Internal Revenue Bulletin 2006-35 (PDF rendition): IRS Revenue Rulings

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

Bulletin No. 200
6-35
August 28, 2006
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2006–41, page 331.
LIFO; price indexes; department stores.The June 2006
Bureau of Labor Statistics price indexes are accepted for use
by department stores employing the retail inventory and last-in,
first-out inventory methods for valuing inventories for tax years
ended on, or with reference to, June 30, 2006.
Rev. Rul. 2
006–42, page 337.
Levy on ban
k account.This ruling explains that a superpri-
ority lien
argument is not a defense to a levy. If a bank has
such an ar
gument, it must file a wrongful levy suit within nine
months of
the levy. Otherwise, the statute of limitations bars
such a sui
t.
T.D. 9272, page 332.
REG–159929–02, page 341.
Final, temporary, and proposed regulations under section
860G of the Code relate to income that is associated with a
residual interest in a Real Estate Mortgage Investment Conduit
(REMIC) and that is allocated through certain entities to foreign
persons who have invested in those entities. The regulations
accelerate the time when income is recognized for withholding
tax purposes to conform to the timing of income recognition
for general income tax purposes.
T.D. 9275, page 327.
Final regulations under section 410 of the Code implement
a statutory directive of the Economic Growth and Tax Re-
lief Reconciliation Act of 2001 (EGTRRA) to amend section
1.410(b)–6(g) of the regulations. The final regulations per-
mit, in certain circumstances, employees of a tax-exempt
organization described in section 501(c)(3) to be excluded for
the purpose of testing whether a section 401(k) plan (or a
section 401(m) plan that is provided under the same general
arrangement as the section 401(k) plan of the employer)
meets the requirements for minimum coverage specified in
section 410(b). The regulations affect tax-exempt employers
described in section 501(c)(3), retirement plans sponsored by
these employers, and participants in these plans.
EMPLOYEE PLANS
Rev. Rul. 2006–43, page 329.
Government pick-up plans; employer contributions; in-
come tax; prospective application.This ruling describes
the actions required for a state or its political subdivisions, etc.,
to “pick-up” or treat certain contributions as employer contri-
butions to a plan qualified under section 401(a) of the Code. If
certain criteria are met, this ruling will be applied prospectively.
Rev. Ruls. 81–35, 81–36, and 87–10 amplified and modified.
T.D. 9275, page 327.
Final regulations under section 410 of the Code implement
a statutory directive of the Economic Growth and Tax Re-
lief Reconciliation Act of 2001 (EGTRRA) to amend section
1.410(b)–6(g) of the regulations. The final regulations per-
mit, in certain circumstances, employees of a tax-exempt
organization described in section 501(c)(3) to be excluded for
the purpose of testing whether a section 401(k) plan (or a
section 401(m) plan that is provided under the same general
arrangement as the section 401(k) plan of the employer)
meets the requirements for minimum coverage specified in
section 410(b). The regulations affect tax-exempt employers
described in section 501(c)(3), retirement plans sponsored by
these employers, and participants in these plans.
(Continued on the next page)
A
nnouncements of Disbarments and Suspensions begin on page 343.
Finding Lists begin on page ii.
Index for July through August begins on page iv.

Notice 2006–74, page 339.
Weighted average interest rate update; 30–year Trea-
sury securities.The weighted average interest rate for Au-
gust 2006 and the resulting permissible range of interest rates
used to calculate current liability and to determine the required
contribution are set forth.
EXEMPT ORGANIZATIONS
Announcement 2006–55, page 342.
Aviation Safety Council, Inc., of Pasadena, CA; Budget and
Credit Counseling Services, Inc., of New York, NY; and Mason
Credit Counseling, Inc., of Hauppauge, NY, no longer qualify as
organizations to which contributions are deductible under sec-
tion 170 of the Code.
ADMINISTRATIVE
Rev. Rul. 2006–42, page 337.
Levy on bank account.This ruling explains that a superpri-
ority lien argument is not a defense to a levy. If a bank has
such an argument, it must file a wrongful levy suit within nine
months of the levy. Otherwise, the statute of limitations bars
such a suit.
Notice 2006–73, page 339.
This notice effects interim revisions to Forms 8898,Statement
for Individuals Who Begin or End Bona Fide Residence in a U.S.
Possession, and 8840,Closer Connection Exception State-
ment for Aliens. Taxpayers required to file these forms should
disregard certain line items. However, filers are reminded that
they must retain the information elicited on those line items, as
well as the rest of the form, in their books and records.
Announcement 2006–56, page 342.
This document contains corrections to temporary regulations
(T.D. 9262, 2006–24 I.R.B. 1040) concerning the application
of section 199 of the Code, which provides a deduction for in-
come attributable to domestic production activities, to certain
transactions involving computer software.
August 28, 20062006–35 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.
2006–35 I.R.B.August 28, 2006

Place missing child here.
August 28, 20062006–35 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 410.—Minimum
Participation Standards
26 CFR 1.410(b)–6: Excludable employees.
T.D. 9275
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Exclusion of Employees of
501(c)(3) Organizations in
401(k) and 401(m) Plans
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains fi-
nal regulations under section 410(b) of the
Internal Revenue Code. The final regu-
lations permit, in certain circumstances,
employees of a tax-exempt organization
described in section 501(c)(3) to be ex-
cluded for the purpose of testing whether
a section 401(k) plan (or a section 401(m)
plan that is provided under the same gen-
eral arrangement as the section 401(k)
plan of the employer) meets the require-
ments for minimum coverage specified in
section 410(b). These regulations affect
tax-exempt employers described in section
501(c)(3), retirement plans sponsored by
these employers, and participants in these
plans.
DATES:Effective Date:July 21, 2006.
Applicability Date:These regulations
apply to plan years beginning after Decem-
ber 31, 1996.
FOR FURTHER INFORMATION
CONTACT: Linda L. Conway,
202–622–6060, or Michael P. Brewer,
202–622–6090 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains final amend-
ments to the Income Tax Regulations
(26 CFR Part 1) under section 410(b) of
the Internal Revenue Code of 1986 (Code).
On March 16, 2004, a notice of proposed
rulemaking (REG–149752–03, 2004–1
C.B. 707) was published in theFederal
Register(69 FR 12291) under section
410(b). The regulations implement a di-
rective by Congress, contained in section
664 of the Economic Growth and Tax
Relief Reconciliation Act of 2001 (Public
Law 107–16, 115 Stat. 38) (EGTRRA), to
amend §1.410(b)–6(g) of the regulations.
