Internal Revenue Bulletin 2004-5 (PDF rendition): IRS Notices

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

Bulletin No. 200
4-5
February 2, 2004
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
T.D. 9101, page 376.
REG–156232–03, page 399.
Temporary and proposed regulations under section 6043 of
the Code provide information reporting rules regarding corpo-
rations which are acquired, or which experience a recapital-
ization or other substantial change in capital structure. The
proposed regulations also withdraw REG–143321–02. A pub-
lic hearing on the proposed regulations is scheduled for March
31, 2004.
T.D. 9102
, page 366.
Final regu
lations under section 643 of the Code revise the defi-
nition of
trust accounting income to take into account changes
in the def
inition of trust accounting income under state laws,
which all
ow certain amounts traditionally considered as princi-
pal to be t
reated as income. The regulations also clarify the
situati
ons in which capital gains will be included in a trust’s dis-
tributa
ble net income. Conforming amendments with regard
to the re
vised definition of trust accounting income are made
to regul
ations affecting various trusts, including pooled income
funds, c
haritable remainder trusts, trusts qualifying for the mar-
ital de
duction, and trusts exempt from the generation-skipping
transf
er tax.
EMPLOYEE PLANS
Notice 2004–3, page 391.
Weighted average interest rate update.The weighted av-
erage interest rate for January 2004 and the resulting permis-
sible range of interest rates used to calculate current liability
and to determine the required contribution are set forth.
ESTATE TAX
T.D. 9102, page 366.
Final regulations under section 643 of the Code revise the defi-
nition of trust accounting income to take into account changes
in the definition of trust accounting income under state laws,
which allow certain amounts traditionally considered as princi-
pal to be treated as income. The regulations also clarify the
situations in which capital gains will be included in a trust’s dis-
tributable net income. Conforming amendments with regard
to the revised definition of trust accounting income are made
to regulations affecting various trusts, including pooled income
funds, charitable remainder trusts, trusts qualifying for the mar-
ital deduction, and trusts exempt from the generation-skipping
transfer tax.
REG–139
845–02, page 397.
Propose
d regulations under section 2032 of the Code con-
cern the
election to value a decedent’s gross estate on the
alterna
te valuation date. The regulations reflect a change
to the la
w made by the Deficit Reduction Act of 1984. The
regula
tions, when finalized, will remove temporary regulation
301.91
00–6T(b).
(Continued on the next page)
Announcements of Disbarments and Suspensions begin on page 402.
Fi
nding Lists begin on page ii.

GIFT TAX
T.D. 9102, page 366.
Final regulations under section 643 of the Code revise the defi-
nition of trust accounting income to take into account changes
in the definition of trust accounting income under state laws,
which allow certain amounts traditionally considered as princi-
pal to be treated as income. The regulations also clarify the
situations in which capital gains will be included in a trust’s dis-
tributable net income. Conforming amendments with regard
to the revised definition of trust accounting income are made
to regulations affecting various trusts, including pooled income
funds, charitable remainder trusts, trusts qualifying for the mar-
ital deduction, and trusts exempt from the generation-skipping
transfer tax.
ADMINISTRATIVE
T.D. 9106, page 384.
Final regulations under section 7430 of the Code provide guid-
ance to taxpayers on how to make a qualified offer. The regu-
lations explain the circumstances under which qualified offers
may be made, the requirements to make a valid qualified offer,
and to whom the qualified offer should be made. The regula-
tions also provide examples to aid taxpayer in understanding
how qualified offers operate.
REG–122379–02, page 392.
Proposed regulations under section 330 of title 31 of the Code
set forth best practices for tax advisors providing advice to
taxpayers relating to federal tax issues or submissions to the
Internal Revenue Service and modify the standards for certain
tax shelter opinions. Section 10.33 encourages all tax advi-
sors to provide their clients with the highest quality representa-
tion. Section 10.35 prescribes specific requirements for “more
likely than not” and “marketed” tax shelter opinions. Section
10.36 provides that the practitioner who has the principal au-
thority and responsibility for overseeing a firm’s practice of pro-
viding advice to clients regarding federal tax issues must take
reasonable steps to ensure that the firm has adequate proce-
dures in place for purposes of complying with section 10.35.
Section 10.37 authorizes the Director of the Office of Profes-
sional Responsibility to establish one or more advisory com-
mittees to review and make recommendations regarding pro-
fessional standards or best practices for tax advisors, includ-
ing whether a practitioner mayhave violated section 10.35 or
10.36. A public hearing is scheduled for February 18, 2004.
February 2, 20042004-5 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bul-
letin contents are consolidated semiannually into Cumulative
Bulletins, which are sold on a single-copy basis.
It is the pol
icy of the Service to publish in the Bulletin all sub-
stantive ru
lings necessary to promote a uniform application of
the tax law
s, including all rulings that supersede, revoke, mod-
ify, or ame
nd any of those previously published in the Bulletin.
All publis
hed rulings apply retroactively unless otherwise indi-
cated. Pro
ceduresrelatingsolelytomattersofinternalman-
agement ar
e not published; however, statements of internal
practice
s and procedures that affect the rights and duties of
taxpayer
s 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.—1986 Code.
This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscella-
neous.
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 part includes notices of proposed rulemakings, disbar-
ment and 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 cont
ents 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.
* Beginning with Internal Revenue Bulletin 2003–43, we are publishing the index at the end of the month, rather than at the beginning.
2004-5 I.R.B.February 2, 2004

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 643.—Definitions
Applicable to Subparts
A, B, C, and D
26 CFR 1.643(a)–3: Capital gains and losses.
T.D. 9102
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 20, 25, and
26
Definition of Income for Trust
Purposes
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION:
Final regulations.
SUMMARY: This document contains fi-
nal regulations revising the definition of
incomeundersection643(b)oftheInter-
nal Revenue Code. The regulations are
necessary to reflect changes in the defini-
tion of trust accounting income under state
laws. The final regulations also clarify
the situations in which capital gains are
included in distributable net income un-
der section 643(a)(3). Conforming amend-
ments are made to regulations affecting or-
dinary trusts, pooled income funds, char-
itable remainder trusts, trusts that qualify
for the gift and estate tax marital deduc-
tion, and trusts that are exempt from gen-
eration-skipping transfer taxes. The reg-
ulations affect the grantors, beneficiaries,
and fiduciaries of trusts.
DATES:Effective Date: These regulations
are effective January 2, 2004.
Applicability Date: Generally, the fi-
nal regulations are applicable to trusts and
estates for taxable years ending after Jan-
uary 2, 2004. See revised §§1.642(c)–2,
1.642(c)–5, and 1.664–3 for special dates
of applicability affecting those sections.
FOR FURTHER INFORMATION
CONTACT: BradfordR. Poston at (202)
622–3060 (not a toll-free number).
Background
On February 15, 2001, proposed reg-
ulations (REG–106513–00, 2001–1 C.B.
1076 [66 FR 10396]) were published in
theFederal Registercontaining proposed
amendments to the Income Tax Regula-
tions [26 CFR part 1], the Estate Tax Regu-
lations [26 CFR part 20], the Gift Tax Reg-
ulations [26 CFR part 25], and the Gen-
eration-Skipping Transfer Tax Regulations
[26 CFR part 26] relating to the defini-
tion of income for trust purposes. A pub-
lic hearing was held on the proposed reg-
ulations on June 8, 2001. Written com-
ments were received on the proposed reg-
ulations. The proposed regulations, with
certain changes in response to the com-
ments, are adopted as final regulations.
Summary of Comments and
Explanation of Revisions
Definition of Income
The proposed regulations provide that,
for purposes of determining what con-
stitutes trust accounting income under
section 643(b), trust provisions that depart
fundamentally from the traditional con-
cepts of income and principal generally
will continue to be disregarded as they
have been under the existing regulations.
One commentator suggested that, instead
of using traditional concepts of income
and principal, the benchmark should be
whether there is a departure from the duty
to administer the trust or estate impartially
based upon what is fair and reasonable
to all the parties. One commentator sug-
gested eliminating the distinction between
trust accounting income and principal.
Another suggested that the regulations
clarify the consequences of a fundamen-
tal departure from traditional concepts of
income and principal.
Income under section 643(b) is the
amount of income determined under the
terms of the governing instrument and
applicable local law. This concept of in-
come is used as the measure of the amount
that must be distributed from a trust in
order for the trust to qualify for certain
treatment under various provisions of the
Internal Revenue Code. Trusts classified
as simple trusts, pooled income funds,
net income charitable remainder unitrusts,
and qualified subchapter S trusts (QSSTs)
are required to make distributions mea-
sured at least in part by the amount of trust
accounting income. A similar concept
applies to trusts that qualify for the gift
and estate tax marital deductions. Because
section 643(b) requires a determination of
trust accounting income, it is not possible
to ignore any distinctions between trust
accounting income and principal as sug-
gested by a commentator.
A trust instrument may provide for any
amount to be distributed to beneficiaries
currently. Trust provisions that measure
the amount of the distribution by reference
to income but define income differently
from the state statutory definition of in-
come generally will be recognized for state
law purposes. However, Internal Revenue
Code provisions that require the current
distribution of income to qualify the trust
for certain federal tax treatment are based
on the assumption that the income ben-
eficiary will receive what is traditionally
considered to be income. In some situa-
tions, such as with QSSTs and marital de-
duction trusts for spouses who are U.S.
citizens, the income beneficiary is permit-
ted to also receive principal distributions
as long as all the income is currently dis-
tributed. In other situations, as with pooled
income funds and net income charitable re-
mainder unitrusts, only the income may be
distributed. In all these situations, the de-
termination of income is critical. Thus, the
definition of income under the terms of the
governing instrument and applicable local
law must not depart fundamentally from
traditional concepts of income and princi-
pal, if the desired federal tax treatment is
to be secured.
The IRS and the Treasury Department
recognize that state statutes are in the
process of changing traditional concepts
of income and principal in response to
investment strategies that seek total posi-
tive return on trust assets. These statutes
are designed to ensure that, when a trust
invests in assets that may generate little
traditional income (including dividends,
interest, and rents), the income and re-
mainder beneficiaries are allocated rea-
2004-5 I.R.B.366February 2, 2004

sonable amounts of the total return of the
trust (including both traditional income
and capital appreciation of trust assets)
so that both classes of beneficiaries are
treated impartially. Some statutes permit
the trustee to pay to the person entitled to
the income a unitrust amount based on a
fixed percentage of the fair market value of
the trust assets. Other statutes permit the
trustee the discretion to make adjustments
between income and principal to treat the
beneficiaries impartially. Under the pro-
posed regulations, a trust’s definition of
income in conformance with applicable
state statutes will be respected for federal
tax purposes when the state statutes pro-
vide for a reasonable apportionment of the
total return of the trust.
Some commentators suggested that,
even in those states that have not enacted
legislation specifically authorizing pow-
ers to adjust or a unitrust definition of
income, trust instruments containing such
provisions should be respected as defining
income for purposes of section 643(b).
Under a unitrust or power to adjust, items
traditionally allocable to principal (such
as gains from the sale or exchange of
trust assets) may, under certain circum-
stances, be allocated to income, and items
traditionally allocable to income (such as
dividends, interest, and rents) may, un-
der certain circumstances, be allocated
to principal. The proposed regulations
already recognize that gains from the sale
or exchange of trust assets may, under
certain circumstances, be allocated to in-
come under the terms of the governing
instrument. However, §1.643(b)–1 has
always provided that the allocation to
principal, under the terms of the govern-
ing instrument, of items that traditionally
would be allocable to income will not be
respected for purposes of section 643(b),
and this position is maintained in the final
regulations. Accordingly, the IRS and the
Treasury Department believe that an allo-
cation to principal of traditional income
items should be respected for Federal tax
purposes only if applicable state law has
specifically authorized such an allocation
in certain limited circumstances, such
as when necessary to ensure impartiality
regarding a trust investing for total re-
turn. Under the regulations, a state statute
specifically authorizing certain unitrust
payments in satisfaction of an income in-
terest or certain powers to adjust would
satisfy that requirement. Further, the IRS
and the Treasury Department acknowl-
edge that other actions may constitute
applicable state law, such as a decision by
the highest court of the state announcing a
general principle or rule of law that would
apply to all trusts administered under the
laws of that state. However, a court order
applicable only to the trust before the court
would not constitute applicable state law
for this purpose.
Two commentators suggested that the
permissible range of unitrust percentages
should include any percentage permitted
by state statutes. The IRS and the Treasury
Department believe that when establishing
a unitrust percentage that attempts to yield
the equivalent of income over a long pe-
riod of time that may encompass wide vari-
ations in economic conditions, a range of
3% to 5% will be considered a reasonable
apportionment of a trust’s total return. In
response to one comment, the range of uni-
trust percentages has been adjusted in the
final regulations to include, rather than ex-
clude, unitrust percentages of 3% and 5%.
Also in response to comments, the final
regulations state that the periodic redeter-
mination of the fair market value of the
trust assets may be done as of a particular
date each year or as an average determined
on a multiple year basis.
The proposed regulations state that
traditionally ordinary income is allocated
to income and capital gains are allocated
to principal. One commentator pointed
out that ordinary income and capital gains
are tax concepts and not concepts that
have any meaning for purposes of trust
accounting income. The final regulations
have been revised to state that traditionally
items such as dividends, interest, and rents
are allocated to income and the proceeds
from the sale or exchange of trust assets
are allocated to principal.
The proposed regulations refer to a
power to make equitable adjustments be-
tween income and principal and describe
the circumstances under which these ad-
justments currentlyare permitted under
state law and will be respected for Federal
tax purposes. Specifically, state statutes
permit adjustments when trust assets are
invested under the state’s prudent investor
standard, the trust instrument refers to
income in describing the amount that may
or must be paid to a beneficiary, and the
trustee, after applying the state statutory
rules regarding the allocation of receipts
and disbursements between income and
principal, is unable to administer the trust
impartially. One commentator requested
clarification of the requirements a trustee
must satisfy to make an adjustment that
will be respected for Federal tax purposes.
Those requirements are a matter of local
law and may differ from state to state; the
trustee must meet whatever requirements
are imposed by applicable local law on
the exercise of this power. One commen-
tator pointed out that state statutes do not
include the term equitable in referring to
this power and suggested deleting that
term. One commentator suggested adding
“generally” to the statement concerning
the circumstances in which these adjust-
ments are permitted because some states
may permit these adjustments without en-
acting a prudent investor standard. These
two suggestions are adopted in the final
regulations.
One commentator suggested clarifying
that the definition of income in the regu-
lations also applies to spray and sprinkle
trusts. The final regulations provide that
allocations apportioning the total return of
the trust pursuant to the state statute will
be respected regardless of whether the trust
has one or more income beneficiaries and
irrespective of whether income must or
may be paid out each year. The commen-
tator also suggested that allocations pur-
suant to one apportionment method should
be respected even if a different apportion-
ment method was used in prior years. The
final regulations provide that, as long as
the trust complies with the requirements of
state statutes for switching between meth-
ods authorized by the statute, then, when
the trust switches between permitted meth-
ods: (i) the method used in any year will
be respected for Federal tax purposes; (ii)
the switch will not constitute a recognition
event under section 1001; and (iii) neither
the grantor nor any beneficiary will have
any gift tax consequences. This provision
does not apply to switches between meth-
ods not specifically authorized by state
statute.
It has been questioned whether the
changes to §1.643(b)–1 affect the amount
of income required to be distributed by
QSSTs. Section 1.1361–1(j) provides that
QSSTs are required to distribute income
as defined in §1.643(b)–1. Therefore,
no amendment to the QSST regulations
February 2, 20043672004-5 I.R.B.

is necessary for the new provisions of
§1.643(b)–1 to be applicable to QSSTs.
The proposed regulations provide that
an allocation of capital gains to income
will be respected if made either (i) pur-
suant to the terms of the governing instru-
ment and applicable local law, or (ii) pur-
suant to a reasonable and consistent exer-
cise of a discretionary power granted to the
fiduciary by local law, or by the govern-
ing instrument if not inconsistent with lo-
cal law. One commentator suggested that
in the phrase "pursuant to the terms of the
governing instrument and applicable local
law,” the term “and” be replaced with “or.”
The phrase with the term “and” is consis-
tent with the statutory language of section
643(b), and, therefore, no change has been
made.
One commentator suggested that a dis-
cretionary power to allocate capital gains
to income should not have to be exercised
consistently. The exercise of the power
generally affects the actual amount that
may or must be distributed to the income
beneficiaries and affects whether the trust
or the beneficiary will be taxed on the cap-
ital gains. Thus, the IRS and the Treasury
Department agree that the power does not
have to be exercised consistently, as long
as it is exercised reasonably and impar-
tially. However, if the amount of income is
determined by a unitrust amount, the exer-
cise of this discretionary power has no ef-
fect on the amount of the distribution, but
does affect whether the beneficiary or the
trust is taxed on the capital gains. Under
these circumstances, a discretionary power
must be exercised consistently. One com-
mentator suggested changing the phrase
“if not inconsistent with local law” be-
cause powers to allocate capital gains to
income will almost always be inconsistent
with the default provisions of state law.
Accordingly, the phrase has been changed
to “if not prohibited by local law.”
Pooled Income Funds
Several commentators were concerned
about the provision in the proposed regu-
lations that long-term capital gain does not
qualify for the income tax charitable de-
duction available to pooled income funds
(PIFs), if the amount of income payable to
the noncharitable beneficiaries may be ei-
ther a unitrust amount or an amount that
could include unrealized appreciation in
the value of trust assets pursuant to the ex-
ercise of a trustee’s power to adjust. One
commentator suggested that, if income is
defined as a unitrust amount or is subject to
the trustee’s power of adjustment, the pro-
vision in the proposed regulation invalidly
limits the amount that can be paid to the
noncharitable beneficiaries of the PIF.
This regulatory provision places no
prohibition on paying to the noncharita-
ble beneficiaries an amount of income
determined under the governing instru-
ment and applicable local law, even if that
income is a unitrust amount or is deter-
mined pursuant to a power of adjustment
that takes into account unrealized appre-
ciation. Rather, this regulatory provision
addresses whether long-term capital gains
recognized during a year but not dis-
tributed during that year are permanently
set aside for a charitable purpose as re-
quired by section 642(c)(3) to allow the
PIF to claim a charitable deduction for
these amounts. If income is defined as
a unitrust amount, a future payment of
income to the noncharitable beneficiaries
may be attributable to long-term capital
gains realized, but not distributed, in the
current year. If income is determined pur-
suant to a power of adjustment that takes
into account unrealized appreciation, a
portion of the capital gain recognized
during a year may be attributable to appre-
ciation that was the basis for a distribution
to the noncharitable beneficiaries in a prior
year. In both situations, the long-term cap-
ital gains are not permanently set aside
for charitable purposes and therefore do
not qualify for the charitable deduction in
computing the PIF’s income tax liability.
Some commentators were concerned
that PIFs need to be able to distribute more
than the traditional amounts of income to
remain useful vehicles for charitable giv-
ing. They suggest that PIFs should be
able to define trust accounting income as
traditional income plus any realized capi-
tal gains for the year but the total amount
defined as income cannot exceed a speci-
fied percentage. Thus, the annual payout
would be the lesser of a unitrust amount or
trust accounting income defined to include
gains from the appreciation of assets sold
by the trust during the year.
Distinct statutory provisions govern
PIFs and charitable remainder unitrusts
(CRUTs). The provisions applicable to
each type of trust are specifically designed
to achieve statutory objectives based on
the nature of the charitable and nonchar-
itable interests in each type of trust. The
commentators’ suggestion is, in effect, to
permit PIFs to operate in the same manner
as a net income CRUT, but without apply-
ing any of the other CRUT requirements to
these funds. There is no authority for in-
corporating certainprovisions applicable
to CRUTs into the provisions applicable
to PIFs.
Nevertheless, the power to adjust au-
thorized by many state statutes currently
appliestoPIFsadministeredinthose
states. If permitted under the terms of the
governing instrument and state statutes, a
trustee may use the power to make adjust-
ments by allocating to income a portion
of the sales proceeds from trust assets in
order to treat the income and remainder
beneficiaries impartially. The proper ex-
ercise of a power to adjust may provide
the income beneficiaries with amounts
in excess of the amount of traditional in-
come. The final regulations provide that,
for a PIF, the amount of proceeds from
the sale of assets that may be allocated
to income pursuant to a power to adjust
is limited to the amount by which those
proceeds exceed the fair market value of
those assets as of the date those assets
were contributed to or purchased by the
PIF. This provision ensures that amounts
attributable to the fair market value of
assets on the date contributed to the PIF
cannot be reallocated to income under a
power to adjust. In addition, long-term
capital gains from the sale or exchange
of trust assets do not qualify for the char-
itable deduction under section 642(c)(3)
to the extent that any sales proceeds are
distributed to the income beneficiaries.
One commentator suggested that the
“or’ in the phrase “under the terms of the
governing instrument or applicable local
law” should be changed to “and” to be
consistent with the statutory definition of
income under section 643(b). This change
has been made.
Charitable Remainder Trusts
Several commentators were concerned
about the requirement in the proposed
regulations that net income CRUTs under
sections 664(d)(2) and 664(d)(3) contain
their own definition of income if appli-
cable state law provides that income is a
2004-5 I.R.B.368February 2, 2004

unitrust amount. The purpose of this pro-
posed requirement was to avert potential
problems with qualification of a net in-
come CRUT in a state that defines income
as a unitrust amount. Some commentators
pointed out that state statutes provide al-
ternative definitions of income and all that
should be necessary is that the trust use a
definition of income, whether contained
in the terms of the governing instrument
or applicable local law, that is not a uni-
trust amount. Therefore, the requirement
that the trust contain its own definition of
income has been eliminated from the final
regulations.
Several commentators were concerned
about the provision in the proposed regu-
lations that the allocation of post-contri-
bution capital gain to income, if permit-
ted under the terms of the governing in-
strument and applicable local law, may not
be discretionary with the trustee. Some
suggested eliminating the prohibition on
discretionary powers held by the trustee.
Some suggested that a discretionary power
should be permitted if held by an indepen-
dent trustee. Some requested clarification
that this prohibition does not apply to a
trustee’s power to allocate receipts to in-
come or principal pursuant to state law.
The provision in the proposed regula-
tions has no effect on the determination of
trust accounting income under applicable
state law that grants the trustee a power to
reasonably apportion the total return of the
trust. The provision isdirected at discre-
tion given the trustee under the terms of
the governing instrument to allocate cap-
ital gains to income in some years and not
others. Allowing the trustee this type of
discretion is inconsistent with the require-
ments for net income CRUTs as explained
in the legislative history. The settlor has
the option of providing in the trust that
the trustee is to distribute the lesser of the
stated percentage payout or trust income.
However, this option must be adopted in
the trust instrument and not left to the dis-
cretion of the trustee. See H.R. Conf. Rep.
No. 91–782, at 296 (1969), reprinted in
1969–3 C.B. 644, 655. A power to allo-
cate capital gains to income in some years
and not others in the trustee’s sole discre-
tion is similar to having the discretionary
ability to pay out either the trust income
or the stated percentage payout each year,
regardless of their relative values. Thus,
the final regulations continue to provide
that, for CRUTs, post-contribution capital
gains may be included in the definition of
income under the terms of the governing
instrument or applicable local law, but not
pursuant to a trustee’s discretionary power
granted by the trust instrument, rather than
by state statute, to allocate capital gains to
income.
Capital Gains and Distributable Net
Income
Section 643(a)(3) provides that gains
from the sale or exchange of capital assets
generally are excluded from distributable
net income (DNI) to the extent that these
gains are allocated to corpus. However,
capital gains allocated to corpus are in-
cluded in DNI if they are either paid, cred-
ited, or required to be distributed, to a ben-
eficiary during the year, or paid, perma-
nently set aside, or to be used for a charita-
ble purpose. In certain situations it is eas-
ily ascertained whether capital gains are
paid to a beneficiary. For example, if the
trust instrument provides that the proceeds
from the sale of a certain asset are to be
paid to a beneficiary upon sale, then any
capital gain recognized upon the sale of
that asset is paid to the beneficiary and is
includible in DNI. However, the circum-
stances in which recognized capital gain
determines the amount to be distributed to
a beneficiary during theyear are relatively
rare.
More frequently, the trustee is autho-
rized by the trust instrument to make dis-
cretionary distributions of principal or, by
the recently-enacted state statutes, to pay
the income beneficiary a unitrust amount.
In these circumstances, the amount of real-
ized capital gain during the year does not
affect the amount distributed to a benefi-
ciary, and because money is fungible, it is
difficult to ascertain whether capital gains
are actually paid to the beneficiary. With
respect to these situations, the proposed
regulations attempt to clarify the circum-
stances in which capital gains are treated
as distributed to a beneficiary and there-
fore are includable in DNI. The proposed
regulations provide that capital gains will
be treated as part of a distribution to a
beneficiary, if the trustee allocates capi-
tal gains to the distribution pursuant to a
discretionary power granted by local law
or by the governing instrument (if not in-
consistent with local law) to treat capital
gains in this manner, provided the alloca-
tion power is exercised in a reasonable and
consistent manner, and is evidenced on the
trust’s books, records, and tax returns.
Commentators requested guidance on
several issues concerning the treatment of
capital gains as part of a distribution to a
beneficiary. These issues include clarifica-
tion that one trustee may exercise the dis-
cretion differently for different trusts and
that the treatment of capital gains from
the sale of different types of assets may
be different. Examples have been added
to the final regulations to address these
situations. In addition, some commenta-
tors were concerned about how a trustee
may show consistency in the first year,
whether the treatment in future years may
be changed based on something other than
a change in the definition of income, and
whether existing trusts may establish a dif-
ferent treatment based on the rules in the
final regulations.
In some respects, the proposed regu-
lations merely clarify how a trustee may
demonstrate that capital gain has been paid
to a beneficiary and therefore is includible
in DNI under section 643(a)(3). This de-
termination is relevant when distributions
are made to beneficiaries that exceed the
amount of DNI determined without regard
to the capital gains. In the past, this sit-
uation arose when mandatory or discre-
tionary payments of principal were made.
Because of the changes to the definition
of income under state statutes, the number
and variety of situations in which this de-
termination is relevant are increasing. In
implementing a different method for de-
termining income under a state statute, the
trustee may establish a pattern for includ-
ing or not including capital gains in DNI
to the extent that the amount of income so
determined is greater than the amount of
DNI determined without regard to the cap-
ital gains. This choice may be made ir-
respective of the trustee’s practice under
a prior legal definition of income regard-
ing the treatment of capital gains as part of
DNI when discretionary or mandatory dis-
tributions of principal were made from the
trust.
Two commentators requested examples
of the inclusion of capital gains in DNI
when the trustee exercises a power to ad-
just between income and principal under
applicable local law. The circumstances
in which a power to adjust is exercisable
February 2, 20043692004-5 I.R.B.

