Internal Revenue Bulletin 2004-37 (PDF rendition): IRS Revenue Rulings

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
4-37
September 13, 20
04
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2004–70, page 460.
Fringe benefits aircraft valuation formula.The Standard
Industry Fare Level (SIFL) cents-per-mile rates and terminal
charges in effect for the second half of 2004 are set forth for
purposes of determining the value of noncommercial flights
on employer-provided aircraft under section 1.61–21(g) of the
regulations.
Rev. Rul.
2004–92, page 466.
Interest r
ates; underpayments and overpayments.The
rate of in
terest determined under section 6621 of the Code for
the calen
dar quarter beginning October 1, 2004, will be 5 per-
cent for o
verpayments (4 percent in the case of a corporation),
5percent
for underpayments, and 7 percent for large corpo-
rate unde
rpayments. The rate of interest paid on the portion of
acorpor
ate overpayment exceeding $10,000 will be 2.5 per-
cent.
Rev. Rul. 2004–93, page 462.
LIFO; price indexes; department stores.The July 2004
Bureau of Labor Statistics price indexes are accepted for use
by department stores employing the retail inventory and last-in,
first-out inventory methods for valuing inventories for tax years
ended on, or with reference to, July 31, 2004.
T.D. 9147, page 461.
REG–171386–03, page 477.
Temporary and proposed regulations amend the regulations
under section 163(d) of the Code to provide the rules relating
to how and when taxpayers may elect to take qualified dividend
income into account as investment income for purposes of
calculating the deduction for investment income expense.
T.D. 9148, page 460.
Final regulations under section 83 of the Code provide that the
transfer of a compensatory stock option to a related person
will not be treated as an arm’s length transaction, meaning that
section 83 will continue to apply and the original holder of the
option may realize further compensation income at the time of
exercise of the option. The regulations also provide a definition
of a related person.
REG–108637–03, page 472.
Proposed regulations under section 1275 of the Code provide
rules for the accrual of original issue discount (OID) on certain
real estate mortgage investment conduit (REMIC) regular inter-
ests. The regulations provide guidance to REMICs, REMIC reg-
ular interest holders and information reporters regarding the
accrual of OID. A public hearing is scheduled for November
17, 2004.
REG–154077–03, page 476.
Proposed regulations under section 860F of the Code discuss
the definition of partnership item for purposes of applying the
unified partnership audit procedures to real estate mortgage
investment conduits (REMICs).
REG–129706–04, page 478.
Proposed regulations under section 368 of the Code provide
that in order to qualify as a tax-free reorganization, a transac-
tion must meet certain requirements. One such requirement
is that the owners of the corporation being acquired exchange
their interests in the acquired corporation for a substantial in-
terest in the acquiring corporation. These regulations explain
the circumstances in which the determination will be made
of whether the owners of the acquired corporation have ex-
changed their interests for a substantial interest in the acquir-
ing corporation by reference to the signing date value of the
acquiring corporation stock to be issued in the transaction.
(Continued on the next page)
Fi
nding Lists begin on page ii.

REG–136481–04, page 480.
Proposed regulations under section 861 of the Code describe
theproperbasisfordeterminingthesourceofcompensation
for labor or personal services performed partly within and
partly without the United States. REG–208254–90 withdrawn.
EXCISE TAX
T.D. 9145, page 464.
REG–120616–03, page 474.
Final, temporary, and proposed regulations under section 4081
oftheCoderelatetotheentryoftaxablefuelintotheUnited
States. The regulations affect enterers of taxable fuel, certain
other importers of record, and certain sureties.
September 13, 20042004–37 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2004–37 I.R.B.September 13, 2004

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 61.—Gross Income
Defined
26 CFR 1.61–21: Taxation of fringe benefits.
Fringe benefits aircraft valuation for-
mula.The Standard Industry Fare Level
(SIFL) cents-per-mile rates and terminal
charges in effect for the second half of
2004 are set forth for purposes of deter-
mining the value of noncommercial flights
on employer-provided aircraft under sec-
tion 1.61–21(g) of the regulations.
Rev. Rul. 2004–70
For purposes of the taxation of fringe
benefits under section 61 of the Inter-
nal Revenue Code, section 1.61–21(g) of
the Income Tax Regulations provides a
rule for valuing noncommercial flights
on employer-provided aircraft. Section
1.61–21(g)(5) provides an aircraft valua-
tion formula to determine the value of such
flights. The value of a flight is determined
under the base aircraft valuation formula
(also known as the Standard Industry Fare
Level formula or SIFL) by multiplying
the SIFL cents-per-mile rates applicable
for the period during which the flight was
taken by the appropriate aircraft multiple
provided in section 1.61–21(g)(7) and then
adding the applicable terminal charge. The
SIFL cents-per-mile rates in the formula
and the terminal charge are calculated by
the Department of Transportation and are
reviewed semi-annually.
The following chart sets forth the termi-
nal charges and SIFL mileage rates:
Period During Which
the Flight Is Taken
Terminal
Charge
SIFL Mileage
Rates
7/1/04 - 12/31/04
$35.21
Up to 500 miles
= $.1926 per mile
501–1500 miles
= $.1469 per mile
Over 1500 miles
= $.1412 per mile
DRAFTING INFORMATION
The principal author of this revenue
ruling is Kathleen Edmondson of the
Office of Division Counsel/Associate
Chief Counsel (Tax Exempt and Govern-
ment Entities). For further information
regarding this revenue ruling, contact
Ms. Edmondson at (202) 622–6040 (not a
toll-free call).
Section 83.—Property
Transferred in Connection
With Performance of
Services
26 CFR 1.83–7: Taxation of nonqualified stock op-
tions.
T.D. 9148
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Transfers of Compensatory
Options
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains reg-
ulations that provide rules governing trans-
fers of certain compensatory stock options
(nonstatutory stock options). The regula-
tions affect persons who have been granted
nonstatutory stock options, as well as ser-
vice recipients who may be entitled to de-
ductions related to the options.
DATES:Effective Date:These regulations
are effective August 10, 2004.
Applicability Dates:These regulations
apply to transfers of nonstatutory stock op-
tions on or after July 2, 2003.
FOR FURTHER INFORMATION
CONTACT: Stephen Tackney (202)
622–6030 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
These regulations amend 26 CFR part
1. On July 2, 2003, a temporary regulation
(T.D. 9067, 2003–32 I.R.B. 287) relating
to transfers of compensatory options was
published in theFederal Register(68 FR
39453). A notice of proposed rulemaking
(REG–116914–03, 2003–32 I.R.B. 338)
was published in theFederal Registerfor
the same day (68 FR 39498). No public
hearing was requested or held. No writ-
ten or electronic comments responding to
2004–37 I.R.B.460September 13, 2004

the notice of proposed rulemaking were
received. The proposed regulations are
adopted without change by this Treasury
decision, and the corresponding temporary
regulations are removed.
Special Analyses
It has been determined that these regu-
lations are not a significant regulatory ac-
tion as defined in Executive Order 12866.
Therefore, a regulatory assessment is not
required. It also has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because
these regulations do not impose a collec-
tion of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) does not apply. Pursuant to section
7805(f) of the Code, these regulations were
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on their impact on small busi-
ness.
Drafting Information
The principal author of these final regu-
lations is Stephen Tackney of the Office of
Division Counsel/Associate Chief Coun-
sel (Tax Exempt and Government Enti-
ties). However, other personnel from the
IRS and Treasury Department participated
in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by removing the entry
for “1.83–7T” and continues to read in part
as follows:
Authority:26U.S.C.7805***.
Par. 2. §1.83–7 is amended as follows:
1. Paragraph (a) is amended by adding
two sentences at the end.
2. Paragraphs (a)(1) and (a)(2) are
added.
3. Paragraph (d) is revised.
The additions read as follows:
§1.83–7 Taxation of nonqualified stock
options.
(a)***Thepreceding sentence does
not apply to a sale or other disposition of
theoptiontoapersonrelatedtotheser-
vice provider that occurs on or after July
2, 2003. For this purpose, a person is re-
latedtotheserviceproviderif—
(1) The person and the service provider
bear a relationship to each other that is
specified in section 267(b) or 707(b)(1),
subject to the modifications that the lan-
guage “20 percent” is used instead of
“50 percent” each place it appears in sec-
tions 267(b) and 707(b)(1), and section
267(c)(4) is applied as if the family of
an individual includes the spouse of any
member of the family; or
(2) The person and the service provider
are engaged in trades or businesses under
common control (within the meaning of
section 52(a) and (b)); provided that a per-
son is not related to the service provider
if the person is the service recipient with
respect to the option or the grantor of the
option.
*****
(d) This section applies on and after
July 2, 2003. For transactions prior to that
date, see §1.83–7 as published in 26 CFR
Part 1 (revised as of April 1, 2003).
§1.83–7T [Removed]
Par. 3. Section 1.83–7T is removed.
Linda M. Kroening,
Acting Assistant Deputy Commissioner for
Services and Enforcement.
Approved July 28, 2004.
Gregory Jenner,
Acting Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on August 9,
2004, 8:45 a.m., and published in the issue of the Federal
Register for August 10, 2004, 69 F.R. 48392)
Section 163.—Interest
26 CFR 1.163(d)–1: Time and manner for making
elections under the Omnibus Budget Reconciliation
Act of 1993 and the Jobs and Growth Tax Relief Rec-
onciliation Act of 2003.
T.D. 9147
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Time and Manner of Making
§163(d)(4)(B) Election to Treat
Qualified Dividend Income as
Investment Income
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains tem-
poraryregulationsrelatingtoanelection
that may be made by noncorporate taxpay-
ers to treat qualified dividend income as in-
vestment income for purposes of calculat-
ing the deduction for investment interest.
The regulations reflect changes to the law
made by the Jobs and Growth Tax Relief
Reconciliation Act of 2003. The regula-
tions affect taxpayers making the election
under section 163(d)(4)(B) to treat qual-
ified dividend income as investment in-
come. The text of these temporary regula-
tions also serves as the text of the proposed
regulations (REG–171386–03) set forth in
the notice of proposed rulemaking on this
subject in this issue of the Bulletin.
DATES:Effective Date:These regulations
are effective August 5, 2004.
Applicability Dates:For dates of appli-
cability, see §1.163(d)–1T(d).
FOR FURTHER INFORMATION
CONTACT: Amy Pfalzgraf, (202)
622–4950 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
Section 163(d)(1) provides that the in-
vestment interest deduction for a noncor-
porate taxpayer for any taxable year is
limited to the net investment income of
September 13, 20044612004–37 I.R.B.

the taxpayer for the taxable year. Sec-
tion 163(d)(4)(A) defines “net investment
income” as the excess of investment in-
come over investment expenses. Section
163(d)(4)(B)(iii) provides that an electing
taxpayer may take all or a portion of cer-
tain net capital gain attributable to disposi-
tions of property held for investment into
account as investment income. Section
1(h)(2) provides that any net capital gain
taken into account as investment income is
not eligible to be taxed at the capital gains
rates.
Section 302(b) of the Jobs and Growth
Tax Relief Reconciliation Act of 2003,
(Public Law 108–27, 117 Stat. 762)
(JGTRRA 2003), amended section
163(d)(4)(B) to provide that an electing
taxpayer may take all or a portion of quali-
fied dividend income (as defined in section
1(h)(11)(B)) into account as investment
income. Section 302(a) of JGTRRA 2003
added new section 1(h)(11)(D) to provide
that any qualified dividend income taken
into account as investment income is not
eligible to be taxed at the capital gains
rates.
Section 1.163(d)–1 of the Income
Tax Regulations provides rules regard-
ing the time and manner for making
the net capital gain election under sec-
tion 163(d)(4)(B)(iii). These regulations
amend §1.163(d)–1 to provide that the
rules regarding the time and manner for
making the qualified dividend income
election under section 163(d)(4)(B) are
the same as the rules for making the
net capital gain election under section
163(d)(4)(B)(iii).
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 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. For
application of the Regulatory Flexibility
Act (5 U.S.C. chapter 6) please refer to the
cross-reference notice of proposed rule-
making published elsewhere in this issue
of the Bulletin. Pursuant to section 7805(f)
of the Internal Revenue Code, these tem-
porary regulations will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Drafting Information
The principal author of these regula-
tions is Amy Pfalzgraf of the Office of As-
sociate Chief Counsel (Income Tax & Ac-
counting). However, other personnel from
the IRS and Treasury Department partici-
pated in their development.
*****
Amendments to the Regulations
Accordingly, 26 CFR part 1 is 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 1.163(d)–1 is revised.
§1.163(d)–1 Time and manner for making
elections under the Omnibus Budget
Reconciliation Act of 1993 and the Jobs
and Growth Tax Relief Reconciliation Act
of 2003.
(a) [Reserved]. For further guidance,
see §1.163(d)–1T(a).
(b) [Reserved]. For further guidance,
see §1.163(d)–1T(b).
(c) [Reserved]. For further guidance,
see §1.163(d)–1T(c).
(d) [Reserved]. For further guidance,
see §1.163(d)–1T(d).
Par. 3. Section 1.163(d)–1T is added to
read as follows:
§1.163(d)–1T Time and manner for
making elections under the Omnibus
Budget Reconciliation Act of 1993 and the
Jobs and Growth Tax Relief Reconciliation
Actof2003(temporary).
(a)Description. Section 163(d)(4)
(B)(iii), as added by section 13206(d) of
the Omnibus Budget Reconciliation Act
of 1993 (Public Law 103–66, 107 Stat.
467), allows an electing taxpayer to take
all or a portion of certain net capital gain
attributable to dispositions of property
held for investment into account as in-
vestment income. Section 163(d)(4)(B),
as amended by section 302(b) of the Jobs
and Growth Tax Relief Reconciliation Act
of 2003 (Public Law 108–27, 117 Stat.
762), allows an electing taxpayer to take
all or a portion of qualified dividend in-
come, as defined in section 1(h)(11)(B),
into account as investment income. As
a consequence, the net capital gain and
qualified dividend income taken into ac-
count as investment income under these
elections are not eligible to be taxed at the
capital gains rates. An election may be
made for net capital gain recognized by
noncorporate taxpayers during any taxable
year beginning after December 31, 1992.
An election may be made for qualified
dividend income received by noncorpo-
rate taxpayers during any taxable year
beginning after December 31, 2002, but
before January 1, 2009.
(b)Time and manner for making the
elections. The elections for net capital
gain and qualified dividend income must
be made on or before the due date (includ-
ing extensions) of the income tax return
for the taxable year in which the net capi-
tal gain is recognized or the qualified divi-
dend income is received. The elections are
to be made on Form 4952, “Investment In-
terest Expense Deduction,” in accordance
with the form and its instructions.
(c)Revocability of elections. The elec-
tions described in this section are revoca-
ble with the consent of the Commissioner.
(d)Effective date. The rules set forth in
this section regarding the net capital gain
election are effective December 12, 1996.
The rules set forth in this section regard-
ing the qualified dividend income election
apply to any taxable year beginning after
December 31, 2002, but before January 1,
2009.
Nancy J. Jardini,
Acting Deputy Commissioner for
Services and Enforcement.
Approved July 29, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on August 4,
2004, 8:45 a.m., and published in the issue of the Federal
Register for August 5, 2004, 69 F.R. 47364)
Section 472.—Last-in,
First-out Inventories
26 CFR 1.472–1: Last-in, first-out inventories.
LIFO; price indexes; department
stores.The July 2004 Bureau of Labor
2004–37 I.R.B.462September 13, 2004

Statistics price indexes are accepted for
use by department stores employing the
retail inventory and last-in, first-out in-
ventory methods for valuing inventories
for tax years ended on, or with reference
to, July 31, 2004.
Rev. Rul. 2004–93
The following Department Store In-
ventory Price Indexes for July 2004 were
issued by the Bureau of Labor Statistics.
The indexes are accepted by the Inter-
nal Revenue Service, under § 1.472–1(k)
of the Income Tax Regulations and Rev.
Proc. 86–46, 1986–2 C.B. 739, for ap-
propriate application to inventories of
department stores employing the retail
inventory and last-in, first-out inventory
methods for tax years ended on, or with
reference to, July 31, 2004.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of depart-
ments, (b) three special combinations of
the major groups — soft goods, durable
goods, and miscellaneous goods, and (c) a
store total, which covers all departments,
including some not listed separately, ex-
cept for the following: candy, food, liquor,
tobacco, and contract departments.
BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
GroupsJuly 2003July 2004
Percent Change
from July 2003
to July 2004
1
1. PieceGoods .............................................487.0507.84.3
2. DomesticsandDraperies..................................570.0525.0-7.9
3. Women’sandChildren’sShoes ............................613.9608.5-0.9
4. Men’sShoes.............................................831.2831.70.1
5. Infants’Wear ............................................573.3560.5-2.2
6. Women’sUnderwear......................................509.0508.0-0.2
7. Women’sHosiery ........................................346.9330.4-4.8
8. Women’sandGirls’Accessories ...........................537.8565.85.2
9. Women’sOuterwearandGirls’Wear .......................342.8335.9-2.0
10. Men’sClothing ..........................................533.3532.7-0.1
11. Men’sFurnishings........................................562.7567.00.8
12. Boys’ClothingandFurnishings............................424.4420.9-0.8
13. Jewelry..................................................882.3907.82.9
14. Notions .................................................792.1798.60.8
15. ToiletArticlesandDrugs..................................992.0993.30.1
16. FurnitureandBedding ....................................619.9616.3-0.6
17. FloorCoverings..........................................587.3587.70.1
18. Housewares..............................................722.5712.1-1.4
19. MajorAppliances.........................................213.3199.6-6.4
20. RadioandTelevision......................................45.341.6-8.2
21. Recreation and Education
2
.................................82.880.3-3.0
22. Home Improvements
2
.....................................123.7129.84.9
23. Automotive Accessories
2
..................................111.4112.71.2
Groups1–15:SoftGoods .......................................549.6545.1-0.8
Groups16–20:DurableGoods...................................394.3382.3-3.0
Groups 21–23: Misc. Goods
2
....................................94.093.3-0.7
Store Total
3
..............................................493.4487.2-1.3
1
A
bsence of a minus sign before the percentage change in this column signifies a price increase.
2
Indexes on a January 1986 = 100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor,
tobacco and contract departments.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Michael Burkom of the Office
of Associate Chief Counsel (Income Tax
and Accounting). For further informa-
tion regarding this revenue ruling, contact
Mr. Burkom at (202) 622–7924 (not a
toll-free call).
September 13, 20044632004–37 I.R.B.