Prior to the enactment of the Small
Business Job Protection Act of 1996
(Public Law 104–188, 110 Stat. 1755)
(SBJPA), both governmental and tax-ex-
empt entities generally were subject to the
section 410(b) coverage requirements and
precluded from maintaining section 401(k)
plans pursuant to section 401(k)(4)(B). To
prevent the section 401(k)(4)(B) prohi-
bition from causing a plan to fail section
410(b), the existing regulations provide
that employees of either governmental
or tax-exempt entities who are precluded
from being eligible employees under a
section 401(k) plan by reason of section
401(k)(4)(B) may be treated as exclud-
able in applying the minimum coverage
rules to a section 401(k) plan or a section
401(m) plan that is provided under the
same general arrangement as the section
401(k) plan, if more than 95 percent of
the employees of the employer who are
not precluded from being eligible em-
ployees by section 401(k)(4)(B) benefit
under the plan for the plan year. Although
tax-exempt organizations described in sec-
tion 501(c)(3) were precluded by section
401(k)(4)(B) from maintaining a section
401(k) plan, they were permitted to allow
their employees to make salary reduction
contributions to a plan or contract that
satisfies section 403(b) (a section 403(b)
plan).
Section 1426(a) of SBJPA amended
section 401(k)(4)(B), effective for plan
years beginning after December 31, 1996,
to allow nongovernmental tax-exempt
organizations (including organizations
exempt under section 501(c)(3)) to main-
tain section 401(k) plans. Thus, a section
501(c)(3) tax-exempt organization can
now maintain a section 401(k) plan, a sec-
tion 403(b) plan, or both. Prior to the en-
actment of SBJPA, many eligible tax-ex-
empt organizations maintained section
403(b) plans. In light of this provision of
SBJPA, section 664 of EGTRRA directed
the Secretary of the Treasury to modify
the regulations under section 410(b) to
provide that employees of an organization
described in section 403(b)(1)(A)(i) (a
section 501(c)(3) organization) who are
eligible to make contributions under sec-
tion 403(b) pursuant to a salary reduction
agreement may be treated as excludable
with respect to a plan under section 401(k)
or a plan under section 401(m) that is pro-
vided under the same general arrangement
as a plan under section 401(k), if (1) no
employee of an organization described
in section 403(b)(1)(A)(i) is eligible to
participate in such section 401(k) plan or
section 401(m) plan and (2) 95 percent
of the employees who are not employees
of an organization described in section
403(b)(1)(A)(i) are eligible to participate
in such plan under such section 401(k) or
(m).
The amendment to §1.410(b)–6(g) of
the regulations pursuant to section 664
of EGTRRA allows the continued main-
tenance of section 403(b) plans by these
organizations without requiring the same
employees to be covered under a section
401(k) plan and the section 403(b) plan.
In certain circumstances, the amendments
will help an employer that maintains both
a section 401(k) plan and a section 403(b)
plan that provides for contributions un-
der a salary reduction agreement (within
the meaning of section 402(g)) to satisfy
the section 410(b) coverage requirements
with respect to the section 401(k) plan
without the employer having to provide
dual coverage for employees.
Only a few comments were received on
the proposed regulations. No public hear-
ing was requested or held. After consid-
eration of the comments received, the fi-
nal regulations adopt the provisions of the
proposed regulations with certain modifi-
cations described below.
2006–35 I.R.B.327August 28, 2006

Explanation of Provisions
These final regulations retain the rule
that provides that employees of govern-
mental entities who are precluded from
being eligible employees under a sec-
tion 401(k) plan by reason of section
401(k)(4)(B)(ii) may be treated as exclud-
able employees if more than 95 percent of
the employees of the employer who are
not precluded from being eligible employ-
ees by reason of section 401(k)(4)(B)(ii)
benefit under the plan for the year.
As directed by section 664 of
EGTRRA, these final regulations also pro-
vide that employees of a section 501(c)(3)
organization who are eligible to make con-
tributions under section 403(b) pursuant
to a salary reductionagreement (within
themeaningofsection402(g))maybe
treated as excludable with respect to a sec-
tion 401(k) plan, or a section 401(m) plan
that is provided under the same general
arrangement as a section 401(k) plan, if
(1)noemployeeofasection501(c)(3)or-
ganization is eligible to participate in such
section 401(k) plan or section 401(m)
plan; and (2) at least 95 percent of the
employees who are neither employees of
a section 501(c)(3) organization nor em-
ployees of a governmental entity who are
precluded from being eligible employees
under a section 401(k) plan by reason
of section 401(k)(4)(B)(ii) are eligible to
participate in such section 401(k) plan or
section 401(m) plan.
The proposed regulations, in an at-
tempt to simplify the language in section
664 of EGTRRA, would have provided
that, for purposes of testing either a sec-
tion 401(k) plan, or a section 401(m)
plan that is provided under the same gen-
eral arrangement, employees of a section
501(c)(3) organization who are eligible
to make salary reduction contributions
(within the meaning of section 402(g))
under a section 403(b) plan may be treated
as excludible employees if no employee of
the organization (rather than no employee
of any organization described in section
403(b)(1)(A)(ii) (as in the language in
section 664 of EGTRRA)) is eligible to
participate in the section 401(k) plan or
401(m) plan, and 95% of the employees of
the employer who are not employees of the
organization (rather than an organization
described in section 403(b)(1)(A)(ii) (as in
the language in section 664 of EGTRRA))
are eligible to participate in the section
401(k) plan or section 401(m) plan. After
further consideration, the IRS and Trea-
sury Department have concluded that this
simplification of thestatutory language
might not in all cases result in the same
employees being excludible as would be
excludible by applying the statutory lan-
guage, which was not the intent. Thus, the
final regulations more closely track the
language in section 664 of EGTRRA than
the proposed regulations.
The few comments received on the pro-
posed regulations generally did not ask for
changes to the basic rule but rather asked
for further explanation as to the proper in-
terpretation of the rule, including the scope
of the exclusion and the interaction of the
rule with other rules in the regulations un-
der section 410(b). As explained further
below, the IRS and Treasury Department
believe that the answers to the questions
raised in the comments is reasonably clear
under the existing language, and have de-
cided not to expand guidance in the regula-
tion beyond the specific direction of Con-
gress.