may vary among states and may be de-
termined by the powers of the trustee to
make distributions of income and princi-
pal under the terms of the governing in-
strument. For example, if a trust instru-
ment does not permit the trustee to distrib-
ute any corpus and the power to adjust un-
der local law may be exercised only with
respect to receipts from the sale of trust as-
sets, the amount allocated to income un-
der the power to adjust may have to be
from the realized appreciation in the value
of the assets that were sold. On the other
hand, if the trust instrument permits discre-
tionary distributions of principal and the
power to adjust under local law may be ex-
ercisedonlywithrespect to appreciation
in the value of trust assets, the power to
adjust may be similar to a unitrust amount
that is payable irrespective of whether ap-
preciated assets are sold during the year.
Because of the potential variations in the
circumstances and ramifications of exer-
cising a power to adjust under applicable
state statutes, additional examples would
be unlikely to provide meaningful or com-
plete guidance; thus, the final regulations
contain no additional examples concerning
inclusion of capital gains in DNI when the
trustee exercises a power to adjust.
It has been pointed out thatExamples
6through8in §1.643(a)–3(e) of the pro-
posed regulations, which are essentially
identical to examples in the existing reg-
ulations, may no longer be consistent with
the rules in the proposed regulations. In
the final regulations, the corresponding ex-
amples, nowExamples 7through10,have
been updated to takeinto account the new
rules. One commentator requested exam-
ples of the effect on DNI of capital gains
from a passthrough entity and income from
a passthrough entity that is more or less
than the trust accounting income from that
entity. These issues are beyond the scope
of this project.
Trusts Qualifying for Gift and Estate Tax
Marital Deductions
The proposed regulations provide that
a spouse will be treated as entitled to
receive all net income from a trust, as
required for the trust to qualify for the
gift and estate tax marital deductions un-
der §20.2056(b)–5(a)(1) of the Estate Tax
Regulations and §25.2523(e)–1(f)(1) of
the Gift Tax Regulations, if the trust is
administered under applicable state law
that provides for a reasonable apportion-
ment between the income and remainder
beneficiaries of the total return of the
trust and that meets the requirements of
§1.643(b)–1. Thus, a spouse who, as
the income beneficiary, is entitled in ac-
cordance with the state statute and the
governing instrument to a unitrust amount
of no less than 3% and no more than 5%
would be entitled to all the income from
the trust for purposes of qualifying the
trust for the marital deduction.
Several commentators suggested that a
trust that provides for a unitrust payment
to the spouse should satisfy the income
standard even in states that have not en-
acted legislation defining income as a uni-
trust amount or providing that a right to
income may be satisfied by such a pay-
ment. The income distribution require-
ment that must be satisfied for a trust to
qualify for the gift and estate tax mari-
tal deductions ensures that the spouse re-
ceives what is traditionally considered to
be income from the assets held in trust.
As previously discussed, the IRS and the
Treasury Department believe that only if
applicable state law has authorized a de-
parture from traditional concepts of in-
come and principal should such a depar-
ture be respected for Federal tax purposes.
A state statute specifically authorizing cer-
tain unitrust amounts in satisfaction of an
income interest or certain powers to ad-
just in conformance with the provisions
of §1.643(b)–1 would meet this standard.
However, in the absence of a state statute,
or, for example, a decision of the highest
court of the state applicable to all trusts ad-
ministered under that state’s law, the appli-
cable state law requirement will not be sat-
isfied.
It has also been suggested that, in some
circumstances, the proposed regulations
would allow the spouse to receive less
than all the traditional trust income, and
therefore would conflict with the section
2056 statutory requirement that the spouse
receive all trust income. For example, a
spouse who, in accordance with the state
statute, receives a 4% unitrust amount
would receive less than all the traditional
income generated by the trust, if the trust’s
total dividends, interest, rents, etc., for the
year exceed 4%. However, that spouse
would receive more than the amount of
traditional income earned by the trust in
any year that the trust’s total dividends,
interest, rents, etc., do not exceed 4%.
The regulations are intended to strike a
reasonable balance between the marital
deduction statutory requirements and the
many state statutes intended to facilitate
the investment of trust assets while ensur-
ing equitable treatment for the income and
remainder beneficiaries. Indeed, Congress
contemplated that, in appropriate circum-
stances, an annuity could be treated as sat-
isfying the statutory income distribution
requirement. The flush language follow-
ing section 2056(b)(7)(B)(ii) specifically
authorizes regulations that treat an annuity
“in a manner similar to an income inter-
est in property.” The IRS and Treasury
Department believe that these regulations
implement this statutory authorization in
a reasonable manner by recognizing allo-
cations under state statutes that provide
for a reasonable apportionment of the total
return of the trust.
Trusts Exempt From Generation-Skipping
Transfer Tax
The proposed regulations expand the
rules concerning changes that may be
made to trusts that are exempt from the
generation-skipping transfer tax because
they were irrevocable on September 25,
1985, without causing the loss of the
trusts’ exempt status. If such an exempt
trust is administered in conformance with
applicable state law that permits a unitrust
amount to be paid to the income bene-
ficiary or permits adjustments between
income and principal to ensure impartial-
ity, and that meets the requirements of
§1.643(b)–1, its exempt status will not be
affected.
One commentator requested that the fi-
nal regulations also provide that adminis-
tration of an exempt trust as described in
these regulations will not cause any trust
beneficiary to be treated as making a gift
and will not result in any taxable exchange
by the trust or any of its beneficiaries. An-
other commentator requested that the final
regulations clarify that changing the situs
of a trust from a state with only a tradi-
tional definition of income to a state that
permits unitrusts or powers to adjust will
not affect the exempt status of the trust.
Examples 11and12have been revised to
address these and similar concerns. The
same conclusions apply to a change of si-
2004-5 I.R.B.370February 2, 2004

tus in the opposite direction, from a state
that permits unitrusts or the power to ad-
just to a state that has only the traditional
definition of income.
Effective Dates
The proposed regulations provide that
the final regulations apply for taxable
years that begin on or after January 2,
2004. Commentators suggested that, as
a number of states have already enacted
statutes permitting the trustee to pay to the
person entitled to the income a unitrust
amount based on a fixed percentage of the
fair market value of the trust assets or pro-
viding the trustee the discretion to make
adjustments between income and principal
to treat the beneficiaries impartially, the
effective date provision should be changed
to allow trustees to take advantage of these
statutes for periodsbeginning before the
date of the publication of the final regula-
tions. As an alternative, one commentator
suggested that the IRS issue guidance al-
lowing trustees to rely on the proposed
regulations prior to the publication of the
final regulations.
The final regulations, in general, will
become effective for taxable years of trusts
and estates ending after January 2, 2004.
In addition, taxpayers may rely on the pro-
visions of the final regulations for any tax-
able years in which a trust or estate is
governed by a state statute authorizing a
unitrust payment in satisfaction of the in-
come interest of the income beneficiaries
or granting the trustee a power to adjust be-
tween income and principal, in each case
as described in the final regulations.
With respect to CRUTs, the prohibition
of a trustee’s discretionary power, granted
solely by the governing instrument and not
by applicable state statute, to allocate to in-
come sales proceeds attributable to appre-
ciation in the value of the asset after the
date it was contributed to the trust or pur-
chased by the trust is applicable to trusts
created after January 2, 2004.
With respect to PIFs, the provision con-
cerning the failure of net long-term capi-
tal gain to qualify for the charitable deduc-
tion if the income beneficiaries, under the
terms of the governing instrument and the
state statute, may receive a unitrust amount
or an amount based on unrealized appre-
ciation in the value of the fund’s assets is
applicable to taxable years of PIFs begin-
ning after January 2, 2004. However, pro-
vided income has not already been deter-
mined in such a manner, the fund’s gov-
erning instrument may be amended or re-
formed to eliminate this possibility. A ju-
dicial proceeding to reform the fund’s gov-
erning instrument must be commenced, or
a nonjudicial reformation that is valid un-
der state law must be completed, by the
date that is nine months after the later of
January 2, 2004, or the effective date of
the state statute authorizing determination
of income in such a manner.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations, and because
the regulations do not impose a collection
of information on small entities, the Regu-
latory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f)
of the Internal Revenue Code, the notice of
proposed rulemaking preceding these reg-
ulations was submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on its impact
on small business.
Drafting Information
The principal authors of these regula-
tions are Bradford R. Poston and Mary
Berman of the Office of Associate Chief
Counsel (Passthroughs and Special Indus-
tries), IRS. However, other personnel from
the IRS and the Treasury Department par-
ticipated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 20, 25,
and 26 are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.642(c)–2 is amended
as follows:
1. Paragraph (c) is amended by adding
two sentences after the first sentence.
2. Paragraph (e) is added immediately
following paragraph (d).
The additions read as follows
§1.642(c)–2 Unlimited deduction for
amounts permanently set aside for a
charitable purpose.
*****
(c) * * * No amount of net long-term
capital gain shall be considered perma-
nently set aside for charitable purposes if,
under the terms of the fund’s governing
instrument and applicable local law, the
trustee has the power, whether or not ex-
ercised, to satisfy the income beneficia-
ries’ right to income by the payment of
either: an amount equal to a fixed per-
centage of the fair market value of the
fund’s assets (whether determined annu-
ally or averaged on a multiple year basis);
or any amount that takes into account un-
realized appreciation in the value of the
fund’s assets. In addition, no amount of net
long-term capital gain shall be considered
permanently set aside for charitable pur-
poses to the extent the trustee distributes
proceeds from the sale or exchange of the
fund’s assets as income within the mean-
ing of §1.642(c)–5(a)(5)(i). * * *
*****
(e)Effective dates. Generally, the sec-
ond sentence of paragraph (c) of this sec-
tion, concerning the loss of any charita-
ble deduction for long-term capital gains
if the fund’s income may be determined
by a fixed percentage of the fair market
value of the fund’s assets or by any amount
that takes into account unrealized appre-
ciation in the value of the fund’s assets,
applies for taxable years beginning after
January 2, 2004. In a state whose statute
permits income to be determined by refer-
ence to a fixed percentage of, or the un-
realized appreciation in, the value of the
fund’s assets, net long-term capital gain
of a pooled income fund may be consid-
ered to be permanently set aside for char-
itable purposes if the fund’s governing in-
strument is amended or reformed to elimi-
nate the possibility of determining income
in such a manner and if income has not
been determined in this manner. For this
purpose, a judicial proceeding to reform
the fund’s governing instrument must be
commenced, or a nonjudicial reformation
February 2, 20043712004-5 I.R.B.

that is valid under state law must be com-
pleted, by the date that is nine months after
the later of January 2, 2004, or the effective
date of the state statute authorizing deter-
mination of income in such a manner.
*****
Par. 3. In §1.642(c)–5, paragraph
(a)(5)(i) is revised to read as follows:
§1.642(c)–5 D
efinition of pooled income
fund.
(a) * * *
(5) * * *
(i) The termincomehas the same mean-
ing as it does under section 643(b) and the
regulations thereunder, except that income
generally may not include any long-term
capital gains. However, in conformance
with the applicable state statute, income
may be defined as or satisfied by a unitrust
amount, or pursuant to a trustee’s power
to adjust between income and principal to
fulfill the trustee’s duty of impartiality, if
the state statute both provides for a reason-
able apportionment between the income
and remainder beneficiaries of the total re-
turn of the trust and meets the requirements
of §1.643(b)–1. In exercising a power to
adjust, the trustee must allocate to princi-
pal, not to income, the proceeds from the
sale or exchange of any assets contributed
to the fund by any donor or purchased by
the fund at least to the extent of the fair
marketvalueofthoseassetsonthedateof
their contribution to the fund or of the pur-
chase price of those assets purchased by
the fund. This definition of income applies
for taxable years beginning after January 2,
2004.
*****
Par. 4. Section 1.643(a)–3 is revised to
read as follows:
§1.643(a)–3 Capital gains and losses.
(a)In general. Except as provided in
§1.643(a)–6 and paragraph (b) of this sec-
tion, gains from the sale or exchange of
capital assets are ordinarily excluded from
distributable net income and are not ordi-
narily considered as paid, credited, or re-
quired to be distributed to any beneficiary.
(b)Capital gains included in dis-
tributable net income.Gainsfromthe
sale or exchange of capital assets are in-
cluded in distributable net income to the
extent they are, pursuant to the terms of the
governing instrument and applicable local
law, or pursuant to a reasonable and impar-
tial exercise of discretion by the fiduciary
(in accordance with a power granted to the
fiduciary by applicable local law or by the
governing instrument if not prohibited by
applicable local law) —
(1) Allocated to income (but if income
under the state statute is defined as, or
consists of, a unitrust amount, a discre-
tionary power to allocate gains to income
must also be exercised consistently and the
amount so allocated may not be greater
than the excess of the unitrust amount over
the amount of distributable net income de-
termined without regard to this subpara-
graph §1.643(a)–3(b));
(2) Allocated to corpus but treated con-
sistently by the fiduciary on the trust’s
books, records, and tax returns as part of
a distribution to a beneficiary; or
(3) Allocated to corpus but actually dis-
tributed to the beneficiary or utilized by the
fiduciary in determining the amount that is
distributed or required to be distributed to
a beneficiary.
(c)Charitable contributions included in
distributable net income. If capital gains
are paid, permanently set aside, or to be
used for the purposes specified in section
642(c), so that a charitable deduction is
allowed under that section in respect of
the gains, they must be included in the
computation of distributable net income.
(d)Capital losses. Losses from the sale
or exchange of capital assets shall first be
netted at the trust level against any gains
from the sale or exchange of capital assets,
except for a capital gain that is utilized
under paragraph (b)(3) of this section in
determining the amount that is distributed
or required to be distributed to a particular
beneficiary. See §1.642(h)–1 with respect
to capital loss carryovers in the year of
final termination of an estate or trust.
(e)Examples. The following examples
illustrate the rules of this section:
Example 1. Under the terms of Trust’s govern-
ing instrument, all income is to be paid to A for
life. Trustee is given discretionary powers to invade
principal for A’s benefit and to deem discretionary
distributions to be made from capital gains realized
during the year. During Trust’s first taxable year,
Trust has $5,000 of dividend income and $10,000 of
capital gain from the sale of securities. Pursuant to
the terms of the governing instrument and applicable
local law, Trustee allocates the $10,000 capital gain
to principal. During the year, Trustee distributes to
A $5,000, representing A’s right to trust income. In
addition, Trustee distributes to A $12,000, pursuant
to the discretionary power to distribute principal.
Trustee does not exercise the discretionary power
to deem the discretionary distributions of principal
as being paid from capital gains realized during the
year. Therefore, the capital gains realized during
the year are not included in distributable net income
and the $10,000 of capital gain is taxed to the trust.
In future years, Trustee must treat all discretionary
distributions as not being made from any realized
capital gains.
Example 2. ThefactsarethesameasinExam-
ple 1, except that Trustee intends to follow a regu-
lar practice of treating discretionary distributions of
principal as being paid first from any net capital gains
realized by Trust during the year. Trustee evidences
this treatment by including the $10,000 capital gain
in distributable net income on Trust’s federal income
tax return so that it is taxed to A. This treatment of
the capital gains is a reasonable exercise of Trustee’s
discretion. In future years, Trustee must treat all dis-
cretionary distributions as being made first from any
realized capital gains.
Example 3.ThefactsarethesameasinExample
1, except that Trustee intends to follow a regular prac-
tice of treating discretionary distributions of principal
as being paid from any net capital gains realized by
Trust during the year from the sale of certain speci-
fied assets or a particular class of investments. This
treatment of capital gains is a reasonable exercise of
Trustee’s discretion.
Example 4.ThefactsarethesameasinExample
1, except that pursuant to the terms of the governing
instrument (in a provision not prohibited by applica-
ble local law), capital gains realized by Trust are al-
located to income. Because the capital gains are allo-
cated to income pursuant to the terms of the govern-
ing instrument, the $10,000 capital gain is included in
Trust’s distributable net income for the taxable year.
Example 5. ThefactsarethesameasinExam-
ple 1, except that Trustee decides that discretionary
distributions will be made only to the extent Trust
has realized capital gains during the year and thus
the discretionary distribution to A is $10,000, rather
than $12,000. Because Trustee will use the amount
of any realized capital gain to determine the amount
of the discretionary distribution to the beneficiary,
the $10,000 capital gain is included in Trust’s dis-
tributable net income for the taxable year.
Example 6. Trust’s assets consist of Blackacre
and other property. Under the terms of Trust’s gov-
erning instrument, Trustee is directed to hold Black-
acre for ten years and then sell it and distribute all the
sales proceeds to A. Because Trustee uses the amount
of the sales proceeds thatincludes any realized cap-
ital gain to determine the amount required to be dis-
tributed to A, any capital gain realized from the sale
of Blackacre is included in Trust’s distributable net
income for the taxable year.
Example 7. Under the terms of Trust’s govern-
ing instrument, all income is to be paid to A during
the Trust’s term. When A reaches 35, Trust is to ter-
minate and all the principal is to be distributed to A.
Because all the assets of the trust, including all capital
gains, will be actually distributed to the beneficiary at
the termination of Trust, all capital gains realized in
the year of termination are included in distributable
net income. See §1.641(b)–3 for the determination
of the year of final termination and the taxability of
2004-5 I.R.B.372February 2, 2004

capital gains realized after the terminating event and
before final distribution.
Example 8. ThefactsarethesameasExample
7, except Trustee is directed to pay B $10,000 before
distributing the remainder of Trust assets to A. Be-
cause the distribution to B is a gift of a specific sum of
money within the meaning of section 663(a)(1), none
of Trust’s distributable net income that includes all of
the capital gains realized during the year of termina-
tion is allocated to B’s distribution.
Example 9. The facts are the same asExample 7,
except Trustee is directed to distribute one-half of the
principal to A when A reaches 35 and the balance to
A when A reaches 45. Trust assets consist entirely
of stock in corporation M with a fair market value of
$1,000,000 and an adjusted basis of $300,000. When
A reaches 35, Trustee sellsone-half of the stock and
distributes the sales proceeds to A. All the sales pro-
ceeds, including all the capital gain attributable to that
sale, are actually distributed to A and therefore all the
capital gain is included in distributable net income.
Example 10. The facts are the same asExample 9,
except when A reaches 35, Trustee sells all the stock
and distributes one-half of the sales proceeds to A. If
authorized by the governing instrument and applica-
ble state statute, Trustee may determine to what ex-
tent the capital gain is distributed to A. The $500,000
distribution to A may be treated as including a mini-
mum of $200,000 of capital gain (and all of the princi-
pal amount of $300,000) and a maximum of $500,000
of the capital gain (with no principal). Trustee ev-
idences the treatment by including the appropriate
amount of capital gain in distributable net income on
Trust’s federal income tax return. If Trustee is not au-
thorized by the governing instrument and applicable
state statutes to determine to what extent the capital
gain is distributed to A, one-half of the capital gain
attributable to the sale is included in distributable net
income.
Example 11. The applicable state statute provides
that a trustee may make an election to pay an income
beneficiary an amount equal to four percent of the
fair market value of the trust assets, as determined
at the beginning of each taxable year, in full satis-
faction of that beneficiary’s right to income. State
statute also provides that this unitrust amount shall be
considered paid first from ordinary and tax-exempt
income, then from net short-term capital gain, then
from net long-term capital gain, and finally from re-
turn of principal. Trust’s governing instrument pro-
vides that A is to receive each year income as defined
under state statute. Trustee makes the unitrust elec-
tion under state statute. At the beginning of the tax-
able year, Trust assets are valued at $500,000. During
the year, Trust receives $5,000 of dividend income
and realizes $80,000 of net long-term gain from the
sale of capital assets. Trustee distributes to A $20,000
(4% of $500,000) in satisfaction of A’s right to in-
come. Net long-term capital gain in the amount of
$15,000 is allocated to income pursuant to the order-
ingruleofthestatestatuteandisincludedindis-
tributable net income for the taxable year.
Example 12. The facts are the same as inExample
11, except that neither state statute nor Trust’s gov-
erning instrument has an ordering rule for the charac-
ter of the unitrust amount, but leaves such a decision
to the discretion of Trustee. Trustee intends to follow
a regular practice of treating principal, other than cap-
ital gain, as distributed to the beneficiary to the extent
that the unitrust amount exceeds Trust’s ordinary and
tax-exempt income. Trustee evidences this treatment
by not including any capital gains in distributable net
income on Trust’s Federalincome tax return so that
the entire $80,000 capital gain is taxed to Trust. This
treatment of the capital gains is a reasonable exercise
of Trustee’s discretion. In future years, Trustee must
consistently follow this treatment of not allocating re-
alized capital gains to income.
Example 13. The facts are the same as inExample
11, except that neither state statutes nor Trust’s gov-
erning instrument has an ordering rule for the char-
acter of the unitrust amount, but leaves such a deci-
sion to the discretion of Trustee. Trustee intends to
follow a regular practice of treating net capital gains
as distributed to the beneficiary to the extent the uni-
trust amount exceeds Trust’s ordinary and tax-exempt
income. Trustee evidences this treatment by includ-
ing $15,000 of the capital gain in distributable net
income on Trust’s Federal income tax return. This
treatment of the capital gains is a reasonable exer-
cise of Trustee’s discretion. In future years, Trustee
must consistently treat realized capital gain, if any,
as distributed to the beneficiary to the extent that the
unitrust amount exceeds ordinary and tax-exempt in-
come.
Example 14. Trustee is a corporate fiduciary that
administers numerous trusts. State statutes provide
that a trustee may make an election to distribute to an
income beneficiary an amount equal to four percent
of the annual fair market value of the trust assets in
full satisfaction of that beneficiary’s right to income.
Neither state statutes nor the governing instruments
of any of the trusts administered by Trustee has an
ordering rule for the character of the unitrust amount,
but leaves such a decision to the discretion of Trustee.
With respect to some trusts, Trustee intends to fol-
low a regular practice of treating principal, other than
capital gain, as distributed to the beneficiary to the
extent that the unitrust amount exceeds the trust’s or-
dinary and tax-exempt income. Trustee will evidence
this treatment by not including any capital gains in
distributable net income on the Federal income tax
returns for those trusts. With respect to other trusts,
Trustee intends to follow a regular practice of treat-
ing any net capital gains as distributed to the bene-
ficiary to the extent the unitrust amount exceeds the
trust’s ordinary and tax-exempt income. Trustee will
evidence this treatment by including net capital gains
in distributable net income on the Federal income
tax returns filed for these trusts. Trustee’s decision
with respect to each trust is a reasonable exercise of
Trustee’s discretion and, in future years, Trustee must
treat the capital gains realized by each trust consis-
tently with the treatment by that trust in prior years.
(f)Effective date. This section applies
for taxable years of trusts and estates end-
ing after January 2, 2004.
Par. 5. Section 1.643(b)–1 is revised to
read as follows:
§1.643(b)–1 Definition of income.
For purposes of subparts A through
D, part I, subchapter J, chapter 1 of the
Internal Revenue Code, “income,” when
not preceded by the words “taxable,”
“distributable net,” “undistributed net,”
or “gross,” means the amount of income
of an estate or trust for the taxable year
determined under the terms of the govern-
ing instrument and applicable local law.
Trust provisions that depart fundamentally
from traditional principles of income and
principal will generally not be recognized.
For example, if a trust instrument directs
that all the trust income shall be paid to
the income beneficiary but defines ordi-
nary dividends and interest as principal,
the trust will not be considered one that
under its governing instrument is required
to distribute all its income currently for
purposes of section 642(b) (relating to
the personal exemption) and section 651
(relating to simple trusts). Thus, items
such as dividends, interest, and rents are
generally allocated to income and pro-
ceeds from the sale or exchange of trust
assets are generally allocated to princi-
pal. However, an allocation of amounts
between income and principal pursuant
to applicable local law will be respected
if local law provides for a reasonable
apportionment between the income and
remainder beneficiaries of the total return
of the trust for the year, including ordinary
and tax-exempt income, capital gains, and
appreciation. For example, a state statute
providing that income is a unitrust amount
of no less than 3% and no more than 5%
of the fair market value of the trust assets,
whether determined annually or averaged
on a multiple year basis, is a reasonable
apportionment of the total return of the
trust. Similarly, a state statute that permits
the trustee to make adjustments between
income and principal to fulfill the trustee’s
duty of impartiality between the income
and remainder beneficiaries is generally
a reasonable apportionment of the total
return of the trust. Generally, these adjust-
ments are permitted by state statutes when
the trustee invests and manages the trust
assets under the state’s prudent investor
standard, the trust describes the amount
that may or must be distributed to a bene-
ficiary by referring tothe trust’s income,
and the trustee after applying the state
statutory rules regarding the allocation
of receipts and disbursements to income
and principal, is unable to administer the
trust impartially. Allocations pursuant to
methods prescribed by such state statutes
for apportioning the total return of a trust
between income and principal will be re-
February 2, 20043732004-5 I.R.B.

