Internal Revenue Bulletin 2005-39 (PDF rendition): IRS Revenue Rulings

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Bulletin No. 200
5-39
September 26, 20
05
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2005–63, page 603.
LIFO; price indexes; department stores.The July 2005
Bureau of Labor Statistics price indexes are accepted for use
by department stores employing the retail inventory and last-in,
first-out inventory methods for valuing inventories for tax years
ended on, or with reference to, July 31, 2005.
Rev. Rul. 2
005–64, page 600.
Interacti
on of sections 469 and 4261.This ruling de-
scribes th
e circumstances in which losses incurred by an in-
dividual
who provides air transportation through a passthrough
entity ca
n qualify as passive losses under section 469 of the
Code. In a
ddition, this ruling describes the applicability of sec-
tion 4261
to the amounts paid for the air transportation ser-
vices.
REG–133578–05, page 610.
Proposed regulations under section 162(k) of the Code pro-
vide guidance concerning which corporation is entitled to the
deduction for applicable dividends under section 404(k) and
also clarify that a payment in redemption of employer securi-
ties held by an ESOP is not deductible.
Notice 2005–61, page 607.
This notice clarifies that employers that amend their cafete-
riaplanstoprovideagraceperiodfordependentcareassis-
tance may continue to rely on the safe harbor in Notice 89-111,
1989–2 C.B. 449, and report salary reduction amounts elected
by an employee for a calendar year on Form W–2. Notice
89-111 amplified.
Notice 2005–65, page 607.
The Department of Homeland Security issued a temporary
waiver of the Jones Act as a result of Hurricane Katrina. The
waiver permits foreign corporations to operate ships in the
U.S. domestic trade to transport petroleum and refined petro-
leum products between U.S. ports for a limited period. The
notice provides that the IRS will not challenge certain positions
taken by foreign corporations operating ships pursuant to the
waiver and by ships’ nonresident alien crewmembers.
Announcement 2005–66, page 613.
This announcement advises donee organizations of the release
of new Form 1098–C,Contributions of Motor Vehicles, Boats,
and Airplanes. The form is used by donee organizations to
file with the IRS to satisfy the reporting requirements of new
section 170(f)(12) of the Code. The form may also be used to
furnish the donor of a qualified vehicle with a contemporaneous
written acknowledgment.
EMPLOYEE PLANS
T.D. 9220, page 596.
REG–122857–05, page 609.
Temporary and proposed regulations under section 408A of the
Code provide guidance concerning the tax consequences of
converting a non-Roth IRA annuity to a Roth IRA. The regulations
affect individuals establishing Roth IRAs, beneficiaries under
Roth IRAs, and trustees, custodians and issuers of Roth IRAs.
(Continued on the next page)
Finding Lists begin on page ii.
Index for July through September begins on page v.

T.D. 9223, page 591.
Final regulations under section 402 of the Code address the
amount includible in a distributee’s income when life insurance
contracts are distributed by a qualified retirement plan and also
address the treatment of property sold by a qualified retirement
plan to a plan participant or beneficiary for less than fair mar-
ket value. The regulations also provide guidance regarding the
amounts includible in income when an employee is provided
permanent benefits in combination with group-term life insur-
ance or when a life insurance contract is transferred in con-
nection with the performance of services.
REG–133578–05, page 610.
Proposed regulations under section 162(k) of the Code pro-
vide guidance concerning which corporation is entitled to the
deduction for applicable dividends under section 404(k) and
also clarify that a payment in redemption of employer securi-
ties held by an ESOP is not deductible.
Notice 2005–60, page 606.
Minimum funding standards; disaster relief.The Inter-
nal Revenue Service, the Employee Benefits Security Admin-
istration of the Department of Labor, and the Pension Benefit
Guaranty Corporation are providing relief in connection with cer-
tain employee benefit plans because of damage in Louisiana,
Mississippi, and Alabama caused by Hurricane Katrina. The re-
lief provided by this notice is in addition to the relief already
provided by the Service to victims of Hurricane Katrina.
EXEMPT ORGANIZATIONS
Announcement 2005–66, page 613.
This announcement advises donee organizations of the release
of new Form 1098–C,Contributions of Motor Vehicles, Boats,
and Airplanes. The form is used by donee organizations to
file with the IRS to satisfy the reporting requirements of new
section 170(f)(12) of the Code. The form may also be used to
furnish the donor of a qualified vehicle with a contemporaneous
written acknowledgment.
EXCISE TAX
Rev. Rul. 2005–64, page 600.
Interaction of sections 469 and 4261.This ruling de-
scribes the circumstances in which losses incurred by an in-
dividual who provides air transportation through a passthrough
entity can qualify as passive losses under section 469 of the
Code. In addition, this ruling describes the applicability of sec-
tion 4261 to the amounts paid for the air transportation ser-
vices.
T.D. 9221, page 604.
Final regulations under section 4291 of the Code provide guid-
ance for collectors of communications excise taxes under sec-
tion 4251 and excise taxes on amounts paid for taxable trans-
portation under sections 4261 and 4271. These regulations
clarify the time by which collectors must report refusals to pay
or other failures to collect these excise taxes.
ADMINISTRATIVE
Announcement 2005–68, page 613.
This document contains corrections to proposed regulations
(REG–108524–00, 2005–23 I.R.B. 1209) under section 1446
of the Code relating to the circumstances under which a part-
nership may take partner-level deductions and losses into ac-
count in computing its withholding tax obligation with respect
to a foreign partner’s allocable share of effectively connected
taxable income.
September 26, 20052005–39 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.
2005–39 I.R.B.September 26, 2005

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 402.—Taxability of
Beneficiary of Employees’
Trust
26 CFR 1.402(a)–1: Taxability of beneficiary under a
trust which meets the requirements of section 401(a).
T.D. 9223
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Value of Life Insurance
Contracts When Distributed
From a Qualified Retirement
Plan
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations under section 402(a) of
the Internal Revenue Code regarding the
amount includible in a distributee’s in-
come when life insurance contracts are
distributed by a qualified retirement plan
and regarding the treatment of property
sold by a qualified retirement plan to a plan
participant or beneficiary for less than fair
market value. This document also contains
final regulations under sections 79 and 83
of the Internal Revenue Code regarding
the amounts includible in income when an
employee is provided permanent benefits
in combination with group-term life in-
surance or when a life insurance contract
is transferred in connection with the per-
formance of services. These regulations
will affect administrators of, participants
in, and beneficiaries of qualified retire-
ment plans. These regulations will also
affect employers who provide permanent
benefits in combination with group-term
life insurance for their employees and
employees who receive those permanent
benefits,aswellasservice recipients who
transfer life insurance contracts to service
providers in connection with the perfor-
mance of services, and service providers
to whom those life insurance contracts are
transferred.
DATES: These regulations are effective
August 29, 2005.
FOR FURTHER INFORMATION
CONTACT: Concerning the section
79 regulations, Betty Clary at (202)
622–6080; concerning the section 83 regu-
lations, Robert Misner at (202) 622–6030;
concerning the section 402 regulations,
Bruce Perlin or Linda Marshall at (202)
622–6090 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
A. In General
This document contains amendments
to the Income Tax Regulations (26 CFR
part 1) under section 402(a) of the In-
ternal Revenue Code (Code) relating to
the amount includible in a distributee’s
income when a life insurance contract,
retirement income contract, endowment
contract, or other contract providing life
insurance protection is distributed by a
retirement plan qualified under section
401(a), and relating to the sale of property
by a qualified retirement plan to a plan
participant or beneficiary for less than the
fair market value of the property. This
document also contains amendments to
the regulations under sections 79 and 83
relating, respectively, to permanent ben-
efits that are provided to employees in
combination with group-term life insur-
ance, and to life insurance contracts that
are transferred in connection with the per-
formance of services.
Section 402(a) generally provides that
any amount actually distributed to any
distributee by any employees’ trust de-
scribedinsection401(a)whichisexempt
from tax under section 501(a) is taxable
to the distributee in the taxable year of
the distributee in which distributed, in
accordance with section 72. Distribu-
tions from a qualified employees’ trust
generally are subject to withholding and
reporting requirements pursuant to section
3405 and regulationsthereunder. Section
1.402(a)–1(a)(1)(iii) provides, in general,
that a distribution of property by a section
401(a) plan is taken into account by the
distributee at itsfair market value.Priorto
its amendment by this Treasury decision,
§1.402(a)–1(a)(2) (which was originally
published in 1956) provided, in general,
that upon the distribution of a life insur-
ance contract, the “entire cash value” of
the contract must be included in the dis-
tributee’s income.
1
Section 1.402(a)–1(a)
did not definefair market valueorentire
cash value, and questions have arisen re-
garding the interaction between these two
provisions and regarding whether the term
entire cash valueincludes a reduction for
surrender charges.
On April 30, 1975, proposed regu-
lations under section 402 regarding the
taxation of certain lump sum distributions
from qualified plans (the 1975 proposed
regulations) were published in theFed-
eral Register(40 FR 18798) to reflect
changes to section 402 made by the Em-
ployee Retirement Income Security Act
of 1974 (ERISA) (Public Law 93–406,
88 Stat. 829). Under §1.402(a)–1(a)(2)
of the 1975 proposed regulations, the dis-
tribution of an annuity contract must be
treated as a lump sum distribution under
section 402(e) for purposes of determining
the separate tax imposed under section
402(e)(1)(A),
2
even if the distribution of
the annuity contract itself is not currently
taxable. The 1975 proposed regulations
also expanded the situations in which the
distribution of a retirement income, en-
dowment, or other life insurance contract
is not currently taxable to include the sit-
uation where, within 60 days after the
distribution of such contract, the contract
is treated as a rollover contribution under
1
Section 1.402(a)–1(a)(2) also provides rules regarding the taxation of the distribution of an annuity contract. In certain cases, the distributionof an annuity contract is not includible in the
participant’s gross income until distributions are made from the annuity contract.
2
The tax imposed under section 402(e)(1)(A), as in effect at the time of the 1975proposed regulations, generally wasbased on 10-year averaging of the tax otherwise payable with respect to
a lump-sum distribution.
2005–39 I.R.B.591September 26, 2005

section 402(a)(5), as in effect after De-
cember 31, 1973.
Section 79 generally requires that the
cost of group-term life insurance cover-
age provided by an employer on the life of
an employee that is in excess of $50,000
of coverage be included in the income of
the employee. Pursuant to §1.79–1(b),
under specified circumstances, group-term
life insurance may be combined with other
benefits, referred to as permanent benefits.
A permanent benefit is defined in §1.79–0
as an economic value extending beyond
one policy year (for example, a paid-up or
cash surrender value) that is provided un-
der a life insurance policy. Section 1.79–0
further provides that certain features are
not permanent benefits, including: (a) a
right to convert (or continue) life insurance
after group life insurance coverage termi-
nates, (b) any other feature that provides no
economic benefit (other than current insur-
ance protection) to the employee, and (c) a
feature under which term life insurance is
provided at a level premium for a period of
five years or less.
Permanent benefits provided to an em-
ployee are subject to taxation under rules
described in §1.79–1(d). Under those
rules, the cost of the permanent benefits,
reduced by the amount paid for those ben-
efits by the employee, is included in the
employee’s income. Section 1.79–1(d)
provides that the cost of the permanent
benefits cannot be less than an amount
determined under a formula set forth in
the regulations. Prior to its amendment
by this Treasury decision, §1.79–1(d) pro-
vided that one of the factors used in the
formula for determining the cost of perma-
nent benefits was “the net level premium
reserve at the end of that policy year for
all benefits provided to the employee by
the policy or, if greater, the cash value of
the policy at the end of that policy year.”
Section 83(a) generally provides that
when property is transferred to any per-
soninconnectionwiththeperformance
of services, the service provider must in-
clude in gross income (as compensation in-
come) the excess of the fair market value
of the property over the amount (if any)
paid for the property. For this purpose, the
fair market value of the property is deter-
mined without regard to lapse restrictions
and is determined at the first time that the
transferee’s rights in the property are either
transferable or not subject to a substantial
risk of forfeiture. Prior to its amendment
by this Treasury decision, §1.83–3(e) gen-
erally provided that in the case of “a trans-
fer of a life insurance contract, retirement
income contract, endowment contract, or
other contract providing life insurance pro-
tection, only the cash surrender value of
the contract is considered to be property.”
In T.D. 9092, 2003–2 I.R.B. 1055,
published in theFederal Registeron
September 17, 2003 (68 FR 54336), relat-
ing to split-dollar life insurance arrange-
ments, §1.83–3(e) was amended to add
the following sentence: “Notwithstand-
ing the previous sentence, in the case of
a transfer of a life insurance contract,
retirement income contract, endowment
contract, or other contract providing life
insurance protection, or any undivided
interest therein, that is part of a split-dollar
life insurance arrangement (as defined in
§1.61–22(b)(1) or (2)) that is entered into,
or materially modified (within the mean-
ing of §1.61–22(j)(2)), after September
17, 2003, the policy cash value and all
other rights under such contract (including
any supplemental agreements thereto and
whether or not guaranteed), other than cur-
rent life insurance protection, are treated
as property for purposes of this section.”
The prohibited transaction provisions
of ERISA generally prohibit various trans-
actions between plans covered by Title I of
ERISA and certain parties in interest (in-
cluding plan participants) with respect to
such plans. Specifically, unless an exemp-
tion from the prohibited transaction rules
applies, sections 406(a)(1)(A) and (D) of
ERISA provide that a fiduciary with re-
spect to a plan shall not cause the plan
to engage in a transaction, if he knows or
should know that such transaction consti-
tutes a direct or indirect sale or exchange,
or leasing, of any property between the
plan and a party in interest; or transfer to,
or use by or for the benefit of, a party
in interest of any assets of the plan. Ac-
cordingly, unless a statutory or administra-
tive exemption is applicable, the prohib-
ited transaction rulesare applicable to the
sale of a life insurance contract, or annuity
contract, by a plan to a party in interest.
Section 4975 of the Code sets forth par-
allel rules that impose excise taxes on the
amount involved with respect to prohib-
ited transactions involving certain plans.
The prohibited transaction provisions un-
der section 4975, as well as the exemptions
from the application of such rules, gener-
ally parallel the prohibited transaction pro-
visions under Title I of ERISA.
Prohibited Transaction Exemption
(PTE) 77–8 (1977–2 C.B. 425), subse-
quently amended and redesignated as
Prohibited Transaction Exemption 92–6,
was jointly issued in 1977 by the Depart-
ment of Labor and the IRS to provide an
exemption from the restrictions of sec-
tions 406(a) and 406(b)(1) and (b)(2) of
ERISA and from the taxes imposed by
sections 4975(a) and (b) of the Code for
certain transactions. Under the exemption
set forth in PTE 77–8 and PTE 92–6, an
employee benefit plan is permitted to sell
individual life insurance contracts and
annuities for the cash surrender value of
the contracts to certain specified parties,
provided conditions are satisfied. Under
PTE 77–8 and PTE 92–6, such specified
parties are: (1) a plan participant insured
under such policies, (2) a relative of such
insured participant who is the beneficiary
under the contract, (3) an employer any of
whose employees are covered by the plan,
or (4) another employee benefit plan.
The preamble to PTE 77–8 (citing Rev.
Rul. 59–195, 1959–1 C.B. 18) noted that,
for Federal income tax purposes, the value
of an insurance policy is not the same as,
and may exceed, its cash surrender value,
and that a purchase of an insurance policy
at its cash surrender value may therefore
be a purchase of property for less than its
fair market value. At the time PTE 77–8
was issued, the regulations under section
402 did not address the consequences of a
sale of property by a section 401(a) plan
to a plan participant or beneficiary for less
than the fair market value of that property.
In this regard, the preamble to PTE 77–8
stated that the Federal income tax conse-
quences of such a bargain purchase was
required to be determined in accordance
with generally applicable Federal income
tax rules but that any income realized by
a participant or relative of such partici-
pant upon such a purchase under the con-
ditions of PTE 77–8 would not be deemed
a distribution from the plan to such par-
ticipant for purposes of subchapter D of
chapter 1 of subtitle A of the Internal Rev-
enue Code (i.e., sections 401 to 424 re-
lating to qualified pension, profit-sharing,
and stock bonus plans).
September 26, 20055922005–39 I.R.B.

B. The 2004 Proposed Regulations
In February 2004, the IRS issued pro-
posed amendments to the regulations
under section 402(a) (REG–126967–03,
2004–1 C.B. 566 [69 FR 7384]) to clarify
that the requirement that a distribution of
property be includedin the distributee’s
income at fair market value is controlling
in those situations where the regulations
provided for the inclusion of the entire
cash value of a retirement income, endow-
ment, or other life insurance contract. The
2004 proposed regulations provided that
the fair market value of a life insurance
contract is determined taking into account
the value of all rights under the contract,
including any supplemental agreements
thereto and whether or not guaranteed.
The proposed regulations also provided
that, if a qualified retirement plan transfers
property to a plan participant or benefi-
ciary for consideration that is less than
the fair market value of the property, the
transfer would be treated as a distribution
by the plan to the participant or benefi-
ciary to the extent the fair market value of
the distributed property exceeds the value
of the consideration received. Thus, under
the proposed regulations, such a transfer
would be treated as a distribution for pur-
poses of applying the plan qualification
requirements of section 401(a).
The 2004 proposed regulations also
contained proposed amendments to ex-
isting regulations under section 83 to
clarify that fair market value is also con-
trolling with respect to a life insurance
contract, retirement income contract,
endowment contract, or other contract
providing life insurance protection and
thus all of the rights under the contract
(including any supplemental agreements
thereto and whether or not guaranteed)
must be considered in determining that
fair market value. The proposed regu-
lations contained proposed amendments
to §1.83–3(e), which generally apply the
definition of property for new split-dollar
life insurance arrangements to all situa-
tions subject to section 83 involving the
transfer of life insurance contracts. The
proposed regulations also contained pro-
posed amendments to §1.79–(d) to replace
the term “cash value” in the formula for
determining the cost of permanent benefits
with the term “fair market value.”
C. Determination of Fair Market Value
As noted under the headingIn Gen-
eral, §1.402(a)–1(a)(1)(iii) does not de-
fine the termfair market value.InRev.
Rul. 59–195, the IRS addressed the de-
termination of fair market value of a life
insurance contract in situations similar to
those in which an employer purchases and
pays the premiums on an insurance pol-
icy on the life of one of its employees for
several years and on which further premi-
ums must be paid, and subsequently sells
such policy. The IRS held that the value
of such a policy for purposes of comput-
ing taxable gain to the employee in the
year of purchase should be determined un-
der the method of valuation prescribed in
§25.2512–6 of the Gift Tax Regulations.
Under this method, the value of such a pol-
icy is not its cash surrender value but the
interpolated terminal reserve at the date of
sale plus the proportionate part of any pre-
mium paid by the employer prior to the
date of the sale which is applicable to a pe-
riod subsequent to the date of the sale. Sec-
tion 25.2512–6 also provides that if “be-
cause of the unusual nature of the contract
such approximation is not reasonably close
to the full value, this method may not be
used.” Thus, this method may not be used
to determine the fair market value of an in-
surance policy where the reserve does not
reflect the value of all of the relevant fea-
tures of the policy.
Q&A–10 of Notice 89–25, 1989–1 C.B.
662, described a distribution from a qual-
ified plan of a life insurance policy with
a value substantially higher than the cash
surrender value stated in the policy. The
notice concluded that the practice of using
cash surrender value as fair market value
is not appropriate where the total policy
reserves, including life insurance reserves
(if any) computed under section 807(d), to-
gether with any reserves for advance pre-
miums, dividend accumulations, etc., rep-
resent a much more accurate approxima-
tion of the policy’s fair market value.
Since Notice 89–25 was issued, life in-
surance contracts have been marketed that
are structured in a manner which results in
a temporary period during which neither
a contract’s reserves nor its cash surren-
der value represent the fair market value of
the contract. For example, some life insur-
ance contracts may provide for large sur-
render charges and other charges that are
not expected to be paid because they are
expected to be eliminated or reversed in
the future (under the contract or under an-
other contract for which the first contract is
exchanged), but this future elimination or
reversal is not always reflected in the cal-
culation of the contract’s reserve. If such
a contract is distributed prior to the elim-
ination or reversal of those charges, both
the cash surrender value and the reserve
under the contract could significantly un-
derstate the fair market value of the con-
tract. Thus, in some cases, it would not be
appropriate to use either the net surrender
value (i.e., the contract’s cash value after
reduction for any surrender charges) or, be-
cause of the unusual nature of the contract,
the contract’s reserves to determine the fair
market value of the contract. Accordingly,
Q&A–10 of Notice 89–25 should not be
interpreted to provide that a contract’s re-
serves (including life insurance reserves (if
any) computed under section 807(d), to-
gether with any reserves for advance pre-
miums, dividend accumulations, etc.) are
always an accurate representation of the
contract’s fair market value.
The IRS and Treasury recognized that
taxpayers could have difficulty determin-
ing the fair market value of a life insur-
ance contract for which the contract’s re-
serves (including life insurance reserves (if
any) computed under section 807(d), to-
gether with any reserves for advance pre-
miums, dividend accumulations, etc.) are
not an accurate representation of the con-
tract’s fair market value. Accordingly, the
IRS issued Rev. Proc. 2004–16, 2004–1
C.B. 559), which provided interim rules
under which the cash value (without reduc-
tion for surrender charges) of a life insur-
ance contract distributed from a qualified
plan may be treated as the fair market value
of that contract, provided that certain re-
quirements are satisfied. This safe harbor
for determining fair market value was also
available for purposes of sections 79 and
83.
D. Comments and Public Hearing on
the 2004 Proposed Regulations and
Rev. Proc. 2004–16
The IRS received comments on the
2004 proposed regulations, and a public
hearing was held on June 9, 2004. While
none of the commentators objected to the
proposed amendments to the regulations,
2005–39 I.R.B.593September 26, 2005

