Internal Revenue Bulletin 2005-15 (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
5-15
April 11, 2005
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Ct. D. 2080, page 850.
Gross income; litigant’s recovery includes attorney’s
contingent fee.The Supreme Court holds that when a
litigant’s recovery constitutes income, the litigant’s income
includes the portion of the recovery paid to the attorney as
a contingent fee.Commissioner of Internal Revenuev.
Banks.
Rev. Rul.
2005–23, page 864.
Federal ra
tes; adjusted federal rates; adjusted federal
long-ter
m rate and the long-term exempt rate.For pur-
poses of s
ections 382, 642, 1274, 1288, and other sections
of the Cod
e, tables set forth the rates for April 2005.
T.D. 9190, page 855.
Final regulations under section 664 of the Code concern the or-
dering rule of regulations section 1.664–1(d). The regulations
provide rules for characterizing the income distributions from
charitable remainder trusts (CRTs) when the income is subject
to different federal income tax rates. The regulations reflect
changes made to income tax rates, including capital gains and
certain dividends, by the Taxpayer Relief Act of 1997, the In-
ternal Revenue Service Restructuring and Reform Act of 1998,
and the Jobs and Growth Tax Relief Reconciliation Act of 2003.
T.D. 9191, page 854.
Final regulations amend 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. 9192, page 866.
Final regulations under section 1502 of the Code provide guid-
ance concerning the determination of the tax attributes that
are available for reduction and the method for reducing those
attributes when a member of a consolidated group excludes
discharge of indebtedness income from gross income under
section 108.
T.D. 9193, page 862.
Final regulations under section 704 of the Code clarify that if
section 704(c) property is sold for an installment obligation, the
installment obligation is treated as the contributed property for
purposes of applying sections 704(c) and 737. Likewise, if
the contributed property is a contract, such as an option to ac-
quire property, the property acquired pursuant to the contract
is treated as the contributed property for these purposes.
Announcement 2005–25, page 891.
This document contains a correction to final regulations (T.D.
9187, 2005–13 I.R.B. 778) that disallow certain losses recog-
nized on sales of subsidiary stock by members of a consoli-
dated group.
EXEMPT ORGANIZATIONS
Announcement 2005–24, page 889.
A list is provided of organizations now classified as private foun-
dations.
(Continued on the next page)
Fi
nding Lists begin on page ii.

ADMINISTRATIVE
T.D. 9188, page 883.
REG–147195–04, page 888.
Temporary and proposed regulations under section 6103 of the
Code set forth changes to the list of items of return informa-
tion that the IRS discloses to the Department of Commerce for
the purpose of structuring censuses and national economic ac-
counts and conducting related statistical activities authorized
by law.
Rev. Proc. 200
5–22, page 886.
Qualified mor
tgage bonds; mortgage credit certificates;
national medi
an gross income.Guidance is provided con-
cerning the u
se of the national and area median gross income
figures by is
suers of qualified mortgage bonds and mortgage
credit certi
ficates in determining the housing cost/income ratio
described in
section 143(f) of the Code. Rev. Proc. 2004–24
obsoleted.
April 11, 20052005–15 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2005–15 I.R.B.April 11, 2005

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 1.—Tax Imposed
Ct. D. 2080
SUPREME COURT OF THE
UNITED STATES
No. 03-892
COMMISSIONER OF INTERNAL
REVENUEv. BANKS
CERTIORARI TO THE UNITED
STATES COURT
OF APPEALS FOR THE SIXTH
CIRCUIT
January 24, 2005
*
Syllabus
Respondent Banks settled his federal
employment discrimination suit against
a California state agency and respondent
Banaitis settled his Oregon state case
against his former employer, but neither
included fees paid to their attorneys under
contingent-fee agreements as gross in-
come on their federal income tax returns.
In each case petitioner Commissioner of
Internal Revenue issued a notice of defi-
ciency, which the Tax Court upheld. In
Banks’ case, the SixthCircuit reversed
in part, finding that the amount Banks
paid to his attorney was not includable
as gross income. In Banaitis’ case, the
Ninth Circuit found that because Oregon
law grants attorneys a superior lien in the
contingent-fee portion of any recovery,
that part of Banaitis’ settlement was not
includable as gross income.
Held: When a litigant’s recovery con-
stitutes income, the litigant’s income in-
cludes the portion of the recovery paid to
the attorney as a contingent fee. Pp. 5–12.
(a) Two preliminary observations help
clarify why this issue is of consequence.
First, taking the legal expenses as miscel-
laneous itemized deductions would have
been of no help to respondents because the
Alternative Minimum Tax establishes a tax
liability floor and does not allow such de-
ductions. Second, the American Jobs Cre-
ation Act of 2004—which amended the In-
ternal Revenue Code to allow a taxpayer,
in computing adjusted gross income, to
deduct attorney’s fees such as those at is-
sue—does not apply here because it was
passed after these cases arose and is not
retroactive. Pp. 5–6.
(b) The Code defines “gross income”
broadly to include all economic gains not
otherwise exempted. Under the anticipa-
tory assignment of income doctrine, a tax-
payer cannot exclude an economic gain
from gross income by assigning the gain
in advance to another party,e.g., Lucas v.
Earl, 281 U.S. 111, because gains should
be taxed “to those who earn them,”id., at
114. The doctrine is meant to prevent tax-
payers from avoiding taxation through ar-
rangements and contracts devised to pre-
vent income from vesting in the one who
earned it.Id., at 115. Because the rule is
preventative and motivated by administra-
tive and substantive concerns, this Court
does not inquire whether any particular as-
signment has a discernible tax avoidance
purpose. Pp. 6–7.
(c) The Court agrees with the Com-
missioner that a contingent-fee agreement
should be viewed as an anticipatory as-
signment to the attorney of a portion of
the client’s income from any litigation re-
covery. In an ordinary case, attribution
of income is resolved by asking whether
a taxpayer exercises complete dominion
over the income in question. However,
in the context of anticipatory assignments,
where the assignor may not have domin-
ion over the income at the moment of re-
ceipt, the question is whether the assignor
retains dominion over the income-gener-
ating asset. Looking to such control pre-
serves the principle that income should be
taxed to the party who earns the income
and enjoys the consequent benefits. In
the case of a litigation recovery, the in-
come-generating asset is the cause of ac-
tion derived from the plaintiff’s legal in-
jury. The plaintiff retains dominion over
this asset throughout the litigation. Re-
spondents’ counterarguments are rejected.
The legal claim’s value may be specula-
tive at the moment of the assignment, but
the anticipatory assignment doctrine is not
limited to instances when the precise dol-
lar value of the assigned income is known
in advance. In these cases, the taxpayer re-
tained control over the asset, diverted some
of the income produced to another party,
and realized a benefit by doing so. Also
rejected is respondents’ suggestion that the
attorney-client relationship be treated as a
sort of business partnership or joint ven-
ture for tax purposes. In fact, that rela-
tionship is a quintessential principal-agent
relationship, for the client retains ultimate
dominion and control over the underlying
claim. The attorney can make tactical de-
cisions without consulting the client, but
the client still must determine whether to
settle or proceed to judgment and make,
as well, other criticaldecisions. The attor-
ney is an agent who is duty bound to act in
the principal’s interests, and so it is appro-
priate to treat the full recovery amount as
income to the principal. This rule applies
regardless of whether the attorney-client
contract or state law confers any special
rights or protections on the attorney, so
long as such protections do not alter the
relationship’s fundamental principal-agent
character. The Court declines to comment
on other theories proposed by respondents
and theiramici, which were not advanced
in earlier stages of the litigation or exam-
ined by the Courts of Appeals. Pp. 7–10.
(d) This Court need not address Banks’
contention that application of the anticipa-
tory assignment principle would be incon-
sistent with the purpose of statutory fee-
shifting provisions, such as those applica-
ble in his case brought under 42 U.S.C.
Secs. 1981, 1983, and 2000(e)et seq.He
settled his case, and the fee paid to his
attorney was calculated based solely on
the contingent-fee contract. There was no
court-ordered fee award or any indication
in his contract with his attorney or the set-
tlement that the contingent fee paid was in
lieu of statutory fees that might otherwise
have been recovered. Also, the American
Jobs Creation Act redresses the concern
*
Together with No. 03–907,Commissioner of Internal Revenue v. Banaitis, on certiorari to the United States Court of Appeals for the Ninth Circuit.
2005–15 I.R.B.850April 11, 2005

for many, perhaps most, claims governed
by fee-shifting statutes. P. 11.
No. 03–892, 345 F.3d 373; No.
03–907, 340 F.3d 1074, reversed and
remanded.
KENNEDY, J., delivered the opinion
of the Court, in which all other Members
joined, except REHNQUIST, C.J., who
took no part in the decision of the cases.
SUPREME COURT OF THE
UNITED STATES
No. 03-892
COMMISSIONER OF INTERNAL
REVENUE, PETITIONERv.
JOHN W. BANKS, II
ON WRIT OF CERTIORARI TO THE
UNITED STATES COURT
OF APPEALS FOR THE SIXTH
CIRCUIT
No. 03–907
COMMISSIONER OF INTERNAL
REVENUE, PETITIONERv.
SIGITAS J. BANAITIS
ON WRIT OF CERTIORARI TO THE
UNITED STATES COURT
OF APPEALS FOR THE NINTH
CIRCUIT
January 24, 2005
JUSTICE KENNEDY delivered the
opinion of the Court.
The question in these consolidated
cases is whether the portion of a money
judgment or settlement paid to a plaintiff’s
attorney under a contingent-fee agreement
is income to the plaintiff under the Internal
Revenue Code, 26 U.S.C. Sec. 1et seq.
(2000 ed. and Supp. I). The issue divides
the courts of appeals. In one of the instant
cases,Banks v. Commissioner, 345 F.3d
373 (2003), the Court of Appeals for the
Sixth Circuit held the contingent-fee por-
tion of a litigation recovery is not included
in the plaintiff’s gross income. The Courts
of Appeals for the Fifth and Eleventh Cir-
cuits also adhere to this view, relying on
the holding, over Judge Wisdom’s dissent,
inCotnam v. Commissioner, 263 F.2d
119, 125–126 (CA5 1959).Srivastava v.
Commissioner, 220 F.3d 353, 363–365
(CA5 2000);Foster v. United States,249
F.3d 1275, 1279–1280 (CA11 2001). In
the other case under review,Banaitis v.
Commissioner, 340 F.3d 1074 (2003), the
Court of Appeals for the Ninth Circuit
held that the portion of the recovery paid
to the attorney as a contingent fee is ex-
cluded from the plaintiff’s gross income
if state law gives the plaintiff’s attorney
a special property interest in the fee, but
not otherwise. Six Courts of Appeals have
held the entire litigation recovery, includ-
ingtheportionpaidtoanattorneyasa
contingent fee, is income to the plaintiff.
Some of these Courts of Appeals discuss
state law, but little of their analysis ap-
pears to turn on this factor.Raymond
v. United States, 355 F.3d 107, 113–116
(CA2 2004);Kenseth v. Commissioner,
259 F.3d 881, 883–884 (CA7 2001);
Baylin v. United States,43F.3d1451,
1454–1455 (CA Fed. 1995). Other Courts
of Appeals have been explicit that the fee
portion of the recovery is always income
to the plaintiff regardless of the nuances
of state law.O’Brien v. Commissioner,38
T.C. 707, 712 (1962), aff’d, 319 F.2d 532
(CA3 1963) (per curiam);Young v. Com-
missioner, 240 F.3d 369, 377–379 (CA4
2001);Hukkanen-Campbell v. Commis-
sioner, 274 F.3d 1312, 1313–1314 (CA10
2001). We granted certiorari to resolve the
conflict. 541 U.S. 958 (2004).
We hold that, as a general rule, when a
litigant’s recovery constitutes income, the
litigant’s income includes the portion of
the recovery paid to the attorney as a con-
tingent fee. We reverse the decisions of the
Courts of Appeals for the Sixth and Ninth
Circuits.
I
A.Commissioner v. Banks
In 1986, respondent John W. Banks, II,
was fired from his job as an educational
consultant with the California Department
of Education. He retained an attorney on a
contingent-fee basis and filed a civil suit
against the employer in a United States
District Court. The complaint alleged em-
ployment discrimination in violation of 42
U.S.C. Secs. 1981 and 1983, Title VII of
the Civil Rights Act of 1964, as amended,
42 U.S.C. Sec. 2000eet seq., and Cal.
Govt. Code Ann. Sec. 12965 (West
1986). The original complaint asserted
various additional claims under state law,
but Banks later abandoned these. After
trial commenced in 1990, the parties set-
tled for $464,000. Banks paid $150,000 of
this amount to his attorney pursuant to the
fee agreement.
Banks did not include any of the
$464,000 in settlement proceeds as gross
income in his 1990 federal income tax
return. In 1997 the Commissioner of In-
ternal Revenue issued Banks a notice of
deficiency for the 1990 tax year. The Tax
Court upheld the Commissioner’s deter-
mination, finding that all the settlement
proceeds, including the $150,000 Banks
had paid to his attorney, must be included
in Banks’ gross income.
The Court of Appeals for the Sixth Cir-
cuit reversed in part. 345 F.3d 373 (2003).
It agreed the net amount received by Banks
was included in gross income but not the
amount paid to the attorney. Relying on
its prior decision inEstate of Clarks v.
Commissioner,202 F.3d 854 (2000), the
court held the contingent-fee agreement
was not an anticipatory assignment of
Banks’ income because the litigation re-
covery was not already earned, vested, or
even relatively certain to be paid when
the contingent-fee contract was made. A
contingent-fee arrangement, the court rea-
soned, is more like a partial assignment
of income-producing property than an as-
signment of income. The attorney is not
the mere beneficiary of the client’s largess,
but rather earns his fee through skill and
diligence. 345 F.3d, at 384–385 (quoting
Estate of Clarks,supra, at 857–858). This
reasoning, the court held, applies whether
or not state law grants the attorney any
special property interest (e.g., a superior
lien) in part of the judgment or settlement
proceeds.
B.Commissioner v. Banaitis
After leaving his job as a vice president
and loan officer at the Bank of Califor-
nia in 1987, Sigitas J. Banaitis retained
an attorney on a contingent-fee basis and
brought suit in Oregon state court against
the Bank of California and its successor
in ownership, the Mitsubishi Bank. The
complaint alleged that Mitsubishi Bank
willfully interfered with Banaitis’ em-
ployment contract, and that the Bank of
California attempted to induce Banaitis to
breach his fiduciary duties to customers
April 11, 20058512005–15 I.R.B.

and discharged him when he refused. The
jury awarded Banaitis compensatory and
punitive damages. After resolution of all
appeals and post-trial motions, the parties
settled. The defendants paid $4,864,547
to Banaitis; and, following the formula set
forth in the contingent-fee contract, the
defendants paid an additional $3,864,012
directly to Banaitis’ attorney.
Banaitis did not include the amount
paid to his attorney in gross income on his
federal income tax return, and the Com-
missioner issued a notice of deficiency.
The Tax Court upheld the Commissioner’s
determination, but the Court of Appeals
for the Ninth Circuit reversed. 340 F.3d
1074 (2003). In contrast to the Court of
Appeals for the Sixth Circuit, theBanaitis
court viewed state law as pivotal. Where
state law confers on the attorney no spe-
cial property rights in his fee, the court
said, the whole amount of the judgment
or settlement ordinarily is included in the
plaintiff’s gross income.Id., at 1081.
Oregon state law, however, like the law
of some other States, grants attorneys a
superior lien in the contingent-fee portion
of any recovery. As a result, the court
held, contingent-fee agreements under
Oregon law operate not as an anticipatory
assignment of the client’s income but as a
partial transfer to the attorney of some of
the client’s property in the lawsuit.
II
To clarify why the issue here is of any
consequence for tax purposes, two prelim-
inary observations are useful. The first
concerns the general issue of deductibil-
ity. For the tax years in question the le-
gal expenses in these cases could have
been taken as miscellaneous itemized de-
ductions subject to the ordinary require-
ments, 26 U.S.C. Secs. 67–68 (2000 ed.
and Supp. I), but doing so would have
been of no help to respondents because of
the operation of the Alternative Minimum
Tax (AMT). For noncorporate individual
taxpayers, the AMT establishes a tax lia-
bility floor equal to 26 percent of the tax-
payer’s “alternative minimum taxable in-
come” (minus specified exemptions) up to
$175,000, plus 28 percent of alternative
minimum taxable income over $175,000.
Secs. 55(a), (b) (2000 ed.). Alterna-
tive minimum taxable income, unlike or-
dinary gross income, does not allow any
miscellaneous itemized deductions. Secs.
56(b)(1)(A)(i).
Second, after these cases arose Con-
gress enacted the American Jobs Creation
Act of 2004, 118 Stat. 1418. Section 703
of the Act amended the Code by adding
Sec. 62(a)(19).Id., at 1546. The amend-
ment allows a taxpayer, in computing
adjusted gross income, to deduct “attorney
fees and court costs paid by, or on behalf
of, the taxpayer in connection with any ac-
tion involving a claim of unlawful discrim-
ination.”Ibid. The Act defines “unlawful
discrimination” to include a number of
specific federal statutes, Secs. 62(e)(1) to
(16), any federal whistle-blower statute,
Sec. 62(e)(17), and any federal, state, or
local law “providing for the enforcement
of civil rights” or “regulating any aspect
of the employment relationship . . . or
prohibiting the discharge of an employee,
the discrimination against an employee,
or any other form of retaliation or reprisal
against an employee for asserting rights
or taking other actions permitted by law,”
Sec. 62(e)(18).Id., at 1547–1548. These
deductions are permissible even when the
AMT applies. Had the Act been in force
for the transactions now under review,
these cases likely would not have arisen.
The Act is not retroactive, however, so
while it may cover future taxpayers in
respondents’ position, it does not pertain
here.
III
The Internal Revenue Code defines
“gross income” for federal tax purposes
as “all income from whatever source
derived.” 26 U.S.C. Sec. 61(a). The def-
inition extends broadly to all economic
gains not otherwise exempted.Commis-
sioner v. Glenshaw Glass Co.,348U.S.
426, 429–430 (1955);Commissioner v.
Jacobson,336 U.S. 28, 49 (1949). A
taxpayer cannot exclude an economic
gain from gross income by assigning the
gain in advance to another party.Lucas
v. Earl, 281 U.S. 111 (1930);Commis-
sioner v. Sunnen,333 U.S. 591, 604
(1948);Helvering v. Horst, 311 U.S. 112,
116–117 (1940). The rationale for the
so-called anticipatory assignment of in-
come doctrine is the principle that gains
should be taxed “to those who earn them,”
Lucas, supra, at 114, a maxim we have
called “the first principle of income tax-
ation,”Commissioner v. Culbertson,337
U.S. 733, 739–740 (1949). The antici-
patory assignment doctrine is meant to
prevent taxpayers from avoiding taxation
through “arrangements and contracts how-
ever skillfully devised to prevent [income]
when paid from vesting even for a second
in the man who earned it.”Lucas,281
U.S., at 115. The rule is preventative and
motivated by administrative as well as
substantive concerns, so we do not inquire
whether any particular assignment has a
discernible tax avoidance purpose. As
Lucasexplained, “no distinction can be
taken according to the motives leading to
the arrangement by which the fruits are
attributed to a different tree from that on
whichtheygrew.”Ibid.
Respondents argue that the anticipatory
assignment doctrine is a judge-made an-
tifraud rule with no relevance to contin-
gent-fee contracts of the sort at issue here.
The Commissioner maintains that a con-
tingent-fee agreement should be viewed as
an anticipatory assignment to the attorney
of a portion of the client’s income from
any litigation recovery. We agree with the
Commissioner.
In an ordinary case, attribution of in-
come is resolved by asking whether a tax-
payer exercises complete dominion over
the income in question.Glenshaw Glass
Co., supra, at 431; see alsoCommissioner
v. Indianapolis Power & Light Co., 493
U.S. 203, 209 (1990);Commissioner v.
First Security Bank of Utah,N.A.,405U.S.
394, 403 (1972). In the context of antici-
patory assignments, however, the assignor
often does not have dominion over the in-
come at the moment of receipt. In that
instance, the question becomes whether
the assignor retains dominion over the in-
come-generating asset, because the tax-
payer “who owns or controls the source
of the income, also controls the disposi-
tion of that which he could have received
himself and diverts the payment from him-
self to others as the means of procuring
the satisfaction of his wants.”Horst, supra,
at 116–117. See alsoLucas, supra,at
114–115;Helvering v. Eubank,311U.S.
122, 124–125 (1940);Sunnen, supra,at
604. Looking to control over the income-
generating asset, then, preserves the prin-
ciple that income should be taxed to the
party who earns the income and enjoys the
consequent benefits.
2005–15 I.R.B.852April 11, 2005

In the case of a litigation recovery, the
income-generating asset is the cause of ac-
tion that derives from the plaintiff’s legal
injury. The plaintiff retains dominion over
this asset throughout the litigation. We do
not understand respondents to argue oth-
erwise. Rather, respondents advance two
counterarguments. First, they say that,
in contrast to the bond coupons assigned
inHorst, the value of a legal claim is
speculative at the moment of assignment,
and may be worth nothing at all. Second,
respondents insist that the claimant’s legal
injury is not the only source of the ultimate
recovery. The attorney, according to re-
spondents, also contributes income-gener-
ating assets—effort and expertise—with-
out which the claimant likely could not
prevail. On these premises respondents
urge us to treat a contingent-fee agreement
as establishing, for tax purposes, some-
thing like a joint venture or partnership
in which the client and attorney combine
their respective assets—the client’s claim
and the attorney’s skill—and apportion
any resulting profits.
We reject respondents’ arguments.
Though the value of the plaintiff’s claim
may be speculative at the moment the
fee agreement is signed, the anticipatory
assignment doctrine is not limited to in-
stances when the precise dollar value of
the assigned income is known in advance.
Lucas, supra; United States v. Bayse,410
U.S. 441, 445, 450–452 (1973). Though
Horstinvolved an anticipatory assignment
of a predetermined sum to be paid on a
specific date, the holding in that case did
not depend on ascertaining a liquidated
amount at the time of assignment. In the
cases before us, as inHorst, the taxpayer
retained control over the income-gener-
ating asset, diverted some of the income
produced to another party, and realized
a benefit by doing so. As Judge Wesley
correctly concluded in a recent case, the
rationale ofHorstapplies fully to a con-
tingent-fee contract.Raymond v. United
States, 355 F.3d, at 115–116. That the
amount of income the asset would pro-
duce was uncertain at the moment of
assignment is of no consequence.
We further reject the suggestion to treat
the attorney-client relationship as a sort of
business partnership or joint venture for
tax purposes. The relationship between
client and attorney, regardless of the vari-
ations in particular compensation agree-
ments or the amount of skill and effort
the attorney contributes, is a quintessential
principal-agent relationship. Restatement
(Second) of Agency Sec. 1, Comment
e(1957) (hereinafter Restatement); ABA
Model Rules of Professional Conduct Rule
1.3, Comments 1, 1.7 1 (2002). The client
may rely on the attorney’s expertise and
special skills to achieve a result the client
could not achieve alone. That, however, is
true of most principal-agent relationships,
and it does not alter the fact that the client
retains ultimate dominion and control over
the underlying claim. The control is evi-
dent when it is noted that, although the at-
torney can make tactical decisions without
consulting the client, the plaintiff still must
determine whether to settle or proceed to
judgment and make, as well, other critical
decisions. Even where the attorney exer-
cises independent judgment without super-
vision by, or consultation with, the client,
the attorney, as an agent, is obligated to act
solely on behalf of, and for the exclusive
benefit of, the client-principal, rather than
for the benefit of the attorney or any other
party. Restatement Secs. 13, 39, 387.
The attorney is an agent who is duty
bound to act only in the interests of the
principal, and so it is appropriate to treat
the full amount of the recovery as in-
come to the principal. In this respect
Judge Posner’s observation is apt: “[T]he
contingent-fee lawyer [is not] a joint
owner of his client’s claim in the le-
gal sense any more than the commission
salesman is a joint owner of his employer’s
accounts receivable.Kenseth, 259 F.3d,
at 883. In both cases a principal relies
on an agent to realize an economic gain,
and the gain realized by the agent’s efforts
is income to the principal. The portion
paid to the agent may be deductible, but
absent some other provision of law it is
not excludable from the principal’s gross
income.
This rule applies whether or not the at-
torney-client contract or state law confers
any special rights or protections on the at-
torney, so long as these protections do not
alter the fundamental principal-agent char-
acter of the relationship. Cf. Restatement
Sec. 13, Commentb, and Sec. 14G, Com-
menta(an agency relationship is created
where a principal assigns a chose in ac-
tion to an assignee for collection and grants
the assignee a security interest in the claim
against the assignor’s debtor in order to
compensate the assignee for his collection
efforts). State laws vary with respect to the
strength of an attorney’s security interest
in a contingent fee and the remedies avail-
able to an attorney should the client dis-
charge or attempt to defraud the attorney.
No state laws of which we are aware, how-
ever, even those that purport to give attor-
neys an “ownership” interest in their fees,
e.g., 340 F.3d, at 1082–1083 (discussing
Oregon law);Cotnam, 263 F.2d, at 125
(discussing Alabama law), convert the at-
torney from an agent to a partner.
Respondents and theiramicipropose
other theories to exclude fees from income
or permit deductibility. These suggestions
include: (1) The contingent-fee agreement
establishes a Subchapter K partnership
under 26 U.S.C. Secs. 702 704, and
761, Brief for Respondent Banaitis in
No. 03–907, p. 5–21; (2) litigation re-
coveries are proceeds from disposition of
property, so the attorney’s fee should be
subtracted as a capital expense pursuant
to Secs. 1001, 1012, and 1016, Brief for
Association of Trial Lawyers of America
asAmicus Curiae23–28, Brief for Charles
Davenport asAmicus Curiae3–13; and
(3) the fees are deductible reimbursed
employee business expenses under Sec.
62(a)(2)(A) (2000 ed. and Supp. I), Brief
for Stephen Cohen asAmicus Curiae.
These arguments, it appears, are being
presented for the first time to this Court.
We are especially reluctant to entertain
novel propositions of law with broad im-
plications for the tax system that were not
advanced in earlier stages of the litiga-
tion and not examined by the Courts of
Appeals. We decline comment on these
supplementary theories. In addition, we
do not reach the instance where a relator
pursues a claim on behalf of the United
States. Brief for Taxpayers Against Fraud
EducationFundasAmicus Curiae 10–20.
IV
The foregoing suffices to dispose of
Banaitis’ case. Banks’ case, however,
involves a further consideration. Banks
brought his claims under federal statutes
that authorize fee awards to prevailing
plaintiffs’ attorneys. He contends that
application of the anticipatory assignment
principle would be inconsistent with the
purpose of statutory fee shifting provi-
sions. SeeVenegas v. Mitchell, 495 U.S.
April 11, 20058532005–15 I.R.B.