Section 4081.—Imposition
of Tax
26 CFR 48.4081–1: Taxable fuel; definitions.
T.D. 9145
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 48 and 602
Entry of Taxable Fuel
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains fi-
nal and temporary regulations relating to
the tax on the entry of taxable fuel into
the United States. These regulations affect
enterers of taxable fuel, other importers
of record, and certain sureties. The text
of the temporary regulations also serves
as the text of the proposed regulations
(REG–120616–03) set forth in the notice
of proposed rulemaking on this subject in
this issue of the Bulletin.
DATES:Effective Date:These regulations
are effective on September 28, 2004.
Applicability Dates:For dates of
applicability, see §§48.4081–1T(b) and
48.4081–3T(c)(2)(ii) and (iv).
FOR FURTHER INFORMATION
CONTACT: Celia Gabrysh (202)
622–3130 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These temporary regulations are being
issued without prior notice and public pro-
cedure pursuant to the Administrative Pro-
cedure Act (5 U.S.C. 553). For this reason,
the collection of information contained in
these regulations has been reviewed and,
pending receipt and evaluation of public
comments, approved by the Office of Man-
agement and Budget under control number
1545–1897. Responses to this collection
of information are required to obtain a tax
benefit.
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.
For further information concerning this
collection of information, and where to
submit comments on the collection of in-
formation and the accuracy of the esti-
mated burden, and suggestions for reduc-
ing this burden, please refer to the pream-
ble to the cross-referencing notice of pro-
posedrulemakingpublishedinthisissueof
the Bulletin.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
Background
Present Law
Section 4081(a)(1)(A)(iii) of the Inter-
nal Revenue Code (Code) imposes a tax on
the entry into the United States of taxable
fuel. Taxable fuel means gasoline, diesel
fuel, and kerosene. Existing regulations
provide that the enterer is liable for the tax
imposed on the entry of taxable fuel.
The regulations currently define the
termentereras generally meaning the im-
porter of record (under customs law) with
respect to the taxable fuel. However, if
the importer of record is acting as an agent
(for example, the importer of record is a
customs broker engaged by the owner of
the taxable fuel), the person for whom the
agent is acting is the enterer.
The regulations require an enterer to be
registered by the IRS. The IRS will register
an applicant only if the IRS determines that
the applicant meets several tests, including
the adequate security test. An applicant
meets the adequate security test only if the
IRS determines that the applicant has both
adequate financial resources and a satis-
factory tax history, or the applicant gives
the IRS a bond.
Section 142.4 of the Customs regula-
tions (19 CFR) provides that merchandise
shall not be released from Customs cus-
tody unless a bond on Customs Form 301,
Customs Bond, has been filed. This bond,
which is filed by the importer of record,
secures the payment of any duty, tax, or
charge, and compliance with Customs
laws and regulations. Section 141.3 of
the Customs regulations provides that the
importer’s liability for duties includes lia-
bility for any internal revenue taxes which
attach upon the importation of merchan-
dise, unless otherwise provided by law or
regulation. Also, §113.62(a)(1)(ii) of the
Customs regulations provides, in part, that
if merchandise is imported and released
from Customs custody, the obligors on
a Customs bond (principal and surety,
jointly and severally) agree to pay, as de-
manded by Customs, all additional duties,
taxes, and charges subsequently found
due, legally fixed, and imposed on any
entry secured by the bond.
Reason for Change
The IRS has found that abusive situa-
tions exist with regard to the entry of tax-
able fuel into the United States. For exam-
ple, some enterers are not registered and
are not paying the tax on their fuel en-
tries. This not only gives noncompliant en-
terers a competitive advantage over their
compliant competitors, but it also deprives
the United States Treasury of revenue in-
tended for the Highway Trust Fund.
When Congress enacted the present fuel
tax regime, it noted that the Treasury De-
partment is permitted “to prescribe rules
and administrative procedures for deter-
mining liability for payment of tax.” H.R.
Conf. Rep. No. 101–964, at 1052 (1990).
Explanation of Provisions
Pursuant to these temporary regula-
tions, the importer of record (under Cus-
toms law) is jointly and severally liable
with the enterer for the tax if the importer
of record is not the enterer of the taxable
fuel (that is, the importer of record is a
customs broker engaged by the enterer)
and the enterer is not a taxable fuel regis-
trant. Thus, an importer of record engaged
by an enterer and seeking assurance that
it will not be jointly and severally liable
for the enterer’s tax liability should ver-
ify that the enterer is registered by the
IRS. This temporary regulation is similar
to §48.4081–2(c)(2) of the regulations,
which provides that a terminal operator
generally is jointly and severally liable for
the tax imposed on the removal of taxable
fuel from the rack if the terminal operator
2004–37 I.R.B.464September 13, 2004

allows an unregistered position holder to
operate in its terminal.
Customs laws and regulations provide
that the importer of record is liable for any
duties or taxes that attach upon the impor-
tation of merchandise. Therefore, an im-
porter of record’s Customs bond secures
not only the payment of duties, but also
the payment of taxes that are imposed on
the entry of merchandise, including tax-
able fuel. Consequently, under existing
law, a surety could be compelled to meet
a demand on a Customs bond if the ex-
cise tax on the entry of taxable fuel is not
paid when due. However, the IRS will
not charge a surety bond for this tax un-
til the effective date of these temporary
regulations. It should be noted, however,
that under these temporary regulations the
Customs bond posted for the entry of tax-
able fuel will not be charged for the section
4081 tax if the enterer is a taxable fuel reg-
istrant.
Special Analysis
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 flexibil-
ity assessment is not required. It also has
been determined thatsection 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regu-
lations. For the applicability of the Reg-
ulatory Flexibility Act (5 U.S.C. chapter
6), refer to the Special Analyses section
of the preamble to the cross-reference no-
tice of proposed rulemaking published in
this issue of the Bulletin. Pursuant to sec-
tion 7805(f) of the Code, these temporary
regulations will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on their
impact on small business.
Drafting Information
The principal author of these regula-
tions is Celia Gabrysh, Office of Associate
Chief Counsel (Passthroughs and Special
Industries). However, other personnel
from the IRS, the Treasury Department,
and the Bureau of Customs and Border
Protection, Department of Homeland Se-
curity, participated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 48 and 602
are amended as follows:
PART 48—MANUFACTURERS AND
RETAILERS EXCISE TAXES
Paragraph 1. The authority citation for
part 48 continues to read, in part, as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §48.4081–1, paragraph (b) is
amended by adding a new sentence to the
end of the definition of enterer to read as
follows:
§48.4081–1 Taxable fuel; definitions.
*****
(b)***Thisdefinitionofentererdoes
not apply with respect to an entry if the
definition of enterer in §48.4081–1T(b) is
applicable with respect to that entry.
*****
Par. 3. Section 48.4081–1T is added to
read as follows:
§48.4081–1T Taxable fuel; definitions
(temporary).
(a) [Reserved]. For further guidance,
see §48.4081–1(a).
(b)Definitions.
Definitions of approved terminal or
refinery through diesel-powered train
[Reserved].
Enterergenerally means, in the case of
an entry of taxable fuel on or after Septem-
ber 28, 2004, the importer of record (un-
der customs law) with respect to the tax-
able fuel, except that—
(1) If the importer of record is a customs
broker engaged by the owner of the taxable
fuel, the person for whom the broker is
acting is the enterer; and
(2) If there is no importer of record for
taxable fuel entered into the United States,
the owner of the taxable fuel at the time
it is brought into the United States is the
enterer.
Definition of entry through (f)(2)
[Reserved]. For further guidance, see
§48.4081–1(b) definition of entry through
(f)(2).
Par. 4. In §48.4081–3, paragraph (c)
is amended by revising paragraph (c)(2) to
read as follows:
§48.4081–3 Taxable fuel; taxable events
other than removal at the terminal rack.
*****
(c) * * *
(2)Liability for tax—(i)In general.
The enterer is liable for the tax imposed
under paragraph (c)(1) of this section.
(ii) through (iv) For further guidance,
see §48.4081–3T(c)(2)(ii) through (iv).
*****
Par. 5. Section 48.4081–3T is added to
read as follows:
§48.4081–3T Taxable fuel; taxable events
other than removal at the terminal rack
(temporary).
(a) through (c)(2)(i) [Reserved]. For
further guidance, see §48.4081–3(a)
through (c)(2)(i).
(c)(2)(ii)Joint and several liability of
the importer of record. In the case of an
entry of taxable fuel on or after September
28, 2004, the importer of record with re-
spect to the taxable fuel is jointly and sev-
erally liable with the enterer for the tax im-
posed under §48.4081–3(c)(1) if—
(A) The importer of record is not the
enterer of the taxable fuel; and
(B) The enterer is not a taxable fuel
registrant.
(iii)Conditions for avoidance of liabil-
ity. The importer of record is not liable
for the tax under paragraph (c)(2)(ii) of this
section if, at the time of the entry, the im-
porter of record—
(A) Has an unexpired notification cer-
tificate (as described in §48.4081–5) from
the enterer; and
(B) Has no reason to believe that any
information in the notification certificate is
false.
(iv)Customs bond. In the case of an
entry of taxable fuel on or after September
28, 2004, the Customs bond posted with
respect to the importation of the fuel will
not be charged for the tax imposed on the
entry of the fuel if the enterer is a taxable
fuel registrant. A surety bond will not be
charged for the tax imposed on the entry of
the fuel covered by the bond, if at the time
of entry, the surety—
(A) Has an unexpired notification cer-
tificate (as described in §48.4081–5) from
the enterer; and
September 13, 20044652004–37 I.R.B.

(B) Has no reason to believe that any
information in the notification certificate is
false.
(d) through (j) [Reserved]. For further
guidance, see §48.4081–3(d) through (j).
§48.4081–5 [Amended]
Par. 6. Section 48.4081–5 is amended
as follows:
a. Paragraph (a) is amended by re-
moving the language “48.4081–2(c)(3),”
and by adding “48.4081–2(c)(2)(ii),
48.4081–3T(c)(2)(iii) and (iv),” in its
place.
b. Paragraph (b)(2) is amended by re-
moving the language “gasoline registrant”
and adding “taxable fuel registrant” in its
place.
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT.
Par. 7. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 8. In §602.101, paragraph (b) is
amended by adding an entry in numerical
order to the table to read as follows:
§602.101 OMB Control numbers.
*****
(b) * * *
CFR part or section where
identified and described
Current OMB
control No.
*****
48.4081–3T........................................................... 1545–1897
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved July 14, 2004.
Gregory Jenner,
Acting Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on July 29, 2004,
8:45 a.m., and published in the issue of the Federal Register
for July 30, 2004, 69 F.R. 45587)
Section 6621.—Determina-
tion of Rate of Interest
26 CFR 301.6621–1: Interest rate.
Interest rates; underpayments and
overpayments.The rate of interest deter-
mined under section 6621 of the Code for
the calendar quarter beginning October 1,
2004, will be 5 percent for overpayments
(4 percent in the case of a corporation), 5
percent for underpayments, and 7 percent
for large corporate underpayments. The
rate of interest paid on the portion of a
corporate overpayment exceeding $10,000
will be 2.5 percent.
Rev. Rul. 2004–92
Section 6621 of the Internal Revenue
Code establishes the rates for interest
on tax overpayments and tax underpay-
ments. Under section 6621(a)(1), the
overpayment rate is the sum of the federal
short-term rate plus 3 percentage points (2
percentage points in the case of a corpo-
ration), except the rate for the portion of
a corporate overpayment of tax exceeding
$10,000 for a taxable period is the sum of
the federal short-term rate plus 0.5 of a
percentage point for interest computations
made after December 31, 1994. Under
section 6621(a)(2), the underpayment rate
is the sum of the federal short-term rate
plus 3 percentage points.
Section 6621(c) provides that for pur-
poses of interest payable under section
6601 on any large corporate underpay-
ment, the underpayment rate under section
6621(a)(2) is determined by substituting
“5 percentage points” for “3 percentage
points.” See section6621(c) and section
301.6621–3 of the Regulations on Proce-
dure and Administration for the definition
of a large corporate underpayment and
for the rules for determining the appli-
cable date. Section 6621(c) and section
301.6621–3 are generally effective for
periods after December 31, 1990.
Section 6621(b)(1) provides that the
Secretary will determine the federal
short-term rate for the first month in each
calendar quarter.
Section 6621(b)(2)(A) provides that the
federal short-term rate determined under
section 6621(b)(1) for any month applies
during the first calendar quarter beginning
after such month.
Section 6621(b)(3) provides that the
federal short-term rate for any month is
the federal short-term rate determined
during such month by the Secretary in
accordance with § 1274(d), rounded to the
nearest full percent (or, if a multiple of
1
/2
of 1 percent, the rate is increased to the
next highest full percent).
Notice 88–59, 1988–1 C.B. 546, an-
nounced that, in determining the quarterly
interest rates to be used for overpayments
and underpayments of tax under section
6621, the Internal Revenue Service will
use the federal short-term rate based on
daily compounding because that rate is
most consistent with section 6621 which,
pursuant to section 6622, is subject to daily
compounding.
Rounded to the nearest full percent, the
federal short-term rate based on daily com-
pounding determined during the month of
July 2004 is 2 percent. Accordingly, an
overpayment rate of 5 percent (4 percent
in the case of a corporation) and an under-
payment rate of 5 percent are established
for the calendar quarter beginning October
1, 2004. The overpayment rate for the por-
tion of a corporate overpayment exceeding
$10,000 for the calendar quarter beginning
October 1, 2004, is 2.5 percent. The un-
derpayment rate for large corporate under-
payments for the calendar quarter begin-
ning October 1, 2004, is 7 percent. These
rates apply to amounts bearing interest dur-
ing that calendar quarter.
Interest factors for daily compound in-
terest for annual rates of 2.5 percent, 4 per-
cent, 5 percent, and 7 percent are published
in Tables 58, 61, 63, and 67 of Rev. Proc.
95–17, 1995–1 C.B. 556, 612, 615, 617,
and 621.
2004–37 I.R.B.466September 13, 2004

Annual interest rates to be compounded
daily pursuant to section 6622 that apply
for prior periods are set forth in the tables
accompanying this revenue ruling.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Crystal Foster of the Office of Asso-
ciate Chief Counsel (Procedure & Admin-
istration). For further information regard-
ing this revenue ruling, contact Ms. Foster
at (202) 622–7326 (not a toll-free call).
TABLE OF INTEREST RATES
PERIODS BEFORE JUL. 1, 1975 — PERIODS ENDING DEC. 31, 1986
OVERPAYMENTS AND UNDERPAYMENTS
PERIODRATE
In 1995–1 C.B.
DAILY RATE TABLE
Before Jul. 1, 19756%Table 2, pg. 557
Jul. 1, 1975—Jan. 31, 19769%Table 4, pg. 559
Feb. 1, 1976—Jan. 31, 19787%Table 3, pg. 558
Feb. 1, 1978—Jan. 31, 19806%Table 2, pg. 557
Feb. 1, 1980—Jan. 31, 198212%Table 5, pg. 560
Feb. 1, 1982—Dec. 31, 198220%Table 6, pg. 560
Jan. 1, 1983—Jun. 30, 198316%Table 37, pg. 591
Jul. 1, 1983—Dec. 31, 198311%Table 27, pg. 581
Jan. 1, 1984—Jun. 30, 198411%Table 75, pg. 629
Jul. 1, 1984—Dec. 31, 198411%Table 75, pg. 629
Jan. 1, 1985—Jun. 30, 198513%Table 31, pg. 585
Jul. 1, 1985—Dec. 31, 198511%Table 27, pg. 581
Jan. 1, 1986—Jun. 30, 198610%Table 25, pg. 579
Jul. 1, 1986—Dec. 31, 19869%Table 23, pg. 577
TABLE OF INTEREST RATES
FROM JA
N. 1, 1987 — Dec. 31, 1998
OVERPAYMENTSUNDERPAYMENTS
1995–1 C.B.1995–1 C.B.
RATETABLEPGRATETABLEPG
Jan. 1, 1987—Mar. 31, 19878%215759%23577
Apr. 1, 1987—Jun. 30, 19878%215759%23577
Jul.
1, 1987—Sep. 30, 1987
8%215759%23577
Oct. 1, 1987—Dec. 31, 19879%2357710%25579
Jan. 1, 1988—Mar. 31, 198810%7362711%75629
Apr.
1, 1988—Jun. 30, 1988
9%7162510%73627
Jul. 1, 1988—Sep. 30, 19889%7162510%73627
Oct. 1, 1988—Dec. 31, 198810%7362711%75629
Jan
. 1, 1989—Mar. 31, 1989
10%2557911%27581
Apr. 1, 1989—Jun. 30, 198911%2758112%29583
Jul. 1, 1989—Sep. 30, 198911%2758112%29583
Oc
t. 1, 1989—Dec. 31, 1989
10%2557
9
11%2758
1
Jan. 1, 1990—Mar. 31, 199010%2557911%27581
Apr. 1, 1990—Jun. 30, 199010%2557911%27581
J
ul. 1, 1990—Sep. 30, 1990
1
0
%2
5
5
79
1
1
%2
7
5
81
Oct. 1, 1990—Dec. 31, 199010%2557911%27581
Jan. 1, 1991—Mar. 31, 199110%2557911%27581
Apr. 1, 1991—Jun. 30, 19919%2357710%25579
Jul. 1, 1991—Sep. 30, 19919%2357710%25579
Oct. 1, 1991—Dec. 31, 19919%2357710%25579
Jan. 1, 1992—Mar. 31, 19928%696239%71625
Apr. 1, 1992—Jun. 30, 19927%676218%69623
Jul. 1, 1992—Sep. 30, 19927%676218%69623
Oct. 1, 1992—Dec. 31, 19926%656197%67621
Jan. 1, 1993—Mar. 31, 19936%175717%19573
Apr. 1, 1993—Jun. 30, 19936%175717%19573
September 13, 20044672004–37 I.R.B.