a number of commentators raised con-
cerns regarding the safe harbor formula
for fair market value set forth in Rev.
Proc. 2004–16. Several commentators
recommended that final guidance provide
more than one safe harbor for determining
the fair market value of a policy and as-
serted that the safe harbor formulas under
Rev. Proc. 2004–16 produce a value that
is too high and does not reflect market
realities. Suggestions were made that the
interpolated terminal reserve (ITR) and
tax reserve valuation methods under sec-
tion 807(d) be used as alternatives to the
interim safe harbor formula.
Some commentators claimed that the
interim safe harbor provided by Rev. Proc
2004–16 was not usable for all types of
life insurance policies. In particular, these
commentators asserted that the formulas
did not function well for traditional whole
life policies. In addition, commentators
were concerned about the possible dou-
ble-counting of certain dividends under the
formulas, and the fact that the formulas did
not make an explicit adjustment for with-
drawals or distributions, nor did they pro-
vide for any recognition of the possibility
that a surrender charge would apply in the
future.
E. Rev. Proc. 2005–25 — Safe Harbors
for Determining Fair Market Value
After reviewing the comments to the
prior guidance, the IRS and Treasury con-
cluded that the safe harbor formulas in
Rev. Proc. 2004–16 did not function well
for certain types of traditional policies, and
also should be revised to reflect a discount
for the possibility that a surrender charge
would apply in certain situations. Ac-
cordingly, Rev. Proc. 2005–25, 2005–17
I.R.B. 962, was issued to modify and su-
persede Rev. Proc. 2004–16 in order to
make adjustments to the safe harbor for-
mulas. These new safe harbor formulas re-
place the formulas in Rev. Proc. 2004–16
for distributions, sales, and other transfers
made on or after February 13, 2004, and
for permanent benefits provided on or after
February 13, 2004. For all periods, includ-
ing periods before May 1, 2005, taxpayers
mayrelyonthesafeharborsinRev.Proc.
2005–25. In addition, for periods on or af-
ter February 13, 2004, and before May 1,
2005, taxpayers may rely on the safe har-
bors in Rev. Proc. 2004–16.
Explanation of Provisions
These final regulations retain the rules
set forth in the 2004 proposed regulations
under section 402(a) providing that the
requirement that a distribution of prop-
erty be included in the distributee’s in-
come at fair market value is controlling
in those situations where the former reg-
ulations provided for the inclusion of the
entire cash value of a retirement income,
endowment, or other life insurance con-
tract. Thus, these finalregulations clarify
that, in those cases where a qualified plan
distributes a life insurance contract, retire-
ment income contract, endowment con-
tract, or other contract providing life in-
surance protection, the fair market value of
such a contract (i.e., the value of all rights
under the contract, including any supple-
mental agreements thereto and whether or
not guaranteed) is generally included in the
distributee’s income, and not merely the
entire cash value of the contract. How-
ever, these final regulations retain the rules
from existing final regulations setting forth
the situations under which a distribution of
such a contract is not currently includible
in income.
These final regulations also set forth a
portion of the rules included in the 1975
proposed regulations. Under those rules,
the distribution of an annuity contract must
be treated as a lump sum distribution for
purposes of determining the amount of tax
under the 10-year averaging rule of sec-
tion 402(e) (as in effect prior to the amend-
ment by the Tax Reform Act of 1986, Pub-
lic Law 99–514, 100 Stat. 2085), even if
the distribution of the annuity contract it-
self is not currently taxable. The distribu-
tion of a retirement income, endowment,
or other life insurance contract is not tax-
able in the situation where within 60 days
after the distribution of such contract, the
contract is treated as a rollover contribu-
tion under section 402(a)(5), as in effect af-
ter December 31, 1973. Although the final
regulations reject the use of the termentire
cash valueas found in the 1975 proposed
regulations, no inference should be made
that other rules in the 1975 proposed regu-
lations that have not been included in these
final regulations havealso been rejected.
These final regulations retain the rules
provided in the 2004 proposed regulations
that, if a qualified plan transfers property
to a plan participant or beneficiary for con-
sideration that is less than the fair mar-
ket value of the property, the transfer is
treated as a distribution under the plan to
the participant or beneficiary to the ex-
tent the fair market value of the distributed
property exceeds the value of the consid-
eration. Thus, in contrast to the state-
ment to the contrary in the preamble to
PTE 77–8, these regulations provide that
any bargain element in the sale is treated as
a distribution under section 402(a). In ad-
dition, any such bargain element is treated
as a distribution under the plan for all other
purposes of the Code, including the qual-
ification requirements of section 401(a).
Thus, for example, this bargain element is
treated as a distribution for purposes of ap-
plying the limitations on in-service distri-
butions from certain qualified retirement
plans and the limitations of section 415.
The rule treating the bargain element in a
sale as a distribution from a qualified plan
applies to transfers that occur on or af-
ter August 29, 2005. For transfers before
that date, the bargain element in the sale
must be included in the plan participant’s
income under section 61. However, such
a transfer of a life insurance contract, re-
tirement income contract, endowment con-
tract, or other contract providing life insur-
ance protection occurring before that date
is deemed not to give rise to a distribution
for purposes of applying the requirements
of subchapter D of chapter 1 of subtitle A
of the Code.
These final regulations also retain the
rules set forth in the 2004 proposed regu-
lations under sections 79 and 83 that clar-
ify that fair market value is also control-
ling with respect to life insurance con-
tracts under those sections and, thus, that
all of the rights under the contract (includ-
ing any supplemental agreements thereto
and whether or not guaranteed) must be
considered in determining that fair mar-
ket value. These final regulations amend
§1.79–1(d) to replace the termcash value
in the formula for determining the cost
of permanent benefits with the termfair
market value. These final regulations also
amend §1.83–3(e) generally to apply the
definition of property for new split-dol-
lar life insurance arrangements to all sit-
uations involving the transfer of a life in-
surance contract, retirement income con-
tract, endowment contract, or other con-
tract providing life insurance protection.
Section 83(a) requires that the excess of
September 26, 20055942005–39 I.R.B.

the fair market value of the property over
the amount paid for the property be in-
cluded in income. The purpose of the
changes to the regulations is to clarify that,
unless specifically excepted from the def-
inition of permanent benefits or fair mar-
ket value, the value of all features of a life
insurance policy providing an economic
benefit to a service provider (including,
for example, the value of a springing cash
value feature) must be included in deter-
mining the employee’s income.
These final regulations do not affect the
relief granted by the provisions of Sec-
tion IV, paragraph 4 of Notice 2002–8,
2002–1 C.B. 398, to the parties to any in-
surance contract that is part of a pre-Jan-
uary 28, 2002, split-dollar life insurance
arrangement. Also, consistent with the ef-
fective date of the final split-dollar life in-
surance regulations at §1.61–22(j), these
final regulations do not apply to the trans-
fer of a life insurance contract which is
part of a split-dollar life insurance arrange-
ment entered into on or before September
17, 2003, and not materially modified af-
ter that date. However, taxpayers are re-
minded that, in determining the fair mar-
ket value of propertytransferred under sec-
tion 83, lapse restrictions (such as life in-
surance contract surrender charges) are ig-
nored.
Effective Date
These regulations are effective Au-
gust 29, 2005. The amendments to
§1.402(a)–1(a) apply to any distribution of
a retirement income, endowment, or other
life insurance contract occurring on or
after February 13, 2004. The amendment
to §1.79–1 is applicable to permanent
benefits provided on or after February 13,
2004. The amendment to §1.83–3(e) is
applicable to any transfer occurring on or
after February 13, 2004.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It has also been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations. In addition,
because no collection of information is im-
posed on small entities, the provisions of
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) do not apply, and therefore, a
Regulatory Flexibility Analysis is not re-
quired. Pursuant to section 7805(f) of the
Code, the notice of proposed rulemaking
preceding these regulations was submitted
to the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal authors of these regula-
tions are Bruce Perlin and Linda Marshall,
Office of Division Counsel/Associate
Chief Counsel (Tax Exempt and Govern-
ment Entities). However, other personnel
from the IRS and Treasury participated in
the development of these regulations.
*****
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §1.79–1, paragraph (d)(3) is
revised to read as follows:
§1.79–1 Group-term life
insurance—general rules.
*****
(d) * * *
(3)Formula for determining deemed
death benefit. The deemed death benefit
(DDB) at the end of any policy year for
any particular employee is equal to—
R/Y
where —
R is the net level premium reserve at
the end of that policy year for all benefits
provided to the employee by the policy
or, if greater, the fair market value of the
policy at the end of that policy year; and
Y is the net single premium for insur-
ance (the premium forone dollar of paid-
up, whole life insurance) at the employee’s
age at the end of that policy year.
*****
Par. 3. In §1.83–3, paragraph (e), the
fourth and fifth sentences are revised to
read as follows:
§1.83–3 Meaning and use of certain
terms.
*****
(e)***Inthecaseofatransferofalife
insurance contract, retirement income con-
tract, endowment contract, or other con-
tract providing life insurance protection,
or any undivided interest therein, the pol-
icy cash value and all other rights under
such contract (including any supplemen-
tal agreements thereto and whether or not
guaranteed), other than current life insur-
ance protection, are treated as property for
purposes of this section. However, in the
case of the transfer of a life insurance con-
tract, retirement income contract, endow-
ment contract, or other contract providing
life insurance protection, which was part
of a split-dollar arrangement (as defined
in §1.61–22(b)) entered into (as defined in
§1.61–22(j)) on or before September 17,
2003, and which is not materially mod-
ified (as defined in §1.61–22(j)(2)) after
September 17, 2003, only the cash surren-
der value of the contract is considered to
be property. * * *
*****
Par. 4. Section 1.402(a)–1 is amended
by:
1. Revising paragraph (a)(1)(iii).
2. Revising paragraph (a)(2).
The revisions read as follows:
§1.402(a)–1 Taxability of beneficiary
under a trust which meets the requirements
of section 401(a).
(a) * * *
(1) * * *
(iii) Except as provided in paragraph
(b) of this section, a distribution of prop-
ertybyatrustdescribedinsection401(a)
and exempt under section 501(a) shall be
taken into account by the distributee at its
fair market value. In the case of a dis-
tribution of a life insurance contract, re-
tirement income contract, endowment con-
tract, or other contract providing life insur-
ance protection, or any interest therein, the
policy cash value and all other rights under
such contract (including any supplemen-
tal agreements thereto and whether or not
guaranteed) are included in determining
the fair market value of the contract. In ad-
dition, in the case of a transfer of property
that occurs on or after August 29, 2005,
whereatrustdescribedinsection401(a)
2005–39 I.R.B.595September 26, 2005

and exempt under section 501(a) transfers
property to a plan participant or benefi-
ciary in exchange for consideration and
where the fair market value of the prop-
erty transferred exceeds the value of the
consideration, then the excess of the fair
market value of the property transferred by
the trust over the value of the considera-
tion received by the trust is treated as a dis-
tribution to the distributee under the plan
for all purposes under the Internal Revenue
Code. Where such a transfer occurs be-
fore that date, the excess of the fair mar-
ket value of the property transferred by the
trust over the value of the consideration
received by the trust is includible in the
gross income of the participant or bene-
ficiary under section 61. However, such
a transfer of a life insurance contract, re-
tirement income contract, endowment con-
tract, or other contractproviding life insur-
ance protection occurring before that date
is not treated as a distribution for purposes
of applying the requirements of subchapter
D of chapter 1 of subtitle A of the Internal
Revenue Code.
*****
(2) If a trust described in section 401(a)
and exempt under section 501(a) pur-
chases an annuity contract for an employee
and distributes it to the employee in a year
in which the trust is exempt, and the con-
tract contains a cash surrender value which
may be available to an employee by sur-
rendering the contract, such cash surrender
value will not be considered income to the
employee unless and until the contract is
surrendered. For the rule as to nontrans-
ferability of annuity contracts issued after
1962, see §1.401–9(b)(1). For additional
requirements regarding distributions of an-
nuity contracts, see,e.g., §§1.401(a)–20,
Q&A–2, 1.401(a)(31)–1, Q&A–17, and
1.401(a)(9)–6, Q&A–4. However, the
distribution of an annuity contract must
be treated as a lump sum distribution for
purposes of determining the amount of
tax under the 10-year averaging rule of
section 402(e) (as in effect prior to amend-
ment by the Tax Reform Act of 1986,
Public Law 99–514, 100 Stat. 2085). If,
however, the contract distributed by such
exempt trust is a life insurance contract,
retirement income contract, endowment
contract, or other contract providing life
insurance protection, the fair market value
of the contract at the time of distribution
must be included in the distributee’s in-
come in accordance with the provisions of
section 402(a), except to the extent that,
within 60 days after the distribution of the
contract, all or any portion of such value is
irrevocably converted into a contract un-
der which no part of any proceeds payable
on death at any time would be excludable
under section 101(a) (relating to life insur-
ance proceeds), or the contract is treated
as a rollover contribution under section
402(c). If the contract distributed by such
trust is a transferable annuity contract, or
a retirement income, endowment, or other
life insurance contract and such contract is
not treated as a rollover contribution under
section 402(c), then, notwithstanding the
preceding sentence, the fair market value
of the contract is includible in the distribu-
tee’s gross income unless, within such 60
days, such contract is made nontransfer-
able.
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved August 9, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary
for Tax Policy.
(Filed by the Office of the Federal Register on August 26,
2005, 8:45 a.m., and published in the issue of the Federal
Register for August 29, 2005, 70 F.R. 50967)
Section408A.—RothIRAs
26 CFR 1.408A–4T: Converting amounts to Roth
IRAs.
T.D. 9220
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Converting an IRA Annuity to
aRothIRA
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary Regulations.
SUMMARY: This document contains tem-
porary regulations under section 408A of
the Internal Revenue Code (Code). These
temporary regulations provide guidance
concerning the tax consequences of con-
verting a non-Roth IRA annuity to a Roth
IRA. These temporary regulations affect
individuals establishing Roth IRAs, ben-
eficiaries under Roth IRAs, and trustees,
custodians and issuers of Roth IRAs. The
text of these temporary regulations also
serves as the text of proposed regulations
(REG–122857–05) set forth in a notice of
proposed rulemaking in this issue of the
Bulletin.
DATES:Effective Date: These regulations
are effective August 19, 2005.
Applicability Date: These regulations
are applicable to any Roth IRA conversion
where an annuity contract is distributed
or treated as distributed from a traditional
IRA on or after August 19, 2005.
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
Cathy A. Vohs, 202–622–6090.
SUPPLEMENTARY INFORMATION:
Background
Roth IRAs and Conversions
This document contains temporary reg-
ulations that amend the Income Tax Regu-
lations (26 CFR part 1) under section 408A
of the Code relating to Roth IRAs. Section
408A of the Code, which was added by
section 302 of the Taxpayer Relief Act of
1997, Public Law 105–34 (111 Stat. 788),
establishes the Roth IRA as a type of in-
dividual retirement plan, effective for tax-
able years beginning on or after January 1,
1998.
Under Code section 408A, a Roth IRA
is treated like a traditional IRA with sev-
eral significant exceptions. Like amounts
held in traditional IRAs, amounts held
in Roth IRAs generally are exempt from
Federal income tax under Code section
408(e)(1). Likewise, contributions to tra-
ditional IRAs and Roth IRAs are subject
to specific limitations.
The identifying characteristic of Roth
IRAs is that all contributions are after-
tax contributions, and qualified distribu-
tions are tax free. Thus, unlike certain
contributions to traditional IRAs, which
September 26, 20055962005–39 I.R.B.