82, 86 (1990) (observing that statutory
fees enable “plaintiffs to employ reason-
ably competent lawyers without cost to
themselves if they prevail”). In the federal
system statutory fees are typically awarded
by the court under the lodestar approach,
Hensley v. Eckerhart, 461 U.S. 424, 433
(1983), and the plaintiff usually has little
control over the amount awarded. Some-
times, as when the plaintiff seeks only
injunctive relief, or when the statute caps
plaintiffs’ recoveries, or when for other
reasons damages are substantially less than
attorney’s fees, court-awarded attorney’s
fees can exceed a plaintiff’s monetary re-
covery. See,e.g.,Riverside v. Rivera,477
U.S. 561, 564–565 (1986) (compensatory
and punitive damages of $33,350; attor-
ney’s fee award of $245,456.25). Treating
the fee award as income to the plaintiff in
such cases, it is argued, can lead to the per-
verse result that the plaintiff loses money
by winning the suit. Furthermore, it is
urged that treating statutory fee awards
as income to plaintiffs would undermine
the effectiveness of fee-shifting statutes in
deputizing plaintiffs and their lawyers to
act as private attorneys general.
We need not address these claims. After
Banks settled his case, the fee paid to his
attorney was calculated solely on the ba-
sis of the private contingent-fee contract.
There was no court-ordered fee award, nor
was there any indication in Banks’ con-
tract with his attorney, or in the settlement
agreement with the defendant, that the con-
tingent fee paid to Banks’ attorney was in
lieu of statutory fees Banks might other-
wise have been entitled to recover. Also,
the amendment added by the American
Jobs Creation Act redresses the concern
for many, perhaps most, claims governed
by fee-shifting statutes.
***
For the reasons stated, the judgments
of the Courts of Appeals for the Sixth and
Ninth Circuits are reversed, and the cases
are remanded for further proceedings con-
sistent with this opinion.
It is so ordered.
THE CHIEF JUSTICE took no part in the
decision of these cases.
Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2005. See Rev. Rul. 2005-23, page 864.
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. 9191
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: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains fi-
nal regulations relating to an election that
may be made by noncorporate taxpayers to
treat qualified dividend income as invest-
ment income for purposes of calculating
the deduction for investment interest. The
regulations reflect changes to the law made
by the Jobs and Growth Tax Relief Rec-
onciliation Act of 2003. The regulations
affect taxpayers making the election under
section 163(d)(4)(B) to treat qualified div-
idend income as investment income.
DATES:Effective Date: These regulations
are effective March 18, 2005.
Applicability Dates: For dates of appli-
cability, see §1.163(d)–1(d).
FOR FURTHER INFORMATION
CONTACT: Amy Pfalzgraf, (202)
622–4950 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to
26 CFR part 1 under section 163(d) of the
Internal Revenue Code (Code). On Au-
gust 5, 2004, temporary regulations (T.D.
9147, 2004–37 I.R.B. 461) were published
in theFederal Register(69 FR 47364)
relating to an election that may be made by
noncorporate taxpayers to treat qualified
dividend income as investment income for
purposes of calculating the deduction for
investment interest. A notice of proposed
rulemaking (REG–171386–03, 2004–37
I.R.B. 477) cross-referencing the tempo-
rary regulations also was published in the
Federal Register(69 FR 47395) on Au-
gust 5, 2004. No comments in response
to the notice of proposed rulemaking or
requests to speak at a public hearing were
received, and no hearing was held. This
Treasury decision adopts the proposed
regulations and removes the temporary
regulations.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations, and
because the regulations do not impose a
collection of information on small entities,
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to sec-
tion 7805(f) of the Code, the proposed reg-
ulations preceding 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 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.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
2005–15 I.R.B.854April 11, 2005

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 to
read as follows:
§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)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 apply beginning December
12, 1996. The rules set forth in this sec-
tion regarding the qualified dividend in-
come election apply to any taxable year be-
ginning after December 31, 2002, but be-
fore January 1, 2009.
Par. 3. Section 1.163–1T is removed.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved March 10, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on March 17,
2005, 8:45 a.m., and published in the issue of the Federal
Register for March 18, 2005, 70 F.R. 13100)
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term rates
are set forth for the month of April 2005. See Rev.
Rul. 2005-23, page 864.
Section 382.—Limitation
on Net Operating Loss
Carryforwards and Certain
Built-In Losses Following
Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of April 2005. See Rev. Rul.
2005-23, page 864.
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2005. See Rev. Rul. 2005-23, page 864.
Section 467.—Certain
Payments for the Use of
Property or Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2005. See Rev. Rul. 2005-23, page 864.
Section 468.—Special
Rules for Mining and Solid
Waste Reclamation and
Closing Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2005. See Rev. Rul. 2005-23, page 864.
Section 482.—Allocation
of Income and Deductions
Among Taxpayers
Federal short-term, mid-term, and long-te
rm rates
are set forth for the month of April 2005. See
Rev.
Rul. 2005-23, page 864.
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2005. See Rev. Rul. 2005-23, page 864.
Section 642.—Special
Rules for Credits and
Deductions
Federal short-term, mid-term, and long-term rates
are set forth for the month of April 2005. See Rev.
Rul. 2005-23, page 864.
Section 664.—Charitable
Remainder Trusts
26 CFR 1.664–1: Charitable remainder trusts.
T.D. 9190
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Charitable Remainder Trusts;
Application of Ordering Rule
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations on the ordering rules of sec-
tion 664(b) of the Internal Revenue Code
for characterizing distributions from char-
itable remainder trusts (CRTs). The fi-
April 11, 20058552005–15 I.R.B.

nal regulations reflect changes made to in-
come tax rates, including the rates applica-
ble to capital gains and certain dividends,
by the Taxpayer Relief Act of 1997, the In-
ternal Revenue Service Restructuring and
Reform Act of 1998, and the Jobs and
Growth Tax Relief Reconciliation Act of
2003. The final regulations provide guid-
ance needed to comply with these changes
and affect CRTs and their beneficiaries.
DATES:Effective Date: These regulations
are effective on March 16, 2005.
Applicability Dates: For dates of appli-
cability, see §1.664–1(d)(1)(ix).
FOR FURTHER INFORMATION
CONTACT: Theresa M. Melchiorre, (202)
622–7830 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to the Income Tax Regulations (26 CFR
part 1) under section 664(b) of the Internal
Revenue Code. On November 20, 2003,
the Treasury Department and the IRS pub-
lished a notice of proposed rulemaking
(REG–110896–98, 2003–2 C.B. 1226) in
theFederal Register(68 FR 65419). The
public hearing scheduled for March 9,
2004, was cancelled because no requests
to speak were received. Several written
comments responding to the notice of pro-
posed rulemaking were received. After
consideration of the written comments,
the proposed regulations are adopted as
revised by this Treasury decision. The
revisions and a summary of the comments
are discussed below.
The proposed regulations reflected
changes made to income tax rates, includ-
ing the rates applicable to capital gains and
certain dividends, by the Taxpayer Relief
Act of 1997 (TRA), Public Law 105–34
(111 Stat. 788), and the Jobs and Growth
Tax Relief Reconciliation Act of 2003
(JGTRRA), Public Law 108–27 (117 Stat.
752). These changes affect the ordering
rules of section 664(b) for characterizing
distributions from CRTs.
Prior to the TRA, long-term capital
gains were generally subject to the same
Federal income tax rate. The TRA pro-
vided, however, that gain from certain
types of long-term capital assets would
be subject to different Federal income tax
rates. Accordingly, after May 6, 1997,
a CRT could have at least three classes
of long-term capital gains and losses: a
class for 28-percent gain (gains and losses
from collectibles and section 1202 gains);
a class for unrecaptured section 1250 gain
(long-term gains not treated as ordinary
income that would be treated as ordinary
income if section 1250(b)(1) included all
depreciation); and a class for all other
long-term capital gain. In addition, the
TRA provided that qualified 5-year gain
(as defined in section 1(h)(9) prior to
amendment by the JGTRRA) would be
subject to reduced capital gains tax rates
under certain circumstances for certain
taxpayers. For taxpayers subject to a
10-percent capital gains tax rate, qualified
5-year gain would be taxed at an 8-percent
capital gains tax rate effective for taxable
years beginning after December 31, 2000.
For taxpayers subject to a 20-percent cap-
ital gains tax rate, qualified 5-year gain
would be taxed at an 18-percent capital
gains tax rate provided the holding period
for the property from which the gain was
derived began after December 31, 2000.
As a result, a CRT could also have a class
for qualified 5-year gain.
Prior to the JGTRRA, a CRT’s ordinary
income was generally subject to the same
Federal income tax rate. The JGTRRA
provided, however, that qualified divi-
dend income as defined in section 1(h)(11)
would be subject to the Federal income
tax rate applicable to the class for all other
long-term capital gain. As a result, after
December 31, 2002, a CRT could have
a qualified dividend income class that
would be subject to a different Federal
income tax rate than that applicable to the
CRT’s other types of ordinary income.
In addition, the JGTRRA provided that
qualified 5-year gain would cease to exist
after May 5, 2003, but that it would return
after December 31, 2008.
In response to the changes made by
the TRA and the technical corrections
to the TRA made by the Internal Rev-
enue Service Restructuring and Reform
Act of 1998, Public Law 105–206 (112
Stat. 685), the IRS issued guidance on the
treatment of capital gains under section
664(b)(2) in Notice 98–20, 1998–1 C.B.
776, as modified by Notice 99–17, 1999–1
C.B. 871. The proposed regulations incor-
porated the guidance provided in Notice
98–20 and Notice 99–17. In addition, the
proposed regulations provided additional
guidance on the treatment of qualified
dividend income under section 664(b)(1)
and the treatment of a class of income
that temporarily ceases to exist, like the
qualified 5-year gain class.
Explanation of Provisions
The proposed regulations provided
that trusts must maintain separate classes
within a category of income when two
classes are only temporarily subject to the
same tax rate (for example, if the current
tax rate applicable to one class sunsets
inafutureyear). Inthepreambletothe
proposed regulations, comments were
requested on the degree of administra-
tive burden and potential tax benefit or
detriment of this requirement. Only one
comment was received in response to this
request. The commentator pointed out that
maintaining a class during a temporary pe-
riod of suspension could be favorable to
taxpayers in one situation and unfavorable
in another. For example, maintaining the
qualified 5-year gain class during a tempo-
rary period of suspension would be advan-
tageous because when the class is again in
existence, gain distributed from the class
probably would be taxed at a rate lower
than the rates applicable to other classes of
long-term capital gain. On the other hand,
if the 28-percent long-term capital gain
class is taxed at 15 percent during a tem-
porary period, gain distributed from that
class after the expiration of that temporary
period is likely to be taxed at a rate higher
than the rates applicable to other classes
of long-term capital gain.
The IRS and Treasury Department con-
tinue to believe that it is appropriate for
CRTs to maintain separate classes for in-
come only temporarily taxed at the same
rate, and no comment received indicated
that this requirement would be unduly bur-
densome. Therefore, this requirement re-
mains unchanged in the final regulations.
The proposed regulations provided that,
to be eligible for inclusion in the class of
qualified dividend income, dividends must
meet the definition of section 1(h)(11) and
must be received by the trust after De-
cember 31, 2002. Several commentators
suggested that the final regulations should
provide that undistributed dividends re-
ceived by a CRT prior to January 1, 2003,
that would otherwise meet the definition of
2005–15 I.R.B.856April 11, 2005

qualified dividends under section 1(h)(11),
be treated as qualified dividends.
Subsequent to the issuance of the pro-
posed regulations, a technical correction
was made to the JGTRRA by the Work-
ing Families Tax Relief Act of 2004, Pub-
lic Law 108–311 (118 Stat. 1166), to pro-
vide that dividends received by a trust on
or before December 31, 2002, shall not be
treated as qualified dividend income as de-
fined in section 1(h)(11). Accordingly, this
suggestion has not been adopted in the fi-
nal regulations.
The proposed regulations provided
that, in netting capital gains and losses, a
net short-term capital loss is first netted
against the net long-term capital gain in
each class before the long-term capital
gains and losses in each class are netted
against each other. One commentator
suggested that this netting rule be revised
to provide that the gains and losses of
the long-term capital gain classes be net-
ted prior to netting short-term capital loss
against any class of long-term capital gain.
The IRS and Treasury Department be-
lieve that the netting rules for CRTs should
be consistent with the netting rules appli-
cable generally to other noncorporate tax-
payers. Accordingly, the final regulations
adopt this suggested change.
The proposed regulations provided that
items of income within the ordinary in-
come and capital gains categories are as-
signed to different classes based on the
Federal income tax rate applicable to each
type of income in thatcategory in the year
the items are required to be taken into ac-
count by the CRT. One commentator sug-
gested that the assignment of items of in-
come to different classes in the year the
items are required to be taken into account
by the CRT should be based on the Fed-
eral income tax rate that is likely to apply
to that item in the hands of the recipient
(for example, depending on the recipient’s
marginal income tax rate bracket) in the
year in which the item is distributed.
The final regulations do not adopt this
change. It is not feasible in many instances
for trustees to determine the tax bracket of
beneficiaries. The IRS and Treasury De-
partment believe that the assignment of an
item to a particular class should be based
upon the tax rate applicable to each class
when the item is received by the CRT, and
not the various tax rates applicable to the
classes at the time of a distribution to the
beneficiary.
The proposed regulations provided that
the determination of the tax character of
amounts distributed by a CRT shall be
made as of the end of the taxable year of
the CRT. One commentator recommended
that the language in the proposed regula-
tions be reworded to make it clear that this
rule applies to all distributions made by the
CRT to recipients throughout the calendar
year. In response to the comment, the sec-
ond sentence in §1.664–1(d)(1)(ii)(a)isre-
vised in the final regulations to read, “[t]he
determination of the character of amounts
distributed or deemed distributed at any
time during the taxable year of the trust
shall be made as of the end of that taxable
year.”
The proposed regulations provided that
the annuity or unitrust recipient is taxed
on the distribution from the CRT based on
the tax rates applicable in the year of the
distribution to the classes of income that
are deemed distributed from the trust. One
commentator suggested that the language
in the proposed regulations be reworded
to make it clear that the tax rates appli-
cable to a distribution or deemed distribu-
tion from a CRT to a recipient are the tax
rates applicable to the classes of income
from which the distribution is derived in
the year of distribution, and not the tax
rates applicable to the income in the year
it is received by the CRT. This suggestion
has been adopted. In the final regulations,
the third sentence in §1.664–1(d)(1)(ii)(a)
is revised to read as follows:
Thetaxrateorratestobeusedincom-
puting the recipient’s tax on the distri-
bution shall be the tax rates that are ap-
plicable, in the year in which the dis-
tributionisrequiredtobemade,tothe
classes of income deemed to make up
that distribution, and not the tax rates
that are applicable to those classes of in-
come in the year the income is received
by the trust.
One commentator suggested that a
cross-reference to §1.664–1(d)(4) should
be made following the above sentence.
This suggestion has not been adopted be-
cause the IRS and Treasury Department
do not believe that a cross reference is
needed. Section 1.664–1(d)(1)(ii)(a)con-
firms that a class of income will be taxed
to the beneficiary at the tax rate applicable
to that class in the year the distribution
is made. Section 1.664–1(d)(4) identifies
the year of the distribution.
One commentator proposed that the
final regulations specifically address the
treatment of municipal bond income and
the effect of the alternative minimum tax
(AMT) provisions and section 469 on
CRT income. The final regulations do not
address these issues, because the IRS and
Treasury Department believe they are be-
yond the scope of these regulations. These
regulations are intended to address only
the income tax rates applicable to classes
of income and the order in which those
classes of income are to be applied to de-
termine the character of a distribution in
the hands of a recipient. The issues raised
by the commentator are more appropri-
ately addressed in separate guidance.
One commentator requested clarifica-
tion of whether the ordering rules in the
proposed regulations apply to a CRT that
has lost its tax-exempt status under section
664(c) in the year income is distributed.
Section 1.664–1(d)(1)(ii) of the proposed
regulations provides that the categories
and classes of income determined under
§1.664–1(d)(1)(i) are used to determine
the character of an annuity or unitrust
distribution from the trust in the hands of
the recipient, irrespective of whether the
trust is exempt from taxation under section
664(c) for the year of the distribution. The
final regulations retain this provision.
One commentator recommended that
the IRS provide a detailed worksheet that
would include all of the possible classes
of income a CRT could have so that the
trustees can track a CRT’s income from
year to year. Because the types of income
that each CRT may have can vary widely,
the IRS and Treasury Department have
determined that such a worksheet is not
administratively feasible at this time.
One commentator recommended that a
provision similar to §1.664–1(d)(4)(ii) be
added to the final regulations to permit
the trustee to make corrections when the
trustee has made incorrect distributions as
a result of mistakes in fiduciary accounting
practices, suggesting that such a provision
would allow the CRT to receive the benefit
of any correction in the year during which
the correction is made. The IRS and Trea-
sury Department believe that the proper
method to remedy such errors is the filing
of amended returns, rather than a current
year adjustment and, therefore, such a pro-
April 11, 20058572005–15 I.R.B.

vision is not included in the final regula-
tions.
One commentator requested that exam-
ples addressing the following situations be
provided in the final regulations:
Situation 1. The end result of a
short-term capital loss and a combina-
tion of long-term capital gains and losses
that net to a long-term capital loss;
Situation 2. The end result when a class
of income has a net-loss amount that is
carried forward without affecting the tax
character of distributions;
Situation 3. The applicability of the
passive loss rules under section 469 to the
ordering rules of section 664(b);
Situation 4. The applicability of the al-
ternative minimum tax (AMT) provisions
under section 55 to the ordering rules un-
der section 664(b); and
Situation 5. The treatment of the dis-
tribution of qualified 5-year gain between
January 1, 2004, and December 31, 2008.
In response to this request, Examples 4
and 5 have been added to the final regu-
lations. Example 4 addresses situations 1
and 2. Example 5 addresses situation 5.
Examples will not be added to address sit-
uations 3 and 4 because they involve issues
beyond the scope of these final regulations.
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 and,
because these regulations do not impose
on small entities a collection of informa-
tion requirement, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Inter-
nal Revenue Code, the notice of proposed
rulemaking preceding this regulation was
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
ness.
Drafting Information
The principal author of these regula-
tionsisTheresaM.Melchiorre,Officeof
Chief Counsel, IRS. Other personnel from
the IRS and Treasury Department partici-
pated in their development.
*****
Adoption of A
mendments to the
Regulation
s
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority for part 1
continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.664–1 is amended as
follows:
1. Paragraph (d)(1) is revised.
2. Paragraph (d)(2) is amended by:
a. Removing the language “or to cor-
pus (determined under subparagraph (1)(i)
of this paragraph)” in the first sentence
and adding “(determined under paragraph
(d)(1)(i)(a) of this section) or to corpus” in
its place.
b. Removing the language “subpara-
graph (1)(i)(c) of this paragraph” from
the fifth sentence and adding “paragraph
(d)(1)(i)(a)(3) of this section” in its place.
c. Removing the language “or to cor-
pus in the categories described in subpara-
graph (1) of this paragraph” from the last
sentence and adding “described in para-
graph (d)(1)(i)(a)ofthissectionortocor-
pus” in its place.
3. Paragraph (e)(1) is amended by re-
moving the language “paragraph (d)(1)”
from the first sentence and adding “para-
graph (d)(1)(i)(a)” in its place.
The revision reads as follows:
§1.664–1 Charitable remainder trusts.
*****
(d)Treatment of annual distributions
to recipients—(1)Character of distribu-
tions—(i)Assignment of income to cate-
gories and classes at the trust level.(a)A
trust’s income, including income includi-
ble in gross income and other income, is
assigned to one of three categories in the
year in which it is required to be taken
into account by the trust. These categories
are—
(1) Gross income, other than gains and
amounts treated as gains from the sale or
other disposition of capital assets (referred
to as the ordinary income category);
(2) Gains and amounts treated as gains
from the sale or other disposition of capital
assets (referred to as the capital gains cat-
egory); and
(3) Other income (including income ex-
cluded under part III, subchapter B, chap-
ter 1, subtitle A of the Internal Revenue
Code).
(b) Items within the ordinary income
and capital gains categories are assigned to
different classes based on the Federal in-
come tax rate applicable to each type of in-
come in that category in the year the items
are required to be taken into account by the
trust. For example, for a trust with a tax-
able year ending December 31, 2004, the
ordinary income category may include a
class of qualified dividend income as de-
finedinsection1(h)(11)andaclassof
all other ordinary income, and the cap-
ital gains category may include separate
classes for short-term and long-term cap-
ital gains and losses, such as a short-term
capital gain class, a 28-percent long-term
capital gain class (gains and losses from
collectibles and section 1202 gains), an un-
recaptured section 1250 long-term capital
gain class (long-term gains not treated as
ordinary income that would be treated as
ordinary income if section 1250(b)(1) in-
cluded all depreciation), a qualified 5-year
long-term capital gain class as defined in
section 1(h)(9) prior to amendment by the
Jobs and Growth Tax Relief Reconcilia-
tion Act of 2003 (JGTRRA), Public Law
108–27 (117 Stat. 752), and an all other
long-term capital gain class. After items
are assigned to a class, the tax rates may
change so that items in two or more classes
would be taxed at the same rate if dis-
tributed to the recipient during a particu-
lar year. If the changes to the tax rates
are permanent, the undistributed items in
those classes are combined into one class.
If, however, the changes to the tax rates are
only temporary (for example, the new rate
for one class will sunset in a future year),
the classes are kept separate.
(ii)Order of distributions.(a) The cat-
egories and classes of income (determined
under paragraph (d)(1)(i) of this section)
are used to determine the character of an
annuity or unitrust distribution from the
trust in the hands of the recipient irre-
spective of whether the trust is exempt
from taxation under section 664(c) for the
year of the distribution. The determination
of the character of amounts distributed or
2005–15 I.R.B.858April 11, 2005

deemed distributed at any time during the
taxableyearofthetrustshallbemadeas
of the end of that taxable year. The tax
rate or rates to be used in computing the
recipient’s tax on the distribution shall be
the tax rates that are applicable, in the year
in which the distribution is required to be
made, to the classes of income deemed to
make up that distribution, and not the tax
rates that are applicable to those classes of
income in the year the income is received
by the trust. The character of the distri-
bution in the hands of the annuity or uni-
trust recipient is determined by treating the
distribution as being made from each cate-
gory in the following order:
(1) First, from ordinary income to the
extent of the sum of the trust’s ordinary
income for the taxable year and its undis-
tributed ordinary income for prior years.
(2) Second, from capital gain to the ex-
tent of the trust’s capital gains determined
under paragraph (d)(1)(iv) of this section.
(3) Third, from other income to the ex-
tent of the sum of the trust’s other income
for the taxable year and its undistributed
other income for prior years.
(4) Finally, from trust corpus (with cor-
pus defined for this purpose as the net fair
market value of the trust assets less the to-
tal undistributed income (but not loss) in
paragraphs (d)(1)(i)(a)(1) through (3)of
this section).
(b) If the trust has different classes of in-
come in the ordinary income category, the
distribution from thatcategory is treated as
being made from each class, in turn, un-
til exhaustion of the class, beginning with
the class subject to the highest Federal in-
come tax rate and ending with the class
subject to the lowest Federal income tax
rate. If the trust has different classes of
net gain in the capital gains category, the
distribution from thatcategory is treated as
being made first from the short-term cap-
ital gain class and then from each class of
long-term capital gain, in turn, until ex-
haustion of the class, beginning with the
class subject to the highest Federal income
tax rate and ending with the class subject
to the lowest rate. If two or more classes
within the same category are subject to the
same current tax rate, but at least one of
those classes will be subject to a different
tax rate in a future year (for example, if
the current rate sunsets), the order of that
class in relation to other classes in the cat-
egory with the same current tax rate is de-
termined based on the future rate or rates
applicable to those classes. Within each
category, if there is more than one type of
income in a class, amounts treated as dis-
tributed from that class are to be treated as
consisting of the same proportion of each
type of income as the total of the current
and undistributed income of that type bears
to the total of the current and undistributed
income of all types of income included in
that class. For example, if rental income
and interest income are subject to the same
current and future Federal income tax rate
and, therefore, are in the same class, a
distribution from that class will be treated
as consisting of a proportional amount of
rental income and interest income.
(iii)Treatmentoflossesatthetrust
level—(a)Ordinary income category.A
net ordinary loss for the current year is
first used to reduce undistributed ordinary
income for prior years that is assigned to
the same class as the loss. Any excess
loss is then used to reduce the current and
undistributed ordinary income from other
classes, in turn, beginning with the class
subject to the highest Federal income tax
rate and ending with the class subject to
the lowest Federal income tax rate. If
any of the loss exists after all the current
and undistributed ordinary income from
all classes has been offset, the excess is
carried forward indefinitely to reduce or-
dinary income for future years and retains
its class assignment. For purposes of this
section, the amount of current income and
prior years’ undistributed income shall be
computed without regard to the deduction
for net operating losses provided by sec-
tion 172 or 642(d).
(b)Other income category. A net loss
in the other income category for the cur-
rent year is used to reduce undistributed in-
come in this category for prior years and
any excess is carriedforward indefinitely
to reduce other income for future years.
(iv)Netting of capital gains and losses
at the trust level. Capital gains of the trust
are determined on a cumulative net ba-
sisundertherulesofthisparagraph(d)(1)
without regard to the provisions of section
1212. For each taxable year, current and
undistributed gains and losses within each
class are netted to determine the net gain or
loss for that class, and the classes of capi-
tal gains and losses are then netted against
each other in the following order. First,
a net loss from a class of long-term capi-
tal gain and loss (beginning with the class
subject to the highest Federal income tax
rate and ending with the class subject to
the lowest rate) is used to offset net gain
from each other class of long-term capital
gain and loss, in turn, until exhaustion of
the class, beginning with the class subject
to the highest Federal income tax rate and
ending with the class subject to the lowest
rate. Second, either —
(a) A net loss from all the classes of
long-term capital gain and loss (beginning
with the class subject to the highest Federal
income tax rate and ending with the class
subject to the lowest rate) is used to offset
any net gain from the class of short-term
capital gain and loss; or
(b) A net loss from the class of short-
term capital gain and loss is used to offset
any net gain from each class of long-term
capital gain and loss, in turn, until exhaus-
tion of the class, beginning with the class
subject to the highest Federal income tax
rate and ending with the class subject to the
lowest Federal income tax rate.
(v)Carry forward of net capital gain
or loss by the trust.If,attheendofa
taxable year, a trust has, after the appli-
cation of paragraph (d)(1)(iv) of this sec-
tion, any net loss or any net gain that is
not treated as distributed under paragraph
(d)(1)(ii)(a)(2) of this section, the net gain
or loss is carried over to succeeding tax-
able years and retains its character in suc-
ceeding taxable years as gain or loss from
its particular class.
(vi)Special transitional rules.Tobe
eligible to be included in the class of qual-
ified dividend income, dividends must
meet the definition of section 1(h)(11) and
must be received by the trust after De-
cember 31, 2002. Long-term capital gain
or loss properly taken into account by the
trust before January 1, 1997, is included
in the class of all other long-term capi-
tal gains and losses. Long-term capital
gain or loss properly taken into account
by the trust on or after January 1, 1997,
and before May 7, 1997, if not treated
as distributed in 1997, is included in the
class of all other long-term capital gains
and losses. Long-term capital gain or loss
(other than 28-percent gain (gains and
losses from collectibles and section 1202
gains), unrecaptured section 1250 gain
(long-term gains not treated as ordinary
income that would be treated as ordinary
income if section 1250(b)(1) included all
April 11, 20058592005–15 I.R.B.

depreciation), and qualified 5-year gain as
defined in section 1(h)(9) prior to amend-
ment by JGTRRA), properly taken into ac-
count by the trust before January 1, 2003,
and distributed during 2003 is treated as
if it were properly taken into account by
the trust after May 5, 2003. Long-term
capital gain or loss (other than 28-percent
gain, unrecaptured section 1250 gain, and
qualified 5-year gain), properly taken into
account by the trust on or after January
1, 2003, and before May 6, 2003, if not
treated as distributed during 2003, is in-
cluded in the class of all other long-term
capital gain. Qualified 5-year gain prop-
erly taken into account by the trust after
December 31, 2000, and before May 6,
2003, if not treated as distributed by the
trust in 2003 or a prior year, must be main-
tained in a separate class within the capital
gains category until distributed. Qualified
5-year gain properly taken into account
by the trust before January 1, 2003, and
deemed distributed during 2003 is subject
to the same current tax rate as deemed
distributions from the class of all other
long-term capital gain realized by the trust
after May 5, 2003. Qualified 5-year gain
properly taken into account by the trust on
or after January 1, 2003, and before May
6, 2003, if treated as distributed by the
trust in 2003, is subject to the tax rate in
effect prior to the amendment of section
1(h)(9) by JGTRRA.
(vii)Application of section 643(a)(7).
For application of the anti-abuse rule
of section 643(a)(7) to distributions
from charitable remainder trusts, see
§1.643(a)–8.
(viii)Examples. The following exam-
ples illustrate the rules in this paragraph
(d)(1):
Example 1. (i) X, a charitable remainder annu-
ity trust described in section 664(d)(1), is created on
January 1, 2003. The annual annuity amount is $100.
X’s income for the 2003 tax year is as follows:
Interestincome...................................................
$80
Qualified
dividendincome..........................................
50
Capitalgainsandlosses............................................0
Tax-exemptincome...............................................0
(ii) In 2003, the year this income is received by
the trust, qualified dividend income is subject to a
differe
nt rate of Federal income tax than interest in-
come and is, therefore, a separate class of income in
the ordinary income category. The annuity amount is
deemed to be distributed from the classes within the
ordinary income category, beginning with the class
subject
to the highest Federal income tax rate and
ending with the class subject to the lowest rate. Be-
cause during 2003 qualified dividend income is taxed
at a lower rate than interest income, the interest in-
come is deemed distributed prior to the qualified divi-
dend inc
ome. Therefore, in the hands of the recipient,
the 2003 annuity amount has the following character-
istics:
Interestincome...................................................
$80
Qualifieddividendincome.......................................... 20
(iii) The remaining $30 of qualified dividend in-
come that is not treated as distributed to the recipient
in 2003 is carried forward to 2004 as undistributed
qualified dividend income.
Example 2. (i) The facts are the same as inEx-
ample 1, and at the end of 2004, X has the following
classes of income:
Interestincomeclass..............................................
$5
Quali
fieddividendincomeclass.....................................
40
($10 from 2004 and $30 carried forward from 2003)
Netshort-termcapitalgainclass.....................................
15
Netlong-termcapitallossin28-percentclass...........................
(325)
Netlong-termcapitalgaininunrecapturedsection1250gainclass.......... 175
Netlong-termcapitalgaininallotherlong-termcapitalgainclass..........
350
(ii) In 2004, gain in the unrecaptured section 1250
gain class is subject to a 25-percent Federal income
tax rate, and gain in the all other long-term capital
gain class is subject to a lower rate. The net long-term
capital loss in the 28-percent gain class is used to
offset the net capital gains in the other classes of
long-term capital gain and loss, beginning with the
class subject to the highest Federal income tax rate
and ending with the class subject to the lowest rate.
The $325 net loss in the 28-percent gain class reduces
the $175 net gain in the unrecaptured section 1250
gain class to $0. The remaining $150 loss from the
28-percent gain class reduces the $350 gain in the
all other long-term capital gain class to $200. As in
Example 1, qualified dividend income is taxed at a
lower rate than interest income during 2004. The an-
nuity amount is deemed to be distributed from all the
classes in the ordinary income category and then from
the classes in the capital gains category, beginning
with the class subject to the highest Federal income
tax rate and ending with the class subject to the lowest
rate. In the hands of the recipient, the 2004 annuity
amount has the following characteristics:
2005–15 I.R.B.860April 11, 2005

Interestincome...................................................
$5
Qualifieddividendincome.......................................... 40
Netshort-termcapitalgain .........................................
15
Net long-term
capitalgaininallotherlong-termcapitalgainclass..........
40
(iii) The remaining $160 gain in the all other long-
term capital gain class that is not treated as distributed
to the recipient in 2004 is carried forward to 2005 as
gain in that same class.
Example 3. (i) The facts are the same as inEx-
amples 1and2, and at the end of 2005, X has the
following classes of income:
Interestincomeclass..............................................
$5
Qualifieddividendincomeclass.....................................20
Netlossinshort-termcapitalgainclass ...............................
(50)
Netlong-termcapitalgainin28-percentgainclass.......................10
Netlong-termcapitalgaininunrecapturedsection1250gainclass.......... 135
Net long-term capital gain in all other long-term capital gain class
(carriedforwardfrom2004) .....................................
160
(ii) There are no long-term capital losses to net
against the long-term capital gains. Thus, the net
short-term capital loss is used to offset the net cap-
ital gains in the classes of long-term capital gain and
loss, in turn, until exhaustion of the class, beginning
with the class subject to the highest Federal income
tax rate and ending with the class subject to the lowest
rate. The $50 net short-term loss reduces the $10 net
gain in the 28-percent gain class to $0. The remaining
$40 net loss reduces the $135 net gain in the unrecap-
tured section 1250 gain class to $95. As inExam-
ples 1and2, during 2005, qualified dividend income
is taxed at a lower rate than interest income; gain in
the unrecaptured section 1250 gain class is taxed at
25 percent; and gain in the all other long-term capital
gain class is taxed at a rate lower than 25 percent. The
annuity amount is deemed to be distributed from all
the classes in the ordinary income category and then
from the classes in the capital gains category, begin-
ning with the class subject to the highest Federal in-
come tax rate and ending with the class subject to the
lowest rate. Therefore, in the hands of the recipient,
the 2005 annuity amount has the following character-
istics:
Interestincome...................................................
$5
Qualifieddividendincome.......................................... 20
Unrecapturedsection1250gain ..................................... 75
(iii) The remaining $20 gain in the unrecaptured
section 1250 gain class and the $160 gain in the all
other long-term capital gain class that are not treated
as distributed to the recipient in 2005 are carried for-
ward to 2006 as gains in their respective classes.
Example 4. (i) The facts are the same as inEx-
amples 1,2and3, and at the end of 2006, X has the
following classes of income:
Interestincomeclass..............................................
$95
Qualifieddividendincomeclass.....................................10
Netlossinshort-termcapitalgainclass ............................... (20)
Netlong-termcapitallossin28-percentclass...........................
(350)
Net long-term capital gain in unrecaptured section 1250 gain class
(carriedforwardfrom2005) .....................................
20
Net long-term capital gain in all other long-term capital gain class
(carriedforwardfrom2005) .....................................
160
(ii) A net long-term capital los
sinoneclassis
used to offset the net capital gains in the other classes
of long-term capital gain and loss, in turn, until ex-
haustion of the class, beginnin
g with the class subject
to the highest Federal income tax rate and ending with
the class subject to the lowest rate. The $350 net loss
in the 28-percent gain class re
duces the $20 net gain
in the unrecaptured section 125
0gainclassto$0.The
remaining $330 net loss reduces the $160 net gain in
the all other long-term capital gain class to $0. As in
Examples 1,2and3, during 2006,
qualified dividend
income is taxed at a lower rate than interest income.
The annuity amount is deemed to be distributed from
all the classes in the ordinary
income category and
then from the classes in the capi
tal gains category, be-
ginning with the class subject to the highest Federal
income tax rate and ending with the class subject to
the lowest rate. In the hands of t
he recipient, the 2006
annuity amount has the following characteristics:
Interestincome...................................................
$95
Qualifieddividendincome..........................................
5
(iii) The remaining $5 of qualified dividend in-
come that is not treated as distributed to the recipient
in 2006 is carried forward to 2007 as qualified divi-
dend income. The $20 net loss in the short-term cap-
ital gain class and the $170 net loss in the 28-percent
gain class are carried forward to 2007 as net losses in
their respective classes.
Example 5. (i) X, a charitable remainder annu-
ity trust described in section 664(d)(1), is created on
January 1, 2002. The annual annuity amount is $100.
Except for qualified 5-year gain of $200 realized be-
fore May 6, 2003, but not distributed, X has no other
gains or losses carried over from former years. X’s
income for the 2007 tax year is as follows:
April 11, 20058612005–15 I.R.B.