TABLE OF INTEREST RATES
FROM JAN. 1, 1987 — Dec. 31, 1998 – Continued
OVERPAYMENTSUNDERPAYMENTS
1995–1 C.B.1995–1 C.B.
RATETABLEPGRATETABLEPG
Jul. 1, 1993—Sep. 30, 19936%175717%19573
Oct. 1, 1993—Dec. 31, 19936%175717%19573
Jan. 1, 1994—Mar. 31, 19946%175717%19573
Apr. 1, 1994—Jun. 30, 19946%175717%19573
Jul. 1, 1994—Sep. 30, 19947%195738%21575
Oct. 1, 1994—Dec. 31, 19948%215759%23577
Jan. 1, 1995—Mar. 31, 19958%215759%23577
Apr. 1, 1995—Jun. 30, 19959%2357710%25579
Jul. 1, 1995—Sep. 30, 19958%215759%23577
Oct. 1, 1995—Dec. 31, 19958%215759%23577
Jan. 1, 1996—Mar. 31, 19968%696239%71625
Apr. 1, 1996—Jun. 30, 19967%676218%69623
Jul. 1, 1996—Sep. 30, 19968%696239%71625
Oct. 1, 1996—Dec. 31, 19968%696239%71625
Jan. 1, 1997—Mar. 31, 19978%215759%23577
Apr. 1, 1997—Jun. 30, 19978%215759%23577
Jul. 1, 1997—Sep. 30, 19978%215759%23577
Oct. 1, 1997—Dec. 31, 19978%215759%23577
Jan. 1, 1998—Mar. 31, 19988%215759%23577
Apr. 1, 1998—Jun. 30, 19987%195738%21575
Jul. 1, 1998—Sep. 30, 19987%195738%21575
Oct. 1, 1998—Dec. 31, 19987%195738%21575
TABLE OF INTEREST RATES
FROM JANUARY 1, 1999 — PRESENT
NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS
1995–1 C.B.
RATETABLEPAGE
Jan. 1, 1999—Mar. 31, 19997%19573
Apr. 1, 1999—Jun. 30, 19998%21575
Jul. 1, 1999—Sep. 30, 19998%21575
Oct. 1, 1999—Dec. 31, 19998%21575
Jan. 1, 2000—Mar. 31, 20008%69623
Apr. 1, 2000—Jun. 30, 20009%71625
Jul. 1, 2000—Sep. 30, 20009%71625
Oct. 1, 2000—Dec 31, 20009%71625
Jan. 1, 2001—Mar. 31, 20019%23577
Apr. 1, 2001—Jun. 30, 20018%21575
Jul. 1, 2001—Sep. 30, 20017%19573
Oct. 1, 2001—Dec. 31, 20017%19573
Jan. 1, 2002—Mar. 31, 20026%17571
Apr. 1, 2002—Jun. 30, 20026%17571
Jul. 1, 2002—Sep. 30, 20026%17571
Oct. 1, 2002—Dec. 31, 20026%17571
Jan. 1, 2003—Mar. 31, 20035%15569
Apr. 1, 2003—Jun. 30, 20035%15569
Jul. 1, 2003—Sep. 30, 20035%15569
Oct. 1, 2003—Dec. 31, 20034%13567
Jan. 1, 2004—Mar. 31, 20044%61615
Apr. 1, 2004—Jun. 30, 20045%63617
Jul. 1, 2004—Sep. 30, 20044%61615
Oct. 1, 2004—Dec. 31, 20045%63617
2004–37 I.R.B.468September 13, 2004

TABLE OF INTEREST RATES
FROM JANUARY 1, 1999 — PRESENT
CORPORATE OVERPAYMENTS AND UNDERPAYMENTS
OVERPAYMENTSUNDERPAYMENTS
1995–1 C.B.1995–1 C.B.
RATE TABLEPGRATE TABLEPG
Jan. 1, 1999—Mar. 31, 19996%175717%19573
Apr. 1, 1999—Jun. 30, 19997%195738%21575
Jul. 1, 1999—Sep. 30, 19997%195738%21575
Oct. 1, 1999—Dec. 31, 19997%195738%21575
Jan. 1, 2000—Mar. 31, 20007%676218%69623
Apr. 1, 2000—Jun. 30, 20008%696239%71625
Jul. 1, 2000—Sep. 30, 20008%696239%71625
Oct. 1, 2000—Dec. 31, 20008%696239%71625
Jan. 1, 2001—Mar. 31, 20018%215759%23577
Apr. 1, 2001—Jun. 30, 20017%195738%21575
Jul. 1, 2001—Sep. 30, 20016%175717%19573
Oct. 1, 2001—Dec. 31, 20016%175717%19573
Jan. 1, 2002—Mar. 31, 20025%155696%17571
Apr. 1, 2002—Jun. 30, 20025%155696%17571
Jul. 1, 2002—Sep. 30, 20025%155696%17571
Oct. 1, 2002—Dec. 31, 20025%155696%17571
Jan. 1, 2003—Mar. 31, 20034%135675%15569
Apr. 1, 2003—Jun. 30, 20034%135675%15569
Jul. 1, 2003—Sep. 30, 20034%135675%15569
Oct. 1, 2003—Dec. 31, 20033%115654%13567
Jan. 1, 2004—Mar. 31, 20043%596134%61615
Apr. 1, 2004—Jun. 30, 20044%616155%63617
Jul. 1, 2004—Sep. 30, 20043%596134%61615
Oct. 1, 2004—Dec. 31, 20044%616155%63617
TABLE OF INTEREST RATES FOR
LARGE CORPORATE UNDERPAYMENTS
FROM JANUARY 1, 1991 — PRESENT
1995–1 C.B.
RATETABLEPG
Jan. 1, 1991—Mar. 31, 199113%31585
Apr. 1, 1991—Jun. 30, 199112%29583
Jul. 1, 1991—Sep. 30, 199112%29583
Oct. 1, 1991—Dec. 31, 199112%29583
Jan. 1, 1992—Mar. 31, 199211%75629
Apr. 1, 1992—Jun. 30, 199210%73627
Jul. 1, 1992—Sep. 30, 199210%73627
Oct. 1, 1992—Dec. 31, 19929%71625
Jan. 1, 1993—Mar. 31, 19939%23577
Apr. 1, 1993—Jun. 30, 19939%23577
Jul. 1, 1993—Sep. 30, 19939%23577
Oct. 1, 1993—Dec. 31, 19939%23577
Jan. 1, 1994—Mar. 31, 19949%23577
Apr. 1, 1994—Jun. 30, 19949%23577
Jul. 1, 1994—Sep. 30, 199410%25579
Oct. 1, 1994—Dec. 31, 199411%27581
Jan. 1, 1995—Mar. 31, 199511%27581
Apr. 1, 1995—Jun. 30, 199512%29583
Jul. 1, 1995—Sep. 30, 199511%27581
September 13, 20044692004–37 I.R.B.

TABLE OF INTEREST RATES FOR
LARGE CORPORATE UNDERPAYMENTS
FROM JANUARY 1, 1991 — PRESENT – Continued
1995–1 C.B.
RATETABLEPG
Oct. 1, 1995—Dec. 31, 199511%27581
Jan. 1, 1996—Mar. 31, 199611%75629
Apr. 1, 1996—Jun. 30, 199610%73627
Jul. 1, 1996—Sep. 30, 199611%75629
Oct. 1, 1996—Dec. 31, 199611%75629
Jan. 1, 1997—Mar. 31, 199711%27581
Apr. 1, 1997—Jun. 30, 199711%27581
Jul. 1, 1997—Sep. 30, 199711%27581
Oct. 1, 1997—Dec. 31, 199711%27581
Jan. 1, 1998—Mar. 31, 199811%27581
Apr. 1, 1998—Jun. 30, 199810%25579
Jul. 1, 1998—Sep. 30, 199810%25579
Oct. 1, 1998—Dec. 31, 199810%25579
Jan. 1, 1999—Mar. 31, 19999%23577
Apr. 1, 1999—Jun. 30, 199910%25579
Jul. 1, 1999—Sep. 30, 199910%25579
Oct. 1, 1999—Dec. 31, 199910%25579
Jan. 1, 2000—Mar. 31, 200010%73627
Apr. 1, 2000—Jun. 30, 200011%75629
Jul. 1, 2000—Sep. 30, 200011%75629
Oct. 1, 2000—Dec. 31, 200011%75629
Jan. 1, 2001—Mar. 31, 200111%27581
Apr. 1, 2001—Jun. 30, 200110%25579
Jul. 1, 2001—Sep. 30, 20019%23577
Oct. 1, 2001—Dec. 31, 20019%23577
Jan. 1, 2002—Mar. 31, 20028%21575
Apr. 1, 2002—Jun. 30, 20028%21575
Jul. 1, 2002—Sep. 30, 20028%21575
Oct. 1, 2002—Dec. 30, 20028%21575
Jan. 1, 2003—Mar. 31, 20037%19573
Apr. 1, 2003—Jun. 30, 20037%19573
Jul. 1, 2003—Sep. 30, 20037%19573
Oct. 1, 2003—Dec. 31, 20036%17571
Jan. 1, 2004—Mar. 31, 20046%65619
Apr. 1, 2004—Jun. 30, 20047%67621
Jul. 1, 2004—Sep. 30, 20046%65619
Oct. 1, 2004—Dec. 31, 20047%67621
2004–37 I.R.B.470September 13, 2004

TABLE OF INTEREST RATES FOR CORPORATE
OVERPAYMENTS EXCEEDING $10,000
FROM JANUARY 1, 1995 — PRESENT
1995–1 C.B.
RATETABLEPG
Jan. 1, 1995—Mar. 31, 19956.5%18572
Apr. 1, 1995—Jun. 30, 19957.5%20574
Jul. 1, 1995—Sep. 30, 19956.5%18572
Oct. 1, 1995—Dec. 31, 19956.5%18572
Jan. 1, 1996—Mar. 31, 19966.5%66620
Apr. 1, 1996—Jun. 30, 19965.5%64618
Jul. 1, 1996—Sep. 30, 19966.5%66620
Oct. 1, 1996—Dec. 31, 19966.5%66620
Jan. 1, 1997—Mar. 31, 19976.5%18572
Apr. 1, 1997—Jun. 30, 19976.5%18572
Jul. 1, 1997—Sep. 30, 19976.5%18572
Oct. 1, 1997—Dec. 31, 19976.5%18572
Jan. 1, 1998—Mar. 31, 19986.5%18572
Apr. 1, 1998—Jun. 30, 19985.5%16570
Jul. 1. 1998—Sep. 30, 19985.5%16570
Oct. 1, 1998—Dec. 31, 19985.5%16570
Jan. 1, 1999—Mar. 31, 19994.5%14568
Apr. 1, 1999—Jun. 30, 19995.5%16570
Jul. 1, 1999—Sep. 30, 19995.5%16570
Oct. 1, 1999—Dec. 31, 19995.5%16570
Jan. 1, 2000—Mar. 31, 20005.5%64618
Apr. 1, 2000—Jun. 30, 20006.5%66620
Jul. 1, 2000—Sep. 30, 20006.5%66620
Oct. 1, 2000—Dec. 31, 20006.5%66620
Jan. 1, 2001—Mar. 31, 20016.5%18572
Apr. 1, 2001—Jun. 30, 20015.5%16570
Jul. 1, 2001—Sep. 30, 20014.5%14568
Oct. 1, 2001—Dec. 31, 20014.5%14568
Jan. 1, 2002—Mar. 31, 20023.5%12566
Apr. 1, 2002—Jun. 30, 20023.5%12566
Jul. 1, 2002—Sep. 30, 20023.5%12566
Oct. 1, 2002—Dec. 31, 20023.5%12566
Jan. 1, 2003—Mar. 31, 20032.5%10564
Apr. 1, 2003—Jun. 30, 20032.5%10564
Jul. 1, 2003—Sep. 30, 20032.5%10564
Oct. 1, 2003—Dec. 31, 20031.5%8562
Jan. 1, 2004—Mar. 31, 20041.5%56610
Apr. 1, 2004—Jun. 30, 20042.5%58612
Jul. 1, 2004—Sep. 30, 20041.5%56610
Oct. 1, 2004—Dec. 31, 20042.5%58612
September 13, 20044712004–37 I.R.B.

Part IV. Items of General Interest
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Accrual for Certain REMIC
Regular Interests
REG–108637–03
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains pro-
posed regulations relating to the accrual
of original issue discount (OID) on cer-
tain real estate mortgage investment con-
duit (REMIC) regular interests. The pro-
posed regulations are necessary to provide
guidance to REMICs, REMIC regular in-
terest holders and information reporters re-
garding the accrual of OID. This document
also provides notice of a public hearing on
the proposed regulations.
DATES: Written or electronic comments
must be received by November 23, 2004.
Outlines of topics to be discussed at the
public hearing scheduled for November
17, 2004, must be received by October 27,
2004.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–108637–03), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–108637–03),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC, or sent electronically, via
the IRS Internet site atwww.irs.gov/regs
or via the Federal eRulemaking Por-
tal atwww.regulations.gov(IRS —
REG–108637–03). The public hearing
will be held in the Auditorium, Internal
Revenue Building, 1111 Constitution Av-
enue, NW, Washington, DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
contact Rebecca Asta at (202) 622–3930.
To be placed on the building access list for
the hearing, contact Sonya Cruse at (202)
622–7180.
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
1.General Background
A debt instrument may provide for
qualified stated interest (QSI) (that is,
certain periodic payments of stated inter-
est), OID, or both. Sections 163(e) and
1271 through 1275 provide rules for the
treatment of OID on debt instruments. In
general, the holder of a debt instrument
includes OID in income as it accrues, even
if the holder generally uses a cash method
of accounting. A holder of a REMIC reg-
ular interest includes QSI in income under
an accrual method of accounting because
section 860B(b) requires that amounts in-
cludible in gross income with respect to
a REMIC regular interest be determined
under an accrual method.
For many debt instruments, only one
or two days separate the date on which
the holder becomes entitled to a payment
(the record date) from the date on which
the holder receives payment (the payment
date). For REMIC regular interests, how-
ever, the record date may precede the pay-
ment date by 15 to 30 days.
2.Current REMIC Accrual Practice
Under the governing contract provi-
sions, REMIC regularinterests generally
accrue interest from the issue date to the
final record date, and holders become enti-
tled to receive interest payments based on
month-end record dates. The IRS and the
Treasury Department understand, how-
ever, that, in general, REMIC servicers
have interpreted the OID rules to require
or permit holders’ OID to accrue for tax
purposes over the period from payment
date to payment date and have treated QSI
as accruing over the same periods. To
compensate for accruing QSI and OID
beyond the final record date to the final
payment date, the servicers have treated
QSI and OID on REMIC regular interests
as not accruing from the date of issue for
a period equal to the number of days be-
tween the record date and payment date.
In effect, for tax purposes, the tax accrual
of QSI and OID lags the legal accrual of
interest by the delayed payment period.
For tax purposes, as of the date a
REMIC regular interest is purchased in
the secondary market, the purchaser be-
gins to accrue QSI and OID, and the seller
ceases to accrue QSI and OID. A pur-
chaser that holds the instrument until the
final payment date or redemption accrues
QSI and OID past the final record date
as long as it holds the instrument. A pur-
chaser that begins to accrue QSI and OID
on the purchase date gives up the benefit
of the lag in the beginning of the accrual
period. As a result, the delayed accrual
system causes the last secondary market
purchaserofaREMICregularinterest
to accrue for tax purposes an additional
number of days of QSI and OID equal to
the number of days between the record
and payment dates, and too much QSI
and OID is allocated to the last secondary
purchaser of the REMIC regular interest.
Moreover, because of principal payments,
the holder will earn interest on a declining
principal balance, while the lagging tax
accruals will be based on a higher prin-
cipal amount between record dates and
payment dates in many instances. Conse-
quently, a secondary market purchaser that
is not the last secondary market purchaser
will experience tax accruals in excess of
legal entitlements if the regular interest
has significant stated principal and bears
interest at a stated rate.
3.Overview of the Proposed Regulations
The proposed rules address the mis-
allocation of QSI and OID by creating a
special rule for accruing OID on REMIC
regular interests that provide for a delay
between record and payment dates. Under
the proposed regulations, the period over
which OID accrues generally coincides
with the period over which the holder’s
right to interest payments accrues under
the governing contract provisions.
Generally, under the proposed regula-
tions, if the terms of a REMIC regular
interest provide for a delay between the
record and payment dates, the initial ac-
crual period begins on the date of issuance
2004–37 I.R.B.472September 13, 2004