may be deductible, contributions to Roth
IRAs cannot be deducted from gross in-
come. Distributions from a traditional IRA
are includable in gross income except to
the extent attributable to a return of ba-
sis. However, qualified distributions from
Roth IRAs are excludable from gross in-
come. Under section 408A(d)(2), a quali-
fied distribution from a Roth IRA is a dis-
tribution that is made: (1) at least 5 years
after the account owner (or the account
owner’s spouse) made a Roth IRA contri-
bution, and (2) after age 59
1
/2, after death,
on account of disability, or for a first-time
home purchase.
A taxpayer whose modified adjusted
gross income for a year does not exceed
$100,000 may convert an amount held in
a non-Roth IRA (i.e., a traditional IRA or
SIMPLE IRA) to an amount held in a Roth
IRA. This conversion requires taking into
income the value of the non-Roth IRA be-
ing converted (to the extent the conver-
sion is not a conversion of basis in the
non-Roth IRA), essentially converting the
value into an after-tax rollover contribu-
tion to the Roth IRA. A conversion may
be accomplished by means of a rollover,
trustee-to-trustee transfer, or account re-
designation.
Regardless of the means used to
convert, any amount converted from a
non-Roth IRA to a Roth IRA is treated
as distributed from the non-Roth IRA and
rolled over to the Roth IRA. The con-
version amount is generally includible in
gross income for the year of the conver-
sion under section 408(d)(1) and (2). In
the case of a conversion involving prop-
erty, the conversion amount generally is
the fair market value of the property on
the date of distribution or the date the
property is treated asdistributed from the
traditional IRA.
Final regulations regarding Roth IRAs
were published in theFederal Registeron
February 4, 1999 (T.D. 8816, 1999–1 C.B.
518 [64 FR 5597). Section 1.408A–4 pro-
vides rules relating to converting amounts
from a traditional IRA to a Roth IRA. Sec-
tion 1.408A–4, A–7, which sets forth the
tax consequences of converting an amount
held in a traditional IRA to a Roth IRA,
provides that any amount that is converted
to a Roth IRA is includible in gross income
as a distribution according to the rules of
section 408(d)(1) and (2) for the taxable
year in which the amount is distributed or
transferred from the traditional IRA.
Under A–1 of §1.408A–7, any amount
converted from a non-Roth IRA to a
Roth IRA is treated as a distribution for
which a Form 1099-R, “Distributions
From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance
Contracts, etc.”mustbefiledbythe
trustee maintaining the non-Roth IRA.
Fair Market Value of Annuity Contracts
Before the enactment of section 408A,
the need to value an annuity contract as a
result of distribution from a qualified plan
or IRA rarely arose. The distribution of
an annuity contract from a qualified plan
or a traditional IRA is generally not a tax-
able event because, in most cases, the dis-
tributed annuity accountcontract contin-
ues to be subject to requirements neces-
sary for tax deferral,e.g., the annuity re-
mains subject to the minimum distribution
requirements of section 401(a)(9). In such
a case, no amount is includible in income
until amounts are actually distributed from
the annuity contract. However, in certain
situations, the Code provides that the fair
market value of an individual retirement
annuity is treated as a taxable distribution.
For example, under section 408(e), the fair
market value of the annuity is included in
taxable income if the annuity ceases to be
an individual retirement annuity because
of violations of requirements set forth un-
der that subsection.
Section 25.2512–6 of the Gift Tax Reg-
ulations provides rules regarding the valu-
ation of certain life insurance contracts for
gift tax purposes
1
. Under these rules, the
value of a life insurance contract or of a
contract for the payment of an annuity is-
sued by a company regularly engaged in
the selling of contracts of that character is
established through the sale of the partic-
ular contract by the company, or through
the sale by the company of comparable
contracts. In addition, §25.2512–6 pro-
vides that, as the value of an insurance pol-
icy through sale of comparable contracts
is not readily ascertainable when the gift
is of a contract which has been in force
for some time and on which further pre-
mium payments are to be made, the value
may be approximated by adding to the in-
terpolated terminal reserve at the date of
the gift the proportionate part of the gross
premium last paid before the date of the
gift which covers the period extending be-
yond that date. If, however, because of
the unusual nature of the contract, such
approximation is not reasonably close to
the full value, this method may not be
used. Thus, this method may not be used
to determine the fair market value of an
insurance policy where the reserve does
not reflect the value of all relevant fea-
tures of the policy. These gift tax valua-
tion rules also apply for purposes of com-
mercial annuity contracts. SeeExamples
1and2of §25.2512–6. In addition, un-
der §20.2031–8 of the Estate Tax Regula-
tions, the same rules govern the valuation
of such life insurance and commercial an-
nuity contracts for estate tax purposes. See
§§20.2031–7(b) and 20.2039–1(c).
Under A–12 of §1.401(a)(9)–6, an em-
ployee’s entire interest under an annuity
contract is the dollar amount credited to the
employee or beneficiary under the contract
plus the actuarial value of any additional
benefits (such as survivor benefits in ex-
cess of the account balance) that will be
provided under the contract. This rule re-
quiring that the value of additional benefits
under an annuity contract be included in
the employee’s entire interest, for purposes
of determining the required minimum dis-
tribution under section 401(a)(9), is based
on the general requirement that the fair
market value of all assets must be reflected
in valuing an account balance under a de-
fined contribution plan. However, certain
additional benefits may be disregarded for
purposes of calculating the required min-
imum distribution, such as when there is
apro-ratareduction in additional benefits
for a withdrawal and a guaranteed return
of premiums upon death, to reflect the fact
that distributions are being made to satisfy
section 401(a)(9).
Rev. Proc. 2005–25, 2005–17 I.R.B.
962, provides safe harbor formulas that, if
used to determine the value of a life insur-
ance contact, retirement income contract,
endowment contract, or other contract pro-
viding life insurance protection that is dis-
1
In Rev. Rul. 59–195, 1959–1 C.B. 18, the IRS ruled that, in situations similar tothose in which an employer purchases and pays the premiums on an insurance policy on the life of one of
its employees and subsequently sells such policy, on which further premiumsmust be paid, the value of such policy for computing taxable gain in the year of purchase should be determined
under the method of valuation prescribed in §25.2512–6 of the Gift Tax Regulations.
2005–39 I.R.B.597September 26, 2005

tributed or otherwise transferred from a
qualified plan, will meet the definition of
fair market value for purposes of applying
the rules of section 402(a) (as well as sec-
tions 79, 83, and 402(b)).
Explanation of Provisions
These temporary regulations under sec-
tion 408A clarify that, when a non-Roth
individual retirement annuity is converted
to a Roth IRA, the amount that is treated
as distributed is the fair market value of
the annuity contract on the date the annu-
ity contract is converted. Similarly, when
a non-Roth individual retirement account
holds an annuity contract as an account
asset and the account is converted to a
Roth IRA, the amount that is treated as dis-
tributed with respect to the annuity con-
tract is the fair market value of the annu-
ity contract on the date the annuity contract
is distributed or treated as distributed from
the non-Roth IRA.
Some taxpayers and their advisers as-
sert that the only amount includible in in-
come as a distribution when a non-Roth in-
dividual retirement annuity is converted to
a Roth IRA is the cash surrender value of
the contract, even when the cash surren-
der value does not accurately reflect the
fair market value of the contract. In par-
ticular, some advisers market a transaction
in which taxpayers are encouraged to in-
vest their non-Roth IRA funds in a sin-
gle premium annuity contract with signif-
icant artificial penalties that apply in the
first year (or years) of the contract if the
annuity is surrendered, causing the annu-
ity to have a low cash surrender value in
the early years of the contract. Under this
transaction, shortly after the annuity con-
tract is purchased by the non-Roth IRA,
the taxpayer converts the IRA to a Roth
IRA. In such a case, the taxpayer asserts
that the only amount includible in gross in-
come as a result of the conversion is the
low cash surrender value. This assertion is
made even though the surrender penalties
are unlikely to be paid because the taxpay-
ers do not expect to surrender the contract
during the early years. In this case, the tax-
payers expect that the ultimate payments
under the contract will be qualified distri-
butions from the Roth IRA (i.e.,tax-ex-
empt), and thus, they also expect the ar-
tificially depressedcash surrender value to
be the only amount ever includible in gross
income.
In another situation, a taxpayer pur-
chases a non-Roth individual retirement
variable annuity with a guaranteed min-
imum death benefit equal to the highest
account value ever attained under the
contract, adjusted for withdrawals. If an
amount is withdrawn from the contract,
the death benefit is reduced dollar for
dollar (rather than apro-ratareduction)
by the amount of the withdrawal. Prior
to the date of conversion, the annuity has
a death benefit far in excess of the ac-
count value and the taxpayer withdraws
from the IRA annuity all but a minimum
account value that will keep the IRA an-
nuity in force. Because the withdrawal
reduces the guaranteed minimum death
benefit on a dollar-for-dollar basis, the re-
maining death benefit will be significantly
greater than the current account value,
and accordingly, the current account value
will not reflect the fair market value of
the contract. For example, suppose such
an individual retirement variable annuity
has a guaranteed minimum death ben-
efit of $200,000 with an account value
of $100,000. The taxpayer withdraws
$99,000 leaving a $1,000 account value
and a $101,000 death benefit ($200,000
less $99,000). The taxpayer then converts
the IRA annuity into a Roth IRA and takes
the position that the $1,000 account value
is the conversion amount even though the
account value does not reflect the fair mar-
ket value of the additional $100,000 that
will be paid upon the taxpayer’s death.
In this case, the taxpayer expects that the
entire benefit payment of $101,000 will be
a qualified distribution from the Roth IRA
(i.e., tax-exempt), and thus, expects that
the $1,000 account value on the date of
conversion will be the only amount ever
includible in gross income.
The IRS and Treasury Department have
concluded that cash surrender value is not
always an appropriate measure of fair mar-
ket value with respect to non-Roth IRA an-
nuities that are converted to Roth IRA an-
nuities. Rather than use the cash surren-
der value as the basis for determining fair
market value, these temporary regulations
follow the gift tax regulations in provid-
ing that the fair market value of an individ-
ual retirement annuity is established by the
premiums paid for such annuity if the con-
version occurs soon after the annuity was
purchased.
Under the temporary regulations, if the
conversion occurs after the annuity con-
tract has been in force for some time and no
further premium payments are to be made,
fair market value is determined through the
sale by the company of comparable con-
tracts. The temporary regulations further
provide that, if the conversion occurs af-
ter the annuity contract has been in force
forsometimeandfuturepremiumpay-
ments are to be made, fair market value is
determined through an approximation that
is based on the interpolated terminal re-
serve at the date of the conversion, plus the
proportionate part of the gross premium
last paid before the date of the conversion
which covers the period extending beyond
that date. However, if, because of the un-
usual nature of the contract, this approxi-
mation is not reasonably close to the full
value, this method may not be used.
These temporary regulations also pro-
vide authority for the Commissioner to
issue additional guidance regarding the
fair market value of an individual retire-
ment annuity, including formulas to be
used for determining fair market value.
The IRS and Treasury Department expect
to issue additional guidance regarding the
rulestobeusedindeterminingthefair
market value of a non-Roth IRA annu-
ity. It is anticipated that such guidance
will be similar to the provisions of Rev.
Proc. 2005–25, 2005–17 I.R.B. 962 (April
25, 2005), except that the adjustment for
potential surrender charges, to the extent
permitted, will not exceed 9 percent. It
is also anticipated that such guidance will
provide that in determining fair market
value, the value of all additional benefits
(such as guaranteed minimum death ben-
efits) under the contract must be taken
into account. The IRS and Treasury De-
partment request comments regarding this
anticipated guidance. The IRS and Trea-
sury Department also request comments
regarding whether the method used to
calculate the fair market value of an an-
nuity contract that is converted to a Roth
IRA should also apply for purposes of
the determining fair market value of an
annuity contract under sections 408(e) and
401(a)(9). These comments may be sub-
mitted in conjunction with the comments
submitted on the proposed regulations
discussed below.
September 26, 20055982005–39 I.R.B.

Proposed regulations regarding the de-
termination of fair market value of an an-
nuity contract are contained in this issue
of the Bulletin. The preamble and text of
these temporary regulations also serves as
the preamble and text of the proposed reg-
ulations.
Effective Date
The temporary amendments to
§1.408A–4 of the regulations are applica-
ble to any Roth IRA conversion where an
annuity contract is distributed or treated
as distributed from a traditional IRA on
or after August 19, 2005. No implication
is intended concerning whether or not a
rule to be adopted in these regulations is
applicable law for taxable years ending
before that date.
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 Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these temporary reg-
ulations. For applicability of the Regula-
tory Flexibility Act (5 U.S.C. chapter 6),
refer to the notice of proposed rulemak-
ing published in this issue of the Bulletin.
Pursuant to section 7805(f) of the Code,
these temporary regulations will be sub-
mitted to the Chief Counsel for Advocacy
of the Small BusinessAdministration for
comment on its impact on small business.
Drafting Information
The principal author of these tempo-
rary regulations is Cathy A. Vohs of the
Office of the Division Counsel/Associate
Chief Counsel (Tax Exempt and Govern-
ment Entities). However, other person-
nel from the IRS and Treasury Department
participated in the development of these
regulations.
*****
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 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
§1.408A–4T also issued under 26
U.S.C. 408A * * *
Par. 2. Section 1.408A–4 is amended
by adding, in numerical order, Q–14 and
A–14, to read as follows:
§1.408A–4 Converting amounts to Roth
IRAs.
*****
Q–14. [Reserved]. For further guid-
ance, see §1.408A–4T, Q–14.
A–14. [Reserved]. For further guid-
ance, see §1.408A–4T, A–14.
Par. 3. Section 1.408A–4T is added to
read as follows:
§1. 408A–4T Converting amounts to Roth
IRAs.
*****
Q–14. What is the amount that is in-
cludable in income as a distribution when
a conversion involves an annuity contract?
A–14. (a)In general. Notwithstanding
§1.408–4(e), when part or all of a tradi-
tional IRA that is an individual retirement
annuity described in section 408(b) is con-
verted to a Roth IRA, for purposes of deter-
mining the amount includible in gross in-
come as a distribution under §1.408A–4,
A–7, the amount that is treated as dis-
tributed is the fair market value of the an-
nuity contract on the date the annuity con-
tract is converted. Similarly, when a tra-
ditional IRA that is an individual retire-
ment account described in section 408(a)
holds an annuity contract as an account as-
set and the traditional IRA is converted to
a Roth IRA, for purposes of determining
the amount includible in gross income as
a distribution under §1.408A–4, A–7, the
amount that is treated as distributed with
respect to the annuity contract is the fair
market value of the annuity contract on
the date that the annuity contract is dis-
tributed or treated as distributed from the
traditional IRA.
(b)Determination of fair market
value—(1)General rule. For purposes
of this A–14, the fair market value of an
individual retirement annuity issued by a
company regularly engaged in the selling
of contracts of that character generally is
established as follows—
(A) If the conversion occurs soon after
the contract was sold and there have been
no material changes in market conditions,
the fair market value of the contract is es-
tablished through the sale of the particu-
lar contract by the company (i.e., the actual
premiums paid for such contract);
(B) If the conversion occurs after the
contract has been in force for some time
and no further premium payments are to be
made, the fair market value of the contract
is established through the sale by the com-
pany of comparable contracts;
(C) If the conversion occurs after the
contract has been in force for some time
and future premium payments are to be
made, the fair market value of the con-
tract is established through an approxima-
tion that is based on the interpolated ter-
minal reserve at the date of the conversion,
plus the proportionate part of the gross pre-
mium last paid before the date of the con-
version which covers the period extending
beyond that date. However, if, because of
the unusual nature of the contract, this ap-
proximation is not reasonably close to the
full value, this method may not be used.
Thus, this method may not be used to de-
termine the fair market value of an annuity
contract where the reserve does not reflect
the value of all relevant features of the con-
tract.
(2)Additional guidance. Additional
guidance regarding the fair market value
of an individual retirement annuity, in-
cluding formulas to be used for deter-
mining fair market value, may be issued
by the Commissioner in revenue rul-
ings, notices, or other guidance published
in the Internal Revenue Bulletin (See
§601.601(d)(2)(ii)(b)).
(c)Effective date. The provisions of
this A–14 are applicable to any conversion
where an annuity contract is distributed
or treated as distributed from a traditional
IRA on or after August 19, 2005.
(d)Definitions. The definitions set
forth in §1.408A–8 apply for purposes of
this A–14.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved August 9, 2005.
2005–39 I.R.B.599September 26, 2005

Eric Solomon,
Acting Deputy Assistant Secretary
for Tax Policy.
(Filed by the Office of the Federal Register on August 19,
2005, 8:45 a.m., and published in the issue of the Federal
Register for August 22, 2005, 70 F.R. 48868)
Section 469.—Passive
Activity Losses and
Credits Limited
26 CFR 1.469–1T: General rules (Temporary).
If an individual provides air transportation ser-
vices through a passthrough entity, may those ser-
vices qualify as extraordinary personal services. See
Rev. Rul. 2005-64, page 600.
26 CFR 1.469–1T: General rules.
(Also §§ 4261, 4262, 4291; 1.469–4, 1.469–5,
1.469–5T, 40.6011(a)–1.)
Interaction of sections 469 and 4261.
This ruling describes the circumstances
inwhichlossesincurredbyanindividual
who provides air transportation through a
passthrough entity can qualify as passive
losses under section 469 of the Code. In
addition, this ruling describes the applica-
bility of section 4261 to the amounts paid
for the air transportation services.
Rev. Rul. 2005–64
ISSUES
(1) Whether the losses incurred by an
individual who engages in an air trans-
portation activity in the circumstances de-
scribed below are passive losses within the
meaning of § 469 of the Internal Revenue
Code?
(2) Whether the amounts paid for the
air transportation services described below
are subject to the tax imposed by § 4261?
FACTS
Situation 1.Ais the CEO and part
owner of the closely held C corporation,
Corp1.Aparticipates in the activities of
Corp1for more than 500 hours during the
year.Ais also the sole owner ofSCorp1,
an S corporation.SCorp1’s sole asset is
an aircraft with a maximum certificated
takeoff weight of more than six thousand
(6,000) pounds.SCorp1leases the air-
craft toCorp1to satisfyCorp1’s air trans-
portation needs, but supplies neither the
pilot necessary to operate the aircraft nor
the crew necessary to maintain the aircraft.
Corp1paysSCorp1only for the lease of
the aircraft.Ahas incurred significant
losses from the operation ofSCorp1.
Situation 2.Bis the CEO and part
owner of the closely held C corporation,
Corp2.Bparticipates in the activities of
Corp2for more than 500 hours during the
year.BisalsothesoleownerofSCorp2,
an S corporation.SCorp2’s sole asset is
an aircraft with a maximum certificated
takeoff weight of more than six thousand
(6,000) pounds.SCorp2employs a pilot
and crew to operate and maintain the air-
craft.Corp2paysSCorp2a guaranteed
monthly fee plus an additional amount for
each flying hour.Corp2uses the aircraft
to transport its employees throughout the
continental United States. In the conduct
of its air transportation activity,SCorp2
usually supplies its own aircraft, but is
solely responsible for the provision of al-
ternative aircraft in the event thatSCorp2’s
aircraft is undergoing maintenance or
isbeingprovidedtoothercustomers.
SCorp2’s activities include the provision
of air transportation services toCorp2,
including, but not limited to, the use of
the aircraft, with pilot and crew, fuel, and
food provided bySCorp2.SCorp2is the
only air transportation business in which
Bis involved. Upon initiation ofSCorp2’s
business,Bdecided to groupB’s activi-
ties conducted throughSCorp2withB’s
activities conducted throughCorp2for
purposes of § 1.469–4 of the Income Tax
Regulations.Bhas incurred significant
losses from the operation ofSCorp2.
LAW AND ANALYSIS
Section 469(a) disallows passive ac-
tivity losses and credits for the taxable
year for individuals, estates, trusts, closely
held C corporations, and personal service
corporations. Section 469(c)(2) provides
that, except as provided in § 469(c)(7)
(concerning special rules for taxpayers
engaged in real property businesses), the
term passive activity includes any rental
activity. Section 469(c)(4) provides that
§ 469(c)(2) shall be applied without regard
to whether or not the taxpayer materially
participates in the activity.
Section 469(j)(8) defines “rental activ-
ity” as any activity where payments are
principally for the use of tangible property.
Section 1.469–1T(e)(1) of the tempo-
rary Income Tax Regulations provides in
general that an activity is a passive activ-
ity of the taxpayer for a taxable year if
and only if the activity: (i) is a trade or
business activity (within the meaning of
§ 1.469–1T(e)(2)) in which the taxpayer
does not materially participate for the tax-
able year; or (ii) a rental activity (within
the meaning of § 1.469–1T(e)(3)), without
regard to whether or to what extent the tax-
payer participates in the activity.
Section 1.469–1T(e)(3)(i) provides in
general that an activity is a rental activity
for a taxable year if: (A) during the taxable
year, tangible property held in connection
with the activity is used by customers or
held for use by customers; and (B) the
gross income attributable to the conduct of
the activity during the taxable year repre-
sents (or, in the case of an activity in which
property is held for use by customers, the
expected gross income from the conduct of
the activity will represent) amounts paid or
to be paid principally for the use of the tan-
gible property (without regard to whether
the use of the property by customers is pur-
suant to a lease or pursuant to a service
contract or other arrangement that is not
denominated a lease).
Section 1.469–1T(e)(3)(ii)(C) provides
that an activity involving the use of tangi-
ble property is not a rental activity for a
taxable year if for the taxable year extraor-
dinary personal services (within the mean-
ing of § 1.469–1T(e)(3)(v)) are provided
by or on behalf of the owner of the prop-
erty in connection with making the prop-
erty available for use by customers (with-
out regard to the average period of cus-
tomer use).
Section 1.469–1T(e)(3)(v) pro-
vides that for purposes of § 1.469–
1T(e)(3)(ii)(C), extraordinary personal
services are providedinconnectionwith
making property available for use by cus-
tomers only if the services provided in
connection with the use of the property are
performed by individuals, and the use by
customers of the property is incidental to
their receipt of the services. For example,
the use by patients of a hospital’s boarding
facilities generally is incidental to their
receipt of the personal services provided
by the hospital’s medical and nursing
staff. Similarly, the use by students of a
boarding school’s dormitories generally is
incidental to their receipt of the personal
September 26, 20056002005–39 I.R.B.

