,347
Letter rulings:
And determination letters, areas which will not be issued from
Associates Chief Counsel and Division Counsel (TE/GE)
(RP 3) 1,122
And information letters, procedures (RP 4) 1,132
User fees, request for letter rulings (RP 8) 1,245
List of organizations classified as private foundations (Ann 5) 4,
378; (Ann 14) 8,516; (Ann 18) 12,654
Revocations (Ann 3) 3,327;(Ann9)5,392; (Ann 13) 7,462;
(Ann 17) 12,653; (Ann 24) 16,820
Technical advice to IRS employees (RP 5) 1,174
GIFT TAX
Charitable remainder trusts, waiver of spousal right of election
to ensure qualification of charitable remainder annuity trust
(CRAT) or charitable remainder unitrust (CRUT) (Notice 15)
8,501
Disaster relief, expanded postponement of deadlines for certain
acts under section 7508A with respect to taxpayers affected by
Hurricane Katrina (Notice 20) 10,560
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1
Technical Advice Memoranda (TAMs) and Technical Expedited
Advice Memoranda (TEAMs) (RP 2) 1,89
INCOME TAX
Acceptance agent revenue procedure (RP 10) 2,293
INCOME TAX—Cont.
Accounting methods:
Automatic consent to change procedures (RP 12) 3,310
Automatic consent to change, replacement cost method for
parts inventory of heavy equipment dealers (RP 14) 4,350
Normalization public utilities (REG–104385–01) 5,389
Simplified service cost and simplified production methods,
consent procedures (RP 11) 3,309
Advance Pricing Agreement (APA) Program:
Administration (RP 9) 2,278
Annual report to the public, 2005 (Ann 22) 16,779
Agent for a consolidated group with foreign common parent (TD
9255) 15,741; (REG–164247–05) 15,758
Allocation and apportionment of expenses, tax book value
method (TD 9247) 9,521
Annual notice to donors regarding pending and settled declara-
tory judgment suits (Ann 1) 1,260
Application of section 108 to members of a consolidated group,
correctiontoTD9192(Ann15)11,632
Automobile owners and lessees, inflation adjustment for 2006
(RP 18) 12,645
Bonds:
Clean renewable energy bonds (Notice 7) 10,559
Private activity bond, definition, tax-exempt bonds issued by
state and local governments (TD 9234) 4,329
Book-tax filter of reportable transactions under regulations sec-
tion 1.6011–4, removal (Notice 6) 5,385
Commercial revitalization deduction for buildings located in the
expanded area of a renewal community (RP 16) 9,539
Consolidated returns, basis reallocation, loss suspension, and ex-
piration of losses on certain stock dispositions (TD 9254) 13,
662
Corporations:
Clarification of section 1374 effective dates (TD 9236) 5,382
Determination of surrogate foreign corporation status when
there is an expanded affiliated group (TD 9238) 6,408;
(REG–143244–05) 6,419
Entity classification,classification of:
Foreign entities, per se corporations (TD 9235) 4,338
Japanese Tokurei Yugen Kaisha (TYK) (RR 3) 2,276
Estimated tax payments by corporations (REG–107722–00)
4,354
Information reporting for distributions with respect to securi-
ties issued by foreign corporations (Notice 3) 3,306
Passive foreign investment company (PFIC) purging elec-
tions:
Foreign corporation no longer satisfies definition of PFIC
under section 1297(a) (TD 9231) 2,272
Foreign corporation no longer treated as PFIC under sec-
tion 1297(a) or (e) (TD 9232) 2,266; (REG–133446–03)
2,299
Section 951 pro rata share allocations, special rules (TD 9251)
11,590
Statutory mergers or consolidations:
Definition (TD 9242) 7,422
2006–17 I.R.B.viiApril 24, 2006

INCOME TAX—Cont.