of the regular interest, and the final ac-
crual period ends on the final record date of
that REMIC regular interest. By shifting
the entire tax accrual schedule, this spe-
cial rule allocates all QSI and OID to the
period between the issue date and the fi-
nal record date of the instrument and none
to the period between the final record date
and final payment date. For purposes of
calculating OID in the final accrual pe-
riod with the methodology described in
section 1272(a)(6), but for no other pur-
pose, payments on the REMIC regular in-
terest after the end of that accrual period
that are included in the stated redemption
price at maturity of the instrument (such as
the payment on the final payment date) are
treated as being made during the final ac-
crual period.
The IRS and Treasury Department rec-
ognize that, although the proposed regula-
tions result in a more accurate allocation
of QSI and OID among REMIC regular
interest holders, some economic accuracy
may be sacrificed by ending the accrual of
OID before final payments are made on the
regular interests. Therefore, the proposed
regulations are limited to REMIC regular
interests with delayed payment periods of
fewer than 32 days. The regulation regard-
ing REMIC regular interests with delayed
payment periods of more than 31 days is
reserved. The IRS and Treasury Depart-
ment request comments on whether addi-
tional guidance is needed for these REMIC
regular interests.
4.Accrual of Qualified Stated Interest
Section 1.1272–1(a)requires a holder
to include QSI in income under the
holder’s regular method of accounting.
Section 1.446–2(b) requires a holder, as
well as the issuer, to accrue QSI ratably
over the accrual period to which it is at-
tributable. In addition, section 860B(b)
requires a holder of a regular interest to ac-
crue amounts into gross income regardless
of the holder’s overall method of account-
ing. The amounts that must be so accrued
include QSI. The Treasury Department
and the IRS understand that many REMIC
servicers have accrued QSI over the same
period as OID. It is intended that, with
respect to the accrual periods referenced
in §1.446–2(b), the initial accrual period
for QSI will begin on the date of issuance
and the final accrual period for QSI will
end on the final record date. As a result,
the QSI accrues over the same period as
the OID.
Proposed Effective Date
These regulations are proposed to apply
to any REMIC regular interest issued after
the date the final regulations are published
in theFederal Register. The proposed
regulations provide automatic consent for
theholderofaREMICregularinterestto
change its method of accounting for OID
under the final regulations. The change
is proposed to be made on a cut-off basis
and, thus, does not affect REMIC regular
interests issued before the date the final
regulations are published in theFederal
Register.
The Treasury Department and the IRS
are concerned regarding the extent to
which holders of REMIC regular interests
will be aware that changes in accounting
methods for QSI may be necessary to com-
ply with the special rule in the proposed
regulations. If a holder of REMIC regular
interests relies on data provided on behalf
of the REMIC rather than performing its
own computations, the holder may be un-
aware that these rules will have required
newly issued REMICs to alter the accrual
periods over which interest reported to
holders is computed. The Treasury De-
partment and the IRS request comments
on the way in which a change in account-
ing method for QSI should be effected.
The Treasury Department and the IRS
request comments concerning the extent to
which any other debt instruments provide
for a significant delay between record and
payment dates and, if some do, whether
rules like those in the proposed regulations
should be extended to them. Any com-
ments received will be considered in con-
nection with the publication of final regu-
lations in theFederal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory flexibility assessment is not required.
It has also been determined that section
553(b) of the Administrative Procedures
Act (5 U.S.C. chapter 5) does not apply
to these regulations, and because the reg-
ulation does not impose a collection of in-
formation on small entities, the Regula-
tory 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 Administration for com-
ment 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 written comments
(a signed original and eight (8) copies)
or electronic comments that are submitted
timely to the IRS. The Treasury Depart-
ment and IRS specifically request com-
ments on the clarity of the proposed rules
and how they may be made easier to un-
derstand. All comments will be available
for public inspection and copying.
A public hearing has been scheduled
for November 17, 2004, beginning at 10
a.m. in the Auditorium of the Internal Rev-
enue Building, 1111 Constitution Avenue,
NW, Washington, DC. Due to building se-
curity procedures, visitors must enter at the
Constitution Avenue entrance. All visitors
must present photo identification to enter
the building. Because of access restric-
tions, visitors will not be admitted beyond
the immediate entrance area more than 30
minutes before the hearing starts. For in-
formation about having your name placed
on the building access list to attend the
hearing, see the “FOR FURTHER INFOR-
MATION CONTACT” section of this pre-
amble.
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
November 23, 2004, and an outline of the
topics to be discussed and the time to be
devoted to each topic (signed original and
eight (8) copies) by October 27, 2004. A
period of 10 minutes will be allotted to
each person for making comments. An
agenda showing the schedule of speakers
will be prepared after the deadline for re-
ceiving outlines has passed. Copies of the
agenda will be available free of charge at
the hearing.
Drafting Information
The principal author of these proposed
regulations is Rebecca Asta of the Office
September 13, 20044732004–37 I.R.B.

of Associate Chief Counsel (Financial In-
stitutions and Products). However, other
personnel from the IRS and Treasury
Department participated in their develop-
ment.
*****
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 1.1271–0 is amended by
adding entries for §1.1275–2(l) and (m) to
read as follows:
§1.1271–0 Original issue discount;
effective date; table of contents.
*****
§1.1275–2 Special rules relating to debt
instruments.
*****
(l) [Reserved]
(m) Special rule for certain REMIC regular
interests.
(1) Scope.
(2) General rules.
(3) Special rule for calculation of OID in
final accrual period.
(4) Definition of record date.
(5) Accrual of qualified stated interest.
(6) Example.
(7) Treatment of REMIC regular interests
if the record dates and the payment dates
are separated by more than thirty-one days.
(8) Effective date.
*****
Par. 3. Section 1.1275–2 is amended by
adding new paragraphs (l) and (m) to read
as follows:
§1.1275–2 Special rules relating to debt
instruments.
*****
(l) [Reserved].
(m)Special rules for certain REMIC
regular interests—(1)Scope.Iftheterms
of a REMIC regular interest (as defined
in section 860G(a)(1)) provide for a de-
lay between its record dates and the associ-
ated payment dates, the initial accrual pe-
riod and final accrual period for that regu-
lar interest are determined under this para-
graph (m). Except as provided in para-
graph (m)(7) of this section, this paragraph
(m) does not apply to a REMIC regular in-
terest if the record dates and the payment
dates are separated by more than thirty-one
days.
(2)General rules—(i)Initial accrual
period. The initial accrual period for a
REMIC regular interest subject to this
paragraph (m) begins on issuance of the
REMIC regular interest.
(ii)Final accrual period. The final ac-
crual period for a REMIC regular interest
subject to this paragraph (m) ends on the
final record date of the REMIC regular in-
terest.
(3)Special rule for calculation of OID
in final accrual period. In applying section
1272(a)(6)(A) to calculate OID in the final
accrual period for a REMIC regular inter-
est subject to this paragraph (m), payments
after the end of the final accrual period of
amounts included in the stated redemption
price at maturity are treated as payments
during the final accrual period.
(4)Definition of record date. For pur-
poses of this paragraph (m), arecord date
of a REMIC regular interest is a date, pro-
vided by the terms of the REMIC regular
interest, on which the holder becomes en-
titled to a payment (of interest or principal)
that is to be made on a subsequent payment
date.
(5)Accrual of qualified stated interest.
See §1.446–2 for the accrual of qualified
stated interest.
(6)Example. The following example
illustrates the application of this paragraph
(m).
Example. REMIC X issues regular interests on
January 1, 2009. The terms of the regular interests
provide for payments of interest and principal to the
persons who hold the regular interests on the last day
of the calendar month (the record date). Each such
payment is to be made on the fifteenth day of the suc-
ceeding calendar month (the payment date). The last
payment with respect to the regular interests issued
by REMIC X is to be made on January 15, 2014, to
persons who hold the regular interests on December
31, 2013. Under this paragraph (m), the initial ac-
crual period begins on the date of issuance, January
1, 2009, and the last accrual period ends on the last
record date, December 31, 2013.
(7)Treatment of REMIC regular inter-
ests if the record dates and the payment
dates are separated by more than thirty-
one days.[Reserved.]
(8)Effective date—(i)In general.This
paragraph (m) applies to REMIC regular
interests issued after the date the final reg-
ulations are published in theFederal Reg-
ister.
(ii)Automatic consent to change
method of accounting. Taxpayers are
hereby granted the Commissioner’s con-
sent under section 446(e) to change their
method of accounting for REMIC regular
interests to which this paragraph (m) ap-
plies if—
(A) The change involves changing ac-
crual periods to accrual periods allowed by
this paragraph (m);
(B) The change is made for the first tax-
able year of the taxpayer during which the
taxpayer holds a REMIC regular interest to
which the rules of this paragraph (m) ap-
ply; and
(C) The change in method of account-
ing is effected on a cut-off basis.
Deborah M. Nolan,
Acting Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on August 24,
2004, 8:45 a.m., and published in the issue of the Federal
Register for August 25, 2004, 69 F.R. 52217)
Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulations
Entry of Taxable Fuel
REG–120616–03
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing temporary regulations
(T.D. 9145) relating to the tax on the en-
try of taxable fuel into the United States.
The text of those regulations also serves
as the text of these proposed regulations.
The regulations affect enterers of taxable
fuel, certain other importers, and certain
sureties.
2004–37 I.R.B.474September 13, 2004

DATES: Written and electronic comments
and requests for a public hearing must be
received by October 28, 2004.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–120616–03), room
5203, Internal Revenue Service, POB
7604, Ben Franklin Station, Washing-
ton, DC 20044. Alternatively, submis-
sions may be hand delivered Monday
through Friday between the hours of 8
a.m.and4p.m.to:CC:PA:LPD:PR
(REG–120616–03), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC, or sent
electronically, via the IRS Internet site at
www.irs.gov/regsor via the Federal eRule-
making portal atwww.regulations.gov
(IRS and REG–120616–03).
FOR FURTHER INFORMATION
CONTACT: Concerning submissions,
LaNita Van Dyke (202) 622–7180; con-
cerning the regulations, Celia Gabrysh
(202) 622–3130 (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(d)). Comments on the
collection of information should be sent to
theOffice of Management and Budget,
Attn: Desk Officer for the Department
of the Treasury, Office of Information
and Regulatory Affairs, Washington, DC
20503, with copies to theInternal Rev-
enue Service, Attn: IRS Reports Clear-
ance Officer, SE:W:CAR:MP:T:T:SP,
Washington, DC 20224. Comments on
the collection of information should be re-
ceived by September 28, 2004. Comments
are specifically requested concerning:
Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the functions of the IRS, in-
cluding whether the information will have
practical utility;
The accuracy of the estimated burden
associated with the proposed collection of
information (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
in this proposed regulation are in
§48.4081–3T(c)(2)(iii) and (iv). Section
48.4081–3T(c)(2)(iii) generally provides
that an importer of record may avoid tax
liability if the importer of record obtains
from the enterer a notification certificate,
described in §48.4081–5, which contains
the enterer’s registration number. Section
48.4081–3T(c)(2)(iv) generally provides
that a surety bond will not be charged for
thetaximposedontheentryofthefuel
covered by the bond, if at the time of en-
try, the surety has a notification certificate,
described in §48.4081–5, which contains
the enterer’s registration number. These
collections of information are required to
obtain a tax benefit. The likely respon-
dents are businesses.
Estimated total annual reporting and/or
recordkeeping burden: 281 hours.
Estimated average annual burden hours
per respondent and/or recordkeeper varies
from .25 hour to 2.25 hours, depending
on individual circumstances, with an esti-
mated average of 1.25 hours.
Estimated number of respondents
and/or recordkeepers: 225.
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 26 U.S.C. 6103.
Background
Temporary regulations in this issue of
the Bulletin amend the Manufacturers and
Retailers Excise Taxes Regulations (26
CFR Part 48) relating to the tax on the
entry of taxable fuel imposed by section
4081. The text of those regulations also
serves as the text of these proposed reg-
ulations. The preamble to the temporary
regulations explains the amendments.
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 flex-
ibility assessment is not required. It also
has been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations. It is hereby certified that the
collection of information in these regula-
tions will not have a significant economic
impact on a substantial number of small
entities. This certification is based on the
fact that the time requiredtorequestand
to furnish a notification certificate is min-
imal and will not have a significant im-
pact on those small entities. Therefore, a
Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) is not required. Pursuant to section
7805(f) of the 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, consideration
will be given to any written comments
(a signed original and eight (8) copies)
or electronic comments that are submit-
ted timely to the IRS. Comments are re-
quested on all aspects of the proposed reg-
ulations. In addition, the IRS and Treasury
Department specifically request comments
on the clarity of the proposed regulations
and how they may be made easier to un-
derstand. All comments will be available
for public inspection and copying. A pub-
lic hearing may be scheduled if requested
in writing by any person that timely sub-
mits written comments. If a public hearing
is scheduled, notice of the date, time, and
place for the hearing will be published in
theFederal Register.
September 13, 20044752004–37 I.R.B.

Drafting Information
The principal author of these regula-
tions is Celia Gabrysh, Office of Associate
Chief Counsel (Passthroughs and Special
Industries). However, other personnel
from the IRS, the Treasury Department,
and the Bureau of Customs and Border
Protection, Department of Homeland Se-
curity, participated in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 48 is pro-
posedtobeamendedasfollows:
PART 48 — MANUFACTURERS AND
RETAILERS EXCISE TAXES
Paragraph 1. The authority citation for
part 48 continues to read in part as follows:
Authority: 26 U.S.C. 7805* * *
Par. 2. In §48.4081–1, paragraph (b),
the definition ofEntereris revised to read
as follows:
§48.4081–1 Taxable fuel; definitions.
[The text of the proposed amendment
to §48.4081–1(b) is the same as the text
of §48.4081–1T(b), definition of enterer,
published elsewhere in this issue of the
Bulletin].
Par. 3. Section 48.4081–3 is amended
by adding paragraphs (c)(2)(ii) through
(c)(2)(iv) to read as follows:
§48.4081–3 Taxable fuel; taxable events
other than removal at the terminal rack.
[The text of the proposed amendment
to §48.4081–3(c)(2)(ii) through (iv) is the
same as the text of §48.4081–3T(c)(2)(ii)
through (iv) 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 July 29, 2004,
8:45 a.m., and published in the issue of the Federal Register
for July 30, 2004, 69 F.R. 45631)
Notice of Proposed
Rulemaking
Real Estate Mortgage
Investment Conduits
REG–154077–03
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains pro-
posed regulations relating to the applica-
tion of the unified partnership audit proce-
dures to disputes regarding the ownership
of residual interests in a Real Estate Mort-
gage Investment Conduit (REMIC). These
regulations will affect taxpayers that invest
in REMIC residual interests.
DATES: Written or electronically gener-
ated comments and requests for a public
hearing must be received by November 1,
2004.
ADDRESSES: Send submissions to
CC:PA:LPD:PR (REG–154077–03), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand-delivered Monday through Friday
betweenthehoursof8a.m. and4p.m.
to CC:PA:LPD:PR (REG–154077–03),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC. Alternatively, taxpay-
ers may submit electronic comments
directly to the IRS Internet site at:
www.irs.gov/regsor the Federal eRule-
making Portal atwww.regulations.gov
(IRS - REG–154077–03).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed reg-
ulations, Arturo Estrada, (202) 622–3900)
(not a toll-free number); concerning the
submissions of comments, or a request for
a public hearing, LaNita Van Dyke (202)
622–7180 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This proposed regulation amends 26
CFR Part 1 under section 860F of the
Internal Revenue Code (Code) relating
to the application of the unified partner-
ship audit procedures of subchapter C of
chapter 63 of the Code to REMICs and
the holders of residual interests. Section
860F(e) provides that a REMIC is treated
as a partnership (and holders of residual
interests in that REMIC shall be treated as
partners) for purposes of subtitle F of the
Code, which includes the unified partner-
ship audit procedures. The taxable income
of a holder of a REMIC residual interest is
determined under the REMIC provisions
of part IV of subchapter M, which require
the holder to take into account its daily
portion of the REMIC’s taxable income
or net loss for each day during the taxable
year on which the holder holds its interest.
Section 860C(a)(1). The provisions of
subchapter K relating to the determination
of the taxable income of a partnership and
its partners do not apply to REMICs or
the holders of REMIC residual interests.
Section 860A(a).
Questions have arisen regarding
whether the identity of the holder of a
REMIC residual interest is treated as a
partnership item for purposes of the uni-
fied partnership audit procedures. Ques-
tions also have arisen regarding the ap-
plicability of the unified partnership audit
procedures when a determination is made
under the REMIC regulations to disregard
certain transfers of REMIC residual in-
terests and continue to treat the transferor
as the holder of the transferred REMIC
residual interests. See §§1.860E–1(c) and
1.860G–3.
The IRS and Treasury Department have
determined that the identity of a holder of
a REMIC residual interest is more appro-
priately determined at the residual inter-
est holder level thanat the REMIC entity
level.
Explanation of Provisions
The proposed regulations provide that
the determination of the identity of a
holder of a REMIC residual interest is
not a partnership item for purposes of the
unified partnership audit procedures as
applied to REMICs, whether or not such
determination involves the application of a
disregarded transfer rule. Unlike the iden-
tity of a partner in a partnership subject to
subchapter K, the identity of the holder of
2004–37 I.R.B.476September 13, 2004