services provided by the school’s teaching
staff.
Section 1.469–1T(e)(3)(viii) provides
several examples to illustrate the operation
of § 1.469–1T(e)(3). In Example (1), the
taxpayer is engaged in an activity of leas-
ing photocopying equipment. The average
period of customer use for the equipment
exceeds 30 days. Pursuant to the lease
agreements, skilled technicians employed
by the taxpayer maintain the equipment
and service malfunctioning equipment for
no additional charge. Service calls occur
frequently (three times per week on av-
erage) and require substantial labor. The
value of the maintenance and repair ser-
vices (measured by the cost to the taxpayer
of employees performing these services)
exceeds 50 percent of the amount charged
for the use of the equipment. Under these
facts, services performed by individu-
als are provided in connection with the
use of the photocopying equipment, but
the customers’ use of the photocopying
equipment is not incidental to their receipt
of the services. Therefore, extraordinary
personal services (within the meaning of
§ 1.469–1T(e)(3)(v)) are not provided in
connection with making the photocopying
equipment available for use by customers,
and the activity is a rental activity.
In Example (3) of § 1.469–1T
(e)(3)(viii), the taxpayer is engaged in
an activity of transporting goods for cus-
tomers. In conducting the activity, the tax-
payer provides tractor-trailers to transport
goods for customers pursuant to arrange-
ments under which the tractor-trailers are
selected by the taxpayer, may be replaced
at the sole option of the taxpayer, and
are operated and maintained by drivers
and mechanics employed by the taxpayer.
The average period of customer use for
the tractor-trailers exceeds 30 days. Un-
der these facts, the use of tractor-trailers
by taxpayer’s customers is incidental to
their receipt of personal services pro-
vided by the taxpayer. Accordingly, the
services performed in the activity are ex-
traordinary personal services (within the
meaning of § 1.469–1T(e)(3)(v)) and, un-
der § 1.469–1T(e)(3)(ii)(C), the activity is
not a rental activity.
Section 1.469–4 sets forth the rules for
grouping a taxpayer’s trade or business ac-
tivities and rental activities for purposes
of applying the passive activity loss and
credit limitation rules of § 469. Section
1.469–4(a) further states that a taxpayer’s
activities include those conducted through
C corporations that are subject to § 469,
S corporations, and partnerships.
Section 1.469–4(b)(1) states that “trade
or business activities” are activities, other
than rental activities or activities that are
treated under § 1.469–1T(e)(3)(vi)(B) as
incidental to an activity of holding prop-
erty for investment, that: (i) involve the
conduct of a trade or business (within
the meaning of § 162); (ii) are conducted
in anticipation of the commencement of
a trade or business; or (iii) involve re-
search or experimental expenditures that
are deductible under § 174 (or would
be deductible if the taxpayer adopted
the method described in § 174(a)). Sec-
tion 1.469–4(b)(2) provides that “rental
activities” are activities that constitute
rental activities within the meaning of
§ 1.469–1T(e)(3).
Section 1.469–4(c)(1) states that one or
more trade or business activities or rental
activities may be treated as a single activ-
ity if the activities constitute an appropri-
ate economic unit for the measurement of
gain or loss for purposes of § 469. Sec-
tion 1.469–4(c)(2) provides that a facts and
circumstances test determines whether ac-
tivities constitute an appropriate economic
unit.
Section 1.469–4(c)(3) provides several
examples that illustrate the application of
§ 1.469–4(c). In Example (2), Taxpayer
B, an individual, is a partner in a business
that sells non-food items to grocery stores
(partnershipL).Balso is a partner in a part-
nership that owns and operates a trucking
business (partnershipQ). The two partner-
ships are under common control. The pre-
dominant portion ofQ’s business is trans-
porting goods forL,andQis the only
trucking business in whichBis involved.
Under § 1.469–4(c),Bappropriately treats
L’s wholesale activity andQ’s trucking ac-
tivity as a single activity.
Section 1.469–4(d)(1) limits a tax-
payer’s ability to group a rental activ-
ity with a trade or business activity and
§ 1.469–4(d)(5)(ii) provides that an ac-
tivity that a taxpayer conducts through
a C corporation subject to § 469 may
be grouped with another activity of the
taxpayer, but only for purposes of deter-
mining whether the taxpayer materially
or significantly participates in the other
activity.
Section 1.469–5(f)(1) provides in gen-
eral that any work done by an individual
(without regard to the capacity in which
the individual does the work) in connec-
tion with an activity in which the individ-
ual owns an interest at the time the work is
done shall be treated asparticipation of the
individual in the activity.
Section 1.469–5T(a) provides in gen-
eral that an individual shall be treated,
for purposes of § 469 and the regulations
thereunder, as materially participating in
an activity for the taxable year if and only
if: (1) the individual participates in the
activity for more than 500 hours during
the year; (2) the individual’s participa-
tion in the activity for the taxable year
constitutes substantially all of the partic-
ipation in the activity of all individuals
(including individuals who are not owners
of interests in the activity) for the year;
(3) the individual participates in the ac-
tivity for more than 100 hours during the
taxable year, and the individual’s partic-
ipation in the activity is not less than the
participation in the activity of any other
individual (including individuals who are
not owners of interests in the activity) for
such year; (4) the activity is a significant
participation activity (within the meaning
of § 1.469–5T(c)) for the taxable year, and
the individual’s aggregate participation
in all significant participation activities
during the year exceeds 500 hours; (5)
the individual materially participated in
the activity (determined without regard
to § 1.469–5T(a)(5)) for any five taxable
years (whether or not consecutive) during
the ten taxable years that immediately pre-
cede the taxable year; (6) the activity is a
personal service activity (within the mean-
ing of § 1.469–5T(d)), and the individual
materially participated in the activity for
any three taxable years (whether or not
consecutive) preceding the taxable year;
or (7) based on all of the facts and circum-
stances (taking into account the rules in
§ 1.469–5T(b)), the individual participates
in the activity on a regular, continuous,
and substantial basis during the year.
Section 4261(a) imposes a tax on the
amount paid for taxable transportation of
anypersonbyairand§4261(b)imposes
a tax on the amount paid for each do-
mestic segment of taxable transportation.
Section 4262(a)(1) generally defines tax-
able transportation as including transporta-
tion by air which begins and ends in the
2005–39 I.R.B.601September 26, 2005

United States. Section 4262(d) provides
that the term “transportation” includes lay-
over or waiting time and movement of the
aircraft in deadhead service. All amounts
paid for air transportation service, includ-
ing hourly,per diem,ormonthlyfees,are
subject to the tax imposed by § 4261. Rev.
Rul. 76–556, 1976–2 C.B. 354.
Under § 4261(d), the tax generally is
paid by the person making payment for
the air transportation service and § 4291
generally provides that the person receiv-
ing the payment is responsible for collect-
ing the tax. Section 40.6011(a)–1(a)(3)
of the Excise Tax Procedural Regulations
provides that the person required to collect
the tax must file the return.
If the owner of an aircraft leases it to
others for the transportation of persons but
retains possession, command, and control
of the aircraft, the owner is furnishing tax-
able transportation within the meaning of
§ 4261. However, if the owner of the
aircraft transfers the complete possession,
command, and controlof the aircraft, the
owner is not engaging in a taxable trans-
portation service, but is merely leasing the
aircraft. Rev. Rul. 60–311, 1960–2 C.B.
341. If the owner of the aircraft employs
the pilot and crew and provides their ser-
vices with the aircraft, the owner is deemed
to have the essential elements of posses-
sion, command, and control of the aircraft
at all times, irrespective of the fact that the
lessee may direct the pilot as to destination
and other details concerning actual flights
when using the aircraft. Rev. Rul. 76–394,
1976–2 C.B. 355.
Situation 1. In this situation,SCorp1
holds an aircraft in connection with its
activities, such aircraft is used by cus-
tomers or held for use by customers, and
the gross income attributable to the con-
duct of the activities represents an amount
paid or to be paid principally for the use
of the aircraft. Therefore, the activity
conducted inSCorp1is a rental activ-
ity. Section 1.469–1T(e)(3)(i). Section
1.469–1T(e)(3)(ii)(C) does not alter this
conclusion because there are no extra-
ordinary personal services provided in
connection with making the aircraft avail-
able toCorp1and because the use of
the aircraft, rather than the provision of
services, is the dominant element of the
relationship betweenSCorp1andCorp1.
See Frank v. Commissioner, T.C. Memo
1996–177 (1996) (holding that taxpayer’s
losses from its airplane leasing activities
were passive because the services ren-
dered to the lessee were not the dominant
element of the relationship between the
taxpayer and the lessee).
This ruling does not address whether
§ 1.469–4(d)(1), which limits a taxpayer’s
ability to group a rental activity with a
trade or business activity, would prevent
Afrom grouping the rental activity con-
ducted throughSCorp1with the trade
or business activityconducted through
Corp1. Even if such a grouping were
permitted, however, § 1.469–4(d)(5)(ii)
provides that a taxpayer can group activ-
ities conducted through a closely held C
corporation with other activities of the tax-
payer only for the purpose of establishing
material or significant participation in the
other activities. Consequently, grouping
the activitiesAconducts throughCorp1
andSCorp1will not change the character
of the activityAconducts throughSCorp1.
The activity will remain a rental activity
because the grouping is only for purposes
of establishing material or significant
participation and will remain a passive ac-
tivity because, under § 469(c)(4), material
participation in rental activities does not
change their passive nature. Accordingly,
the losses incurred byAthroughSCorp1
are losses from a passive activity and are
subject to the limitations of § 469.
SCorp1does not provide taxable
transportation within the meaning of
§ 4262(a)(1) toCorp1becauseSCorp1
does not retain possession, command and
control of the aircraft; thus, the taxes im-
posedby§4261donotapplytoamounts
paid byCorp1toSCorp1for the lease of
the aircraft.
Situation 2. In this situation, the ser-
vices provided bySCorp2in connection
with the use of the aircraft byCorp2are
provided by individuals. In addition, the
use of the aircraft byCorp2is incidental
toCorp2’s receipt of the services provided,
as the use of a seat on the aircraft is inci-
dental to the passenger’s receipt of the per-
sonal services provided by the aircraft’s air
transportation staff. Accordingly, extraor-
dinary personal services within the mean-
ing of § 1.469–1T(e)(3)(v) are provided on
behalf of the owner of the aircraft in con-
nectionwithmakingtheaircraft available
for use by customers. Therefore, the ac-
tivityBconducts throughSCorp2is not a
rental activity for purposes of § 469. Sec-
tion 1.469–1T(e)(3)(ii)(C).
Pursuant to § 1.469–1T(e)(1)(i), the air
transportation activity is not a passive ac-
tivity ifBmaterially participates in the ac-
tivity. In this situation,Corp2andSCorp2
are under common control, the predomi-
nant portion ofSCorp2’s air transportation
service business is transporting executives
forCorp2,andSCorp2is the only air
transportation service business in which
Bis involved.Bhas consistently chosen
to group the activity conducted through
SCorp2withCorp2’s trade or business
activity and to treat those activities as a
single activity for the measurement of
material participation in the activity of
SCorp2. Section 1.469–4(c)(1) and (c)(3),
Example (2). BecauseBparticipates for
more than 500 hours in theCorp2activity
that is grouped with the activity conducted
throughSCorp2for purposes of measur-
ing material participation in theSCorp2
activity,Bmaterially participates in the
SCorp2activity under § 1.469–5T(a)(1).
Accordingly, the provision of air trans-
portation services isnot a passive activity,
and losses incurred byBthroughSCorp2
are not subject to the limitations of § 469.
If, however,Bdid not participate inCorp 2
for more than 500 hours and did not other-
wise materially participate in the grouped
activities, the losses incurred byBthrough
SCorp2would be subject to the passive
loss limitations of § 469.
SCorp2provides taxable transporta-
tion service toCorp2becauseSCorp2
retains possession, command and control
of the aircraft; thus, the taxes imposed by
§ 4261 apply to the amounts paid (includ-
ing monthly and hourly fees) byCorp2
toSCorp2for the taxable transportation.
Corp2is liable for the tax andSCorp2is
responsible for collecting the § 4261 taxes
and filing the return.
HOLDINGS
(1) InSituation 1,A’s activities con-
ducted throughSCorp1are rental activi-
ties, and therefore the losses incurred in
the activities are passive losses subject to
the limitations of § 469. InSituation 2,
B’s activities conducted throughSCorp2
are not rental activities because extraordi-
nary personal services are provided. Be-
causeBconsistently grouped the activities
conducted throughCorp2andSCorp2for
September 26, 20056022005–39 I.R.B.

purposes of measuring material participa-
tion in the activity ofSCorp2, and par-
ticipates in theCorp2activity for more
than 500 hours a year,Bmaterially partic-
ipates in theSCorp2activity. Therefore,
the losses incurred byBthroughSCorp2
are not losses from a passive activity.
(2) InSituation 1,Corp1does not pay
SCorp1for taxable transportation and
§ 4261 does not apply. InSituation 2,
Corp2paysSCorp2for taxable trans-
portation; therefore, § 4261 applies to the
amount paid for the services.
DRAFTING INFORMATION
The principal author of the § 469
portion of this revenue ruling is
Timothy J. Leska of the Office of As-
sociate Chief Counsel (Passthroughs &
Special Industries). The principal author
of the § 4261 portion of this revenue rul-
ing is Taylor Cortright of the Office of
Associate Chief Counsel (Passthroughs
& Special Industries). For further in-
formation regarding this revenue ruling,
contact Mr. Leska at (202) 622–3050 or
Ms. Cortright at (202) 622–3130 (not
toll-free calls).
Section 472.—Last-in,
First-out Inventories
26 CFR 1.472–1: Last-in, first-out inventories.
LIFO; price indexes; department
stores.The July 2005 Bureau of Labor
Statistics price indexes are accepted for
use by department stores employing the
retail inventory and last-in, first-out in-
ventory methods for valuing inventories
for tax years ended on, or with reference
to, July 31, 2005.
Rev. Rul. 2005–63
The following Department Store In-
ventory Price Indexes for July 2005 were
issued by the Bureau of Labor Statistics.
The indexes are accepted by the Inter-
nal Revenue Service, under § 1.472–1(k)
of the Income Tax Regulations and Rev.
Proc. 86–46, 1986–2 C.B. 739, for ap-
propriate application to inventories of
department stores employing the retail
inventory and last-in, first-out inventory
methods for tax years ended on, or with
reference to, July 31, 2005.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of depart-
ments, (b) three special combinations of
the major groups — soft goods, durable
goods, and miscellaneous goods, and (c) a
store total, which covers all departments,
including some not listed separately, ex-
cept for the following: candy, food, liquor,
tobacco, and contract departments.
BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
GroupsJuly 2004July 2005
Percent Change
from July 2004
to July 2005
1
1. PieceGoods .............................................507.8495.0-2.5
2. DomesticsandDraperies..................................525.0517.7-1.4
3. Women’sandChildren’sShoes ............................608.5629.03.4
4. Men’sShoes.............................................831.7867.04.2
5. Infants’Wear ............................................560.5548.0-2.2
6. Women’sUnderwear......................................508.0541.26.5
7. Women’sHosiery ........................................330.4339.72.8
8. Women’sandGirls’Accessories ...........................565.8580.52.6
9. Women’sOuterwearandGirls’Wear .......................335.9321.7-4.2
10. Men’sClothing ..........................................532.7520.6-2.3
11. Men’sFurnishings........................................567.0552.6-2.5
12. Boys’ClothingandFurnishings............................420.9386.1-8.3
13. Jewelry..................................................907.8870.2-4.1
14. Notions .................................................798.6809.21.3
15. ToiletArticlesandDrugs..................................993.3997.10.4
16. FurnitureandBedding ....................................616.3599.1-2.8
17. FloorCoverings..........................................587.7609.83.8
18. Housewares..............................................712.1712.20.0
19. MajorAppliances.........................................199.6203.52.0
20. RadioandTelevision......................................41.638.9-6.5
21. Recreation and Education
2
.................................80.377.9-3.0
22. Home Improvements
2
.....................................129.8137.66.0
23. Automotive Accessories
2
..................................112.7115.12.1
2005–39 I.R.B.603September 26, 2005