spected regardless of whether the trust
provides that the income must be dis-
tributed to one or more beneficiaries or
may be accumulated in whole or in part,
and regardless of which alternate permit-
ted method is actually used, provided the
trust complies with all requirements of
the state statute for switching methods. A
switch between methods of determining
trust income authorized by state statute
will not constitute a recognition event
for purposes of section 1001 and will not
result in a taxable gift from the trust’s
grantor or any of the trust’s beneficiaries.
A switch to a method not specifically au-
thorized by state statute, but valid under
state law (including a switch via judicial
decision or a binding non-judicial settle-
ment) may constitute a recognition event
to the trust or its beneficiaries for purposes
of section 1001 and may result in taxable
gifts from the trust’s grantor and bene-
ficiaries, based on the relevant facts and
circumstances. In addition, an allocation
to income of all or a part of the gains from
thesaleorexchangeoftrustassetswill
generally be respected if the allocation is
made either pursuant to the terms of the
governing instrument and applicable local
law, or pursuant to a reasonable and im-
partial exercise of a discretionary power
granted to the fiduciary by applicable local
law or by the governing instrument, if not
prohibited by applicable local law. This
section is effective for taxable years of
trusts and estates ending after January 2,
2004.
Par. 6. In §1.651(a)–2, paragraph (d) is
added to read as follows:
§1.651(a)–2 Income required to be
distributed currently.
*****
(d) If a trust distributes property in kind
as part of its requirement to distribute cur-
rently all the income as defined under sec-
tion 643(b) and the applicable regulations,
the trust shall be treated as having sold the
property for its fair market value on the
date of distribution. If no amount in excess
of the amount of income as defined under
section 643(b) and the applicable regula-
tions is distributed by the trust during the
year, the trust will qualify for treatment un-
der section 651 even though property in
kind was distributed as part of a distribu-
tion of all such income. This paragraph (d)
applies for taxable years of trusts ending
after January 2, 2004.
Par. 7. In §1.661(a)–2, paragraph (f) is
revised to read as follows:
§1.661(a)–2 Deduction for distributions
to beneficiaries.
*****
(f) Gain or loss is realized by the trust
or estate (or the other beneficiaries) by rea-
son of a distribution of property in kind if
the distribution is in satisfaction of a right
to receive a distribution of a specific dollar
amount, of specific property other than that
distributed, or of income as defined un-
der section 643(b) and the applicable reg-
ulations, if income is required to be dis-
tributed currently. In addition, gain or loss
is realized if the trustee or executor makes
the election to recognize gain or loss under
section 643(e). This paragraph applies for
taxable years of trusts and estates ending
January 2, 2004.
Par. 8. Section 1.664–3 is amended as
follows:
1. Paragraphs (a)(1)(i)(b)(3)and(4)are
revised.
2. Paragraph (a)(1)(i)(b)(5) is removed.
The revisions read as follows:
§1.664–3 Charitable remainder unitrust.
(a) * * *
(1) * * *(i) * * *
(b)***
(3) For purposes of this paragraph
(a)(1)(i)(b), trust income generally means
income as defined under section 643(b)
and the applicable regulations. However,
trust income may not be determined by
reference to a fixed percentage of the an-
nual fair market value of the trust property,
notwithstanding any contrary provision in
applicable state law. Proceeds from the
sale or exchange of any assets contributed
to the trust by the donor must be allocated
to principal and not to trust income at least
to the extent of the fair market value of
those assets on the date of their contribu-
tion to the trust. Proceeds from the sale
or exchange of any assets purchased by
the trust must be allocated to principal and
not to trust income at least to the extent of
the trust’s purchase price of those assets.
Except as provided in the two preceding
sentences, proceeds from the sale or ex-
change of any assets contributed to the
trust by the donor or purchased by the
trust may be allocated to income, pursuant
to the terms of the governing instrument,
if not prohibited by applicable local law.
A discretionary power to make this alloca-
tion may be granted to the trustee under the
terms of the governing instrument but only
to the extent that the state statute permits
the trustee to make adjustments between
income and principal to treat beneficiaries
impartially.
(4) The rules in paragraph
(a)(1)(i)(b)(1)and(2)ofthissection
are applicable for taxable years ending
after April 18, 1997. The rule in the first
sentence of paragraph (a)(1)(i)(b)(3)is
applicable for taxable years ending after
April 18, 1997. The rules in the second,
fourth, and fifth sentences of paragraph
(a)(1)(i)(b)(3) are applicable for taxable
years ending after January 2, 2004. The
rule in the third sentence of paragraph
(a)(1)(i)(b)(3) is applicable for sales or
exchanges that occur after April 18, 1997.
The rule in the sixth sentence of paragraph
(a)(1)(i)(b)(3) is applicable for trusts
created after January 2, 2004.
*****
PART 20—ESTATE TAX; ESTATES
OF DECEDENTS DYING AFTER
AUGUST 16, 1954
Par. 9. The authority citation for part
20 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 10. Section 20.2056(b)–5 is
amended by adding a new sentence to the
end of paragraph (f)(1) to read as follows:
§20.2056(b)–5 Marital deduction; life
estate with power of appointment in
surviving spouse.
*****
(f)***(1)***Inaddition,thesur-
viving spouse’s interest shall meet the con-
dition set forth in paragraph (a)(1) of this
section if the spouse is entitled to income
as determined by applicable local law that
provides for a reasonable apportionment
between the income and remainder bene-
ficiaries of the total return of the trust and
that meets the requirements of §1.643(b)–1
of this chapter.
*****
Par. 11. Section 20.2056(b)–7 is
amended by adding a new sentence to the
end of paragraph (d)(1) to read as follows:
2004-5 I.R.B.374February 2, 2004

§20.2056(b)–7 Election with respect to
life estate for surviving spouse.
*****
(d) * * * (1) * * * A power under ap-
plicable local law that permits the trustee
to adjust between income and principal
to fulfill the trustee’s duty of impartiality
between the income and remainder ben-
eficiaries that meets the requirements of
§1.643(b)–1 of this chapter will not be con-
sidered a power to appoint trust property to
a person other than the surviving spouse.
*****
Par. 12. Section 20.2056(b)–10 is
amendedbyaddinganewsentenceatthe
end of the section to read as follows:
§20.2056(b)–10 Effective dates.
* * * In addition, the rule in the last sen-
tence of §20.2056(b)–5(f)(1) and the rule
in the last sentence of §20.2056(b)–7(d)(1)
regarding the effect on the spouse’s right to
income if applicable local law provides for
the reasonable apportionment between the
income and remainder beneficiaries of the
total return of the trust are applicable with
respect to trusts for taxable years ending
after January 2, 2004.
Par. 13. Section 20.2056A–5 is
amendedbyaddinganewsentencein
paragraph (c)(2) afterthe third sentence t
o
read as follows:
§20.2056A–5 Imposition of section 2056A
estate tax.
*****
(c) * * *
(2) * * * However, distributions made to
the surviving spouse as the income bene-
ficiary in conformance with applicable lo-
cal law that defines the term income as a
unitrust amount (or permits a right to in-
cometobesatisfiedbysuchanamount),
or that permits the trustee to adjust be-
tween principal and income to fulfill the
trustee’s duty of impartiality between in-
come and principal beneficiaries, will be
considered distributions of trust income if
applicable local law provides for a reason-
able apportionment between the income
and remainder beneficiaries of the total re-
turn of the trust and meets the requirements
of §1.643(b)–1 of this chapter. * * *
*****
Par. 14. Section 20.2056A–13 is re-
vised to read as follows:
§20.2056A–13 Effective dates.
Except as provided in this section,
the provisions of §§20.2056A–1 through
20.2056A–12 are applicable with respect
to estates of decedents dying after August
22, 1995. The rule in the fourth sentence
of §20.2056A–5(c)(2) regarding unitrusts
and distributions of income to the surviv-
ing spouse in conformance with applicable
local law is applicable to trusts for taxable
years ending after January 2, 2004.
PART 25—GIFT TAX; GIFTS MADE
AFTER DECEMBER 31, 1954
Par. 15. The authority citation for part
25 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 16. Section 25.2523(e)–1 is
amendedbyaddinganewsentenceto
the end of paragraph (f)(1) to read as fol-
lows:
§25.2523(e)–1 Marital deduction; life
estate with power of appointment in donee
spouse.
*****
(f) * * * (1) * * * In addition, the
spouse’s interest shall meet the condition
set forth in paragraph (a)(1) of this sec-
tion if the spouse is entitled to income as
defined or determined by applicable local
law that provides for a reasonable appor-
tionment between the income and remain-
der beneficiaries of the total return of the
trust and that meets the requirements of
§1.643(b)–1 of this chapter.
*****
Par. 17. Section 25.2523(h)–2 is
amended by adding a new sentence to the
end of the section to read as follows:
§25.2523(h)–2 Effective dates.
* * * In addition, the rule in the last sen-
tence of §25.2523(e)–1(f)(1) regarding the
determination of income under applicable
local law applies to trusts for taxable years
ending after January 2, 2004.
PART 26—GENERATION-SKIPPING
TRANSFER TAX REGULATIONS
UNDER THE TAX REFORM ACT OF
1986
Par. 18. The authority citation for part
26 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 19. Section 26.2601–1 is amended
as follows:
1. The second and third sentences of
paragraph (b)(4)(i) are revised to read as
follows.
2. Paragraph (b)(4)(i)(D)(2) is amend-
ed by adding a new sentence to the end of
the paragraph.
3. Paragraph (b)(4)(i)(E) is amended by
addingExamples 11and12.
4. Paragraph (b)(4)(ii) is revised to read
as follows.
The additions and revisions read as fol-
lows:
§26.2601–1 Effective dates.
*****
(b) * * *
(4)***(i)***Ingeneral,unless
specifically provided otherwise, the rules
contained in this paragraph are applicable
only for purposes of determining whether
an exempt trust retains its exempt status
for generation-skipping transfer tax pur-
poses. Thus (unless specifically noted),
the rules do not apply in determining, for
example, whether the transaction results in
a gift subject to gift tax, or may cause the
trust to be included in the gross estate of a
beneficiary, or may result in the realization
of gain for purposes of section 1001.
*****
(D) * * *
(2) * * * In addition, administration of
a trust in conformance with applicable lo-
cal law that defines the term income as a
unitrust amount (or permits a right to in-
cometobesatisfiedbysuchanamount)or
that permits the trustee to adjust between
principal and income to fulfill the trustee’s
duty of impartiality between income and
principal beneficiaries will not be consid-
ered to shift a beneficial interest in the
trust, if applicable local law provides for a
reasonable apportionment between the in-
come and remainder beneficiaries of the
total return of the trust and meets the re-
quirements of §1.643(b)–1 of this chapter.
February 2, 20043752004-5 I.R.B.

(E) * * *
Example 11. Conversion of income interest to
unitrust interest under state statute. In 1980, Grantor,
a resident of State X, established an irrevocable trust
for the benefit of Grantor’s child, A, and A’s issue.
The trust provides that trust income is payable to A
for life and upon A’s death the remainder is to pass
to A’s issue, per stirpes. In 2002, State X amends
its income and principal statute to define income as a
unitrust amount of 4% of the fair market value of the
trust assets valued annually. For a trust established
prior to 2002, the statute provides that the new defi-
nition of income will apply only if all the beneficia-
ries who have an interest in the trust consent to the
change within two years after the effective date of the
statute. The statute provides specific procedures to
establish the consent of the beneficiaries. A and A’s
issue consent to the change in the definition of income
within the time period, and in accordance with the
procedures, prescribed by the state statute. The ad-
ministration of the trust, in accordance with the state
statute defining income to be a 4% unitrust amount,
will not be considered to shift any beneficial interest
in the trust. Therefore, the trust will not be subject to
the provisions of chapter 13 of the Internal Revenue
Code. Further, under these facts, no trust beneficiary
will be treated as having made a gift for federal gift
tax purposes, and neither the trust nor any trust ben-
eficiary will be treated as having made a taxable ex-
change for federal income tax purposes. Similarly,
the conclusions in this example would be the same if
the beneficiaries’ consent was not required, or, if the
change in administration of the trust occurred because
the situs of the trust was changed to State X from a
state whose statute does not define income as a uni-
trust amount or if the situs was changed to such a state
from State X.
Example 12. Equitable adjustments under state
statute.The facts are the same as inExample 11,
except that in 2002, State X amends its income and
principal statute to permit the trustee to make ad-
justments between income and principal when the
trustee invests and manages the trust assets under the
state’s prudent investor standard, the trust describes
the amount that shall or must be distributed to a ben-
eficiary by referring to the trust’s income, and the
trustee after applying the state statutory rules regard-
ing allocation of receipts between income and princi-
pal is unable to administer the trust impartially. The
provision permitting the trustees to make these ad-
justments is effective in 2002 for trusts created at any
time. The trustee invests and manages the trust assets
under the state’s prudent investor standard, and pur-
suant to authorization in the state statute, the trustee
allocates receipts between the income and principal
accounts in a manner to ensure the impartial admin-
istration of the trust. The administration of the trust in
accordance with the state statute will not be consid-
ered to shift any beneficial interest in the trust. There-
fore, the trust will not be subject to the provisions of
chapter 13 of the Internal Revenue Code. Further,
under these facts, no trust beneficiary will be treated
as having made a gift for federal gift tax purposes,
and neither the trust nor any trust beneficiary will be
treated as having made a taxable exchange for fed-
eral income tax purposes. Similarly, the conclusions
in this example would be the same if the change in
administration of the trust occurred because the situs
of the trust was changed to State X from a state whose
statute does not authorize the trustee to make adjust-
ments between income and principal or if the situs
was changed to such a state from State X.
(ii)Effective dates. The rules in this
paragraph (b)(4) are generally applicable
on and after December 20, 2000. How-
ever, the rule in the last sentence of para-
graph (b)(4)(i)(D)(2) of this section and
Example 11andExample 12in paragraph
(b)(4)(i)(E) of this section regarding the
administration of a trust and the determi-
nation of income in conformance with ap-
plicable state law appliestotrustsfortax-
able years ending after January 2, 2004.
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved December 16, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on December 30,
2003, 8:45 a.m., and published in the issue of the Federal
Register f
or January 2, 2004, 69 F.R. 12)
Section 6043.—Liquidating,
etc., Transactions
26 CFR 1.6
043–4T: Information returns relating to
certain a
cquisitions of control and changes in capital
structur
e (temporary).
T.D. 9101
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Information Reporting
Relating to Taxable Stock
Transactions
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains tem-
porary regulations requiring information
reporting by a corporation if control of the
corporation is acquired or if the corpora-
tion has a recapitalization or other substan-
tial change in capital structure. This doc-
ument also contains temporary regulations
concerning information reporting require-
ments for brokers with respect to transac-
tions described in section 6043(c). The
text of these temporary regulations also
serves as the text of proposed regulations
(REG–156232–03) set forth in this issue of
the Bulletin.
DATES:Effective Date: These regulations
are effective December 30, 2003.
Applicability Dates: For dates of
applicability, see §§1.6043–4T(i) and
1.6045–3T(g).
FOR FURTHER INFORMATION
CONTACT: Nancy Rose at (202)
622–4910 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The forms referenced in these regula-
tions have been, or will be, reviewed and
approved by the Office of Management
and Budget in accordance with the require-
ments of the Paperwork Reduction Act of
1995 (44 U.S.C. 3507(d)).
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
Books and records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and tax
return information are confidential, as re-
quired by 26 U.S.C 6103.
Background
Section 6043(c) provides that if any
person acquires control of a corporation,
or if there is a recapitalization or other
substantial change in capital structure
of a corporation, the corporation, when
required by the Secretary, shall make a re-
turn setting forth the identity of the parties
to the transaction, the fees involved, the
changes in the capital structure involved,
and such other information as the Sec-
retary may require with respect to such
transaction.
On November 18, 2002, the IRS pub-
lished temporary regulations under section
6043(c) (T.D. 9022, 2002–2 C.B. 909).
The transactions covered by the reporting
2004-5 I.R.B.376February 2, 2004

requirement were certain acquisitions of
control and substantial changes in the cap-
ital structure of a corporation. These reg-
ulations required a corporation to attach a
form to its income tax return describing
these transactions and to file information
returns with respect to certain sharehold-
ersinsuchtransactions. OnNovember
18, 2002, the IRS also published tempo-
rary regulations under section 6045, which
provided for information reporting with re-
spect to these transactions by brokers (to-
gether with the section 6043(c) temporary
regulations, the 2002 temporary regula-
tions). The 2002 temporary regulations
were applicable to acquisitions of control
and substantial changes in capital structure
occurring after December 31, 2001, if the
reporting corporation or any shareholder
was required to recognize gain (if any) as
a result of the application of section 367(a)
as a result of the transaction.
The text of the 2002 temporary regula-
tions also served as the text of proposed
regulations set forthin a cross-referenc-
ing notice of proposed rulemaking pub-
lished in the Proposed Rules section of the
same issue of theFederal Register(2002
proposed regulations) (REG–143321–02,
2002–2 C.B. 922). The provisions of the
proposed regulations were proposed to ap-
ply with respect to any acquisition of con-
trol or substantial change in capital struc-
ture occurring after the date on which fi-
nal regulations would be published in the
Federal Register. The preamble to the no-
tice of proposed rulemaking invited pub-
lic comments with respect to the potential
for duplicate reporting and with respect to
the burden of compliance with the report-
ing requirements.
The IRS received a number of writ-
ten public comments with respect to the
information reporting requirements set
forth in the 2002 temporary and proposed
regulations. In addition, the IRS met
with representatives of the Information
Reporting Program Advisory Committee
(IRPAC) and other representatives of the
securities industry to discuss their con-
cerns and suggestions for revisions to the
regulations.
After considering the issues concerning
affected taxpayers, the IRS has decided
to revise the 2002 temporary regulations.
The revised temporary regulations set
forth information reporting rules that will
help ensure that brokers and sharehold-
ers receive information regarding these
corporate transactions, without unduly
burdening brokers and other members of
the securities industry.
The text of the revised temporary regu-
lations also serves as the text of new pro-
posed regulations (reproposed regulations)
set forth in the cross-referencing notice of
proposed rulemaking published elsewhere
in this issue of the Bulletin. The pream-
ble to that notice of proposed rulemaking
invites public comments with respect to
the revised temporary and reproposed reg-
ulations, particularly with respect to the
ability of brokers to obtain the informa-
tion necessary for reporting under revised
§1.6045–3T and proposed §1.6045–3.
Summary of Comments
The commentators noted certain gaps in
the transmission of information under the
2002 temporary and proposed regulations
between corporations subject to reporting
and brokers. Information reporting by bro-
kers depends upon the effective dissemi-
nation of information from the corporation
to the reporting community, and broker re-
porting is difficult to effectuate if there are
gaps in the process of transmitting this in-
formation.
As provided in the 2002 temporary
regulations, a reporting corporation would
file Forms 1099–CAP, “Changes in Cor-
porate Control and Capital Structure,”
with respect to its shareholders of record,
including brokers, under §1.6043–4T(b).
Brokers who received Forms 1099–CAP
would then file Forms 1099–CAP with
respect to their customers pursuant to
§1.6045–3T. The commentators pointed
out that a large majority of U.S. pub-
licly issued securitiesare actually held on
behalf of brokerage firms through clear-
ing organizations. Pursuant to the 2002
temporary regulations, clearing organi-
zations would receive Forms 1099–CAP
from the reporting corporation; however,
because clearing organizations are not
treated as brokers, they in turn would
not be required under §1.6045–3T to file
Forms 1099–CAP with respect to their
broker-members. Consequently, brokers
(who otherwise had the requirement to
file a Form 1099–CAP upon receiving
one) would not receive Form 1099–CAP
if they held their shares through a clearing
organization. In addition, brokers may not
be aware of the requirement to report with
respect to a particular corporate transac-
tion, or may have difficulty obtaining the
information necessaryfor reporting. Thus,
under the 2002 temporary regulations, the
actual shareholders of the reporting cor-
poration, the broker’s customers, may not
receive information returns to assist them
in preparing their income tax returns.
To address this issue, commentators
suggested an alternative procedure to
ensure that brokers receive the required
information for reporting and to bridge
any potential gaps in the chain of re-
porting. Commentators recommended
that the IRS act as a central repository
of information necessary for brokers and
issue a publication containing information
needed for brokers to satisfy their report-
ing obligations. Brokers and commercial
tax services that publish current devel-
opments could access this information,
and brokers could use this information in
preparing Forms 1099–CAP with respect
to their customers. An alternative sug-
gested by commentators was to require
the reporting corporation to post essential
information for reporting, from its Form
8806, “Information Return for Acquisition
of Control or Substantial Change in Capi-
tal Structure,” to an IRS website.
Based on the comments, the re-
vised temporary regulations provide in
§1.6043–4T(a)(1)(vi) that reporting cor-
porations may elect on Form 8806 to
consent to the publication by the IRS of
information necessary for brokers to file
information returns with respect to their
customers. To provide every corporation
with the ability to make this election, the
revised temporary regulations require re-
porting corporations to file Form 8806
even though the corporation may also re-
port the transaction under sections 351,
355, or 368. In order to enable the IRS to
publish the information timely, the revised
temporary regulations require reporting
corporations to file Form 8806 within 45
days after the transaction, and in no event
later than January 5 of the year following
the calendar year in which the transaction
occurs.
The role of clearing organizations was
also the subject of comments. Commen-
tators suggested that the regulations use
existing processes for distributing infor-
mation to minimize the cost of and the
time required for implementing reporting
February 2, 20043772004-5 I.R.B.

by the industry. Those existing processes
include the dissemination of information
by clearing organizations. Under current
practices, important information regarding
corporate transactions (including tax infor-
mation) is disseminated by clearing orga-
nizations to their members. The new tem-
porary regulations try to take advantage of
this existing information flow by contin-
uing to require corporations to provide a
Form 1099–CAP to clearing organizations
that are listed as shareholders of record at
the time of an acquisition of control or sub-
stantial change in capital structure. It is
anticipated that clearing organizations will
disseminate information obtained from the
Form 1099–CAP to their members and
that broker-members will use that informa-
tion (and information obtained from other
sources) to satisfy their own reporting obli-
gations under revised §1.6045–3T. Under
the revised temporary regulations, a bro-
ker is required to report information if the
broker knows or has reason to know, based
on readily available information, that there
was an acquisition of control or substantial
change in capital structure with respect to
shares held by the broker on behalf of a
customer. If a clearing organization dis-
seminates information identifying an ac-
quisition of control or a substantial change
in capital structure to a broker-member, the
broker-member has readily available infor-
mation about the transaction and must sat-
isfy its §1.6045–3T reporting obligations
with respect to the transaction.
The revised temporary regulations pro-
vide that a reporting corporation is not
required to file Forms 1099–CAP with
respect to its shareholders which are clear-
ing organizations, or to furnish Forms
1099–CAP to such clearing organizations,
if the corporation makes the election to
permit the IRS to publish information
regarding the transaction. The IRS’ publi-
cation of such information pursuant to the
corporation’s consentwill provide readily
available information for brokers, who
must satisfy their reporting obligations
with respect to the transaction.
Commentators also requested that bro-
kers be permitted to use Form 1099–B,
“Proceeds From Broker and Barter Ex-
change Transactions,” for reporting under
§1.6045–3T, rather than overhaul their
systems to report on Form 1099–CAP.
The commentators point out that this
would also avoid any confusion stemming
from the issuance of both types of forms to
the same taxpayer in the same transaction.
The revised temporary regulations provide
that Form 1099–B should be used by bro-
kers for reporting under §1.6045–3T. With
respect to transactions occurring in 2003,
brokers may use either Form 1099–B or
1099–CAP.
Explanation of Provisions
The revised temporary regulations re-
quire a domestic corporation involved in
certain large taxable transactions to file
Form 8806 reporting and describing such
transactions. The revised temporary reg-
ulations require the filing of Form 8806
within 45 days following an acquisition
of control or substantial change in capi-
tal structure, as defined in §§1.6043–4T(c)
and (d), or, if earlier, by January 5
th
of the
year following the calendar year in which
such event occurred.
The revised temporary regulations do
not change the definition ofacquisition
of controlorsubstantial change in capital
structureas set forth in the 2002 tempo-
rary regulations. An acquisition of control
of a corporation is defined as a transaction
or series of related transactions in which
stock representing control of that corpo-
ration is distributed by a second corpora-
tion or in which stock representing con-
trol of that corporation is acquired (directly
or indirectly) by a second corporation and
the shareholders of the first corporation re-
ceive cash, stock or other property. For
these purposes, control is determined in
accordance with the first sentence of sec-
tion 304(c)(1). With certain limitations,
the constructive ownership rules of sec-
tion 318(a) apply to determine ownership.
Acquisitions of control within an affiliated
group are excepted from this definition, as
are acquisitions in which the fair market
value of the stock acquired in the transac-
tion or series of related transactions is less
than $100,000,000.
A corporation has a substantial change
in its capital structure if the corporation in
a transaction or series of related transac-
tions (a) undergoes a recapitalization with
respect to its stock, (b) redeems its stock,
(c) merges, consolidates or otherwise com-
bines with another entity or transfers sub-
stantially all of its assets to one or more
entities, (d) transfers all or part of its as-
sets to another corporation in a title 11 or
similar case and, in pursuance of the plan,
distributes stock or securities of that cor-
poration, or (e) changes its identity, form
or place of organization. Transactions in
which the amount of any cash plus the fair
market value of any property (including
stock) provided to shareholders of the cor-
poration is less than $100,000,000 are ex-
cepted from this definition, as are transac-
tions within an affiliated group.
The revised temporary regulations re-
quire a domestic corporation involved in
the specified transactions to issue, with re-
spect to each of its shareholders of record,
a Form 1099–CAP reporting the amount
of any cash plus the fair market value of
any property (including certain stock) ex-
changed in the transaction. Corporations
are not required to report the fair market
value of any stock provided to a share-
holder if the corporation reasonably deter-
mines that the receipt of such stock would
not cause the shareholder to recognize gain
(if any). Corporations also are not required
to report amounts distributed to certain ex-
empt recipients. The list of exempt recipi-
ents has been expanded to include brokers.
Penalties under section 6652(l) may be
imposed for failing to file required returns
under section 6043(c) (including failure to
file on magnetic media, as required un-
der section 6011(e) and §1.6011–2). The
penalty under section 6652(l) is $500 for
each day the failure continues, but the to-
tal amount imposed with respect to a re-
turn cannot exceed $100,000. The revised
temporary regulations provide that the in-
formation returns required under these reg-
ulations shall be treated as one return for
purposes of the section 6652(l) penalty, so
that the penalty shall not exceed $500 per
day ($100,000 in total) with respect to any
acquisition of control or change in capi-
tal structure. Further, as provided in sec-
tion 6652(l), such penalty does not apply if
the failure is due to reasonable cause. Un-
til regulations are promulgated under sec-
tion 6652(l) to set forth specific standards
for determining reasonable cause, the IRS
will use the reasonable cause standards set
forth in §301.6724–1 as a guideline for de-
termining reasonable cause.
The 2002 temporary regulations under
section 6045 required a broker who, as the
record holder of stock, received a Form
1099–CAP from a corporation pursuant to
the reporting requirements of §1.6043–4T
to file a Form 1099–CAP with respect to
2004-5 I.R.B.378February 2, 2004