Commentators requested clarification
as to when a section 401(m) plan is pro-
vided under the same general arrangement
as a section 401(k) plan for purposes of
these regulations. Generally, a section
401(m) plan is provided under the same
general arrangement as a section 401(k)
plan only to the extent that the matching
contributions are contingent upon elective
deferrals in the section 401(k) plan.
Commentators asked for clarification of
the relationship between the proposed reg-
ulations and §1.410(b)–7(f) and whether
matching contributions made under a
401(a) tax-qualified plan may be taken
into account when applying the coverage
requirements of section 410(b) to match-
ing contributions provided as part of a
section 403(b) plan. Treasury regulation
§1.410(b)–7(f) permits a plan subject to
section 403(b)(12)(A)(i), which requires
the universal availability of the right to
defer, to satisfy section 410(b) by taking
into account plans that are not subject to
section 403(b)(12)(A)(i). Accordingly, a
section 403(b) plan is permitted to satisfy
the section 410(b) coverage requirements
for matching contributions by taking into
account matching contributions that are
provided under a plan that is not subject
to section 403(b)(12)(A)(i) (e.g., a section
401(a) tax-qualified plan). However, be-
cause Treasury regulation §1.410(b)–7(f)
does not permit a section 401(a) tax-quali-
fied plan to satisfy the requirements of sec-
tion 410(b) by taking into account a plan
subject to section 403(b)(12)(A)(i), a sec-
tion 401(a) tax-qualified plan must satisfy
the section 410(b) coverage requirements
by disregarding coverage under a section
403(b) plan. These regulations provide
the rules for disregarding employees of
a governmental or tax-exempt entity for
purposes of applying the coverage require-
ments of section 410(b) to a section 401(k)
plan or a section 401(m) plan that is pro-
vided under the same general arrangement
as the section 401(k) plan.
Commentators asked whether employ-
ees of a tax-exempt organization described
in section 501(c)(3) who would be eligible
to make salary reduction contributions un-
der a section 403(b) plan but for the exclu-
sions permitted under section 403(b)(12),
such as nonresident aliens and employees
who normally work less than 20 hours per
week, are taken into account as employees
who are eligible to make salary reduction
contributions for purposes of these reg-
ulations. These regulations provide that
such employees are not taken into account
unless they are actually eligible to make
salary reduction contributions to the sec-
tion 403(b) plan.
Effective Date
As directed by Congress in section
664 of EGTRRA, these final regulations
apply to plan years beginning after De-
cember 31, 1996. However, the preamble
to the proposed regulations provided that
taxpayers were permitted to rely on the
proposed regulations, and if and to the
extent that the final regulations were more
restrictive, the final regulations would be
prospective. As described above, the final
regulations make certain modifications to
the proposed regulations. These may be
more restrictive than the proposed regula-
tions under certain limited circumstances.
Consequently, for plan years beginning
after December 31, 1996, but before Jan-
uary 1, 2007, an employer is permitted to
determine the excludible employees under
a section 401(k) plan or section 401(m)
plan using either §1.410(b)–6(g) in the
proposed regulations or these final regula-
tions.
August 28, 20063282006–35 I.R.B.

Special Analyses
It has been determined that this is not
a significant regulatory action as defined
in Executive Order12866. Therefore,
a regulatory assessment is not required.
It also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations, and, because these
regulations do not impose a collection of
information on small entities, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply.
Drafting Information
The principal authors of these reg-
ulations are Linda L. Conway and
Michael P. Brewer of the Office of the Di-
vision Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
However, other personnel from the IRS
and Treasury participated in the develop-
ment 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 is amended by removing the entry
for §§1.410(b)–2 through 1.410(b)–10 and
adding entries in numerical order to read,
in part, as follows:
Authority: 26 U.S.C. 7805. * * *
§1.410(b)–2 also issued under 26
U.S.C. 410(b)(6).
§1.410(b)–3 also issued under 26
U.S.C. 410(b)(6).
§1.410(b)–4 also issued under 26
U.S.C. 410(b)(6).
§1.410(b)–5 also issued under 26
U.S.C. 410(b)(6).
§1.410(b)–6 also issued under 26
U.S.C. 410(b)(6) and section 664 of the
Economic Growth and Tax Relief Recon-
ciliation Act of 2001 (Public Law 107–16,
115 Stat. 38).
§1.410(b)–7 also issued under 26
U.S.C. 410(b)(6).
§1.410(b)–8 also issued under 26
U.S.C. 410(b)(6).
§1.410(b)–9 also issued under 26
U.S.C. 410(b)(6).
§1.410(b)–10 also issued under 26
U.S.C. 410(b)(6).* * *
Par. 2. Section 1.410(b)–0, table
of contents, the entry for 1.410(b)–6 is
amended by:
1. Revising the entry for 1.410(b)–6(g).
2. Adding entries for 1.410(b)–6(g)(1),
(g)(2), and (g)(3).
The revision and additions read as fol-
lows:
§1.410(b)–0 Table of contents.
*****
§1.410(b)–6 Excludable employees.
*****
(g) Employees of certain governmental
or tax-exempt entities.
(1) Plans covered.
(2) Employees of governmental enti-
ties.
(3) Employees of tax-exempt entities.
*****
Par. 3. In §1.410(b)–6, paragraph (g) is
revised to read as follows:
§1.410(b)–6 Excludable employees.
*****
(g)Employees of certain governmen-
tal or tax-exempt entities—(1)Plans cov-
ered. For purposes of testing either a sec-
tion 401(k) plan, or a section 401(m) plan
that is provided under the same general ar-
rangement as a section 401(k) plan, an em-
ployer may treat as excludable those em-
ployees described in paragraphs (g)(2) and
(3)ofthissection.
(2)Employees of governmental enti-
ties. Employees of governmental entities
who are precluded from being eligible
employees under a section 401(k) plan by
reason of section 401(k)(4)(B)(ii) may be
treated as excludable employees if more
than 95 percent of the employees of the
employer who are not precluded from
being eligible employees by reason of
section 401(k)(4)(B)(ii) benefit under the
plan for the year.
(3)Employees of tax-exempt entities.