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
GroupsJuly 2004July 2005
Percent Change
from July 2004
to July 2005
1
Groups1–15:SoftGoods .......................................545.1537.3-1.4
Groups16–20:DurableGoods...................................382.3379.6-0.7
Groups 21–23: Misc. Goods
2
....................................93.393.0-0.3
Store Total
3
..............................................487.2481.6-1.1
1
Absence of a minus sign before the percentage change in this column signifies a price increase.
2
Indexes on a January 1986 = 100 base.
3
The store t
otal index covers all departments, including some not listed separately, except for the following: candy, food, liquor,
tobacco and
contract departments.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Michael Burkom of the Office
of Associate Chief Counsel (Income Tax
and Accounting). For further informa-
tion regarding this revenue ruling, contact
Mr. Burkom at (202) 622–7924 (not a
toll-free call).
Section 4261.—Imposition
of Tax
26 CFR 49.4261–1: Imposition of tax; in general.
If an individual provides air transportation services
through a passthrough entity, may the amounts paid
for those services be subject to tax. See Rev. Rul.
2005-64, page 600.
Section 4291.—Cases
Where Persons Receiving
PaymentMustCollectTax
26 CFR 49.4291–1: Persons receiving payment must
collect tax.
T.D. 9221
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 40 and 49
Collected Excise Taxes; Duties
of Collector
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains final
regulations relating to the reporting obliga-
tions of persons that receive payments for
air transportation or communications ser-
vices subject to excise tax when persons
liable for tax refuse to pay the tax. The fi-
nal regulations affect persons that receive
payments subject to tax and persons liable
for those taxes.
DATES:Effective Date: These regulations
are effective August 26, 2005.
Applicability Date: For dates of ap-
plicability, see §§40.6302(c)–3(g) and
49.4291–1.
FOR FURTHER INFORMATION
CONTACT: Taylor Cortright, (202)
622–3130 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document amends the Excise Tax
Procedural Regulations (26 CFR part 40)
and the Facilities and Services Excise
Tax Regulations (26 CFR part 49). On
August 10, 2004, a temporary regulation
(T.D. 9149, 2004–38 I.R.B. 494 [60 FR
48393]) was published in theFederal
Register. A notice of proposed rulemak-
ing (REG–163909–02, 2004–38 I.R.B.
499 [69 FR 48432]) cross-referencing the
temporary regulations was published in
theFederal Registeron the same day.
A written comment was received and no
public hearing was requested or held. Af-
ter considering the comment, the proposed
regulations are adopted by this Treasury
decision with clarifying changes. The
corresponding temporary regulations are
removed.
Special Analyses
It has been determined that these regu-
lations are not a significant regulatory ac-
tion as defined in Executive Order 12866.
Therefore, a regulatory assessment is not
required. It also has been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because
September 26, 20056042005–39 I.R.B.

these regulations do not impose a collec-
tion of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) does not apply. Pursuant to section
7805(f) of the Internal Revenue Code, the
notice of proposed rulemaking preceding
these final regulations was 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 regula-
tions is Taylor Cortright of the Office of
Associate Chief Counsel (Passthroughs
and Special Industries). However, other
personnel from the IRS and Treasury
Department participated in their develop-
ment.
*****
Adoption of Amendments to the
Regulations
Accordingly,
26 CFR parts 40 and 49
are amended a
sfollows:
PART 40—EXCISE TAX
PROCEDURAL REGULATIONS
Paragraph 1. The authority citation for
part 40 is amended by removing the entry
for §40.6302(c)–3T to read, in part, as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 40.6302(c)–3 is
amended as follows:
1. Paragraph (b)(2)(ii) is revised.
2. Paragraph (g) is amended by re-
moving the language “October 1, 2001”
and adding the language “October 1, 2001,
except that paragraph (b)(2)(ii)(B) of this
section is applicable October 1, 2004” in
its place.
The revision reads as follows:
§40.6302(c)–3 Special rules for use of
Government depositaries under chapter
33.
*****
(b) * * *
(2) * * *
(ii)Separate account. The account re-
quired under paragraph (b)(2)(i)(A) of this
section (the separate account)—
(A) Must reflect for each month all
items of tax that are included in amounts
billed or tickets sold to customers during
the month;
(B) May not reflect an item of adjust-
ment for any month during a quarter if the
adjustment results from a refusal to pay
or inability to collect the tax and the un-
collected tax has not been reported under
§49.4291–1 of this chapter on or before the
due date of the return for that quarter; and
(C) Must reflect for each month items
of adjustment (including bad debts and er-
rors) relating to the tax for prior months
within the period of limitations on credits
or refunds.
*****
§40.6302(c)–3T [Removed]
Par. 3. Section 40.6302(c)–3T is re-
moved.
PART 49—FACILITIES AND
SERVICES EXCISE TAXES
Par. 4. The authority citation for part
49 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 5. Section 49.4291–1 is amended
as follows:
1. The fourth sentence is revised.
2. The fifth sentence is amended by
removing the language “this information”
and adding the language “this report” in its
place.
3. A new sentence is added at the end
of the paragraph.
4. Paragraphs (a) and (b) are added.
The revisions and addition read as fol-
lows:
§49.4291–1 Persons receiving payment
must collect tax.
* * * Applicable October 1, 2004, this re-
port must be made on or before the report
duedate. ***Forpurposesofthissec-
tion, the report due date is—
(a) In the case of a person using the al-
ternative method of making deposits de-
scribed in §40.6302(c)–3 of this chapter,
the due date of the return on which the
item of adjustment relating to the uncol-
lected tax would be reflected if items of ad-
justment were determined without regard
to the limitation in §40.6302(c)–3 of this
chapter; and
(b) In any other case, the due date of
the return on which the tax would have
been reported but for the refusal to pay or
inability to collect.
§49.4291–1T [Removed]
Par. 6. Section 49.4291–1T is removed.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved July 20, 2005.
Eric Solomon,
Acting Deputy Secretary
oftheTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on August 24,
2005, 8:45 a.m., and published in the issue of the Federal
Register for August 25, 2005, 70 F.R. 49869)
2005–39 I.R.B.605September 26, 2005

Part III. Administrative, Procedural, and Miscellaneous
Additional Relief for Certain
Employee Benefit Plans as a
Result of Hurricane Katrina
Notice 2005–60
I. PURPOSE
The Internal Revenue Service, the De-
partment of Labor’s Employee Benefits
Security Administration (“EBSA”) and
the Pension Benefit Guaranty Corporation
(“PBGC”) are providing relief in connec-
tion with certain employee benefit plans
because of damage caused by Hurricane
Katrina (“Katrina”). The relief provided
by this notice is in addition to the relief
already provided by the Service and the
PBGC to victims of Katrina.
II. BACKGROUND
Section 412(a) of the Code and § 302(a)
of the Employee Retirement Income Se-
curity Act of 1974, Pub. L. No. 93–406
(“ERISA”) provide that, in order for a plan
to meet the minimum funding standards of
the Code and ERISA, the plan must not
have an accumulated funding deficiency
as of the end of each plan year. Section
412(c)(10) of the Code and § 302(c)(10) of
ERISA provide that, for purposes of satis-
fying the minimum funding requirements
of the Code and ERISA, any contributions
for a plan year made by an employer by the
end of the 8
1
/2-month period following the
end of such plan year are deemed to have
been made on the last day of the year.
Section 412(d) of the Code and § 303
of ERISA provide for waivers of the mini-
mum funding requirements in the event of
temporary substantial business hardship.
In order for a plan other than a multi-
employer plan to receive such a waiver,
§ 412(d)(4) of the Code and § 303(d)(1) of
ERISA provide that an application for such
a waiver must be submitted no later than
the 15
th
day of the 3rd month beginning
after the close of the plan year for which
the waiver is sought. Thus, for example,
in order for a plan to receive a waiver of
the minimum funding requirements for the
plan year ending on June 30, 2005, the
sponsor of the plan must have submitted
an application by September 15, 2005.
Section 412(m)(1) of the Code and
§ 302(e)(1) of ERISA require that, with
respect to certain plans with a funded
current liability percentage of less than
100 percent, a higher rate of interest be
charged on any unpaid required quarterly
installments. Section 412(m)(5) of the
Code and § 302(e)(5) of ERISA increase
the required quarterly installments to the
amount needed to prevent a liquidity short-
fall (as defined in those sections). For a
plan with a calendar-year plan year, the
due dates for the required installments for
the 2005 calendar year are April 15, 2005,
July 15, 2005, October 15, 2005, and Jan-
uary 15, 2006.
Section 412(n)(1) of the Code and
§ 302(f)(1) of ERISA provide that, with
respect to certain plans with a funded cur-
rent liability percentage of less than 100
percent, if the required installments or any
other payment required under those sec-
tions are not made to the plan before the
due date for such installment or other pay-
ment, and if the aggregate unpaid balance
of such installments or other payments
exceeds $1,000,000, then there shall be a
lien in favor of the plan. The lien may be
perfected by the PBGC.
Section 7508A(b) of the Code provides
that, in the case of a pension or other
employee benefit plan, or any sponsor,
administrator, participant, beneficiary, or
other person with respect to such plan,
affected by a Presidentially declared dis-
aster or a terroristic or military action, the
Secretary of the Treasury may prescribe a
period of up to 1 year which may be dis-
regarded in determining the date by which
any action is required or permitted to be
completed. No plan shall be treated as
failing to be operated in accordance with
its terms solely because the plan disre-
gards any period by reason of such relief.
Parallel provisions are in Titles I and IV
of ERISA.
Under the PBGC’s premium regula-
tions, contributions may be taken into
account for determining a plan’s unfunded
vested benefits for a premium payment
year or a plan’s entitlement to the full
funding limit exemption from the vari-
able-rate premium for a premium payment
year if the contributions (1) are for a plan
year before the premium payment year
and (2) are made on or before the earlier
of (a) the due date for payment of the
variable-rate premium or (b) the date the
variable-rate premium is paid (29 CFR
§§ 4006.4(b)(2)(iv) and 4006.5(a)(5)).
In addition, there are Title IV reporting
and disclosure requirements arising from
certain late contributions (e.g.,29CFR
§ 4043.25, 29 CFR § 4011.10(b)(6)).
III. RELIEF
For any plan that is affected by
Katrina (an “Affected Plan”), if the date
described in § 412(c)(10) or 412(m) of the
Code and § 302(c)(10) or 302(e) of ERISA
for making contributions falls within the
period beginning on August 29, 2005,
and ending on October 30, 2005, then the
date such contributions must be made is
postponed to October 31, 2005. If the date
described in § 412(d)(4) of the Code and
§ 303(d)(1) of ERISA for applying for a
waiver for an Affected Plan falls within
the period beginning on August 29, 2005,
and ending on October 30, 2005, then the
date such waiver must be applied for is
postponed to October 31, 2005.
For purposes of the notice, a plan is an
Affected Plan only if any of the following
were located at the time of Katrina in any
of the parishes or counties declared by the
President to be eligible for individual as-
sistance under the Robert T. Stafford Dis-
aster Relief and Emergency Assistance Act
of 1988, Pub. L. No. 93–288: the princi-
pal place of business of the employer that
maintains the plan (in the case of a sin-
gle-employer plan, determined disregard-
ing the rules of § 414(b) and (c) of the
Code); the principal place of business of
employers that employ more than 50 per-
cent of the active participants covered by
the plan (in the case of a plan covering em-
ployees of more than one employer, deter-
mined disregarding the rules of § 414(b)
and (c)); the office of the plan or the plan
administrator; the office of the primary
recordkeeper serving the plan; or the office
of the enrolled actuary or other advisor that
had been retained by the plan or the em-
ployer at the time of Katrina to determine
the funding requirements for which the due
date falls between the period beginning on
August 29, 2005, and ending on October
30, 2005. For purposes of the preceding
September 26, 20056062005–39 I.R.B.

sentence, the term “office” includes only
the worksite of those individuals, and the
location of any records, necessary to deter-
mine the plan’s funding requirements for
the relevant period.
The following rule applies under Title
IV of ERISA for purposes of determin-
ing a plan’s unfunded vested benefits for
a premium payment year or entitlement
to the full funding limit exemption from
the variable-rate premium for a premium
payment year. For any plan for which
this notice extends a date described in
§ 412(c)(10) of the Code and § 302(c)(10)
of ERISA, contributions for any plan year
before the premium payment year may
be taken into account if they are made on
or before the earlier of (1) the extended
§ 412(c)(10)/§ 302(c)(10) date under this
notice or (2) the date of the plan’s vari-
able-rate premium filing (or, if applicable,
amended variable-rate premium filing) for
the premium payment year. In addition,
for any plan for which this notice extends
a date described in § 412(c)(10) of the
Code and § 302(c)(10) of ERISA, contri-
butions are treated as timely for purposes
of any Title IV reporting and disclosure
requirement if they are made on or before
the extended § 412(c)(10)/§ 302(c)(10)
date under this notice.
DRAFTING INFORMATION
The principal authors of this notice
are Donna Prestia and Roger Kuehnle
oftheEmployeePlans,TaxExempt
and Government Entities Division. For
further information regarding this no-
tice, please contact the Employee Plans’
taxpayer assistance telephone service at
1–877–829–5500, between the hours of
8:30 a.m. and 6:30 p.m. Eastern Time,
Monday through Friday (a toll-free num-
ber). Ms. Prestia may be reached at (202)
283–9543 (not a toll-free number).
Reporting Requirements for
Dependent Care Assistance
Programs
Notice 2005–61
PURPOSE
The purpose of this notice is to clar-
ify the Form W–2 reporting requirements
when an employer has amended a cafeteria
plan document to provide a grace period
for qualified dependent care assistance im-
mediately following the end of a cafeteria
plan year.
BACKGROUND AND APPLICATION
Notice 2005–42, 2005–23 I.R.B. 1204,
modifies the application of the rule pro-
hibiting deferred compensation under a
cafeteria plan. That notice permits an em-
ployer to amend a cafeteria plan document
to provide a grace period immediately
following the end of each plan year during
which unused benefits or contributions
remaining at the end of the plan year, in-
cluding contributions for dependent care
assistance as described in § 129, may be
used to pay or reimburse expenses in-
curred during the grace period.
Notice 89–111, 1989–2 C.B. 449,am-
plified, Notice 90–66, 1990–2 C.B. 350
(extending Notice 89–111 to years follow-
ing 1989), provides guidance concerning
the reporting requirements for dependent
care assistance furnished by an employer
to an employee under a qualified depen-
dent care assistance program. The no-
tice states that in a cash reimbursement ar-
rangement, the amount reported on Form
W–2,Wage and Tax Statement,isthetotal
amount of cash reimbursement furnished
to the employee during the calendar year.
However, if the employer does not know
the actual total amount of cash reimburse-
ment at the time the Form W–2 is prepared,
the employer may report a reasonable es-
timate of the total amount on Form W–2.
Notice 89–111 states that for a salary re-
duction arrangement under a § 125 cafete-
ria plan, the amount electively contributed
by an employee for the year for dependent
care assistance (plus any employer match-
ing contributions attributable thereto) will
be considered a reasonable estimate.
An employer that amends its cafeteria
plan to provide a grace period for depen-
dent care assistance may continue to rely
on Notice 89–111, by reporting in Box 10
of Form W–2 the salary reduction amount
elected by the employee for the year for
dependent care assistance (plus any em-
ployer matching contributions attributable
thereto). For example, suppose an em-
ployer amends its calendar year cafeteria
plan to permit a grace period for depen-
dent care assistance until March 15 of the
subsequent year, that an employee elects
salary reduction of $5,000 for dependent
care assistance for the 2005 calendar year
and elects an additional $5,000 salary
reduction for dependent care assistance
for the 2006 calendar year, and that the
employee has $500 of dependent care
contributions remaining unused at the end
of the 2005 plan year, which is available
to reimburse dependent care expenses in-
curred during the grace period. For the
2005 calendar year, the employer may
report in Box 10 of Form W–2 the $5,000
salary reduction amount elected by the
employee for dependent care assistance
in 2005. Similarly, for the 2006 calendar
year, the employer may report in Box 10
of Form W–2 the $5,000 salary reduction
amount elected by the employee for de-
pendent care assistance in 2006.
EFFECT ON OTHER DOCUMENTS
Notice 89–111, 1989–2 C.B. 449, is
amplified.
DRAFTING INFORMATION
The principal author of this notice is
Elizabeth Purcell of the Office of Division
Counsel/Associate Chief Counsel (Tax Ex-
empt and Government Entities). For fur-
ther information regarding this notice, con-
tact Ms. Purcell at (202) 622–6080 (not a
toll-free call).
Announcement of Rules
Relating to the Temporary
Operation of Ships in the
Domestic Trade as a Result of
Hurricane Katrina
Notice 2005–65
As a result of the devastation caused
by Hurricane Katrina, the Treasury De-
partment and the Internal Revenue Ser-
vice (IRS) understand that on September
1, 2005, the Secretary of the Department
of Homeland Security waived the Mer-
chant Marine Act of 1920 and related laws
for the transportation of petroleum and re-
fined petroleum products for the period un-
til 12:01 a.m., September 19, 2005, and for
the transportation of petroleum released
from the Strategic Petroleum Reserve un-
dertaken in response to the circumstances
2005–39 I.R.B.607September 26, 2005

arising from Katrina (the waiver). As a re-
sult of these unique circumstances, Trea-
sury and the IRS announce the following
guidance with respectto the temporary op-
eration of ships in the domestic trade pur-
suant to the waiver.
The IRS will not challenge a position
taken by a foreign corporation that is oth-
erwise engaged in the international oper-
ation of ships, that the transport of petro-
leum pursuant to the waiver is an activ-
ity incidental to its international operation
of ships under Treas. Reg. § 1.883–1(g).
In addition, Treasury and the IRS consider
such activities conducted pursuant to the
waiver by enterprises otherwise engaged
in the operation of ships in international
traffic to be ancillary activities the income
from which will qualify for exemption un-
der the shipping article of U.S. income tax
treaties.
In light of these unique circumstances,
and the special consideration given to for-
eign crew members reflected in section
861(a)(3), the IRS will not challenge a po-
sition that compensation for labor or ser-
vices performed by a nonresident alien as a
regular member of a crew of a foreign ves-
sel during the use of the vessel pursuant to
the waiver is income from sources without
the United States.
For purposes of section 7701(b)(7), the
IRS will not challenge a position taken by
an individual who is temporarily present in
the United States on any day as a regular
member of the crew of a foreign vessel
operating in the United States pursuant to
the waiver that the individual is not present
in the United States on such day unless
such individual otherwise engages in any
trade or business in the United States on
such day.
In addition, for purposes of the alterna-
tive tax under subchapter R of the Internal
Revenue Code, the IRS will not challenge
a position that days operating in the United
States pursuant to the waiver are not in-
cluded in the computation of the 30-day
limitation of section 1355(f)(4).
EFFECTIVE DATE
This notice is an emergency measure
and relates to the specific circumstances
described in the waiver. Except as oth-
erwise provided, the rules of this notice
are applicable from September 1, 2005,
through September 18, 2005. With respect
to the transportation of petroleum released
from the Strategic Petroleum Reserve un-
dertaken pursuant to the waiver, the rules
of this notice are applicable from Septem-
ber 1, 2005, through October 31, 2005.
DRAFTING INFORMATION
The principal author of this notice is
Patricia A. Bray of the Office of Asso-
ciate Chief Counsel (International). For
further information regarding this notice,
contact Patricia Bray or David Lundy at
(202) 622–3880 (not a toll-free call).
September 26, 20056082005–39 I.R.B.