the actual owner and furnish such Form
1099–CAP to the actual owner. Under
the revised temporary regulations, bro-
kers should not receive Forms 1099–CAP
from a corporation and are not required
to issue Forms 1099–CAP. Instead, re-
vised §1.6045–3T requires a broker that
knows or has reason to know, based on
readily available information, that a trans-
action described in §1.6043–4T(c) or (d)
has occurred to file an information return
reporting the required information with
respect to its customers who are not ex-
empt recipients. In order to allow brokers
to use their existing information reporting
systems, the new temporary regulations
require Form 1099–B, “Proceeds From
Broker and Barter Exchange Transac-
tions,” to be used for such reporting. It
is anticipated that brokers will obtain the
information regarding the corporate trans-
actions from the IRS website or an IRS
publication, from information provided
by clearing organizations, as well as from
other sources regularly consulted within
the industry.
The revised temporary regulations are
effective only for acquisitions of control
and substantial changes of capital structure
that occur after December 31, 2002, and
for which the reporting corporation or any
shareholder is required to recognize gain
(if any) as a result of the application of
section 367(a). The cross-referencing pro-
posed regulations published in this issue of
the Bulletin will apply to all acquisitions of
control and substantial changes in capital
structure occurring after the date that such
regulations are published as final regula-
tions (regardless of whether section 367(a)
applies).
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations. For
the applicability of the Regulatory Flexi-
bility Act (5 U.S.C. chapter 6), refer to the
Special Analyses section of the preamble
to the cross-referencing notice of proposed
rulemaking published in this issue of the
Bulletin. Pursuant to section 7805(f) of
the Internal Revenue Code, these tempo-
rary regulations will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small businesses.
Drafting Information
The principal author of these temporary
regulations is Nancy L. Rose, Office of
Associate Chief Counsel (Procedure and
Administration).
*****
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
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805* * *
Par. 2. Section 1.6043–4T is revised to
read as follows:
§1.6043–4T Information returns relating
to certain acquisitions of control and
changes in capital structure (temporary).
(a)Information returns for an acqui-
sition of control or a substantial change
in capital structure—(1)General rule.If
there is an acquisition of control (as de-
fined in paragraph (c) of this section) or a
substantial change in the capital structure
(as defined in paragraph (d) of this section)
of a domestic corporation (reporting cor-
poration), the reporting corporation must
file a completed Form 8806, “Information
Return for Acquisition of Control or Sub-
stantial Change in Capital Structure,” in
accordance with the instructions to that
form. Form 8806 will request the infor-
mation required in paragraphs (a)(1)(i)
through (vi) of this section and any other
information specifiedin the instructions.
(i)Reporting corporation.Providethe
name, address, and taxpayer identification
number (TIN) of the reporting corporation.
(ii)Common parent, if any, of the re-
porting corporation. If the reporting cor-
poration was a subsidiary member of an
affiliated group filing a consolidated re-
turn immediately priorto the acquisition of
control or the substantial change in capital
structure, provide the name, address, and
TIN of the common parent of that affili-
ated group.
(iii)Acquiring corporation.Providethe
name, address and TIN of any corpora-
tion that acquired control of the reporting
corporation within the meaning of para-
graph (c) of this section or combined with
or received assets from the reporting cor-
poration pursuant to a substantial change
in capital structure within the meaning of
paragraph (d) of this section (acquiring
corporation). State whether the acquiring
corporation is foreign (as defined in sec-
tion 7701(a)(5)) or is a dual resident cor-
poration (as defined in §1.1503–2(c)(2)).
In either case, state whether the acquiring
corporation was newly formed prior to its
involvement in the transaction.
(iv)Common parent, if any, of acquir-
ing corporation. If the acquiring corpora-
tion named in paragraph (a)(1)(iii) of this
section was a subsidiary member of an
affiliated group filing a consolidated re-
turn immediately prior to the acquisition of
control or the substantial change in capital
structure, provide the name, address, and
TIN of the common parent of that affili-
ated group.
(v)Information about acquisition of
control or substantial change in capital
structure.Provide—
(A) A description of the transaction or
transactions that gave rise to the acquisi-
tion of control or the substantial change in
capital structure of the corporation;
(B) The date or dates of the transaction
or transactions that gave rise to the acqui-
sition of control or the substantial change
in capital structure;
(C) A description of and a statement of
the fair market value of any stock provided
to the reporting corporation’s shareholders
in exchange for their stock if the reporting
corporation reasonably determines that the
shareholders are not required to recognize
gain (if any) from the receipt of such stock
for U.S. federal income tax purposes; and
(D) A statement of the amount of cash
plus the fair market value of any property
(including stock if the reporting corpora-
tion reasonably determines that its share-
holders would be required to recognize
gain (if any) on the receipt of such stock,
but excluding stock described in paragraph
(a)(1)(v)(C) of this section) provided to the
reporting corporation’s shareholders in ex-
change for each share of their stock.
February 2, 20043792004-5 I.R.B.

(2)Consent election.Form8806will
provide the reporting corporation with the
ability to elect to permit the IRS to pub-
lish information that will inform brokers
of the transaction and enable brokers to
satisfy their reporting obligations under
§1.6045–3T. The information to be pub-
lished, on the IRS website and/or in an
IRS publication, would be limited to the
name and address of the corporation, the
date of the transaction, a description of the
shares affected by the transaction, and the
amount of cash and the fair market value
of any property (excluding stock described
in paragraph (a)(1)(v)(C) of this section)
provided to each class of shareholders in
exchange for a share.
(3)Time for making return—(i)In gen-
eral. Form8806mustbefiledonorbe-
fore the 45
th
day following the acquisition
of control or substantial change in capital
structure of the corporation, or, if earlier,
on or before January 5
th
of the year fol-
lowing the calendar year in which the ac-
quisition of control or substantial change
in capital structure occurs.
(ii)Transition rule. If an acquisition of
control or a substantial change in capital
structure of a corporation occurs after De-
cember 31, 2002, and before December 29,
2003, Form 8806 must be filed on or before
January 5, 2004.
(4)Exception where transaction is re-
ported under section 6043(a).Noreport-
ing is required under paragraph (a) of this
section with respect to a transaction for
which information is required to be re-
ported pursuant to section 6043(a), pro-
vided the transaction is properly reported
in accordance with that section.
(5)Exception where shareholders are
exempt recipients. No reporting is required
under paragraph (a) of this section if the re-
porting corporation reasonably determines
that all of its shareholders who receive
cash, stock or other property pursuant to
the acquisition of control or substantial
change in capital structure are exempt re-
cipients under paragraph (b)(5) of this sec-
tion.
(b)Information returns regarding
shareholders—(1)General rule.Acor-
poration that is required to file Form
8806 pursuant to paragraph (a)(1) of this
section shall file a return of information
on Forms 1096, “Annual Summary and
Transmittal of U.S. Information Returns,”
and 1099–CAP, “Changes in Corporate
Control and Capital Structure,” with re-
spect to each shareholder of record in the
corporation (before or after the acquisition
of control or the substantial change in cap-
ital structure) who receives cash, stock, or
other property pursuant to the acquisition
of control or the substantial change in
capital structure and who is not an exempt
recipient as defined in paragraph (b)(5) of
this section. A corporation is not required
to file a Form 1096 or 1099–CAP with
respect to a clearing organization if the
corporation makes the election described
in paragraph (a)(2) of this section.
(2)Time for making information re-
turns. Forms 1096 and 1099–CAP must
befiledonorbeforeFebruary28(March
31 if filed electronically) of the year fol-
lowing the calendar year in which the
acquisition of control or the substantial
change in capital structure occurs.
(3)Contents of return.AseparateForm
1099–CAP must be filed with respect to
amounts received by each shareholder
(who is not an exempt recipient as defined
in paragraph (b)(5) of this section) show-
ing—
(i) The name, address, telephone num-
ber and TIN of the reporting corporation;
(ii) The name, address and TIN of the
shareholder;
(iii) The number and class of shares in
the reporting corporation exchanged by the
shareholder;
(iv) The aggregate amount of cash
and the fair market value of any stock
(other than stock described in paragraph
(a)(1)(v)(C) of this section) or other prop-
erty provided to the shareholder in ex-
change for its stock; and
(v) Such other information as may
be required by the instructions to Form
1099–CAP.
(4)Furnishing of forms to sharehold-
ers. The Form 1099–CAP filed with
respect to each shareholder must be fur-
nished to such shareholder on or before
January 31 of the yearfollowing the calen-
dar year in which the shareholder receives
cash, stock, or other property as part of
the acquisition of control or the substan-
tial change in capital structure. The Form
1099–CAP filed with respect to a clear-
ing organization must be furnished to the
clearing organization on or before Jan-
uary 5
th
of the year following the calendar
year in which the acquisition of control or
substantial change in capital structure oc-
curred. A Form 1099–CAP is not required
to be furnished to a clearing organization
if the reporting corporation makes the
election described in paragraph (a)(2) of
this section.
(5)Exempt recipients. A corporation is
not required to file a Form 1099–CAP pur-
suant to this paragraph (b) of this section
with respect to any of the following share-
holders that is not a clearing organization:
(i) Any shareholder who receives solely
stock described in paragraph (a)(1)(v)(C)
of this section in exchange for its stock in
the corporation.
(ii) Any shareholder who is required to
recognize gain (if any) as a result of the
receipt of cash, stock, or other property if
the corporation reasonably determines that
the amount of such cash plus the fair mar-
ket value of such stock and other property
does not exceed $1,000. Stock described
in paragraph (a)(1)(v)(C) of this section is
not taken into account for purposes of this
paragraph (b)(5)(ii).
(iii) Any shareholder described in para-
graphs (b)(5)(iii)(A) through (M) of this
section if the corporation has actual knowl-
edge that the shareholder is described in
one of paragraphs (b)(5)(iii)(A) through
(M)ofthissectionorifthecorporation
has a properly completed exemption cer-
tificate from the shareholder (as provided
in §31.3406(h)–3 of this chapter). The
corporation also may treat a shareholder
as described in paragraphs (b)(5)(iii)(A)
through (M) of this section based on
the applicable indicators described in
§1.6049–4(c)(1)(ii).
(A) A corporation, as described in
§1.6049–4(c)(1)(ii)(A) (except for corpo-
rations for which an election under section
1362(a) is in effect).
(B) A tax-exempt organization, as de-
scribed in §1.6049–4(c)(1)(ii)(B)(1).
(C) An individual retirement plan, as
described in §1.6049–4(c)(1)(ii)(C).
(D) The United States, as described in
§1.6049–4(c)(1)(ii)(D).
(E) A state, as described in
§1.6049–4(c)(1)(ii)(E).
(F) A foreign government, as described
in §1.6049–4(c)(1)(ii)(F).
(G) An international organization, as
described in §1.6049–4(c)(1)(ii)(G).
(H) A foreign central bank of issue, as
described in §1.6049–4(c)(1)(ii)(H).
(I) A securities or commodities dealer,
as described in §1.6049–4(c)(1)(ii)(I).
2004-5 I.R.B.380February 2, 2004

(J) A real estate investment trust, as de-
scribed in §1.6049–4(c)(1)(ii)(J).
(K) An entity registered under the
Investment Company Act of 1940
(15 U.S.C. 80a–1), as described in
§1.6049–4(c)(1)(ii)(K).
(L) A common trust fund, as described
in §1.6049–4(c)(1)(ii)(L).
(M) A financial institution such as a
bank, mutual savings bank, savings and
loan association, building and loan associ-
ation, cooperative bank, homestead associ-
ation, credit union, industrial loan associa-
tion or bank, or other similar organization.
(iv) Any shareholder that the corpora-
tion, prior to the transaction, associates
with documentation upon which the cor-
poration may rely in order to treat pay-
ments to the shareholder as made to a for-
eign beneficial owner in accordance with
§1.1441–1(e)(1)(ii) or as made to a foreign
payee in accordance with §1.6049–5(d)(1)
or presumed to be made to a foreign payee
under §1.6049–5(d)(2) or (3). For pur-
poses of this paragraph (b)(5)(iv), the
provisions in §1.6049–5(c) (regarding
rules applicable to documentation of for-
eign status and definition of U.S. payor
and non-U.S. payor) shall apply. The pro-
visions of §1.1441–1 shall apply by using
the termscorporationandshareholder
in place of the termswithholding agent
andpayeeand without regard to the fact
that the provisions apply only to amounts
subject to withholding under chapter 3 of
the Internal Revenue Code. The provi-
sions of §1.6049–5(d) shall apply by using
the termscorporationandshareholder
in place of the termspayorandpayee.
Nothing in this paragraph (b)(5)(iv) shall
be construed to relieve a corporation of
its withholding obligations under section
1441.
(v) Any shareholder if, on January 31
of the year following the calendar year in
which the shareholder receives cash, stock,
or other property, the corporation did not
know and did not have reason to know that
the shareholder received such cash, stock,
or other property in a transaction or series
of related transactions that would result in
an acquisition of control or a substantial
change in capital structure.
(6)Coordination with other sections.
In general, no reporting is required un-
der paragraph (b) of this section with re-
spect to amounts that are required to be re-
ported under section 6042 or section 6045,
unless the corporation knows or has rea-
son to know that such amounts are not
properly reported inaccordance with those
sections. A corporation must satisfy the
requirements under paragraph (b) of this
section with respect to any shareholder of
record that is a clearing organization.
(c)Acquisition of control of a corpo-
ration—(1)In general. For purposes of
this section, an acquisition of control of a
corporation (first corporation) occurs if, in
a transaction or series of related transac-
tions, either—
(i) Stock representing control of the
first corporation is distributed by a second
corporation to shareholders of the second
corporation and the fair market value of
such stock on the date of distribution is
$100,000,000 or more; or
(ii) (A) Before an acquisition of stock of
the first corporation (directly or indirectly)
by a second corporation, the second cor-
poration does not have control of the first
corporation;
(B) After the acquisition, the second
corporation has control of the first corpo-
ration;
(C) The fair market value of the stock
acquired in the transaction and in any re-
lated transactions as of the date or dates
on which such stock was acquired is
$100,000,000 or more; and
(D) The shareholders of the first cor-
poration (determined without applying
the constructive ownership rule of section
318(a)) receive cash, stock, or other prop-
erty pursuant to the acquisition.
(2)Control. For purposes of this sec-
tion, control is determined in accordance
with the first sentence of section 304(c)(1).
(3)Constructive ownership.(i)Ex-
cept as otherwise provided in this section,
the constructive ownership rules of section
318(a) (except for section 318(a)(4), pro-
viding for constructive ownership through
an option to acquire stock), modified as
provided in section 304(c)(3)(B), shall ap-
ply for determining whether there has been
an acquisition of control.
(ii) The determination of whether there
has been an acquisition of control shall be
made without regard to whether the per-
son or persons from whom control was ac-
quired retain indirect control of the first
corporation under section 318(a).
(iii) For purposes of paragraph (c)(1)(ii)
of this section, section 318(a) shall not ap-
ply to cause a second corporation to be
treated as owning, before an acquisition
of stock in a first corporation (directly or
indirectly) by the second corporation, any
stock that is acquired in the first corpora-
tion. For example, if the shareholders of a
domestic corporation form a new holding
company and then transfer their shares in
the domestic corporation to the new hold-
ing company, the new holding company
shall not be treated as having control of
the domestic corporation before the acqui-
sition. The new holding company acquires
control of the domestic corporation as a re-
sult of the transfer. Similarly, if the share-
holders of a domestic parent corporation
transfer their shares in the parent corpo-
ration to a subsidiary of the parent in ex-
change for shares in the subsidiary, the
subsidiary shall not be treated as having
control of the parent before the transaction.
The subsidiary acquires control of the par-
ent as a result of the transfer.
(4)Corporation includes group.For
purposes of this paragraph (c), if two or
more corporations act pursuant to a plan or
arrangement with respect to acquisitions of
stock, such corporations will be treated as
one corporation for purposes of this sec-
tion. Whether two or more corporations
act pursuant to a plan or arrangement de-
pends on the facts and circumstances.
(5)Section 338 election. For purposes
of this paragraph (c), an acquisition of
stock of a corporation with respect to
which an election under section 338 is
made is treated as anacquisition of stock
(and not as an acquisition of the assets of
such corporation).
(d)Substantial change in capital struc-
ture of a corporation—(1)In general.
A corporation has a substantial change
in capital structure if it has a change in
capital structure (as defined in paragraph
(d)(2) of this section) and the amount of
any cash and the fair market value of any
property (including stock) provided to the
shareholders of such corporation pursuant
to the change in capital structure, as of the
date or dates on which the cash or other
property is provided, is $100,000,000 or
more.
(2)Change in capital structure.For
purposes of this section, a corporation has
a change in capital structure if the corpo-
ration in a transaction or series of transac-
tions—
(i) Undergoes a recapitalization with re-
spect to its stock;
February 2, 20043812004-5 I.R.B.

(ii) Redeems its stock (including
deemed redemptions);
(iii) Merges, consolidates or other-
wise combines with another corporation
or transfers all or substantially all of its
assets to one or more corporations;
(iv) Transfers all or part of its assets to
another corporation in a title 11 or simi-
lar case and, in pursuance of the plan, dis-
tributes stock or securities of that corpora-
tion; or
(v) Changes its identity, form or place
of organization.
(e)Reporting by successor entity.If
a corporation (transferor) transfers all or
substantially all of its assets to another en-
tity (transferee) in a transaction that con-
stitutes a substantial change in the capi-
tal structure of transferor, transferor must
satisfy the reporting obligations in para-
graph (a) or (b) of this section. If trans-
feror does not satisfy the reporting obliga-
tions in paragraph (a) or (b) of this sec-
tion, then transferee must satisfy those re-
porting obligations. If neither transferor
nor transferee satisfies the reporting obli-
gations in paragraphs (a) and (b) of this
section, then transferor and transferee shall
be jointly and severally liable for any ap-
plicable penalties (see paragraph (g) of this
section).
(f)Receipt of property. For purposes
of this section, a shareholder is treated as
receiving property (or as having property
provided to it) pursuant to an acquisition
of control or a substantial change in capital
structure if a liability of the shareholder is
assumed in the transaction and, as a result
of the transaction, an amount is realized by
the shareholder from the sale or exchange
of stock.
(g)Penalties for failure to file.For
penalties for failure to file as required un-
der this section, see section 6652(l). The
information returns required to be filed un-
der paragraphs (a) and (b) of this section
shall be treated as one return for purposes
of section 6652(l) and, accordingly, the
penalty shall not exceed $500 for each day
the failure continues (up to a maximum of
$100,000) with respect to any acquisition
of control or any substantial change in cap-
ital structure. Failuretofileasrequiredun-
der this section also includes the require-
ment to file on magnetic media as required
by section 6011(e) and §1.6011–2. In ad-
dition, criminal penalties under sections
7203, 7206 and 7207 may apply in appro-
priate cases.
(h)Examples. The following exam-
ples illustrate the application of the rules
of this section. For purposes of these
examples, assume the transaction is not
reported under sections 6042, 6043(a)
or 6045, unless otherwise specified, and
assume that the fair market value of the
consideration provided to the shareholders
exceeds $100,000,000.The examples are
as follows:
Example 1. The shareholders of X, a domes-
tic corporation and parent of an affiliated group, ex-
change their X stock for stock in Y, a newly-formed
foreign holding corporation. After the transaction, Y
owns all the outstanding X stock. The X sharehold-
ers must recognize gain (if any) on the exchange of
their stock as a result of the application of section
367(a). Because the transaction results in an acqui-
sition of control of X, X must comply with the rules
in paragraphs (a) and (b) of this section. X must file
Form 8806 reporting the transaction. X must also file
a Form 1099–CAP with respect to each shareholder
who is not an exempt recipient showing the fair mar-
ket value of the Y stock received by that shareholder,
and X must furnish a copy of the Form 1099–CAP
to that shareholder. If X elects on the Form 8806 to
permit the IRS to publish information regarding the
transaction, X is not required to file or furnish Forms
1099–CAP with respect to shareholders that are clear-
ing organizations.
Example 2. C, a domestic corporation, and parent
of an affiliated group merges into D, an unrelated do-
mestic corporation. Pursuant to the transaction, the
C shareholders exchange their C stock for D stock or
for a combination of short term notes and D stock.
The transaction does not satisfy the requirements of
section 368, and the C shareholders must recognize
gain (if any) on the exchange. Because the transac-
tion results in a substantial change in the capital struc-
ture of C, C (or D as the successor to C) must comply
with the rules in paragraphs (a) and (b) of this sec-
tion. C must file Form 8806. C (or D as the successor
to C) also must file a Form 1099–CAP with respect
to each shareholder who is not an exempt recipient
showing the fair market value of the short term notes
and the fair market value of the D stock provided to
that shareholder. In addition, C (or D) must furnish a
copy of the Form 1099–CAP to that shareholder.
Example 3. (i) The facts are the same as inExam-
ple 2, except that C reasonably determines that—
(A) The transaction satisfies the requirements of
section 368;
(B) The C shareholders who exchange their C
stock solely for D stock will not be required to rec-
ognize gain (if any) on the exchange; and
(C) The C shareholders who exchange their C
stock for a combination of short term notes and D
stock will be required to recognize gain (if any) on
the exchange solely with respect to the receipt of the
short term notes.
(ii) C is required to file Form 8806 under para-
graph (a) of this section. C (or D as the successor to
C) must also comply with the rules in paragraph (b) of
this section. With respect to each shareholder who re-
ceives a combination of short term notes and D stock,
and who is not an exempt recipient, C (or D) must file
a Form 1099–CAP showing the fair market value of
the short term notes provided to the shareholder, and
C (or D) must furnish a copy of the Form 1099–CAP
to that shareholder. The Form 1099–CAP should not
show the fair market value of the D stock provided to
the shareholder. C and D are not required to file and
furnish Forms 1099–CAP with respect to sharehold-
ers who receive only D stock in exchange for their C
stock.
Example 4. ThefactsarethesameasinExam-
ple 3, except C hires a transfer agent to effectuate
the exchange. The transfer agent is treated as a bro-
ker under section 6045 and is required to report the
fair market value of the short term notes provided
to C’s shareholders under §1.6045–3T. Under para-
graph (b)(6) of this section, C and D are not required
to file information returns under paragraph (b) of this
section with respect to a shareholder of record, un-
less C or D knows or has reason to know that the
transfer agent does not satisfy its information report-
ing obligation under §1.6045–3T with respect to that
shareholder. Thus, if the transfer agent satisfies its in-
formation reporting requirements under §1.6045–3T
with respect to shareholder I, an individual who re-
ceives both D stock and short term notes, C and D are
not required to file a Form 1099–CAP with respect to
I. Conversely, if the transfer agent does not have an
information reporting obligation under §1.6045–3T
with respect to one of C’s shareholder’s of record (for
example, a clearing organization that is an exempt re-
cipient under §1.6045–3T(b)(ii)), or if C or D knows
or has reason to know that the transfer agent has not
satisfied its information reporting requirement with
respect to a shareholder, then C (or D) must provide
a Form 1099–CAP to that shareholder.
(i)Effective date. This section applies
to any acquisition of control and any sub-
stantial change in capital structure occur-
ring after December 31, 2001, if the re-
porting corporation or any shareholder is
required to recognize gain (if any) as a re-
sult of the application of section 367(a) as
a result of the transaction. However, para-
graphs (a) through (h) of this section ap-
ply to acquisitions of control and substan-
tial changes in capital structure occurring
after December 31, 2002, if the reporting
corporation or any shareholder is required
to recognize gain (if any) as a result of the
application of section 367(a) as a result of
the transaction. For transactions prior to
January 1, 2003, see §1.6043–4T as pub-
lished in 26 CFR Part 1 (revised as of April
1, 2003). This section expires on Novem-
ber 14, 2005.
Par. 3. Section 1.6045–3T is revised to
read as follows:
2004-5 I.R.B.382February 2, 2004

§1.6045–3T Information reporting for
an acquisition of control or a substantial
change in capital structure (temporary).
(a)In general. Any broker (as defined
in §1.6045–1(a)(1)) that holds shares on
behalf of a customer in a corporation that
the broker knows or has reason to know
based on readily available information (in-
cluding, for example, information from a
clearing organization or from information
published by the Internal Revenue Ser-
vice (see §601.601(d)(2) of this chapter))
has engaged in a transaction described in
§1.6043–4T(c) (acquisition of control) or
§1.6043–4T(d) (substantial change in cap-
ital structure), shall file a return of infor-
mation with respect to the customer, unless
the customer is an exempt recipient as de-
fined in paragraph (b) of this section.
(b)Exempt recipients. A broker is not
required to file a return of information un-
der this section with respect to the follow-
ing customers:
(1) Any customer who receives only
cash in exchange for its stock in the corpo-
ration, which must be reported by the bro-
ker pursuant to §1.6045–1(a).
(2) Any customer who is an exempt re-
cipient as defined in §1.6043–4T(b)(5) or
§1.6045–1(c)(3)(i).
(c)Form, manner and time for making
information returns. The return required
by paragraph (a) of this section must be
on Forms 1096, “Annual Summary and
Transmittal of U.S. Information Returns,”
and 1099–B, “Proceeds From Broker and
Barter Exchange Transactions,” or on
an acceptable substitute statement. Such
forms must be filed on or before February
28 (March 31 if filed electronically) of the
year following the calendar year in which
the acquisition of control or the substantial
change in capital structure occurs.
(d)Contents of return.AseparateForm
1099–B must be prepared for each cus-
tomer showing—
(1) The name, address and taxpayer
identification number (TIN) of the cus-
tomer;
(2) The name and address of the corpo-
ration which engaged in the transaction de-
scribed in §1.6043–4T(c) or (d);
(3) The number and class of shares
in the corporation exchanged by the cus-
tomer;
(4) The aggregate amount of cash
and the fair market value of any
stock (other than stock described in
1.6043–4T(a)(1)(v)(C)) or other prop-
erty provided to the customer in exchange
for its stock; and
(5) Such other information as may be
required by Form 1099–B.
(e)Furnishing of forms to customers.
The Form 1099–B prepared for each cus-
tomer must be furnished to the customer on
or before January 31 of the year following
the calendar year in which the customer re-
ceives stock, cash or other property.
(f)Single Form 1099. If a broker is re-
quired to file a Form 1099–B with respect
to a customer under both this §1.6045–3T
and §1.6045–1(b) with respect to the same
transaction, the broker may satisfy the re-
quirements of both sections by filing and
furnishing one Form 1099–B that contains
all the relevant information, as provided in
the instructions to Form 1099–B.
(g)Effective date. (1) This section ap-
plies with respect to any acquisition of
control and any substantial change in cap-
ital structure occurring after December 31,
2001, if the reporting corporation or any
shareholder is required to recognize gain
(if any) as a result of the application of sec-
tion 367(a) as a result of the transaction.
However, paragraphs (a) through (f) of this
section apply to acquisitions of control and
substantial changes in capital structure oc-
curring after December 31, 2002, if the re-
porting corporation or any shareholder is
required to recognize gain (if any) as a re-
sult of the application of section 367(a) as
a result of the transaction. For transactions
prior to that date, see §1.6045–3T as pub-
lished in 26 CFR Part 1 (revised as of April
1, 2003). This section expires on Novem-
ber 14, 2005.
(2) For any acquisition of control or
any substantial change in capital struc-
ture occurring during the 2003 calendar
year, a broker may elect to satisfy the re-
quirements of this section by using Form
1099–CAP in lieu of Form 1099–B.
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 4. The authority citation for part
602 continues to read in part as follows:
Authority: 26 U.S.C 7805 * * *
Par. 5. In §602.101, paragraph (b) is
amended by removing the following en-
tries in the table as follows:
§602.101 OMB Control numbers
*****
(b) * * *
CFR part or section where
identified and described
Current OMB
control No.
*****
1.6043–4T ........................................................................... 1545–1812
*****
1.6045–3T............................................................................ 1545–1812
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved December 12, 2003.
Gregory Jenner,
Deputy Assistant Secretary of the
Treasury (Tax Policy).
(Filed by the Office of the Federal Register on December 29,
2003, 8:45 a.m., and published in the issue of the Federal
Register for December 30, 2003, 68 F.R. 75119)
February 2, 20043832004-5 I.R.B.