a REMIC residual interest does not affect
the calculation of the REMIC’s taxable
income or net loss.
Proposed dates of applicability
These regulations are proposed to
apply after December 31, 1986. See
§1.860A–1(b)(1)(ii).
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It also has
been determined thatsection 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because these regulations do not
impose a collection requirement on small
entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. There-
fore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f)
of the Code, this notice of proposed rule-
making has been submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration 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 written comments
(a signed original and eight (8) copies)
or electronic comments that are submitted
timely to the IRS. The IRS and Treasury
Department request comments on the clar-
ity of the proposed rules and how they may
be made easier to understand. All com-
ments will be available for public inspec-
tion and copying.
A public hearing will 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 public hearing
will be published in theFederal Register.
Drafting Information
The principal author of these regula-
tions is Arturo Estrada, Office of the As-
sociate Chief Counsel (Financial Institu-
tions and Products). However, other per-
sonnel from the IRS and Treasury Depart-
ment participated in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 860F–4 issued under 26 U.S.C.
860G(e) and 26 U.S.C. 6230(k).
Par. 2. In §1.860F–4, paragraph (a) is
amended by adding a sentence at the end
to read as follows:
§1.860F–4 RE
MIC reporting requirements
and other adm
inistrative rules.
(a) *** The identity of a holder of a
residual interest in a REMIC is not treated
as a partnership item with respect to the
REMIC for purposes of subchapter C of
chapter 63.
*****
Nancy J. Ja
rdini,
Acting Dep
uty Commissioner for
Services a
nd Enforcement.
(Filed by the Office of the Federal Register on August 9,
2004, 8:45 a.m., and published in the issue of the Federal
Register for August 10, 2004, 69 F.R. 48431)
Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulations
Time and Manner of Making
§163(d)(4)(B) Election to Treat
Qualified Dividend Income as
Investment Income
REG–171386–03
AGENC
Y: Internal Revenue Service
(IRS)
, Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing temporary regulations
(T.D. 9147) relating to an election that may
be made by noncorporate taxpayers to treat
qualified dividend income as investment
income for purposes of calculating the de-
duction for investment interest. The text of
those temporary regulations also serves as
the text of these proposed regulations.
DATES: Written or electronic comments
and requests for a public hearing must be
received by November 3, 2004.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–171386–03), room
5203, Internal Revenue Service, POB
7604, Ben Franklin Station, Washing-
ton, D.C. 20044. Alternatively, submis-
sions may be hand-delivered Monday
through Friday between the hours of 8
a.m. and 4 p.m. to: CC:PA:LPD:PR
(REG–171386–03), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue, NW, Washington, D.C. Taxpayers
also may submit comments electronically
to the IRS internet site atwww.irs.gov/regs
or via the Federal eRulemaking Portal at
www.regulations.gov(indicate IRS and
REG–171386–03 or RIN 1545-BD16).
FOR FURTHER INFORMATION
CONTACT: Concerning submission of
comments or requesting a hearing, LaNita
Van Dyke, (202) 622–7180; concerning
the proposed regulations, Amy Pfalzgraf,
(202) 622–4950 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
Temporary regulations in this issue
of the Bulletin amend the Income Tax
Regulations (26 CFR Part 1) relating to
section 163(d)(4)(B) of the Internal Rev-
enue Code. The temporary regulations
provide rules regarding the time and man-
ner for making an election under section
163(d)(4)(B) to treat qualified dividend
income as investment income for purposes
of calculating the deduction for invest-
ment interest. The text of the temporary
regulations also serves as the text of these
proposed regulations. The preamble to
the temporary regulations explains the
amendments.
September 13, 20044772004–37 I.R.B.

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 also has 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
business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(a signed original and eight (8) copies)
or electronic comments that are submitted
timely to the IRS. The IRS and Treasury
Department request comments on the clar-
ity of the proposed rules and how they can
be made easier to understand. All com-
ments will be available for public inspec-
tion and copying. A public hearing will be
scheduled if requested in writing by any
person that timely submits written com-
ments. If a public hearing is scheduled, no-
tice of the date, time, and place for the pub-
lic hearing will be published in theFederal
Register.
Drafting Information
The principal author of these regula-
tions is Amy Pfalzgraf of the Office of As-
sociate Chief Counsel (Income Tax & Ac-
counting). However, other personnel from
the IRS and Treasury Department partici-
pated in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.163(d)–1 is revised.
§1.163(d)–1 Time and manner for making
elections under the Omnibus Budget
Reconciliation Act of 1993 and the Jobs
and Growth Tax Relief Reconciliation Act
of 2003.
[The text of proposed paragraphs (a),
(b), (c), and (d) is the same as the text
of paragraphs (a), (b), (c), and (d) of
§1.163(d)–1T published elsewhere in this
issue of the Bulletin.]
Nancy J. Jardini,
Acting Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Re
gister on August 4,
2004, 8:45 a.m., and published in the issue of the Federal
Register for August 5, 2004, 69 F.R. 47395)
Notice of Proposed
Rulemaking
Corporate Reorganizations;
Guidance on the Measurement
of Continuity of Interest
REG–129706–04
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains pro-
posed regulations that provide guidance
regarding the satisfaction of the continu-
ity of interest requirement for corporate re-
organizations. These proposed regulations
affect corporations and their shareholders.
This document also provides a notice of a
public hearing on these proposed regula-
tions.
DATES: Written or electronic comments
and requests for a public hearing must be
received by November 8, 2004.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–129706–04),
room 5203, Internal Revenue Ser-
vice, PO Box 7604, Ben Franklin Sta-
tion, Washington, DC 20044. Submis-
sions may be hand-delivered Monday
through Friday between the hours of 8
a.m. and 4 p.m. to CC:PA:LPD:PR
(REG–129706–04), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC, or sent
electronically, via the IRS Internet site at
www.irs.gov/regsor via the Federal eRule-
making Portal atwww.regulations.gov
(IRS REG–129706–04).
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
Christopher M. Bass, (202) 622–7770;
concerning submissions and comments,
concerning the hearing, Guy Traynor,
(202) 622–7180 (not-toll free numbers).
SUPPLEMENTARY INFORMATION:
Background
The Internal Revenue Code of 1986
(Code) provides general nonrecognition
treatment for reorganizations described in
section368oftheCode. Inadditionto
complyingwiththestatutoryrequirements
and certain other requirements, to qualify
as a reorganization, a transaction gener-
ally must satisfy the continuity of interest
(COI) requirement.
Section 1.368–1(e) provides that the
purpose of the COI requirement is to pre-
vent transactions that resemble sales from
qualifying for nonrecognition of gain or
loss available to corporate reorganiza-
tions. COI requires that, in substance, a
substantial part of the value of the propri-
etary interests in the target corporation be
preserved in the reorganization. A propri-
etary interest in the target corporation is
preserved if, in a potential reorganization,
it is exchanged for a proprietary interest in
the issuing corporation, it is exchanged by
the acquiring corporation for a direct in-
terest in the target corporation enterprise,
or it otherwise continues as a proprietary
interest in the target corporation.
In a transaction in which the sharehold-
ers of the target corporation receive both
money and acquiring corporation stock,
commentators have expressed concern that
the transaction could fail to satisfy the COI
requirement as a result of a decline in the
value of the acquiring corporation’s stock
between the date the parties agree to the
terms of the transaction (the signing date)
and the date the transaction closes. Com-
mentators have notedthat attempts to miti-
gate this concern have led to complexity in
2004–37 I.R.B.478September 13, 2004

structuring transactions intended to qualify
as reorganizations. These proposed reg-
ulations provide guidance to help address
those concerns.
Explanation of Provisions
The IRS and Treasury Department be-
lieve that there are certain cases in which
the determination of whether the COI re-
quirement is satisfied should be made by
reference to the signing date value of the
issuing corporation stock to be issued in
the transaction. In these cases, the target
corporation shareholders generally can be
viewed as being subject to the economic
fortunes of the issuing corporation as of
the signing date. Therefore, these pro-
posed regulations provide that in determin-
ing whether the COI requirement is satis-
fied, the consideration to be exchanged for
the proprietary interests in the target cor-
poration is valued as of the end of the last
business day before the first date there is a
binding contract to effect the potential re-
organization, provided the consideration to
be provided to the target corporation share-
holders is fixed in such contract and in-
cludes only stock of the issuing corpora-
tion and money.
For this purpose, a binding contract is
an instrument enforceable under applica-
ble law against the parties to the instru-
ment. The IRS and Treasury Department
understand that tender offers are a frequent
acquisition vehicle. Because the terms of a
tender offer that is subject to section 14(d)
of the Securities and Exchange Act of 1934
and the regulations promulgated thereun-
derarefixedinamannersimilartothoseof
a binding contract, these proposed regula-
tions provide that such a tender offer, even
if not pursuant to a binding contract, will
be treated as a binding contract for pur-
poses of these regulations.
The proposed regulations provide that
the presence of a condition outside the con-
trol of the parties shall not prevent an in-
strument from being a binding contract.
For example, the fact that the completion
of a tender offer is subject to a shareholder
vote or the target shareholders tendering
a sufficient amount of target stock will be
considered a condition outside the control
of the parties.
Finally, these proposed regulations
provide that consideration is fixed if the
contract states the exact number of shares
of the issuing corporation and the exact
amount of money, if any, to be exchanged
for the proprietary interests in the target
corporation. However, where the consid-
eration is comprised of only issuing corpo-
ration stock and money, variable consider-
ation will be treated as fixed consideration
if a target corporation shareholder has an
election to receive stock and/or money in
respect of target corporation stock and the
minimum amount of issuing corporation
stock and the maximum amount of money
that the target shareholders might receive
can be determined. For purposes of deter-
mining whether a transaction that involves
such variable consideration satisfies the
continuity of interest requirement, these
proposed regulations assume the issuance
of the minimum number of shares and the
maximum amount of money allowable
under the contract, without regard to the
number of shares and amount of money
actually exchanged for proprietary inter-
ests in the target corporation.
In the course of developing these regu-
lations, the IRS and Treasury Department
considered whether the rule provided in
these proposed regulations should be ap-
plied in other cases and what presumptions
or conventions would be necessary to as-
sess whether the COI requirement has been
satisfied in such other cases. The IRS and
Treasury Department request comments in
this regard.
This regulation is proposed to apply to
transactions occurring pursuant to binding
contracts entered into after the date these
regulations are published as final regula-
tions in theFederal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It has 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 these 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, these proposed regulations will be
submitted to the Chief Counsel of Advo-
cacy of the Small Business Administration
for comment on their impact on small busi-
nesses.
Comments and Requests for Public
Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written (a signed
original and 8 copies) or electronic com-
ments that are submitted timely to the IRS.
The IRS and Treasury Department request
comments regarding the clarity of the pro-
posed regulations and how they can be
made easier to understand. All comments
will be available for public inspection and
copying. A public hearing will be sched-
uled 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 public hearing
will be published in theFederal Register.
Drafting Information
The principal author of these proposed
regulations is Christopher M. Bass, Office
of the Associate Chief Counsel (Corpo-
rate). However, other personnel from the
IRS and Treasury Department participated
in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.368–1 is amended by:
1. Redesignating paragraphs (e)(2)
through (e)(7) as (e)(3) through (e)(8),
respectively.
2. Adding new paragraph (e)(2).
3. Newly designated paragraph (e)(7)
is further redesignated as (e)(7)(i) andEx-
amples 10,11,and12are added.
4. Adding paragraph (e)(7)(ii).
The additions read as follows:
§1.368–1 Purpose and scope of exception
of reorganization exchanges.
*****
(e) * * *
September 13, 20044792004–37 I.R.B.

(2)Measuring continuity of inter-
est—(i)In General. In determining
whether a proprietary interest in the target
corporation is preserved, the considera-
tion to be exchanged for the proprietary
interests in the target corporation shall be
valued as of the end of the last business
day before the first date there is a binding
contract to effect the potential reorganiza-
tion, provided the consideration is fixed in
such contract and includes only stock of
the issuing corporation and money.
(ii)Binding contract—(A)In general.
A binding contract is an instrument en-
forceable under applicable law against the
parties to the instrument. The presence of a
condition outside the control of the parties
(including, for example, regulatory agency
approval) shall not prevent an instrument
from being a binding contract. Further,
the fact that insubstantial terms remain to
be negotiated by the parties to the con-
tract, or that customary conditions remain
to be satisfied, shall not prevent an instru-
ment from being a binding contract. If a
term of a binding contract that relates to
the amount or type of the consideration the
target shareholders will receive in a poten-
tial reorganization is modified before the
closing date of the potential reorganiza-
tion, and the contract as modified is a bind-
ing contract, the date of the modification
shall be treated as the first date there is a
binding contract.
(B)Tender offers. For purposes of this
paragraph (e)(2), a tender offer that is
subject to section 14(d) of the Securities
and Exchange Act of 1934 [15 U.S.C.
78n(d)(1)] and Regulation 14D [17 CFR
§§240.14d–1 through 240.14d–101] and
is not pursuant to a binding contract, is
treated as a binding contract made on the
date of its announcement, notwithstanding
that it may be modified by the offeror or
that it is not enforceable against the of-
ferees. If a modification of such a tender
offer is subject to the provisions of Regu-
lation 14d–6(c) [17 CFR §240.14d–6(c)]
and relates to the amount or type of the
consideration received in the tender offer,
then the date of the modification shall be
treated as the first date there is a binding
contract.
(iii)Fixed consideration—(A)In gen-
eral. Consideration is fixed in a contract
if the contract states the number of shares
of the issuing corporation and the amount
of money, if any, to be exchanged for the
proprietary interestsin the target corpora-
tion. Placing part of the stock issued or
money paid in escrow to secure customary
target representations and warranties will
not prevent the consideration from being
fixed.
(B)Special rule for shareholder elec-
tions. Notwithstanding the provisions of
paragraph (e)(2)(iii)(A) of this section,
consideration is also treated as fixed if
a target corporation shareholder has an
election to receive stock and/or money
in respect of target corporation stock and
the contract statesthe minimum number
of shares of the issuing corporation and
the maximum amount of money to be
exchanged for the proprietary interests in
the target corporation. In this case, the
determination of whether a proprietary in-
terest in the target corporation is preserved
shall be made by assuming the issuance
of the minimum number of shares and the
maximum amount of money allowable un-
der the contract and without regard to the
number of shares and amount of money
actually exchanged thereafter for propri-
etary interests in the target corporation.
(iv)Effective date. Paragraph (e)(2)
applies to transactions occurring pursuant
to binding contracts entered into after the
date these regulations are published as fi-
nal regulations in theFederal Register.
*****
(7)(i)Examples.***
*****
Example 10.Fixed consideration on signing date.
On January 3 of Year 1, P and T sign a binding con-
tract pursuant to which T will be merged with and into
P on June 2 of Year 1. Pursuant to the contract, the T
shareholders will receive 40 P shares and $60 in ex-
change for all of the outstanding stock of T. Ten of
the P shares, however, will be placed in escrow to se-
cure customary target representations and warranties.
At the end of the day on January 2 of Year 1, the P
stock trades for $1 per share. On June 1 of Year 1,
the P stock trades for $.25 per share. Under paragraph
(e)(2) of this section, there is a binding contract with
fixed consideration as of January 3 of Year 1. There-
fore, whether the transaction satisfies the continuity
of interest requirement is determined by reference to
the value of the P stock as of the end of the day on
January 2 of Year 1. Because, for continuity of in-
terest purposes, the T stock is exchanged for $40 of
P stock and $60, the transaction preserves a substan-
tial part of the value of the proprietary interest in T.
Therefore, the transaction satisfies the continuity of
interest requirement.
Example 11.Modification of binding contract.
ThefactsarethesameasinExample 10, except that
on April 1 of Year 1, the parties modify their con-
tract. Pursuant to the modified contract, which is a
binding contract, the T shareholders will receive 50
P shares and $60 in exchange for all of the outstand-
ing T stock. At the end of the day on March 31 of
Year 1, the P stock trades for $.80 per share. Under
paragraph (e)(2) of this section, although there was a
binding contract with fixed consideration as of Jan-
uary 3 of Year 1, terms of that contract relating to the
consideration to be provided to the target sharehold-
ers were modified on April 1 of Year 1. Therefore,
whether the transaction satisfies the continuity of in-
terest requirement is determined by reference to the
value of the P stock as of the end of the day on March
31 of Year 1. Because, for continuity of interest pur-
poses, the T stock is exchanged for $40 of P stock and
$60, the transaction preserves a substantial part of the
value of the proprietary interest in T. Therefore, the
transaction satisfies the continuity of interest require-
ment.
Example 12. The facts are the same as inExam-
ple 11exceptthat,attheendofthedayonMarch31
of Year 1, the P stock trades for $.51 per share. As in
Example 11, whether the transaction satisfies COI is
determined by reference to the value of the P stock as
of the end of the day on March 31 of Year 1. Because,
for continuity of interest purposes, the T stock is ex-
changed for $25.50 of P stock and $60, a substantial
part of the value of the proprietary interest in T is not
preserved. Therefore, the transaction does not satisfy
the continuity of interest requirement.
(ii)Effective date. Paragraph (e)(7)(i)
Examples 10,11,and12apply to trans-
actions occurring pursuant to binding con-
tracts entered into after the date these reg-
ulations are published as final regulations
in theFederal Register.
*****
Nancy J. Jardini,
Acting Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on August 9,
2004, 8:45 a.m., and published in the issue of the Federal
Register for August 10, 2004, 69 F.R. 48429)
Withdrawal of Notice of
Proposed Rulemaking
and Notice of Proposed
Rulemaking
Source of Compensation for
LabororPersonalServices
REG–208254–90;
REG–136481–04
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Withdrawal of notice of pro-
posed rulemaking and notice of proposed
rulemaking.
2004–37 I.R.B.480September 13, 2004