Employees of an organization described in
section 403(b)(1)(A)(i) who are eligible to
make salary reduction contributions under
section 403(b) may be treated as exclud-
able with respect to a section 401(k) plan,
or a section 401(m) plan that is provided
under the same general arrangement as a
section 401(k) plan, if—
(i) No employee of an organization de-
scribed in section 403(b)(1)(A)(i) is eligi-
ble to participate in such section 401(k)
plan or section 401(m) plan; and
(ii) At least 95 percent of the employees
who are neither employees of an organi-
zation described in section 403(b)(1)(A)(i)
nor employees of a governmental entity
who are precluded from being eligible em-
ployees under a section 401(k) plan by rea-
son of section 401(k)(4)(B)(ii) are eligible
to participate in such section 401(k) plan
or section 401(m) plan.
*****
Par. 4. In §1.410(b)–10, paragraph (e)
is added to read as follows:
§1.410(b)–10 Effective dates and
transition rules.
*****
(e)Effective date for provisions relat-
ing to exclusion of employees of certain
tax-exempt entities. The provisions in
§1.410(b)–6(g) apply to plan years be-
ginning after December 31, 1996. For
plan years to which §1.410(b)–6 ap-
plies that begin before January 1, 1997,
§1.410(b)–6(g) (as it appeared in the April
1, 2005 edition of 26 CFR part 1) applies.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved June 30, 2006.
Eric Solomon,
Acting Deputy Assistant Secretary
oftheTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on July 20, 2006,
8:45 a.m., and published in the issue of the Federal Register
for July 21, 2006, 71 F.R. 41357)
Section 414.—Definitions
and Special Rules
(Also§7805.)
Government pick-up plans; em-
ployer contributions; income tax;
prospective application.This ruling
describes the actions required for a state or
its political subdivisions, etc., to “pick-up”
or treat certain contributions as employer
contributions to a plan qualified under
2006–35 I.R.B.329August 28, 2006

section 401(a) of the Code. If certain cri-
teria are met, this ruling will be applied
prospectively. Rev. Ruls. 81–35, 81–36,
and 87–10 amplified and modified.
Rev. Rul. 2006–43
ISSUES
What actions are required in order for
a State or political subdivision thereof, or
an agency or instrumentality of any of the
foregoing, to “pick up” employee contri-
butions to a plan qualified under § 401(a)
of the Internal Revenue Code so that the
contributions are treated as employer con-
tributions pursuant to § 414(h)(2)?
FACTS
Employer M is a political subdivision of
State N. Employer M participates in Plan
A, a defined benefit pension plan qualified
under § 401(a) and established by State N
to provide retirement benefits to eligible
employees of State N and any political
subdivision of State N. Plan A requires
each participating employee to make em-
ployee contributions to Plan A equal to a
specified percentageof the participant’s
salary. These amounts, designated as em-
ployee contributions under § 414(h)(1),
are deducted from the participant’s salary.
State N statutes governing Plan A permit
any political subdivision to provide that
the employee contributions will be paid by
the employer in order to be picked up and
treated as employercontributions under
§ 414(h)(2). On March 1, 2006, Employer
M amends its governing laws to provide
that the amounts designated as employee
contributions under Plan A will be paid
by Employer M for all of Employer M’s
employees in order to be treated as em-
ployer contributions under § 414(h)(2),
as permitted under the statutes governing
Plan A. The amendment is in writing, was
adopted by persons authorized to amend
Employer M’s governing laws, and is
effective for periods on or after April 1,
2006. Employer M, thereafter, treats the
amounts as employer contributions, in-
stead of as being employee contributions,
for federal income tax purposes and does
not include these amounts in the partici-
pating employees’ gross income.
LAW AND ANALYSIS
Section 414(h)(1) provides that any
amount contributed to a qualified plan
is not treated as having been made by the
employer if it is designated as an employee
contribution.
Section 414(h)(2) provides a special
rule for qualified plans established by a
State government or political subdivision
thereof, or by any agency or instrumen-
tality of the foregoing. Under this rule,
contributions, although designated as em-
ployee contributions, are nevertheless
treated as employer contributions if the
contributions are picked up by the em-
ploying unit.
Section 401(k) provides the rules relat-
ing to cash or deferred elections. Section
1.401(k)–1(a)(1) of the Income Tax Reg-
ulations provides that a plan, other than
a profit-sharing, stock bonus, pre-ERISA
money purchase pension or rural coopera-
tive plan, does not satisfy the requirements
of § 401(a) if the plan includes a cash or
deferred arrangement. Thus, a qualified
defined benefit plan is not permitted to in-
clude a cash or deferred arrangement.
Section 1.401(k)–1(a)(3) generally de-
fines a cash or deferred election as any di-
rect or indirect election(ormodificationof
an earlier election) by an employee to have
the employer (i) provide an amount that is
not currently available to the employee in
the form of cash or some other taxable ben-
efit, or (ii) contribute an amount to a trust
or provide an accrual for a plan deferring
the receipt of compensation.
Rev. Rul. 77–462, 1977–2 C.B. 358,
addresses the income tax treatment of
contributions picked up by the employer
within the meaning of § 414(h)(2). In Rev.
Rul. 77–462, the employer school district
agreed to “pick up” and pay the required
contributions of the eligible employees
under the plan. The revenue ruling holds
that the contributions picked up by the
school district are excluded from the gross
income of employees until such time as
they are distributed to the employees.
Rev. Rul. 81–35, 1981–1 C.B. 255,
and Rev. Rul. 81–36, 1981–1 C.B. 255,
address certain requirements for contri-
butions to be picked up by an employer
within the meaning of § 414(h)(2). These
revenue rulings establish that the follow-
ing criteria must be satisfied: (i) the em-
ployer must specify that the contributions,
although designated as employee contri-
butions, are being paid by the employer in
lieu of contributions by the employee; and
(ii) the employee must not be given the op-
tion of choosing to receive the contributed
amounts directly instead of having them
paid by the employer to the plan. Rev.
Rul. 81–35 and Rev. Rul. 81–36 apply
even if the employer picks up the contribu-
tions through either a reduction in salary
or an offset against future salary increases.
Rev. Rul. 87–10, 1987–1 C.B. 136,
addresses when contributions designated
as employee contributions (designated em-
ployee contributions) under § 414(h)(1) to
a qualified plan established by a State gov-
ernment (including a political subdivision
thereof, or any agency or instrumentality
of the foregoing) are excludable from the
gross income of the employee. The rul-
ing concludes that, to satisfy the criteria
set forth in Rev. Rul. 81–35 and Rev.