Section 7430.—Awarding
of Costs and Certain Fees
26 CFR 301.7430–7: Qualified offers.
T.D. 9106
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 301
Awards of Attorney’s Fees
and Other Costs Based Upon
Qualified Offers
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains fi-
nal regulations relating to the qualified of-
fer rule, including the requirements that an
offer must satisfy to be treated as a qual-
ified offer under section 7430(g) and the
requirements that a taxpayer must satisfy
to qualify as a prevailing party by reason
of having made a qualified offer. The reg-
ulations implement certain changes made
by section 3101(e) of the Internal Revenue
Service Restructuring and Reform Act of
1998. The final regulations affect taxpay-
ers seeking attorney’s fees and costs.
DATES:Effective Date: These regulations
are effective December 24, 2003.
Applicability Date: These regulations
apply to qualified offers postmarked or de-
livered after December 24, 2003, in admin-
istrative or court proceedings described in
section 7430.
FOR FURTHER INFORMATION
CONTACT: Tami C. Belouin (202)
622–7950 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
These final regulations contain amend-
ments to the Procedure and Administration
Regulations (26 CFR part 301) reflecting
changes to section 7430 made by section
3101(e) of the Internal Revenue Service
Restructuring and Reform Act of 1998,
Public Law 105–206 (112 Stat. 686), to
recover reasonable administrative and lit-
igation costs in a court proceeding with
respect to the determination or refund of
any tax, interest or penalty. Proposed
and temporary regulations under sections
7430(c)(4)(E) and 7430(g) were contem-
poraneously issued on January 3, 2001
(REG–121928–98, 2001–1 C.B. 520, T.D.
8922, 2001–1 C.B. 508 [66 FR 725]).
Written comments were submitted in re-
sponse to the proposed regulations and are
discussed in more detail below. The pro-
posed regulations are adopted as revised
by this Treasury decision.
Explanation of Revisions and Summary
of Comments
These final regulations generally adopt
the provisions of the proposed regulations.
The changes to the proposed regulations
reflected in these finalregulations, as well
as the comments received, are discussed
below.
1.Adjustments Affected by the Outcome
of Another Proceeding
A taxpayer’s tax liability may be af-
fected by the outcome of a separate court
or administrative proceeding. The pro-
posed regulations stated that the portion of
the liability to be fully resolved, by stipu-
lation of the parties, through another pro-
ceeding is ignored for purposes of apply-
ing the qualified offer rule. One commen-
tator requested clarification regarding this
rule. The final regulations clarify this rule
and state that the types of proceeding con-
templated include, but are not limited to,
state or Federal court proceedings. For ex-
ample, a taxpayer’s tax liability may be af-
fected by the outcome of a separate court
proceeding, such as a probate, tort liability,
or trademark action.
2.Specified Amount of Offer
The proposed regulations provided that
a qualified offer must state a specific dollar
amount. Commentators noted that there
are instances in which it would be difficult
to calculate the taxpayer’s tax liability and
offer a specific dollar amount. To address
those situations, the final regulations pro-
vide that a qualified offer may specify ei-
ther a dollar amount of liability or a per-
centage of the adjustments at issue.
3.Requirement to Disclose All Relevant
Information
In order for an offer to be treated as
a qualified offer, the proposed regulations
required a taxpayer to disclose all relevant
information concerning any issue raised by
the taxpayer subsequent to the first letter of
proposed deficiency which allows the tax-
payer an opportunity for administrative re-
view in the IRS Office of Appeals that re-
mained unresolved at the time the qualified
offer was made. This disclosure had to oc-
cur contemporaneously with or prior to the
making of the qualified offer. One com-
mentator requested that this requirement
be modified to lower the standard. The
final regulations do not adopt this com-
ment because the proposed regulations re-
flected the standard set out in Treas. Reg.
§ 301.7430–1 for exhaustion of adminis-
trative remedies.
4.End of Qualified Offer Period
One commentator suggested that if a
case is removed from the trial calendar
within 30 days of the trial date, the period
for making a qualified offer should be re-
opened. The final regulations do not adopt
this comment. The Treasury Department
and the IRS do not believe that the pur-
pose of the statute would be furthered if a
taxpayer were permitted to submit a quali-
fied offer after the period for doing so has
expired, even if the case subsequently is
continued. Like the statute of limitations,
once the qualified offer period has expired,
it should not be revived.
5.Multiple Tax Years
The proposed regulations do not specif-
ically address the requirements for making
a valid qualified offer when multiple tax
years are at issue in a court or adminis-
trative proceeding. One commentator re-
quested clarification of the application of
the qualified offer rule in these situations.
The final regulations provide that if adjust-
ments in different tax years arise from sep-
arate and distinct issues such that the reso-
lution of issues in one or more tax years
will not affect the taxpayer’s liability in
one or more of the other years at issue in
the proceeding, then a qualified offer may
be made for less than all of the tax years
involved in the proceeding. A qualified
2004-5 I.R.B.384February 2, 2004

offer, however, must resolve all of the is-
sues for the tax years covered by the of-
fer and also must cover all tax years in the
proceeding affected by those issues. A tax
year (affected year) is affected by an issue
if the treatment of the issue in another tax
year involved in the proceeding necessar-
ily affects the treatment of the issue in the
affected year. The final regulations include
three new examples illustrating the opera-
tion of the qualified offer rule in cases in-
volving multiple tax years.
6.Settlement after Certain Court Rulings
A federal tax case may be settled after
a court has ruled on a motion relating to
the merits of one or more of the adjust-
mentscoveredbyaqualifiedoffer,evenif
the ruling does not fully resolve those ad-
justments. For example, a court’s granting
of a motion for partial summary judgment
may resolve the underlying legal issue for
an adjustment covered by a qualified of-
fer but still leave open issues of substanti-
ation or valuation. The parties at that time
may resolve the adjustment based on the
court’s ruling and the parties’ evaluation of
the remaining issues not addressed by the
court’s ruling that affect that adjustment.
The final regulations provide that if one or
more adjustments covered by a qualified
offer are settled following a ruling by the
court that substantially resolves those ad-
justments, then those adjustments will not
be treated as having been settled prior to
the entry of the judgment by the court and
instead will be treated as amounts included
in the judgment as a result of the court’s
determinations. Whether an adjustment
covered by a qualified offer is substantially
resolved by a court ruling will depend on
the facts and circumstances, including the
scope of the ruling and the nature and im-
portance of the issues affecting the adjust-
ment that remain to be resolved after the
court ruling. The final regulations further
provide, however, thatrulings relating to
discovery, admissibility of evidence, and
burden of proof are not treated as rulings
that substantially resolve adjustments cov-
ered by a qualified offer. These changes
have been made in response to the Tax
Court’s opinion inGladden v. Commis-
sioner, 120 T.C. 446 (2003). The Depart-
ment of Treasury and the IRS will give fur-
ther consideration to this issue and may is-
sue additional guidance regarding the mat-
ter in the future.
7.Spousal Defenses
The proposed regulations do not ad-
dress specifically how spousal defenses
affect the qualified offer rule. The pream-
ble to the temporary regulations stated that
the qualified offer rule applies in multiple
taxpayer situations, such as those involv-
ing joint returns, but did not address the
potential aggregation or segregation of
the qualified offer or liability in situations
that may present special circumstances,
such as claims for innocent spouse relief.
Commentators requested more specific
rules addressing multiple taxpayer situa-
tions. The Treasury Department and the
IRS have decided not to include additional
rules involving multiple taxpayer situa-
tions in the final regulations. As the law in
this area continues to evolve, the Treasury
Department and the IRS may give further
consideration to the issues raised and may
issue additional guidance regarding how
the qualified offer rule applies in these
situations.
8.Recovery of Fees Relating to Settled
Issues
The proposed regulations provided that
a prevailing party may not recover fees un-
der the qualified offer rule for any issue
that is settled. Recovery is limited to issues
that are actually determined by a court.
One commentator recommended that the
final regulations permit the recovery of
fees attributable to adjustments that are
settled. The final regulations do not adopt
this comment. Section 7430(c)(4)(E)(ii)(I)
provides that any case resolved pursuant
to a settlement is not eligible for recov-
ery of fees under the qualified offer rule.
The qualified offer rule was enacted to en-
courage settlements. Requiring the gov-
ernment to pay administrative and litiga-
tion costs with respect to issues resolved
exclusively pursuant to a settlement would
be contrary to that goal.
9.Delivery of Qualified Offer to the
Proper Party
The proposed regulations specify where
an offer must be delivered in order to be
treated as a qualified offer. One com-
mentator requested further clarification
of these provisions and greater flexibility
with respect to delivery locations. The
Treasury Department and the IRS have
considered this comment but no change
has been made to the regulations because
the regulations already provide specific
instructions for the delivery of an offer un-
der a variety of circumstances, as well as
a default location for all other situations.
Thus, the provision is sufficiently com-
prehensive. With respect to the request
for greater flexibility, the comment was
not adopted because it is important that a
qualified offer be received by the office
with jurisdiction over the case at the time
the qualified offer is made in order that
the government may act expeditiously on
the offer. The locations specified in the
regulations are designed to achieve that
objective.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations and,
because these regulations do not impose a
collection of information requirement on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility Anal-
ysis is not required. Pursuant to section
7805(f) of the Internal Revenue Code, the
proposed regulations preceding these reg-
ulations were submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on their im-
pact on small business.
Drafting Information
The principal author of these regula-
tions is Tami C. Belouin, Office of the
Associate Chief Counsel (Procedure and
Administration), Administrative Provi-
sions and Judicial Practice Division.
*****
February 2, 20043852004-5 I.R.B.

Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 301 is
amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.7430–7 is added to
read as follows:
§301.7430–7 Qualified offers.
(a)In general. Section 7430(c)(4)(E)
(the qualified offer rule) provides that a
party to a court proceeding satisfying the
timely filing and net worth requirements of
section 7430(c)(4)(A)(ii) shall be treated
as the prevailing party if the liability of
the taxpayer pursuant to the judgment in
the proceeding (determined without regard
to interest) is equal to or less than the li-
ability of the taxpayer which would have
been so determined if the United States
had accepted the last qualified offer of the
party as defined in section 7430(g). For
purposes of this section, the termjudg-
mentmeans the cumulative determinations
of the court concerning the adjustments
at issue and litigated to a determination
in the court proceeding. In making the
comparison between the liability under the
qualified offer and the liability under the
judgment, the taxpayer’s liability under
the judgment is further modified by the
provisions of paragraph (b)(3) of this sec-
tion. The provisions of the qualified of-
fer rule do not apply if the taxpayer’s li-
ability under the judgment, as modified
by the provisions of paragraph (b)(3) of
this section, is determined exclusively pur-
suant to a settlement, or to any proceeding
in which the amount of tax liability is not
in issue, including any declaratory judg-
ment proceeding, any proceeding to en-
force or quash any summons issued pur-
suant to the Internal Revenue Code (Code),
and any action to restrain disclosure un-
der section 6110(f). If the qualified offer
rule applies to the court proceeding, the
determination of whether the liability un-
der the qualified offer would have equaled
or exceeded the liability pursuant to the
judgment is made by reference to the last
qualified offer made with respect to the
tax liability at issue in the administrative
or court proceeding. An award of reason-
able administrative and litigation costs un-
der the qualified offer rule only includes
those costs incurred on or after the date
of the last qualified offer and is limited to
those costs attributable to the adjustments
at issue at the time the last qualified offer
was made that were included in the court’s
judgment other than by reason of settle-
ment. The qualified offer rule is inappli-
cable to reasonable administrative or liti-
gation costs otherwise awarded to a tax-
payer who is a prevailing party under any
other provision of section 7430(c)(4). This
section sets forth the requirements to be
satisfied for a taxpayer to be treated as a
prevailing party by reason of the taxpayer
making a qualified offer, as well as the cir-
cumstances leading to the application of
the exceptions, special rules, and coordina-
tion provisions of the qualified offer rule.
Furthermore, this section sets forth the el-
ements necessary for an offer to be treated
as a qualified offer under section 7430(g).
(b)Requirements for treatment as a pre-
vailing party based upon having made a
qualified offer—(1)In general.Inorder
to be treated as a prevailing party by rea-
son of having made a qualified offer, the
liability of the taxpayer for the type or
types of tax and the taxable year or years
at issue in the proceeding (as calculated
pursuant to paragraph (b)(2) of this sec-
tion), based on the last qualified offer (as
defined in paragraph (c) of this section)
made by the taxpayer in the court or ad-
ministrative proceeding, must equal or ex-
ceed the liability of the taxpayer pursuant
to the judgment by the court for the same
type or types of tax and the same taxable
year or years (as calculated pursuant to
paragraph (b)(3) of this section). Further-
more, the taxpayer must meet the timely
filing and net worth requirements of sec-
tion 7430(c)(4)(A)(ii). If all of the adjust-
ments subject to the last qualified offer are
settled prior to the entry of the judgment
by the court, the taxpayer is not a pre-
vailing party by reason of having made a
qualified offer. The taxpayer may, how-
ever, still qualify as a prevailing party if
the requirements of section 7430(c)(4)(A)
are met. If one or more adjustments cov-
ered by a qualified offer (see paragraph
(c)(3)) are settled following a ruling by the
court that substantially resolves those ad-
justments, then those adjustments will not
be treated as having been settled prior to
the entry of the judgment by the court and
instead will be treatedas amounts included
in the judgment as a result of the court’s
determinations. For purposes of the pre-
ceding sentence, rulings relating to discov-
ery, admissibility of evidence, and burden
of proof are not rulings that substantially
resolve adjustments covered by a qualified
offer.
(2)Liability under the last qualified of-
fer. For purposes of paragraph (b)(1) of
this section, the taxpayer’s liability under
the last qualified offer is the change in
the taxpayer’s liability that would have re-
sulted if the United States had accepted
the taxpayer’s last qualified offer on all of
the adjustments that were at issue in the
administrative or court proceeding at the
time that the offer was made compared to
the amount shown on the return or returns
(or as previously adjusted). The portion
of a taxpayer’s liability that is attributable
to adjustments raised by either party after
the making of the last qualified offer is not
included in the calculation of the liability
under that offer. The taxpayer’s liability
under the last qualified offer is calculated
without regard to adjustments that the par-
ties have stipulated will be resolved in ac-
cordance with the outcome of a separate
pending Federal, state, or other judicial
or administrative proceeding. For exam-
ple, the parties may stipulate that the tax-
payer’s liability will be resolved in accor-
dance with the outcome of an alternative
dispute resolution proceeding or a separate
court proceeding, such as a probate, tort li-
ability, or trademark action. Furthermore,
the taxpayer’s liability under the last qual-
ified offer is calculated without regard to
interest, unless the taxpayer’s liability for,
or entitlement to, interest is a contested is-
sue in the administrative or court proceed-
ing and is one of the adjustments included
in the last qualified offer.
(3)Liability pursuant to the judgment.
For purposes of paragraph (b)(1) of this
section, the taxpayer’s liability pursuant
to the judgment is the change in the tax-
payer’s liability resulting from amounts
contained in the judgment as a result of the
court’s determinations, and amounts con-
tained in settlements not included in the
judgment, that are attributable to all adjust-
ments that were included in the last quali-
fied offer compared to the amount shown
2004-5 I.R.B.386February 2, 2004

on the return or returns (or as previously
adjusted). This liability includes amounts
attributable to adjustments included in the
last qualified offer and settled by the par-
ties prior to the entry of judgment regard-
less of whether those amounts are actually
included in the judgment entered by the
court. The taxpayer’s liability pursuant to
the judgment does not include amounts at-
tributable to adjustments that are not in-
cluded in the last qualified offer, even if
those amounts are actually included in the
judgment entered by the court. The tax-
payer’s liability under the judgment is cal-
culated without regard to adjustments that
the parties have stipulated will be resolved
in accordance with the outcome of a sep-
arate pending Federal, state, or other ju-
dicial or administrative proceeding. Fur-
thermore, the taxpayer’s liability pursuant
to the judgment is calculated without re-
gard to interest, unless the taxpayer’s li-
ability for, or entitlement to, interest is
a contested issue in the administrative or
court proceeding and is one of the adjust-
ments included in the last qualified offer.
Where adjustments raised by either party
subsequent to the making of the last quali-
fied offer are included in the judgment en-
tered by the court, or are settled prior to
the court proceeding, the taxpayer’s liabil-
ity pursuant to the judgment is calculated
by treating the subsequently raised adjust-
ments as if they had never been raised.
(c)Qualified offer—(1)In general.
Aqualifiedofferisdefinedinsection
7430(g) to mean a written offer which—
(i) Is made by the taxpayer to the United
States during the qualified offer period;
(ii) Specifies the offered amount of the
taxpayer’s liability (determined without
regard to interest, unless interest is a con-
tested issue in the proceeding);
(iii) Is designated at the time it is made
as a qualified offer for purposes of section
7430(g); and
(iv) By its terms, remains open during
the period beginning on the date it is made
and ending on the earliest of the date the
offer is rejected, the date the trial begins,
or the 90th day after the date the offer is
made.
(2)To the United States. (i) A qual-
ified offer is made to the United States
when it is delivered to the office or person-
nel within the Internal Revenue Service,
Office of Appeals, Office of Chief Coun-
sel (including field personnel) or Depart-
ment of Justice that has jurisdiction over
the tax matter at issue in the administrative
or court proceeding. If those offices or per-
sons are unknown to the taxpayer making
the qualified offer, the taxpayer may de-
liver the offer to the appropriate office, as
follows:
(A) If the taxpayer’s initial pleading in
a court proceeding has been answered, the
taxpayer may deliver the offer to the office
that filed the answer.
(B) If the taxpayer’s petition in the Tax
Court has not yet been answered, the tax-
payer may deliver the offer to the Office of
Chief Counsel, 1111 Constitution Avenue,
NW, Washington, DC 20224.
(C) If the taxpayer’s initial pleading
in any Federal court, other than the Tax
Court, has not yet been answered, the
taxpayer may deliver the offer to the At-
torney General of the United States, 950
Pennsylvania Ave., NW, Washington,
DC 20530–0001. For a suit brought in
a United States district court, a copy of
the offer should also be delivered to the
United States Attorney for the district in
which the suit was brought.
(D) In any other situation, the taxpayer
may deliver the offer to the office that sent
the taxpayer the first letter of proposed de-
ficiency which allows the taxpayer an op-
portunity for administrative review in the
Internal Revenue Service Office of Ap-
peals.
(ii) Until an offer is received by the
appropriate personnel or office under this
paragraph (c)(2), it is not considered to
have been made, with the following excep-
tion. If the offer is deposited in the United
States mail, in an envelope or other appro-
priate wrapper, postage prepaid, properly
addressed to the appropriate personnel or
office under this paragraph (c)(2), the date
of the United States postmark stamped on
the cover in which the offer is mailed shall
be deemed to be the date of receipt of that
offer by the addressee. If any offer is de-
posited with a designated delivery service,
as defined in section 7502(f)(2), in lieu of
the United States mail, the provisions of
section 7502(f)(1) shall apply in determin-
ing whether that offer qualifies for this ex-
ception.
(3)Specifies the offered amount.
A qualified offer specifies the offered
amount if it clearly specifies the amount
for the liability of the taxpayer, calcu-
lated as set forth in paragraph (b)(2) of
this section. The offer may be a specific
dollar amount of the total liability or a
percentage of the adjustments at issue in
the proceeding at the time the offer is
made. This amount must be with respect
to all of the adjustments at issue in the
administrative or court proceeding at the
time the offer is made and only those ad-
justments. The specified amount must be
an amount, the acceptance of which by
the United States will fully resolve the
taxpayer’s liability, and only that liability
(determined without regard to adjustments
that the parties have stipulated will be re-
solved in accordance with the outcome of
a separate pending Federal, state, or other
judicial or administrative proceeding, or
interest, unless interest is a contested issue
in the proceeding) for the type or types of
tax and the taxable year or years at issue
in the proceeding. In cases involving mul-
tiple tax years, if adjustments in different
tax years arise from separate and distinct
issues such that the resolution of issues in
one or more tax years will not affect the
taxpayer’s liability in one or more of the
other tax years in the proceeding, then a
qualified offer may be made for less than
all of the tax years involved. A qualified
offer, however, must resolve all of the is-
sues for the tax years covered by the offer
and also must cover all tax years in the
proceeding affected by those issues. A tax
year (affected year) is affected by an issue
if the treatment of the issue in another tax
year involved in the proceeding necessar-
ily affects the treatment of the issue in the
affected year.
(4)Designated at the time it is made as
a qualified offer. An offer is not a qual-
ified offer unless it designates in writing
atthetimeitismadethatitisaqualified
offer for purposes of section 7430(g). An
offer made at a time when one or more
adjustments not included in the first let-
ter of proposed deficiency which allows
the taxpayer an opportunity for adminis-
trative review in the Internal Revenue Ser-
vice Office of Appeals have been raised by
the taxpayer and remain unresolved, is not
considered to be a qualified offer unless
contemporaneously or prior to the mak-
ing of the offer, the taxpayer has provided
the United States with the substantiation
and legal and factual arguments necessary
to allow for informed consideration of the
merits of those adjustments. For exam-
ple, a taxpayer will be considered to have
February 2, 20043872004-5 I.R.B.