SUMMARY: This document contains new
proposed rules that describe the proper ba-
sis for determining the source of compen-
sation from labor or personal services per-
formed partly within and partly without the
United States. The new proposed rules
will affect individuals that earn compen-
sation from labor or personal services per-
formed partly within and partly without
the United States and are needed to pro-
vide appropriate guidance regarding the
determination of the proper source of that
compensation. This document also with-
draws the notice of proposed rulemaking
(REG–208254–90, 2000–1 C.B. 577) pub-
lished in theFederal Registeron January
21, 2000 (65 FR 3401).
DATES: Written or electronic comments
and requests for a public hearing must be
received by November 4, 2004. The notice
of proposed rulemaking published on Jan-
uary 21, 2000, is withdrawn as of August
6, 2004.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–136481–04),
room 5203, Internal Revenue Ser-
vice, POB 7604, Ben Franklin Sta-
tion, Washington, DC 20044. Submis-
sions may be hand delivered Monday
through Friday between the hours of 8
a.m.and4p.m.to:CC:PA:LPD:PR
(REG–136481–04), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue, NW, Washington DC, or sent
electronically via the IRS Internet site
at:http://www.irs.gov/regsor Federal
eRulemaking Portal athttp://www.regula-
tions.gov(IRS and REG–136481–04).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed reg-
ulations, David Bergkuist, (202) 622–3850
(not a toll-free number); concerning
the submissions of comments, LaNita
Van Dyke (202) 622–7180 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in this notice of proposed rulemak-
ing have been submitted to the Office of
Management and Budget for review in
accordance with the Paperwork Reduc-
tion Act of 1995 (44 U.S.C. 3507(d)).
Comments on the collections of infor-
mation should be sent to theOffice of
Management and Budget,Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503, with
copies to theInternal Revenue Service,
Attn: IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP Washington, DC
20224. Comments on the collection of
information should be received by Octo-
ber 5, 2004. Comments are specifically
requested concerning:
Whether the proposed collections of in-
formation are necessary for the proper per-
formance of the functions of the IRS, in-
cluding whether the information will have
practical utility;
The accuracy of the estimated burden
associated with the proposed collections of
information (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 collections 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
in this proposed regulation are in
§1.861–4(b)(2)(ii)(C)(1)(i), (b)(2)(ii)(D),
and (b)(2)(ii)(D)(6). The information re-
quired in §1.861–4(b)(2)(ii)(C)(1)(i)will
enable an individual, where appropri-
ate, to use an alternative basis other than
that described in §1.861–4(b)(2)(ii)(A)
or (B) to determine the source of his or
her compensation as an employee for la-
bor or personal services performed partly
within and partly without the United
States. The information required in
§1.861–4(b)(2)(ii)(D) and (D)(6)willen-
able an employee to source certain fringe
benefits on a geographical basis. The
collections of information will, likewise,
allow the IRS to verify these determina-
tions.
The collections of information and re-
sponses to these collections of information
are required to obtain and maintain bene-
fits. The likely respondents are individu-
als who perform labor or personal services
partly within and partly without the United
States, some of which may receive certain
fringe benefit compensation for those ser-
vices.
Estimated total annual recordkeeping
burden:10,000 hours.
The estimated annual burden per
recordkeeper varies from 15 minutes to
one hour, depending on the circumstances
of the individual, with an estimated aver-
age of 30 minutes.
Estimated number of recordkeepers:
20,000.
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 26 U.S.C. 6103.
Background
This document contains proposed
amendments (the new proposed regula-
tions) 26 CFR part 1 under section 861
of the Internal Revenue Code (Code).
On January 21, 2000, a notice of pro-
posed rulemaking was published in
theFederal Registerat 65 FR 3401
[REG–208254–90, 2000–1 C.B. 577] (the
previously proposed regulations). The
previously proposed regulations would
have modified the existing final regula-
tions relating to the determination of the
source of income from the performance
of labor or personal services performed
partly within and partly without the United
States. Written comments were received
in response to the notice of proposed rule-
making. A public hearing was held on July
18, 2000. In response to these comments,
and after further consideration of the is-
sue, the previously proposed regulations
are withdrawn and new regulations are
proposed. This preamble discusses com-
ments received on the previously proposed
regulations and describes the differences
between the new proposed regulations and
the previously proposed regulations.
September 13, 20044812004–37 I.R.B.

Explanation of Provisions
The existing final regulations,
§1.861–4(b), provide that if a person
performs labor or personal services partly
within and partly without the United
States, the amount to be included in gross
income from United States sources shall
be determined on the basis that most cor-
rectly reflects the proper source of income
under the facts and circumstances of the
particular case.
The previously proposed regulations
retained the facts and circumstances basis
for determining the source of such in-
come for persons other than individuals.
For individuals, however, the previously
proposed regulations provided that if an
individual received compensation for a
specific time period for labor or personal
services that are performed partly within
and partly without the United States, the
amount of compensation for labor or per-
sonal services performed within the United
States would have been determined solely
on a time basis.
Several comments questioned the rule
in the previously proposed regulations
that required individuals to determine the
source of such income on a time basis. In
response to those comments, and after fur-
ther consideration of the issues presented,
the previously proposed regulations are
withdrawn and new regulations are pro-
posed that take into account the concerns
raised.
Treasury and the IRS believe that a
time basis generally is the most appro-
priate method for determining the source
of an individual employee’s compen-
sation for labor and personal services
performed partly within and partly with-
out the United States. Compensation
provided to an employee for a specific
time period is generally considered to be
earned by the employee ratably over that
time period. Accordingly, it is appropriate
generally to source such compensation
on a ratable basis. In addition, Treasury
and the IRS believe that this rule will
provide certainty and simplification for
both taxpayers and the IRS. The infor-
mation necessary to apply the time basis
should be readily available to employers
and employees. For example, Form 2555,
“Foreign Earned Income”, requires an
individual who claims the foreign earned
income exclusion to provide the IRS with
information relating to the number of busi-
ness days spent within the United States
and any fringe benefits received. Sourc-
ing on a time basis may be appropriate as
well for individuals other than employees
who receive compensation for labor or
personal services and who may be viewed
as earning such compensation ratably.
Nonetheless, for entities other than in-
dividuals and for individuals who are not
employees, the facts and circumstances in
many cases may be such that an apportion-
ment on a basis other than a time basis may
be more appropriate. For example, a cor-
poration could receive payments under a
contract for services to be performed by
numerous employees at various pay levels
in a number of different geographic loca-
tions. In such a case, payroll costs under
the contract for services, or another basis
besides time, may more correctly reflect
the proper source of the corporation’s in-
come.
The new proposed regulations retain
the facts and circumstances basis as the
general rule for determining the source of
compensation for labor and personal ser-
vices performed partly within and partly
without the United States received by
persons other than individuals and by indi-
viduals who are not employees. However,
the new proposed regulations provide two
new general bases for determining the
proper source of compensation that an in-
dividual receives as an employee for such
labor or personal services. Under the first
general basis of §1.861–4(b)(2)(ii)(A), an
individual who receives compensation,
other than compensation in the form of
certain fringe benefits, as an employee
for labor or personal services performed
partly within and partly without the United
States is required to source such com-
pensation on a time basis, as defined in
§1.861–4(b)(2)(ii)(E).
Under the second general basis of
§1.861–4(b)(2)(ii)(B) and (D), an individ-
ual who receives compensation as an em-
ployee for labor or personal services per-
formed partly within and partly without the
United States in the form of fringe benefits,
as described in §1.861–4(b)(2)(ii)(D)(1)
through (6), is required to source such
compensation on a geographical basis
(e.g., at the employee’s principal place
of work, as defined in section 217 and
§1.217–2(c)(3)). The fringe benefits to
which this general basis applies are: hous-
ing, education, local transportation, tax
reimbursement, hazardous or hardship
duty pay, and moving expense reimburse-
ment fringe benefits. This general basis
will apply only if the amount of the fringe
benefit is reasonable and is substantiated
by adequate contemporaneous records or
sufficient evidence under rules similar to
those set forth in §1.274–5T(c) or (h) or
§1.132–5, and only if the fringe benefit
meets the definition set forth in the new
proposed regulations. Treasury and the
IRS intend to keep the list and descrip-
tions of identified fringe benefits current
and invite comments regarding whether
the identified fringe benefits are appro-
priately defined and whether other fringe
benefits should be identified in the regula-
tions and sourced on a specific geographic
basis.
Treasury and the IRS recognize that
there are circumstances in which these
two general bases may not be the most ap-
propriate basis for determining the source
of an employee’s compensation for la-
bor or personal services performed partly
within and partly without the United
States. Accordingly, the new proposed
regulations at §1.861–4(b)(2)(ii)(C)(1)(i)
provide that an employee may use an
alternative basis, based upon the facts
and circumstances, to source such com-
pensation if he or she establishes to the
satisfaction of the Commissioner that such
an alternative basis more properly deter-
mines the source of the compensation. For
example, when an employee’s compensa-
tion is tied to the performance of specific
actions rather than earned ratably over a
specific time period, an alternative basis
may more properly determine the source
of compensation than the bases for deter-
mining source of compensation described
in §1.861–4(b)(2)(ii)(A) and (B).
In order to satisfy the Commissioner, an
employee must retain in his or her records
documentation setting forth why the alter-
native basis more properly determines the
source of the compensation than the ba-
sis for determining source of compensa-
tion described in §1.861–4(b)(2)(ii)(A) or
(B). In addition, it is anticipated that the
Commissioner, by ruling or other admin-
istrative pronouncement, will issue guid-
ance as to what procedures an employee
must follow in order to assert an alterna-
tive basis to determine the source of his or
her compensation for labor or personal ser-
2004–37 I.R.B.482September 13, 2004

vices performed partly within and partly
without the United States. Such adminis-
trative pronouncementwilllikelyrequire
that an individual who has $250,000 or
more in compensation for the tax year must
indicate in the manner prescribed that he or
she is using an alternative basis to source
his or her compensation. Such individual
may be required to file a form, or retain the
following in his or her records: (1) a writ-
ten explanation of why the alternative ba-
sis more properly determines the source of
the compensation than the basis for deter-
mining source of compensation described
in §1.861–4(b)(2)(ii)(A) or (B) under the
facts and circumstances, and (2) a writ-
ten comparison of the dollar amount of
the compensation sourced within and with-
out the United States under both the indi-
vidual’s alternative basis and the basis for
determining source of compensation de-
scribed in §1.861–4(b)(2)(ii)(A) or (B).
Section 1.861–4(b)(2)(ii)(C)(1)(ii)of
the new proposed regulations also pro-
vides that the Commissioner may, under
the facts and circumstances of the partic-
ular case, determine the source of com-
pensation that is received by an individual
as an employee for labor or personal ser-
vices performed partly within and partly
without the United States under an alter-
native basis other than a basis described
in paragraph (b)(2)(ii)(A) or (B) if such
compensation either(1) is not for a spe-
cific time period or (2) constitutes in
substance a fringe benefit described in
paragraph (b)(2)(ii)(D) notwithstanding a
failure to meet any requirement of para-
graph (b)(2)(ii)(D). The Commissioner
may make this determination only if such
alternative basis determines the source of
compensation in a more reasonable man-
ner than the basis used by the individual
pursuant to paragraph (b)(2)(ii)(A) or (B).
Section 1.861–4(b)(2)(ii)(C)(2)ofthe
new proposed regulations provides that
the Commissioner may, by ruling or other
administrative pronouncement applying to
similarly situated taxpayers generally, per-
mit individuals to determine the source of
their compensation as an employee for la-
bororpersonalservices performed partly
within and partly without the United States
under an alternative basis. Any such indi-
vidual shall be treated as having met the
requirement to establish such alternative
basis to the satisfaction of the Commis-
sioner under the facts and circumstances
of the particular case, provided that the
individual meets the other requirements of
paragraph (b)(2)(ii)(C)(1)(i). This para-
graph also provides that the Commissioner
may, by ruling or other administrative pro-
nouncement, indicate the circumstances in
which he will require individuals to deter-
mine the source of certain compensation
as an employee for labor or personal ser-
vices performed partly within and partly
without the United States under an al-
ternative basis pursuant to the authority
under paragraph (b)(2)(ii)(C)(1)(ii)ofthis
section.
Section 1.861–4(b)(2)(ii)(C)(3)ofthe
new proposed regulations is reserved with
respect to artists and athletes who are em-
ployees. It is intended that the specific
rules for artists and athletes who are em-
ployees will require such individuals to de-
termine the proper source of compensation
for labor or personal services on the ba-
sis that most correctly reflects the proper
source of that income under the facts and
circumstances of the particular case, con-
sistent with current law. Comments are in-
vited in this connection, including on the
proper definition of anartistorathletefor
this purpose.
Examples illustrating these new rules
with respect to compensation that an in-
dividual receives as an employee are in-
cluded in §1.861–4(b)(2)(ii)(G) of the new
proposed regulations.
Several of the comments to the pre-
viously proposed regulations requested
specific rules for compensation arrange-
ments that relate to services performed
over a period of more than one year,
such as employee stock option plans,
transfers of restricted property, and other
deferred compensation arrangements.
The new proposed regulations provide at
§1.861–4(b)(2)(ii)(F) that the source of
multi-year compensation of an employee
is generally determined on a time basis
over the applicable period to which the
compensation is attributable. Determina-
tion of the applicable period to which the
compensation is attributable (including
whether the compensation relates to more
than one taxable year) is based upon the
facts and circumstances of the particular
case. Treasury and the IRS invite taxpay-
ers to provide comments on whether alter-
native bases for determining the source of
such multi-year compensation are appro-
priate.
One comment questioned whether a
day was the only time period upon which
to apply the time basis of sourcing com-
pensation. In response to this comment,
the new proposed regulations provide at
§1.861–4(b)(2)(ii)(E) that, although the
time basis is generally determined by
comparing the number of days of perfor-
mance of the labor or personal services by
the individual within the United States to
his or her total number of days of perfor-
mance of labor or personal services, use of
a unit of time less than a day may be ap-
propriate for purposes of this calculation.
For example, it may be more appropriate
to source compensation paid to an airline
flight crewmember based on a time unit of
less than a day.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Ex-
ecutive Order 12866. Therefore, a regu-
latory assessment is not required. It also
has been determined that section 553(b)
of 5 U.S.C. chapter 5 does not apply to
these regulations, and because the regula-
tion does not impose a collection of infor-
mation on small entities, the Regulatory
Flexibility Act, 5 U.S.C. chapter 6, does
not apply. Pursuant to section 7805(f) of
the Code, this notice of proposed rulemak-
ing will be submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on their impact
on small businesses.
Comments and Requests for a Public
Hearing
Before the new proposed regulations
are adopted as final regulations, considera-
tion will be given to any written comments
(a signed original and 8 copies) or elec-
tronic comments thatare submitted timely
to the IRS. The IRS and Treasury request
comments on the clarity of the proposed
rules and how they may be made easier to
understand. All comments will be made
available for public inspection and copy-
ing. A public hearing will be scheduled
ifrequestedinwritingbyanypersonthat
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the public hearing
will be published in theFederal Register.
September 13, 20044832004–37 I.R.B.