Rul. 81–36, the governmental action nec-
essary to effectuate the “pick-up” must be
completed before the period to which such
contributions relate. Thus, designated em-
ployee contributions to a qualified plan es-
tablished by a State government are ex-
cluded from gross income as “pick-up”
contributions that are treated as employer
contributions only to the extent the contri-
butions relate to compensation for services
rendered after the date of the last govern-
mental action necessary to effectuate the
“pick-up.”
Based on the foregoing, a contribution
to a qualified plan established by a State
government will not be treated as picked
up by the employing unit under § 414(h)(2)
unless the employing unit:
(1) Specifies that the contributions, al-
though designated as employee contribu-
tions, are being paid by the employer. For
this purpose, the employing unit must take
formal action to provide that the contribu-
tions on behalf of a specific class of em-
ployees of the employing unit, although
designated as employee contributions, will
be paid by the employing unit in lieu of
employee contributions. A person duly au-
thorized to take such action with respect to
the employing unit must take such action.
The action must apply only prospectively
and be evidenced by a contemporaneous
written document (e.g., minutes of a meet-
ing, a resolution, or an ordinance).
(2) Does not permit a participating
employee from and after the date of the
August 28, 20063302006–35 I.R.B.

“pick-up” to have a cash or deferred
election right (within the meaning of
§ 1.401(k)–1(a)(3)) with respect to des-
ignated employee contributions. Thus,
for example, participating employees
must not be permitted to opt out of the
“pick-up”, or to receive the contributed
amounts directly instead of having them
paid by the employing unit to the plan.
Employer M has taken formal action
which was memorialized in a contempo-
raneous writing that provides that it will
“pick up” all prospective contributions for
the Employer M employees who are re-
quired to contribute to Plan A. Further, em-
ployees are required to participate in Plan
A, do not have the option of choosing to re-
ceive the contributed amounts directly, and
may not make a cash or deferred election
with respect to such amounts. Employer M
has met the requirements to have the des-
ignated employee contributions under Plan
A picked up and treated as employer con-
tributions pursuant to § 414(h)(2). Thus,
contributions made to Plan A are not in-
cludible in a participant’s gross income un-
til distributed under § 402.
This revenue ruling applies only
for federal income tax purposes. See
§§ 3121(a)(5)(A) and 3121(v)(1)(B) of
the Federal Insurance Contributions Act
(FICA) for the treatment of amounts
treated as an employercontributions under
§ 414(h)(2).
HOLDING
Because an authorized person has taken
formal action in writing prospectively to
have the employing unit pay previously
designated employee contributions to a
§ 401(a) qualified plan, appropriate ac-
tions have been taken for the contributions
to be picked up by the employing unit and
treated as employer contributions pursuant
to § 414(h)(2).
TRANSITION RELIEF FOR
PRE-EXISTING “PICK-UPS”
Under the authority of § 7805(b)(8), the
Service will not treat any plan that on or
before August 28, 2006, includes desig-
nated employee contributions that were in-
tended to be picked up as employer con-
tributions pursuant to § 414(h)(2) as fail-
ing to meet the requirements of such sec-
tion prior to January 1, 2009, solely on ac-
count of the failure to satisfy the require-
ment that the “pick-up” be pursuant to a
formal action, by a person duly authorized
to take such action with respect to the em-
ploying unit, that isevidenced by contem-
poraneous writing, but only if the follow-
ing conditions are satisfied: (1) the em-
ploying unit has taken contemporaneous
action evidencing an intent to establish a
“pick-up” (e.g., provided information to
employees relating to the establishment of
the “pick-up”) and has operated the plan
accordingly; and (2) the employing unit
takes formal action in writing prior to Jan-
uary 1, 2009, with respect to future contri-
butions to meet the requirements set forth
above in paragraph (1) ofLaw and Analy-
sisin this revenue ruling.
The relief provided above for
“pick-ups” implemented prior to Au-
gust 28, 2006, applies only if the actions
taken otherwise complied with Rev. Rul.
81–35, Rev. Rul. 81–36, and Rev. Rul.
87–10, and only if the employing unit has
not reported the contributions as wages
subject to federal income tax withholding
from and after the date of implementation
of the intended “pick-up”.
In addition, under the authority of
§ 7805(b)(8), this revenue ruling does not
modify or revoke any private letter ruling
issued to any taxpayer prior to August 28,
2006. See § 601.201(l)(4).
EFFECT ON OTHER GUIDANCE
Rev. Rul. 81–35, Rev. Rul. 81–36,
and Rev. Rul. 87–10 are amplified and
modified.
DRAFTING INFORMATION
The principal drafter of this revenue rul-
ing is Kathleen Herrmann of the Employee
Plans, Tax Exempt and Government Enti-
ties Division. For further information re-
garding this revenue ruling, please contact
the Employee Plans’ taxpayer assistance
telephone service at 1–877–829–5500 (a
toll-free number) between the hours of
8:30 a.m. and 4:30 p.m. Eastern Time,
Monday through Friday. Ms. Herrmann
may be reached at (202) 283–9888 (not a
toll-free number).
Section 472.—Last-in,
First-out Inventories
26 CFR 1.472–1: Last-in, first-out inventories.
LIFO; price indexes; department
stores.The June 2006 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, June 30, 2006.
Rev. Rul. 2006–41
The following Department Store In-
ventory Price Indexes for June 2006 were
issued by the Bureau of Labor Statistics.
The indexes are accepted by the Inter-
nal Revenue Service, under § 1.472–1(k)
of the Income Tax Regulations and Rev.
Proc. 86–46, 1986–2 C.B. 739, for ap-
propriate application to inventories of
department stores employing the retail
inventory and last-in, first-out inventory
methods for tax years ended on, or with
reference to, June 30, 2006.
The Department Store Inventory Price
Indexes are prepared on a national basis
and include (a) 23 major groups of depart-
ments, (b) three special combinations of
the major groups — soft goods, durable
goods, and miscellaneous goods, and (c) a
store total, which covers all departments,
including some not listed separately, ex-
cept for the following: candy, food, liquor,
tobacco, and contract departments.