provided the United States with the nec-
essary substantiation and legal and factual
arguments if the taxpayer (or a recognized
representative of the taxpayer described in
§601.502 of this chapter) participates in
an Appeals office conference, participates
in an Area Counsel conference, or con-
fers with the Department of Justice, and
at that time, discloses all relevant infor-
mation. All relevant information includes,
but is not limited to, the legal and factual
arguments supporting the taxpayer’s posi-
tion on any adjustments raised by the tax-
payer after the issuance of the first letter of
proposed deficiency which allows the tax-
payer an opportunity for administrative re-
view in the Internal Revenue Service Of-
fice of Appeals. A taxpayer has disclosed
all relevant information if the taxpayer has
supplied sufficient information to allow in-
formed consideration of the taxpayer’s tax
matter to the extent the information and its
relevance were known or should have been
known to the taxpayer at the time of the
conference.
(5)Remains open. A qualified offer
must, by its terms, remain open for accep-
tance by the United States from the date it
is made, as defined in paragraph (c)(2)(ii)
of this section, until the earliest of the date
it is rejected in writing by a person with au-
thority to reject the offer, the date the trial
begins, or the 90th day after being received
by the United States. The offer, by its writ-
ten terms, may remain open after the oc-
currence of one or more of the above-refer-
enced events. Once made, the period dur-
ing which a qualified offer remains open
may be extended by the taxpayer prior to
its expiration, but an extension cannot be
used to make an offer meet the minimum
period for remaining open required by this
paragraph (c)(5).
(6)Last qualified offer. A taxpayer may
make multiple qualified offers during the
qualified offer period. For purposes of
the comparison under paragraph (b) of this
section, the making of a qualified offer su-
persedes any previously made qualified of-
fers. In making the comparison described
in paragraph (b) of this section, only the
qualified offer made most closely in time
to the end of the qualified offer period is
compared to the taxpayer’s liability under
the judgment.
(7)Qualified offer period. To consti-
tute a qualified offer, an offer must be
made during the qualified offer period.
The qualified offer period begins on the
date on which the first letter of proposed
deficiency which allows the taxpayer an
opportunity for administrative review in
the Internal Revenue Service Office of
Appeals is sent to the taxpayer. For this
purpose, the date of the notice of claim
disallowance will begin the qualified of-
fer period in a refund case. If there has
been no notice of claim disallowance in
a refund case, the qualified offer period
begins on the date on which the answer
or other responsive pleading is filed with
the court. The qualified offer period ends
on the date which is thirty days before the
date the case is first set for trial. In de-
termining when the qualified offer period
ends for cases in the Tax Court and other
Federal courts using calendars for trial, a
case will be considered set for trial on the
date scheduled for the calendar call. A
case may be removed from a trial calendar
at any time. Thus, a case may be removed
from a trial calendar before the date that
precedes by thirty days the date scheduled
for that trial calendar. The qualified offer
period does not end until the case remains
on a trial calendar on the date that pre-
cedes by 30 days the scheduled date of
the calendar call for that trial session. The
qualified offer period may not be extended
beyond the periods set forth in this para-
graph (c)(7), although the period during
which a qualified offer remains open may
extend beyond the end of the qualified
offer period.
(d) [Reserved].
(e)Examples. The following examples
illustrate the provisions of this section:
Example 1.Definition of a judgment.TheInter-
nal Revenue Service (IRS) audits Taxpayer A for year
X and issues a notice of proposed deficiency (30-day
letter) proposing to disallow deductions 1, 2, 3, and
4. A files a protest and participates in a conference
with the Internal Revenue Service Office of Appeals
(Appeals). Appeals allows deduction 1, and issues
a statutory notice of deficiency for deductions 2, 3,
and 4. A’s petition to the United States Tax Court for
year X never mentions deduction 2. Prior to trial, A
concedes deduction 3. After the trial, the Tax Court
issues an opinion allowing A to deduct a portion of
deduction 4. As used in paragraph (a) of this sec-
tion, the term judgment means the cumulative deter-
minations of the court concerning the adjustments at
issue in the court proceeding. Thus, the term judg-
ment does not include deduction 1 because it was
never at issue in the court proceeding. Similarly, the
term judgment does not include deduction 2 because
it was not placed at issue by A in the court proceed-
ing. Although deduction 3 was at issue in the court
proceeding, it is not included in the term judgment
because it was not determined by the court, but rather
by concession or settlement. For purposes of section
7430(c)(4)(E), the term judgment only includes the
portion of deduction 4 disallowed by the Tax Court.
Example 2.Liability under the offer and liabil-
ity under the judgment. Assume the same facts as in
Example 1except that A makes a qualified offer af-
ter the Appeals conference, which is not accepted by
the IRS. A’s offer is with respect to all adjustments
at issue at that time. Those adjustments are deduc-
tions 2, 3, and 4. At the conclusion of the litigation,
A’s entitlement to an award based upon the qualified
offer will depend, among other things, on a compar-
ison of the change in A’s liability for income tax for
year X resulting from the judgment of the Tax Court
with the change that would have resulted had the IRS
accepted A’s qualified offer. In making this compari-
son, the term judgment (as discussed inExample 1)is
modified by including the amounts of settled or con-
ceded adjustments that were at issue at the time the
qualified offer was made. Any settled or conceded
adjustments that were not at issue at the time the qual-
ified offer was made, either because the settlement or
concession occurred before the offer or because the
adjustment was not raised until after the offer, are not
included in the comparison. Thus, A’s offer on de-
ductions 2, 3, and 4 is compared with the change in
A’s liability resulting from the Tax Court’s determi-
nation of deduction 4, and the concessions of issues
2and3byA.
Example 3. Offer must resolve full liability.As-
sume the same facts as inExample 2except that A’s
offer after the Appeals conference explicitly states
that it is only with respect to adjustments 2 and 3 and
not with respect to adjustment 4. Even if A’s liability
pursuant to the judgment, calculated under paragraph
(b)(3) of this section as illustrated inExample 2,is
equal to or less than it would have been had the IRS
accepted A’s offer after the Appeals conference, A is
not a prevailing party under section 7430(c)(4)(E). A
qualified offer must include all adjustments at issue at
the time the offer is made. Since A’s offer excluded
adjustment 4, which was an adjustment at issue at the
time the offer was made, it does not constitute a quali-
fied offer pursuant to paragraph (b)(2) of this section.
Example 4. Offer must resolve full liability.As-
sume the same facts as inExample 1, except that A
makes a qualified offer that is accepted by the IRS.
After the offer is accepted, A attempts to reduce the
amount A will pay pursuant to the offer by applying
net operating loss carryovers to the years in issue.
Because the net operating losses were not at issue
when the offer was made, A’s offer was a qualified
offer. Whether A is entitled to apply net operating
losses to reduce the amount stated in the offer will de-
pend upon the application of contract principles, local
court rules, and, because net operating losses are at is-
sue, section 6511(d) and related provisions.
Example 5. Qualified offer rule for multiple
tax years, partial resolution offer is a qualified
offer. Taxpayer B receives a notice of deficiency
for taxable years 2001, 2002, and 2003. For 2001,
the statutory notice disallows business deductions.
For 2002, the statutory notice increases income for
unreported lottery winnings. For 2003, the statutory
notice disallows a child care credit. B submits a
qualified offer only with respect to 2002. Since the
adjustments for the threetax years are separate and
distinct, B may submit a qualified offer for a single
year. If B’s liability under the judgment is equal to
2004-5 I.R.B.388February 2, 2004

or less than the qualified offer with respect to 2002,
irrespective of 2001 and 2003, B is a prevailing party
for 2002 for purposes of section 7430(g). Assuming
B satisfies the remaining requirements of section
7430, B may recover reasonable administrative and
litigation costs that are attributable to 2002 from the
date of the qualified offer. To qualify for any costs
with respect to 2001 or 2003, B must satisfy the
requirements of section 7430(c)(4).
Example 6. Qualified offer rule for multiple tax
years, partial resolution offer is not a qualified of-
fer. Assume the same facts as inExample 5except
that with respect to 2002, in addition to increasing
B’s income for the unreported lottery winnings, the
statutory notice also disallows a charitable contribu-
tion deduction. B submits a settlement offer that pur-
ports to be a qualified offer, but only covers the un-
reported lottery winnings. B’s offer is not a qualified
offer because it does not address the charitable con-
tribution issue, and thus, does not fully resolve B’s
liability for 2002.
Example 7. Qualified offer rule for multiple tax
years, partial resolution offer is not a qualified offer.
Taxpayer C receives a notice of deficiency for taxable
years 2001, 2002, and 2003 adjusting the amount of
a depreciation deduction due to the Internal Revenue
Service’s increase to the recovery period. C submits a
settlement offer relating only to 2003 that purports to
be a qualified offer. C’s offer is not a qualified offer
because the issue in the three tax years is not separa-
ble given that the treatment of the issue in one of the
years necessarily affects the treatment of the issue in
the other years, and C’s offer only applies to one of
the years in the proceeding. In cases involving mul-
tiple tax years with nonseparable tax issues affecting
all tax years, an offer is not a qualified offer unless
it resolves the liability for all tax years at issue in the
administrative or judicial proceeding.
Example 8. Qualified offer rule inapplicable
when all issues settled. Taxpayer D receives a notice
of proposed deficiency (30-day letter) proposing to
disallow both a personal interest deduction in the
amount of $10,000 (Adjustment 1), and a charita-
ble contribution deduction in the amount of $2,000
(Adjustment 2), and to include in income $4,000 of
unreported interest income (Adjustment 3). D timely
files a protest with Appeals. At the Appeals con-
ference, D presents substantiation for the charitable
contribution and presents arguments that the interest
paid was deductible mortgage interest and that the
interestreceivedwasheldintrustforTaxpayerE.At
the conference, D also provides the Appeals officer
assigned to D’s case a written offer to settle the case
for a deficiency of $2,000, exclusive of interest. The
offer states that it is a qualified offer for purposes of
section 7430(g) and that it will remain open for ac-
ceptance by the IRS for a period in excess of 90 days.
After considering D’s substantiation and arguments,
the Appeals Officer accepts the $2,000 offer to settle
the case in full. Although D’s offer is a qualified
offer, because all three adjustments contained in the
qualified offer were settled, the qualified offer rule
is inapplicable.
Example 9. Qualified offer rule inapplicable
when all issues contained in the qualified offer are
settled; subsequently raised adjustments ignored.
Assume the same facts as inExample 8except that
D’s qualified offer was for a deficiency of $1,800 and
the IRS rejected that offer. Subsequently, the IRS
issued a statutory notice of deficiency disallowing
the three adjustments contained inExample 8, and,
in addition, disallowing a home office expense in the
amount of $5,000 (Adjustment 4). After petitioning
the Tax Court, D presents the field attorney assigned
to the case with a written offer, which is not des-
ignated as a qualified offer for purposes of section
7430(g), to settle the three adjustments that had been
the subject of the qualified offer, plus adjustment 4,
for a total deficiency of $2,500. After negotiating
with D, a settlement is reached on the three adjust-
ments that were the subject of the rejected qualified
offer, for a deficiency of $1,800. Adjustment 4 is
litigated in the Tax Court and the court determines
that D is entitled to the full $5,000 deduction for
that adjustment. Consequently, a decision is entered
by the Tax Court reflecting the $1,800 settlement
amount, which matches exactly the amount of D’s
only qualified offer in the case. Although the deter-
mined liability for adjustments 1, 2, and 3, equals
that of the rejected qualified offer, because all three
adjustments contained in the qualified offer were
settled, the qualified offer rule is inapplicable.
Example 10. Exclusion of adjustments made af-
ter the qualified offer is made. Assume the same facts
as inExample 9except the settlement is reached only
on adjustments 1 and 2, for a liability of $1,500. Ad-
justments 3 and 4 are tried in the Tax Court and in
accordance with the court’s opinion, the taxpayer has
a $300 deficiency attributable to Adjustment 3, and a
$1,550 deficiency attributable to adjustment 4. Con-
sequently, a decision is entered reflecting the $1,500
settled amount, the $300 liability on adjustment 3,
and the $1,550 liability on adjustment 4. The $3,350
deficiency reflected in the Tax Court’s decision ex-
ceeds the last (and only) qualified offer made by D.
For purposes of determining whether D is a prevail-
ing party as a result of having made a qualified offer
in the proceeding, the liability attributable to adjust-
ment 4, which was raised after the last qualified offer
was made, is not included in the comparison of D’s
liability under the judgment with D’s offered liability
under the last qualified offer. Thus, D’s $1,800 liabil-
ity under the judgment, as modified for purposes of
the qualified offer rule comparison, is equal to D’s of-
fered liability under the last qualified offer. Because
D’s liability under the last qualified offer equals or ex-
ceeds D’s liability under the judgment, as calculated
under paragraph (b)(3) of this section, D is a prevail-
ing party for purposes of section 7430. Assuming D
satisfies the remaining requirements of section 7430,
D may recover those reasonable administrative and
litigation costs attributable to adjustment 3. To qual-
ify for any further award of reasonable administrative
and litigation costs, D must satisfy the requirements
of section 7430(c)(4)(A).
Example 11. Qualified offer in a refund case.
Taxpayer E timely files an amended return claiming
a refund of $1,000. This refund claim results from
several omitted deductions which, if allowed, would
reduce E’s tax liability from $10,000 to $9,000. E
receives a notice of claim disallowance and files a
complaint with the appropriate United States District
Court. Subsequently, E makes a qualified offer for a
refund of $500. The offer is rejected and after trial
the court finds E is entitled to a refund of $700. The
change in E’s liability from the tax shown on the re-
turn that would have resulted from the acceptance of
E’s qualified offer is a reduction in that liability of
$500. The change in E’s liability from the tax shown
on the return resulting from the judgment of the court
is a reduction in that liability of $700. Because E’s
liability under the qualified offer exceeds E’s liabil-
ity under the judgment, E is a prevailing party for
purposes of section 7430. Assuming E satisfies the
remaining requirements of section 7430, E may re-
cover those reasonable litigation costs incurred on or
after the date of the qualified offer. To qualify for any
further award of reasonable administrative and litiga-
tion costs E must satisfy the requirements of section
7430(c)(4)(A).
Example 12. End of qualified offer period when
case is removed from Tax Court trial calendar more
than 30 days before scheduled trial calendar.Tax-
payer F has petitioned the Tax Court in response to
the issuance of a notice of deficiency. F receives no-
tice that the case will be heard on the July trial ses-
sion in F’s city of residence. The scheduled date for
the calendar call for that trial session is July 1st. On
May 15th, F’s motion to remove the case from the
July trial session and place it on the October trial ses-
sion for that city is granted. The scheduled date for
the calendar call for the October trial session is Oc-
tober 1st. On May 31st, F delivers a qualified offer
to the field attorney assigned to the case. On Au-
gust 31st, F delivers a revised qualified offer to the
field attorney assigned to the case. Neither offer is
accepted. The case is tried during the October trial
session, and at some time thereafter, a decision is en-
tered by the court. Assume the judgment in the case,
as calculated under paragraph (b)(3) of this section,
is greater than the amount offered, as calculated un-
der paragraph (b)(2) of this section, in the qualified
offer delivered on May 31st, but less than the amount
offered, as similarly calculated, in the qualified offer
delivered on August 31st. Because the qualified offer
period did not end until September 1st, and the offer
of August 31st otherwise satisfied the requirements
of paragraph (c) of this section, the offer delivered on
August 31st is a qualified offer. Furthermore, because
the August 31st qualified offer is closer in time to the
end of the qualified offer period than the May 31st
qualified offer, the August 31st qualified offer is the
last qualified offer made by F. Consequently, the Au-
gust 31st offer is the qualified offer that is compared
to the judgment for purposes of determining whether
F is a prevailing party under section 7430(c)(4)(E).
Because F’s liability under the August 31st qualified
offer equals or exceeds F’s liability under the judg-
ment as calculated under paragraph (b)(3) of this sec-
tion, F is a prevailing party for purposes of section
7430.
Example 13. End of qualified offer period when
case is removed from Tax Court trial calendar less
than 30 days before scheduled trial calendar.As-
sume the same facts as inExample 12except that F’s
motion was granted on June 15th. Because the qual-
ified offer period ended on June 1st when the case
remained on the July trial session on the date that
preceded by 30 days the scheduled date of the cal-
endar call for that trial session, the offer delivered on
May 31st was F’s last qualified offer. The August
31st offer is not a qualified offer for purposes of this
rule. Consequently, F is not a prevailing party under
the qualified offer rule. Therefore, F must satisfy the
requirements of section 7430(c)(4)(A) to qualify for
any award of reasonable administrative and litigation
costs.
February 2, 20043892004-5 I.R.B.

Example 14. When a qualified offer can be made
and to whom it must be made. During the examina-
tion of Taxpayer G’s return, the IRS issues a notice
of deficiency without having first issued a 30-day let-
ter. After receiving the notice of deficiency, G timely
petitions the Tax Court. The next day G mails an of-
fer to the office that issued the notice of deficiency,
which offer satisfies the requirements of paragraphs
(c)(3) through (6) of this section. This is the only
written offer made by G during the administrative or
courtproceeding,andbyitstermsitistoremainopen
for a period in excess of 90 days after the date of
mailing to the office issuing the notice of deficiency.
The office that issued the notice of deficiency trans-
mitted the offer to the field attorney with jurisdic-
tion over the Tax Court case. After answering the
case, the field attorney refers the case to Appeals pur-
suant to Rev. Proc. 87–24, 1987–1 C.B. 720. See
§601.601(d)(2)(ii)(b) of this chapter. After careful
consideration, Appeals rejects the offer and holds a
conference with G during which some adjustments
are settled. The remainder of the adjustments are tried
in the Tax Court and G’s liability resulting from the
Tax Court’s determinations, when added to G’s liabil-
ity resulting from the settled adjustments, is less than
G’s liability would have been under the offer rejected
by Appeals. Because the Tax Court case had not yet
been answered when the offer was sent, G properly
mailed the offer to the office that issued the notice of
deficiency. Thus, G’s offer satisfied the requirements
of paragraph (c)(2) of this section. Furthermore, even
though G did not receive a 30-day letter, G’s offer was
made after the beginning of the qualified offer period,
satisfying the requirements of paragraph (c)(7) of this
section, because the issuance of the statutory notice
provided G with notice of the IRS’s determination of
a deficiency, and the docketing of the case provided
G with an opportunity for administrative review in
the Internal Revenue Service Office of Appeals un-
der Rev. Proc. 87–24. See §601.601(d)(2)(ii)(b)of
this chapter. Because G’s offer satisfied all of the re-
quirements of paragraph (c) of this section, the offer
was a qualified offer and G is a prevailing party.
Example 15. Substitution of parties permitted un-
der last qualified offer. Taxpayer H receives a 30-day
letter and participates in a conference with the Of-
fice of Appeals but no agreement is reached. Sub-
sequently, H receives a notice of deficiency and peti-
tions the Tax Court. Upon receiving the Internal Rev-
enue Service’s answer to the petition, H sends a qual-
ified offer to the field attorney who signed the answer,
by United States mail. The qualified offer stated that
it would remain open for more than 90 days. Thirty
days after making the offer, H dies and, on motion
under Rule 63(a) of the Tax Court’s Rules of Prac-
tice and Procedure by H’s personal representative, I
is substituted for H as a party in the Tax Court pro-
ceeding. I makes no qualified offers to settle the case
and the case proceeds to trial, with the Tax Court is-
suing an opinion partially in favor of I. Even though
I was not a party when the qualified offer was made
by H, that offer constitutes a qualified offer because
by its terms, when made, it was to remain open until
at least the earlier of the date it is rejected, the date of
trial, or 90 days. If the liability of I under the qual-
ified offer, as determined under paragraph (b)(2) of
this section, equals or exceeds the liability under the
judgment of the Tax Court, as determined under para-
graph (b)(3) of this section, I will be a prevailing party
for purposes of an award of reasonable litigation costs
under section 7430.
(f)Effective date.Thissectionisappli-
cable with respect to qualified offers made
in administrative or court proceedings de-
scribed in section 7430 after December 24,
2003.
§301.7430–7T [Removed]
Par. 3. Section 301.7430–7T is re-
moved.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved December 19, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on December 24,
2003, 8:45 a.m., and published in the issue of the Federal
Register for December 29, 2003, 68 F.R. 74848)
2004-5 I.R.B.390February 2, 2004

Part III. Administrative, Procedural, and Miscellaneous
Weighted Average Interest
Rate Update
Notice 2004–3
Sections 412(b)(5)(B) and 412(l)
(7)(C)(i) of the Internal Revenue Code
provide that the interest rates used to cal-
culate current liability and to determine
the required contribution under § 412(l)
must be within a permissible range around
the weighted average of the rates of inter-
est 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.
Section 417(e)(3)(A)(ii)(II) of the Code
defines the applicable interest rate, which
must be used for purposes of determining
the minimum present value of a partici-
pant’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 pre-
scribe. Section 1.417(e)–1(d)(3) of the In-
come Tax Regulations provides that the ap-
plicable interest rate for a month is the an-
nual interest rate on 30-year Treasury se-
curities as specified by the Commissioner
for that month in revenue rulings, notices
or other guidance published in the Internal
Revenue Bulletin.
The rate of interest on 30-year Treasury
Securities for December 2003 is 5.07 per-
cent. Pursuant to Notice 2002–26, 2002–1
C.B. 743, the Service has determined this
rate as the monthly average of the daily de-
termination of yield on the 30-year Trea-
surybondmaturinginFebruary2031.
The following rates were determined
for the plan years beginning in the month
shown below.
MonthYear
Weighted
Average
90% to 105%
Permissible
Range
90% to 110%
Permissible
Range
January20045.254.72 to 5.514.72 to 5.77
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 8:00 a.m. and
6:30 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 thepreceding sentences
are not toll-free.
February 2, 20043912004-5 I.R.B.

Part IV. Items of General Interest
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Regulations Governing
Practice Before the Internal
Revenue Service
REG–122379–02
AGENCY: Office of the Secretary, Trea-
sury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This notice proposes modifi-
cations of the regulations governing prac-
tice before the Internal Revenue Service
(Circular 230). These regulations affect in-
dividuals who are eligible to practice be-
fore the IRS. The proposed modifications
set forth best practicesfor tax advisors pro-
viding advice to taxpayers relating to Fed-
eral tax issues or submissions to the IRS
and modify the standards for certain tax
shelter opinions. This document also pro-
vides notice of a public hearing regarding
the proposed regulations.
DATES: Comments: Written or elec-
tronically generated comments must be
received by February 13, 2004.
Public hearing: Outlines of topics to
be discussed at the public hearing sched-
uled for February 18,2004, in the Audito-
rium of the Internal Revenue Building at
1111 Constitution Avenue, NW, Washing-
ton, DC 20224, must be received by Feb-
ruary 11, 2004.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–122379–02), room
5203, Internal Revenue Service, POB
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–122379–02),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC. Alternatively, taxpayers may
submit comments electronically via the
IRS Internet site at:www.irs.gov/regs.
FOR FURTHER INFORMATION
CONTACT: Concerning issues for com-
ment, Heather L. Dostaler or Bridget E.
Tombul at (202) 622–4940; concerning
submissions of comments, Guy Traynor of
the Publications and Regulations Branch
at (202) 622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in this notice of proposed rulemaking has
been submitted to the Office of Manage-
ment and Budget for review in accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507). Comments on the col-
lection of information 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. Comments on the collection of
information should be received by March
1, 2004. Comments are specifically re-
quested concerning:
Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the Office of Professional Re-
sponsibility, including whether the infor-
mation will have practical utility;
The accuracy of the estimated burden
associated with the proper collection of in-
formation (see below);
How the quality, utility, and clarity of
the information to be collected may be en-
hanced;
How the burden of complying with the
proposed collection of information may be
minimized, including through the appli-
cation of automated collection techniques
or other forms of information technology;
and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of services to provide informa-
tion.
The collections of information (disclo-
sure requirements) in these proposed reg-
ulations are in Sec. 10.35(d). Section
10.35(d) requires a practitioner providing
a tax shelter opinion to make certain dis-
closures in the beginning of marketed tax
shelter opinions, limited scope opinions
and opinions that fail to conclude at a con-
fidence level of at least more likely than
not. In addition, certain relationships be-
tween the practitioner and a person pro-
moting or marketing a tax shelter must
be disclosed. A practitioner may be re-
quired to make one or more disclosure at
the beginning of an opinion. The collec-
tion of this material helps to ensure that
taxpayers who receive a tax shelter opinion
are informed of any facts or circumstances
that might limit the taxpayer’s use of the
opinion. The collection of information is
mandatory.
Estimated total annual disclosure bur-
den is 13,333 hours.
Estimated annual burden per disclosing
practitioner varies from 5 to 10 minutes,
depending on individual circumstances,
with an estimated average of 8 minutes.
Estimated number of disclosing practi-
tioners is 100,000.
Estimated annual frequency of re-
sponses is on occasion.
An agency may not conduct or sponsor,
and a person is not required to respond to a
collection of information unless it displays
a valid control number assigned by the Of-
fice 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 section 6103 of the Internal Revenue
Code.
Background
Section 330 of title 31 of the United
States Code authorizes the Secretary of
the Treasury to regulate the practice of
representatives before the Treasury De-
partment. The Secretary has published the
regulations in Circular 230 (31 CFR part
10). On February 23, 1984, the regulations
were amended to provide standards for tax
shelter opinions (49 FR 6719). On May 5,
2000, an advance notice of proposed rule-
making was published (REG–111835–99,
published in the Bulletin as Announce-
ment 2000–51, 2000–1 C.B. 1141 [65
FR 30375]) which requested comments
2004-5 I.R.B.392February 2, 2004

regarding amendments to the standards
of practice governing tax shelters and
other general matters. On January 12,
2001, a notice of proposed rulemaking
(REG–111835–99, 2001–1 C.B. 834 [66
FR 3276]) was published that proposed
amendments to the regulations relating to
practice before the Internal Revenue Ser-
vice in general and addressing tax shelter
opinions in particular. On July 26, 2002,
final regulations (T.D. 9011, 2002–2 C.B.
356 [67 FR 48760]) were issued incor-
porating only the non-tax shelter related
matters. The IRS and the Treasury De-
partment announced that regulations gov-
erning standards for tax shelter opinions
would be proposed again at a later date.
This document proposes new proposed
amendments to the standards governing
tax shelter opinions and withdraws pro-
posed amendments to §§10.33, 10.35 and
10.36 of the regulations governing practice
before the IRS that were published in 2001.
See 66 FR 3276 (Jan. 12, 2001).
Explanation of Provisions
Tax advisors play an increasingly im-
portant role in the Federal tax system,
which is founded on principles of volun-
tary compliance. The tax system is best
served when the public has confidence in
the honesty and integrity of the profes-
sionals providing tax advice. To restore,
promote, and maintain the public’s confi-
dence in those individuals and firms, these
proposed regulations set forth best prac-
tices applicable to all tax advisors. These
regulations also amend the mandatory re-
quirements for practitioners who provide
certain tax shelter opinions. These regula-
tions are limited to practice before the IRS
and do not alter or supplant other ethical
standards applicable to practitioners.
The standards set forth in these pro-
posed regulations differ from the January
12, 2001 proposed regulations in several
ways. First, §10.33 prescribes best prac-
tices for all tax advisors. Second, §10.35
combines and modifies the standards
applicable to marketed and more likely
than not tax shelter opinions in former
§10.33 (tax shelter opinions used to mar-
ket tax shelters) and former §10.35 (more
likely than not tax shelter opinions) of the
January 12, 2001, proposed regulations.
Third, these regulations revise proposed
§10.36, which provides procedures for
ensuring compliance with §§10.33 and
10.35. Finally, provisions relating to ad-
visory committees to the Office of Profes-
sional Responsibility are provided in new
§10.37. The Treasury Department and the
IRS will publish conforming amendments
to §§10.22 and 10.52 in a separate notice
of proposed rulemaking.
Best Practices
To ensure the integrity of the tax sys-
tem, tax professionals should adhere to
best practices when providing advice or as-
sisting their clients in the preparation of a
submission to the IRS. Section 10.33 de-
scribes the best practices to be observed by
all tax advisors in providing clients with
the highest quality representation. These
best practices include: (1) communicating
clearly with the client regarding the terms
of the engagement and the form and scope
of the advice or assistance to be rendered;
(2) establishing the relevant facts, includ-
ing evaluating the reasonableness of any
assumptions or representations; (3) relat-
ing applicable law, including potentially
applicable judicial doctrines, to the rele-
vant facts; (4) arriving at a conclusion sup-
ported by the law and the facts; (5) advis-
ing the client regarding the import of the
conclusions reached; and (6) acting fairly
and with integrity in practice before the
IRS.
Standards for Certain Tax Shelter
Opinions
Section 10.35 prescribes requirements
for practitioners providingmore likely than
notandmarketedtax shelter opinions. A
more likely than not tax shelter opinion is
a tax shelter opinion that reaches a conclu-
sion of at least more likely than not with
respect to one or more material Federal tax
issue(s). A marketed tax shelter opinion
is a tax shelter opinion, including a more
likely than not tax shelter opinion, that a
practitioner knows, or has reason to know,
will be used or referred to by a person other
than the practitioner (or a person who is a
member of, associated with, or employed
by the practitioner’s firm) in promoting,
marketing or recommending a tax shelter
to one or more taxpayers.
Definition of Tax Shelter Opinion
These proposed regulations retain the
definition oftax shelterproposed in Jan-
uary 2001 by applying the definition found
in section 6662 to all taxes under the In-
ternal Revenue Code. A number of com-
mentators expressed concern that this def-
inition is overly broad, encompasses rou-
tine tax matters, and is difficult to adminis-
ter by practitioners and the IRS. After care-
ful consideration of these issues, the Trea-
sury Department and the IRS have deter-
mined that the definition in the proposed
regulations best defines the scope of these
regulations. Section 10.35 has been mod-
ified, however, to address commentators’
concerns by excluding from the definition
of a tax shelter opinion preliminary ad-
vice provided pursuant to an engagement
in which the practitioner is expected subse-
quently to provide an opinion that satisfies
the requirements of this section. In addi-
tion, under §10.35(a)(3)(ii), a practitioner
may provide an opinion that is limited to
some, but not all, material Federal tax is-
sues that may be relevant to the treatment
of a tax shelter item if the taxpayer and the
practitioner agree to limit the scope of the
opinion. Such a limited scope opinion can-
not be a marketed tax shelter opinion, and
all limited scope opinions must contain the
appropriate disclosures described below.
Requirements for Tax Shelter Opinions
The requirements for all more likely
than not and marketed tax shelter opin-
ions include: (1) identifying and consid-
ering all relevant facts and not relying on
any unreasonable factual assumptions or
representations; (2) relating the applicable
law (including potentially applicable judi-
cial doctrines) to the relevant facts and not
relying on any unreasonable legal assump-
tions, representations or conclusions; (3)
considering all material Federal tax issues
and reaching a conclusion, supported by
the facts and the law, with respect to each
material Federal tax issue; and (4) provid-
ing an overall conclusion as to the Fed-
eral tax treatment of the tax shelter item or
items and the reasons for that conclusion.
In addition to the exception to the re-
quirements for limited scope opinions dis-
cussed above, in the case of a marketed
tax shelter opinion, a practitioner is not ex-
pected to identify and ascertain facts pe-
February 2, 20043932004-5 I.R.B.