Interestincomeclass..............................................
$10
Netgaininshort-termcapitalgainclass...............................
5
Netlong-termcapitalgainin28-percentgainclass.......................
5
Net long-term
capitalgaininunrecapturedsection1250gainclass..........
10
Netlong-termcapitalgaininallotherlong-termcapitalgainclass.......... 10
(ii) The annuity amount is deemed to be dis-
tributed from all the classes in the ordinary income
category and then from the classes in the capital
gains category, beginning with the class subject to
the highest Federal income tax rate and ending with
the class subject to the lowest rate. In 2007, gains
distributed to a recipient from both the qualified
5-year gain class and the all other long-term capital
gains class are taxed at a 15/5 percent tax rate. Since
after December 31, 2008, gains distributed from the
qualified 5-year gain class will be taxed at a lower
rate than gains distributed from the other classes of
long-term capital gain and loss, distributions from
the qualified 5-year gain class are made after distri-
butions from the other classes of long-term capital
gain and loss. In the hands of the recipient, the 2007
annuity amount has the following characteristics:
Interestincome ..................................................
$10
Short-termcapitalgain.............................................
5
28-percentgain ..................................................
5
Unrecapturedsection1250gain .....................................
10
Allotherlong-termcapitalgain...................................... 10
Qualified5-yeargain(taxedasallotherlong-termcapitalgain)............
60
(iii
) The remaining $140 of qualified 5-year gain
that is not treated as distributed to the recipient in
2007iscarriedforwardto2008asqualified5-year
gai
n.
(ix)
Effective dates. The rules in this
par
agraph (d)(1) that require long-term
cap
ital gains to be distributed in the fol-
low
ing order: first, 28-percent gain (gains
and
losses from collectibles and section
120
2 gains); second, unrecaptured section
12
50 gain (long-term gains not treated
as
ordinary income that would be treated
as
ordinary income if section 1250(b)(1)
in
cluded all depreciation); and then, all
ot
her long-term capital gains are appli-
c
able for taxable years ending on or after
D
ecember 31, 1998. The rules in this para-
g
raph (d)(1) that provide for the netting of
c
apital gains and losses are applicable for
t
axable years ending on or after December
3
1, 1998. The rule in the second sentence
of paragraph (d)(1)(vi) of this section is
applicable for taxable years ending on or
after December 31, 1998. The rule in the
third sentence of paragraph (d)(1)(vi) of
this section is applicable for distributions
made in taxable years ending on or after
December 31, 1998. All other provisions
of this paragraph (d)(1) are applicable for
taxable years ending after November 20,
2003.
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved March 10, 2005.
Eric
Solomon,
Acti
ng Deputy Assistant Secretary
of t
he Treasury.
(Filed by the Office of the Federal Register on March 15,
2005, 8:45 a.m., and published in the issue of the Federal
Reg
ister for March 16, 2005, 70 F.R. 12793)
Section 704.—Partner’s
Distributive Share
26 CFR 1.704–3: Contributed property.
T.D. 9193
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Section 704(c), Installment
Obligations and Contributed
Contracts
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations under sections 704(c) and 737
relating to the tax treatment of installment
obligations and property acquired pursuant
to a contract. The regulations affect part-
ners and partnerships and provide guid-
ance necessary to comply with the law.
DATE
S:Effective Date:These regulations
are e
ffective November 23, 2003.
Appl
icability Date:For dates of appli-
cabi
lity, see §§1.704–3(f), 1.704–4(g) and
1.7
37–5.
FOR FURTHER INFORMATION
CONTACT: Christopher L. Trump, (202)
622–3070 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to 26 CFR part 1 under sections 704 and
737. On November 24, 2003, a notice of
proposed rulemaking (REG–160330–02,
2003–2 C.B. 1230) relating to the tax
treatment of installment obligations and
property acquired pursuant to a contract
under sections 704(c) and 737 was pub-
lished in theFederal Register(68 FR
65864). A notice of correction was pub-
lished in theFederal Register(69 FR
5797) on February 6, 2004. No comments
were received from the public in response
tothenoticeofproposedrulemaking. No
public hearing was requested, and accord-
ingly, no hearing washeld. This Treasury
decision adopts the language of the pro-
posed regulations without change.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
2005–15 I.R.B.862April 11, 2005

12866. Therefore, a regulatory assessment
is not required. It also has been deter-
mined that section 553(b) of the Adminis-
trative Procedure Act (5 U.S.C. chapter 5)
does not apply to these regulations and, be-
cause the regulations do not impose a col-
lection 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 Internal Revenue Code, the
proposed regulations preceding these reg-
ulations were submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on its impact
on small business.
Drafting Information
The principal author of these regu-
lations is Christopher L. Trump of the
Office of the Associate Chief Coun-
sel (Passthroughs & Special Industries).
However, other personnel from the IRS
and Treasury Department participated in
their development.
*****
Adoption of Amendments to
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 1.704–3 is amended as
follows:
1. The paragraph heading for (a)(8) is
revised.
2. The text of paragraph (a)(8) is redes-
ignated as paragraph (a)(8)(i).
3. A paragraph heading for newly des-
ignated paragraph (a)(8)(i) is added.
4. The first sentence of newly desig-
nated paragraph (a)(8)(i) is amended by re-
moving the language “in which no gain or
loss is recognized”.
5. Paragraphs (a)(8)(ii) and (a)(8)(iii)
are added.
6. Paragraph (f) is amended by:
a. Revising the paragraph heading.
b. Amending the first sentence of para-
graph (f) by removing the language “of
paragraph (a)(11)” and adding “of para-
graphs (a)(8)(ii), (a)(8)(iii) and (a)(11)” in
its place.
c. Adding two sentences at the end of
paragraph (f).
The revisions and additions read as fol-
lows:
§1.704–3 Contributed property.
(a) * * *
(8)Special rules—(i)Disposition in a
nonrecognition transaction.***
(ii)Disposition in an installment sale.
If a partnership disposes of section 704(c)
property in an installment sale as defined
in section 453(b), the installment obliga-
tion received by the partnership is treated
as the section 704(c) property with the
same amount of built-ingainasthesection
704(c) property disposed of by the partner-
ship (with appropriate adjustments for any
gain recognized on the installment sale).
The allocation methodfor the installment
obligation must be consistent with the al-
location method chosen for the original
property.
(iii)Contributed contracts.Ifapartner
contributes to a partnership a contract that
is section 704(c) property, and the partner-
ship subsequently acquires property pur-
suant to that contract in a transaction in
whichlessthanallofthegainorlossis
recognized, then the acquired property is
treated as the section 704(c) property with
the same amount of built-in gain or loss as
the contract (with appropriate adjustments
for any gain or loss recognized on the ac-
quisition). For this purpose, the term con-
tract includes, but is not limited to, op-
tions, forward contracts, and futures con-
tracts. The allocation method for the ac-
quired property must be consistent with
the allocation method chosen for the con-
tributed contract.
*****
(f)Effective dates. * * * Paragraph
(a)(8)(ii) applies to installment obligations
received by a partnership in exchange for
section704(c)propertyonorafterNovem-
ber 24, 2003. Paragraph (a)(8)(iii) applies
to property acquired on or after November
24, 2003, by a partnership pursuant to a
contract that is section 704(c) property.
Par. 3. Section 1.704–4 is amended as
follows:
1. The paragraph heading for (d)(1) is
revised.
2. The text of paragraph (d)(1) is redes-
ignated as paragraph (d)(1)(i).
3. A paragraph heading for newly des-
ignated paragraph (d)(1)(i) is added.
4. Paragraphs (d)(1)(ii) and (d)(1)(iii)
are added.
5. Revising paragraph (g).
The revisions and additions read as fol-
lows:
§1.704–4 Distribution of contributed
property.
*****
(d)Special rules—(1)Nonrecognition
transactions, installment obligations and
contributed contracts—(i)Nonrecogni-
tion transactions.***
(ii)Installment obligations. An install-
ment obligation received by the partner-
ship in an installment sale (as defined in
section 453(b)) of section 704(c) property
is treated as the section 704(c) property
for purposes of section 704(c)(1)(B) and
this section to the extent that the install-
ment obligation received is treated as sec-
tion 704(c) property under §1.704–3(a)(8).
See §1.737–2(d)(3) for a similar rule in the
context of section 737.
(iii)Contributed contracts. Property
acquired by the partnership pursuant to
a contract that is section 704(c) property
is treated as the section 704(c) prop-
erty for purposes of section 704(c)(1)(B)
and this section, to the extent that the
acquired property is treated as section
704(c) property under §1.704–3(a)(8).
See §1.737–2(d)(3) for a similar rule in
the context of section 737.
*****
(g)Effective dates. This section applies
to distributions by a partnership to a part-
ner on or after January 9, 1995, except that
paragraphs (d)(1)(ii) and (iii) apply to dis-
tributions by a partnership to a partner on
or after November 24, 2003.
Par. 4. Section 1.737–2 is amended as
follows:
1. The paragraph heading for (d)(3) is
revised.
2. The text of paragraph (d)(3) is redes-
ignated (d)(3)(i).
3. A paragraph heading for newly des-
ignated (d)(3)(i) is added.
4. Paragraphs (d)(3)(ii) and (d)(3)(iii)
are added.
§1.737–2 Exceptions and special rules.
*****
April 11, 20058632005–15 I.R.B.

(d) * * *
(3)Nonrecognition transactions, in-
stallment sales and contributed con-
tracts—(i)Nonrecognition transactions.
***
(ii)Installment sales. An installment
obligation received by the partnership in
an installment sale (as defined in sec-
tion 453(b)) of section 704(c) property
is treated as the contributed property
with regard to the contributing partner
for purposes of section 737 to the extent
that the installment obligation received is
treated as section 704(c) property under
§1.704–3(a)(8). See §1.704–4(d)(1) for
a similar rule in the context of section
704(c)(1)(B).
(iii)Contributed contracts.Property
acquired by a partnership pursuant to a
contract that is section 704(c) property is
treated as the contributed property with re-
gard to the contributing partner for pur-
poses of section 737 to the extent that
the acquired property is treated as section
704(c) property under §1.704–3(a)(8). See
§1.704–4(d)(1) for a similar rule in the
context of section 704(c)(1)(B).
*****
Par. 5. Section 1.737–5 is revised to
read as follows:
§1.737–5 Effective dates.
Sections 1.737–1, 1.737–2, 1.737–3,
and 1.737–4 apply to distributions by a
partnership to a partner on or after January
9, 1995, except that §1.737–2(d)(3)(ii)
and (iii) apply to distributions by a part-
nership to a partner on or after November
24, 2003.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved March 15, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary
oftheTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on March 21,
2005, 8:45 a.m., and published in the issue of the Federal
Register for March 22, 2005, 70 F.R. 14394)
Section 807.—Rules for
Certain Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2005. See Rev. Rul. 2005-23, page 864.
Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2005. See Rev. Rul. 2005-23, page 864.
Section 1274.—Determi-
nation of Issue Price in the
Case of Certain Debt Instru-
ments Issued for Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate and the
long-term exempt rate.For purposes of
sections 382, 642, 1274, 1288, and other
sections of the Code, tables set forth the
rates for April 2005.
Rev. Rul. 2005–23
This revenue ruling provides vari-
ous prescribed rates for federal income
tax purposes for April 2005 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month
for purposes of section 1274(d) of the
Internal Revenue Code. Table 2 contains
the short-term, mid-term, and long-term
adjusted applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the ap-
propriate percentages for determining the
low-income housing credit described in
section 42(b)(2) for buildings placed in
service during the current month. Finally,
Table 5 contains the federal rate for deter-
mining the present value of an annuity, an
interest for life or for a term of years, or
a remainder or a reversionary interest for
purposes of section 7520.
REV. RUL. 2005–23 TABLE 1
Applica
ble Federal Rates (AFR) for April 2005
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-
term
AFR3.35%3.32%3.31%3.30%
110% A
FR
3.68%3.65%3.63%3.62%
120% AFR4.02%3.98%3.96%3.95%
130% AFR4.37%4.32%4.30%4.28%
2005–15 I.R.B.864April 11, 2005

REV. RUL. 2005–23 TABLE 1
Applicable Federal Rates (AFR) for April 2005 — Continued
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Mid-term
AFR4.09%4.05%4.03%4.02%
110% AFR4.51%4.46%4.44%4.42%
120% AFR4.92%4.86%4.83%4.81%
130% AFR5.34%5.27%5.24%5.21%
150% AFR6.17%6.08%6.03%6.00%
175% AFR7.22%7.09%7.03%6.99%
Long-term
AFR4.68%4.63%4.60%4.59%
110% AFR5.15%5.09%5.06%5.04%
120% AFR5.64%5.56%5.52%5.50%
130% AFR6.11%6.02%5.98%5.95%
REV. RUL. 2005–23 TABLE 2
Adjusted AFR for April 2005
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term adjusted
AFR
2.40%2.39%2.38%2.38%
Mid-te
rm adjusted AFR
3.03%3.01%3.00%2.99%
Long-term adjusted
AFR4.19%4.15%4.13%4.11%
REV. RUL. 2005–23 TABLE 3
Rates Under Section 382 for April 2005
Adjusted federal long-term rate for the current month4.19%
Lon
g-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted
fed
eral long-term rates for the current month and the prior two months.)
4.2
0%
REV. RUL. 2005–23 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for April 2005
Appropriate percentage for the 70% present value low-income housing credit8.02%
Appropriate percentage for the 30% present value low-income housing credit3.44%
April 11, 20058652005–15 I.R.B.

REV. RUL. 2005–
23 TABLE 5
Rate Under Section 7520 for April 2005
Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,
or a remainder or reversionary interest5.00%
Section 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2005. See Rev. Rul. 2005-23, page 864.
Section 1502.—Regulations
26 CFR 1.1502–11: Consolidated taxable income.
T.D. 9192
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Guidance Under Section 1502;
Application of Section 108 to
Members of a Consolidated
Group
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations, temporary
regulations, and removal of temporary
regulations.
SUMMARY: This document contains final
regulations under section 1502 of the In-
ternal Revenue Code that govern the ap-
plication of section 108 when a member
of a consolidated group realizes discharge
of indebtedness income. These final reg-
ulations affect corporations filing consoli-
dated returns.
DATES:Effective Date: These regulations
are effective March 21, 2005.
Applicability Dates:: For dates of
applicability, see §1.1502–11(c)(7),
§1.1502–13(g)(3)(i)(A) and (ii)(C),
§1.1502–19(h)(2)(ii), §1.1502–21(h)(6),
§1.1502–28(d), and §1.1502–32(h)(7).
FOR FURTHER INFORMATION
CONTACT: Concerning §1.1502–11 of
the final regulations, Candace B. Ewell
at (202) 622–7530 (not a toll-free num-
ber), concerning all other sections of the
final regulations, Amber R. Cook at (202)
622–7530 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
This document contains amendments
to 26 CFR part 1 under section 1502
of the Internal Revenue Code (Code).
On September 4, 2003, temporary reg-
ulations (T.D. 9089, 2003–2 C.B. 906)
(the first temporary regulations) relat-
ing to the application of section 108 to
members of a consolidated group were
published in theFederal Register(68
FR 52487). A notice of proposed rule-
making (REG–132760–03, 2003–2 C.B.
933) cross-referencing the first temporary
regulations was published in theFederal
Registerfor the same day (68 FR 52542).
The first temporary regulations added
§1.1502–28T, which provides guidance re-
garding the determination of the attributes
that are available for reduction when a
member of a consolidated group realizes
discharge of indebtedness income that is
excluded from gross income (excluded
COD income) and the method for reduc-
ing those attributes. Section 1.1502–28T
reflects a consolidated approach that is
intended to reduce all attributes that are
available to the debtor member.
Because the first temporary regulations
may not have provided for the reduction
of all the attributes that are available to the
debtor member, on December 11, 2003,
the IRS and Treasury Department pub-
lished in theFederal Register(68 FR
69024) temporary regulations (T.D. 9098,
2003–2 C.B. 1248) (the second temporary
regulations) under section 1502 amending
§1.1502–28T. A notice of proposed rule-
making (REG–153319–03, 2003–2 C.B.
1256) cross-referencing the second tem-
porary regulations was published in the
Federal Registerfor the same day (68 FR
69062). The second temporary regulations
clarify that certain attributes that arise (or
are treated as arising)in a separate return
year are subject to reduction when no
SRLY limitation applies to the use of such
attributes.
On March 15, 2004, the IRS and Trea-
sury Department published in theFed-
eral Register(69 FR 12069) temporary
regulations (T.D. 9117, 2004–15 I.R.B.
721) (the third temporary regulations) un-
der section 1502 amending §§1.1502–13
and 1.1502–28T. A notice of proposed
rulemaking (REG–167265–03, 2004–15
I.R.B. 730) (the 2004 proposed regula-
tions) cross-referencing the third tem-
porary regulations was published in the
Federal Registerfor the same day (69 FR
12091). The third temporary regulations
address certain technical issues relating to
the application of excluded COD income
to reduce attributes under sections 108 and
1017 and §1.1502–28T.
The 2004 proposed regulations, in ad-
dition to cross-referencing the third tem-
porary regulations, proposed amendments
to §§1.1502–28T and 1.1502–11 to pro-
vide a methodology for computing consol-
idated taxable income and for effecting at-
tribute reduction when there is a disposi-
tion of the stock of a member in a year dur-
ing which any member realizes excluded
COD income.
No public hearing was requested or held
for any of the regulations described above.
Written and electronic comments respond-
ing to the notices of proposed rulemak-
ing were received. After consideration of
all the comments, the proposed regulations
are adopted as revised by this Treasury de-
cision, and the affected provisions in the
2005–15 I.R.B.866April 11, 2005

corresponding temporary regulations are
removed. The more significant revisions
are discussed below.
A.Apportionment of Net Operating
Losses
In addition to adding §1.1502–28T,
the first temporary regulations added
several provisions to §1.1502–21T. Sec-
tions 1.1502–21 and 1.1502–21T include
rules relating to the amount of consoli-
dated net operating losses apportioned to
a subsidiary when a subsidiary departs
from the group. The provisions added
to §1.1502–21T require a recomputation
of the percentage of a consolidated net
operating loss attributable to a member
when a portion of the loss is carried back
to a separate return year or is reduced in
respect of excluded COD income, or when
a member departs. Questions have arisen
regarding the timing of the recomputation
of the percentage of a consolidated net
operating loss attributable to a member
in cases in which a portion of a consol-
idated net operating loss is carried back
to a separate return year or a portion is
reduced in respect of excluded COD in-
come. Therefore, these final regulations
clarify the timing of the recomputation in
these cases.
B.Timing of Asset Basis Reduction
Section 108(b)(4)(A) requires the re-
duction of the tax attributes listed in sec-
tion 108(b)(2), including basis in property,
in respect of excluded COD income after
the determination of the tax imposed for
the taxable year of the discharge. Section
1017(a) provides that when any portion of
excluded COD income is to be applied to
reduce basis, then such portion is applied
to reduce the basis of any property held by
the taxpayer at the beginning of the taxable
year following the taxable year in which
the discharge occurs. As a result of the ref-
erence in section 1017(a) to the property
held by the taxpayer at the beginning of the
taxable year following the taxable year in
which the discharge occurs, questions have
arisen regarding the appropriate time to re-
duce the basis of property of the taxpayer.
The IRS and Treasury Department be-
lieve that the reference in section 1017 to
the property held by the taxpayer at the be-
ginning of the taxable year following the
taxable year in which the discharge occurs
merely identifies those properties the ba-
sis of which are subject to reduction. It
does not prescribe that basis of property
should not be reduced until the beginning
of the taxable year following the taxable
year in which the discharge occurs. Ac-
cordingly, these regulations clarify that ba-
sis of property is subject to reduction pur-
suant to the rules of sections 108 and 1017
and §1.1502–28 after the determination of
tax for the year during which the member
realizes excluded COD income (and any
prior years) and coincident with the reduc-
tion of other attributes pursuant to section
108 and §1.1502–28. However, only the
basis of property held as of the beginning
of the taxable year following the taxable
year during which the excluded COD in-
come is realized is available for reduction.
C.Application of Look-Through Rule
The first temporary regulations include
a look-through rule that applies if the at-
tribute of the debtor member reduced is
the basis of stock of another member of
the group. In these cases, corresponding
reductions must be made to the attributes
attributable to the lower-tier member. To
effect those corresponding reductions, the
lower-tier member is treated as realizing
excluded COD income in the amount of
the stock basis reduction. Questions have
arisen regarding whether the look-through
rule applies when there is a reduction in
the basis of stock of a corporation that is a
member of the group on the last day of the
debtor’s taxable year during which the ex-
cluded COD income is realized, but is not a
member of the group on the first day of the
debtor’s following taxable year. For exam-
ple, suppose P1 owns all of the stock of S1
and S1 owns all of the stock of S2. P1, S1,
and S2 file a consolidated return. In Year
1, P1 realizes excluded COD income. On
the last day of Year 1, P1 sells 50 percent
of the stock of S1 to P2. P1 reduces its ba-
sis in the 50 percent of the S1 stock that it
owns on the first day of Year 2 in respect of
its excluded COD income. Commentators
have questioned whether the look-through
rule applies to reduce S1’s attributes.
The IRS and Treasury Department be-
lieve that because S1 and S2 were mem-
bers of the same group on the last day of
the debtor’s taxable year during which the
excluded COD income was realized, it is
appropriate to apply the single entity prin-
ciples reflected in the look-through rule.
The IRS and Treasury Department have
also considered whether the look-through
rule applies when there is a reduction in
the basis of stock of a corporation that
is not a member of the group on the last
day of the debtor’s taxable year during
which the excluded COD income is real-
ized (by reason of the application of the
next day rule of §1.1502–76), but is a
member of the group on the first day of the
debtor’s following taxable year. In these
cases too, the IRS and Treasury Depart-
ment believe that it is appropriate to apply
the single entity principles reflected in the
look-through rule. Therefore, these regu-
lations provide that, if the basis of stock
of a corporation (the lower-tier member)
that is owned by another corporation (the
higher-tier member) is reduced and both
of such corporations are members of the
same consolidated group on the last day of
the higher-tier member’s taxable year that
includes the date on which the excluded
COD income is realized or the first day of
the higher-tier member’s taxable year that
follows the taxable year that includes the
date on which the excluded COD income
is realized, the look-through rule will ap-
ply to reduce the attributes of the lower-tier
member.
D.Attributes Available for Reduction on
Departure of Debtor Member
Questions have arisen regarding the
identification of the attributes available
for reduction in cases in which the mem-
ber that realizes the excluded COD income
leaves the group (for example, by reason
of a stock acquisition) or the assets of the
member are acquired by a corporation that
is not a member of the group in a trans-
action to which section 381(a) applies on
or prior to the last day of the consolidated
return year duringwhich the excluded
COD income is realized. At least one
commentator has questioned whether the
attributes of other members of the group
from which the debtor member departs
are available for reduction in these cases.
These final regulations confirm that, in
such cases, the tax attributes that remain
after the determination of the tax imposed
on the group that belong to members of
the group are available for reduction.
April 11, 20058672005–15 I.R.B.

E.Intragroup Reorganizations and Group
Structure Changes
Questions have also arisen regarding
the application of the attribute reduction
rules when a taxpayer that is a member of a
consolidated group realizes excluded COD
income during the same consolidated re-
turn year during which it transfers assets
in a transaction to which section 381(a)
applies to a corporation that is a member
of the group immediately after the trans-
action. Section 1.108–7 provides that if
a taxpayer realizes excluded COD income
either during or after a taxable year in
which the taxpayer is the distributor or
transferor of assets in a transaction de-
scribed in section 381(a), any tax attributes
to which the acquiring corporation suc-
ceeds, including the basis of property ac-
quired by the acquiring corporation in the
transaction, must reflect the reductions re-
quired by section 108(b). If a member of
the group transfers assets in a transaction
towhichsection381(a)appliestoacorpo-
ration that is a member of the group imme-
diately after the transaction and, as a result,
the taxable year of the transferor member
ends prior to the end of the consolidated re-
turn year, the basis of the transferred prop-
erty following the transfer may generate
depreciation deductions that are allowed
in computing the group’s consolidated tax-
able income for the entire consolidated re-
turn year that includes the date of the dis-
charge. Requiring the basis of the trans-
ferred property to reflect a reduction in re-
spect of the excluded COD income imme-
diately after the transfer could arguably vi-
olate the directive of section 108(b)(4)(A)
that attributes (including basis) be reduced
only after the determination of tax for the
taxable year of the discharge. However, if
attributes were reduced after the determi-
nation of the group’s tax for the taxable
year of the discharge, it may be difficult
to determine which attributes of the com-
bined entity are attributable to the debtor
member and available for reduction. For
example, if after the transaction to which
section 381(a) applies the acquiring corpo-
ration purchases property, it may be diffi-
cult to determine whether that property is
property of the debtor the basis of which is
available for reduction or property of the
acquiring corporation the basis of which
may not be available for reduction. Sim-
ilar issues may arise with respect to other
attributes of the transferor.
To address this issue, these final regu-
lations provide that, if the taxable year of
a member during which such member re-
alizes excluded COD income ends prior to
the last day of the consolidated return year
and, on the first day of the taxable year
of such member that follows the taxable
year during which such member realizes
excluded COD income, such member has
a successor member, the successor mem-
ber is treated as if it had realized the ex-
cluded COD income. Accordingly, all at-
tributes of the successor member listed in
section 108(b)(2) (including attributes that
were attributable to the successor member
prior to the date such member became a
successor member) are subject to reduc-
tion prior to the attributes attributable to
other members of the group. For this pur-
pose, a successor member means a per-
son to which the member that realizes ex-
cluded COD income transfers its assets in
a transaction to which section 381(a) ap-
plies if such transferee is a member of the
group immediately after the transaction.
This rule avoids the difficulty of tracing at-
tributes and property of the debtor mem-
ber once the debtor member has been ac-
quired by another member and recognizes
that the direction of a transaction to which
section 381(a) applies in a group may not
be meaningful. These regulations provide
a similar rule for cases in which a member
of the group acquires the assets of another
member in a transaction to which section
381(a) applies that is also a group structure
change.
F.Application of Next Day Rule
Under §1.1502–76, a consolidated re-
turn must include the common parent’s
items of income, gain, deduction, loss, and
credit for the entire consolidated return
year, and each subsidiary’s items for the
portion of the year for which it is a mem-
ber. A corporation that leaves a consoli-
dated group during the tax year must gen-
erally file a short period separate return (or
join in the consolidated return of another
group) for the portion of the year not in-
cluded in the consolidated return. If a cor-
poration ceases to be a member during a
consolidated return year, it ceases to be a
member at the end of the day on which
its status as a member changes, and its tax
year ends at the end of that day. Under
the next day rule, however, any transaction
that occurs on the day the member ceases
to be affiliated with the group that is prop-
erly allocable to the portion of the sub-
sidiary’s day after the event terminating af-
filiation must be treated as occurring at the
beginning of the following day. Commen-
tators have questioned whether the next
day rule can be applied when the debt of
a subsidiary is discharged in exchange for
stock of the subsidiary and, as a result of
the issuance of the subsidiary’s stock to
the creditor, the subsidiary ceases to be a
member of the group. As a result of the
application of that rule, the excluded COD
income would be treated as realized at the
beginning of the day following the day the
subsidiary ceases to be a member of the
group, rather than on the day it ceases to
be a member of the group.
The IRS and Treasury Department be-
lieve that because the excluded COD in-
come accrued in the group, it is not appro-
priate to apply the next day rule in these
cases. Therefore, these regulations pro-
vide that the next day rule cannot be ap-
plied to treat excluded COD income as re-
alized at the beginning of the day follow-
ing the day on which it is realized.
G.Timing of Investment Adjustments
Under §1.1502–32, excluded COD in-
come of a subsidiary results in a positive
basis adjustment to the extent it is applied
to reduce attributes and the reduction of the
subsidiary’s attributes (other than credits)
in respect of excluded COD income will
generally result in a negative basis adjust-
ment. Commentators have requested clar-
ification regarding when these basis ad-
justments are effective in cases in which
a subsidiary ceases to be a member of the
group on or prior to the end of the consol-
idated return year during which a member
realizes excluded COD income. There-
fore, these regulations clarify that, in those
cases, basis adjustments resulting from the
realization of excluded COD income and
from the reduction of attributes in respect
thereof are made immediately after the de-
termination of tax for the group for the
consolidated returnyear during which the
excluded COD income is realized (and any
prior years) and are effective immediately
before the beginning of the day follow-
ing the day the member departs from the
2005–15 I.R.B.868April 11, 2005

group. Therefore, if the departing member
becomes a member of another group (the
new group), the adjustments to the basis of
the departing member’s stock in respect of
the excluded COD income will not cause
stock basis adjustments in the new group.
H.Elimination of Circular Stock Basis on
Disposition of Member Stock
The 2004 proposed regulations provide
a methodology for computing consoli-
dated taxable income and for effecting
attribute reduction when there is a dispo-
sition of member stock during the same
taxable year in which any member realizes
excluded COD income. The methodology
is intended to prevent the reduction of tax
attributes from affecting the basis of the
member stock that is sold, which would
affect the tax liability of the group for the
taxable year of the discharge. Accord-
ingly, the methodology limits the actual
reduction of tax attributes to the amount
of tax attributes available for reduction
following the tentative computation of
taxable income (or loss).
Commentators have noted, however,
that pursuant to section 108(b)(4)(A),
attributes are reduced only after the de-
termination of tax for the taxable year of
the discharge. Computing the limitation
on attribute reduction based on the tax
attributes remaining after a tentative com-
putation of taxable income (or loss) does
not account for the use of credits in the
computation of the group’s tax liability for
the taxable year of the discharge. There-
fore, in response to these comments, the
final regulations provide for the computa-
tion of the limitation on attribute reduction
after the computation of the tax imposed
by chapter 1 of the Code, rather than after
the computation of taxable income (or
loss).
I.Transactions Designed to Avoid the
Application of the Attribute Reduction
Rules
The preamble to the first temporary
regulations stated that the IRS and Trea-
sury Department are considering adopting
rules under section 1502 (and possibly
other Code sections) to address the effect
of transitory transactions and other trans-
actions designed to avoid the application
of the rules concerning attribute reduc-
tion. The IRS and Treasury Department
continue to believe that general principles
(including step transaction doctrine) could
be applied to disregard certain transac-
tions that have the effect of changing the
result of the application of the attribute
reduction rules. Therefore, the IRS and
Treasury Department have decided not to
adopt any additional rules at this time.
J.Elective Retroactive Application of
Final Regulation
The portion of these regulations finaliz-
ing the rules contained in §1.1502–28T ap-
ply to discharges of indebtedness that oc-
cur after March 21, 2005. Groups, how-
ever, may apply those rules in whole, but
not in part, to discharges of indebtedness
that occur on or before March 21, 2005,
and after August 29, 2003.
These regulations also permit further
retroactive application of a rule included
in the third temporary regulations that
prevents the potential duplication of ordi-
nary income recapture under section 1245
that could be caused by reason of the ap-
plication of both section 1245 and either
section 1017(b)(3)(D) (which permits sub-
sidiary stock to be treated as depreciable
property to the extent that the subsidiary
consents to a corresponding reduction in
the basis of its depreciable property) or the
look-through rule. This section 1245 rule
provides that a reduction of the basis of
subsidiary stock is treated as a deduction
allowed for depreciation only to the extent
that the amount by which the basis of the
subsidiary stock is reduced exceeds the to-
tal amount of the attributes attributable to
such subsidiary that are reduced pursuant
to the subsidiary’s consent under section
1017(b)(3)(D) or as a result of the appli-
cation of the look-through rule. The third
temporary regulations made this special
rule effective for discharges of indebted-
ness that occur after August 29, 2003, the
effective date of the look-through rule.
The IRS and Treasury Department are
aware that the problem addressed by this
special rule could have occurred in cases
of discharges of indebtedness that oc-
curred before August 29, 2003, if section
1017(b)(3)(D) was applied. Accordingly,
these final regulations provide that groups
may apply this special rule to discharges
of indebtedness that occur on or before
August 29, 2003, in cases in which section
1017(b)(3)(D) was applied.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. Further, it is hereby cer-
tified that these regulations will not have
a significant economic impact on a sub-
stantial number of small entities. This cer-
tification is based on the fact that these
regulations will primarily affect affiliated
groups of corporations that have elected to
file a consolidated return, which tend to be
larger businesses. Accordingly, a regula-
tory flexibility analysis under the Regula-
tory Flexibility Act (5 U.S.C. chapter 6) is
not required. Pursuant to section 7805(f)
of the Code, the notices of proposed rule-
making preceding 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 regula-
tions is Amber R. Cook of the Office of As-
sociate Chief Counsel (Corporate). How-
ever, 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 en-
tries for §§1.1502–13T, 1.1502–19T, and
1.1502–28T and adding the following en-
try in numerical order to read, in part, as
follows:
Authority: 26 U.S.C. 7805. * * *
Section 1.1502–28 also issued under 26
U.S.C. 1502. * * *
Par. 2. Section 1.1502–11 is amended
as follows:
1. Paragraph (b)(1) is revised.
2. Paragraph (c) is redesignated as para-
graph (d).
3. New paragraph (c) is added.
April 11, 20058692005–15 I.R.B.