2006–35 I.R.B.331August 28, 2006

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
GroupsJune 2005June 2006
Percent Change
from June 2005
to June 2006
1
1. PieceGoods .............................................504.8456.6-9.5
2. DomesticsandDraperies..................................519.1490.1-5.6
3. Women’sandChildren’sShoes ............................650.4686.55.6
4. Men’sShoes.............................................878.2892.01.6
5. Infants’Wear ............................................559.9556.3-0.6
6. Women’sUnderwear......................................541.4549.91.6
7. Women’sHosiery ........................................340.0349.42.8
8. Women’sandGirls’Accessories ...........................588.9564.4-4.2
9. Women’sOuterwearandGirls’Wear .......................347.5354.42.0
10. Men’sClothing ..........................................536.9523.2-2.6
11. Men’sFurnishings........................................562.8560.2-0.5
12. Boys’ClothingandFurnishings............................413.6388.3-6.1
13. Jewelry..................................................872.3885.91.6
14. Notions .................................................810.4815.10.6
15. ToiletArticlesandDrugs..................................997.0996.4-0.1
16. FurnitureandBedding ....................................598.7604.10.9
17. FloorCoverings..........................................604.6610.41.0
18. Housewares..............................................711.9695.7-2.3
19. MajorAppliances.........................................204.3203.1-0.6
20. RadioandTelevision......................................39.036.1-7.4
21. Recreation and Education
2
.................................78.576.8-2.2
22. Home Improvements
2
.....................................137.8139.31.1
23. Automotive Accessories
2
..................................114.6120.14.8
Groups1–15:SoftGoods .......................................552.0552.20.0
Groups16–20:DurableGoods...................................379.8372.9-1.8
Group
s 21–23: Misc. Goods
2
....................................
93.493.60.2
Store Total
3
..............................................490.8489.4-0.3
1
Absence of a minus sign before the percentage change in this column signifies a price increase.
2
In
dexes on a January 1986 = 100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor,
tobacco, and contract departments.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Michael Burkom of the Office
of Associate Chief Counsel (Income Tax
and Accounting). For further informa-
tion regarding this revenue ruling, contact
Mr. Burkom at (202) 622–7924 (not a
toll-free call).
Section 860G.—Other
Definitions and Special
Rules
26 CFR 1.860G–3: Treatment of foreign persons.
T.D. 9272
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
REMIC Residual
Interests—Accounting for
REMIC Net Income (Including
Any Excess Inclusions)
(Foreign Holders)
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains tem-
porary regulations relating to income that
is associated with a residual interest in a
Real Estate Mortgage Investment Conduit
(REMIC) and that is allocated through
certain entities to foreign persons who
have invested in those entities. The regu-
lations accelerate the time when income is
August 28, 20063322006–35 I.R.B.

recognized for withholding tax purposes
to conform to the timing of income recog-
nition for general income tax purposes.
The foreign persons covered by these
regulations include partners in domestic
partnerships, shareholders of real estate
investment trusts, shareholders of regu-
lated investment companies, participants
in common trust funds, and patrons of sub-
chapter T cooperatives. These regulations
are necessary to prevent inappropriate
avoidance of current income tax liability
by foreign persons to whom income from
REMIC residual interests is allocated.
The regulations clarify the timing of in-
come under section 860G for purposes
of determining a domestic partnership’s
responsibility under sections 1441 and
1442 for withholding tax with respect to
a foreign partner’s share of REMIC net
income as a result of indirectly holding
a residual interest. The regulations also
provide that an excess inclusion is treated
as income from sources within the United
States. The text of the temporary regula-
tions also serves as the text of the proposed
regulations (REG–159929–02) set forth in
the notice of proposed rulemaking on this
subject in this issue of the Bulletin.
DATES:Effective Date:These regulations
are effective August 1, 2006.
Applicability Dates:For dates of
applicability, see §§1.860A–1T(b)(5),
1.863–1T(f) and 1.1441–2T(f).
FOR FURTHER INFORMATION
CONTACT: Dale Collinson, (202)
622–3900 (not a toll-free number).
Background and Explanation of
Provisions
This document contains amendments
to 26 CFR part 1 under sections 860A,
860G(b), 863, 1441, and 1442 of the
Internal Revenue Code (Code). Under
section 860C(a)(1), in general, a holder
ofaREMICresidualinterestmusttake
into account the holder’s daily portion
of the taxable income or net loss of the
REMIC for each day of the taxable year
on which the holder held the interest.
Thus, a residual interest holder generally
is taxable currently on the taxable income
or net loss of the REMIC without regard
to whether or when the REMIC makes
distributions. Section 860G(b) provides
an exception to this general rule in section
860C for the timing of income attributable
to the ownership of a REMIC residual in-
terest. Under this exception, for purposes
of sections 871(a), 881, 1441, and 1442,
if amounts are includible in the income
of a holder of a REMIC residual interest
that is a nonresident alien individual or a
foreign corporation, the amounts are taken
into account only when paid or distributed
to the foreign holder, or when the interest
is disposed of.
In its earlier years, a REMIC may ac-
crue and recognize more taxable interest
income from the mortgages that it holds
than it accrues and deducts as interest on
the regular interests that it has issued. This
produces net income for the REMIC and
thus for the holder of the REMIC’s resid-
ual interest. Many REMICs are structured
so that the REMIC uses all, or substan-
tially all, of its cash flow to pay expenses
and to pay principal and interest on regu-
lar interests (effectively using a portion of
interest receipts to pay principal or other
nondeductible items). Such a REMIC will
make little or no distributions to the hold-
ers of the residual interest in the REMIC,
and each holder will incur tax liabilities
with respect to its share of the REMIC’s
net income in an amount that exceeds the
holder’s economic return.
In addition, all or substantially all of
the income attributable to holding the
residual interest will be subject to special
rules relating toexcess inclusions.Toen-
sure that the income will be taxable in all
events, these rules, among other things,
prevent the use of net operating losses to
offset the excess inclusions, see section
860E, and preclude any exemption from,
or reduction in, applicable withholding
taxes, see section 860G(b)(2). Residual
interests that entitle the holder to little or
no distributions are commonly referred
to asnoneconomicREMIC residual inter-
ests, and persons acquiring those interests
receive aninducement feefor becoming
the holder and undertaking the associated
tax payment responsibilities. Taxable in-
come that must be recognized in excess
of the economic income for a period is
often calledphantom income. In the case
of a REMIC, the early phantom income is
generally offset by matching deductions
(generally calledphantom losses) in later
periods.