culiar to a taxpayer to whom the transac-
tion is marketed, but the opinion must in-
clude the appropriate disclosure described
below. Moreover, if a practitioner is un-
able to reach a conclusion with respect to
one or more material Federal tax issue(s)
or to reach an overall conclusion in a tax
shelter opinion, the opinion must state that
the practitioner is unable to reach a con-
clusion with respect to those issues or to
reach an overall conclusion and describe
the reasons that the practitioner is unable to
reach such a conclusion. If the practitioner
fails to reach a conclusion at a confidence
level of at least more likely than not with
respect to one or more material Federal tax
issue(s), the opinion must include the ap-
propriate disclosures described below.
Required Disclosures
Section 10.35(d) provides disclosures
that are required to be made in the begin-
ning of marketed tax shelter opinions, lim-
ited scope opinions, and opinions that fail
to reach a conclusion at a confidence level
of at least more likely than not. In addition,
certain relationships between the practi-
tioner and a person promoting or market-
ing a tax shelter must be disclosed. A prac-
titioner may be required to make more than
one of the disclosures described below.
1.Relationship Between Practitioner and
Promoter
Under §10.35(d)(1), a practitioner must
disclose if the practitioner has a compen-
sation arrangement with any person (other
than the client for whom the opinion is pre-
pared) with respect to the promoting, mar-
keting or recommending of a tax shelter
discussed in the opinion. A practitioner
also must disclose if there is any refer-
ral agreement between the practitioner and
any person (other than the client for whom
the opinion is prepared) engaged in the
promoting, marketing or recommending of
the tax shelter discussed in the opinion.
2.Marketed Tax Shelter Opinion
Under §10.35(d)(2), a practitioner must
disclose that a marketed opinion may not
be sufficient for a taxpayer to use for the
purpose of avoiding penalties under sec-
tion 6662(d) of the Code. The practitioner
also must state that taxpayers should seek
advice from their own tax advisors.
3.Limited Scope Opinion
Under §10.35(d)(3), a practitioner must
disclose in a limited scope opinion that ad-
ditional issue(s) may exist that could affect
the Federal tax treatment of the tax shel-
ter addressed in the opinion, that the opin-
ion does not consider or reach a conclusion
with respect to those additional issues and
that the opinion was not written, and can-
not be used by the recipient, for the pur-
pose of avoiding penalties under section
6662(d) of the Code with respect to those
issues outside the scope of the opinion.
4.Opinions That Fail to Reach a
Conclusion at a Confidence Level of at
Least More Likely Than Not
Under §10.35(d)(4), a practitioner must
disclose that the opinion fails to reach a
conclusion at a confidence level of at least
more likely than not with respect to one
or more material Federal tax issue(s) ad-
dressed by the opinion and that the opin-
ion was not written, and cannot be used
by the recipient, for the purpose of avoid-
ing penalties under section 6662(d) of the
Code with respect to such issue(s).
Procedures to Ensure Compliance
Section 10.36 provides that tax advisors
with responsibility for overseeing a firm’s
practice before the IRS should take reason-
able steps to ensure that the firm’s proce-
dures for all members, associates, and em-
ployees are consistent with the best prac-
tices described in §10.33. In the case of
tax shelter opinions, a practitioner with this
oversight responsibility must take reason-
able steps to ensure that the firm has ade-
quate procedures in effect for purposes of
complying with §10.35.
Advisory Committees on the Integrity of
Tax Professionals
Section 10.37 authorizes the Director
of the Office of Professional Responsi-
bility to establish one or more advisory
committees composed of at least five in-
dividuals authorized to practice before the
IRS. Under procedures prescribed by the
Director and at the request of the Director,
an advisory committee may review and
make recommendations regarding pro-
fessional standards or best practices for
tax advisors or may advise the Director
whether a practitioner may have violated
§§10.35 or 10.36.
Proposed Effective Date
These regulations are proposed to apply
on the date that final regulations are pub-
lished in theFederal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It is hereby cer-
tified that these regulations will not have
a significant economic impact on a sub-
stantial number of small entities. Persons
authorized to practice before the IRS have
long been required to comply with certain
standards of conduct. The added disclo-
sure requirements for tax shelter opinions
imposed by these regulations will not have
a significant economic impact on a sub-
stantial number of small entities because,
as previously noted, the estimated burden
of disclosures is minimal. This is because
practitioners have the information needed
to determine whether some of the disclo-
sures are required before the opinion is
prepared and for the other disclosures the
regulations provide practitioners with the
language to be included in the opinion.
Therefore, a regulatory flexibility analy-
sis under the Regulatory Flexibility Act (5
U.S.C. chapter 6) is not required. Pursuant
to section 7805(f) of the Internal Revenue
Code, this notice of proposed rulemaking
will be submitted to the Chief Counsel for
Advocacy of the Small Business Adminis-
tration for comment on its impact on small
businesses.
Comments and Public Hearing
Before the regulations are adopted as fi-
nal regulations, consideration will be given
to any written comments and electronic
comments that are submitted timely to the
IRS. The IRS and Treasury Department
specifically request comments on the clar-
ity of the proposed regulations and how
they can be made easier to understand. All
comments will be available for public in-
spection and copying.
The public hearing is scheduled for
February 18, 2004, at 10 a.m., and will be
held in the Auditorium, Internal Revenue
2004-5 I.R.B.394February 2, 2004

Building, 1111 Constitution Avenue, NW,
Washington, DC. Due to building secu-
rity procedures, visitors must enter at the
Constitution Avenue entrance. All visitors
must present photo identification to enter
the building. Visitors will not be admitted
beyond the immediate entrance area more
than 30 minutes before the hearing starts.
For information about having your name
placed on the building access list to attend
the hearing, see the FOR FURTHER IN-
FORMATION CONTACT section of this
preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written or electronic comments by
February 13, 2004, and submit an outline
of the topics to be discussed and the time
to be devoted to each topic by February
11, 2004. A period of 10 minutes will be
allocated to each person for making com-
ments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has passed.
Copies of the agenda will be available free
of charge at the hearing.
Drafting Information
The principal authors of the regula-
tions are Heather L. Dostaler, Bridget E.
Tombul, and Brinton T. Warren of the
Office of the Associate Chief Counsel
(Procedure and Administration), Admin-
istrative Provisions and Judicial Practice
Division, but other personnel from the IRS
and Treasury Department participated in
their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 31 CFR part 10 is pro-
posedtobeamendedasfollows
Paragraph 1. The authority citation for
subtitle A, part 10 continues to read as fol-
lows:
[Authority: Sec. 3, 23 Stat. 258, secs.
2–12, 60 Stat. 237et. seq.; 5 U.S.C. 301,
500, 551–559; 31 U.S.C. 330; Reorg. Plan
No. 26 of 1950, 15 FR 4935, 64 Stat.
1280, 3 CFR, 1949–1953 Comp., P. 1017.]
PART 10—PRACTICE BEFORE THE
INTERNAL REVENUE SERVICE
Par. 2. Section 10.33 is revised to read
as follows:
§10.33 Best pra
ctices for tax advisors.
(a)Best practices. Tax advisors should
provide clients with the highest quality
representation concerning Federal tax is-
sues by adhering to best practices in pro-
viding advice and in preparing or assisting
in the preparation of a submission to the
Internal Revenue Service. Best practices
include the following:
(1) Communicating clearly with the
client regarding the terms of the engage-
ment. For example, the advisor should
determine the client’s expected purpose
for and use of the advice and should have
a clear understanding with the client re-
garding the form and scope of the advice
or assistance to be rendered.
(2) Establishing the facts, determining
which facts are relevant, and evaluating
the reasonableness of any assumptions or
representations.
(3) Relating the applicable law (in-
cluding potentially applicable judicial
doctrines) to the relevant facts.
(4) Arriving at a conclusion supported
by the law and the facts.
(5) Advising the client regarding the
import of the conclusions reached, in-
cluding, for example, whether a taxpayer
may avoid penalties for a substantial un-
derstatement of income tax under section
6662(d) of the Internal Revenue Code if a
taxpayer acts in reliance on the advice.
(6)Actingfairlyandwithintegrityin
practice before the Internal Revenue Ser-
vice.
(b)Effective date. This section is effec-
tive on the date that final regulations are
published in theFederal Register.
Par. 3. Section 10.35 is added to read
as follows:
§10.35 Requirements for certain tax
shelter opinions.
(a)In general. A practitioner provid-
ing amore likely than not tax shelter opin-
ionor amarketed tax shelter opinionmust
comply with each of the following require-
ments.
(1)Factual matters. (i) The practitioner
must use reasonable efforts to identify and
ascertain the facts, which may relate to fu-
ture events if a transaction is prospective
or proposed, and determine which facts are
relevant. The opinion must identify and
consider all relevant facts.
(ii) The practitioner must not base the
opinion on any unreasonable factual as-
sumptions (including assumptions as to fu-
ture events), such asa factual assumption
that the practitioner knows or should know
is incorrect or incomplete. For example, it
is unreasonable to assume that a transac-
tion has a business purpose or that a trans-
action is potentially profitable apart from
tax benefits, or to make an assumption with
respect to a material valuation issue. In
the case of anymarketed tax shelter opin-
ion, the practitioner is not expected to iden-
tify or ascertain facts peculiar to a taxpayer
to whom the transaction may be marketed,
but the opinion must include the appropri-
ate disclosure(s) required under paragraph
(d)ofthissection.
(iii) The practitioner must not base the
opinion on any unreasonable factual rep-
resentations, statements or findings of the
taxpayer or any other person, such as a
factual representation that the practitioner
knows or should know is incorrect or in-
complete. For example, a practitioner may
not rely on a taxpayer’s factual representa-
tion that a transaction has a business pur-
pose if the representation fails to include
a specific description of the business pur-
pose or the practitioner knows or should
know that the representation is incorrect or
incomplete.
(2)Relate law to facts. (i) The practi-
tioner must relate the applicable law (in-
cluding potentially applicable judicial doc-
trines) to the relevant facts.
(ii) The practitioner must not assume
the favorable resolution of any material
Federal tax issue except as provided in
paragraphs (a)(3)(ii) and (b) of this section,
or otherwise base an opinion on any un-
reasonable legal assumptions, representa-
tions, or conclusions.
(iii) The practitioner’s opinion must not
contain internally inconsistent legal analy-
ses or conclusions.
(3)Evaluation of material Federal tax
issues. (i) The practitioner must consider
all material Federal tax issues except as
provided in paragraphs (a)(3)(ii) and (b) of
this section.
(ii) The practitioner may provide an
opinion that considers less than all of the
material Federal tax issues if—
February 2, 20043952004-5 I.R.B.

(A) The taxpayer and the practitioner
agree to limit the scope of the opinion to
one or more Federal tax issue(s);
(B) The opinion is not amarketed tax
shelter opinion;and
(C) The opinion includes the appropri-
ate disclosure(s) required under paragraph
(d) of this section.
(iii) The practitioner must provide his
or her conclusion as to the likelihood that
the taxpayer will prevail on the merits with
respect to each material Federal tax issue.
If the practitioner is unable to reach a con-
clusion with respect to one or more mate-
rial Federal tax issue(s), the opinion must
state that the practitioner is unable to reach
a conclusion with respect to those issues.
The practitioner must describe the reasons
for the conclusions, including the facts and
analysis supporting the conclusions, or de-
scribe the reasons that the practitioner is
unable to reach a conclusion as to one or
more material Federal tax issue(s). If the
practitioner fails to reach a conclusion at
a confidence level of at least more likely
than not with respect to one or more mate-
rial Federal tax issue(s), the opinion must
include the appropriate disclosure(s) re-
quired under paragraph (d) of this section.
(iv) The practitioner must not take into
account the possibilitythat a tax return will
not be audited, that an issue will not be
raised on audit, or that an issue will be
settled.
(4)Overall conclusion. The practi-
tioner must provide an overall conclusion
as to the likelihood that the Federal tax
treatment of the tax shelter item or items
is the proper treatment and the reasons
for that conclusion. If the practitioner is
unable to reach an overall conclusion, the
opinion must state that the practitioner is
unable to reach an overall conclusion and
describe the reasons for the practitioner’s
inability to reach a conclusion.
(b)Competence to provide opinion; re-
liance on opinions of others. (1) The prac-
titioner must be knowledgeable in all of the
aspects of Federal tax law relevant to the
opinion being rendered. If the practitioner
is not sufficiently knowledgeable to render
an informed opinion with respect to partic-
ular material Federal tax issues, the practi-
tioner may rely on the opinion of another
practitioner with respect to these issues un-
less the practitioner knows or should know
that such opinion should not be relied on.
If a practitioner relies on the opinion of an-
other practitioner, the relying practitioner
must identify the other opinion and set
forth the conclusions reached in the other
opinion.
(2) The practitioner must be satisfied
that the combined analysis of the opinions,
taken as a whole, satisfies the requirements
of this section.
(c)Definitions. For purposes of this
section—
(1) Apractitionerincludes any individ-
ual described in §10.2(e).
(2) The termtax shelterincludes any
partnership or other entity, any investment
plan or arrangement, or any other plan
or arrangement, a significant purpose of
which is the avoidance or evasion of any
tax imposed by the Internal Revenue Code.
A tax shelter may give rise to one or more
tax shelter items.
(3) Atax shelter itemis, with respect
to a tax shelter, an item of income, gain,
loss, deduction, or credit, the existence or
absence of a taxable transfer of property,
or the value of property.
(4)Tax shelter opinion—(i)In general.
Atax shelter opinionis written advice by
a practitioner concerning the Federal tax
aspects of any Federal tax issue relating to
a tax shelter item or items.
(ii)Excluded advice. A tax shelter opin-
ion does not include written advice pro-
vided to a client during the course of an
engagement pursuant to which the practi-
tioner is expected subsequently to provide
written advice to the client that satisfies the
requirements of this section, or written ad-
vice concerning thequalification of a qual-
ified plan.
(iii)Included advice. A tax shelter
opinion includes the Federal tax aspects
or tax risks portion of offering materials
prepared by or at the direction of a prac-
titioner. Similarly, a financial forecast or
projection prepared by or at the direction
of a practitioner is a tax shelter opinion if
it is predicated on assumptions regarding
Federal tax aspects of the investment.
(5) Amore likely than not tax shelter
opinionis a tax shelter opinion that reaches
a conclusion at a confidence level of at
least more likely than not (that is, greater
than 50 percent) that one or more material
Federal tax issues would be resolved in the
taxpayer’s favor.
(6) Amarketed tax shelter opinionis a
tax shelter opinion, including a more likely
than not tax shelter opinion, that a practi-
tioner knows or has reason to know will be
used or referred to by a person other than
the practitioner (or a person who is a mem-
ber of, associated with, or employed by the
practitioner’s firm) in promoting, market-
ing or recommending the tax shelter to one
or more taxpayers.
(7) Amaterial Federal tax issueis any
Federal tax issue for which the Internal
Revenue Service has a reasonable basis for
a successful challenge and the resolution
of which could have a significant impact,
whether beneficial or adverse and under
any reasonably foreseeable circumstance,
on the Federal tax treatment of a taxpayer’s
tax shelter item or items.
(d)Required disclosures.Anopin-
ion must contain all of the following
disclosures that apply—(1)Relationship
between promoter and practitioner.A
practitioner must disclose in the beginning
of the opinion the existence of—
(i) Any compensation arrangement,
such as a referral fee or a fee-sharing
arrangement, between the practitioner
(or the practitioner’s firm) and any person
(other than the client for whom the opinion
is prepared) with respect to the promot-
ing, marketing or recommending of a tax
shelter discussed in the opinion; or
(ii) Any referral agreement between the
practitioner (or the practitioner’s firm) and
a person (other than the client for whom
the opinion is prepared) engaged in the
promoting, marketing or recommending of
the tax shelter discussed in the opinion.
(2)Marketed tax shelter opinions.A
practitioner must disclose in the beginning
of amarketed tax shelter opinionthat with
respect to any material Federal tax issue
for which the opinionreaches a conclusion
at a confidence level of at least more likely
than not—
(i) The opinion may not be sufficient for
a taxpayer to use for the purpose of avoid-
ing penalties relating to a substantial un-
derstatement of income tax under section
6662(d) of the Internal Revenue Code; and
(ii) Taxpayers should seek advice based
on their individual circumstances with re-
spect to those material Federal tax issues
from their own tax advisor(s).
(3)Limited scope opinions. If a prac-
titioner provides an opinion that is limited
to one or more Federal tax issue(s) agreed
to by the taxpayer and the practitioner, the
practitioner must disclose in the beginning
of the opinion that—
2004-5 I.R.B.396February 2, 2004

(i) The opinion is limited to the one
or more Federal tax issue(s) agreed to by
the taxpayer and the practitioner and ad-
dressed in the opinion;
(ii) Additional issue(s) may exist that
could affect the Federal tax treatment of
the tax shelter addressed in the opinion and
the opinion does not consider or provide a
conclusion with respect to any additional
issue(s); and
(iii) With respect to any material Fed-
eral tax issue(s) outside the limited scope
of the opinion, the opinion was not written,
and cannot be used by the recipient, for the
purpose of avoiding penalties relating to a
substantial understatement of income tax
under section 6662(d) of the Internal Rev-
enue Code.
(4)Opinions that fail to reach a more
likely than not conclusion. If a practitioner
does not reach a conclusion at a confi-
dence level of at least more likely than not
with respect to a material Federal tax issue
addressed by the opinion, the practitioner
must disclose in the beginning of the opin-
ion that—
(i) The opinion does not reach a conclu-
sion at a confidence level of at least more
likely than not that with respect to one or
more material Federal tax issues addressed
by the opinion; and
(ii) With respect to those material Fed-
eral tax issues, the opinion was not written,
and cannot be used by the recipient, for the
purpose of avoiding penalties relating to a
substantial understatement of income tax
under section 6662(d) of the Internal Rev-
enue Code.
(e)Effect of opinion that meets these
standards. An opinion that meets these re-
quirements satisfies the practitioner’s re-
sponsibilities under this section, but the
persuasiveness of the opinion with regard
to the tax issues in question and the tax-
payer’s good faith reliance on the opinion
will be separately determined under ap-
plicable provisions of the law and regula-
tions.
(f)Effective date. This section applies
to tax shelter opinions rendered after the
date that final regulations are published in
theFederal Register.
Par. 4. Section 10.36 is added to read
as follows:
§10.36 Procedures to ensure compliance.
(a)Best practices for tax advisors.Tax
advisors with responsibility for overseeing
a firm’s practice of providing advice con-
cerning Federal tax issues or of preparing
or assisting in the preparation of sub-
missions to the Internal Revenue Service
should take reasonable steps to ensure that
the firm’s procedures for all members,
associates, and employees are consistent
with the best practices described in §10.33.
(b)Requirements for certain tax shel-
ter opinions. Any practitioner who has (or
practitioners who have or share) principal
authority and responsibility for overseeing
a firm’s practice of providing advice con-
cerning Federal tax issues must take rea-
sonable steps to ensure that the firm has
adequate procedures in effect for all mem-
bers, associates, and employees for pur-
poses of complying with §10.35. A practi-
tioner will be subject to discipline for fail-
ing to comply with the requirements of this
paragraph if—
(1) The practitioner through willful-
ness, recklessness, or gross incompetence
does not take reasonable steps to ensure
that the firm has adequate procedures to
comply with §10.35, and one or more
individuals who are members of, associ-
ated with, or employed by, the firm are,
or have, engaged in a pattern or practice,
in connection with their practice with the
firm, of failing to comply with §10.35; or
(2) The practitioner knows or has rea-
son to know that one or more individuals
who are members of, associated with, or
employed by, the firm are, or have, en-
gaged in a practice, in connection with
their practice with the firm, that does not
comply with §10.35 and the practitioner,
through willfulness, recklessness, or gross
incompetence fails to take prompt action to
correct the noncompliance.
(c)Effective date. Paragraph (a) of this
section is effective on the date that final
regulations are published in theFederal
Register. Paragraph (b) of this section ap-
plies to tax shelter opinions rendered after
the date that final regulations are published
in theFederal Register.
Par. 5. Section 10.37 is added to read
as follows:
§10.37 Establishment of Advisory
Committees.
(a)Advisory committees.Topromote
and maintain the public’s confidence in
tax advisors, the Director of the Office of
Professional Responsibility is authorized
to establish one or more advisory commit-
tees composed of at least five individuals
authorized to practice before the Internal
Revenue Service. Under procedures pre-
scribed by the Director, an advisory com-
mittee may review and make recommen-
dations regarding professional standards
or best practices for tax advisors, or more
particularly, whether a practitioner may
have violated §§10.35 or 10.36.
(b)Effective date. This section is effec-
tive on the date that final regulations are
published in theFederal Register.
Par. 6. Section 10.93 is revised to read
as follows:
§10.93 Effective date.
Except as otherwise provided in each
section and subject to §10.91, Part 10 is
applicable on July 26, 2002.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved December 19, 2003.
George B. Wolfe,
Deputy General Counsel,
Office of the Secretary.
(Filed by the Office of the Federal Register on December 29,
2003, 8:45 a.m., and published in the issue of the Federal
Register for December 30, 2003, 68 F.R. 75186)
Notice of Proposed
Rulemaking
Gross Estate; Election to Value
on Alternate Valuation Date
REG–139845–02
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains pro-
posed regulations relating to the election
under section 2032 to value a decedent’s
gross estate on the alternate valuation date.
February 2, 20043972004-5 I.R.B.