Part IV. Items of General Interest
Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulations
Converting an IRA Annuity to
aRothIRA
REG–122857–05
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing temporary regulations
(T.D. 9220) under section 408A of the In-
ternal Revenue Code (Code). The tem-
porary regulations provide guidance con-
cerning the tax consequences of convert-
ing a non-Roth IRA annuity to a Roth IRA.
The temporary regulations affect individ-
uals establishing Roth IRAs, beneficiaries
under Roth IRAs, and trustees, custodians
and issuers of Roth IRAs. The text of those
temporary regulations also serves as the
text of these proposed regulations.
DATES: Written or electronic comments
and requests for a public hearing must be
received by November 21, 2005.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–122857–05), room
5203, Internal Revenue Service, POB
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–122857–05),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC. Alternatively, tax-
payers may submit comments elec-
tronically via the IRS Internet site at
www.irs.gov/regsor the Federal eRule-
making Portal atwww.regulations.gov
(IRS–REG–122857–05).
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
Cathy A. Vohs, 202–622–6090; con-
cerning submissions and requests for a
public hearing, contact Treena Garrett,
202–622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Temporary regulations in this issue
of the Bulletin amend the Income Tax
Regulations (26 CFR part 1) relating to
section 408A. The temporary regulations
(§1.408A–4T) contain rules concerning
the tax consequences of converting a tra-
ditional IRA annuity to a Roth IRA. The
text of those temporary regulations also
serves as the text of these proposed reg-
ulations. The preamble to the temporary
regulations explains the temporary and
proposed regulations.
Applicability Date
These regulations are proposed to be
applicable to any Roth IRA conversion
where an annuity contract is distributed
or treated as distributed from a traditional
IRA on or after August 19, 2005. No im-
plication is intended concerning whether
or not a rule to be adopted in these regu-
lations is applicable law for taxable years
ending before that date.
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 proposed
regulations, and, because these regulations
do not impose a collection of information
on small entities, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not ap-
ply. Pursuant to section 7805(f) of the
Code, these proposed regulations will be
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
ness.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written (a signed
original and eight (8) copies) or electronic
comments that are submitted timely to
the IRS. The IRS and Treasury Depart-
ment request comments on the clarity of
the proposed rules and how they can be
made easier to understand. Comments are
specifically requested regarding the pro-
posed additional guidance discussed in the
preamble to the Temporary Regulations
under section 408A (i.e., §1.408A–4T).
The IRS and Treasury Department also
request comments regarding whether the
method used to calculate the fair market
value of an annuity contract that is con-
vertedtoaRothIRAshouldalsoapplyfor
purposes of determining the fair market
value of an annuity contact under sections
408(e) and 401(a)(9). All comments will
be available for public inspection and
copying. A public hearing will be sched-
uled if requested in writing by any person
that timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the public hearing
will be published in theFederal Register.
Drafting Information
The principal author of these proposed
regulations is Cathy A. Vohs of the Of-
fice of the Division Counsel/Associate
Chief Counsel (Tax Exempt and Govern-
ment Entities). However, other personnel
from the IRS and Treasury Department
participated in the development of these
regulations.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
Part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
§1.408A–4 also issued under 26 U.S.C.
408A * * *
Par. 2. Section 1.408A–4 is amended
by adding, in numerical order, Q–14 and
A–14, to read as follows:
2005–39 I.R.B.609September 26, 2005

§1. 408A–4 Converting amounts to Roth
IRAs.
*****
Q–14. [The text of proposed regulation
§1.408A–4, Q–14 is the same as the text of
§1.408A–4T, Q–14 published elsewhere in
this issue of the Bulletin].
A–14. [The text of proposed regula-
tion §1.408A–4, A–14, is the same as the
text of §1.408A–4T, A–14, published else-
where in this issue of the Bulletin].
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on August 19,
2005, 8:45 a.m., and published in the issue of the Federal
Register for August 22, 2005, 70 F.R. 48924)
Notice of Proposed
Rulemaking
Dividends Paid Deduction for
StockHeldinEmployeeStock
Ownership Plan
REG–133578–05
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains pro-
posed regulations under sections 162(k)
and 404(k) of the Internal Revenue Code
(Code) relating to employee stock owner-
ship plans (ESOPs). The regulations pro-
vide guidance concerning which corpora-
tion is entitled to the deduction for applica-
ble dividends under section 404(k). These
regulations also clarify that a payment in
redemption of employer securities held by
an ESOP is not deductible. These regula-
tions will affect administrators of, employ-
ers maintaining, participants in, and bene-
ficiaries of ESOPs. In addition, they will
affect corporations that make distributions
in redemption of stock held in an ESOP.
DATES: Written or electronic comments
and requests for a public hearing must be
received by November 23, 2005.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–133578–05),
room 5203, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand-delivered Monday through Friday
betweenthehoursof8a.m. and4p.m.
to: CC:PA:LPD:PR (REG–133578–05),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington D.C. Alternatively, taxpayers may
submit comments electronically directly to
the IRS Internet site atwww.irs.gov/regs,
or via the Federal eRulemak-
ing Portal atwww.regulations.gov
(IRS–REG–133578–05).
FOR FURTHER INFORMATION
CONTACT: Concerning the regulations,
John T. Ricotta at (202) 622–6060 with
respect to section 404(k) or Martin Huck
at (202) 622–7750 with respect to sec-
tion 162(k); concerning submission of
comments or to request a public hear-
ing, Robin Jones at (202) 622–7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
This document contains proposed regu-
lations under sections 162(k) and 404(k) of
the Internal Revenue Code (Code). These
regulations address two issues that have
arisen in the application of these sections.
The first issue arises in a case in which
the applicable employer securities held in
an employee stock ownership plan (ESOP)
are not securities of the corporation or cor-
porations that maintain the plan. The is-
sue is which corporation is entitled to the
deduction under section 404(k) for certain
dividends paid with respect to the stock
heldintheESOP.Thesecondissueis
whether payments in redemption of stock
held by an ESOP are deductible.
Code and Regulations
Section 404(a) provides that contribu-
tionspaidbyanemployertoorundera
stock bonus, pension, profit sharing, or
annuity plan are deductible under section
404(a), if they would be otherwise de-
ductible, within the limitations of that sec-
tion. Section 404(k)(1) provides that, in
the case of a C corporation, there is al-
lowed as a deduction for a taxable year the
amount of any applicable dividend paid in
cashbysuchcorporationduringthetax-
able year with respect to applicable em-
ployer securities held by an ESOP. The de-
duction under section 404(k) is in addi-
tion to the deductions allowed under sec-
tion 404(a).
Section 4975(e)(7) provides, in relevant
part, that an ESOP is a defined contribu-
tion plan that is a stock bonus plan quali-
fied under section 401(a) and designed to
invest primarily in qualifying employer se-
curities. Section 4975(e)(8) states that the
termqualifying employer securitymeans
any employer security within the meaning
of section 409(l). Section 409(l) generally
provides that the termemployer security
means common stock issued by the em-
ployer (or a corporation that is a member of
the same controlled group) that is readily
tradable on an established securities mar-
ket, if the corporation (or a member of the
controlled group) has common stock that
is readily tradable onan established secu-
rities market. Section 409(l)(4)(A) pro-
vides that, for purposes of section 409(l),
the termcontrolled group of corporations
has the meaning given to that term by sec-
tion 1563(a) (determined without regard to
subsections (a)(4) and (e)(3)(C) of section
1563). Section 409(l)(4)(B) provides that,
for purposes of section 409(l)(4)(A), if a
common parent owns directly stock pos-
sessing at least 50 percent of the voting
power of all classes of stock and at least 50
percent of each class of nonvoting stock in
a first tier subsidiary, such subsidiary (and
all corporations below it in the chain which
would meet the 80 percent test of section
1563(a) if the first tier subsidiary were the
common parent) are treated as includible
corporations.
Section 404(k)(2), for taxable years be-
ginning on or after January 1, 2002, gener-
ally provides that the termapplicable div-
idendmeans any dividend which, in ac-
cordance with the plan provisions — (i)
is paid in cash to the participants in the
plan or their beneficiaries, (ii) is paid to the
plan and is distributed in cash to partici-
pants in the plan or their beneficiaries not
later than 90 days after the close of the plan
year in which paid, (iii) is, at the election
of such participants or their beneficiaries
— (I) payable as provided in clause (i) or
(ii), or (II) paid to the plan and reinvested
in qualifying employer securities, or (iv) is
used to make payments on a loan described
in section 404(a)(9), the proceeds of which
September 26, 20056102005–39 I.R.B.

were used to acquire the employer secu-
rities (whether or not allocated to partici-
pants) with respect to which the dividend
is paid. Under section 404(k)(4), the de-
duction is allowable in the taxable year of
the corporation in which the dividend is
paid or distributed to a participant or ben-
eficiary.
Prior to 2002, section 404(k)(5)(A) pro-
vided that the Secretary may disallow the
deduction under section 404(k) for any
dividend if the Secretary determines that
such dividend constitutes, in substance, an
evasion of taxation. Section 662(b) of the
Economic Growth and Tax Relief Recon-
ciliation Act of 2001 (115 Stat. 38, 2001)
amended section 404(k)(5)(A) to provide
that the Secretary may disallow a deduc-
tion under section 404(k) for any divi-
dend the Secretary determines constitutes,
in substance, an avoidance or evasion of
taxation. The amendment is effective for
tax years after December 31, 2001.
Section 162(k)(1) generally provides
that no deduction otherwise allowable un-
der chapter 1 of the Code is allowed for
any amount paid or incurred by a corpora-
tion in connection with the reacquisition of
its stock or the stock of any related person
(as defined in section 465(b)(3)(C)). The
legislative history of section 162(k) states
that the phrase “in connection with” is
“intended to be construed broadly.” H.R.
Conf. Rep. No. 99–841, at 168 (1986).
Corporation Entitled to Section 404(k)
Deduction
An ESOP may benefit employees of
more than one corporation. In addition, an
ESOP may be maintained by a corporation
other than the payor of a dividend. In these
cases, the issue arises as to which entity
is entitled to the deduction provided under
section 404(k). Assume, for example, that
a publicly traded corporation owns all of
the stock of a subsidiary. The subsidiary
operates a trade or business with employ-
ees in the U.S. and maintains an ESOP
that holds stock of its parent for its em-
ployees. If the parent distributes a divi-
dend with respect to its stock held in the
ESOP maintained by the subsidiary, ques-
tions have arisen as to whether the parent
or subsidiary is entitled to the deduction
under section 404(k). This question arises
in cases in which the parent and subsidiary
file a consolidated return as well as in cases
in which the parent and subsidiary do not
file a consolidated return.
The IRS and Treasury Department be-
lieve that the statutory language of sec-
tion 404(k) clearly provides that only the
payor of the applicable dividend is entitled
to the deduction under section 404(k), re-
gardless of whether the employees of mul-
tiple corporations benefit under the ESOP
and regardless of whether another mem-
ber of the controlled group maintains the
ESOP. Therefore, in the example above,
the parent, not the subsidiary, is entitled to
the deduction under section 404(k).
Treatment of Payments Made to Reacquire
Stock
Some corporations have claimed de-
ductions under section 404(k) for pay-
ments in redemption of stock held by an
ESOP that are used to make benefit dis-
tributions to participants or beneficiaries,
including distributions of a participant’s
account balance upon severance from em-
ployment. These taxpayers have argued
that the payments in redemption qualify as
dividends under sections 301 and 316 and,
therefore, are deductible under section
404(k).
In Rev. Rul. 2001–6, 2001–1 C.B. 491,
the IRS concluded that section 162(k)
bars a deduction for payments made in
redemption of stock from an ESOP. This
conclusion was based on the fact that
section 162(k)(1) disallows a deduction
for payments paid in connection with the
reacquisition of an issuer’s stock and that
the redemption payments are such pay-
ments. The IRS also concluded that such
payments were not applicable dividends
under section 404(k)(1). The IRS reasoned
that allowing a deduction for redemption
amounts would vitiate important rights
and protections for recipients of ESOP
distributions, including the right to reduce
taxes by utilizing the return of basis pro-
visions under section 72, the right to make
rollovers of ESOP distributions received
upon separation from service, and the
protection against involuntary cash-outs.
Finally, the IRS stated that a deduction
under section 404(k)(1) for such amounts
would constitute, in substance, an evasion
of tax.
InBoise Cascade Corporation v.
United States, 329 F.3d 751 (9
th
Cir.
2003), the Court of Appeals for the Ninth
Circuit held that payments made by a cor-
poration to redeem its stock held by its
ESOP were deductible as dividends paid
under section 404(k), and that the deduc-
tion was not precluded by section 162(k).
The court reasoned that the distribution
by the ESOP of the redemption proceeds
to the participants was a transaction sep-
arate from the redemption transaction.
Therefore, the court concluded that the
distribution did not constitute a payment
in connection withthe corporation’s reac-
quisition of its stock, and section 162(k)
did not bar the deduction of such pay-
ments.
For the reasons stated in Rev. Rul.
2001–6, the IRS and Treasury Department
continue to believe that allowing a deduc-
tion for amounts paid to reacquire stock is
inconsistent with the intent of, and poli-
cies underlying, section 404. In addition,
the IRS and Treasury Department believe
that allowing such a deduction would
constitute, in substance, an avoidance or
evasion of taxation within the meaning of
section 404(k)(5)(A) because it would al-
low a corporation to claim two deductions
for the same economic cost: once for the
value of the stock originally contributed to
the ESOP and again for the amount paid
to redeem the same stock. SeeCharles
Ilfeld Co. v. Hernandez, 292 U.S. 62
(1934). Moreover, despite the Ninth Cir-
cuit’s conclusion inBoise Cascade,the
IRS and Treasury Department continue to
believe that, even if a payment in redemp-
tionofstockheldbyanESOPwereto
qualify as an applicable dividend, section
162(k) would disallow a deduction for that
amount because such payment would be
in connection with the reacquisition of the
corporation’s stock.
This notice of proposed rulemaking,
therefore, includesproposed regulations
under section 404(k) that confirm that
payments made to reacquire stock held by
an ESOP are not deductible under section
404(k) because suchpayments do not con-
stitute applicable dividends under section
404(k)(2) and a deduction for such pay-
ments would constitute, in substance, an
avoidance or evasion of taxation within the
meaning of section 404(k)(5). It also in-
cludes proposed regulations under section
162(k) that provide that section 162(k),
subject to certain exceptions, disallows
any deduction for amounts paid or in-
curred by a corporation in connection with
2005–39 I.R.B.611September 26, 2005

the reacquisition of its stock or the stock
of any related person (as defined in section
465(b)(3)(C)). The proposed regulations
also provide that amounts paid or incurred
in connection with the reacquisition of
stock include amounts paid by a corpora-
tion to reacquire its stock from an ESOP
that are then distributed by the ESOP to
its participants (or their beneficiaries) or
otherwise used in a manner described in
section 404(k)(2)(A).
Proposed Effective Date
These regulations are proposed to be ef-
fective on the date of issuance of final reg-
ulations. However, before these regula-
tions become effective, the IRS will con-
tinue to assert in any matter in controversy
outside of the Ninth Circuit that sections
162(k) and 404(k) disallow a deduction for
payments to reacquire employer securities
held by an ESOP. See Chief Counsel No-
tice 2004–038 (October 1, 2004) available
atwww.irs.gov/foiathrough theelectronic
reading room.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It has also
been determined thatsection 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regu-
lations, and, because the regulations do
not impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Code,
this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on its impact on small busi-
ness.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written (a signed
original and eight (8) copies) or electronic
comments that are submitted timely to the
IRS. The IRS and Treasury Department
specifically request comments on the clar-
ity of the proposed regulations and how
they may be made easier to understand.
All comments will be available for public
inspection and copying. A public hearing
will be scheduled if requested in writing
by any person that timely submits written
comments. If a public hearing is sched-
uled, notice of the date, time, and place for
the public hearing will be published in the
Federal Register.
Drafting Information
The principal authors of these reg-
ulations are John T. Ricotta, Office of
Division Counsel/Associate Chief Coun-
sel (Tax Exempt and Government Entities)
and Martin Huck of Office of Associate
Chief Counsel (Corporate). However,
other personnel from the IRS and Trea-
sury participated in the development of
these regulations.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part1isamendedtoread,inpart,asfol-
lows:
Authority: 26 U.S.C. 7805 * * *
Section 1.162(k)–1 is also issued under
26 U.S.C. 162(k) * * *
Section 1.404(k)–3 is also issued under
26 U.S.C. 162(k) and 404(k)(5)(A) * * *
Par. 2. Section 1.162(k)–1 is added to
read as follows:
§1.162(k)–1 Disallowance of deduction
for reacquisition payments.
(a)In general. Except as provided
in paragraph (b) of this section, no de-
duction otherwise allowable is allowed
under Chapter 1 of the Internal Revenue
Code for any amount paid or incurred
by a corporation in connection with the
reacquisition of its stock or the stock of
any related person (as defined in section
465(b)(3)(C)). Amounts paid or incurred
in connection with the reacquisition of
stock include amounts paid by a corpora-
tion to reacquire its stock from an ESOP
that are used in a manner described in
section 404(k)(2)(A). See §1.404(k)–3.
(b)Exceptions. Paragraph (a) of this
section does not apply to any—
(i) Deduction allowable under section
163 (relating to interest);
(ii) Deduction for amounts that are
properly allocable to indebtedness and
amortized over the term of such indebted-
ness;
(iii) Deduction for dividends paid
(within the meaning of section 561); or
(iv) Amount paid or incurred in connec-
tion with the redemption of any stock in a
regulated investment company that issues
only stock which is redeemable upon the
demand of the shareholder.
(c)Effective date. This section applies
with respect to amounts paid or incurred on
or after the date these regulations are pub-
lished as final regulations in theFederal
Register.
Par. 3. Section1.404(k)–2isaddedto
read as follows:
§1.404(k)–2 Dividends paid by
corporation not maintaining ESOP.
Q–1: What corporation is entitled to the
deduction provided under section 404(k)
for applicable dividends paid on applica-
ble employer securities of a C corporation
held by an ESOP if the ESOP benefits em-
ployees of more than one corporation or if
the corporation paying the dividend is not
the corporation maintaining the plan?
A–1: (a)In general. Under section
404(k), only the corporation paying the
dividend is entitled to the deduction with
respect to applicable employer securities
held by an ESOP. Thus, no deduction is
permitted to a corporation maintaining the
ESOP if that corporation does not pay the
dividend.
(b)Example.(i)Facts. S is a U.S. corporation that
is wholly owned by P, an entity organized under the
laws of Country A that is classified as a corporation
for Federal income tax purposes. P is not engaged in a
U.S. trade or business. P has a single class of common
stock that is listed on a stock exchange in a foreign
country. In addition, these shares are listed on the
New York Stock Exchange, in the form of American
Depositary Shares, and are actively traded through
American Depositary Receipts (ADRs) meeting the
requirements of section 409(l). S maintains an ESOP
for its employees. The ESOP holds ADRs of P on
Date X and receives a dividend with respect to those
employer securities. The dividends received by the
ESOP constitute applicable dividends as described in
section 404(k)(2).
September 26, 20056122005–39 I.R.B.