The revision and addition read as fol-
lows:
§1.1502–11 Consolidated taxable income.
*****
(b)Elimination of circular stock ba-
sis adjustments when there is no excluded
COD income—(1)In general. If one mem-
ber (P) disposes of the stock of another
member (S), this paragraph (b) limits the
use of S’s deductions and losses in the year
of disposition and the carryback of items
to prior years. The purpose of the lim-
itation is to prevent P’s income or gain
from the disposition of S’s stock from in-
creasing the absorption of S’s deductions
and losses, because the increased absorp-
tion would reduce P’s basis (or increase
its excess loss account) in S’s stock under
§1.1502–32 and, in turn, increase P’s in-
come or gain. See paragraph (b)(3) of this
section for the application of these princi-
ples to P’s deduction or loss from the dis-
position of S’s stock, and paragraph (b)(4)
of this section for the application of these
principles to multiple stock dispositions.
This paragraph (b) applies only when no
member realizes discharge of indebtedness
income that is excluded from gross income
under section 108(a) (excluded COD in-
come) during the taxable year of the dispo-
sition. See paragraph (c) of this section for
rules that apply when a member realizes
excluded COD income during the taxable
year of the disposition. See §1.1502–19(c)
for the definition of disposition.
*****
(c)Elimination of circular stock basis
adjustments when there is excluded COD
income—(1)In general.Ifonemember
(P) disposes of the stock of another mem-
ber (S) in a year during which any mem-
ber realizes excluded COD income, this
paragraph (c) limits the use of S’s deduc-
tions and losses in the year of disposi-
tion and the carryback of items to prior
years, the amount of the attributes of cer-
tain members that can be reduced in re-
spect of excluded COD income of cer-
tain other members, and the attributes that
can be used to offset an excess loss ac-
count taken into account by reason of the
application of §1.1502–19(c)(1)(iii)(B). In
addition to the purpose set forth in para-
graph (b)(1) of this section, the purpose
of these limitations is to prevent the re-
duction of tax attributes in respect of ex-
cluded COD income from affecting P’s
income, gain, or loss on the disposition
of S stock (including a disposition of S
stock that results from the application of
§1.1502–19(c)(1)(iii)(B)) and, in turn, af-
fecting the attributes available for reduc-
tion pursuant to sections 108 and 1017 and
§1.1502–28. See §1.1502–19(c) for the
definition of disposition.
(2)Computation of tax liability, re-
duction of attributes, and computation
of limits on absorption and reduction of
attributes. If a member realizes excluded
COD income in the taxable year during
which P disposes of S stock, the steps
used to compute tax liability, to effect the
reduction of attributes, and to compute the
limitations on the absorption and reduc-
tion of attributes are as follows. These
steps also apply to determine whether
and to what extent an excess loss account
must be taken into account as a result of
the application of §1.1502–19(b)(1) and
(c)(1)(iii)(B).
(i)Limitation on deductions and losses
to offset income or gain. First, the deter-
mination of the extent to which S’s deduc-
tions and losses for the tax year of the dis-
position (and its deductions and losses car-
ried over from prior years) may offset in-
come and gain is made pursuant to para-
graphs (b)(2) and (3) of this section.
(ii)Tentative adjustment of stock ba-
sis. Second, §1.1502–32 is tentatively ap-
plied to adjust the basis of the S stock
to reflect the amount of S’s income and
gain included, and unlimited deductions
and losses that are absorbed, in the ten-
tative computation of taxable income or
loss for the year of the disposition (and any
prior years) that is made pursuant to para-
graph (b)(2) of this section, but not to re-
flect the realization of excluded COD in-
come and the reduction of attributes in re-
spect thereof.
(iii)Tentative computation of stock gain
or loss. Third, in the case of a disposition
of S stock that does not result from the ap-
plication of §1.1502–19(c)(1)(iii)(B), P’s
income, gain, or loss from the disposi-
tion of S stock is computed. For this pur-
pose, the result of the computation pur-
suant to paragraph (c)(2)(ii) of this section
is treated as the basis of such stock.
(iv)Tentative computation of tax im-
posed. Fourth, the tax imposed by chap-
ter 1 of the Internal Revenue Code for the
year of disposition (and any prior years)
is tentatively computed. For this purpose,
in the case of a disposition of S stock
that does not result from the application
of §1.1502–19(c)(1)(iii)(B), the tentative
computation of tax imposed takes into ac-
count P’s income, gain, or loss from the
disposition of S stock computed pursuant
to paragraph (c)(2)(iii) of this section. The
tentative computation of tax imposed is
made without regard to whether all or a
portion of an excess loss account in a share
of S stock is required to be taken into ac-
count pursuant to §1.1502–19(b)(1) and
(c)(1)(iii)(B).
(v)Tentative reduction of attributes.
Fifth, the rules of sections 108 and 1017
and §1.1502–28 are tentatively applied
to reduce the attributes remaining after
the tentative computation of tax imposed
pursuant to paragraph (c)(2)(iv) of this
section.
(vi)Actual adjustment of stock basis.
Sixth, §1.1502–32 is applied to reflect the
amount of S’s income and gain included,
and unlimited deductions and losses that
are absorbed, in the tentative computation
of tax imposed for the year of the disposi-
tion (and any prior years) made pursuant to
paragraph (c)(2)(iv) of this section, and the
excluded COD income applied to reduce
attributes and the attributes tentatively re-
duced in respect of the excluded COD in-
come pursuant to paragraph (c)(2)(v) of
this section.
(vii)Actual computation of stock gain
or loss. Seventh, the group’s actual gain
or loss on the disposition of S stock (in-
cluding a disposition that results from the
application of §1.1502–19(c)(1)(iii)(B)) is
computed. The result of the computation
pursuant to paragraph (c)(2)(vi) of this sec-
tion is treated as the basis of such stock.
(viii)Actual computation of tax im-
posed. Eighth, the tax imposed by chapter
1 of the Internal Revenue Code for the year
of the disposition (and any prior years) is
computed. The actual tax imposed on
the group for the year of the disposition
is computed by applying the limitation
computed pursuant to paragraph (c)(2)(i)
of this section, and by including the gain
or loss recognized on the disposition of
S stock computed pursuant to paragraph
(c)(2)(vii) of this section. However, at-
tributes that were tentatively used in the
computation of tax imposed pursuant to
paragraph (c)(2)(iv) of this section and
attributes that were tentatively reduced
2005–15 I.R.B.870April 11, 2005

pursuant to paragraph (c)(2)(v) of this
section cannot offset any excess loss ac-
count taken into account as a result of
the application of §1.1502–19(b)(1) and
(c)(1)(iii)(B).
(ix)Actual reduction of attributes.
Ninth, the rules of sections 108 and 1017
and §1.1502–28 are actually applied to re-
duce the attributes remaining after the ac-
tual computation of tax imposed pursuant
to paragraph (c)(2)(viii) of this section.
(A)S or a lower-tier corporation re-
alizes excluded COD income.IfSor
a lower-tier corporation of S realizes
excluded COD income, the aggregate
amount of excluded COD income that is
applied to reduce attributes attributable to
members other than S and any lower-tier
corporation of S pursuant to this paragraph
(c)(2)(ix) shall not exceed the aggregate
amount of excluded COD income that was
tentatively applied to reduce attributes
attributable to members other than S and
any lower-tier corporation of S pursuant
to paragraph (c)(2)(v) of this section. The
amount of the actual reduction of attributes
attributable to S and any lower-tier corpo-
ration of S that may be reduced in respect
of the excluded COD income of S or a
lower-tier corporation of S shall not be so
limited.
(B)A member other than S or a
lower-tier corporation realizes excluded
COD income. If a member other than
S or a lower-tier corporation of S real-
izes excluded COD income, the aggregate
amount of excluded COD income that
is applied to reduce attributes (other than
credits) attributable to S and any lower-tier
corporation of S pursuant to this paragraph
(c)(2)(ix) shall not exceed the aggregate
amount of excluded COD income that was
tentatively applied to reduce attributes
(other than credits) attributable to S and
any lower-tier corporation of S pursuant
to paragraph (c)(2)(v) of this section. The
amount of the actual reduction of attributes
attributable to any member other than S
and any lower-tier corporation of S that
may be reduced in respect of the excluded
COD income of S or a lower-tier corpora-
tion of S shall not be so limited.
(3)Special rules. (i) If the reduction of
attributes attributable to a member is pre-
vented as a result of a limitation described
in paragraph (c)(2)(ix)(B) of this section,
the excluded COD income that would have
otherwise been applied to reduce such at-
tributes is applied to reduce the remaining
attributes of the same type that are avail-
able for reduction under §1.1502–28(a)(4),
on apro ratabasis, prior to reducing at-
tributes of a different type. The reduc-
tion of such remaining attributes, however,
is subject to any applicable limitation de-
scribed in paragraph (c)(2)(ix)(B) of this
section.
(ii) To the extent S’s deductions and
losses in the year of disposition (or those of
a lower-tier corporation of S) cannot offset
income or gain because of the limitation
under paragraph (b) of this section or this
paragraph (c) and are not reduced pursuant
to sections 108 and 1017 and §1.1502–28,
such items are carried to other years under
the applicable provisions of the Internal
Revenue Code and regulations as if they
were the only items incurred by S (or a
lower-tier corporation of S) in the year of
disposition. For example, to the extent S
incurs an operating loss in the year of dis-
position that is limited and is not reduced
pursuant to section 108 and §1.1502–28,
the loss is treated as a separate net oper-
ating loss attributable to S arising in that
year.
(4)Definition of lower-tier corporation.
A corporation is a lower-tier corporation of
S if all of its items of income, gain, deduc-
tion, and loss (including the absorption of
deduction or loss and the reduction of at-
tributes other than credits) would be fully
reflected in P’s basis in S’s stock under
§1.1502–32.
(5)Examples. For purposes of the ex-
amples in this paragraph (c), unless other-
wise stated, the tax year of all persons is
the calendar year, all persons use the ac-
crual method of accounting, the facts set
forth the only corporate activity, all trans-
actions are between unrelated persons, tax
liabilities are disregarded, and no election
under section 108(b)(5) is made. The prin-
ciples of this paragraph (c) are illustrated
by the following examples:
Example 1.Departing member realizes excluded
COD income.(i)Facts. P owns all of S’s stock with
a $90 basis. For Year 1, P has ordinary income of
$30, and S has an $80 ordinary loss and $100 of ex-
cluded COD income from the discharge of non-inter-
company indebtedness. P sells the S stock for $20 at
the close of Year 1. As of the beginning of Year 2, S
has Asset A with a basis of $0 and a fair market value
of $20.
(ii)Analysis. The steps used to compute the tax
imposed on the group, to effect the reduction of at-
tributes, and to compute the limitations on the use and
reduction of attributes are as follows:
(A)Computation of limitation on deductions and
losses to offset income or gain.Todeterminethe
amount of the limitation under paragraph (c)(2)(i)
of this section on S’s loss and the effect of the ab-
sorption of S’s loss on P’s basis in S’s stock under
§1.1502–32(b), P’s gain or loss from the disposition
of S’s stock is not taken into account. The group
is tentatively treated as having a consolidated net
operating loss of $50 (P’s $30 of income minus
S’s $80 loss). Thus, $30 of S’s loss is unlimited
and $50 of S’s loss is limited under paragraph
(c)(2)(i) of this section. Under the principles of
§1.1502–21(b)(2)(iv), all of the consolidated net
operating loss is attributable to S.
(B)Tentative adjustment of stock basis. Then,
pursuant to paragraph (c)(2)(ii) of this section,
§1.1502–32 is tentatively applied to adjust the basis
of S stock. For this purpose, however, adjustments
attributable to the excluded COD income and the
reduction of attributes in respect thereof are not taken
into account. Under §1.1502–32(b), the absorption
of $30 of S’s loss decreases P’s basis in S’s stock by
$30 to $60.
(C)Tentative computation of stock gain or loss.
Then, P’s income, gain, or loss from the sale of S
stock is computed pursuant to paragraph (c)(2)(iii) of
this section using the basis computed in the previous
step. Thus, P is treated as recognizing a $40 loss from
thesaleofSstock.
(D)Tentative computation of tax imposed.Pur-
suant to paragraph (c)(2)(iv) of this section, the tax
imposed for the year of disposition is then tentatively
computed, taking into account P’s $40 loss on the
sale of the S stock computed pursuant to paragraph
(c)(2)(iii) of this section. The group has a $50 con-
solidated net operating loss for Year 1 that, under
the principles of §1.1502–21(b)(2)(iv), is wholly at-
tributable to S and a consolidated capital loss of $40
that, under the principles of §1.1502–21(b)(2)(iv), is
wholly attributable to P.
(E)Tentative reduction of attributes. Next, pur-
suant to paragraph (c)(2)(v) of this section, the rules
of sections 108 and 1017 and §1.1502–28 are ten-
tatively applied to reduce attributes remaining after
the tentative computation of the tax imposed. Pur-
suant to §1.1502–28(a)(2), the tax attributes attrib-
utable to S would first be reduced to take into ac-
count its $100 of excluded COD income. Accord-
ingly, the consolidated net operating loss for Year 1
would be reduced by $50, the portion of that consol-
idated net operating loss attributable to S under the
principles of §1.1502–21(b)(2)(iv), to $0. Then, pur-
suant to §1.1502–28(a)(4), S’s remaining $50 of ex-
cluded COD income would reduce the consolidated
capital loss attributable to P of $40 by $40 to $0. The
remaining $10 of excluded COD income would have
no effect.
(F)Actual adjustment of stock basis.Pursuantto
paragraph (c)(2)(vi) of this section, §1.1502–32 is ap-
plied to reflect the amount of S’s income and gain in-
cluded, and unlimited deductions and losses that are
absorbed, in the tentative computation of the tax im-
posed for the year of the disposition and the excluded
COD income tentatively applied to reduce attributes
and the attributes reduced in respect of the excluded
COD income pursuant to the previous step. Under
§1.1502–32(b), the absorption of $30 of S’s loss, the
application of $90 of S’s excluded COD income to
reduce attributes of P and S, and the reduction of the
April 11, 20058712005–15 I.R.B.

$50 loss attributable to S in respect of the excluded
COD income results in a positive adjustment of $10
to P’s basis in the S stock. P’s basis in the S stock,
therefore, is $100.
(G)Actual computation of stock gain or loss.Pur-
suant to paragraph (c)(2)(vii) of this section, P’s ac-
tual gain or loss on the sale of the S stock is com-
puted using the basis computed in the previous step.
Accordingly, P recognizes an $80 loss on the dispo-
sition of the S stock.
(H)Actual computation of tax imposed.Pur-
suant to paragraph (c)(2)(viii) of this section, the
tax imposed is computed by taking into account
P’s $80 loss from the sale of S stock. Before the
application of §1.1502–28, therefore, the group
has a consolidated net operating loss of $50 that
is wholly attributable to S under the principles of
§1.1502–21(b)(2)(iv), and a consolidated capital
loss of $80 that is wholly attributable to P under the
principles of §1.1502–21(b)(2)(iv).
(I)Actual reduction of attributes. Pursuant
to paragraph (c)(2)(ix) of this section, sections
108 and 1017 and §1.1502–28 are then actually
applied to reduce attributes remaining after the
actual computation of the tax imposed. Pursuant
to §1.1502–28(a)(2), the tax attributes attributable
to S must first be reduced to take into account its
$100 of excluded COD income. Accordingly, the
consolidated net operating loss for Year 1 is re-
duced by $50, the portion of that consolidated net
operating loss attributable to S under the principles
of §1.1502–21(b)(2)(iv), to $0. Then, pursuant to
§1.1502–28(a)(4), S’s remaining $50 of excluded
COD income reduces consolidated tax attributes. In
particular, without regard to the limitation imposed
by paragraph (c)(2)(ix)(A) of this section, the $80
consolidated capital loss, which under the principles
of §1.1502–21(b)(2)(iv) is attributable to P, would
be reduced by $50 from $80 to $30. However, the
limitation imposed by paragraph (c)(2)(ix)(A) of
this section prevents the reduction of the consoli-
dated capital loss attributable to P by more than $40.
Therefore, the consolidated capital loss attributable
to P is reduced by only $40 in respect of S’s excluded
COD income. The remaining $10 of excluded COD
income has no effect.
Example 2.Member other than departing mem-
ber realizes excluded COD income.(i)Facts.Powns
all of S1’s and S2’s stock. P’s basis in S2’s stock is
$600. For Year 1, P has ordinary income of $30, S1
has a $100 ordinary loss and $100 of excluded COD
income from the discharge of non-intercompany in-
debtedness, and S2 has $200 of ordinary loss. P sells
the S2 stock for $600 at the close of Year 1. As of the
beginning of Year 2, S1 has Asset A with a basis of
$0 and a fair market value of $10.
(ii)Analysis. The steps used to compute the tax
imposed on the group, to effect the reduction of at-
tributes, and to compute the limitations on the use and
reduction of attributes are as follows:
(A)Computation of limitation on deductions and
losses to offset income or gain. To determine the
amount of the limitation under paragraph (c)(2)(i) of
this section on S2’s loss and the effect of the absorp-
tion of S2’s loss on P’s basis in S2’s stock under
§1.1502–32(b), P’s gain or loss from the sale of S2’s
stock is not taken into account. The group is tenta-
tively treated as having a consolidated net operating
loss of $270 (P’s $30 of income minus S1’s $100 loss
and S2’s $200 loss). Consequently, $20 of S2’s loss
from Year 1 is unlimited and $180 of S2’s loss from
Year 1 is limited under paragraph (c)(2)(i) of this sec-
tion. Under the principles of §1.1502–21(b)(2)(iv),
$90 of the consolidated net operating loss is attribut-
able to S1 and $180 of the consolidated net operating
loss is attributable to S2.
(B)Tentative adjustment of stock basis. Then,
pursuant to paragraph (c)(2)(ii) of this section,
§1.1502–32 is tentatively applied to adjust the basis
of S2’s stock. For this purpose, however, adjustments
to the basis of S2’s stock attributable to the reduction
of attributes in respect of S1’s excluded COD income
are not taken into account. Under §1.1502–32(b), the
absorption of $20 of S2’s loss decreases P’s basis in
S2’s stock by $20 to $580.
(C)Tentative computation of stock gain or loss.
Then, P’s income, gain, or loss from the disposition of
S2 stock is computed pursuant to paragraph (c)(2)(iii)
of this section using the basis computed in the previ-
ous step. Thus, P is treated as recognizing a $20 gain
from the sale of the S2 stock.
(D)Tentative computation of tax imposed.Pur-
suant to paragraph (c)(2)(iv) of this section, the tax
imposed for the year of disposition is then tentatively
computed, taking into account P’s $20 gain from
the sale of S2 stock computed pursuant to paragraph
(c)(2)(iii) of this section. Although S2’s limited
loss cannot be used to offset P’s $20 gain from the
sale of S2’s stock under the rules of this section,
S1’s loss will offset that gain. Therefore, the group
is tentatively treated as having a consolidated net
operating loss of $250, $70 of which is attributable
to S1 and $180 of which is attributable to S2 under
the principles of §1.1502–21(b)(2)(iv).
(E)Tentative reduction of attributes.Next,pur-
suant to paragraph (c)(2)(v) of this section, the rules
of sections 108 and 1017 and §1.1502–28 are ten-
tatively applied to reduce attributes remaining after
the tentative computation of the tax imposed. Pur-
suant to §1.1502–28(a)(2), the tax attributes attrib-
utable to S1 would first be reduced to take into ac-
count its $100 of excluded COD income. Accord-
ingly, the consolidated net operating loss for Year 1
would be reduced by $70, the portion of that consol-
idated net operating loss attributable to S1 under the
principles of §1.1502–21(b)(2)(iv), to $0. Then, pur-
suant to §1.1502–28(a)(4), S1’s remaining $30 of ex-
cluded COD income would reduce the consolidated
net operating loss for Year 1 attributable to S2 of $180
by $30 to $150.
(F)Actual adjustment of stock basis.Pursuantto
paragraph (c)(2)(vi) of this section, §1.1502–32 is ap-
plied to reflect the amount of S2’s income and gain
included, and unlimited deductions and losses that
are absorbed, in the tentative computation of the tax
imposed for the year of the disposition and the ex-
cluded COD income tentatively applied to reduce at-
tributes and the attributes reduced in respect of the
excluded COD income pursuant to the previous step.
Under §1.1502–32(b), the absorption of $20 of S2’s
loss to offset a portion of P’s income and the applica-
tion of $30 of S1’s excluded COD income to reduce
attributes attributable to S2 results in a negative ad-
justment of $50 to P’s basis in the S2 stock. P’s basis
in the S2 stock, therefore, is $550.
(G)Actual computation of stock gain or loss.Pur-
suant to paragraph (c)(2)(vii) of this section, P’s ac-
tual gain or loss on the sale of the S2 stock is com-
puted using the basis computed in the previous step.
Therefore, P recognizes a $50 gain on the disposition
of the S2 stock.
(H)Actual computation of tax imposed.Pursuant
to paragraph (c)(2)(viii) of this section, the tax im-
posediscomputedbytakingintoaccountP’s$50
gain from the disposition of the S2 stock. Before the
application of §1.1502–28, therefore, the group has a
consolidated net operating loss of $220, $40 of which
is attributable to S1 and $180 of which is attributable
to S2 under the principles of §1.1502–21(b)(2)(iv).
(I)Actual reduction of attributes.Pursuant
to paragraph (c)(2)(ix) of this section, sections
108 and 1017 and §1.1502–28 are then actually
applied to reduce attributes remaining after the ac-
tual computation of the tax imposed. Pursuant to
§1.1502–28(a)(2), the tax attributes attributable to
S1 must first be reduced to take into account its
$100 of excluded COD income. Accordingly, the
consolidated net operating loss for Year 1 is reduced
by $40, the portion of that consolidated net oper-
ating loss attributable to S1 under the principles
of §1.1502–21(b)(2)(iv), to $0. Then, pursuant to
§1.1502–28(a)(4), without regard to the limitation
imposed by paragraph (c)(2)(ix)(B) of this sec-
tion, S1’s remaining $60 of excluded COD income
would reduce S2’s net operating loss of $180 to
$120. However, the limitation imposed by paragraph
(c)(2)(ix)(B) of this section prevents the reduction
of S2’s loss by more than $30. Therefore, S2’s loss
of $180 is reduced by $30 to $150 in respect of
S1’s excluded COD income. The remaining $30 of
excluded COD income has no effect.
Example 3.Lower-tier corporation of departing
member realizes excluded COD income.(i)Facts.P
owns all of S1’s stock, S2’s stock, and S3’s stock.
S1 owns all of S4’s stock. P’s basis in S1’s stock
is $50 and S1’s basis in S4’s stock is $50. For Year
1, P has $50 of ordinary loss, S1 has $100 of ordi-
nary loss, S2 has $150 of ordinary loss, S3 has $50
of ordinary loss, and S4 has $50 of ordinary loss and
$80 of excluded COD income from the discharge of
non-intercompany indebtedness. P sells the S1 stock
for $100 at the close of Year 1. As of the beginning
of Year 2, S4 has Asset A with a fair market value of
$10. After the computation of tax imposed for Year
1 and before the application of sections 108 and 1017
and §1.1502–28, Asset A has a basis of $0.
(ii)Analysis. Thestepsusedtocomputethetax
imposed on the group, to effect the reduction of at-
tributes, and to compute the limitations on the use and
reduction of attributes are as follows:
(A)Computation of limitation on deductions and
losses to offset income or gain.Todeterminethe
amount of the limitation under paragraph (c)(2)(i) of
this section on S1’s and S4’s losses and the effect of
the absorption of S1’s and S4’s losses on P’s basis
in S1’s stock under §1.1502–32(b), P’s gain or loss
from the sale of S1’s stock is not taken into account.
The group is tentatively treated as having a consoli-
dated net operating loss of $400. Consequently, $100
of S1’s loss and $50 of S4’s loss is limited under para-
graph (c)(2)(i) of this section.
(B)Tentative adjustment of stock basis. Then,
pursuant to paragraph (c)(2)(ii) of this section,
§1.1502–32 is tentatively applied to adjust the basis
of S1’s stock. For this purpose, adjustments to the
basis of S1’s stock attributable to S4’s realization
of excluded COD income and the reduction of at-
2005–15 I.R.B.872April 11, 2005