Drafting Information
The principal author of these proposed
regulations is David Bergkuist of the Of-
fice of Associate Chief Counsel (Interna-
tional). However, other personnel from the
IRS and Treasury participated in their de-
velopment.
*****
Withdrawal of a Notice of Proposed
Rulemaking
Accordingly, under the authority of 26
U.S.C. 7805, the notice of proposed rule-
making published in theFederal Regis-
teron January 21, 2000 (65 CFR 3401),
REG–208254–90 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 1.861–4 is amended as
follows:
1. The heading for paragraph (a) is re-
vised.
2. A sentence is added at the beginning
of paragraph (a)(1).
3. Paragraph (b) is revised.
4. A sentence is added at the end of
paragraph (d).
The revisions and addition read as fol-
lows:
§1.861–4 Compensation for labor or
personal services.
(a)Compensation for labor or per-
sonal services performed wholly within
the United States—(1) Generally, com-
pensation for labor or personal services,
including fees, commissions, fringe bene-
fits, and similar items, performed wholly
within the United States is gross income
from sources within the United States.
***
(b)Compensation for labor or per-
sonal services performed partly within
and partly without the United States—(1)
Compensation for labor or personal ser-
vices performed by persons other than
individuals—(i)In general. In the case of
compensation for labor or personal ser-
vices performed partly within and partly
without the United States by a person
other than an individual, the part of that
compensation that is attributable to the la-
bor or personal services performed within
the United States, and that is therefore
included in gross income as income from
sources within the United States, is de-
termined on the basis that most correctly
reflects the proper source of the income
under the facts and circumstances of the
particular case. In many cases, the facts
and circumstances will be such that an ap-
portionment on the time basis, as defined
in paragraph (b)(2)(ii)(E) of this section,
will be acceptable.
(ii)Example. Corp X, a domestic corporation,
receives compensation of $150,000 under a contract
for services to be performed concurrently in the
United States and in several foreign countries by nu-
merous Corp X employees. Each Corp X employee
performing services under this contract performs
his or her services exclusively in one jurisdiction.
Although the number of employees (and hours spent
by employees) performing services under the con-
tract within the United States equals the number of
employees (and hours spent by employees) perform-
ing services under the contract without the United
States, the compensation paid to employees perform-
ing services under the contract within the United
States is higher because of the more sophisticated
nature of the services performed by the employees
within the United States. Accordingly, the payroll
cost for employees performing services under the
contract within the United States is $20,000 out of a
total contract payroll cost of $30,000. Under these
facts and circumstances, a determination based upon
relative payroll costs would be the basis that most
correctly reflects the proper source of the income
received under the contract. Thus, of the $150,000
of compensation included in Corp X’s gross income,
$100,000 ($150,000 x $20,000/$30,000) is attrib-
utable to the labor or personal services performed
within the United States and $50,000 ($150,000 X
$10,000/$30,000) is attributable to the labor or per-
sonal services performed without the United States.
(2)Compensation for labor or personal
services performed by an individual—(i)
In general. Except as provided in para-
graph (b)(2)(ii) of this section, in the case
of compensation for labor or personal ser-
vices performed partly within and partly
without the United States by an individual,
the part of such compensation that is at-
tributable to the labor or personal services
performed within the United States, and
that is therefore included in gross income
as income from sources within the United
States, is determined on the basis that most
correctly reflects the proper source of that
income under the facts and circumstances
of the particular case. In many cases, the
facts and circumstances will be such that
an apportionment on a time basis, as de-
fined in paragraph (b)(2)(ii)(E) of this sec-
tion, will be acceptable.
(ii)Employee compensation—(A)In
general. Except as provided in paragraph
(b)(2)(ii)(B) or (C) of this section, in the
case of compensation for labor or per-
sonal services performed partly within
and partly without the United States by
an individual as an employee, the part of
such compensation that is attributable to
the labor or personal services performed
within the United States, and that is there-
fore included in gross income as income
from sources within the United States, is
determined on a time basis, as defined in
paragraph (b)(2)(ii)(E) of this section.
(B)Certain fringe benefits sourced on
a geographical basis. Except as provided
in paragraph (b)(2)(ii)(C) of this section,
items of compensation of an individual as
an employee for labor or personal services
performed partly within and partly with-
out the United States that are described in
paragraph (b)(2)(ii)(D)(1) through (6)of
this section are sourced on a geographical
basis in accordance with those paragraphs.
(C)Exceptions and special rules—(1)
Alternative basis—(i)Individual as an em-
ployee generally. An individual may de-
termine the source of his or her compen-
sation as an employee for labor or per-
sonal services performed partly within and
partly without the United States under an
alternative basis if the individual estab-
lishes to the satisfaction of the Commis-
sioner that, under the facts and circum-
stances of the particular case, the alter-
native basis more properly determines the
source of the compensation than a basis de-
scribed in paragraph (b)(2)(ii)(A) or (B),
whichever is applicable, of this section.
An individual that uses an alternative basis
must retain in his or her records documen-
tation setting forth why the alternative ba-
sis more properly determines the source of
the compensation. In addition, the individ-
ual must comply with the requirements set
forth in any applicable administrative pro-
nouncement issued by the Commissioner.
(ii)Determination by Commissioner.
The Commissioner may, under the facts
and circumstances of the particular case,
determine the source of compensation
that is received by an individual as an
employee for labor or personal services
performed partly within and partly without
2004–37 I.R.B.484September 13, 2004

the United States under an alternative basis
other than a basis described in paragraph
(b)(2)(ii)(A) or (B) of this section if such
compensation either is not for a specific
time period or constitutes in substance
a fringe benefit described in paragraph
(b)(2)(ii)(D) of this section notwithstand-
ing a failure to meet any requirement of
paragraph (b)(2)(ii)(D) of this section.
The Commissioner may make this de-
termination only if such alternative basis
determines the source of compensation in
a more reasonable manner than the basis
used by the individual pursuant to para-
graph (b)(2)(ii)(A) or (B) of this section.
(2)Ruling or other administrative pro-
nouncement with respect to groups of tax-
payers. The Commissioner may, by ruling
or other administrative pronouncement
applying to similarly situated taxpayers
generally, permit individuals to determine
the source of their compensation as an
employee for labor or personal services
performed partly within and partly with-
out the United States under an alternative
basis. Any such individual shall be treated
as having met the requirement to establish
such alternative basis to the satisfaction of
the Commissioner under the facts and cir-
cumstances of the particular case, provided
that the individual meets the other require-
ments of paragraph (b)(2)(ii)(C)(1)(i)of
this section. The Commissioner also may,
by ruling or other administrative pro-
nouncement, indicate the circumstances in
which he will require individuals to deter-
mine the source of certain compensation
as an employee for labor or personal ser-
vices performed partly within and partly
without the United States under an al-
ternative basis pursuant to the authority
under paragraph (b)(2)(ii)(C)(1)(ii)ofthis
section.
(3)Artists and athletes.[RESERVED.]
(D)Fringe benefits sourced on a ge-
ographical basis. Except as provided
in paragraph (b)(2)(ii)(C) of this sec-
tion, compensation of an individual as an
employee for labor or personal services
performed partly within and partly with-
out the United States in the form of the
following fringe benefits is sourced on
a geographical basis as indicated in this
paragraph (b)(2)(ii)(D). The amount of
the compensation in the form of the fringe
benefit must be reasonable, and the indi-
vidual must substantiate such amounts by
adequate records or by sufficient evidence
under rules similar to those set forth in
§1.274–5T(c) or (h) or §1.132–5. For pur-
poses of this paragraph (b)(2)(ii)(D), the
termprincipal place of workhas the same
meaning that it has for purposes of section
217 and §1.217–2(c)(3).
(1)Housing fringe benefit. The source
of compensation in the form of a housing
fringe benefit is determined based on the
location of the individual’s principal place
of work. For purposes of this paragraph
(b)(2)(ii)(D)(1), a housing fringe benefit
includes payments to or on behalf of an
individual (and the individual’s family
if the family resides with the individual)
only for rent, utilities (other than tele-
phone charges), real and personal property
insurance, occupancy taxes not deductible
under section 164 or 216(a), nonrefund-
able fees paid for securing a leasehold,
rental of furniture and accessories, house-
hold repairs, residential parking, and the
fair rental value of housing provided in
kind by the individual’s employer. A
housing fringe benefit does not include
payments for expenses or items set forth
in §1.911–4(b)(2).
(2)Education fringe benefit.The
source of compensation in the form of an
education fringe benefit for the education
expenses of the individual’s dependents
is determined based on the location of the
individual’s principal place of work. For
purposes of this paragraph (b)(2)(ii)(D)(2),
an education fringe benefit includes pay-
ments only for qualified tuition and related
expenses of the type described in section
530(b)(4)(A)(i) and expenditures for room
and board and uniforms as described in
section 530(b)(4)(A)(ii) with respect to
education at an elementary or secondary
educational institution.
(3)Local transportation fringe benefit.
The source of compensation in the form of
a local transportation fringe benefit is de-
termined based on the location of the in-
dividual’s principal place of work. For
purposes of this paragraph (b)(2)(ii)(D)(3),
an individual’s local transportation fringe
benefit is the amount that the individual
receives as compensation for local trans-
portation of the individual or the individ-
ual’s spouse or dependents at the location
of the individual’s principal place of work.
The amount treated as a local transporta-
tion fringe benefit is limited to the actual
expenses incurred for local transportation
and the fair rental value of any vehicle pro-
vided by the employer and used predomi-
nantly by the individual or the individual’s
spouse or dependents for local transporta-
tion. For this purpose, actual expenses in-
curred for local transportation do not in-
clude the cost (including interest) of the
purchase by the individual, or on behalf of
the individual, of an automobile or other
vehicle.
(4)Tax reimbursement fringe benefit.
The source of compensation in the form of
a foreign tax reimbursement fringe benefit
is determined based on the location of the
jurisdiction that imposed the tax for which
the individual is reimbursed.
(5)Hazardous or hardship duty pay
fringe benefit. The source of compensa-
tion in the form of a hazardous or hardship
duty pay fringe benefit is determined
based on the location of the hazardous
or hardship duty zone for which the haz-
ardous or hardship duty pay fringe benefit
is paid. For purposes of this paragraph
(b)(2)(ii)(D)(5), a hazardous or hardship
duty zone is any place in a foreign country
which is either designated by the Sec-
retary of State as a place where living
conditions are extraordinarily difficult,
notably unhealthy, or where excessive
physical hardships exist, and for which
apostdifferentialof15percentormore
would be provided under section 5925(b)
of Title 5 of the U.S. Code to any officer or
employee of the U.S. Government present
at that place, or where a civil insurrection,
civil war, terrorism, or wartime condi-
tions threatens physical harm or imminent
danger to the health and well-being of
the individual. Compensation provided
an employee during the period that the
employee performs labor or personal ser-
vices in a hazardous or hardship duty zone
may be treated as a hazardous or hardship
duty pay fringe benefit only if the em-
ployer provides the hazardous or hardship
duty pay fringe benefit only to employees
performing labor or personal services in
a hazardous or hardship duty zone. The
amount of compensation treated as a haz-
ardous or hardship duty pay fringe benefit
may not exceed the maximum amount that
the U. S. government would allow its offi-
cers or employees presentatthatlocation.
(6)Moving expense reimbursement
fringe benefit. Except as otherwise pro-
vided in this paragraph (b)(2)(ii)(D)(6),
the source of compensation in the form
of a moving expense reimbursement is
September 13, 20044852004–37 I.R.B.

determined based on the location of the
employee’s new principal place of work.
The source of such compensation is de-
termined based on the location of the em-
ployee’s former principal place of work,
however, if the individual provides suf-
ficient evidence that such determination
of source is more appropriate under the
facts and circumstances of the particu-
lar case. For purposes of this paragraph
(b)(2)(ii)(D)(6), sufficient evidence gen-
erally requires an agreement, between the
employer and the employee, or a writ-
ten statement of company policy, which
is reduced to writing before the move
and which is entered into or established
to induce the employee or employees to
move to another country. The writing
must state that the employer will reim-
burse the employee for moving expenses
that the employee incurs to return to the
employee’s former principal place of work
regardless of whether he or she continues
to work for the employer after returning
to that location. The writing may contain
certain conditions upon which the right to
reimbursement is determined as long as
those conditions set forth standards that
are definitely ascertainable and can only
be fulfilled prior to, or through completion
of, the employee’s return move to the em-
ployee’s former principal place of work.
(E)Time basis. The amount of com-
pensation for labor or personal services
performed within the United States deter-
mined on a time basis is the amount that
bears the same relation to the individual’s
total compensation as the number of days
of performance of the labor or personal ser-
vices by the individual within the United
States bears to his or her total number of
days of performance of labor or personal
services. A unit of time less than a day may
be appropriate for purposes of this calcula-
tion. The time period for which the com-
pensation for labor or personal services is
made is presumed to be the calendar year
in which the labor or personal services are
performed, unless the taxpayer establishes
to the satisfaction of the Commissioner, or
the Commissioner determines, that another
distinct, separate, and continuous period of
time is more appropriate. For example, a
transfer during a year from a position in
the United States to a foreign posting that
lasted through the end of that year would
generally establish two separate time pe-
riods within that taxable year. The first
of these time periods would be the portion
of the year preceding the start of the for-
eign posting, and the second of these time
periods would be the portion of the year
following the start of the foreign posting.
However, in the case of a foreign post-
ing that requires short-term returns to the
United States to perform services for the
employer, such short-term returns would
not be sufficient to establish distinct, sep-
arate, and continuous time periods within
the foreign posting time period but would
be relevant to the allocation of compensa-
tion relating to the overall time period. In
each case, the source of the compensation
on a time basis is based upon the number
of days (or unit of time less than a day, if
appropriate) in that separate time period.
(F)Multi-year compensation arrange-
ments. The source of multi-year compen-
sation is determined generally on a time
basis, as defined in paragraph (b)(2)(ii)(E)
of this section, over the period to which
such compensation is attributable. For
purposes of this paragraph (b)(2)(ii)(F),
multi-year compensationmeans compen-
sation that is included in the income of an
individual in one taxable year but that is
attributable to a period that includes two
or more taxable years. The determination
of the period to which such compensation
is attributable, for purposes of determin-
ing its source, is based upon the facts and
circumstances of the particular case. For
example, an amount of compensation that
specifically relates to a period of time that
includes several calendar years is attribut-
able to the entirety of that multi-year pe-
riod. The amount of such compensation
that is treated as from sources within the
United States is the amount that bears the
same relationship to the total multi-year
compensation as thenumber of days (or
unit of time less than a day, if appropriate)
that labor or personal services were per-
formed within the United States in connec-
tion with the project bears to the total num-
ber of days (or unit of time less than a day,
if appropriate) that labor or personal ser-
vices were performed in connection with
the project. In the case of stock options,
the facts and circumstances generally will
be such that the applicable period to which
the compensation is attributable is the pe-
riod between the grant of an option and the
date on which all employment-related con-
ditions for its exercise have been satisfied
(the vesting of the option).
(G)Examples. The following examples
illustrate the application of this paragraph
(b)(2)(ii):
Example 1. B, a nonresident alien individual, was
employed by Corp M, a domestic corporation, from
March 1 to December 25 of the taxable year, a total
of 300 days, for which B received compensation in
the amount of $80,000. Under B’s employment con-
tract with Corp M, B was subject to call at all times by
Corp M and was in a payment status on a 7-day week
basis. Pursuant to that contract, B performed ser-
vices (or was available to perform services) within the
United States for 180 days and performed services (or
was available to perform services) without the United
States for 120 days. None of B’s $80,000 compen-
sation was for fringe benefits as identified in para-
graph (b)(2)(ii)(D) of this section. B determined the
amount of compensation that is attributable to his la-
bor or personal services performed within the United
States on a time basis under paragraph (b)(2)(ii)(A)
and (E) of this section. B did not assert, pursuant to
paragraph (b)(2)(ii)(C)(1)(i) of this section, that, un-
der the particular facts and circumstances, an alterna-
tive basis more properly determines the source of that
compensation than the time basis. Therefore, B must
include in income from sources within the United
States $48,000 ($80,000 x 180/300) of his compen-
sation from Corporation M.
Example 2. (i) Same facts as inExample 1except
that Corp M had a company-wide arrangement with
its employees, including B, that they would receive
an education fringe benefit,as described in paragraph
(b)(2)(ii)(D)(2) of this section, while working in the
United States. During the taxable year, B incurred
education expenses for his dependent daughter that
qualified for the education fringe benefit in the
amount of $10,000, for which B received a reim-
bursement from Corp M. B did not maintain adequate
records or sufficient evidence of this fringe benefit
as required by paragraph (b)(2)(ii)(D) of this section.
When B filed his Federal income tax return for the
taxable year, B did not apply paragraphs (b)(2)(ii)(B)
and (D)(2) of this section to treat the compensation
in the form of the education fringe benefit as income
from sources within the United States, the location of
his principal place of work during the 300-day period.
Rather, B combined the $10,000 reimbursement with
his base compensation of $80,000 and applied the
time basis of paragraph (b)(2)(ii)(A) of this section
to determine the source of his gross income.
(ii) On audit, B argues that because he failed to
substantiate the education fringe benefit in accor-
dance with paragraph (b)(2)(ii)(D) of this section,
his entire employment compensation from Corp M
is sourced on a time basis pursuant to paragraph
(b)(2)(ii)(A) of this section. The Commissioner, af-
ter reviewing Corp M’s fringe benefit arrangement,
determines, pursuant to paragraph (b)(2)(ii)(C)(1)(ii)
of this section, that the $10,000 educational expense
reimbursement constitutes in substance a fringe ben-
efit described in paragraph (b)(2)(ii)(D)(2)ofthis
section, notwithstanding a failure to meet all of the
requirements of paragraph (b)(2)(ii)(D) of this sec-
tion, and that an alternative geographic source basis,
under the facts and circumstances of this particular
case, is a more reasonable manner to determine the
source of the compensation than the time basis used
by B.
2004–37 I.R.B.486September 13, 2004