Consistent with the Congressional pur-
pose of ensuring that excess inclusions of
REMICs be subject to tax, §1.860E–1(c)
of the Income Tax Regulations provides
for disregarding transfers of noneconomic
REMIC residual interests if a significant
purpose of the transfer is avoiding assess-
ment or collection of tax. In addition,
§1.860G–3(a)(1) provides, “A transfer of
a residual interest that has tax avoidance
potential is disregarded for all Federal in-
come tax purposes if the transferee is a for-
eign person.” Section 1.860G–3(a)(2) pro-
vides, “A residual interest has tax avoid-
ance potential . . . unless, at the time of
the transfer, the transferor reasonably ex-
pects that, for each excess inclusion, the
REMIC will distribute to the transferee
residual interest holder an amount that will
equal at least 30 percent of the excess in-
clusion, and that each such amount will
be distributed at or after the time at which
the excess inclusion accrues and not later
than the close of the calendar year follow-
ing the calendar year of accrual.” Accord-
ingly, foreign persons are generally pre-
cluded from becoming the direct holders of
noneconomic residual interests.
“Where necessary or appropriate to
prevent the avoidance of tax imposed by
[chapter 1 of the Code],” section 860G(b)
authorizes the adoption of regulations
requiring REMIC net income inclusions
of foreign holders of REMIC residual
interests to be taken into account for pur-
poses of sections 871(a), 881, 1441, and
1442 earlier than is provided in section
860G(b)(1). The legislative history of the
Tax Reform Act of 1986 indicates that
Congress intended that this regulatory
authority may be exercised with respect
to noneconomic residual interests.See2
H.R. Rep. No. 841, 99
th
Cong., 2d Sess.
II–236 (1986) (referring to residual inter-
ests that do “not have significant value”).
The IRS and Treasury Department have
become aware that noneconomic REMIC
residual interests are being transferred to
domestic partnerships that subsequently
allocate the phantom income to foreign
persons. If a partnership has no foreign
partners at the time the partnership ac-
quires a noneconomic REMIC residual
interest, the person transferring the resid-
ual interest to the partnership may take
the position that neither §1.860E–1(c) nor
§1.860G–3 is applicable. In turn, the part-
nership may take the position, by applying
the aggregate approach to the relation be-
tween a partnership and its partners, that
2006–35 I.R.B.333August 28, 2006

foreign persons who later become partners
hold the REMIC residual interest that had
previously been acquired by the partner-
ship. Based on the conclusion that the
foreign partners are holders of the residual
interest, the partnership may take the fur-
ther position that, under section 860G(b),
a withholding tax obligation on the part-
nership’s allocation to the foreign partner
of income from the residual interest arises
no sooner than the time when distribu-
tions on the residual interest are made by
the REMIC (distributions that will almost
never occur with a noneconomic residual)
or when the interest is disposed of. Under
this view, the foreign holder’s tax liability
with respect to net income of the REMIC
(including excess inclusions) would be
deferred until disposition of the holder’s
interest in the REMIC residual interest, in-
cluding a disposition through termination
of the REMIC, a disposition of the REMIC
residual interest by the partnership, or a
disposition of the partnership interest by
the foreign partner.
The IRS and Treasury Department
have concluded that, in order to achieve
effective assessment and collection of
U.S. tax on REMIC net income, including
excess inclusion income, in furtherance
of the congressional purpose referenced
above and section 860E(a)(1), (b), and
(e) and section 860G(b) of the Code, the
time when foreign partners are required
to account for REMIC net income should
be accelerated. That is, for purposes of
sections 871(a), 881, 1441, and 1442, the
temporary regulations eliminate the defer-
ral (relative to section 860C) that section
860G(b)(1) might otherwise prescribe. To
prevent the adoption of similar schemes
using real estate investment trusts, reg-
ulated investment companies, common
trust funds, or subchapter T cooperative
organizations, foreign persons to whom
excess inclusion income is allocated by
any of these other entities must account for
REMIC excess inclusions on a similarly
accelerated basis.
Several provisions of regulations under
sections 1441 and 1442 are relevant to the
taxation of REMIC net income inclusions
(and particularly net income inclusions
with respect to noneconomic REMIC
residual interests) that are allocated to
foreign persons. Under §1.1441–2(e),
for purposes of section 1441 and 1442,
a payment generally is considered made
to a person if that person realizes in-
come, whether or not the income results
from an actual transfer of cash or other
property. Under §1.1441–2(d)(1), how-
ever, if a withholding agent is not related
to the recipient or beneficial owner, the
withholding agent has an obligation to
withhold only to the extent that, at any
time between the date that the obligation
to withhold would arise but for the pro-
visions of §1.1441–2(d) and the due date
for the filing of a return on Form 1042,
“Annual Withholding Tax Return for U.S.
Source Income of Foreign Persons,”(in-
cluding extensions) for the year in which
the payment occurs, the withholding agent
has control over, or custody of money or
property owned by therecipient or ben-
eficial owner from which to withhold an
amount and has knowledge of the facts
that give rise to the payment. For this pur-
pose, a withholding agent is related to the
recipient or beneficial owner if it is related
within the meaning of section 482. Sec-
tion 1.1441–2(d)(1) further provides that
the foregoing exception does not apply
“to distributions with respect to stock or
if the lack of control or custody of money
or property owned by the recipient or ben-
eficial owner from which to withhold is
part of a prearranged plan known to the
withholding agent to avoid withholding
under sections 1441, 1442, or 1443.”
Under §1.1441–5(b)(2), a U.S. part-
nership is required to withhold under
§1.1441–1 as a withholding agent on an
amount subject to withholding (as de-
fined in §1.1441–2(a)) that is includible
in the gross income of a partner that is
a foreign person. Except as provided in
§1.1441–5(b)(2)(v) (which prevents a sec-
ond withholding obligation from arising
with respect to the actual distribution of
income previously withheld upon as a dis-
tribution from a U.S. partnership or trust),
a U.S. partnership is required to withhold
when making any distributions that in-
clude amounts subject to withholding. To
the extent a foreign partner’s distributive
share of income subject to withholding
has not actually been distributed to the
foreign partner, the U.S. partnership must
withhold on the foreign partner’s distribu-
tive share of the income on the earlier of
the date that the statement on Form 1065,
“U.S. Return of Partnership Income,”
is mailed (or otherwise provided) to the
partner or the due date for furnishing that
statement.