(ii)Conclusion. P, as the payor of the dividend,
is entitled to a deduction under section 404(k) with
respect to the dividends, although as a foreign corpo-
ration P does not obtain a U.S. tax benefit from the
deduction. No corporation other than the corporation
paying the dividend is entitled to the deduction under
section 404(k). Thus, because S did not pay the div-
idends, S is not entitled to a deduction under section
404(k). The answer would be the same if P is a U.S.
C corporation.
Q–2: What is the effective date of this
section?
A–2: This section applies with respect
to dividends paid on or after the date these
regulations are published as final regula-
tions in theFederal Register.
Par. 4. Section 1.404(k)–3 is added to
read as follows:
§1.404(k)–3 Disallowance of deduction
for reacquisition payments.
Q–1: Are payments to reacquire stock
held by an ESOP applicable dividends that
are deductible under section 404(k)(1)?
A–1: (a) Payments to reacquire stock
held by an ESOP, including reacquisition
payments that are used to make benefit dis-
tributions to participants or beneficiaries,
are not deductible under section 404(k) be-
cause—
(1) Those payments do not consti-
tuteapplicable dividendsunder section
404(k)(2); and
(2) The treatment of those payments
as applicable dividends would constitute,
in substance, an avoidance or evasion of
taxation within the meaning of section
404(k)(5).
(b) See §1.162(k)–1 concerning the dis-
allowance of deductions for amounts paid
or incurred by a corporation in connection
with the reacquisition of its stock from an
ESOP.
Q–2: What is the effective date of this
section?
A–2: This section applies with respect
to payments to reacquire stock that are
made on or after the date these regulations
are published as final regulations in the
Federal Register.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on August 24,
2005, 8:45 a.m., and published in the issue of the Federal
Register for August 25, 2005, 70 F.R. 49897)
Release of Form 1098–C,
Contributions of Motor
Vehicles,Boats,andAirplanes
Announcement 2005–66
The IRS has released new Form
1098–C,Contributions of Motor Vehi-
cles, Boats, and Airplanes.Theformis
used by donee organizations to report the
contribution of qualified vehicles to the
IRS under new IRC section 170(f)(12).
The form may also be used to provide
the donor with a contemporaneous written
acknowledgment of the contribution.
Section 1446 Regulations;
Withholding on
Effectively-Connected Taxable
Income Allocable to Foreign
Partners; Correction
Announcem
ent 2005–68
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correction to notice of pro-
posed rulemaking and notice of public
hearing.
SUMMARY: This document cor-
rects a notice of proposed rulemaking
(REG–108524–00, 2005–23 I.R.B. 1209)
that was published in theFederal Reg-
isteron Wednesday, May 18, 2005 (70
FR 28743). The document contains regu-
lations providing guidance under section
1446 of the Internal Revenue Code relat-
ing to the circumstances under which a
partnership may take partner-level deduc-
tions and losses into account in computing
its withholding tax obligation with respect
to a foreign partner’s allocable share of
effectively connected taxable income.
FOR FURTHER INFORMATION
CONTACT: Ronald M. Gootzeit, (202)
622–3860 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
The notice of proposed rulemak-
ing and notice of public hearing
(REG–108524–00) that is the subject of
these corrections are under section 1446
of the Internal Revenue Code.
Need for Correction
As published, REG–108524–00 con-
tains errors that may prove to be mislead-
ing and are in need of clarification.
Correction of Publication
Accordingly, the notice of proposed
rulemaking and notice of public hearing
(REG–108524–00), that was the subject of
FR Doc. 05–9423, is corrected as follows:
1. On page 28743, column 1, in the
preamble, under the caption “DATES:”,
last line, the language “must be received
by August 16, 2005.” is corrected to
read “must be received by September 12,
2005.”.
2. On page 28743, column 2, in the pre-
amble, under the caption “FOR FURTHER
INFORMATION CONTACT:”, line 3, the
language “the hearing, Jacqueline Turner
at (202)” is correctedto read “the hearing,
Richard A. Hurst at (202)”.
3. On page 28744, column 1, in the
preamble, under the paragraph heading,
“Comments and Public Hearing”, third
paragraph, line 8, the language “and eight
(8) copies) by August 16,” is corrected to
read “and eight (8) copies) by September
12,”.
Cynthia Grigsby,
Acting Chief, Publications and
Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on September
2, 2005, 8:45 a.m., and published in the issue of the Federal
Register for September 6, 2005, 70 F.R. 52952)
2005–39 I.R.B.613September 26, 2005

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
September 26, 2005i2005–39 I.R.B.

Numerical Finding List
1
Bulletins 2005–27 through 2005–39
Announcements:
2005-46, 2005-27 I.R.B.63
2005-47, 2005-28 I.R.B.71
2005-48, 2005-29 I.R.B.111
2005-49, 2005-29 I.R.B.119
2005-50, 2005-30 I.R.B.152
2005-51, 2005-32 I.R.B.283
2005-52, 2005-31 I.R.B.257
2005-53, 2005-31 I.R.B.258
2005-54, 2005-32 I.R.B.283
2005-55, 2005-33 I.R.B.317
2005-56, 2005-33 I.R.B.318
2005-57, 2005-33 I.R.B.318
2005-58, 2005-33 I.R.B.319
2005-59, 2005-37 I.R.B.524
2005-60, 2005-35 I.R.B.455
2005-61, 2005-36 I.R.B.495
2005-62, 2005-36 I.R.B.495
2005-63, 2005-36 I.R.B.496
2005-64, 2005-37 I.R.B.537
2005-65, 2005-38 I.R.B.587
2005-66, 2005-39 I.R.B.613
2005-68, 2005-39 I.R.B.613
Notices:
2005-48, 2005-27 I.R.B.9
2005-49, 2005-27 I.R.B.14
2005-50, 2005-27 I.R.B.14
2005-51, 2005-28 I.R.B.74
2005-52, 2005-28 I.R.B.75
2005-53, 2005-32 I.R.B.263
2005-54, 2005-30 I.R.B.127
2005-55, 2005-32 I.R.B.265
2005-56, 2005-32 I.R.B.266
2005-57, 2005-32 I.R.B.267
2005-58, 2005-33 I.R.B.295
2005-59, 2005-35 I.R.B.443
2005-60, 2005-39 I.R.B.606
2005-61, 2005-39 I.R.B.607
2005-62, 2005-35 I.R.B.443
2005-63, 2005-35 I.R.B.448
2005-64, 2005-36 I.R.B.471
2005-65, 2005-39 I.R.B.607
Proposed Regulations:
REG-131739-03, 2005-36 I.R.B.494
REG-130241-04, 2005-27 I.R.B.18
REG-138362-04, 2005-33 I.R.B.299
REG-149436-04, 2005-35 I.R.B.454
REG-156518-04, 2005-38 I.R.B.582
REG-121584-05, 2005-37 I.R.B.523
REG-122857-05, 2005-39 I.R.B.609
Proposed Regulations— Continued:
REG-133578-05, 2005-39 I.R.B.610
Revenue Procedures:
2005-35, 2005-28 I.R.B.76
2005-36, 2005-28 I.R.B.78
2005-37, 2005-28 I.R.B.79
2005-38, 2005-28 I.R.B.81
2005-39, 2005-28 I.R.B.82
2005-40, 2005-28 I.R.B.83
2005-41, 2005-29 I.R.B.90
2005-42, 2005-30 I.R.B.128
2005-43, 2005-29 I.R.B.107
2005-44, 2005-29 I.R.B.110
2005-45, 2005-30 I.R.B.141
2005-46, 2005-30 I.R.B.142
2005-47, 2005-32 I.R.B.269
2005-48, 2005-32 I.R.B.271
2005-49, 2005-31 I.R.B.165
2005-50, 2005-32 I.R.B.272
2005-51, 2005-33 I.R.B.296
2005-52, 2005-34 I.R.B.326
2005-53, 2005-34 I.R.B.339
2005-54, 2005-34 I.R.B.353
2005-55, 2005-34 I.R.B.367
2005-56, 2005-34 I.R.B.383
2005-57, 2005-34 I.R.B.392
2005-58, 2005-34 I.R.B.402
2005-59, 2005-34 I.R.B.412
2005-60, 2005-35 I.R.B.449
2005-61, 2005-37 I.R.B.507
2005-62, 2005-37 I.R.B.507
2005-63, 2005-36 I.R.B.491
2005-64, 2005-36 I.R.B.492
2005-65, 2005-38 I.R.B.564
2005-66, 2005-37 I.R.B.509
Revenue Rulings:
2005-38, 2005-27 I.R.B.6
2005-39, 2005-27 I.R.B.1
2005-40, 2005-27 I.R.B.4
2005-41, 2005-28 I.R.B.69
2005-42, 2005-28 I.R.B.67
2005-43, 2005-29 I.R.B.88
2005-44, 2005-29 I.R.B.87
2005-45, 2005-30 I.R.B.123
2005-46, 2005-30 I.R.B.120
2005-47, 2005-32 I.R.B.261
2005-48, 2005-32 I.R.B.259
2005-49, 2005-30 I.R.B.125
2005-50, 2005-30 I.R.B.124
2005-51, 2005-31 I.R.B.163
2005-52, 2005-35 I.R.B.423
2005-53, 2005-35 I.R.B.425
2005-54, 2005-33 I.R.B.289
2005-55, 2005-33 I.R.B.284
Revenue Rulings— Continued:
2005-56, 2005-35 I.R.B.427
2005-57, 2005-36 I.R.B.466
2005-58, 2005-36 I.R.B.465
2005-59, 2005-37 I.R.B.505
2005-60, 2005-37 I.R.B.502
2005-61, 2005-38 I.R.B.538
2005-62, 2005-38 I.R.B.557
2005-63, 2005-39 I.R.B.603
2005-64, 2005-39 I.R.B.600
Tax Conventions:
2005-47, 2005-28 I.R.B.71
Treasury Decisions:
9208, 2005-31 I.R.B.157
9209, 2005-31 I.R.B.153
9210, 2005-33 I.R.B.290
9211, 2005-33 I.R.B.287
9212, 2005-35 I.R.B.429
9213, 2005-35 I.R.B.440
9214, 2005-35 I.R.B.435
9215, 2005-36 I.R.B.468
9216, 2005-36 I.R.B.461
9217, 2005-37 I.R.B.498
9218, 2005-37 I.R.B.503
9219, 2005-38 I.R.B.538
9220, 2005-39 I.R.B.596
9221, 2005-39 I.R.B.604
9223, 2005-39 I.R.B.591
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2005–1 through 2005–26 is in Internal Revenue Bulletin
2005–26, dated June 27, 2005.
2005–39 I.R.B.iiSeptember 26, 2005

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2005–27 through 2005–39
Announcements:
84-26
Obsoleted by
REG-149436-04, 2005-35 I.R.B.454
2004-72
Updated and superseded by
Ann. 2005-59, 2005-37 I.R.B.524
2005-36
Modified by
Rev. Proc. 2005-66, 2005-37 I.R.B.509
2005-53
Corrected by
Ann. 2005-61, 2005-36 I.R.B.495
Notices:
89-111
Amplified by
Notice 2005-61, 2005-39 I.R.B.607
2001-42
Modified by
Rev. Proc. 2005-66, 2005-37 I.R.B.509
2005-4
Modified by
Notice 2005-62, 2005-35 I.R.B.443
2005-10
Clarified by
Notice 2005-64, 2005-36 I.R.B.471
2005-38
Modified by
Notice 2005-64, 2005-36 I.R.B.471
2005-51
Modified and superseded by
Notice 2005-57, 2005-32 I.R.B.267
Proposed Regulations:
REG-108524-00
Corrected by
Ann. 2005-68, 2005-39 I.R.B.613
REG-142686-01
Withdrawn by
Ann. 2005-55, 2005-33 I.R.B.317
REG-100420-03
Corrected by
Ann. 2005-57, 2005-33 I.R.B.318
REG-102144-04
Corrected by
Ann. 2005-56, 2005-33 I.R.B.318
Revenue Procedures:
64-54
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
66-33
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
69-13
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
70-8
Modified by
Rev. Proc. 2005-46, 2005-30 I.R.B.142
71-1
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
72-22
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
83-77
Superseded by
Rev. Proc. 2005-63, 2005-36 I.R.B.491
87-8
Obsoleted by
Rev. Proc. 2005-44, 2005-29 I.R.B.110
87-9
Obsoleted by
Rev. Proc. 2005-44, 2005-29 I.R.B.110
89-20
Superseded by
Rev. Proc. 2005-52, 2005-34 I.R.B.326
90–11
Modified by
Rev. Proc. 2005-40, 2005-28 I.R.B.83
90-30
Section4supersededby
Rev. Proc. 2005-54, 2005-34 I.R.B.353
Section5supersededby
Rev. Proc. 2005-55, 2005-34 I.R.B.367
Section6supersededby
Rev. Proc. 2005-56, 2005-34 I.R.B.383
Section7supersededby
Rev. Proc. 2005-58, 2005-34 I.R.B.402
Section8supersededby
Rev. Proc. 2005-59, 2005-34 I.R.B.412
90-31
Section4supersededby
Rev. Proc. 2005-52, 2005-34 I.R.B.326
Section5supersededby
Rev. Proc. 2005-54, 2005-34 I.R.B.353
Section6supersededby
Rev. Proc. 2005-55, 2005-34 I.R.B.367
Revenue Procedures— Continued:
Section7supersededby
Rev. Proc. 2005-56, 2005-34 I.R.B.383
Section8supersededby
Rev. Proc. 2005-58, 2005-34 I.R.B.402
Section9supersededby
Rev. Proc. 2005-59, 2005-34 I.R.B.412
93-22
Obsoleted by
Rev. Proc. 2005-44, 2005-29 I.R.B.110
98-18
Obsoleted by
Rev. Proc. 2005-45, 2005-30 I.R.B.141
99-39
Superseded by
Rev. Proc. 2005-60, 2005-35 I.R.B.449
2000-27
Modified and superseded by
Rev. Proc. 2005-66, 2005-37 I.R.B.509
2000-31
Superseded by
Rev. Proc. 2005-60, 2005-35 I.R.B.449
2000-49
Superseded by
Rev. Proc. 2005-41, 2005-29 I.R.B.90
2001-9
Superseded by
Rev. Proc. 2005-60, 2005-35 I.R.B.449
2001-16
Superseded by
Rev. Proc. 2005-42, 2005-30 I.R.B.128
2002-9
Modified and amplified by
Rev. Rul. 2005-42, 2005-28 I.R.B.67
Rev. Proc. 2005-35, 2005-28 I.R.B.76
Rev. Proc. 2005-43, 2005-29 I.R.B.107
Rev. Proc. 2005-47, 2005-32 I.R.B.269
2002-49
Modified, amplified, and superseded by
Rev. Proc. 2005-62, 2005-37 I.R.B.507
2004-50
Superseded by
Rev. Proc. 2005-49, 2005-31 I.R.B.165
2004-54
Superseded by
Rev. Proc. 2005-65, 2005-38 I.R.B.564
2005-3
Amplified by
Rev. Proc. 2005-61, 2005-37 I.R.B.507
2005-6
Modified by
Rev. Proc. 2005-66, 2005-37 I.R.B.509
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2005–1 through 2005–26 is in Internal Revenue Bulletin 2005–26, dated June 27, 2005.
September 26, 2005iii2005–39 I.R.B.

Revenue Procedures— Continued:
2005-16
Modified by
Rev. Proc. 2005-66, 2005-37 I.R.B.509
Revenue Rulings:
65-109
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
68-549
Obsoleted by
Rev. Rul. 2005-43, 2005-29 I.R.B.88
74-203
Revoked by
Rev. Rul. 2005-59, 2005-37 I.R.B.505
82-29
Modified and clarified by
Rev. Proc. 2005-39, 2005-28 I.R.B.82
2005-41
Corrected by
Ann. 2005-50, 2005-30 I.R.B.152
Treasury Decisions:
9149
Removed by
T.D. 9221, 2005-39 I.R.B.604
9186
Corrected by
Ann. 2005-53, 2005-31 I.R.B.258
9193
Corrected by
Ann. 2005-62, 2005-36 I.R.B.495
9205
Corrected by
Ann. 2005-63, 2005-36 I.R.B.496
9206
Corrected by
Ann. 2005-49, 2005-29 I.R.B.119
9207
Corrected by
Ann. 2005-52, 2005-31 I.R.B.257
9210
Corrected by
Ann. 2005-64, 2005-37 I.R.B.537
2005–39 I.R.B.ivSeptember 26, 2005

INDEX
Internal Revenue Bulletins 2005–27 through
2005–39
The abbreviation and number in parenthesis following the index entry
refer to the specific item; numbers in roman and italic type following
the parentheses refer to the Internal Revenue Bulletin in which the item
may be found and the page number on which it appears.
Key to Abbreviations:
AnnAnnouncement
CDCourt Decision
DODelegation Order
EOExecutive Order
PLPublic Law
PTEProhibited Transaction Exemption
RPRevenue Procedure
RRRevenue Ruling
SPRStatement of Procedural Rules
TCTax Convention
TDTreasury Decision
TDOTreasury Department Order
EMPLOYEE PLANS
Disaster relief, minimum funding standards (Notice 60) 39,606
Electronic technologies, use for providing employee benefit no-
tices and transmitting employee benefit elections and consents
(REG–138362–04) 33,299
Federal credit unions, section 457, nonqualified deferred com-
pensation plans (Notice 58) 33,295
Full funding limitations, weighted average interest rate for:
July 2005 (Notice 54) 30,127
August 2005 (Notice 63) 35,448
IRA annuity, converting to Roth IRA (TD 9220) 39,596;
(REG–122857–05) 39,609
Letter rulings and determinationletters, areas from which Asso-
ciates Chief Counsel and Division Counsel will not issue (RP
61) 37,507
Nonbank trustee and nonbank custodian, approval list (Ann 59)
37,524
Prescription drug coverage, section 420, minimum cost require-
ment (RR 60) 37,502
Proposed Regulations:
26 CFR 1.72(p)–1, amended; 1.401(a)–21, added; 1.402(f)–1,
amended; 1.411(a)–11, amended; 1.417(a)(3)–1, amended;
1.7476–2, amended; use of electronic technologies for pro-
viding employee benefit noticesand transmitting employee
benefit elections and consents (REG–138362–04) 33,299
26 CFR 1.162(k)–1, added; 1.404(k)–2, –3, added; dividends
paid deduction for stock held in employee stock ownership
plan (ESOP) (REG–133578–05) 39,610
26 CFR 1.401(a)(9)–6, revised; 1.401(k)–1, amended;
1.403(b)–3(b)(4)(ii), revised; 1.415–1 thru –10, removed;
1.415(a)–1, (b)–1, (b)–2, (c)–1, (c)–2, (d)–1, (f)–1,
(g)–1, (j)–1, added; 1.457–4, –5, –6, –10, amended;
EMPLOYEE PLANS—Cont.
11.415(c)(4)–1, removed; limitations on benefits and con-
tributions under qualified plans (REG–130241–04) 27,18
26 CFR 1.408A–4, amended; converting an IRA annuity to a
Roth IRA (REG–122857–05) 39,609
26 CFR 1.411(d)–3, amended;section 411(d)(6) protected
benefits (REG–156518–04) 38,582
Qualified retirement plans:
Determination letters, staggered remedial amendments (RP
66) 37,509
Limitations on benefits and contributions (REG–130241–04)
27,18
Profit-sharing plan, retiree health accounts (RR 55) 33,284
Section 411(d)(6) protected benefits, anti-cutback rules
(REG–156518–04) 38,582
Section 411(d)(6) protected benefits, anti-cutback rules, noti-
fication requirements (TD 9219) 38,538
Value of life insurance contracts when distributed from qual-
ified retirement plan (TD 9223) 39,591
Regulations:
26 CFR 1.79–1, amended; 1.83–3, amended; 1.402(a)–1,
amended; value of life insurance contracts when distributed
from a qualified retirement plan (TD 9223) 39,591
26 CFR 1.408A–4, amended; 1.408A–4T, added; converting
an IRA annuity to a Roth IRA (TD 9220) 39,596
26 CFR 1.411(d)–3, revised; 1.411(a)–4, (d)–4, amended;
54.4980F–1, amended; section 411(d)(6) protected benefits
(TD 9219) 38,538
Stocks, disallowance of deduction for reacquisition payments,
dividends paid by corporation not maintaining employee stock
ownership plan (ESOP) (REG–133578–05) 39,610
EMPLOYMENT TAX
Alternative signature methods, facsimile signatures (RP 39) 28,
82
Electronic technologies, use for providing employee benefit no-
tices and transmitting employee benefit elections and consents
(REG–138362–04) 33,299
Industry Issue Resolution (IIR) program, additional criteria for
considering specific industries’ proposals regarding account-
able plan rules (Notice 59) 35,443
Penalties, disclosure on reports filed with Securities and Ex-
change Commission (SEC) (RP 51) 33,296
Proposed Regulations:
26 CFR 35.3405–1, amended; use of electronic tech-
nologies for providing employee benefit notices and
transmitting employee benefit elections and consents
(REG–138362–04) 33,299
26 CFR 301.6020–1, added; substitute for return
(REG–131739–03) 36,494
Publication 1141, General Rules and Specifications for Substi-
tute Forms W-2 and W-3, revised (RP 65) 38,564
Regulations:
26 CFR 301.6020–1, removed; 301.6020–1T, added; substi-
tute for return (TD 9215) 36,468
September 26, 2005v2005–39 I.R.B.