tributes in respect of such excluded COD income are
not taken into account. There is no adjustment under
§1.1502–32 to the basis of the S1 stock. Therefore,
P’s basis in the S1 stock for this purpose is $50.
(C)Tentative computation of stock gain or loss.
Then,P’sincome,gain,orlossfromthesaleofS1
stock is computed pursuant to paragraph (c)(2)(iii) of
this section using the basis computed in the previous
step. Thus, P is treated as recognizing a $50 gain from
thesaleoftheS1stock.
(D)Tentative computation of tax imposed.Pur-
suant to paragraph (c)(2)(iv) of this section, the tax
imposed for the year of disposition is then tentatively
computed, taking into account P’s $50 gain from the
sale of the S1 stock computed pursuant to paragraph
(c)(2)(iii) of this section. Although S1’s and S4’s lim-
itedlossescannotbeusedtooffsetP’s$50gainfrom
the sale of S1’s stock under the rules of this section,
$10 of P’s loss, $30 of S2’s loss, and $10 of S3’s loss
will offset that gain. Therefore, the group is tenta-
tively treated as having a consolidated net operating
loss of $350, $40 of which is attributable to P, $100
of which is attributable to S1, $120 of which is attrib-
utable to S2, $40 of which is attributable to S3, and
$50 of which is attributable to S4 under the principles
of §1.1502–21(b)(2)(iv).
(E)Tentative reduction of attributes.Next,pur-
suant to paragraph (c)(2)(v) of this section, the rules
of sections 108 and 1017 and §1.1502–28 are ten-
tatively applied to reduce attributes remaining after
the tentative computation of the tax imposed. Pur-
suant to §1.1502–28(a)(2), the tax attributes attrib-
utable to S4 would first be reduced to take into ac-
count its $80 of excluded COD. Accordingly, the con-
solidated net operating loss for Year 1 would be re-
duced by $50, the portion of the consolidated net op-
erating loss attributable to S4 under the principles
of §1.1502–21(b)(2)(iv), to $300. Then, pursuant to
§1.1502–28(a)(4), S4’s remaining $30 of excluded
COD income would reduce the consolidated net oper-
ating loss for Year 1 that is attributable to other mem-
bers. Therefore, the consolidated net operating loss
for Year 1 would be reduced by $30. Of that amount,
$4 is attributable to P, $10 is attributable to S1, $12 is
attributable to S2, and $4 is attributable to S3.
(F)Actual adjustment of stock basis. Pursuant
to paragraph (c)(2)(vi) of this section, §1.1502–32 is
applied to reflect the amount of S1’s and S4’s in-
come and gain included, and unlimited deductions
and losses that are absorbed, in the tentative compu-
tation of tax imposed for the year of the disposition
and the excluded COD income tentatively applied to
reduce attributes and the attributes reduced in respect
of the excluded COD income pursuant to the previous
step. Under §1.1502–32(b), the application of $80 of
S4’s excluded COD income to reduce attributes, and
the reduction of S4’s loss in the amount of $50 and
S1’s loss in the amount of $10 in respect of the ex-
cluded COD income results in a positive adjustment
of $20 to P’s basis in the S1 stock. Accordingly, P’s
basis in S1 stock is $70.
(G)Actual computation of stock gain or loss.Pur-
suant to paragraph (c)(2)(vii) of this section, P’s ac-
tual gain or loss on the sale of the S1 stock is com-
puted using the basis computed in the previous step.
Accordingly, P recognizes a $30 gain on the disposi-
tion of the S1 stock.
(H)Actual computation of tax imposed. Pursuant
to paragraph (c)(2)(viii) of this section, the tax im-
posed is computed by taking into account P’s $30
gain from the sale of S1 stock. Before the applica-
tion of §1.1502–28, therefore, the group has a con-
solidated net operating loss of $370, $44 of which is
attributable to P, $100 of which is attributable to S1,
$132 of which is attributable to S2, $44 of which is
attributable to S3, and $50 of which is attributable to
S4.
(I)Actual reduction of attributes. Pursuant
to paragraph (c)(2)(ix) of this section, sections
108 and 1017 and §1.1502–28 are then actually
applied to reduce attributes remaining after the ac-
tual computation of the tax imposed. Pursuant to
§1.1502–28(a)(2), the tax attributes attributable to
S4 must first be reduced to take into account its
$80 of excluded COD income. Accordingly, the
consolidated net operating loss for Year 1 is reduced
by $50, the portion of that consolidated net oper-
ating loss attributable to S4 under the principles of
§1.1502–21(b)(2)(iv), to $320. Then, pursuant to
§1.1502–28(a)(4), without regard to the limitation
imposed by paragraph (c)(2)(ix)(A) of this section,
S4’s remaining $30 of excluded COD income would
reduce the consolidated net operating loss for Year 1
by $30 ($4.12 of the consolidated net operating loss
attributable to P, $9.38 of the consolidated net operat-
ing loss attributable to S1, $12.38 of the consolidated
net operating loss attributable to S2, and $4.12 of the
consolidated net operating loss attributable to S3) to
$290. However, the limitation imposed by paragraph
(c)(2)(ix)(A) of this section prevents the reduction of
the consolidated net operating loss attributable to P,
S2, and S3 by more than $4, $12, and $4 respectively.
The $.62 of excluded COD income that would have
otherwise reduced the consolidated net operating
loss attributable to P, S2, and S3 is applied to reduce
the consolidated net operating loss attributable to S1.
Therefore, S1 carries forward $90 of loss.
Example 4.Excess loss account taken into ac-
count.(i)Facts. P is the common parent of a con-
solidated group. On Day 1 of Year 2, P acquired all
of the stock of S1. As of the beginning of Year 2, S1
had a $30 net operating loss carryover from Year 1,
a separate return limitation year. A limitation under
§1.1502–21(c) applies to the use of that loss by the P
group. For Years 1 and 2, the P group had no con-
solidated taxable income or loss. On Day 1 of Year
3, S1 acquired all of the stock of S2 for $10. In Year
3, P had ordinary income of $10, S1 had ordinary in-
come of $25, and S2 had an ordinary loss of $50. In
addition, in Year 3, S2 realized $20 of excluded COD
income from the discharge of non-intercompany in-
debtedness. After the discharge of this indebtedness,
S2 had no liabilities. As of the beginning of Year
4, S2 had Asset A with a fair market value of $10.
After the computation of tax imposed for Year 3 and
before the application of sections 108 and 1017 and
§1.1502–28, Asset A has a basis of $0. S2 had no
taxable income (or loss) for Year 1 and Year 2.
(ii)Analysis. The steps used to compute the tax
imposed on the group, to effect the reduction of at-
tributes, and to compute the limitations on the use and
reduction of attributes are as follows:
(A)Computation of limitation on deductions and
losses to offset income or gain, tentative basis ad-
justments, tentative computation of stock gain or loss.
Because it is not initially apparent that there has been
a disposition of stock, paragraph (c)(2)(i) of this sec-
tion does not limit the use of deductions to offset in-
come or gain, no adjustments to the basis are required
pursuant to paragraph (c)(2)(ii) of this section, and
no stock gain or loss is computed pursuant to para-
graph (c)(2)(iii) of this section or taken into account
in the tentative computation of tax imposed pursuant
to paragraph (c)(2)(iv) of this section.
(B)Tentative computation of tax imposed.Pur-
suant to paragraph (c)(2)(iv) of this section, the tax
imposed for Year 3 is tentatively computed. For Year
3, the P group has a consolidated taxable loss of $15,
all of which is attributable to S2 under the principles
of §1.1502–21(b)(2)(iv).
(C)Tentative reduction of attributes. Next, pur-
suant to paragraph (c)(2)(v) of this section, the rules
of sections 108 and 1017 and §1.1502–28 are ten-
tatively applied to reduce attributes remaining after
the tentative computation of tax imposed. Pursuant
to §1.1502–28(a)(2), the tax attributes attributable
to S2 would first be reduced to take into account
its $20 of excluded COD income. Accordingly,
the consolidated net operating loss for Year 3 is
reduced by $15, the portion of that consolidated net
operating loss attributable to S2 under the principles
of §1.1502–21(b)(2)(iv), to $0. The remaining $5
of excluded COD income is not applied to reduce
attributes as there are no remaining attributes that are
subject to reduction.
(D)Actual adjustment of stock basis.Pursuantto
paragraph (c)(2)(vi) of this section, §1.1502–32 is ap-
plied to reflect the amount of S2’s income and gain
included, and unlimited deductions and losses that
are absorbed, in the tentative computation of tax im-
posed for the year of the disposition and the excluded
COD income tentatively applied to reduce attributes
and the attributes reduced in respect of the excluded
COD income pursuant to the previous step. Under
§1.1502–32, the absorption of $35 of S2’s loss, the
application of $15 in respect of S2’s excluded COD
income to reduce attributes, and the reduction of $15
in respect of the loss attributable to S2 reduced in re-
spect of the excluded COD income results in a neg-
ative adjustment of $35 to the basis of the S2 stock.
Therefore, S1 has an excess loss account of $25 in the
S2 stock.
(E)Actual computation of stock gain or loss.Pur-
suant to paragraph (c)(2)(vii) of this section, S1’s ac-
tual gain or loss, if any, on the S2 stock is computed.
Because S2 realized $5 of excluded COD income
that was not applied to reduce attributes, pursuant to
§1.1502–19(b)(1) and (c)(1)(iii)(B), S1 is required to
take into account $5 of its excess loss account in the
S2 stock.
(F)Actual computation of tax imposed.Pursuant
to paragraph (c)(2)(viii) of this section, the tax im-
posed is computed by taking into account the $5
of the excess loss account in the S2 stock required
to be taken into account. See §1.1502–28(b)(6)
(requiring an excess loss account that is required to
be taken into account as a result of the application
of §1.1502–19(c)(1)(iii)(B) to be included in the
group’s tax return for the year that includes the date
of the debt discharge). However, pursuant to para-
graph (c)(2)(viii) of this section, such amount may
not be offset by any of the consolidated net operating
loss attributable to S2. It may, however, subject to
applicable limitations, be offset by the separate net
operating loss of S1 from Year 1.
(G)Actual reduction of attributes.Pursuantto
paragraph (c)(2)(ix) of this section, sections 108 and
April 11, 20058732005–15 I.R.B.

1017 and §1.1502–28 are then actually applied to re-
duce attributes remaining after the actual computa-
tion of the tax imposed. Attributes will be actually
reduced in the same way that they were tentatively
reduced.
(6)Additional rules for multiple dispo-
sitions. [Reserved].
(7)Effective date. This paragraph
(c) applies to dispositions of subsidiary
stock that occur after March 22, 2005.
Taxpayers may apply §1.1502–11(c) of
REG–167265–03, 2004–15 I.R.B. 730
(see §601.601(d)(2) of this chapter) in
whole, but not in part, to any disposition
of subsidiary stock that occurs on or be-
fore March 22, 2005, if a member of the
group realized excluded COD income af-
ter August 29, 2003, in the taxable year
that includes the date of the disposition of
such subsidiary stock.
*****
Par. 3. Section 1.1502–13 is amended
as follows:
1. Three sentences are added at the end
of paragraph (g)(3)(i)(A).
2. Paragraph (g)(3)(ii)(B) is revised.
3. Paragraph (g)(3)(ii)(C) is added.
The revision and additions read as fol-
lows:
§1.1502–13 Intercompany transactions.
*****
(g) * * *
(3) * * *
(i) * * *
(A) * * * For purposes of the preced-
ing sentence, a reduction of the basis of an
intercompany obligation pursuant to sec-
tions 108 and 1017 and 1.1502–28 is not a
comparable transaction. Notwithstanding
paragraph (l) of this section, the preceding
sentence applies to transactions or events
occurring during a taxable year the origi-
nal return for which is due (without regard
to extensions) after March 21, 2005. For
transactions or events occurring during a
taxable year the original return for which
is due (without regard to extensions) on or
before March 21, 2005, and after March
12, 2004, see §1.1502–13T(g)(3)(ii)(B)(3)
as contained in 26 CFR part 1 revised as of
April 1, 2004.
*****
(ii) * * *
(B)Timing and attributes. For purposes
of applying the matching rule and the ac-
celeration rule —
(1) Paragraph (c)(6)(ii) of this section
(limitation on treatment of intercompany
income or gain as excluded from gross in-
come) does not apply to prevent any inter-
company income or gain from being ex-
cluded from gross income;
(2) Paragraph (c)(6)(i) of this section
(treatment of intercompany items if cor-
responding items are excluded or nond-
eductible) will not apply to exclude any
amount of income or gain attributable to
a reduction of the basis of an intercom-
pany obligation pursuant to sections 108
and 1017 and §1.1502–28; and
(3) Any gain or loss from an intercom-
pany obligation is not subject to section
108(a), section 354 or section 1091.
(C)Effective date. Notwithstanding
paragraph (l) of this section, paragraph
(g)(3)(ii)(B) of this section applies to
transactions or events occurring during a
taxable year the original return for which
is due (without regard to extensions) af-
ter March 12, 2004. For transactions or
events occurring during a taxable year the
original return for which is due (without
regard to extensions) on or before March
12, 2004, see §1.1502–13(g)(3)(ii)(B) as
contained in 26 CFR part 1 revised as of
April 1, 2003.
*****
§1.1502–13T [Removed]
Par. 4. Section 1.1502–13T is removed.
Par. 5. Section 1.1502–19 is amended
as follows:
1. Paragraph (b)(1) is revised.
2. Paragraph (h)(2)(ii) is revised.
The revisions read as follows:
§1.1502–19 Excess loss accounts.
*****
(b) * * *
(1)Operating rules—(i)General rule.
Except as provided in paragraph (b)(1)(ii)
of this section, if P is treated under this
section as disposing of a share of S’s stock,
P takes into account its excess loss account
in the share as income or gain from the
disposition.
(ii)Special limitation on amount taken
into account. Notwithstanding paragraph
(b)(1)(i) of this section, if P is treated
as disposing of a share of S’s stock as
a result of the application of paragraph
(c)(1)(iii)(B) of this section, the aggre-
gate amount of its excess loss account
in the shares of S’s stock that P takes
into account as income or gain from the
disposition shall not exceed the amount
of S’s indebtedness that is discharged
that is neither included in gross income
nor treated as tax-exempt income under
§1.1502–32(b)(3)(ii)(C)(1). If more than
one share of S’s stock has an excess loss
account, such excess loss accounts shall
be taken into account pursuant to the pre-
ceding sentence, to the extent possible, in
a manner that equalizes the excess loss
accounts in S’s shares that have an excess
loss account.
(iii)Treatment of disposition. Except as
provided in paragraph (b)(4) of this sec-
tion, the disposition is treated as a sale or
exchange for purposes of determining the
character of the income or gain.
*****
(h) * * *
(2) * * *
(ii)Application of special limitation.
If P was treated as disposing of stock of
S because S was treated as worthless as
a result of the application of paragraph
(c)(1)(iii)(B) of this section after August
29, 2003, the amount of P’s income, gain,
deduction, or loss, and the stock basis
reflected in that amount, are determined
or redetermined with regard to paragraph
(b)(1)(ii) of this section. If P was treated
as disposing of stock of S because S was
treated as worthless as a result of the ap-
plication of paragraph (c)(1)(iii)(B) of this
section on or before August 29, 2003, the
group may determine or redetermine the
amount of P’s income, gain, deduction, or
loss, and the stock basis reflected in that
amount with regard to paragraph (b)(1)(ii)
of this section.
*****
§1.1502–19T [Removed]
Par. 6. Section 1.1502–19T is removed.
Par. 7. In §1.1502–21, paragraphs
(b)(1), (b)(2)(ii)(A), (b)(2)(iv), (c)(2)(vii),
and (h)(6) are revised to read as follows:
§1.1502
–21 Net operating losses.
*****
(b) * * *
2005–15 I.R.B.874April 11, 2005

(1)Carryovers and carrybacks gener-
ally.The net operating loss carryovers
and carrybacks to a taxable year are deter-
mined under the principles of section 172
and this section. Thus, losses permitted
to be absorbed in a consolidated return
year generally are absorbed in the order of
the taxable years in which they arose, and
losses carried from taxable years ending
on the same date, and which are available
to offset consolidated taxable income for
the year, generally are absorbed on apro
ratabasis. In addition, the amount of any
CNOL absorbed by the group in any year
is apportioned among members based on
the percentage of the CNOL attributable
to each member as of the beginning of
the year. The percentage of the CNOL
attributable to a member is determined
pursuant to paragraph (b)(2)(iv)(B) of
this section. Additional rules provided
under the Internal Revenue Code or reg-
ulations also apply. See,e.g., section
382(l)(2)(B) (if losses are carried from
the same taxable year, losses subject to
limitation under section 382 are absorbed
before losses that are not subject to limi-
tation under section 382). See paragraph
(c)(1)(iii) of this section,Example 2,for
an illustration ofpro rataabsorption of
losses subject to a SRLY limitation. See
§1.1502–21T(b)(3)(v) regarding the treat-
ment of any loss that is treated as expired
under §1.1502–35T(f)(1).
(2) * * *
(ii)Special rules—(A)Year of depar-
ture from group. If a corporation ceases to
be a member during a consolidated return
year, net operating loss carryovers attrib-
utable to the corporation are first carried
to the consolidated return year, and then
are subject to reduction under section 108
and §1.1502–28 in respect of discharge of
indebtedness income that is realized by a
member of the group and that is excluded
from gross income under section 108(a).
Only the amount so attributable that is not
absorbed by the group in that year or re-
duced under section 108 and §1.1502–28
is carried to the corporation’s first separate
return year. For rules concerning a mem-
ber departing a subgroup, see paragraph
(c)(2)(vii) of this section.
*****
(iv)Operating rules—(A)Amount of
CNOL attributable to a member.The
amount of a CNOL that is attributable to
a member shall equal the product of the
CNOL and the percentage of the CNOL
attributable to such member.
(B)Percentage of CNOL attributable to
amember—(1)In general. Except as pro-
vided in paragraph (b)(2)(iv)(B)(2)ofthis
section, the percentage of the CNOL attrib-
utable to a member shall equal the separate
net operating loss of the member for the
year of the loss divided by the sum of the
separate net operating losses for that year
of all members having such losses. For this
purpose, the separate net operating loss of
a member is determined by computing the
CNOL by reference to only the member’s
items of income, gain, deduction, and loss,
including the member’s losses and deduc-
tions actually absorbed by the group in the
taxable year (whether or not absorbed by
the member).
(2)Special rules—(i)Carryback to a
separate return year.Ifaportionofthe
CNOL attributable to a member for a tax-
able year is carried back to a separate re-
turn year, the percentage of the CNOL at-
tributable to each member as of immedi-
ately after such portion of the CNOL is car-
ried back shall be recomputed pursuant to
paragraph (b)(2)(iv)(B)(2)(iv) of this sec-
tion.
(ii)Excluded discharge of indebtedness
income. If during a taxable year a mem-
ber realizes discharge of indebtedness in-
come that is excluded from gross income
under section 108(a) and such amount re-
duces any portion of the CNOL attribut-
able to any member pursuant to section
108 and §1.1502–28, the percentage of
the CNOL attributable to each member as
of immediately after the reduction of at-
tributes pursuant to sections 108 and 1017
and §1.1502–28 shall be recomputed pur-
suant to paragraph (b)(2)(iv)(B)(2)(iv)of
this section.
(iii)Departing member. If during a tax-
able year a member that had a separate net
operating loss for the year of the CNOL
ceases to be a member, the percentage of
the CNOL attributable to each member as
of the first day of the following consoli-
dated return year shall be recomputed pur-
suant to paragraph (b)(2)(iv)(B)(2)(iv)of
this section.
(iv)Recomputed percentage.There-
computed percentage of the CNOL attrib-
utable to each member shall equal the un-
absorbed CNOL attributable to the mem-
ber at the time of the recomputation di-
vided by the sum of the unabsorbed CNOL
attributable to all of the members at the
time of the recomputation. For purposes
of the preceding sentence, a CNOL that
is reduced pursuant to section 108 and
§1.1502–28 or that is otherwise perma-
nently disallowed or eliminated shall be
treated as absorbed.
*****
(c) * * *
(2) * * *
(vii)Corporations that leave a SRLY
subgroup. If a loss member ceases to
be affiliated with a SRLY subgroup, the
amount of the member’s remaining SRLY
loss from a specific year is determined
pursuant to the principles of paragraphs
(b)(2)(ii)(A) and (b)(2)(iv) of this section.
*****
(h) * * *
(6)Certain prior periods. Para-
graphs (b)(1), (b)(2)(ii)(A), (b)(2)(iv),
and (c)(2)(vii) of this section shall ap-
ply to taxable years the original return
for which the due date (without regard
to extensions) is after March 21, 2005.
Paragraph (b)(2)(ii)(A) of this section
and §1.1502–21T(b)(1), (b)(2)(iv), and
(c)(2)(vii) as contained in 26 CFR part
1 revised as of April 1, 2004, shall ap-
ply to taxable years the original return
for which the due date (without regard
to extensions) is on or before March
21, 2005, and after August 29, 2003.
For taxable years the original return for
which the due date (without regard to
extensions) is on or before August 29,
2003, see paragraphs (b)(1), (b)(2)(ii)(A),
(b)(2)(iv), and (c)(2)(vii) of this section
and §1.1502–21T(b)(1) as contained in 26
CFR part 1 revised as of April 1, 2003.
*****
Par. 8. Section 1.1502–21T is amended
as follows:
1. Paragraphs (a) through (b)(2)(v) are
revised.
2. Paragraphs (c)(1) through (h)(7) are
revised.
The revisions read as follows:
§1.1502–21T Net operating losses
(temporary).
(a) through (b)(2)(v) [Reserved]. For
further guidance, see §1.1502–21(a)
through (b)(2)(v).
*****
April 11, 20058752005–15 I.R.B.

(c)(1) through (h)(7) [Reserved]. For
further guidance, see §1.1502–21(c)(1)
through (h)(7).
*****
Par. 9. Section 1.1502–28 is added to
read as follows:
§1.1502–28 Consolidated section 108.
(a)In general. This section sets forth
rules for the application of section 108(a)
and the reduction of tax attributes pursuant
to section 108(b) when a member of the
group realizes discharge of indebtedness
income that is excluded from gross income
under section 108(a) (excluded COD in-
come).
(1)Application of section 108(a). Sec-
tion 108(a)(1)(A) and (B) is applied sep-
arately to each member that realizes ex-
cluded COD income. Therefore, the lim-
itation of section 108(a)(3) on the amount
of discharge of indebtedness income that is
treated as excluded COD income is deter-
mined based on the assets (including stock
and securities of other members) and lia-
bilities (including liabilities to other mem-
bers) of only the member that realizes ex-
cluded COD income.
(2)Reduction of tax attributes attribut-
able to the debtor—(i)In general.With
respect to a member that realizes excluded
COD income in a taxable year, the tax at-
tributes attributable to that member (and its
direct and indirect subsidiaries to the ex-
tent required by section 1017(b)(3)(D) and
paragraph (a)(3) of this section), including
basis of assets and losses and credits aris-
ing in separate return limitation years, shall
be reduced as provided in sections 108 and
1017 and this section. Basis of subsidiary
stock, however, shall not be reduced below
zero pursuant to paragraph (a)(2) of this
section (including when subsidiary stock is
treated as depreciable property under sec-
tion 1017(b)(3)(D) when there is an elec-
tion under section 108(b)(5)).
(ii)Consolidated tax attributes attrib-
utable to a member. For purposes of this
section, the amount of a consolidated tax
attribute (e.g., a consolidated net operating
loss) that is attributable to a member shall
be determined pursuant to the principles of
§1.1502–21(b)(2)(iv). In addition, if the
member is a member of a separate return
limitation year subgroup, the amount of a
tax attribute that arose in a separate return
limitation year that is attributable to that
member shall also be determined pursuant
to the principles of §1.1502–21(b)(2)(iv).
(3)Look-through rules—(i)Priority of
section 1017(b)(3)(D). If a member treats
stock of a subsidiary as depreciable prop-
erty pursuant to section 1017(b)(3)(D), the
basis of the depreciable property of such
subsidiary shall be reduced pursuant to
section 1017(b)(3)(D) prior to the applica-
tion of paragraph (a)(3)(ii) of this section.
(ii)Application of additional
look-through rule. If the basis of stock
of a corporation (the lower-tier mem-
ber) that is owned by another corpora-
tion (the higher-tier member) is reduced
pursuant to sections 108 and 1017 and
paragraph (a)(2) of this section (but not
as a result of treating subsidiary stock
as depreciable property pursuant to sec-
tion 1017(b)(3)(D)), and both of such
corporations are members of the same
consolidated group on the last day of the
higher-tier member’s taxable year that
includes the date on which the excluded
COD income is realized or the first day of
the higher-tier member’s taxable year that
follows the taxable year that includes the
date on which the excluded COD income
is realized, solely for purposes of sec-
tions 108 and 1017 and this section other
than paragraphs (a)(4) and (b)(1) of this
section, the lower-tier member shall be
treated as realizing excluded COD income
on the last day of the taxable year of the
higher-tier member that includes the date
on which the higher-tier member realized
the excluded COD income. The amount
of such excluded COD income shall be
the amount of such basis reduction. Ac-
cordingly, the tax attributes attributable
to such lower-tier member shall be re-
duced as provided in sections 108 and
1017 and this section. To the extent that
the excluded COD income realized by the
lower-tier member pursuant to this para-
graph (a)(3) does not reduce a tax attribute
attributable to the lower-tier member, such
excluded COD income shall not be ap-
plied to reduce tax attributes attributable
to any member under paragraph (a)(4) of
this section and shall not cause an excess
loss account to be taken into account under
§1.1502–19(b)(1) and (c)(1)(iii)(B).
(4)Reduction of certain tax attributes
attributable to other members.Totheex-
tent that, pursuant to paragraph (a)(2) of
this section, the excluded COD income is
not applied to reduce the tax attributes at-
tributable to the member that realizes the
excluded COD income, after the applica-
tion of paragraph (a)(3) of this section,
such amount shall be applied to reduce
the remaining consolidated tax attributes
of the group, other than consolidated tax
attributes to which a SRLY limitation ap-
plies, as provided in section 108 and this
section. Such amount also shall be ap-
plied to reduce the tax attributes attribut-
able to members that arose (or are treated
as arising) in a separate return limitation
year to the extent that the member that re-
alizes excluded COD income is a member
of the separate return limitation year sub-
group with respect to such attribute if a
SRLY limitation applies to the use of such
attribute. In addition, such amount shall be
applied to reduce the tax attributes attrib-
utable to members that arose in a separate
return year or that arose (or are treated as
arising) in a separate return limitation year
if no SRLY limitation applies to the use of
such attribute. The reduction of each tax
attribute pursuant to the three preceding
sentences shall be made in the order pre-
scribedinsection108(b)(2)andpursuant
to the principles of §1.1502–21(b)(1). Ex-
cept as otherwise provided in this para-
graph (a)(4), a tax attribute that arose in
a separate return year or that arose (or is
treated as arising) in a separate return lim-
itation year is not subject to reduction pur-
suant to this paragraph (a)(4). Basis in as-
sets is not subject to reduction pursuant to
this paragraph (a)(4). Finally, to the extent
that the realization of excluded COD in-
come by a member pursuant to paragraph
(a)(3) does not reduce a tax attribute at-
tributable to such lower-tier member, such
excess shall not be applied to reduce tax
attributes attributable to any member pur-
suant to this paragraph (a)(4).
(b)Special rules—(1)Multiple debtor
members—(i)Reduction of tax attributes
attributable to debtor members prior to re-
duction of consolidated tax attributes.If
in a single taxable year multiple members
realize excluded COD income, paragraphs
(a)(2) and (3) of this section shall apply
with respect to the excluded COD income
of each such member before the applica-
tion of paragraph (a)(4) of this section.
(ii)Reduction of higher-tier debtor’s
tax attributes. If in a single taxable year
multiple members realize excluded COD
income and one such member is a higher-
tier member of another such member, para-
2005–15 I.R.B.876April 11, 2005

graphs (a)(2) and (3) of this section shall
be applied with respect to the excluded
COD income of the higher-tier member
before such paragraphs are applied to the
excluded COD income of the other such
member. In applying the rules of para-
graph (a)(2) and (3) of this section with re-
spect to the excluded COD income of the
higher-tier member, the liabilities that give
rise to the excluded COD income of the
other such member shall not be treated as
discharged for purposes of computing the
limitation on basis reduction under section
1017(b)(2). A member (the first member)
is a higher-tier member of another mem-
ber (the second member) if the first mem-
ber is the common parent or investment ad-
justments under §1.1502–32 with respect
to the stock of the second member would
affect investment adjustments with respect
to the stock of the first member.
(iii)Reduction of additional tax at-
tributes. If more than one member realizes
excluded COD income that has not been
applied to reduce a tax attribute attribut-
able to such member (the remaining COD
amount) and the remaining tax attributes
available for reduction under paragraph
(a)(4) of this section are less than the ag-
gregate of the remaining COD amounts,
after the application of paragraph (a)(2)
of this section, each such member’s re-
maining COD amount shall be applied
on apro ratabasis (based on the relative
remaining COD amounts), pursuant to
paragraph (a)(4) of this section, to reduce
such remaining available tax attributes.
(iv)Ownership of lower-tier member by
multiple higher-tier members.Ifstockof
a corporation is held by more than one
higher-tier member of the group and more
than one such higher-tier member reduces
its basis in such stock, then under para-
graph (a)(3) of this section the excluded
COD income resulting from the stock ba-
sis reductions shall be applied on apro rata
basis (based on the amount of excluded
COD income caused by each basis reduc-
tion) to reduce the attributes of the corpo-
ration.
(v)Ownership of lower-tier member by
multiple higher-tier members in multiple
groups. If a corporation is a member of one
group (the first group) on the last day of
the first group’s higher-tier member’s tax-
able year that includes the date on which
that higher-tier member realizes excluded
COD income and is a member of another
group (the second group) on the follow-
ing day and the first group’s higher-tier
member and the second group’s higher-tier
member both reduce their basis in the stock
of such corporation pursuant to sections
108 and 1017 and this section, paragraph
(a)(3) of this section shall first be applied
in respect of the excluded COD income
that results from the reduction of the ba-
sis of the corporation’s stock owned by the
first group’s higher-tier member and then
shall be applied in respect of the excluded
COD income that results from the reduc-
tion of the basis of the corporation’s stock
owned by the second group’s higher-tier
member.
(2)Election under section 108(b)
(5)—(i)Availability of election. The group
may make the election described in section
108(b)(5) for any member that realizes ex-
cluded COD income. The election is made
separately for each member. Therefore,
an election may be made for one member
that realizes excluded COD income (either
actually or pursuant to paragraph (a)(3) of
this section) while another election, or no
election, may be made for another mem-
ber that realizes excluded COD income
(either actually or pursuant to paragraph
(a)(3) of this section). See §1.108–4 for
rules relating to the procedure for making
an election under section 108(b)(5).
(ii)Treatment of shares with an excess
loss account. For purposes of applying
section 108(b)(5)(B), the basis of stock of
a subsidiary that has an excess loss account
shall be treated as zero.
(3)Application of section 1017—(i)
Timing of basis reduction. Basis of prop-
erty shall be subject toreduction pursuant
to the rules of sections 108 and 1017 and
this section after the determination of the
tax imposed by chapter 1 of the Internal
Revenue Code for the taxable year during
which the member realizes excluded COD
income and any prior years and coinci-
dent with the reduction of other attributes
pursuant to section 108 and this section.
However, only the basis of property held
as of the beginning of the taxable year
following the taxable year during which
the excluded COD income is realized is
subject to reduction pursuant to sections
108 and 1017 and this section.
(ii)Limitation of section 1017(b)(2).
The limitation of section 1017(b)(2) on the
reduction in basis of property shall be ap-
plied by reference to the aggregate of the
basis of the property held by the member
that realizes excluded COD income, not
the aggregate of the basis of the property
held by all of the members of the group,
and the liabilities of such member, not the
aggregate liabilities of all of the members
of the group.
(iii)Treatment of shares with an excess
loss account. For purposes of applying
section 1017(b)(2) and §1.1017–1, the ba-
sis of stock of a subsidiary that has an ex-
cess loss account shall be treated as zero.
(4)Application of section 1245.Not-
withstanding section 1017(d)(1)(B), a re-
duction of the basis of subsidiary stock is
treated as a deduction allowed for depreci-
ation only to the extent that the amount by
which the basis of the subsidiary stock is
reduced exceeds the total amount of the at-
tributes attributable to such subsidiary that
are reduced pursuant to the subsidiary’s
consent under section 1017(b)(3)(D) or as
a result of the application of paragraph
(a)(3)(ii) of this section.
(5)Reduction of basis of intercompany
obligations and former intercompany obli-
gations—(i)Intercompany obligations
that cease to be intercompany obliga-
tions. If excluded COD income is realized
in a consolidated return year in which
an intercompany obligation becomes an
obligation that is not an intercompany
obligation because the debtor or the cred-
itor becomes a nonmember or because
the assets of the creditor are acquired by
a nonmember in a transaction to which
section 381(a) applies, the basis of such
intercompany obligation is not available
for reduction in respect of such excluded
COD income pursuant to sections 108
and 1017 and this section. However, in
such cases, the basis of the debt treated as
new debt issued under §1.1502–13(g)(3)
is available for reduction in respect of
such excluded COD income pursuant to
sections 108 and 1017 and this section.
(ii)Intercompany obligations.There-
duction of the basis of an intercompany
obligation pursuant to sections 108 and
1017 and this section shall not result in the
satisfaction and reissuance of the obliga-
tion under §1.1502–13(g). Therefore, any
income or gain (or reduction of loss or de-
duction) attributable to a reduction of the
basis of an intercompany obligation will be
taken into account when §1.1502–13(g)(3)
applies to such obligation. Furthermore,
§1.1502–13(c)(6)(i) (regarding the treat-
April 11, 20058772005–15 I.R.B.