Under section 368(a)(1)(A), involving one or more foreign
corporations (TD 9243) 8,475
Subpart F income (TD 9240) 7,454; (REG–106418–05) 7,
461
Transfers to corporations, corporate formations, corporate re-
organizations (RR 2) 2,261
Credits:
Alternative motor vehicle credit, advanced lean burn and hy-
brid motor vehicles (Notice 9) 6,413
Clean renewable energy bonds (Notice 7) 10,559
Energy efficient home credit:
Certification for dwellingunit other than manufactured
home (Notice 27) 11,626
Certification for manufactured home (Notice 28) 11,628
Low-income housing credit:
2006 population figures used for calculation (Notice 22)
11,593
Satisfactory bond, “bond factor” amounts for the period:
January through March 2006 (RR 5) 3,302
January through June 2006 (RR 14) 15,740
Suspension of certain requirements under section 42 due
to Hurricane Rita (Notice 11) 7,457
Nonbusiness energy property credit, Eligible Building Enve-
lope Component or Qualified Energy Property (Notice 26)
11,622
Qualifying advanced coal project credit (Notice 24) 11,595
Qualifying gasification project credit (Notice 25) 11,609
Rehabilitation tax credit, disaster relief (Notice 38) 16,777
Renewable electricity credit, reduction under section 45(b)(3)
(RR 9) 9,519
Deemed election to be an association taxable as a corporation for
a qualified electing S corporation, correction to TD 9203 (Ann
12) 6,421
Determination of bona fide residence in a U.S. possession (TD
9248) 9,524
Disaster relief:
Backup withholding, postponement of deadlines for certain
acts due to Hurricanes Katrina and Rita (Notice 12) 7,458
Expanded postponement of deadlines for certain acts under
section 7508A with respect totaxpayers affected by Hurri-
cane Katrina (Notice 20) 10,560
Gulf Opportunity (GO) Zone resident population estimates
(Notice 21) 12,643
Hurricanes Katrina, Rita, andWilma, postponement of dead-
line to make certain section 165(i) elections (Notice 17) 10,
559
Hurricane Katrina, treatment of special evacuation al-
lowances (Notice 10) 5,386
Rehabilitation tax credit (Notice 38) 16,777
Suspension of certain requirements under section 42 due to
Hurricane Rita (Notice 11) 7,457
Disciplinary actions involving attorneys, certified public accoun-
tants, enrolled agents, and enrolled actuaries (Ann 23) 14,729
Disclosure and use of tax return information:
Disclosure of return information to Department of Agriculture
for use in census of agriculture (TD 9245) 14,696
INCOME TAX—Cont.
New and additional rules for electronic consent
(REG–137243–02) 3,317
Employer-provided vehicles, maximum values for which the
special valuation rules of regulations sections 1.61–21(d) and
(e) may be used (RP 15) 5,387
Entity classification, dually chartered entity, clarification of def-
initions (TD 9246) 9,534
Forms:
8609 revision, 8609-A replaces Schedule A (Form 8609)
(Ann 2) 2,300
Frivolous tax returns, tax avoidance:
All individuals are subject to federal income tax (RR 18) 15,
743
Attempts to escape taxation by attributing income to pur-
ported trust (RR 19) 15,749
Claim of tax exempt status based on an unspecified “Native
American Treaty” (RR 20) 15,746
Common frivolous arguments and schemes (Notice 31) 15,
751
Insertion of phrase “nunc pro tunc” on tax return (RR 17) 15,
748
Paperwork Reduction Act does not relieve taxpayers of the
duty to file a federal income tax return (RR 21) 15,745
Guidance Priority List, recommendations for 2006–2007 (Notice
36) 15,756
Guidance regarding reporting for widely held fixed investment
trusts (WHFITs) (Notice 29) 12,644
Individual Retirement Accounts (IRAs), bankruptcy, right to re-
ceive payments (CD 2081) 13,656
Information reporting by organizations that receive charitable
contributions of certain motor vehicles, boats, and airplanes
(Notice 1) 4,347
Insurance companies:
Deemed sale or acquisition of an insurance company’s assets
(TD 9257) 17,821; (REG–146384–05) 17,843
Tentative recomputed differential earnings rate for 2004 (No-
tice 18) 8,502
Interest:
Investment:
Federal short-term, mid-term, and long-term rates for:
January 2006 (RR 4) 2,264
February 2006 (RR 7) 6,399
March 2006 (RR 10) 10,557
April 2006 (RR 22) 14,687
Rates:
Underpayments and overpayments, quarter beginning:
April 1, 2006 (RR 12) 12,637
Inventory:
Heavy equipment dealers, replacement cost method of ac-
counting (RP 14) 4,350
LIFO, price indexes used by department stores for:
November 2005 (RR 6) 5,381
December 2005 (RR 8) 9,520
January 2006 (RR 15) 13,661
February 2006 (RR 23) 17,839
April 24, 2006viii2006–17 I.R.B.

INCOME TAX—Cont.