EMPLOYMENT TAX—Cont.
Stocks, statutory stock options, wages, application of
FICA, FUTA, and income tax withholding, withdrawal
of REG–142686–01 (Ann 55) 33,317
Substitute for return, Internal Revenue officer or employee (TD
9215) 36,468; (REG–131739–03) 36,494
Substitute Forms W-2 and W-3, general rules and specifications
(RP 65) 38,564
Tool allowances to employees, arrangement not considered an
accountable plan (RR 52) 35,423
ESTATE TAX
Charitable remainder unitrusts (CRUTs):
Inter vivos:
For a term of years (RP 53) 34,339
For one measuring life (RP 52) 34,326
With concurrent and consecutive interests for two measur-
ing lives (RP 55) 34,367
With consecutive interests for two measuring lives (RP 54)
34,353
Testamentary:
For a term of years (RP 57) 34,392
For one measuring life (RP 56) 34,383
With concurrent and consecutive interests for two measur-
ing lives (RP 59) 34,412
With consecutive interests for two measuring lives (RP 58)
34,402
Generation-skipping transfer (GST) tax:
Deemed allocations, election out (TD 9208) 31,157
Predeceased parent rule (TD 9214) 35,435
Proposed Regulations:
26 CFR 301.6020–1, added; substitute for return
(REG–131739–03) 36,494
Regulations:
26 CFR 26.2600–1, amended; 26.2612–1, amended;
26.2651–1, –2, –3, added; predeceased parent rule (TD
9214) 35,435
26 CFR 26.2600–1, amended; 26.2632–1, amended; 602.101,
amended; election out of GST deemed allocations (TD
9208) 31,157
26 CFR 301.6020–1, removed; 301.6020–1T, added; substi-
tute for return (TD 9215) 36,468
Substitute for return, Internal Revenue officer or employee (TD
9215) 36,468; (REG–131739–03) 36,494
EXCISE TAX
Air transportation services subject to tax, passive losses (RR 64)
39,600
Biodiesel and aviation-grade kerosene (Notice 62) 35,443
Collector of collected excisetaxes, duties (TD 9221) 39,604
Electronic technologies, use for providing employee benefit no-
tices and transmitting employee benefit elections and consents
(REG–138362–04) 33,299
EXCISE TAX—Cont.
Insurance, qualification of arrangements as insurance, comments
requested (Notice 49) 27,14
Penalties:
Disclosure on reports filed with Securities and Exchange
Commission (SEC) (RP 51) 33,296
Relief under section 6715, dyed diesel fuel (Ann 51) 32,283
Proposed Regulations:
26 CFR 54.4980F–1, amended; use of electronic tech-
nologies for providing employee benefit notices and
transmitting employee benefit elections and consents
(REG–138362–04) 33,299
26 CFR 301.6020–1, added; substitute for return
(REG–131739–03) 36,494
Regulations:
26 CFR 40.6302(c)–3, amended; 40.6302(c)–3T, removed;
49.4291–1, amended; 49.4291–1T, removed; collected ex-
cise taxes, duties of collector (TD 9221) 39,604
26 CFR 301.6020–1, removed; 301.6020–1T, added; substi-
tute for return (TD 9215) 36,468
Rural airport, exception to tax on the amount paid for a domestic
segment of taxable transportation by air (RP 45) 30,141
Substitute for return, Internal Revenue officer or employee (TD
9215) 36,468; (REG–131739–03) 36,494
EXEMPT ORGANIZATIONS
Accounting methods, change in reporting method for eligible ed-
ucational institution (RP 50) 32,272
Federal credit unions, section 457, nonqualified deferred com-
pensation plans (Notice 58) 33,295
Form 1098-C, Contributions of Motor Vehicles, Boats, and Air-
planes, new 2005 form released (Ann 66) 39,613
Insurance, qualification of arrangements as insurance, comments
requested (Notice 49) 27,14
Letter rulings and determination letters, areas from which Asso-
ciates Chief Counsel and Division Counsel will not issue (RP
61) 37,507
List of organizations classifiedas private foundations (Ann 46)
27,63; (Ann 58) 33,319; (Ann 60) 35,455; (Ann 65) 38,587
Revocations (Ann 54) 32,283
GIFT TAX
Charitable remainder unitrusts (CRUTs):
Inter vivos:
For a term of years (RP 53) 34,339
For one measuring life (RP 52) 34,326
With concurrent and consecutive interests for two measur-
ing lives (RP 55) 34,367
With consecutive interests for two measuring lives (RP 54)
34,353
Proposed Regulations:
26 CFR 301.6020–1, added; substitute for return
(REG–131739–03) 36,494
2005–39 I.R.B.viSeptember 26, 2005

GIFT TAX—Cont.
Regulations:
26 CFR 301.6020–1, removed; 301.6020–1T, added; substi-
tute for return (TD 9215) 36,468
Substitute for return, Internal Revenue officer or employee (TD
9215) 36,468; (REG–131739–03) 36,494
INCOME TAX
Accounting methods:
Automatic consent to change to a method under which a utility
may treat an up-front payment for network upgrades as not
being taxable income when received (RP 35) 28,76
Changes in method of accounting, time periods for requesting
consent (RP 63) 36,491
Change in reporting method for eligible educational institu-
tion (RP 50) 32,272
Credit card cash advance fees (RP 47) 32,269
Uniform capitalization of costs, environmental remediation
(RR 42) 28,67
Air transportation services subject to tax, passive losses (RR 64)
39,600
Amended returns, qualified, John Doe summons (TD 9186); cor-
rection (Ann 53) 31,258;correction(Ann61)36,495
Arbitrage rebate payments:
Address change (Notice 52) 28,75
Late payment (RP 40) 28,83
ATM surcharge, treatment of cardholder surcharge fees by credit
card issuers (RR 47) 32,261
Charitable contributions, allocation and apportionment of deduc-
tions (TD 9211) 33,287
Charitable remainder unitrusts (CRUTs):
Inter vivos:
For a term of years (RP 53) 34,339
For one measuring life (RP 52) 34,326
With concurrent and consecutive interests for two measur-
ing lives (RP 55) 34,367
With consecutive interests for two measuring lives (RP 54)
34,353
Testamentary:
For a term of years (RP 57) 34,392
For one measuring life (RP 56) 34,383
With concurrent and consecutive interests for two measur-
ing lives (RP 59) 34,412
With consecutive interests for two measuring lives (RP 58)
34,402
Compensation for labor or personal services, basis for determin-
ing source (TD 9212) 35,429
Corporations:
Definition and tax treatment of a stapled foreign corporation
(TD 9216) 36,461
Dividends received deduction (DRD), foreign tax credit, for-
eign currency, and alternative minimum tax (Notice 64) 36,
471
Exclusions from gross income of foreign corporations (TD
9218) 37,503
INCOME TAX—Cont.
Credits:
Enhanced oil recovery credit, 2005 inflation adjustment (No-
tice 56) 32,266
Health coverage tax credit (HCTC), miscellaneous issues
(Notice 50) 27,14
Increasing research activities (TD 9205); correction (Ann 63)
36,496
Low-income housing credit:
Carryovers to qualified states, 2005 National Pool (RP 36)
28,78
Safe harbor for extending low-income housing commit-
ments (RP 37) 28,79
Satisfactory bond, “bond factor” amounts for the period
January through September 2005 (RR 44) 29,87
Deficiency procedures, use of mathematical or clerical error as-
sessments (RR 51) 31,163
Dependent care assistance, reporting requirements (Notice 61)
39,607
Depreciable business property, election to expense (TD 9209) 31,
153
Disaster relief:
Grants, treatment with respect to gross income (RR 46) 30,
120
Rules relating to temporary operation of ships in domestic
trade as a result of Hurricane Katrina (Notice 65) 39,607
Disciplinary actions involving attorneys, CPAs, enrolled agents,
and enrolled actuaries (Ann 48) 29,111
Dual consolidated loss (REG–102144–04); correction (Ann 56)
33,318
E-file provider responsibilities (RP 60) 35,449
Employer-provided vehicles, cents-per-mile valuation rule, reg-
ulations sections 1.61–21(d) and (e) (RP 48) 32,271
Forms:
W-4, specifications for filing electronically (RP 42) 30,128
1098, 1099, 5498 and W-2G, requirements for filing electron-
ically or magnetically (revised 8-2005) (RP 49) 31,165
1098-C, Contributions of Motor Vehicles, Boats, and Air-
planes, new 2005 form released (Ann 66) 39,613
8027, Employer’s Annual Information Return of Tip Income
and Allocated Tips, specifications for filing electronically
or magnetically (RP 41) 29,90
Information reporting, returns by donees relating to qualified in-
tellectual property contributions (TD 9206); correction (Ann
49) 29,119
Insurance companies:
Differential earnings rate, mutual insurance companies (RR
58) 36,465
Net investment income included by foreign insurance com-
pany on U.S. income tax return, guidance regarding com-
putation of amount (RP 64) 36,492
Tax on insurance companies other than life insurance compa-
nies (RR 40) 27,4
Insurance, qualification of arrangements as insurance, comments
requested (Notice 49) 27,14
September 26, 2005vii2005–39 I.R.B.

INCOME TAX—Cont.
Interest:
Foreign bank interest expense allocation to effectively con-
nected income (Notice 53) 32,263
Investment:
Federal short-term, mid-term, and long-term rates for:
July 2005 (RR 38) 27,6
August 2005 (RR 54) 33,289
September 2005 (RR 57) 36,466
Rates:
Farm real property, special use value (RR 41) 28,69;cor-
rection (Ann 50) 30,152
Underpayments and overpayments, quarter beginning:
October 1, 2005 (RR 62) 38,557
Taxpayer remedies when the Service fails to suspend interest
as required by section 6404(g) (RP 38) 28,81
Inventory:
LIFO, price indexes used by department stores for:
May 2005 (RR 45) 30,123
June 2005 (RR 56) 35,427
July 2005 (RR 63) 39,603
LIFO recapture by corporationsholding LIFO inventory indi-
rectly (TD 9210) 33,290;correction(Ann64)37,537
Joint return elections, section 6020 documents and waivers (RR
59) 37,505
Judicial remedy for third person asserting wrongful levy (RR 49)
30,125
Letter rulings and determinationletters, areas from which Asso-
ciates Chief Counsel and Division Counsel will not issue (RP
61) 37,507
Levied property, return incertain cases (TD 9213) 35,440
Marginal production rates, 2005 (Notice 55) 32,265
New York Liberty Zone, election out of section 1400L(c), 5-year
property (RP 43) 29,107
Obsoleting Rev. Proc. 64-54 and subsequent rulings (RR 43) 29,
88
Partnerships:
Assumption of partner liabilities (TD 9207); correction (Ann
52) 31,257
Installment obligations, treatment of property sold (TD 9193);
correction (Ann 62) 36,495
Requirement to pay withholding tax on effectively connected
U.S. trade or business income allocable to foreign partners
(REG–108524–00); correction (Ann 68) 39,613
Penalties, disclosure on reports filed with Securities and Ex-
change Commission (SEC) (RP 51) 33,296
Private foundations, organizations now classified as (Ann 46) 27,
63; (Ann 58) 33,319; (Ann 60) 35,455; (Ann 65) 38,587
Procedures for claiming section 482 setoffs (RP 46) 30,142
Proposed Regulations:
26 CFR 1.162(k)–1, added; 1.404(k)–2, –3, added; dividends
paid deduction for stock held in employee stock ownership
plan (ESOP) (REG–133578–05) 39,610
26 CFR 1.263A–1, –2, amended; guidance regarding the sim-
plified service cost method and the simplified production
method (REG–121584–05) 37,523
INCOME TAX—Cont.
26 CFR 1.475(a)–4; safe harbor for valuation under section
475 (REG–100420–03); correction (Ann 57) 33,318
26 CFR 1.1503(d)–4, –5; dual consolidated loss
(REG–102144–04); correction (Ann 56) 33,318
26 CFR 1.6012–2, amended; return required by subchapter
T cooperatives under section 6012 (REG–149436–04) 35,
454
26 CFR 301.6020–1, added; substitute for return
(REG–131739–03) 36,494
Publications:
1141, General Rules and Specifications for Substitute Forms
W-2 and W-3, revised (RP 65) 38,564
1220, Specifications for Filing Forms 1098, 1099, 5498 and
W-2G Electronically or Magnetically, 2005 revision (RP
49) 31,165
1239, changes affecting tax year2005 electronic or magnetic
filing of Form 8027, Employer’s Annual Information Re-
turn of Tip Income and Allocated Tips (RP 41) 29,90
1245, changes affecting the filing of Form W-4, Employee’s
Withholding Allowance Certificate, electronically or mag-
netically (RP 42) 30,128
Qualified green building and sustainable design projects, Brown-
fields Demonstration Program (Notice 48) 27,9
Regulations:
26 CFR 1.179–0, –2, –4, –5, amended; 1.179–2T, –4T,
–5T, –6, removed; 1.179–6T, redesignated as 1.179–6 and
amended; 602.101, amended; section 179 elections (TD
9209) 31,153
26 CFR 1.263A–1, –2, amended; 1.263A–1T, –2T, added;
guidance regarding the simplified service cost method and
the simplified production method (TD 9217) 37,498
26 CFR 1.269B–1, added; 1.367(b)–2, revised; 301.269B–1,
added; treatment of a stapled foreign corporation (TD 9216)
36,461
26 CFR 1.861–4, amended; 602.101, amended; source of
compensation for labor or personal services (TD 9212) 35,
429
26 CFR 1.861–8, –8T, –14, –14T, amended; allocation and ap-
portionment of deductions for charitable contributions (TD
9211) 33,287
26 CFR 1.883–5, revised; exclusions from gross income of
foreign corporations (TD 9218) 37,503
26 CFR 1.1363–2, amended; 602.101, amended; LIFO recap-
ture under section 1363(d) (TD 9210) 33,290; correction
(Ann 64) 37,537
26 CFR 1.6664–2T, amended; qualified amended returns (TD
9186); correction (Ann 53) 31,258
26 CFR 301.6020–1, removed; 301.6020–1T, added; substi-
tute for return (TD 9215) 36,468
26 CFR 301.6343–3, added; return of property in certain cases
(TD 9213) 35,440
Restricted property, whether transfer restrictions prevent treat-
ment as substantially vested (RR 48) 32,259
Revocations, exempt organizations (Ann 54) 32,283
Safe harbor, for valuation under section 475 for marking to mar-
ket (REG–100420–03); correction (Ann 57) 33,318
2005–39 I.R.B.viiiSeptember 26, 2005

INCOME TAX—Cont.
Standard Industry Fare Level (SIFL) formula (RR 61) 38,538
Stocks:
Disallowance of deduction forreacquisition payments, divi-
dends paid by corporation not maintaining employee stock
ownership plan (ESOP) (REG–133578–05) 39,610
Golden parachute payments, effect of election under section
83(b) for purposes of section 280G (RR 39) 27,1
Subchapter T cooperatives, return required (REG–149436–04)
35,454
Substitute for return, Internal Revenue officer or employee (TD
9215) 36,468; (REG–131739–03) 36,494
Substitute Forms W-2 and W-3, general rules and specifications
(RP 65) 38,564
Tax conventions:
Canadian memorandum of understanding (MOU) on MAP
(Ann 47) 28,71
Representations required to claim exemption from withhold-
ing tax on personal services income under U.S. income tax
treaties, students/teachers (RP 44) 29,110
Third party not liable for tax, relief under sections 6325(b)(4) and
7426(a)(4) (RR 50) 30,124
Tobacco marketing quotas, tax treatment of termination pay-
ments (Notice 51) 28,74; (Notice 57) 32,267
Uniform capitalization:
Simplified methods, assets produced on a routine and repeti-
tive basis (RR 53) 35,425
Simplified service cost and simplified production methods,
assets produced on a routine and repetitive basis, guidance
(TD 9217) 37,498; (REG–121584–05) 37,523
Utility companies, financing order by state agency (RP 62) 37,
507
SELF-EMPLOYMENT TAX
Proposed Regulations:
26 CFR 301.6020–1, added; substitute for return
(REG–131739–03) 36,494
Regulations:
26 CFR 301.6020–1, removed; 301.6020–1T, added; substi-
tute for return (TD 9215) 36,468
Substitute for return, Internal Revenue officer or employee (TD
9215) 36,468; (REG–131739–03) 36,494
September 26, 2005ix2005–39 I.R.B.
*U.S.Government PrintingOffice:2005—310–365/20024