ment of intercompany items if correspond-
ing items are excluded or nondeductible)
will not apply to exclude any amount of
income or gain attributable to a reduction
of the basis of an intercompany obligation
pursuant to sections 108 and 1017 and this
section. See §1.1502–13(g)(3)(i)(A) and
(ii)(B)(2).
(6)Taking into account of excess loss
account—(i)Determination of inclusion.
The determination of whether any portion
of an excess loss account in a share of
stock of a subsidiary that realizes excluded
COD income is required to be taken into
account as a result of the application of
§1.1502–19(c)(1)(iii)(B) is made after the
determination of the tax imposed by chap-
ter 1 of the Internal Revenue Code for
the year during which the member realizes
excluded COD income (without regard to
whether any portion of an excess loss ac-
count in a share of stock of the subsidiary is
required to be taken into account) and any
prior years, after the reduction of tax at-
tributes pursuant to sections 108 and 1017
and this section, and after the adjustment of
the basis of the share of stock of the sub-
sidiary pursuant to §1.1502–32 to reflect
the amount of the subsidiary’s deductions
and losses that are absorbed in the compu-
tation of taxable income (or loss) for the
year of the disposition and any prior years,
and the excluded COD income applied to
reduce attributes and the attributes reduced
in respect thereof. See §1.1502–11(c) for
special rules related to the computation of
tax that apply when an excess loss account
is required to be taken into account.
(ii)Timing of inclusion.Totheex-
tent an excess loss account in a share of
stock of a subsidiary that realizes excluded
COD income is required to be taken into
account as a result of the application of
§1.1502–19(c)(1)(iii)(B), such amount
shall be included on the group’s tax return
for the taxable year that includes the date
on which the subsidiary realizes such ex-
cluded COD income.
(7)Dispositions of stock.See
§1.1502–11(c) for limitations on the re-
duction of tax attributes when a member
disposes of stock of another member (in-
cluding dispositions that result from the
application of §1.1502–19(c)(1)(iii)(B))
during a taxable year in which any mem-
ber realizes excluded COD income.
(8)Departure of member.Ifthetax-
able year of a member (the departing mem-
ber) during which such member realizes
excluded COD income ends on or prior to
the last day of the consolidated return year
and, on the first day of the taxable year of
such member that follows the taxable year
during which such member realizes ex-
cluded COD income, such member is not
a member of the group and does not have
a successor member (within the meaning
of paragraph (b)(10) of this section), all
tax attributes listed in section 108(b)(2)
that remain after the determination of the
tax imposed that belong to members of
the group (including the departing member
and subsidiaries of the departing member)
shall be subject to reduction as provided
in section 108 and the regulations promul-
gated thereunder (including §1.108–7(c),
if applicable) and this section.
(9)Intragroup reorganization—(i)In
general. If the taxable year of a member
during which such member realizes ex-
cluded COD income ends prior to the last
day of the consolidated return year and, on
the first day that follows the taxable year
of such member during which such mem-
ber realizes excluded COD income, such
member has a successor member, for pur-
poses of applying the rules of sections 108
and 1017 and this section, notwithstanding
§1.108–7, the successor member shall be
treated as the member that realized the ex-
cluded COD income. Thus, all attributes
attributable to the successor member listed
in section 108(b)(2) (including attributes
that were attributable to the successor
member prior to the date such member
became a successor member) are available
for reduction under paragraph (a)(2) of
this section.
(ii)Group structure change. If a mem-
ber that realizes excluded COD income ac-
quires the assets of the common parent of
the consolidated group in a transaction to
which section 381(a) applies and succeeds
such common parent under the principles
of §1.1502–75(d)(2) as the common par-
ent of the consolidated group, the mem-
ber’s attributes that remain after the deter-
mination of tax for the group for the con-
solidated return year during which the ex-
cluded COD income is realized (and any
prior years) (including attributes that were
attributable to the former common parent
prior to the date of the transaction to which
section 381(a) applies) shall be available
for reduction under paragraph (a)(2) of this
section.
(10)Definition of successor member.
A successor member means a person to
which the member that realizes excluded
COD income (or a successor member)
transfers its assets in a transaction to which
section 381(a) applies if such transferee is
a member of the group immediately after
the transaction.
(11)Non-application of next day rule.
For purposes of applying the rules of sec-
tions 108 and 1017 and this section, the
next day rule of §1.1502–76(b)(1)(ii)(B)
shall not apply to treat a member’s ex-
cluded COD income as realized at the be-
ginning of the day following the day on
which such member’s status as a member
changes.
(c)Examples. The principles of para-
graphs (a) and (b) of this section are illus-
trated by the following examples. Unless
otherwise indicated, no election under sec-
tion 108(b)(5) has been made and the tax-
able year of all consolidated groups is the
calendar year. The examples are as fol-
lows:
Example 1.(i)Facts. P is the common parent of
a consolidated group that includes subsidiary S1. P
owns 80 percent of the stock of S1. In Year 1, the
P group sustained a $250 consolidated net operating
loss. Under the principles of §1.1502–21(b)(2)(iv), of
that amount, $125 was attributable to P and $125 was
attributable to S1. On Day 1 of Year 2, P acquired 100
percent of the stock of S2, and S2 joined the P group.
As of the beginning of Year 2, S2 had a $50 net op-
erating loss carryover from Year 1, a separate return
limitation year. In Year 2, the P group sustained a
$200 consolidated net operating loss. Under the prin-
ciples of §1.1502–21(b)(2)(iv), of that amount, $90
was attributable to P, $70 was attributable to S1, and
$40 was attributable to S2. In Year 3, S2 realized
$200 of excluded COD income from the discharge of
non-intercompany indebtedness. In that same year,
the P group sustained a $50 consolidated net oper-
ating loss, of which $40 was attributable to S1 and
$10 was attributable to S2 under the principles of
§1.1502–21(b)(2)(iv). As of the beginning of Year
4, S2 had Asset A with a fair market value of $10.
After the computation of tax imposed for Year 3 and
before the application of sections 108 and 1017 and
this section, Asset A had a basis of $40 and S2 had
no liabilities.
(ii)Analysis—(A)Reduction of tax attributes at-
tributable to debtor. Pursuant to paragraph (a)(2) of
this section, the tax attributes attributable to S2 must
first be reduced to take into account its excluded COD
income in the amount of $200.
(1)Reduction of net operating losses.Pursuant
to section 108(b)(2)(A) and paragraph (a) of this
section, the net operating loss and the net operating
loss carryovers attributable to S2 under the principles
of §1.1502–21(b)(2)(iv) are reduced in the order
prescribed by section 108(b)(4)(B). Accordingly, the
consolidated net operating loss for Year 3 is reduced
by $10, the portion of the consolidated net operating
2005–15 I.R.B.878April 11, 2005

loss attributable to S2, to $40. Then, again pur-
suant to section 108(b)(4)(B), S2’s net operating loss
carryover of $50 from its separate return limitation
year is reduced to $0. Finally, the consolidated net
operating loss carryover from Year 2 is reduced by
$40, the portion of that consolidated net operating
loss carryover attributable to S2, to $160.
(2)Reduction of basis. Following the reduction
of the net operating loss and the net operating loss
carryovers attributable to S2, S2 reduces its basis in
its assets pursuant to section 1017 and §1.1017–1.
Accordingly, S2 reduces its basis in Asset A by $40,
from $40 to $0.
(B)Reduction of remaining consolidated tax at-
tributes. The remaining $60 of excluded COD in-
come then reduces consolidated tax attributes pur-
suant to paragraph (a)(4) of this section. In particular,
the remaining $40 consolidated net operating loss for
Year 3 is reduced to $0. Then, the consolidated net
operating loss carryover from Year 1 is reduced by
$20 from $250 to $230. Pursuant to paragraph (a)(4)
of this section, apro rataamount of the consolidated
net operating loss carryover from Year 1 that is at-
tributable to each of P and S1 is treated as reduced.
Therefore, $10 of the consolidated net operating loss
carryover from Year 1 that is attributable to each of P
and S1 is treated as reduced.
Example 2.(i)Facts. P is the common parent
of a consolidated group that includes subsidiaries
S1 and S2. P owns 100 percent of the stock of
S1andS1owns100percentofthestockofS2.
None of P, S1, or S2 has a separate return limitation
year. In Year 1, the P group sustained a $50 con-
solidated net operating loss. Under the principles of
§1.1502–21(b)(2)(iv), of that amount, $10 was attrib-
utable to P, $20 was attributable to S1, and $20 was
attributable to S2. In Year 2, the P group sustained
a $70 consolidated net operating loss. Under the
principles of §1.1502–21(b)(2)(iv), of that amount,
$30 was attributable to P, $30 was attributable to S1,
and $10 was attributable to S2. In Year 3, S1 realized
$170 of excluded COD income from the discharge
of non-intercompany indebtedness. In that same
year, the P group sustained a $50 consolidated net
operating loss, of which $10 was attributable to S1
and $40 was attributable to S2 under the principles
of §1.1502–21(b)(2)(iv). As of the beginning of Year
4, S1’s sole asset was the stock of S2, and S2 had
Asset A with a $10 value. After the computation of
tax imposed for Year 3 and before the application of
sections 108 and 1017 and this section, S1 had a $80
basis in the S2 stock, Asset A had a basis of $0, and
neither S1 nor S2 had any liabilities.
(ii)Analysis—(A)Reduction of tax attributes at-
tributable to debtor. Pursuant to paragraph (a)(2) of
this section, the tax attributes attributable to S1 must
first be reduced to take into account its excluded COD
income in the amount of $170.
(1)Reduction of net operating losses. Pursuant
to section 108(b)(2)(A) and paragraph (a) of this
section, the net operating loss and the net operating
loss carryovers attributable to S1 under the principles
of §1.1502–21(b)(2)(iv) are reduced in the order
prescribed by section 108(b)(4)(B). Accordingly, the
consolidated net operating loss for Year 3 is reduced
by $10, the portion of the consolidated net operating
loss for Year 3 attributable to S1, to $40. Then, the
consolidated net operating loss carryover from Year 1
is reduced by $20, the portion of that consolidated net
operating loss carryover attributable to S1, to $30,
and the consolidated net operating loss carryover
from Year 2 is reduced by $30, the portion of that
consolidated net operating loss carryover attributable
to S1, to $40.
(2)Reduction of basis. Following the reduction
of the net operating loss and the net operating loss
carryovers attributable to S1, S1 reduces its basis in
its assets pursuant to section 1017 and §1.1017–1.
Accordingly, S1 reduces its basis in the stock of S2
by $80, from $80 to $0.
(3)Tiering down of stock basis reduction.Pur-
suant to paragraph (a)(3) of this section, for purposes
of sections 108 and 1017 and this section, S2 is
treated as realizing $80 of excluded COD income.
Pursuant to section 108(b)(2)(A) and paragraph (a)
of this section, therefore, the net operating loss and
net operating loss carryovers attributable to S2 under
the principles of §1.1502–21(b)(2)(iv) are reduced
in the order prescribed bysection 108(b)(4)(B).
Accordingly, the consolidated net operating loss for
Year 3 is reduced by an additional $40, the portion
of the consolidated net operating loss for Year 3
attributable to S2, to $0. Then, the consolidated net
operating loss carryover from Year 1 is reduced by
$20, the portion of that consolidated net operating
loss carryover attributable to S2, to $10. Then, the
consolidated net operating loss carryover from Year
2 is reduced by $10, the portion of that consolidated
net operating loss carryover attributable to S2, to $30.
S2’s remaining $10 of excluded COD income does
not reduce consolidated tax attributes attributable to
P or S1 under paragraph (a)(4) of this section.
(B)Reduction of remaining consolidated tax
attributes. Finally, pursuant to paragraph (a)(4)
of this section, S1’s remaining $30 of excluded
COD income reduces the remaining consolidated
tax attributes. In particular, the remaining $10 con-
solidated net operating loss carryover from Year
1 is reduced by $10 to $0, and the remaining $30
consolidated net operating loss carryover from Year
2 is reduced by $20 to $10.
Example 3.(i)Facts. P is the common par-
ent of a consolidated group that includes subsidiaries
S1, S2, and S3. P owns 100 percent of the stock
of S1, S1 owns 100 percent of the stock of S2, and
S2 owns 100 percent of the stock of S3. None of P,
S1, S2, or S3 had a separate return limitation year
prior to Year 1. In Year 1, the P group sustained
a $150 consolidated net operating loss. Under the
principles of §1.1502–21(b)(2)(iv), of that amount,
$50 was attributable to S2, and $100 was attribut-
able to S3. In Year 2, the P group sustained a $50
consolidated net operating loss. Under the principles
of §1.1502–21(b)(2)(iv), of that amount, $40 was at-
tributable to S1 and $10 was attributable to S2. In
Year 3, S1 realized $170 of excluded COD income
from the discharge of non-intercompany indebted-
ness. In that same year, the P group sustained a $50
consolidated net operating loss, of which $10 was
attributable to S1, $20 was attributable to S2, and
$20 was attributable to S3 under the principles of
§1.1502–21(b)(2)(iv). At the beginning of Year 4,
S1’s only asset was the stock of S2, and S2’s only
asset was the stock of S3 with a value of $10. After
the computation of tax imposed for Year 3 and before
the application of sections 108 and 1017 and this sec-
tion, S1’s stock of S2 had a basis of $120 and S2’s
stock of S3 had a basis of $180. In addition, none of
S1, S2, and S3 had any liabilities.
(ii)Analysis—(A)Reduction of tax attributes at-
tributable to debtor. Pursuant to paragraph (a)(2) of
this section, the tax attributes attributable to S1 must
first be reduced to take into account its excluded COD
income in the amount of $170.
(1)Reduction of net operating losses.Pursuant
to section 108(b)(2)(A) and paragraph (a) of this
section, the net operating loss and the net operating
loss carryovers attributable to S1 under the principles
of §1.1502–21(b)(2)(iv) are reduced in the order
prescribed by section 108(b)(4)(B). Accordingly, the
consolidated net operating loss for Year 3 is reduced
by $10, the portion of the consolidated net operating
loss attributable to S1, to $40. Then, the consolidated
net operating loss carryover from Year 2 is reduced
by $40, the portion of that consolidated net operating
loss carryover attributable to S1, to $10.
(2)Reduction of basis. Following the reduction
of the net operating loss and the net operating loss
carryovers attributable to S1, S1 reduces its basis in
its assets pursuant to section 1017 and §1.1017–1.
Accordingly, S1 reduces its basis in the stock of S2
by $120, from $120 to $0.
(B)Tiering down of stock basis reduction to S2.
Pursuant to paragraph (a)(3) of this section, for pur-
poses of sections 108 and 1017 and this section, S2 is
treated as realizing $120 of excluded COD income.
Pursuant to section 108(b)(2)(A) and paragraph (a)
of this section, therefore, the net operating loss and
net operating loss carryovers attributable to S2 under
the principles of §1.1502–21(b)(2)(iv) are reduced in
the order prescribed by section 108(b)(4)(B). Accord-
ingly, the consolidated net operating loss for Year 3
is further reduced by $20, the portion of the consol-
idated net operating loss attributable to S2, to $20.
Then, the consolidated net operating loss carryover
from Year 1 is reduced by $50, the portion of that con-
solidated net operating loss carryover attributable to
S2, to $100. Then, the consolidated net operating loss
carryover from Year 2 is further reduced by $10, the
portion of that consolidated net operating loss carry-
over attributable to S2, to $0. Following the reduction
of the net operating loss and the net operating loss car-
ryovers attributable to S2, S2 reduces its basis in its
assets pursuant to section 1017 and §1.1017–1. Ac-
cordingly, S2 reduces its basis in its S3 stock by $40
to $140.
(C)Tiering down of stock basis reduction to S3.
Pursuant to paragraph (a)(3) of this section, for pur-
poses of sections 108 and 1017 and this section, S3
is treated as realizing $40 of excluded COD income.
Pursuant to section 108(b)(2)(A) and paragraph (a)
of this section, therefore, the net operating loss and
the net operating loss carryovers attributable to S3
under the principles of §1.1502–21(b)(2)(iv) are re-
duced in the order prescribed by section 108(b)(4)(B).
Accordingly, the consolidated net operating loss for
Year3isfurtherreducedby$20,theportionofthe
consolidated net operating loss attributable to S3, to
$0. Then, the consolidated net operating loss carry-
over from Year 1 is reduced by $20, the lesser of the
portion of that consolidated net operating loss carry-
over attributable to S3 and the remaining excluded
COD income, to $80.
Example 4.(i)Facts. P is the common parent
of a consolidated group that includes subsidiaries
S1, S2, and S3. P owns 100 percent of the stock of
April 11, 20058792005–15 I.R.B.

each of S1 and S2. Each of S1 and S2 owns stock
of S3 that represents 50 percent of the value of the
stock of S3. None of P, S1, S2, or S3 had a separate
return limitation year prior to Year 1. In Year 1, the
P group sustained a $160 consolidated net operating
loss. Under the principles of §1.1502–21(b)(2)(iv),
of that amount, $10 was attributable to P, $50 was
attributable to S2, and $100 was attributable to S3.
In Year 2, the P group sustained a $110 consoli-
dated net operating loss. Under the principles of
§1.1502–21(b)(2)(iv), of that amount, $40 was at-
tributable to S1 and $70 was attributable to S2. In
Year 3, S1 realized $200 of excluded COD income
from the discharge of non-intercompany indebted-
ness, and S2 realized $270 of excluded COD income
from the discharge of non-intercompany indebted-
ness. In that same year, the P group sustained a
$50 consolidated net operating loss, of which $10
was attributable to S1, $20 was attributable to S2,
and $20 was attributable to S3 under the principles
of §1.1502–21(b)(2)(iv). At the beginning of Year
4, S3 had one asset with a value of $10. After the
computation of tax imposed for Year 3 and before
the application of sections 108 and 1017 and this
section, S1’s basis in its S3 stock was $60, S2’s basis
in its S3 stock was $120, and S3’s asset had a basis
of $200. In addition, none of S1, S2, and S3 had any
liabilities.
(ii)Analysis—(A)Reduction of tax attributes at-
tributable to debtors. Pursuant to paragraph (b)(1)(i)
of this section, the tax attributes attributable to each
of S1 and S2 are reduced pursuant to paragraph (a)(2)
of this section. Then, pursuant to paragraph (a)(3) of
this section, the tax attributes attributable to S3 are
reducedsoastoreflectareductionofS1’sandS2’s
basis in the stock of S3. Then, paragraph (a)(4) is ap-
plied to reduce additional tax attributes.
(1)Reduction of net operating losses generally.
Pursuant to section 108(b)(2)(A) and paragraph (a) of
this section, the net operating losses and the net oper-
ating loss carryovers attributable to S1 and S2 under
the principles of §1.1502–21(b)(2)(iv) are reduced in
the order prescribed by section 108(b)(4)(B).
(2)Reduction of net operating losses attributable
to S1. The consolidated net operating loss for Year 3
is reduced by $10, the portion of the consolidated net
operating loss attributable to S1, to $40. Then, the
consolidated net operating loss carryover from Year
2 is reduced by $40, the portion of that consolidated
net operating loss carryover attributable to S1, to $70.
(3)Reduction of net operating losses attributable
to S2. The consolidated net operating loss for Year 3
is also reduced by $20, the portion of the consolidated
net operating loss attributable to S2, to $20. Then, the
consolidated net operating loss carryover from Year 1
is reduced by $50, the portion of that consolidated net
operating loss carryover attributable to S2, to $110.
Then, the consolidated net operating loss carryover
from Year 2 is reduced by $70, the portion of that
consolidated net operating loss carryover attributable
toS2,to$0.
(4)Reduction of basis. Following the reduction
of the net operating losses and the net operating loss
carryovers attributable to S1 and S2, S1 and S2 must
reduce their basis in their assets pursuant to section
1017 and §1.1017–1. Accordingly, S1 reduces its ba-
sis in the stock of S3 by $60, from $60 to $0, and
S2 reduces its basis in the stock of S3 by $120, from
$120 to $0.
(B)Tiering down of basis reduction.Pursuantto
paragraph (a)(3) of this section, for purposes of sec-
tions 108 and 1017 and this section, S3 is treated as
realizing $180 of excluded COD income. Pursuant
to section 108(b)(2)(A) and paragraph (a) of this sec-
tion, therefore, the net operating loss and the net oper-
ating loss carryovers attributable to S3 under the prin-
ciples of §1.1502–21(b)(2)(iv) are reduced in the or-
der prescribed by section 108(b)(4)(B). Accordingly,
the consolidated net operating loss for Year 3 is fur-
ther reduced by $20, the portion of the consolidated
net operating loss attributable to S3, to $0. Then, the
consolidated net operating loss carryover from Year
1 is reduced by $100, the portion of that consolidated
net operating loss carryover attributable to S3, to $10.
Following the reduction of the net operating loss and
the net operating loss carryover attributable to S3, S3
reduces its basis in its asset pursuant to section 1017
and §1.1017–1. Accordingly, S3 reduces its basis in
its asset by $60, from $200 to $140.
(C)Reduction of remaining consolidated tax at-
tributes. Finally, pursuant to paragraph (a)(4) of this
section, the remaining $90 of S1’s excluded COD
income and the remaining $10 of S2’s excluded
COD income reduce the remaining consolidated tax
attributes. In particular, the remaining $10 consol-
idated net operating losscarryover from Year 1 is
reduced by $10 to $0. Because that amount is less
than the aggregate amount of remaining excluded
COD income, such income is applied on apro rata
basis to reduce the remaining consolidated tax at-
tributes. Accordingly, $9 of S1’s remaining excluded
COD income and $1 of S2’s remaining excluded
COD income is applied to reduce the remaining
consolidated net operating loss carryover from Year
1. Consequently, of S1’s excluded COD income of
$200, only $119 is applied to reduce tax attributes,
and, of S2’s excluded COD income of $270, only
$261 is applied to reduce tax attributes.
Example 5.(i)Facts. P is the common parent of a
consolidated group that includes subsidiaries S1, S2,
and S3. P owns 100 percent of the stock of S1 and S2,
and S1 owns 100 percent of the stock of S3. None of
P, S1, S2, or S3 has a separate return limitation year
prior to Year 1. In Year 1, the P group sustained a $90
consolidated net operating loss. Under the principles
of §1.1502–21(b)(2)(iv), of that amount, $10 was at-
tributable to P, $15 was attributable to S1, $20 was
attributable to S2, and $45 was attributable to S3. On
January 1 of Year 2, P realized $140 of excluded COD
income from the discharge of non-intercompany in-
debtedness. On December 31 of Year 2, S1 issued
stock representing 50 percent of the vote and value of
its outstanding stock to a person that was not a mem-
ber of the group. As a result of the issuance of stock,
S1 and S3 ceased to be members of the P group. For
the consolidated return year of Year 2, the P group
sustained a $60 consolidated net operating loss, of
which $5 was attributable to S1, $40 was attributable
to S2, and $15 was attributable to S3 under the prin-
ciples of §1.1502–21(b)(2)(iv). As of the beginning
of Year 3, P’s only assets were the stock of S1 and
S2,S1’ssoleassetwasthestockofS3,S2hadAs-
set A with a value of $10, and S3 had Asset B with a
value of $10. After the computation of tax imposed
for Year 2 and before the application of sections 108
and 1017 and this section, P had a $80 basis in the S1
stock and a $50 basis in the S2 stock, S1 had a $80
basisintheS3stock,andAssetAandBeachhada
basis of $10. In addition, none of P, S1, S2, and S3
had any liabilities.
(ii)Analysis. Pursuant to paragraph (a)(2) of this
section, the tax attributes attributable to P must first
be reduced to take into account its excluded COD
income in the amount of $140.
(A)Reduction of net operating losses.Pursuant
to section 108(b)(2)(A) and paragraph (a) of this
section, the net operating loss and the net operating
loss carryover attributable to P under the principles
of §1.1502–21(b)(2)(iv) are reduced in the order
prescribed by section 108(b)(4)(B). Accordingly, the
consolidated net operating loss carryover from Year
1 is reduced by $10, the portion of that consolidated
net operating loss carryover attributable to P, to $80.
(B)Reduction of basis. Following the reduction
of the net operating loss and the net operating loss
carryover attributable to P, P reduces its basis in its
assets pursuant to section 1017 and §1.1017–1. Ac-
cordingly, P reduces its basis in the stock of S1 by
$80, from $80 to $0, and its basis in the stock of S2
by $50, from $50 to $0.
(C)Tiering down of stock basis reduction to S1.
Pursuant to paragraph (a)(3) of this section, for pur-
poses of sections 108 and 1017 and this section, S1
is treated as realizing $80 of excluded COD income,
despite the fact that it ceases to be a member of the
group at the end of the day on December 31 of Year
2. Pursuant to section 108(b)(2)(A) and paragraph (a)
of this section, therefore, the net operating loss and
net operating loss carryovers attributable to S1 under
the principles of §1.1502–21(b)(2)(iv) are reduced in
the order prescribed by section 108(b)(4)(B). Accord-
ingly, the consolidated net operating loss for Year 2
is reduced by $5, the portion of the consolidated net
operating loss for Year 2 attributable to S1, to $55.
Then, the consolidated net operating loss carryover
from Year 1 is reduced by an additional $15, the por-
tion of that consolidated net operating loss carryover
attributable to S1, to $65. Following the reduction of
the net operating loss and the net operating loss car-
ryover attributable to S1, S1 reduces its basis in its
assets pursuant to section 1017 and §1.1017–1. Ac-
cordingly, S1 reduces its basis in the stock of S3 by
$60, from $80 to $20.
(D)Tiering down of stock basis reduction to S2.
Pursuant to paragraph (a)(3) of this section, for pur-
poses of sections 108 and 1017 and this section, S2
is treated as realizing $50 of excluded COD income.
Pursuant to section 108(b)(2)(A) and paragraph (a)
of this section, therefore, the net operating loss and
net operating loss carryovers attributable to S2 under
the principles of §1.1502–21(b)(2)(iv) are reduced in
the order prescribed by section 108(b)(4)(B). Accord-
ingly, the consolidated net operating loss for Year 2
is reduced by an additional $40, the portion of the
consolidated net operating loss for Year 2 attributable
to S2, to $15. Then, the consolidated net operating
loss carryover from Year 1 is reduced by an additional
$10, a portion of the consolidated net operating loss
carryover attributable to S2, to $55.
(E)Tiering down of stock basis reduction to S3.
Pursuant to paragraph (a)(3) of this section, for pur-
poses of sections 108 and 1017 and this section, S3 is
treated as realizing $60 of excluded COD income (by
reason of S1’s reduction in its basis of its S3 stock).
Pursuant to section 108(b)(2)(A) and paragraph (a)
of this section, therefore, the net operating loss and
net operating loss carryovers attributable to S3 under
2005–15 I.R.B.880April 11, 2005