Joint tax return, relief from jointand several liability (RR 16) 14,
694
Leases, tax-exempt use property (Notice 2) 2,278
Letter rulings:
And determination letters, areas which will not be issued
from:
Associates Chief Counsel and Division Counsel (TE/GE)
(RP 3) 1,122
Associate Chief Counsel (International) (RP 7) 1,242
And information letters issued by Associate Offices, determi-
nation letters issued by Operating Divisions (RP 1) 1,1
Mortgage bonds and credit certificates, median income figures,
2006 (RP 20) 17,841
National and area median gross income figures, guidance for
2006 (RP 20) 17,841
Nonqualified deferredcompensation plans:
Application of section 409A, correction to REG–158080–04
(Ann 11) 6,420
With associated offshore trusts or financial health triggers,
transition guidance on the application of section 409A(b)
(Notice 33) 15,754
Notional principal contracts, nonperiodic payment, listed trans-
actions, disclosure safe harbor (Notice 16) 9,538
Partnerships:
Certain distributions treated as sales or exchanges (Notice 14)
8,498
Classification of items under the TEFRA partnership provi-
sions (RR 11) 12,635
Patriots’ Day 2006 in Maine, Maryland, Massachusetts, New
Hampshire, New York, Vermont, and the District of Colum-
bia, April 18 filing deadline (Notice 23) 11,594
Practice before the Internal Revenue Service (REG–122380–02)
10,563
Private foundations, organizations now classified as (Ann 5) 4,
378; (Ann 14) 8,516; (Ann 18) 12,654
Proposed Regulations:
26 CFR 1.46–6, amended; 1.168(i)–3, added; application of
normalization accounting rules to balances of excess de-
ferred income taxes and accumulated deferred investment
tax credits of publicutilities whose assets cease to be pub-
lic utility property (REG–104385–01) 5,389
26 CFR 1.56–0, –1, revised; 1.6425–2, revised; 1.6425–3,
amended; 1.6655–0, added; 1.6655–1 thru –3, revised;
1.6655–4 thru –6, added; 1.6655–7, removed; 1.6655–5 re-
designated as 1.6655–7 and revised; 301.6655–1, revised;
corporate estimated tax (REG–107722–00) 4,354
26 CFR 1.197–2, amended; 1.338–1, –11, amended; 1.846–2,
–4, amended; application of section 338 to insurance com-
panies (REG–146384–05) 17,843
26 CFR 1.468B–0, amended; 1.468B–6, added; 1.1031(k)–1,
amended; 1.7872–16, added; escrow accounts, trusts, and
other funds used during deferred exchanges of like-kind
property (REG–113365–04) 10,580
26 CFR 1.954–2, amended; guidance under subpart F relating
to partnerships (REG–106418–05) 7,461
INCOME TAX—Cont.
26 CFR 1.1291–9, revised; 1.1297–0, revised; 1.1297–3,
added; 1.1298–0, –3, revised; guidance on passive
foreign investment company (PFIC) purging elections
(REG–133446–03) 2,299
26 CFR 1.1502–19, amended; treatment of excess loss ac-
counts (REG–138879–05) 8,503
26 CFR 1.1502–77, amended; agent for a consolidated group
with foreign common parent (REG–164247–05) 15,758
26 CFR 1.7874–1, added; guidance for determining owner-
ship by former shareholders or partners of domestic entities
(REG–143244–05) 6,419
26 CFR 301.6103(p)(4)–1, (p)(7)–1, added; procedures for
administrative review of a determination that an authorized
recipient has failed to safeguard tax returns or return infor-
mation (REG–157271–05) 12,652
26 CFR 301.7216–0, added; 301.7216–1, –2, –3, revised;
guidance necessary to facilitate electronic tax administra-
tion (REG–137243–02) 3,317
31 CFR 10.1, 10.25, 10.27, 10.29, 10.34, 10.51, 10.52, 10.61,
10.65, 10.68, 10.76, 10.77, 10.78, 10.90, 10.91, revised;
10.2, 10.5, 10.6, 10.7, 10.22, 10.50, 10.60, 10.62, 10.70,
10.72, 10.73, 10.82, amended; 10.73, removed; 10.72 re-
designated as 10.73; 10.71 redesignated as 10.72, 10.71,
added; regulations governing practice before the Internal