Example 3. (i) A, a United States citizen, is em-
ployed by Corp N, a domestic corporation. A’s prin-
cipal place of work is in the United States. A earns an
annual salary of $100,000. During the first quarter of
the calendar year (which is also A’s taxable year), A
performed services entirely within the United States.
At the beginning of the second quarter of the calendar
year, A was transferred to Country X for the remain-
der of the year and received, in addition to her annual
salary, $30,000 in fringe benefits that are attributable
to her new principal place of work in Country X. Corp
N paid these fringe benefits separately from A’s an-
nual salary. Corp N supplied A with a statement de-
tailing that $25,000 of the fringe benefit was paid
for housing, as defined in paragraph (b)(2)(ii)(D)(1)
of this section, and $5,000 of the fringe benefit was
paid for local transportation, as defined in paragraph
(b)(2)(ii)(D)(3) of this section. None of the local
transportation fringe benefit is excluded from the em-
ployee’s gross income as a qualified transportation
fringe benefit under section 132(a)(5). Under A’s em-
ployment contract, A was required to work on a 5-day
week basis, Monday through Friday. During the last
three quarters of the year, A performed services 30
days in the United States and 150 days in Country X
and other foreign countries.
(ii) A determined the source of all of her com-
pensation from Corp N pursuant to paragraph
(b)(2)(ii)(A), (B), and (D)(1)and(3)ofthissec-
tion. A did not assert, pursuant to paragraph
(b)(2)(ii)(C)(1)(i) of this section, that, under the
particular facts and circumstances, an alternative
basis more properly determines the source of that
compensation than the bases set forth in paragraphs
(b)(2)(ii)(A), (B), and (D)(1)and(3)ofthissection.
However, in applying the time basis set forth in
paragraph (b)(2)(ii)(E) of this section, A establishes
to the satisfaction of the Commissioner that the first
quarter of the calendar year and the last three quarters
of the calendar year are two separate, distinct, and
continuous periods of time. Accordingly, $25,000 of
A’s annual salary is attributable to the first quarter of
the year (25 percent of $100,000). This amount is
entirely compensation that was attributable to the la-
bor or personal services performed within the United
States and is, therefore, included in gross income
as income from sources within the United States.
The balance of A’s compensation as an employee of
Corp N, $105,000 (which includes the $30,000 in
fringe benefits that are attributable to the location
of A’s principal place of work in Country X), is
compensation attributable to the final three quarters
of her taxable year. During those three quarters, A’s
periodic performance of services in the United States
does not result in distinct, separate, and continuous
periods of time. Of the $75,000 paid for annual
salary, $12,500 (30/180 x $75,000) is compensation
that was attributable to the labor or personal services
performed within the United States and $62,500
(150/180 x $75,000) is compensation that was attrib-
utable to the labor or personal services performed
outside the United States. Pursuant to paragraphs
(b)(2)(ii)(B) and (D)(1)and(3) of this section, A
sourced the $25,000 received for the housing fringe
benefit and the $5,000 received for the local trans-
portation fringe benefit based on the location of her
principal place of work, Country X. Accordingly, A
included the $30,000 in fringe benefits in her gross
income as income from sources without the United
States.
Example 4. Same facts as inExample 3.Of
the 150 days during which A performed services in
Country X and in other foreign countries (during
the final three quarters of A’s taxable year), she
performed 30 days of those services in Country Y.
Country Y is a country designated by the Secre-
tary of State as a place where living conditions are
extremely difficult, notably unhealthy, or where ex-
cessive physical hardships exist and for which a post
differential of 15 percent or more would be provided
under section 5925(b) of Title 5 of the U.S. Code
to any officer or employee of the U.S. government
present at that place. Corp N has a policy of paying
its employees a $65 premium per day for each day
worked in countries so designated. The $65 pre-
mium per day does not exceed the maximum amount
that the U.S. government would pay its officers or
employees stationed in Country Y. Because A per-
formed services in Country Y for 30 days, she earned
additional compensation of $1,950. The $1,950 is
considered a hazardous duty or hardship pay fringe
benefit and is sourced under paragraphs (b)(2)(ii)(B)
and (D)(5) of this section based on the location of
the hazardous or hardship duty zone, Country Y. Ac-
cordingly, A included the amount of the hazardous
duty or hardship pay fringe benefit ($1,950) in her
gross income as income from sources without the
United States.
Example 5. (i) During 2006 and 2007, Corp
P, a domestic corporation, employed four United
States citizens, E, F, G, and H to work in its man-
ufacturing plant in Country V. As part of his or her
compensation package, each employee arranged for
local transportation unrelated to Corp P’s business
needs. None of the local transportation fringe benefit
is excluded from the employee’s gross income as a
qualified transportation fringe benefit under section
132(a)(5) and (f).
(ii) Under the terms of thecompensation package
that E negotiated with Corp P, Corp P permitted E to
use an automobile owned by Corp P. In addition, Corp
P agreed to reimburse E for all expenses incurred
by E in maintaining and operating the automobile,
including gas and parking. Provided that the local
transportation fringe benefit meets the requirements
of paragraph (b)(2)(ii)(D)(3) of this section, E’s com-
pensation with respect to the fair rental value of the
automobile and reimbursement for the expenses E in-
curred is sourced under paragraphs (b)(2)(ii)(B) and
(D)(3) of this section based on E’s principal place
of work in Country V. Thus, the local transportation
fringe benefit will be included in E’s gross income as
income from sources without the United States.
(iii) Under the terms of the compensation package
that F negotiated with Corp P, Corp P let F use an au-
tomobile owned by Corp P. However, Corp P did not
agree to reimburse F for any expenses incurred by F in
maintaining and operating the automobile. Provided
that the local transportation fringe benefit meets the
requirements of paragraph (b)(2)(ii)(D)(3) of this sec-
tion, F’s compensation with respect to the fair rental
value of the automobile is sourced under paragraphs
(b)(2)(ii)(B) and (D)(3) of this section based on F’s
principal place of work in Country V. Thus, the lo-
cal transportation fringe benefit will be included in
F’s gross income as income from sources without the
United States.
(iv) Under the terms of the compensation pack-
age that G negotiated with Corp P, Corp P agreed
to reimburse G for the purchase price of an automo-
bile that G purchased in Country V. Corp P did not
agree to reimburse G for any expenses incurred by
G in maintaining and operating the automobile. Be-
cause the cost to purchase an automobile is not a local
transportation fringe benefit as defined in paragraph
(b)(2)(ii)(D)(3) of this section, the source of the com-
pensation to G will be determined pursuant to para-
graph (b)(2)(ii)(A) or (C) of this section.
(v) Under the terms of the compensation pack-
age that H negotiated with Corp P, Corp P agreed
to reimburse H for the expenses that H incurred in
maintaining and operating an automobile, including
gas and parking, which H purchased in Country V.
Provided that the local transportation fringe benefit
meets the requirements of paragraph (b)(2)(ii)(D)(3)
of this section, H’s compensation with respect to the
reimbursement for the expenses H incurred is sourced
under paragraphs (b)(2)(ii)(B) and (D)(3)ofthissec-
tion based on H’s principalplace of work in Country
V. Thus, the local transportation fringe benefit will be
included in H’s gross income as income from sources
without the United States.
Example 6. (i) On January 1, 2006, Company Q
compensates employee J with a grant of options to
which section 421 does not apply that do not have a
readily ascertainable fair market value when granted.
The stock options permit J to purchase 100 shares of
Company Q stock for $5 per share. The stock options
do not become exercisable unless and until J performs
services for Company Q (or a related company) for 5
years. J works for Company Q for the 5 years re-
quired by the stock option grant. In years 2006–08,
J performs all of his services for Company Q within
the United States. In 2009, J performs
1
/2of his ser-
vices for Company Q within the United States and
1
/2of his services for Company Q without the United
States. In year 2010, J performs his services entirely
without the United States. On December 31, 2012,
J exercises the options when the stock is worth $10
per share. J recognizes $500 in taxable compensation
(($10-$5) X 100) in 2012.
(ii) Under the facts and circumstances, the appli-
cable period is the 5-year period between the date of
grant (January 1, 2006) and the date the stock op-
tions become exercisable (December 31, 2010). On
the date the stock options become exercisable, J per-
forms all services necessary to obtain the compensa-
tion from Company Q. Accordingly, the services per-
formed after the date the stock options become ex-
ercisable are not taken into account in sourcing the
compensation from the stock options. Therefore, pur-
suant to paragraph (b)(2)(ii)(A), since J performs 3
1
/2
years of services for Company Q within the United
States and 1
1
/2years of services for Company Q with-
out the United States during the 5-year period, 7/10
of the $500 of compensation (or $350) recognized in
2012 is income from sources within the United States
and the remaining 3/10 of the compensation (or $150)
is income from sources without the United States.
*****
(d)Effective date. *** The first sen-
tence of §1.861–4(a)(1) and §1.861–4(b)
September 13, 20044872004–37 I.R.B.

apply to taxable years beginning on or af-
ter publication of the Treasury Decision
adopting these rules as final regulations in
theFederal Register.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on August 5,
2004, 8:45 a.m., and published in the issue of the Federal
Register for August 6, 2004, 69 F.R. 47816)
2004–37 I.R.B.488September 13, 2004

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.
September 13, 2004i2004–37 I.R.B.

Numerical Finding List
1
Bulletins 2004–27 through 2004–37
Announcements:
2004-55, 2004-27 I.R.B.15
2004-56, 2004-28 I.R.B.41
2004-57, 2004-27 I.R.B.15
2004-58, 2004-29 I.R.B.66
2004-59, 2004-30 I.R.B.94
2004-60, 2004-29 I.R.B.43
2004-61, 2004-29 I.R.B.67
2004-62, 2004-30 I.R.B.103
2004-63, 2004-31 I.R.B.149
2004-64, 2004-35 I.R.B.402
2004-65, 2004-33 I.R.B.300
2004-66, 2004-35 I.R.B.402
2004-67, 2004-36 I.R.B.459
Notices:
2004-41, 2004-28 I.R.B.31
2004-43, 2004-27 I.R.B.10
2004-44, 2004-28 I.R.B.32
2004-45, 2004-28 I.R.B.33
2004-46, 2004-29 I.R.B.46
2004-47, 2004-29 I.R.B.48
2004-48, 2004-30 I.R.B.88
2004-49, 2004-30 I.R.B.88
2004-50, 2004-33 I.R.B.196
2004-51, 2004-30 I.R.B.89
2004-52, 2004-32 I.R.B.168
2004-53, 2004-33 I.R.B.209
2004-54, 2004-33 I.R.B.209
2004-55, 2004-34 I.R.B.319
2004-56, 2004-35 I.R.B.375
2004-57, 2004-35 I.R.B.376
2004-59, 2004-36 I.R.B.447
Proposed Regulations:
REG-208246-90, 2004-36 I.R.B.450
REG-153841-02, 2004-31 I.R.B.145
REG-163679-02, 2004-35 I.R.B.390
REG-108637-03, 2004-37 I.R.B.472
REG-120616-03, 2004-37 I.R.B.474
REG-124405-03, 2004-35 I.R.B.394
REG-131486-03, 2004-28 I.R.B.36
REG-150562-03, 2004-32 I.R.B.175
REG-152549-03, 2004-36 I.R.B.451
REG-154077-03, 2004-37 I.R.B.476
REG-171386-03, 2004-37 I.R.B.477
REG-101447-04, 2004-34 I.R.B.344
REG-117307-04, 2004-28 I.R.B.39
REG-129706-04, 2004-37 I.R.B.478
REG-129771-04, 2004-36 I.R.B.453
REG-136481-04, 2004-37 I.R.B.480
Revenue Procedures:
2004-38, 2004-27 I.R.B.10
2004-39, 2004-29 I.R.B.49
2004-40, 2004-29 I.R.B.50
2004-41, 2004-30 I.R.B.90
2004-42, 2004-31 I.R.B.121
2004-43, 2004-31 I.R.B.124
2004-44, 2004-31 I.R.B.134
2004-45, 2004-31 I.R.B.140
2004-46, 2004-31 I.R.B.142
2004-47, 2004-32 I.R.B.169
2004-48, 2004-32 I.R.B.172
2004-49, 2004-33 I.R.B.210
2004-50, 2004-33 I.R.B.211
2004-51, 2004-33 I.R.B.294
2004-52, 2004-34 I.R.B.319
2004-53, 2004-34 I.R.B.320
2004-54, 2004-34 I.R.B.325
2004-55, 2004-34 I.R.B.343
2004-56, 2004-35 I.R.B.376
Revenue Rulings:
2004-63, 2004-27 I.R.B.6
2004-64, 2004-27 I.R.B.7
2004-65, 2004-27 I.R.B.1
2004-66, 2004-27 I.R.B.4
2004-67, 2004-28 I.R.B.28
2004-68, 2004-31 I.R.B.118
2004-69, 2004-36 I.R.B.445
2004-70, 2004-37 I.R.B.460
2004-71, 2004-30 I.R.B.74
2004-72, 2004-30 I.R.B.77
2004-73, 2004-30 I.R.B.80
2004-74, 2004-30 I.R.B.84
2004-75, 2004-31 I.R.B.109
2004-76, 2004-31 I.R.B.111
2004-77, 2004-31 I.R.B.119
2004-78, 2004-31 I.R.B.108
2004-79, 2004-31 I.R.B.106
2004-80, 2004-32 I.R.B.164
2004-81, 2004-32 I.R.B.161
2004-82, 2004-35 I.R.B.350
2004-83, 2004-32 I.R.B.157
2004-84, 2004-32 I.R.B.163
2004-85, 2004-33 I.R.B.189
2004-86, 2004-33 I.R.B.191
2004-87, 2004-32 I.R.B.154
2004-88, 2004-32 I.R.B.165
2004-89, 2004-34 I.R.B.301
2004-90, 2004-34 I.R.B.317
2004-91, 2004-35 I.R.B.357
2004-92, 2004-37 I.R.B.466
2004-93, 2004-37 I.R.B.462
Tax Conventions:
2004-60, 2004-29 I.R.B.43
Treasury Decisions:
9131, 2004-27 I.R.B.2
9132, 2004-28 I.R.B.16
9133, 2004-28 I.R.B.25
9134, 2004-30 I.R.B.70
9135, 2004-30 I.R.B.69
9136, 2004-31 I.R.B.112
9137, 2004-34 I.R.B.308
9138, 2004-32 I.R.B.160
9140, 2004-32 I.R.B.159
9141, 2004-35 I.R.B.359
9142, 2004-34 I.R.B.302
9143, 2004-36 I.R.B.442
9144, 2004-36 I.R.B.413
9145, 2004-37 I.R.B.464
9146, 2004-36 I.R.B.408
9147, 2004-37 I.R.B.461
9148, 2004-37 I.R.B.460
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2004–1 through 2004–26 is in Internal Revenue Bulletin
2004–26, dated June 28, 2004.
2004–37 I.R.B.iiSeptember 13, 2004

Findings List of Current Actions on
Previously Published Items
1
Bulletins 2004–27 through 2004–37
Notices:
98-65
Superseded by
Rev. Proc. 2004-40, 2004-29 I.R.B.50
2001-50
Modified by
Rev. Proc. 2004-46, 2004-31 I.R.B.142
2004-2
Modified by
Notice 2004-50, 2004-33 I.R.B.196
2004-2,
Corrected by
Ann. 2004-67, 2004-36 I.R.B.459
Proposed Regulations:
INTL-116-90
Withdrawn by
REG-208246-90, 2004-36 I.R.B.450
REG-208254-90
Withdrawn by
REG-136481-04, 2004-37 I.R.B.480
REG-104683-00
Partially withdrawn by
Ann. 2004-64, 2004-35 I.R.B.402
Revenue Procedures:
79-61
Superseded by
Rev. Proc. 2004-44, 2004-31 I.R.B.134
89-37
Obsoleted by
Rev. Rul. 2004-90, 2004-34 I.R.B.317
94-64
Superseded by
Rev. Proc. 2004-38, 2004-27 I.R.B.10
96-18
Obsoleted by
Rev. Rul. 2004-90, 2004-34 I.R.B.317
96-53
Superseded by
Rev. Proc. 2004-40, 2004-29 I.R.B.50
96-60
Superseded by
Rev. Proc. 2004-53, 2004-34 I.R.B.320
98-41
Superseded by
Rev. Proc. 2004-56, 2004-35 I.R.B.376
Revenue Procedures— Continued:
2000-37
Modified by
Rev. Proc. 2004-51, 2004-33 I.R.B.294
2002-9
Modified and amplified by
Rev. Proc. 2004-41, 2004-30 I.R.B.90
2003-30
Superseded by
Rev. Proc. 2004-54, 2004-34 I.R.B.325
2003-52
Superseded by
Rev. Proc. 2004-50, 2004-33 I.R.B.211
2004-4
Modified by
Rev. Proc. 2004-44, 2004-31 I.R.B.134
Revenue Rulings:
54-379
Superseded by
Rev. Rul. 2004-68, 2004-31 I.R.B.118
58-120
Obsoleted by
Rev. Rul. 2004-90, 2004-34 I.R.B.317
62-60
Amplified by
Rev. Proc. 2004-53, 2004-34 I.R.B.320
70-58
Obsoleted by
Rev. Rul. 2004-90, 2004-34 I.R.B.317
73-354
Obsoleted by
Rev. Rul. 2004-76, 2004-31 I.R.B.111
78-371
Distinguished by
Rev. Rul. 2004-86, 2004-33 I.R.B.191
79-64
Obsoleted by
Rev. Rul. 2004-90, 2004-34 I.R.B.317
80-7
Amplified and clarified by
Rev. Rul. 2004-71, 2004-30 I.R.B.74
Rev. Rul. 2004-72, 2004-30 I.R.B.77
Rev. Rul. 2004-73, 2004-30 I.R.B.80
Rev. Rul. 2004-74, 2004-30 I.R.B.84
80-366
Obsoleted by
Rev. Rul. 2004-90, 2004-34 I.R.B.317
81-100
Clarified and modified by
Rev. Rul. 2004-67, 2004-28 I.R.B.28
Revenue Rulings— Continued:
85-70
Amplified and clarified by
Rev. Rul. 2004-71, 2004-30 I.R.B.74
Rev. Rul. 2004-72, 2004-30 I.R.B.77
Rev. Rul. 2004-73, 2004-30 I.R.B.80
Rev. Rul. 2004-74, 2004-30 I.R.B.84
92-105
Distinguished by
Rev. Rul. 2004-86, 2004-33 I.R.B.191
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2004–1 through 2004–26 is in Internal Revenue Bulletin 2004–26, dated June 28, 2004.
September 13, 2004iii2004–37 I.R.B.
*U.S.Government Printing Office: 2004—304–778/60152