the principles of §1.1502–21(b)(2)(iv) are reduced in
the order prescribed by section 108(b)(4)(B). Accord-
ingly, the consolidated net operating loss for Year 2
is reduced by an additional $15, the portion of the
consolidated net operating loss for Year 2 attribut-
able to S3, to $0. Then, the consolidated net oper-
ating loss carryover fromYear 1 is reduced by an ad-
ditional $45, the portion of that consolidated net op-
erating loss carryover attributable to S3, to $10.
Example 6.(i)Facts. P1isthecommonparent
of a consolidated group that includes subsidiaries S1,
S2, and S3. P1 owns 100 percent of the stock of S1
and S2. S1 owns 100 percent of the stock of S3. None
of P1, S1, S2, or S3 has a separate return limitation
year prior to Year 1. In Year 1, the P1 group sustained
a $120 consolidated net operating loss. Under the
principles of §1.1502–21(b)(2)(iv), of that amount,
$40 was attributable to P1, $35 was attributable to
S1, $30 was attributable to S2, and $15 was attribut-
able to S3. On January 1 of Year 2, S3 realized $65 of
excluded COD income from the discharge of non-in-
tercompany indebtedness. On June 30 of Year 2, S3
issued stock representing 80 percent of the vote and
value of its outstanding stock to P2, the common par-
ent of another group. As a result of the issuance of
stock, S3 ceased to be a member of the P1 group and
became a member of the P2 group. For the consol-
idated return year of Year 2, the P1 group sustained
a $50 consolidated net operating loss, of which $5
was attributable to S1, $40 was attributable to S2,
and $5 was attributable to S3 under the principles of
§1.1502–21(b)(2)(iv). As of the beginning of its tax-
able year beginning on July 1 of Year 2, S3’s sole
asset was Asset A with a $10 value. After the com-
putation of tax imposed for Year 2 on the P1 group
and before the application of sections 108 and 1017
and this section and the computation of tax imposed
for Year 2 on the P2 group, Asset A had a basis of
$0. In addition, S3 had no liabilities. On January 1 of
Year 3, P1 sold all of its stock of S1.
(ii)Analysis—(A)Reduction of tax attributes
attributable to debtor. Pursuant to paragraph (a)(2)
of this section, the tax attributes attributable to S3
must first be reduced to take into account its ex-
cluded COD income in the amount of $65. Pursuant
to section 108(b)(2)(A) and paragraph (a) of this
section, the net operating loss and the net operating
loss carryover attributable to S3 under the principles
of §1.1502–21(b)(2)(iv) are reduced in the order
prescribed by section 108(b)(4)(B). Accordingly, the
consolidated net operating loss for Year 2 is reduced
by $5, the portion of the consolidated net operating
loss for Year 2 attributable to S3, to $45. Then, the
consolidated net operating loss carryover from Year
1 is reduced by $15, the portion of that consolidated
net operating loss carryover attributable to S3, to
$105.
(B)Reduction of remaining consolidated tax at-
tributes. Pursuant to paragraphs (a)(4) and (b)(8) of
this section, S3’s remaining $45 of excluded COD
income reduces the remaining consolidated tax at-
tributes in the P1 group. In particular, the remaining
$45 consolidated net operating loss for Year 2 is re-
duced by an additional $45 to $0.
(C)Basis Adjustments. For purposes of comput-
ingP1’sgainorlossonthesaleoftheS1stockin
Year 3, P1’s basis in its S1 stock will reflect a net
positive adjustment of $40, which is the excess of the
amount of S3’s excluded COD income that is applied
to reduce attributes ($65) over the reduction of S1’s
and S3’s attributes in respect of such excluded COD
income ($25).
Example 7.(i)Facts. P is the common parent
of a consolidated group that includes subsidiaries S1
and S2. P owns 100 percent of the stock of S1, and
S1 owns 100 percent of the stock of S2. None of P,
S1, or S2 has a separate return limitation year prior to
Year 1. In Year 1, the P group sustained a $50 con-
solidated net operating loss. Under the principles of
§1.1502–21(b)(2)(iv), of that amount, $10 was attrib-
utable to P, $20 was attributable to S1, and $20 was
attributable to S2. On January 1 of Year 2, S1 real-
ized $55 of excluded COD income from the discharge
of non-intercompany indebtedness. On June 30 of
Year 2, P transferred all of its assets to S1 in a trans-
action to which section 381(a) applied. As a result
of that transaction, pursuant to §1.1502–75(d)(2)(ii),
S1 succeeded P as the common parent of the group.
Pursuant to §1.1502–75(d)(2)(iii), S1’s taxable year
closed on the date of the acquisition. However, P’s
taxable year did not close. On the consolidated re-
turn for Year 2, the group sustained a $50 consol-
idated net operating loss. Under the principles of
§1.1502–21(b)(2)(iv), of that amount, $10 was attrib-
utable to S1 for its taxable year that ended on June 30,
$15 was attributable to S1 as the successor of P, and
$25 was attributable to S2.
(ii)Analysis. Pursuant to paragraph (a)(2) of this
section, the tax attributes attributable to S1 must first
be reduced to take into account its excluded COD in-
come in the amount of $55. For this purpose, S1’s at-
tributes that remain after the determination of tax for
the group for Year 2 are subject to reduction. Pursuant
to section 108(b)(2)(A) and paragraph (a) of this sec-
tion, the net operating loss and the net operating loss
carryover attributable to S1 under the principles of
§1.1502–21(b)(2)(iv) are reduced. Accordingly, the
consolidated net operating loss for Year 2 is reduced
by $25, the portion of the consolidated net operating
loss for Year 2 attributable to S1, to $25. Then, the
consolidated net operating loss carryover from Year
1 is reduced by $30, the portion of that consolidated
net operating loss carryover attributable to S1 (which
includes the portion attributable to P), to $20.
(d)Effective dates. This section applies
to discharges of indebtedness that occur
after March 21, 2005. Groups, however,
may apply this section in whole, but not
in part, to discharges of indebtedness that
occur on or before March 21, 2005, and af-
ter August 29, 2003. For discharges of in-
debtedness occurring on or before March
21, 2005, and after August 29, 2003, with
respect to which a group chooses not to ap-
ply this section, see §1.1502–28T as con-
tained in 26 CFR part 1 revised as of April
1, 2004. Furthermore, groups may ap-
ply paragraph (b)(4) of this section to dis-
charges of indebtedness that occur on or
before August 29, 2003, in cases in which
section 1017(b)(3)(D) was applied.
§1.1502–28T [Removed]
Par. 10. Section 1.1502–28T is re-
moved.
Par. 11. Section 1.1502–32 is amended
as follows:
1. Paragraph (b)(1)(ii) is redesignated
as paragraph (b)(1)(iii).
2. New paragraph (b)(1)(ii) is added.
3. Paragraphs (b)(3)(ii)(C)(1)and
(b)(3)(iii)(A) are revised.
4. Paragraph (b)(5)(ii),Example 4,
paragraphs (a), (b), and (c) are revised.
5. Paragraph (h)(7) is revised.
The addition and revisions read as fol-
lows:
§1.1502–32 Investment adjustments.
*****
(b) * * *
(1) * * *
(ii)Special rule for discharge of in-
debtedness income. Adjustments under
this section resultingfrom the realization
of discharge of indebtedness income of
a member that is excluded from gross
income under section 108(a) (excluded
COD income) and from the reduction
of attributes in respect thereof pursuant to
sections 108 and 1017 and §1.1502–28 (in-
cluding reductions in the basis of property)
when a member (the departing member)
ceases to be a member of the group on or
prior to the last day of the consolidated
return year that includes the date the ex-
cluded COD income is realized are made
immediately after the determination of tax
for the group for the taxable year during
which the excluded COD income is real-
ized (and any prior years) and are effective
immediately before the beginning of the
taxable year of the departing member fol-
lowing the taxable year during which the
excluded COD income is realized. Such
adjustments when a corporation (the new
member)isnotamemberofthegroup
on the last day of the consolidated return
year that includes the date the excluded
COD income is realized but is a member
of the group at the beginning of the fol-
lowing consolidated return year are also
made immediately after the determination
of tax for the group for the taxable year
during which the excluded COD income is
realized (and any prior years) and are ef-
fective immediately before the beginning
of the taxable year of the new member
April 11, 20058812005–15 I.R.B.

following the taxable year during which
the excluded COD income is realized. If
the new member was a member of another
group immediately before it became a
member of the group, such adjustments
are treated as occurring immediately after
it ceases to be a member of the prior group.
*****
(3) * * *
(ii) * * *
(C)***
(1)In general. Excluded COD income
is treated as tax-exempt income only to the
extent the discharge is applied to reduce
tax attributes attributable to any member of
the group under section 108, section 1017
or §1.1502–28. However, if S is treated as
realizing excluded COD income pursuant
to §1.1502–28(a)(3), S shall not be treated
as realizing excluded COD income for pur-
poses of the preceding sentence.
*****
(iii) * * *
(A)In general. S’s noncapital, non-
deductible expenses are its deductions and
losses that are taken into account but per-
manently disallowed or eliminated under
applicable law in determining its taxable
income or loss, and that decrease, directly
or indirectly, the basis of its assets (or an
equivalent amount). For example, S’s Fed-
eral taxes described in section 275 and loss
not recognized under section 311(a) are
noncapital, nondeductible expenses. Sim-
ilarly, if a loss carryover (e.g., under sec-
tion 172 or 1212) attributable to S ex-
pires or is reduced under section 108(b)
and §1.1502–28, it becomes a noncapi-
tal, nondeductible expense at the close of
the last tax year to which it may be car-
ried. However, when a tax attribute attrib-
utable to S is reduced as required pursuant
to §1.1502–28(a)(3), the reduction of the
tax attribute is not treated as a noncapi-
tal, nondeductible expense of S. Finally, if
S sells and repurchases a security subject
to section 1091, the disallowed loss is not
a noncapital, nondeductible expense be-
cause the corresponding basis adjustments
under section 1091(d) prevent the disal-
lowance from being permanent.
*****
(5) * * *
(ii) * * *
Example 4.Discharge of indebtedness.(a)Facts.
P forms S on January 1 of Year 1 and S borrows
$200. During Year 1, S’s assets decline in value
and the P group has a $100 consolidated net oper-
ating loss. Of that amount, $10 is attributable to P
and $90 is attributable to S under the principles of
§1.1502–21(b)(2)(iv). None of the loss is absorbed
by the group in Year 1, and S is discharged from $100
of indebtedness at the close of Year 1. P has a $0 ba-
sis in the S stock. P and S have no attributes other
than the consolidated net operating loss. Under sec-
tion 108(a), S’s $100 of discharge of indebtedness in-
come is excluded from gross income because of in-
solvency. Under section 108(b) and §1.1502–28, the
consolidated net operating loss is reduced to $0.
(b)Analysis. Under paragraph (b)(3)(iii)(A) of
this section, the reduction of $90 of the consolidated
net operating loss attributable to S is treated as a non-
capital, nondeductible expense in Year 1 because that
loss is permanently disallowed by section 108(b) and
§1.1502–28. Under paragraph (b)(3)(ii)(C)(1) of this
section, all $100 of S’s discharge of indebtedness in-
come is treated as tax-exempt income in Year 1 be-
cause the discharge results in a $100 reduction to the
consolidated net operating loss. Consequently, the
loss and the cancellation of the indebtedness result
in a net positive $10 adjustment to P’s basis in its S
stock.
(c)Insufficient attributes. The facts are the same
as in paragraph (a) of thisExample 4, except that S is
discharged from $120 of indebtedness at the close of
Year 1. Under section 108(a), S’s $120 of discharge
of indebtedness income is excluded from gross in-
come because of insolvency. Under section 108(b)
and §1.1502–28, the consolidated net operating loss
is reduced by $100 to $0 after the determination of
tax for Year 1. Under paragraph (b)(3)(iii)(A) of
this section, the reduction of $90 of the consolidated
net operating loss attributable to S is treated as a
noncapital, nondeductibleexpense. Under paragraph
(b)(3)(ii)(C)(1) of this section, only $100 of the dis-
charge is treated as tax-exempt income because only
that amount is applied to reduce tax attributes. The
remaining $20 of discharge of indebtedness income
excluded from gross income under section 108(a) has
no effect on P’s basis in S’s stock.
*****
(h) * * *
(7)Rules related to discharge of
indebtedness income excluded from
gross income. Paragraphs (b)(1)(ii),
(b)(3)(ii)(C)(1),(b)(3)(iii)(A), and
(b)(5)(ii),Example 4, paragraphs (a), (b),
and (c) of this section apply with respect to
determinations of the basis of the stock of
a subsidiary in consolidated return years
the original return for which is due (with-
out regard to extensions) after March 21,
2005. However, groups may apply those
provisions with respect to determinations
ofthebasisofthestockofasubsidiary
in consolidated return years the original
return for which is due (without regard to
extensions) on or before March 21, 2005,
and after August 29, 2003. For deter-
minations of the basis of the stock of a
subsidiary in consolidated return years the
original return for which is due (without
regard to extensions) on or before March
21, 2005, and after August 29, 2003, with
respect to which a group chooses not to ap-
ply paragraphs (b)(1)(ii), (b)(3)(ii)(C)(1),
(b)(3)(iii)(A), and (b)(5)(ii),Example 4,
paragraphs (a), (b), and (c) of this sec-
tion, see §1.1502–32T(b)(3)(ii)(C)(1),
(b)(3)(iii)(A), and (b)(5)(ii),Example 4,
paragraphs (a), (b), and (c) as contained in
26 CFR part 1 revised as of April 1, 2004.
Par. 12. Section 1.1502–32T is
amended as follows:
1. Paragraph (a)(3) is added.
2. Paragraphs (b) through (b)(3)(iii)(B)
are revised.
3.Paragraphs (b)(5)(i) through
(h)(5)(ii) are revised.
4. Paragraph (h)(7) is revised.
The revisions read as follows:
§1.1502–32T Investment adjustments
(temporary).
*****
(a)(3) through (b)(3)(iii)(B) [Re-
served]. For further guidance, see
§1.1502–32(a)(3) through (b)(3)(iii)(B).
*****
(b)(5)(i) through (h)(5)(ii) [Re-
served]. For further guidance, see
§1.1502–32(b)(5)(i) through (h)(5)(ii).
*****
(h)(7) [Reserved]. For further guid-
ance, see §1.1502–32(h)(7).
Par. 13. In §1.1502–76, paragraph
(b)(1)(ii)(B)(3) is revised to read as fol-
lows:
§1.1502–76 Taxable year of members of
group.
*****
(b) * * *
(1) * * *
(ii) * * *
(B) * * *
(3) Whether the allocation is incon-
sistent with other requirements under the
Internal Revenue Code and regulations
promulgated thereunder (e.g., if a section
338(g) election is made in connection with
a group’s acquisition of S, the deemed as-
set sale must take place before S becomes
a member and S’s gain or loss with respect
to its assets must be taken into account by
S as a nonmember (but see §1.338–1(d)),
or if S realizes discharge of indebtedness
2005–15 I.R.B.882April 11, 2005

income that is excluded from gross income
under section 108(a) on the day it becomes
a nonmember, the discharge of indebted-
ness income must be treated as realized by
S as a member (see §1.1502–28(b)(11));
and
*****
Par. 14. In §1.1502–80, the second
sentence of paragraph (c) is revised to read
as follows:
§1.1502–80 Applicability of other
provisions of law.
*****
(c)***See§§1.1502–11(d)and
1.1502–35T for additional rules relating
tostockloss.***
*****
Par. 15. In §1.1502–80T, the third sen-
tence of paragraph (c) is revised to read as
follows:
§1.1502–80T Applicability of other
provisions of law (temporary).
*****
(c)***See§§1.1502–11(d)and
1.1502–35T for additional rules relating
tostockloss.***
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved March 10, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on March 21,
2005, 8:45 a.m., and published in the issue of the Federal
Register for March 22, 2005, 70 F.R. 14395)
Section 6103.—Confi-
dentiality and Disclosure
of Returns and Return
Information
26 CFR 301.6103(j)(1)–1: Disclosures of return in-
formation to officers and employees of the Depart-
ment of Commerce for certain statistical purposes
and related activities.
T.D. 9188
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 301
Disclosure of Return
Information to the Bureau
of the Census
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTIONS: Temporary regulations.
SUMMARY: This document contains tem-
porary regulations relating to additions to
the list of items of return information dis-
closed to the Bureau of the Census (Bu-
reau). The regulation adds two items of
return information for use in producing
demographic statistics programs, includ-
ing the Bureau’s Small Area Income and
Poverty Estimates (SAIPE). The tempo-
rary regulations also remove four items
that the Bureau has indicated are no longer
necessary. The text of these temporary reg-
ulations serves as the text of the proposed
regulations (REG–147195–04) set forth in
the notice of proposed rulemaking on this
subject in this issue of the Bulletin.
DATES:Effective Date:These regulations
are effective March 10, 2005.
Applicability Date:For dates of appli-
cability, see §301.6103(j)(1)–1T(e).
FOR FURTHER INFORMATION
CONTACT: James O’Leary, (202)
622–4580 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Under section 6103(j)(1), upon writ-
ten request from the Secretary of Com-
merce, the Secretary of the Treasury is to
furnish to the Bureau return information
that is prescribed by Treasury regulations
for the purpose of, but only to the extent
necessary in, structuring censuses and na-
tional economic accounts and conducting
related statistical activities authorized by
law. Section 301.6103(j)(1)–1 of the reg-
ulations further defines such purposes by
reference to 13 U.S.C. chapter 5 and pro-
vides an itemized description of the return
information authorized to be disclosed for
such purposes.
This document adopts temporary regu-
lations that authorize the IRS to disclose
the additional items of return information
that have been requested by the Secre-
tary of Commerce to the extent necessary
in developing and preparing demographic
statistics, including statutorily mandated
Small Area Income and Poverty Estimates
(SAIPE). The temporary regulations also
remove certain items of return information
that are enumerated in the existing regula-
tions but that the Secretary of Commerce
has indicated are no longer needed.
Temporary regulations in this issue
of the Bulletin amend the Procedure and
Administration Regulations (26 CFR Part
301) relating to Internal Revenue Code
(Code) section 6103(j)(1). The temporary
regulations contain rules relating to the
disclosure of return information reflected
on returns to officers and employees of the
Department of Commerce for structuring
censuses and national economic accounts
and conducting relatedstatistical activities
authorized by law.
Explanation of Provisions
By letter dated May 11, 2004, the De-
partment of Commerce requested that
additional items of return information
be disclosed to the Bureau for purposes
related to conducting the SAIPE pro-
gram and used to estimate the number of
school-aged children in poverty for each
of the over 14,000 districts in the United
States. Specifically, the Department of
Commerce requested Earned Income
and the number of Earned Income Tax
Credit-eligible qualifying children. The
request indicates that under the Improving
America’s Schools Act of 1994 (Public
Law 103–382, 108 Stat. 3518 (October
20, 1994)), these estimates were mandated
biennially, and under the No Child Left
Behind Act of 2002 (Public Law 107–110,
115 Stat. 1425 (January 8, 2002)), they
are required annually.
The regulations also remove four items
of return information that the Bureau in-
dicated it no longer requires. These items
are: end-of-year code; months actively op-
erated; total number of documents and the
April 11, 20058832005–15 I.R.B.

total amount reported on the Form 1096
(Annual Summary and Transmittal of U.S.
Information Returns) transmitting Forms
1099–MISC (Miscellaneous Income); and
Form 941 (Employer’s Quarterly Federal
Tax Return) indicator and business address
on Schedule C (Profit or Loss From Busi-
ness) of Form 1040. Accordingly, the
temporary regulations have removed these
items from the enumerationofreturninfor-
mation to be disclosed to the Bureau.
Special Analyses
It has been determined that these tem-
porary regulations are not a significant reg-
ulatory action as defined in Executive Or-
der 12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations.
For applicability of the Regulatory Flexi-
bility Act (5 U.S.C. chapter 6), please refer
to the cross-reference notice of proposed
rulemaking published elsewhere in this is-
sue of theFederal Register.Pursuantto
section 7805(f) of the Code, these tempo-
rary regulations will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business.
Drafting Information
The principal author of these temporary
regulations is James C. O’Leary, Office
of the Associate Chief Counsel (Procedure
& Administration), Disclosure and Privacy
Law Division.
*****
Amendments to the Regulations
Accordingly, 26 CFR Part 301 is
amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
Paragraph 1. The authority citation for
part 301 is amended by adding an entry in
numerical order to read in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.6103(j)(1)–1T also issued
under 26 U.S.C. 6103(j)(1); * * *
Par. 2. Section 301.6103(j)(1)–1 is
amended by revising paragraphs (b)(1) in-
troductory text and (b)(3) introductory text
to read as follows:
§301.6103(j)(1)–1 Disclosures of return
information to officers and employees of
the Department of Commerce for certain
statistical purposes and related activities.
*****
(b)(1) [Reserved]. For further guid-
ance, see §301.6103(j)(1)–1T(b)(1)
*****
(b)(3) [Reserved]. For further guid-
ance, see §301.6103(j)(1)–1T(b)(3).
*****
Par. 3. Section 301.6103(j)(1)–1T is
added to read as follows:
§301.6103(j)(1)–1T Disclosures of return
information to officers and employees of
the Department of Commerce for certain
statistical purposes and related activities
(temporary).
(a) [Reserved]. For further guidance,
see §301.6103(j)(1)–1(a).
(b) Disclosure of return information re-
flected on returns to officers and employ-
ees of the Bureau of the Census.
(1) Officers or employees of the Inter-
nal Revenue Service will disclose the fol-
lowing return information reflected on re-
turns of individual taxpayers to officers
and employees of the Bureau of the Cen-
sus for purposes of, but only to the extent
necessary in, conducting and preparing, as
authorized by chapter 5 of title 13, United
States Code, intercensal estimates of popu-
lation and income for all geographic areas
included in the population estimates pro-
gram and demographic statistics programs,
censuses, and related program evaluation:
(i) Taxpayer identity information (as
defined in section 6103(b)(6) of the In-
ternal Revenue Code), validity code with
respect to the taxpayer identifying number
(as described in section 6109), and tax-
payer identity information of spouse and
dependents, if reported.
(ii) Location codes (including area/dis-
trict office and campus/service center
codes).
(iii) Marital status.
(iv) Number and classification of re-
ported exemptions.
(v) Wage and salary income.
(vi) Dividend income.
(vii) Interest income.
(viii) Gross rent and royalty income.
(ix) Total of—
(A) Wages, salaries, tips, etc.;
(B) Interest income;
(C) Dividend income;
(D) Alimony received;
(E) Business income;
(F) Pensions and annuities;
(G) Income from rents, royalties, part-
nerships, estates, trusts, etc.;
(H) Farm income;
(I) Unemployment compensation; and
(J) Total Social Security benefits.
(x) Adjusted gross income.
(xi) Type of tax return filed.
(xii) Entity code.
(xiii) Code indicators for Form 1040,
Form 1040 (Schedules A, C, D, E, F, and
SE), and Form 8814.
(xiv) Posting cycle date relative to fil-
ing.
(xv) Social Security benefits.
(xvi) Earned Income (as defined in sec-
tion 32(c)(2)).
(xvii) Number of Earned Income Tax
Credit-eligible qualifying children.
(b)(2) [Reserved]. For further guid-
ance, see §301.6103(j)(1)–1(b)(2).
(b)(3) Officers or employees of the In-
ternal Revenue Service will disclose the
following business related return infor-
mation reflected on returns of taxpayers
to officers and employees of the Bureau
of the Census for purposes of, but only
to the extent necessary in, conducting
and preparing, as authorized by chapter
5 of title 13, United States Code, demo-
graphic and economic statistics programs,
censuses, and surveys. (The “returns of
taxpayers” include, but are not limited
to: Form 941; Form 990 series; Form
1040 series and Schedules C and SE;
Form 1065 and all attending schedules
and Form 8825; Form 1120 series and
all attending schedules and Form 8825;
Form 851; Form 1096; and other business
returns, schedules and forms that the In-
ternal Revenue Service may issue.):
(i) Taxpayer identity information (as
defined in section 6103(b)(6)) including
parent corporation, shareholder, partner,
and employer identity information.
(ii) Gross income, profits, or receipts.
(iii) Returns and allowances.
(iv) Cost of labor, salaries, and wages.
(v) Total expenses or deductions.
2005–15 I.R.B.884April 11, 2005

(vi) Total assets.
(vii) Beginning- and end-of-year inven-
tory.
(viii) Royalty income.
(ix) Interest income, including portfolio
interest.
(x) Rental income, including gross
rents.
(xi) Tax-exempt interest income.
(xii) Net gain from sales of business
property.
(xiii) Other income.
(xiv) Total income.
(xv) Percentage of stock owned by each
shareholder.
(xvi) Percentage of capital ownership of
each partner.
(xvii) Principal industrial activity code,
including the business description.
(xviii) Consolidated return indicator.
(xix) Wages, tips, and other compensa-
tion.
(xx) Social Security wages.
(xxi) Deferred wages.
(xxii) Social Security tip income.
(xxiii) Total Social Security taxable
earnings.
(xxiv) Gross distributions from em-
ployer-sponsored and individual retire-
ment plans from Form 1099–R.
(b)(4)through(b)(6)[Re-
served]. For further guidance, see
§301.6103(j)(1)–1(b)(4) through (b)(6).
(c) through (d) [Reserved]. For further
guidance, see §301.6103(j)(1)–1(c) and
(d).
(e)Effective date. This section is appli-
cable to disclosures to the Bureau of the
Census on or after March 10, 2005.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved February 26, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary
oftheTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on March 10,
2005, 8:45 a.m., and published in the issue of the Federal
Register for March 11, 2005, 70 F.R. 12140)
Section 7520.—Valuation
Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2005. See Rev. Rul. 2005-23, page 864.
Section 7872.—Treatment
of Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of April 2005. See Rev. Rul. 2005-23, page 864.
April 11, 20058852005–15 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
26 CFR 6
01.601: Rules and regulations.
(Also P
art I, §§ 25, 103, 143; 1.25–4T, 1.103–1,
6a.103
A–2.)
Rev. Proc. 2005–22
SECTIO
N 1. PURPOSE
This re
venue procedure provides guid-
ance wi
th respect to the United States and
area me
dian gross income figures that are
to be u
sed by issuers of qualified mortgage
bonds
, as defined in § 143(a) of the Inter-
nal Re
venue Code, and issuers of mortgage
credi
t certificates, as defined in § 25(c), in
compu
ting the housing cost/income ratio
desc
ribed in § 143(f)(5).
SECTION 2. BACKGROUND
.01 Section 103(a) provides that, ex-
cept as provided in § 103(b), gross income
does not include interest on any state or
local bond. Section 103(b)(1) provides
that § 103(a) shall not apply to any pri-
vate activity bond that is not a qualified
bond (within the meaning of § 141). Sec-
tion 141(e) provides that the term “qual-
ified bond” includes any private activity
bond that (1) is a qualified mortgage bond,
(2) meets the applicable volume cap re-
quirements under § 146, and (3) meets the
applicable requirements under § 147.
.02 Section 143(a)(1) provides that the
term “qualified mortgage bond” means a
bond that is issued as part of a “qualified
mortgage issue”. Section 143(a)(2)(A)
provides that the term “qualified mort-
gage issue” means an issue of one or more
bonds by a state or political subdivision
thereof, but only if (i) all proceeds of the
issue (exclusive of issuance costs and a
reasonably required reserve) are to be used
to finance owner-occupied residences; (ii)
the issue meets the requirements of sub-
sections (c), (d), (e), (f), (g), (h), (i), and
(m)(7) of § 143; (iii) the issue does not
meet the private business tests of para-
graphs(1)and(2)of§141(b);and(iv)
with respect to amounts received more
than 10 years after the date of issuance,
repayments of $250,000 or more of prin-
cipal on financing provided by the issue
are used not later than the close of the first
semi-annual period beginning after the
date the prepayment (or complete repay-
ment) i
s received to redeem bonds that are
part of
the issue.
.03 Sec
tion 143(f) imposes eligibility
requir
ements concerning the maximum
income
of mortgagors for whom financing
may be p
rovided by qualified mortgage
bonds
. Section 25(c)(2)(A)(iii)(IV) pro-
vides
that recipients of mortgage credit
certi
ficates must meet the income re-
quire
ments of § 143(f). Generally, under
§§ 14
3(f)(1) and 25(c)(2)(A)(iii)(IV),
thes
e income requirements are met only
if al
l owner-financing under a qualified
mort
gage bond and all certified indebt-
edne
ss amounts under a mortgage credit
cer
tificate program are provided to mort-
gag
ors whose family income is 115 percent
or l
ess of the applicable median family in-
com
e. Under § 143(f)(6), the income
lim
itation is reduced to 100 percent of the
ap
plicable median family income if there
ar
e fewer than three individuals in the
fa
mily of the mortgagor.
.0
4 Section 143(f)(4) provides that the
te
rm “applicable median family income”
me
ans the greater of (A) the area median
gr
oss income for the area in which the res-
i
dence is located, or (B) the statewide me-
d
ian gross income for the state in which the
r
esidence is located.
.
05 Section 143(f)(5) provides for an
u
pward adjustment of the income limita-
t
ions in certain high housing cost areas.
U
nder § 143(f)(5)(C), a high housing
c
ost area is a statistical area for which
the housing cost/income ratio is greater
than 1.2. The housing cost/income ratio
is determined under § 143(f)(5)(D) by
dividing (a) the applicable housing price
ratio by (b) the ratio that the area median
gross income bears to the median gross
income for the United States. The applica-
ble housing price ratio is the new housing
price ratio (new housing average purchase
price for the area divided by the new hous-
ing average purchase price for the United
States) or the existinghousing price ratio
(existing housing average area purchase
price divided by the existing housing aver-
age purchase price for the United States),
whichever results in the housing cost/in-
come ratio being closer to 1. This income
adjustment applies only to bonds issued,
and nonissued bond amounts elected, after
December 31, 1988.See§ 4005(h) of the
Techni
cal and Miscellaneous Revenue Act
of 1988
, 1988–3 C.B. 1, 311 (1988).
.06 The
Department of Housing and
Urban D
evelopment (HUD) has com-
puted t
he median gross income for the
United
States, the states, and statisti-
cal ar
eas within the states. The income
infor
mation was released to the HUD
regio
nal offices on February 11, 2005,
and ma
ybeobtainedbycallingtheHUD
refe
rence service at 1–800–245–2691.
The i
ncome information is also avail-
able
at HUD’s World Wide Web site,
http
:huduser.org/datasets/il.html,which
prov
ides a menu from which you may
sel
ect the year and type of data of interest.
The
Internal Revenue Service annually
pub
lishes the median gross income for the
Uni
ted States.
.07
The most recent nationwide aver-
age
purchase prices and average area pur-
cha
se price safe harbor limitations were
pu
blished on February 28, 2005, in Rev.
Pr
oc. 2005–15, 2005–9 I.R.B. 638.
SE
CTION 3. APPLICATION
.01 When computing the housing
cost/income ratio under § 143(f)(5), is-
suers of qualified mortgage bonds and
mortgage credit certificates must use
$58,000 as the median gross income for
the United States.See§ 2.06 of this rev-
enue procedure.
.02 When computing the housing
cost/income ratio under § 143(f)(5), is-
suers of qualified mortgage bonds and
mortgage credit certificates must use the
area median gross income figures released
by HUD on February 11, 2005.See§2.06
of this revenue procedure.
SECTION 4. EFFECT ON OTHER
REVENUE PROCEDURES
.01 Rev. Proc. 2004–24, 2004–16
I.R.B. 790, is obsolete except as provided
in § 5.02 of this revenue procedure.
.02 This revenue procedure does not af-
fect the effective date provisions of Rev.
Rul. 86–124, 1986–2 C.B. 27. Those ef-
fective date provisions will remain opera-
tive at least until the Service publishes a
new revenue ruling that conforms the ap-
proach to effective dates set forth in Rev.
Rul. 86–124 to the general approach taken
in this revenue procedure.
2005–15 I.R.B.886April 11, 2005

SECTION 5. EFFECTIVE DATES
.01 Issuers must use the United States
and area median gross income figures
specified in section 3 of this revenue
procedure for commitments to provide fi-
nancing that are made, or (if the purchase
precedes the financing commitment) for
residences that are purchased, in the pe-
riod that begins on February 11, 2005, and
ends on the date when these United States
and area median gross income figures are
rendered obsolete by a new revenue pro-
cedure.
.02 Notwithstanding section 5.01 of this
revenue procedure, issuers may continue
to rely on the United States and area me-
dian gross income figures specified in Rev.
Proc. 2004–24 with respect to bonds orig-
inallysoldandnonissuedbondamounts
elected not later than May 11, 2005, if
the commitments or purchases described
in § 5.01 are made not later than July 10,
2005.
DRAFTING INFORMATION
The principal author of this revenue
procedure is David White of the Office of
Assistant Chief Counsel (Exempt Organi-
zations/Employment Tax/Government En-
tities). For further information regarding
this revenue procedure, contact Mr. White
at (202) 622–3980 (not a toll-free call).
April 11, 20058872005–15 I.R.B.