Revenue Service (REG–122380–02) 10,563
Publication 1223, General Rules and Specifications for Substi-
tute Forms W-2c and W-3c, revised (RP 19) 13,677
Qualified Intermediary (QI) branch rule, revocation (Notice 35)
14,708
Qualified mortgage bonds (QMBs) and mortgage credit certifi-
cates (MCCs), average area housing purchase prices for 2006
(RP 17) 14,709
Qualified settlement funds and certain other escrow accounts,
trusts, and funds, taxation and reporting of earned income (TD
9249) 10,546; (REG–113365–04) 10,580
Regulated investment company (RIC), commodity swaps (RR 1)
2,261
Regulations:
26 CFR 1.141–0, –1, –15, amended; 1.141–13, added;
1.145–0, –2, amended; 1.149(d)–1, amended; 1.150–1,
amended; obligations of states and political subdivisions
(TD 9234) 4,329
26 CFR 1.197–0, –2, amended; 1.197–2T, added; 1.338–0,
–1, amended; 1.338–1T, –11, –11T, added; 1.338(i)–1,
amended; 1.381(c)(22)–1, amended; 1.846–0, –2,
amended; 1.846–2T, –4T, added; 1.846–4, revised;
1.1060–1, amended; 602.101, amended; application of
section 338 to insurance companies (TD 9257) 17,821
26 CFR 1.356–1, revised; 1.358–1, revised; 1.358–2,
amended; 1.1502–19, amended; 1.1502–19T, revised;
1.1502–32, amended; determination of basis of stock or
securities received in exchange for, or with respect to, stock
or securities in certain transactions, treatment of excess
loss accounts (TD 9244) 8,463
26 CFR 1.358–6, amended; 1.367(a)–3, (a)–8, (b)–1, (b)–3,
(b)–4, (b)–6, amended; 1.367(b)–13, added; 1.884–2, –2T,
2006–17 I.R.B.ixApril 24, 2006

INCOME TAX—Cont.
amended; 1.6038B–1, –1T, amended; statutory mergers or
consolidations under section 368(a)(1)(A) involving one or
more foreign corporations, and guidance necessary to fa-
cilitate business electronic filing under section 6038B (TD
9243) 8,475
26 CFR 1.367(a)–3, (b)–4, (b)–6, amended; application of
section 367 in cross border section 304 transactions, certain
transfers of stock involving foreign corporations (TD 9250)
11,588
26 CFR 1.368–2, amended; 1.368–2T, removed; statutory
mergers and consolidations (TD 9242) 7,422
26 CFR 1.468B–0, –1, –5, amended; 1.468B–6 thru –9,
added; 602.101, amended; escrow funds and other similar
funds (TD 9249) 10,546
26 CFR 1.671–4, amended; 1.671–5, added; 1.6041–9,
added; 1.6042–5, added; 1.6045–1, amended; 1.6049–4,
–5, amended; 1.6050N–2, added; 301.6109–1, amended;
reporting for widely held fixed investment trusts (TD 9241)
7,427
26 CFR 1.861–9, –9T, amended; allocation and apportion-
ment of expenses, alternative method for determining tax
book value of assets (TD 9247) 9,521
26 CFR 1.881–5, added; 1.881–5T, revised; 1.931–1T,
amended; 1.932–1T, amended; 1.933–1T, amended;
1.935–1T, amended; 1.937–1, added; 1.937–1T, removed;
602.101, amended; residence rules involving U.S. posses-
sions (TD 9248) 9,524
26 CFR 1.951–1, amended; special rules regarding certain
section 951 pro rata share allocations (TD 9251) 11,590
26 CFR 1.954–2, amended; 1.954–2T, added; guidance under
subpart F relating to partnerships (TD 9240) 7,454
26 CFR 1.1291–9, amended; 1.1297–0, revised; 1.1297–3,
added; 1.1298–0, –3, added; 602.101, amended; guidance
on passive foreign investment company (PFIC) purging
elections (TD 9231) 2,272
26 CFR 1.1291–9T, added; 1.1297–0T, added; 1.1297–3T,
revised; 1.1298–0T, –3T, added; 602.101, amended; guid-
ance on passive foreign investment company (PFIC) purg-
ing elections (TD 9232) 2,266
26 CFR 1.1374–0, –8, –10, amended; 1.1374–8T, –10T, re-
moved; section 1374 effective dates (TD 9236) 5,382
26 CFR 1.1441–1, –3, amended; 1.1441–6, revised;
1.6049–5, amended; 301.6114–1, amended; revisions
to regulations relating to withholding of tax on certain U.S.