The proposed regulations reflect a change
to the law made by the Deficit Reduction
Act of 1984. The proposed regulations af-
fect estates that are required to file Form
706,United States Estate (and Genera-
tion-Skipping Transfer) Tax Return.
DATES: Written or electronic comments
and requests for a public hearing must be
received by March 24, 2004.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–139845–02), room
5203, Internal Revenue Service, POB
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand-delivered between the hours of 8
a.m.and4p.m.to:CC:PA:LPD:PR
(REG–139845–02), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC. Alterna-
tively, taxpayers may submit electronic
comments directly to the IRS Internet site
at:www.irs.gov/regs.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Theresa Melchiorre, (202)
622–7830; concerning submissions of
comments or to request a hearing, Treena
Garrett, (202) 622–3401 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
As a general rule, section 2031 provides
that the value of a decedent’s gross estate is
to be determined as of the date of the dece-
dent’s death. Section 2032 provides that
the executor may elect to value the prop-
erty on an alternate valuation date. Prior
to the enactment of the Deficit Reduction
Act of 1984, Public Law 98–369 (98 Stat.
494), section 2032(c) and §20.2032–1(b)
of the Estate Tax Regulations required the
electiontobemadeonatimelyfiledestate
tax return, including extensions of time to
file actually granted. The Deficit Reduc-
tion Act amended section 2032, effective
for estates of decedents dying after July
18, 1984, by redesignating section 2032(c)
as section 2032(d) and amending section
2032(d) to provide that the election may
be made on the estate tax return, whether
it is filed timely or late, as long as the re-
turnisfilednomorethan1yearafterthe
due date, including extensions. Tempo-
rary Regulation §301.9100–6T(b), issued
on September 5, 1984, reflects this change
to the law and provides a transition rule
for estates of decedents dying before July
19, 1984. The temporary regulation, how-
ever, also provides that once a return that
fails to make the election is filed, the elec-
tion may not be made on a subsequent re-
turn unless the subsequent return is filed
by the due date (including extensions) of
the original return. This limitation is not
found in §§301.9100–1 and 301.9100–3 of
the Procedure and Administration Regula-
tions that apply to all requests for an exten-
sion of time to make an election submitted
to the IRS on or after December 31, 1997.
The Deficit Reduction Act of 1984 also
added new section 2032(c) that provides
that, in the case of estates of decedents
dying after July 18, 1984, the election to
use the alternate valuation method may
be made only if the election results in a
reduction in both the value of the gross
estate and the actual estate tax liability.
The Tax Reform Act of 1986, Public Law
99–514 (100 Stat. 2085), amended section
2032(c)(2) to provide that the election may
be made only if the election results in a de-
crease both in the value of the gross estate
and in the sum of the estate tax and gen-
eration-skipping transfer tax liability (re-
duced by credits allowable against these
taxes).
Explanation of Provisions
These proposed regulations will amend
§20.2032–1(b) to reflect the change made
to section 2032 by the Deficit Reduction
Act of 1984. In addition, the proposed
regulations, when finalized, will remove
temporary regulation §301.9100–6T(b) of
the Procedure and Administration Regula-
tions so that estates that fail to make the
alternate valuation election on the last es-
tate tax return filed before the due date
or the first return filed after the due date
will be able to request an extension of time
to make the election under the provisions
of §§301.9100–1 and 301.9100–3. How-
ever, in view of the statutory 1 year lim-
itation imposed under section 2032(d)(2),
no request for an extension of time will be
granted if the request is submitted to the
IRS more than 1 year after the due date of
the return (including extensions of time to
file actually granted). The proposed regu-
lations also provide guidance on making a
protective election under section 2032.
Special Analyses
It has been determined that this pro-
posed regulation is not a significant regu-
latory action as defined in Executive Or-
der 12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations and,
because these regulations do not impose
on small entities a collection of informa-
tion requirement, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility Anal-
ysis is not required. Pursuant to section
7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking will be sub-
mitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written (a signed
original and eight (8) copies) or electronic
comments that are submitted timely to the
IRS. The IRS and the Treasury Depart-
ment specifically request comments on
the clarity of the proposed regulations and
how they may be made easier to under-
stand. All comments will be available for
public inspection and copying. A public
hearing may be scheduled if requested in
writing by any person that timely submits
written comments. If a public hearing is
scheduled, notice of the date, time, and
place for the hearing will be published in
theFederal Register.
Drafting Information
The principal author of these regu-
lations is Theresa Melchiorre, Office of
Associate Chief Counsel (Passthroughs
and Special Industries). However, other
personnel from the IRS and the Treasury
Department participated in their develop-
ment.
*****
2004-5 I.R.B.398February 2, 2004

Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 20 and 301
are proposed to be amended as follows:
PART 20—ESTATE TAX; ESTATES
OF DECEDENTS DYING AFTER
AUGUST 16, 1954
Paragraph 1. The authority citation for
part 20 continues to read in part as follows:
Authority:26U.S.C.7805***
Par. 2. Section 20.2032–1(b) is revised
to read as follows:
§20.2032–1 Alternate valuation.
*****
(b)Method and effect of election—(1)
In general. The election to use the alter-
nate valuation method is made on the re-
turn of tax imposed by section 2001. For
purposes of this paragraph (b), the termre-
turn of tax imposed by section 2001means
the last estate tax return filed by the execu-
tor on or before the due date of the return
(including extensions of time to file actu-
ally granted) or, if a timely return is not
filed, the first estate tax return filed by the
executor after the due date, provided the
return is filed no later than 1 year after the
due date (including extensions of time to
file actually granted). Once the election
is made, it is irrevocable, provided that an
election may be revoked on a subsequent
return filed on or before the due date of
the return (including extensions of time to
file actually granted). The election may be
made only if it will decrease both the value
of the gross estate and the sum (reduced by
allowable credits) of the estate tax and the
generation-skipping transfer tax with re-
spect to the property includible in the dece-
dent’s gross estate. If the election is made,
the alternate valuation method applies to
all property included in the gross estate and
cannot be applied to only a portion of the
property.
(2)Protective election.If,basedonthe
return of tax as filed, use of the alternate
valuation method would not result in a de-
crease in both the value of the gross estate
and the sum (reduced by allowable credits)
of the estate tax and the generation-skip-
ping transfer tax liability of the estate, a
protective election may be made to use the
alternate valuation method if it is subse-
quently determined that such a decrease
would occur. A protective election made
on the return of tax imposed by section
2001 is irrevocable, provided that it may be
revoked on a subsequent return filed on or
before the due date of the return (including
extensions of time to file actually granted).
Absent such revocation, if it is later deter-
mined that use of the alternate valuation
method would result in a decrease in both
the value of the gross estate and in the sum
(reduced by allowable credits) of the estate
tax and generation-skipping transfer tax li-
ability of the estate, the protective election
becomes effective and cannot thereafter be
revoked.
(3)Requests for extension of time to
make the election. A request for an exten-
sion of time to make the election pursuant
to §§301.9100–1 and 301.9100–3 of this
chapter will not be granted unless the re-
quest is submitted to the Internal Revenue
Service no later than 1 year after the due
date of the return (including extensions of
time to file actually granted).
*****
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 3. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U. S. C. 7805 * * *
§301.9100–6T [Amended]
Par. 4. Section 301.9100–6T is
amended by:
1. Removing the language “paragraph
(b)(2)” from paragraph (a)(2) introductory
text, and adding the language “paragraph
(a)(2)” in its place.
2. Removing paragraph (b).
3.Redesignating paragraphs (c)
through (s) as paragraphs (b) through
(r), respectively.
4. Removing the language “paragraph
(c)(2)” from the last sentence in newly des-
ignated paragraph (b)(2) and adding the
language “paragraph (b)(2)” in its place.
5. Removing the language “paragraph
(l)” from the second, fourth and last sen-
tences in newly designated paragraph (k)
and adding the language “paragraph (k)”
in its place.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on December 23,
2003, 8:45 a.m., and published in the issue of the Federal
Register for December 24, 2003, 68 F.R. 74534)
Withdrawal of Previous
Proposed Rules; Notice
of Proposed Rulemaking
by Cross-Reference to
Temporary Regulations and
Notice of Public Hearing
Information Reporting
Relating to Taxable Stock
Transactions
REG–143321–02;
REG-156232–03
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: With
drawal of previous pro-
posed rules
; notice of proposed rule-
making by cr
oss-reference to temporary
regulation
s and notice of public hearing.
SUMMARY: This document withdraws
proposed regulations published in the
Federal Registeron November 18, 2002
(REG–143321–02, 2002–2 C.B. 922). In
this issue of the Bulletin, the IRS is issuing
temporary regulations (T.D. 9101) relating
to information reporting relating to taxable
stock transactions. This document con-
tains proposed regulations under section
6043(c) requiring information reporting
by a corporation if control of the corpo-
ration is acquired or if the corporation
has a recapitalization or other substantial
change in capital structure. This docu-
ment also contains proposed regulations
under section 6045 concerning informa-
tion reporting requirements for brokers
with respect to transactions described in
section 6043(c). The text of the tempo-
rary regulations serves as the text of these
proposed regulations. This document also
provides notice of a public hearing on
these proposed regulations.
DATES: Written or electronic comments
must be received by March 29, 2004. Out-
lines of topics to be discussed at the pub-
lic hearing scheduled for March 31, 2004,
at 10 a.m., must be received by March 10,
2004.
February 2, 20043992004-5 I.R.B.

ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–156232–03), room
5203, Internal Revenue Service, POB
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–156232–03),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC. Alternatively, taxpayers may
submit electronic comments directly to the
IRS Internet site atwww.irs.gov/regs.The
public hearing will be held in the IRS Au-
ditorium, Internal Revenue Building, 1111
Constitution Avenue, NW, Washington,
DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed reg-
ulations, Nancy L. Rose (202) 622–4910;
concerning submissions of comments, the
hearing, and/or to beplaced on the build-
ing access list to attend the hearing, Robin
Jones at (202) 622–7180 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The forms referenced in these regula-
tions have been, or will be, approved by the
Office of Management and Budget in ac-
cordance with the requirements of the Pa-
perwork Reduction Act of 1995 (44 U.S.C.
3507(d)).
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
Books and records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and tax
return information are confidential, as re-
quired by 26 U.S.C. 6103.
Background
This document withdraws the Notice of
Proposed Rulemaking (REG–143321–02)
that was published in theFederal Regis-
teron November 18, 2002 (67 FR 65496).
Temporary regulations in this issue of the
Bulletin amend the Income Tax Regula-
tions (26 CFR Part 1) relating to sections
6043 and 6045. The temporary regu-
lations set forth information reporting
requirements relating to acquisitions of
control and substantial changes in capital
structure. The text of those regulations
also serves as the text of these proposed
regulations. The preamble to the tempo-
rary regulations explains the amendments
and these proposed regulations.
On November 18, 2002, the IRS pub-
lished temporary regulations under section
6043(c) (T.D. 9022, 2002–2 C.B. 909).
The transactions covered by the reporting
requirement were certain acquisitions of
control and substantial changes in the cap-
ital structure of a corporation. These reg-
ulations required a corporation to attach a
form to its income tax return describing
these transactions and to file information
returns with respect to certain sharehold-
ers in such transactions. On November
18, 2002, the IRS also published tempo-
rary regulations under section 6045, which
provided for information reporting with re-
spect to these transactions by brokers (to-
gether with the section 6043(c) temporary
regulations, the “2002 temporary regula-
tions”). The 2002 temporary regulations
were effective for acquisitions of control
and substantial changes in capital structure
occurring after December 31, 2001, if the
reporting corporation or any shareholder
was required to recognize gain (if any) as
a result of the application of section 367(a)
as a result of the transaction.
The text of the 2002 temporary regula-
tions also served as the text of proposed
regulations set forthin a cross-referenc-
ing notice of proposed rulemaking pub-
lished in the Proposed Rules section of the
same issue of theFederal Register(2002
proposed regulations) (REG–143321–02).
The provisions of the proposed regulations
were proposed to be effective with respect
to any acquisition of control or substantial
change in capital structure occurring after
the date on which final regulations would
be published in theFederal Register.The
preamble to the notice of proposed rule-
making invited public comments with re-
spect to the potential for duplicate report-
ing and with respect to the burden of com-
pliance with the reporting requirements.
The IRS received a number of writ-
ten public comments with respect to the
information reporting requirements set
forth in the 2002 temporary and proposed
regulations. In addition, the IRS met
with representatives of the Information
Reporting Program Advisory Committee
(IRPAC) and other representatives of the
securities industry to discuss their con-
cerns and suggestions for revisions to the
regulations.
After considering the issues concerning
affected taxpayers, the IRS has decided
to revise the 2002 temporary regulations.
The revised temporary regulations set
forth information reporting rules that will
help ensure that brokers and sharehold-
ers receive information regarding these
corporate transactions, without unduly
burdening brokers and other members of
the securities industry. The text of the
revised temporary regulations also serves
as the text of these proposed regulations
(reproposed regulations).
Summary of Comments and
Explanation of Provisions
The commentators noted certain gaps in
the transmission of information under the
2002 temporary and proposed regulations
between corporationssubject to reporting
and brokers. Information reporting by bro-
kers depends upon the effective dissemi-
nation of information from the corporation
to the reporting community, and broker re-
porting is difficult to effectuate if there are
gaps in the process of transmitting this in-
formation.
As provided in the 2002 temporary
and proposed regulations, a reporting cor-
poration would file Forms 1099–CAP,
“Changes in Corporate Control and
Capital Structure,” with respect to its
shareholders of record, including bro-
kers, under §1.6043–4T(b) and proposed
§1.6043–4(b). Brokers who received
Forms 1099–CAP would then file Forms
1099–CAP with respect to their customers
pursuant to §1.6045–3T and proposed
§1.6045–3. The commentators pointed
out that a large majority of U.S. publicly
issued securities are actually held on be-
half of brokerage firms through clearing
organizations. Pursuant to the 2002 tem-
porary and proposed regulations, clear-
ing organizations would receive Forms
1099–CAP from the reporting corpo-
ration; however, because clearing or-
ganizations are nottreated as brokers,
they in turn would not be required under
§1.6045–3T and reproposed §1.6045–3 to
file Forms 1099–CAP with respect to their
2004-5 I.R.B.400February 2, 2004

broker-members. Consequently, brokers
(who had the requirement to file a Form
1099–CAP upon receiving one) would not
receive Form 1099–CAP if they held their
shares through a clearing organization.
In addition, brokers may not be aware of
the requirement to report with respect to
a particular corporate transaction, or may
have difficulty obtaining the information
necessary for reporting. Thus, under the
2002 temporary and proposed regulations,
the actual shareholders of the reporting
corporation, the broker’s customers, may
not receive information returns to assist
them in preparing their income tax returns.
To address this issue, commentators
suggested an alternative procedure to
ensure that brokers receive the required
information for reporting and to bridge
any potential gaps in the chain of re-
porting. Commentators recommended
that the IRS act as a central repository
of information necessary for brokers and
issue a publication containing information
needed for brokers to satisfy their report-
ing obligations. Brokers and commercial
tax services that publish current devel-
opments could access this information,
and brokers could use this information in
preparing Forms 1099–CAP with respect
to their customers. An alternative sug-
gested by commentators was to require
the reporting corporation to post essential
information for reporting, from its Form
8806, “Information Return for Acquisition
of Control or Substantial Change in Capi-
tal Structure,” to an IRS website.
Based on the comments, revised
§1.6043–4T(a)(1)(vi) and reproposed
§1.6043–4(a)(1)(vi) provide that reporting
corporations may elect on Form 8806 to
consent to the publication by the IRS of
information necessary for brokers to file
information returns with respect to their
customers. To provide every corporation
with the ability to make this election, the
revised temporary regulations require re-
porting corporations to file Form 8806
even though the corporation may also re-
port the transaction under sections 351,
355, or 368. In order to enable the IRS to
publish the information timely, the revised
temporary regulations require reporting
corporations to file Form 8806 within 45
days after the transaction, and in no event
later than January 5 of the year following
the calendar year in which the transaction
occurs.
The role of clearing organizations was
also the subject of comments. Commenta-
tors suggested that the regulations utilize
existing processes for distributing infor-
mation to minimize the cost of and the
time required for implementing reporting
by the industry. Those existing processes
include the dissemination of informa-
tion by clearing organizations. Under
current practices, important information
regarding corporate transactions (includ-
ing tax information) is disseminated by
clearing organizations to their members.
The revised temporary and reproposed
regulations try to take advantage of this
existing information flow by continuing
to require corporations to provide a Form
1099–CAP to clearing organizations that
are listed as shareholders of record at the
time of an acquisition of control or sub-
stantial change in capital structure. It is
anticipated that clearing organizations will
disseminate information obtained from
the Form 1099–CAP to their members and
that broker-members will use that infor-
mation (and information obtained from
other sources) to satisfy their own report-
ing obligations under §1.6045–3T and
reproposed §1.6045–3. Under the revised
regulations, a broker is required to report
information if the broker knows or has
reason to know, based on readily available
information, that there was an acquisition
of control or substantial change in capital
structure with respect to shares held by the
broker on behalf of a customer. If a clear-
ing organization disseminates information
identifying an acquisition of control or
a substantial change in capital structure
to a broker-member, the broker-member
has readily available information about
the transaction and must satisfy its re-
porting obligations under §1.6045–3T and
reproposed §1.6045–3 with respect to the
transaction.
The revised temporary and reproposed
regulations provide that a reporting cor-
poration is not required to file Forms
1099–CAP with respect to its shareholders
which are clearing organizations, or to
furnish Forms 1099–CAP to such clearing
organizations, if the corporation makes
theelectiontopermittheIRStopublish
information regarding the transaction.
The IRS’ publication of such information
pursuant to the corporation’s consent will
provide readily available information for
brokers, who must satisfy their reporting
obligations with respect to the transaction.
Commentators also requested that bro-
kers be permitted to utilize Form 1099–B
for reporting under §1.6045–3T and re-
proposed §1.6045–3, rather than over-
haul their systems to report on Form
1099–CAP. The commentators point out
that this would also avoid any confusion
stemming from the issuance of both types
of forms to the same taxpayer in the same
transaction. The revised temporary regula-
tions and reproposed regulations provide
that Form 1099–B should be used by
brokers for reporting under §1.6045–3T
and reproposed §1.6045–3. With respect
to transactions occurring in 2003, bro-
kers may use either Form 1099–B or
1099–CAP.
Proposed Effective Date
The provisions of these regulations are
proposed to be applicable for any acquisi-
tion of control and change in capital struc-
ture occurring after the date on which these
regulations are published in theFederal
Registeras final regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It has also been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations,
and because the regulations do not im-
pose a collection of information on small
entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursuant
to section 7805(f) of the Internal Revenue
Code, this notice of proposed rulemaking
will be submitted to the Chief Counsel for
Advocacy of the Small Business Adminis-
tration for comment on its impact on small
businesses.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any electronic or writ-
ten comments (a signed original and eight
(8) copies) that are submitted timely to
the IRS. The IRS and Treasury Depart-
ment request comments on the clarity of
February 2, 20044012004-5 I.R.B.

the proposed rules and how they can be
made easier to understand. Comments
are particularly requested with respect to
the ability of brokers to obtain the infor-
mation necessary for reporting under the
proposed rules. All comments will be
available for public inspection and copy-
ing. A public hearing has been sched-
uled for March 31, 2004, beginning at 10
a.m. in the IRS Auditorium, Internal Rev-
enue Building, 1111 Constitution Avenue,
NW, Washington, DC. Because of access
restrictions, visitors will not be admitted
beyond the immediate entrance area more
than 30 minutes before the hearing starts.
For information about having your name
placed on the building access list to attend
the hearing, see the FOR FURTHER IN-
FORMATION CONTACT portion of this
preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments must submit elec-
tronic or written comments and an out-
line of the topics to be discussed and the
time to be devoted to each topic (a signed
original and eight (8) copies) by March
10, 2004. A period of 10 minutes will be
allotted to each person for making com-
ments. An agenda showing the scheduling
of the speakers will be prepared after the
deadline for reviewing outlines has passed.
Copies of the agenda will be available free
of charge at the hearing.
Drafting Information
The principal author of this notice of
proposed rulemaking is Nancy L. Rose,
Office of Associate Chief Counsel (Proce-
dure and Administration).
*****
Withdrawal of a Previous Notice of
Proposed Rulemaking
Accordingly, under the authority of 26
U.S.C. 7805, the notice of proposed rule-
making published in theFederal Register
on November 18, 2002 (REG–143321–02)
is withdrawn.
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 * * *
Par. 2. Section 1.6043–4 is added to
read as follows:
§1.6043–4 Information returns relating
to certain acquisitions of control and
changes in capital structure.
[The text of proposed §1.6043–4 is the
same as the text of §1.6043–4T published
elsewhere in this issue of the Bulletin]
Par. 3. Section 1.6045–3 is added to
read as follows:
§1.6045–3 Information reporting for
acquisitions of control or substantial
changes in capital structure.
[The text of proposed §1.6045–3 is the
same as the text of §1.6045–3T 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 December 29,
2003, 8:45 a.m., and published in the issue of the Federal
Register for December 30, 2003, 68 F.R. 75182)
Announcement of Disciplinary Actions Involving
Attorneys, Certified Public Accountants, Enrolled Agents,
and Enrolled Actuaries — Suspensions, Censures,
Disbarments, and Resignations
Announcement 2004-6
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.
2004-5 I.R.B.402February 2, 2004

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
Baxley II, MiltonGainesville, FLCPAOctober 24, 2003
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 institution or con-
clusion of a proceeding for his or her dis-
barment or suspension from practice be-
fore the Internal Revenue Service, may of-
fer his or her consent to suspension from
such practice. The Director, Office of Pro-
fessional Responsibility, in his discretion,
may suspend an attorney, certified public
accountant, enrolled agent or enrolled ac-
tuary in accordance with the consent of-
fered.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue Ser-
vice:
NameAddressDesignationDate of Suspension
Nietupski, John E.Springfield, MAEnrolled AgentIndefinite
from
October 15, 2005
Roberts, Dennis C.Oklahoma City, OKAttorneyIndefinite
from
October 27, 2003
Waldo-Grant, Barbara A.Grand Rapids, MIEnrolled AgentIndefinite
from
November 1, 2003
Naylor, Dale C.El Cajon, CAEnrolled AgentIndefinite
from
November 12, 2003
Schlude, Richard M.Wilkes Barre, PAEnrolled AgentIndefinite
from
November 19, 2003
Stern, Samuel L.Robbinsdale, MNAttorneyIndefinite
from
November 19, 2003
Robles, MichaelDallas, TXCPAIndefinite
from
December 1, 2003
Young Jr., Donald A.Redondo Beach, CAEnrolled AgentDecember 1, 2003
to
August 31, 2004
Hitchcock, William C.Irvine, CAEnrolled AgentIndefinite
from
December 30, 2003
February 2, 20044032004-5 I.R.B.

NameAddressDesignationDate of Suspension
Willms, Bryant E.Lee Summit, MOEnrolled AgentJanuary 1, 2004
to
December 31, 2004
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
Greene, MarvinChicago, ILCPAIndefinite
from
October 21, 2003
Bolusky, Eric B.Perkins, OKAttorneyIndefinite
from
October 21, 2003
Crutchfield Jr., ErnestLatty, OHEnrolled AgentIndefinite
from
October 21, 2003
Covey, CharlesGladstone, MOCPAIndefinite
from
October 23, 2003
Prosperi, Arnold P.Jupiter Island, FLAttorneyIndefinite
from
November 24, 2003
Lucas, ChristopherOverlandPark, KSAttorneyIndefinite
from
November 24, 2003
Ramsey, Henry A.Burnet, TXCPAIndefinite
from
December 15, 2003
2004-5 I.R.B.404February 2, 2004

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 Designation
Pettyplace, Edward F.Sacramento, CAJanuary 30, 2004
February 2, 20044052004-5 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.
2004-5 I.R.B.iFebruary 2, 2004

Numerical Finding List
1
Bulletins 2004–1 through 2004–5
Announcements:
2004-1, 2004-1 I.R.B.254
2004-2, 2004-3 I.R.B.322
2004-3, 2004-2 I.R.B.294
2004-4, 2004-4 I.R.B.357
2004-5, 2004-4 I.R.B.362
2004-6, 2004-3 I.R.B.322
2004-7, 2004-4 I.R.B.365
Notices:
2004-1, 2004-2 I.R.B.268
2004-2, 2004-2 I.R.B.269
2004-3, 2004-5 I.R.B.391
2004-4, 2004-2 I.R.B.273
2004-6, 2004-3 I.R.B.308
2004-7, 2004-3 I.R.B.310
2004-8, 2004-4 I.R.B.333
2004-9, 2004-4 I.R.B.334
Proposed Regulations:
REG-116664-01, 2004-3 I.R.B.319
REG-122379-02, 2004-5 I.R.B.392
REG-139845-02, 2004-5 I.R.B.397
REG-156232-03, 2004-5 I.R.B.399
Revenue Procedures:
2004-1, 2004-1 I.R.B.1
2004-2, 2004-1 I.R.B.83
2004-3, 2004-1 I.R.B.114
2004-4, 2004-1 I.R.B.125
2004-5, 2004-1 I.R.B.167
2004-6, 2004-1 I.R.B.197
2004-7, 2004-1 I.R.B.237
2004-8, 2004-1 I.R.B.240
2004-9, 2004-2 I.R.B.275
2004-10, 2004-2 I.R.B.288
2004-11, 2004-3 I.R.B.311
2004-13, 2004-4 I.R.B.335
Revenue Rulings:
2004-1, 2004-4 I.R.B.325
2004-2, 2004-2 I.R.B.265
2004-5, 2004-3 I.R.B.295
2004-6, 2004-4 I.R.B.328
2004-7, 2004-4 I.R.B.327
Treasury Decisions:
9099, 2004-2 I.R.B.255
9100, 2004-3 I.R.B.297
9101, 2004-5 I.R.B.376
9102, 2004-5 I.R.B.366
9103, 2004-3 I.R.B.306
Treasury Decisions— Continued:
9106, 2004-5 I.R.B.384
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2003–27 through 2003–52 is in Internal Revenue Bulletin
2003–52, dated December 29, 2003.
February 2, 2004ii2004-5 I.R.B.

Findings List of Current Actions on
Previously Published Items
1
Bulletins 2004–1 through 2004–5
Proposed Regulations:
REG-115037-00
Corrected by
Ann. 2004-7, 2004-4 I.R.B.365
REG-143321-02
Withdrawn by
REG-156232-03, 2004-5 I.R.B.399
REG-146893-02
Corrected by
Ann. 2004-7, 2004-4 I.R.B.365
Revenue Procedures:
2000-38
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
2000-50
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
2002-9
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
2002-71
Superseded by
Rev. Proc. 2004-13, 2004-4 I.R.B.335
2003-1
Superseded by
Rev. Proc. 2004-1, 2004-1 I.R.B.1
2003-2
Superseded by
Rev. Proc. 2004-2, 2004-1 I.R.B.83
2003-3
As amplified by Rev. Proc. 2003-14, and as
modified by Rev. Proc. 2003-48 superseded by
Rev. Proc. 2004-3, 2004-1 I.R.B.114
2003-4
Superseded by
Rev. Proc. 2004-4, 2004-1 I.R.B.125
2003-5
Superseded by
Rev. Proc. 2004-5, 2004-1 I.R.B.167
2003-6
Superseded by
Rev. Proc. 2004-6, 2004-1 I.R.B.197
2003-7
Superseded by
Rev. Proc. 2004-7, 2004-1 I.R.B.237
Revenue Procedures— Continued:
2003-8
Superseded by
Rev. Proc. 2004-8, 2004-1 I.R.B.240
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2003–27 through 2003–52 is in Internal Revenue Bulletin 2003–52, dated December 29,
2003.
2004-5 I.R.B.iiiFebruary 2, 2004
*U.S. G.P.O.: 2004—304–774/60120