Part IV. Items of General Interest
Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulations
Disclosure of Return
Information to the Bureau
of the Census
REG–147195–04
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions.
SUMMARY: In this issue of Bulletin, the
IRS is issuing temporary regulations (T.D.
9188) relating to additions to, and dele-
tions from, the list of items of return infor-
mation disclosed to the Bureau of the Cen-
sus (Bureau) for use in producing demo-
graphic statistics programs, including the
Bureau’s Small Area Income and Poverty
Estimates (SAIPE). These temporary reg-
ulations provide guidance to IRS person-
nel responsible for disclosing the informa-
tion. The text of these temporary regula-
tions published in this issue of the Bulletin
serves as the text of the proposed regula-
tions.
DATES: Written and electronic comments
and requests for a public hearing must be
received by June 9, 2005.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–147195–04), room
5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand-delivered between the hours of
8a.m. and4p.m.toCC:PA:LPD:PR
(REG–147195–04), 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 and REG–147195–04).
FOR FURTHER INFORMATION
CONTACT: Concerning submission
of comments, Treena Garrett, (202)
622–7180 (not a toll-free number);
concerning the temporary regulations,
James O’Leary, (202) 622–4580 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Under section 6103(j)(1), upon written
request from the Secretary of Commerce,
the Secretary of the Treasury is to fur-
nish to the Bureau of the Census (Bureau)
return information that is prescribed by
Treasury regulations for the purpose of,
but only to the extent necessary in, struc-
turing censuses and national economic
accounts and conducting related statisti-
cal activities authorized by law. Section
301.6103(j)(1)–1 of the regulations pro-
vides an itemized description of the return
information authorized to be disclosed for
this purpose. Periodically, the disclosure
regulations are amended to reflect the
changing needs of the Bureau for data for
its statutorily authorized statistical activi-
ties.
This document contains proposed reg-
ulations authorizing IRS personnel to dis-
close additional items of return informa-
tion that have been requested by the Secre-
tary of Commerce, and to remove certain
items of return information that are enu-
merated in the existing regulations but that
the Secretary of Commerce has indicated
are no longer needed.
Temporary regulations in this issue
of the Bulletin amend the Procedure and
Administration Regulations (26 CFR Part
301) relating to Internal Revenue Code
(Code) section 6103(j). The temporary
regulations contain rules relating to the
disclosure of return information reflected
on returns to officers and employees of the
Department of Commerce for structuring
censuses and national economic accounts
and conducting related statistical activities
authorized by law.
The text of the temporary regulations
also serves as the text of these proposed
regulations. The preamble to the tempo-
rary regulations explains the proposed reg-
ulations.
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. Pur-
suant to section 7805(f) of the Code, these
proposed regulations will be submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on their 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 electronic and writ-
ten comments (a signed original and eight
(8) copies) that are submitted timely to the
IRS. The IRS and Treasury Department
specifically request comments on the clar-
ity of the proposed regulations and how
they can be made easier to understand. All
comments will be available for public in-
spection and copying. A public hearing
may be scheduled if requested in writing
by a person that timely submits comments.
If a public hearing is scheduled, notice of
the date, time, and place for the hearing
will be published in theFederal Register.
Drafting Information
The principal author of these regula-
tions is James C. O’Leary, Office of the
Associate Chief Counsel (Procedure &
Administration), Disclosure and Privacy
Law Division.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 301 is pro-
posed to be amended as follows:
PART 301—PROCEDURE AND
ADMINISTRATION
2005–15 I.R.B.888April 11, 2005

Paragraph 1. The authority citation for
part 301 is amended in part, by adding an
entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 301.6103(j)(1)–1 also issued
under 26 U.S.C. 6103(j)(1); * * *
Par. 2. In §301.6103(j)(1)–1 para-
graphs (b)(1), (b)(3), and (e) are revised to
read as follows:
§301.6103(j)(1)–1 Disclosure of return
information to officers and employees of
the Department of Commerce for certain
statistical purposes and related activities.
*****
(b) [The text of proposed paragraphs
(b)(1), (b)(3) and (e) are the same as the
text of §301.6103(j)(1)–1T(b)(1), (b)(3)
and (e) 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 March 10,
2005, 8:45 a.m., and published in the issue of the Federal
Register for March 11, 2005, 70 F.R. 12166)
Foundations Status of Certain
Organizations
Announcement 2005–24
The following organizations have failed
to establish or have been unable to main-
tain their status as public charities or as op-
erating foundations. Accordingly, grantors
and contributors may not, after this date,
rely on previous rulings or designations
in the Cumulative List of Organizations
(Publication 78), or on the presumption
arising from the filing of notices under sec-
tion 508(b) of the Code. This listing does
notindicate that the organizations have lost
their status as organizations described in
section 501(c)(3), eligible to receive de-
ductible contributions.
Former Public Charities.The follow-
ing organizations (which have been treated
as organizations thatare not private foun-
dations described in section 509(a) of the
Code) are now classified as private foun-
dations:
Aetep International Education Foundation,
Framingham, MA
African Virtual University International,
Washington, DC
American Charitable Investment Fund,
Detroit, MI
American International Foundation of
Budapest, Inc., Hungary
Americans for Peace and Justice in South
Asia, Takoma Park, MD
Angel Ministries, Monroe, LA
Ann Arbor IT Zone, Ann Arbor, MI
Artreach, Inc., Chicago, IL
Ascension Mission Corporation,
Washington, DC
Asian Bodytherapy Institute,
Sausalito, CA
Avalon Winter Guard, Inc., Waukesha, WI
B B L International Teen Services, Inc.,
Baltimore, MD
Bentley Schmoke Memorial Scholarship
Fund, Baltimore, MD
Benue Aids Council, Inc.,
Minneapolis, MN
Bethesda Lakes, Inc., St. Louis, MO
Big Bear Lake Rotary Club Foundation,
Big Bear Lake, CA
Bilderback Lacrosse Foundation, Inc.,
Severna Park, MD
Bitpogs Kids, Inc., Baltimore, MD
Bloomfield Raiders Youth Football, Inc.,
Bloomfield, CT
Blue-Gray R A F, Bellaire, OH
Boffo, Inc., Los Osos, CA
Boricua Link, Chicago, IL
Boys & Girls Club of Cass County,
Cassopolis, MI
Brandywine Charter School, Inc.,
Wilmington, DE
Brave, Inc., Berlin, MD
Brian’s Neurofibromatosis Foundation,
Indianapolis, IN
Bridgeway Counseling Services,
Columbia, MD
Bristol Trainstation Foundation,
Bristol, VA
CCRNewBeginningsFoundation,
Ellendale, DE
Cambridge MHA Education & Charitable
Corporation, Cambridge, OH
Capital Area Housing Corporation,
Potomac, MD
Catherine Popesco Foundation for the
Arts, Santa Monica, CA
Center for Educational Partnerships,
Chicago, IL
Center for Special Community Services,
Inc., Brooklyn, NY
Centerville Volunteers Fire Fighters
Association, Centerville, IA
Central Illinois Biomedical Research
Group, Inc., Peoria, IL
Change Agent Programs, Inc.,
Orlando, FL
Change Group, Madison, WI
Chesapeake Youth Chorale, Inc.,
Centreville, MD
Chicago Military Academy Bronzeville
Association, Chicago, IL
Chicago School Leadership Development
Corporation, Chicago, IL
Children First Early Childhood Home
Education, Inc., Oak Park, IL
Childrens Day Care, Riverdale, IL
Chocolate Affair, Inc., Los Angeles, CA
Christian Community Youth Board, Inc.,
Salem, IN
Christian Satellite Bible College,
Maywood, IL
Christian Scholarship Foundation, Inc.,
Altoona, IA
Citizens Cornerstone Commission of
Wood River, Wood River, IL
Civic, Salisbury, MO
Clark Conservatory Music and Arts,
Detroit, MI
Clark County Youth Programs, Inc.,
New Albany, IN
Clark Elementary School PTA,
Washington, DC
Cleveland Filmworks, Cleveland, OH
Columbia Weavers and Spinners Guild,
Columbia, MO
Community Education Enhancement,
Inc., Chula Vista, CA
Connecting Classrooms to the World,
Evanston, IL
Counsel for Palestinian Restitution and
Reparation, Inc., Washington, DC
Crown Me Beautiful Arts Foundation,
San Diego, CA
Cuba for Kids Foundation, Inc.,
Miami, FL
Cure MS Now Research Fund,
Corte Madera, CA
Dallas Street Community Development
Corp., Baltimore, MD
Delta Development, Incorporated,
St. Louis, MO
Detroit Area Council of Teachers of
Mathematics, Grosse Pointe, MI
Diamond Life, Baltimore, MD
District of Columbia Public Charter
School Facilities Corporation,
Washington, DC
Dominica Association of Midwestern
USA, Chicago, IL
April 11, 20058892005–15 I.R.B.

Don Lugo Conquistador Foundation,
Chino, CA
Dubuque Audubon Society, Dubuque, IA
Dynamic Directions, Des Plaines, IL
Eastern Shore Heritage, Inc.,
Chestertown, MD
Eastside Community Policing Partnership,
Detroit, MI
Edwardsville Childrens Museum, Inc.,
Edwardsville, IL
Eleventh Commission, Inc.,
Fort Wayne, IN
Elite Performing Company, Inc.,
Indianapolis, IN
Emergency Support of Central Nebraska,
Inc., Grand Island, NE
Emmas Place for Homeless Women and
Children, Chicago, IL
Ensemble Polaris, St. Paul, MN
Ethel Somerstein Memorial Foundation,
Inc., Flushing, NY
Experiential Learning Assessment
Network, Mc Lean, VA
Exposition Park West Asset Leasing
Corporation, Inglewood, CA
Farmington Area Education Foundation,
Farmington, MI
Fathers House Ministries, Matoon, IL
Federal Hill Main Street, Inc.,
Baltimore, MD
Ford County Consortium Educational
Foundation, Dodge City, KS
Foundation for Children and Family
Support Services, Inc., Murphysboro, IL
Fountain of Youth, Flint, MI
Friends of Fun Shop Foundation,
Springfield, IL
Friends of McGregor Public Library,
Highland Park, MI
Friends of Reed Middle School Bridgman,
MI, Bridgman, MI
Fuhrmann Middle School Booster Club,
Sterling Heights, MI
Globe of America, Sherman Oaks, CA
God’s Grace, Salisbury, MD
Grazette Halfway House, Inc.,
Lake Park, FL
Greater Kansas City Gay and Lesbian
Youth Services, Inc., Kansas City, MO
GreenwayontheRedTrust,Inc.,
Fargo, ND
Guajome Park Academy Foundation,
Vista, CA
Hartge Nautical Museum, Galesville, MD
Helix Home Healthcare and Hospice
Services, Inc., Columbia, MD
Heritage Communities Re-Development
Company, Winthrop Harbor, IL
His Hands Ministries Cedar Rapids
Iowa Endowment Foundation, Inc.,
Marion, IA
Home Management Beautification
Community Services, Chicago, IL
House of Sophia, San Diego, CA
Illinois Vipassana Association,
Rockford, IL
Illinois World War II Memorial Project,
Springfield, IL
Illume Productions, Inc., New York, NY
In the Light, Troy, MI
Indiana State School Music Association,
Inc., Indianapolis, IN
Innerlife Ministries, Inc., Grandview, MO
Insight Through Art Foundation, Inc.,
Chicago, IL
Institute for SME Finance,
Washington, DC
Inwood Heights Housing Development
Fund Corporation, Bronx, NY
Iowa Valley Community School District
Foundation, Marengo, IA
Isaiah Films, Winston Salem, NC
Isiserettes Drill & Drum Corps, Inc.,
Des Moines, IA
J. Edward Gilliland Geneva Rotary
Foundation, Geneva, OH
JeffersonCityRotaryWestEndowment
Fund, Jefferson City, MO
Joan Metah Masterson Hospitality House
Foundation, Ventor City, NJ
Kansas Film Culture Development
Society, Olathe, KS
Karna, Incorporated, Peoria, IL
Key City Rotary Club Foundation,
Dubuque, IA
Keyhole Players, Chicago, IL
Kiraw Productions, Inc., Snellville, GA
Lacy Alana West Memorial Scholarship
Fund, Steelville, MO
Lend-A-Hand Foundation, Lanham, MD
Lew Wasserman Scholarship Foundation,
Los Angeles, CA
LHS Band-Orchestra Boosters,
Ludington, MI
Life Center of Prayer, Burnsville, MN
Life Challenges Foundation, Inc.,
South Bend, IN
Lorain County Mission, Elyria, OH
Luhtanen Howes Charitable Foundation,
Inc., Livonia, MI
Marshall Heights, Inc., Sioux City, IA
Mascoutah Cemetary Chapel, Inc.,
Mascoutah, IL
Maywood Baseball League, Inc.,
Hammond, IN
Measuagoon, Inc., Dallas, TX
Midwest Avian Adoption & Rescue
Services, Inc., Stillwater, MN
Milwaukee Choral Artists, Inc.,
Shorewood, WI
Minds Institute, Farmington Hills, MI
Missouri Association of Community
Development Corporations,
Jefferson City, MO
Montesorri After School Program
Corporation, Chicago, IL
Mount Olivet Housing and Community
Development Corporation,
Richmond, VA
Nancy Ferro Learning for Life Foundation,
Easton, MD
Native American Finance Officers
Association, Inc., Denver, CO
Native American Intertribal Veterans
Memorial Foundation, Wichita, KS
Net, Inc., Wapakoneta, OH
Neutral Ground, Inc., Cary, IL
Nevus Link, Maryland Heights, MO
New Life Community Services, Inc.,
University Park, IL
North Akron Wrestling Club, Stow, OH
Northfield Historical Society,
Northfield, IL
Northwestern Minnesota Health Care
Purchasing Alliance, Crookston, MN
Oak Glen, Inc., Sioux Falls, SD
Oak Ridge Assisted Living of Hastings,
Saint Paul, MN
Obadiah Association, Inc., Akron, OH
Obrien County Kinship, Inc., Sheldon, IA
On Our Owne of Anne Arundel County,
Inc., Annapolis, MD
Original Willing Workers Society, Inc.,
Southfield, MI
Orleans Community Enhancement
Corporation, Orleans, IN
Oro Institute & Library NPC,
St. Anthony, MN
Our Lady of Charity, St. Louis, MO
Outreach Youth Services, Chicago, IL
Ozark Sermon Psalms, Perryville, MO
Pacific Springs Village, Omaha, NE
Pana Education Foundation, Pana, IL
Parents and Children First of Lucas
County, Charitan, IA
Parrot Mountain Ranch, Inc.,
Ranchita, CA
PHS Track and Cross Country Foundation,
Inc., Poway, CA
Platte Valley Heritage Foundation,
Kearney, NE
Pocomoke Children & Family Services
Collaborative, Inc., Pocomoke City, MD
2005–15 I.R.B.890April 11, 2005

Potential Developing Ministries, Inc.,
Lawrenceville, GA
Prayer Works, Holland, MI
Prevention Center for a Drug-Free
Community, Chillicothe, MO
Prince Georges Junior Golf Association,
Inc., Fort Washington, MD
Project Prevention & Intervention,
St. Louis, MO
Quilts for Comfort, Inc., Newark, DE
Ralph Jones Youth Center, Inc.,
Fort Wayne, IN
Readers Room Club, Orland Park, IL
Reno County Angels, Inc.,
Hutchinson, KS
Robbins Historical Society and Museum,
Robbins, IL
Rubicon Foundation Trust, St. Louis, MO
Safety Mentoring Network, Inc.,
Evergreen Park, IL
San Miguel Scholarship Foundation,
Chicago, IL
Seaford Lions Foundation, Inc.,
Seaford, DE
Senior Cybernet, Inc., Bloomington, IN
Seven Circles Heritage Center of Central
Illinois Foundation, Tonica, IL
Solid Rock Academy, Inc.,
Port Sulphur, LA
Somali Community Center of Orange
County, Anaheim, CA
SouthBendYouthSymphonyOrchestras,
Inc.,SouthBend,IN
Southern Illinois Foundation for Living
History & Education, Mount Vernon, IL
St. Anne Foundation for Excellence in
Education, Inc., St. Anne, IL
St. Charles High School Boosters Club,
St. Charles, IL
St. Louis Case Management,
St. Louis, MO
Stages of History, Inc., Nevada, MO
Strategic Management Association,
Naperville, IL
Sunrise Ecopolis Foundation, Inc.,
St. George, UT
Tanner-Foster Educational Foundation,
Topeka, KS
Tecumseh Youth Theatre, Tecumseh, MI
Tennessee Football Coaches Association,
Kingsport, TN
Three Stepping Stones, Inc., Vienna, IL
Tierra Del Sol Regional Library Network,
Riverside, CA
Tommy Jane House, Inc., Adelphi, MD
Twin Cities Bronze, Lakeville, MN
United Way of Lapeer County, Lapeer, MI
Universal Charter Schools Corporation,
Santa Ana, CA
Urban Age Institute, Washington, DC
USD 286 Educational Foundation,
Sedan, KS
Vagabond Ministries, Franklin, TN
Victory House, Chicago, IL
Video Machete, Chicago, IL
Vision in Progress for Palatine and
Inverness, Palatine, IL
Volunteer Mounted Patrol, Inc.,
Glen Arm, MD
Whitmore Lake Community Soccer
Association, Inc., Whitmore Lake, MI
Wildspaces, Portland, MI
Wing Feirie Theatre, St. Paul Park, MN
Womens Cultural Collaborative,
Detroit, MI
Youth Encouragement Systems,
Linden, MI
Youth Extensional Services, Inc.,
Milwaukee, WI
Youthvision, Englewood, CO
If an organization listed above submits
information that warrants the renewal of
its classification as a public charity or as
a private operating foundation, the Inter-
nal Revenue Service will issue a ruling or
determination letter with the revised clas-
sification as to foundation status. Grantors
and contributors may thereafter rely upon
such ruling or determination letter as pro-
vided in section 1.509(a)–7 of the Income
Tax Regulations. It is not the practice of
the Service to announce such revised clas-
sification of foundation status in the Inter-
nal Revenue Bulletin.
Loss Limitation Rules;
Correction
Announcement 2005-25
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correcting amendment.
SUMMARY: This document corrects fi-
nal regulations (T.D. 9187, 2005–13 I.R.B.
778) that were published in theFederal
Registeron Thursday, March 3, 2005 (70
FR 10319), that disallows certain losses
recognized on sales of subsidiary stock by
members of a consolidated group.
DATES: This correction is effective on
April 4, 2005.
FOR FURTHER INFORMATION
CONTACT: Theresa Abell, (202)
622–7700 or Martin Huck, (202)
622–7750 (not toll-free numbers).
SUPPLEMENTARY
INFORMATION:
Background
The final and temporary regulations
(T.D. 9187) that is the subject of this cor-
rection is under sections 337(d) and 1502
of the Internal Revenue Code.
Need for Correction
As published, T.D. 9187 contains an er-
ror that may prove to be misleading and is
in need of clarification.
*****
Correction of Publication
Accordingly, 26 CFR Part 1 is cor-
rected by making the following correcting
amendment:
PART1–INCOMETAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority:26USC7805***
§1.1502–20 [Corrected]
Section 1.1502–20(i)(3)(viii), second
sentence, the language “Any reapportion-
ment of a section 382 limitation made
pursuant to the previous sentence shall
have the effects described in paragraphs
(i)(3)(iii)(D)(ii)and(iii)ofthissection.”is
removed and the language “Any reappor-
tionment of a section 382 limitation made
pursuant to the previous sentence shall
have the effects described in paragraph
(i)(3)(iii)(D)(2)and(3) of this section.” is
added in its place.
Cynthia E. Grigsby,
Acting Chief, Publications
and Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedures and Administration).
(Filed by the Office of the Federal Register on March 24,
2005, 8:45 a.m., and published in the issue of the Federal
Register for March 25, 2005, 70 F.R. 15227)
April 11, 20058912005–15 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
2005–15 I.R.B.iApril 11, 2005

Numerical Finding List
1
Bulletins 2005–1 through 2005–15
Announcements:
2005-1, 2005-1 I.R.B.257
2005-2, 2005-2 I.R.B.319
2005-3, 2005-2 I.R.B.270
2005-4, 2005-2 I.R.B.319
2005-5, 2005-3 I.R.B.353
2005-6, 2005-4 I.R.B.377
2005-7, 2005-4 I.R.B.377
2005-8, 2005-4 I.R.B.380
2005-9, 2005-4 I.R.B.380
2005-10, 2005-5 I.R.B.450
2005-11, 2005-5 I.R.B.451
2005-12, 2005-7 I.R.B.555
2005-13, 2005-8 I.R.B.627
2005-14, 2005-9 I.R.B.653
2005-15, 2005-9 I.R.B.654
2005-16, 2005-10 I.R.B.702
2005-17, 2005-10 I.R.B.673
2005-18, 2005-9 I.R.B.660
2005-19, 2005-11 I.R.B.744
2005-20, 2005-12 I.R.B.772
2005-21, 2005-12 I.R.B.776
2005-22, 2005-14 I.R.B.826
2005-23, 2005-14 I.R.B.845
2005-24, 2005-15 I.R.B.889
2005-25, 2005-15 I.R.B.891
Court Decisions:
2080, 2005-15 I.R.B.850
Notices:
2005-1, 2005-2 I.R.B.274
2005-2, 2005-3 I.R.B.337
2005-3, 2005-5 I.R.B.447
2005-4, 2005-2 I.R.B.289
2005-5, 2005-3 I.R.B.337
2005-6, 2005-5 I.R.B.448
2005-7, 2005-3 I.R.B.340
2005-8, 2005-4 I.R.B.368
2005-9, 2005-4 I.R.B.369
2005-10, 2005-6 I.R.B.474
2005-11, 2005-7 I.R.B.493
2005-12, 2005-7 I.R.B.494
2005-13, 2005-9 I.R.B.630
2005-14, 2005-7 I.R.B.498
2005-15, 2005-7 I.R.B.527
2005-16, 2005-8 I.R.B.605
2005-17, 2005-8 I.R.B.606
2005-18, 2005-9 I.R.B.634
2005-19, 2005-9 I.R.B.634
2005-20, 2005-9 I.R.B.635
2005-21, 2005-11 I.R.B.727
Notices— Continued:
2005-22, 2005-12 I.R.B.756
2005-23, 2005-11 I.R.B.732
2005-24, 2005-12 I.R.B.757
2005-25, 2005-14 I.R.B.827
2005-26, 2005-12 I.R.B.758
2005-27, 2005-13 I.R.B.795
2005-28, 2005-13 I.R.B.796
2005-29, 2005-13 I.R.B.796
2005-30, 2005-14 I.R.B.827
2005-31, 2005-14 I.R.B.830
Proposed Regulations:
REG-117969-00, 2005-7 I.R.B.533
REG-125628-01, 2005-7 I.R.B.536
REG-129709-03, 2005-3 I.R.B.351
REG-148701-03, 2005-13 I.R.B.802
REG-148867-03, 2005-9 I.R.B.646
REG-160315-03, 2005-14 I.R.B.833
REG-163314-03, 2005-14 I.R.B.835
REG-122847-04, 2005-13 I.R.B.804
REG-130370-04, 2005-8 I.R.B.608
REG-130671-04, 2005-10 I.R.B.694
REG-131128-04, 2005-11 I.R.B.733
REG-139683-04, 2005-4 I.R.B.371
REG-147195-04, 2005-15 I.R.B.888
REG-152354-04, 2005-13 I.R.B.805
REG-152914-04, 2005-9 I.R.B.650
REG-152945-04, 2005-6 I.R.B.484
REG-159824-04, 2005-4 I.R.B.372
Revenue Procedures:
2005-1, 2005-1 I.R.B.1
2005-2, 2005-1 I.R.B.86
2005-3, 2005-1 I.R.B.118
2005-4, 2005-1 I.R.B.128
2005-5, 2005-1 I.R.B.170
2005-6, 2005-1 I.R.B.200
2005-7, 2005-1 I.R.B.240
2005-8, 2005-1 I.R.B.243
2005-9, 2005-2 I.R.B.303
2005-10, 2005-3 I.R.B.341
2005-11, 2005-2 I.R.B.307
2005-12, 2005-2 I.R.B.311
2005-13, 2005-12 I.R.B.759
2005-14, 2005-7 I.R.B.528
2005-15, 2005-9 I.R.B.638
2005-16, 2005-10 I.R.B.674
2005-17, 2005-13 I.R.B.797
2005-18, 2005-13 I.R.B.798
2005-19, 2005-14 I.R.B.832
2005-22, 2005-15 I.R.B.886
Revenue Rulings:
2005-1, 2005-2 I.R.B.258
2005-2, 2005-2 I.R.B.259
Revenue Rulings— Continued:
2005-3, 2005-3 I.R.B.334
2005-4, 2005-4 I.R.B.366
2005-5, 2005-5 I.R.B.445
2005-6, 2005-6 I.R.B.471
2005-7, 2005-6 I.R.B.464
2005-8, 2005-6 I.R.B.466
2005-9, 2005-6 I.R.B.470
2005-10, 2005-7 I.R.B.492
2005-11, 2005-14 I.R.B.816
2005-12, 2005-9 I.R.B.628
2005-13, 2005-10 I.R.B.664
2005-14, 2005-12 I.R.B.749
2005-15, 2005-11 I.R.B.720
2005-16, 2005-13 I.R.B.777
2005-17, 2005-14 I.R.B.823
2005-18, 2005-14 I.R.B.817
2005-19, 2005-14 I.R.B.819
2005-20, 2005-14 I.R.B.821
2005-21, 2005-14 I.R.B.822
2005-22, 2005-13 I.R.B.787
2005-23, 2005-15 I.R.B.864
Tax Conventions:
2005-3, 2005-2 I.R.B.270
2005-17, 2005-10 I.R.B.673
2005-22, 2005-14 I.R.B.826
Treasury Decisions:
9164, 2005-3 I.R.B.320
9165, 2005-4 I.R.B.357
9166, 2005-8 I.R.B.558
9167, 2005-2 I.R.B.261
9168, 2005-4 I.R.B.354
9169, 2005-5 I.R.B.381
9170, 2005-4 I.R.B.363
9171, 2005-6 I.R.B.452
9172, 2005-6 I.R.B.468
9173, 2005-8 I.R.B.557
9174, 2005-9 I.R.B.629
9175, 2005-10 I.R.B.665
9176, 2005-10 I.R.B.661
9177, 2005-10 I.R.B.671
9178, 2005-11 I.R.B.708
9179, 2005-11 I.R.B.707
9180, 2005-11 I.R.B.714
9181, 2005-11 I.R.B.717
9182, 2005-11 I.R.B.713
9183, 2005-12 I.R.B.754
9184, 2005-12 I.R.B.753
9185, 2005-12 I.R.B.749
9186, 2005-13 I.R.B.790
9187, 2005-13 I.R.B.778
9188, 2005-15 I.R.B.883
9189, 2005-13 I.R.B.788
9190, 2005-15 I.R.B.855
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin
2004–52, dated December 27, 2004.
April 11, 2005ii2005–15 I.R.B.

Treasury Decisions— Continued:
9191, 2005-15 I.R.B.854
9192, 2005-15 I.R.B.866
9193, 2005-15 I.R.B.862
2005–15 I.R.B.iiiApril 11, 2005

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2005–1 through 2005–15
Announcements:
2001-77
Modified by
Rev. Proc. 2005-16, 2005-10 I.R.B.674
Notices:
88-30
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
88-132
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
89-29
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
89-38
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
2004-22
Modified and superseded by
Notice 2005-30, 2005-14 I.R.B.827
2004-38
Obsoleted by
T.D. 9186, 2005-13 I.R.B.790
2004-80
Clarified and modified by
Notice 2005-22, 2005-12 I.R.B.756
Updated by
Notice 2005-17, 2005-8 I.R.B.606
2005-4
Modified by
Notice 2005-24, 2005-12 I.R.B.757
2005-17
Clarified and modified by
Notice 2005-22, 2005-12 I.R.B.756
Proposed Regulations:
REG-149519-03
Corrected by
Ann. 2005-11, 2005-5 I.R.B.451
REG-114726-04
Corrected by
Ann. 2005-10, 2005-5 I.R.B.450
Revenue Procedures:
84-58
Superseded by
Rev. Proc. 2005-18, 2005-13 I.R.B.798
Revenue Procedures— Continued:
98-16
Modified and superseded by
Rev. Proc. 2005-11, 2005-2 I.R.B.307
2000-20
Modified and superseded by
Rev. Proc. 2005-16, 2005-10 I.R.B.674
2001-22
Superseded by
Rev. Proc. 2005-12, 2005-2 I.R.B.311
2002-9
Modified and amplified by
Rev. Proc. 2005-9, 2005-2 I.R.B.303
2004-1
Superseded by
Rev. Proc. 2005-1, 2005-1 I.R.B.1
2004-2
Superseded by
Rev. Proc. 2005-2, 2005-1 I.R.B.86
2004-3
Superseded by
Rev. Proc. 2005-3, 2005-1 I.R.B.118
2004-4
Superseded by
Rev. Proc. 2005-4, 2005-1 I.R.B.128
2004-5
Superseded by
Rev. Proc. 2005-5, 2005-1 I.R.B.170
2004-6
Superseded by
Rev. Proc. 2005-6, 2005-1 I.R.B.200
2004-7
Superseded by
Rev. Proc. 2005-7, 2005-1 I.R.B.240
2004-8
Superseded by
Rev. Proc. 2005-8, 2005-1 I.R.B.243
2004-18
Obsoleted in part by
Rev. Proc. 2005-15, 2005-9 I.R.B.638
2004-24
Obsoleted by
Rev. Proc. 2005-22, 2005-15 I.R.B.886
2004-35
Corrected by
Ann. 2005-4, 2005-2 I.R.B.319
2004-60
Superseded by
Rev. Proc. 2005-10, 2005-3 I.R.B.341
Revenue Procedures— Continued:
2005-6
Modified by
Rev. Proc. 2005-16, 2005-10 I.R.B.674
2005-8
Modified by
Rev. Proc. 2005-16, 2005-10 I.R.B.674
2005-9
Modified by
Rev. Proc. 2005-17, 2005-13 I.R.B.797
Revenue Rulings:
69-516
Obsoleted by
T.D. 9182, 2005-11 I.R.B.713
77-415
Obsoleted by
T.D. 9182, 2005-11 I.R.B.713
77-479
Obsoleted by
T.D. 9182, 2005-11 I.R.B.713
82-34
Obsoleted by
T.D. 9182, 2005-11 I.R.B.713
92-63
Modified and superseded by
Rev. Rul. 2005-3, 2005-3 I.R.B.334
95-63
Modified and superseded by
Rev. Rul. 2005-3, 2005-3 I.R.B.334
2004-43
Revoked by
Rev. Rul. 2005-10, 2005-7 I.R.B.492
2004-103
Superseded by
Rev. Rul. 2005-3, 2005-3 I.R.B.334
Treasury Decisions:
9170
Corrected by
Ann. 2005-13, 2005-8 I.R.B.627
9187
Corrected by
Ann. 2005-25, 2005-15 I.R.B.891
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin 2004–52, dated December 27,
2004.
April 11, 2005iv2005–15 I.R.B.
*U.S.Government PrintingOffice:2005—310–365/70010