source income paid to foreign persons and revisions of
information reporting regulations (TD 9253) 14,689
26 CFR 1.1502–11, amended; application of section 108 to
members of a consolidatedgroup, correction to TD 9192
(Ann 15) 11,632
26 CFR 1.1502–21, –21T, –32, amended; 1.1502–32T, –35T,
removed; 1.1502–35, added; 602.101, amended; suspen-
sion of losses on certain stock dispositions (TD 9254) 13,
662
26 CFR 1.1502–77, amended; 1.1502–77T, added; agent for a
consolidated group with foreign common parent (TD 9255)
15,741
INCOME TAX—Cont.
26 CFR 1.7874–1T, added; guidance for determining owner-
ship by former shareholders or partners of domestic entities
(TD 9238) 6,408
26 CFR 301.6103(j)(5)–1, added; 301.6103(j)(5)–1T, re-
moved; disclosure of return information to the Department
of Agriculture (TD 9245) 14,696
26 CFR 301.6103(p)(4)–1T, (p)(7)–1T, added; 6103(p)(7)–1,
removed; procedures for administrative review of a deter-
mination that an authorized recipient has failed to safeguard
tax returns or return information (TD 9252) 12,633
26 CFR 301.7701–1, –2, –5, revised; 301.7701–1T, –2T, –5T,
removed; clarification of definitions (TD 9246) 9,534
26 CFR 301.7701–2, –2T, amended; classification of defini-
tions (TD 9235) 4,338
26 CFR 301.7701–3T, added; deemed election to be an asso-
ciation taxable as a corporation for a qualified electing S
corporation, correction to TD 9203 (Ann 12) 6,421
Reporting requirements for widely held fixed investment trusts
(TD 9241) 7,427
Revocations, exempt organizations (Ann 3) 3,327;(Ann9)5,
392; (Ann 13) 7,462; (Ann 17) 12,653; (Ann 24) 16,820
Section 1503(d) filings, adoption of reasonable cause standard
(Notice 13) 8,496
Standard Industry Fare Level (SIFL) formula (RR 13) 13,656
Stocks:
Cross border section 304 transactions, application of section
367 (TD 9250) 11,588
Determination of basis of stock and securities received in cer-
tain transactions (TD 9244) 8,463
Outstanding stock rights, application of section 409A (Notice
4) 3,307
Treatment of excess loss accounts (TD 9244) 8,463;
(REG–138879–05) 8,503
Substitute for return, Internal Revenue officer or employee, hear-
ing on REG–131739–03 (Ann 10) 5,393
Substitute Forms W-2c and W-3c,general rules and specifica-
tions (RP 19) 13,677
Tax conventions:
Superseding U.S.-Mexico LLCmutual agreement procedure
(MAP) (Ann 8) 4,344
U.S.-Canada Appeals memorandum of understanding (MOU)
(Ann 7) 4,342
U.S.-Ireland Common Contractual Funds MAP (Ann 19) 13,
674
U.S.-Japan Investment Bank MOU (Ann 6) 4,340; self-certi-
fication of resident investment banks (Ann 20) 13,675
U.S.-Spain limited liability company (LLC) MAP (Ann 21)
14,703
Tax delinquency, sale of seized property (CD 2082) 14,697
Tax returns and return information, administrative review if re-
cipient failed to safeguard information (TD 9252) 12,633;
(REG–157271–05) 12,652
Taxation of cross licenses (Notice 34) 14,705
Technical Advice Memoranda (TAMs) and Technical Expedited
Advice Memoranda (TEAMs) (RP 2) 1,89
April 24, 2006x2006–17 I.R.B.

INCOME TAX—Cont.
Waiver of penalties for failure to report loan origination fees and
capitalized interest (Notice 5) 4,348
Withholding tax, U.S. source income paid to foreign persons (TD
9253) 14,689
SELF-EMPLOYMENT TAX
Disaster relief, expanded postponement of deadlines for certain
acts under section 7508A with respect to taxpayers affected by
Hurricane Katrina (Notice 20) 10,560
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1
Technical Advice Memoranda (TAMs) and Technical Expedited
Advice Memoranda (TEAMs) (RP 2) 1,89
2006–17 I.R.B.xiApril 24, 2006
U.S. GPO: 2006—320–797/20054