Pursuant to the authority granted under
section 860G(b), for purposes of sections
871(a), 881, 1441, and 1442, these tem-
porary regulations generally require a for-
eign partner in a partnership holding one or
more REMIC residual interests to take into
account REMIC net income inclusions at
the end of its taxable year (or on the last
date of the taxable year of a partnership
that allocates REMIC net income to the
foreign partner). The temporary regula-
tions require a foreign shareholder in a real
estate investment trust or regulated invest-
ment company, a foreign participant in a
common trust fund, or a foreign patron of
a subchapter T cooperative organization to
take into account excess inclusion income
at the same time as other income from the
entity.
The temporary regulations also pro-
vide that an excess inclusion is treated as
income from sources within the United
States. The Treasury Department and the
IRS believe this treatment is appropriate
because the inclusions are largelyphantom
incomearising from the special provisions
of the Code relating to REMICs and thus
are unlikely to have tax significance out-
side the United States. The temporary
regulations provide that, to the extent ex-
cess inclusions are taken into account with
respect to a residual interest, net losses
with respect to the residual interest are
allocated and apportioned to the class and
grouping(s) of gross income to which the
excess inclusions were assigned.
The temporary regulations also provide
that the exemption available under cer-
tain circumstances to certain withholding
agents that do not have custody or control
of money or property from which to satisfy
a withholding obligation is not available in
any case with respect to an excess inclu-
sion subject to these rules. No inference
is intended as to whether, for purposes of
this exemption, any right, obligation, con-
tract, or arrangement other than a REMIC
residual interest constitutes property of a
sort from which a withholding obligation
may be satisfied.
Effective Date
The regulations regarding the timing
of REMIC income inclusions apply to
REMIC net income of a foreign person
August 28, 20063342006–35 I.R.B.

with respect to REMIC residual interests
with respect to which the first REMIC net
income allocation to the foreign person
under section 860C occurs on or after Au-
gust 1, 2006. The regulations regarding
the source of excess inclusions are appli-
cable for taxable years ending after August
1, 2006.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Or-
der 12866. Therefore, a regulatory assess-
ment is not required. These regulations are
necessary to provide taxpayers with im-
mediate guidance to discourage the overly
aggressive interpretations being employed
for the inappropriate avoidance of current
income tax assessment or collection by
foreign persons who are allocated income
from REMIC residual interests. Accord-
ingly, good cause is found for dispens-
ing with notice and public comment pur-
suant to 5 U.S.C. 553(b)(B), and with a de-
layed effective date pursuant to 5 U.S.C.
553(d). For the applicability of the Reg-
ulatory Flexibility Act (5 U.S.C. chapter
6) refer to the special analysis section of
the preamble to the cross-referenced notice
of proposed rulemaking published in this
issue of the Bulletin. Pursuant to section
7805(f) of Code, these temporary regula-
tions will be submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on its impact
on small business.
Drafting Information
The principal author of these regula-
tions is Dale Collinson, Office of the As-
sociate Chief Counsel (Financial Institu-
tions and Products). However, other per-
sonnel from the IRS and Treasury Depart-
ment participated in their development.
*****
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
part1isamendedbyaddingentriesinnu-
merical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.860A–1 also issued under
26 U.S.C. 860G(b) and 860G(e).
Section 1.860A–1T also issued under
26 U.S.C. 860G(b) and 860G(e). * * *
Section 1.860G–3T also issued under
26 U.S.C. 860G(b) and 860G(e). * * *
Par. 2. Section 1.860A–0 is amended
as follows:
1. Section 1.860A–1, paragraph (b)(5)
is added.
2. Section 1.860A–1T is added.
3. Section 1.860G–3, paragraph (b) is
revised.
4. Section 1.860G–3T is added.
The additions and revisions read as fol-
lows:
§1.860A–0 Outline of REMIC provisions.
*****
§1.860A–1 Effective dates and transition
rules.
*****
(b) * * *
(5) [Reserved].
§1.860A–1T Effective dates and transition
rules (temporary).
(a) through (b)(4) [Reserved].
(5) Accounting for REMIC net income
of foreign persons.
*****
§1.860G–3 Treatment of foreign persons.
*****
(b) Accounting for REMIC net income.
[Reserved].
§1.860G–3T Treatment of foreign persons
(temporary).
(a) [Reserved].
(b) Accounting for REMIC net income.
(1) Allocation of partnership income to
a foreign partner.
(2) Excess inclusion income allocated
by certain pass-through entities to a for-
eign person.
Par. 3. In §1.860A–1 paragraph (b)(5)
is added to read as follows:
§1.860A–1 Effective dates and transition
rules.
*****
(b) * * *
(5) [Reserved]. For further guidance,
see §1.860A–1T(b)(5).
Par. 4. Section 1.860A–1T is added to
read as follows:
§1.860A–1T Effective dates and transition
rules (temporary).
(a) through (b)(4) [Reserved]. For fur-
ther guidance, see §1.860A–1(a) through
(b)(4).
(5)Accounting for REMIC net income
of foreign persons. Section 1.860G–3T(b)
is applicable to REMIC net income (in-
cluding excess inclusions) of a foreign per-
son with respect to a REMIC residual in-
terest if the first net income allocation un-
der section 860C(a)(1) to the foreign per-
son with respect to that interest occurs on
or after August 1, 2006. This section will
expire July 31, 2009.
Par. 5. In §1.860G–3, paragraph (b) is
revised as follows:
§1.860G–3 Treatment of foreign persons.
*****
(b)Accounting for REMIC net income.
[Reserved]. For further guidance, see
§1.860G–3T(b).
Par. 6. Section 1.860G–3T is added to
read as follows:
§1.860G–3T Treatment of foreign persons
(temporary).
(a) [Reserved]. For further guidance,
see §1.860G–3(a).
(b)Accounting for REMIC net in-
come—(1)Allocation of partnership in-
come to a foreign partner.Adomestic
partnership shall separately state its alloca-
ble share of REMIC taxable income or net
loss in accordance with §1.702–1(a)(8).
If a domestic partnership allocates all
or some portion of its allocable share of
REMIC taxable income to a partner that
is a foreign person, the amount allocated
to the foreign partner shall be taken into
account by the foreign partner for pur-
poses of sections 871(a), 881, 1441, and
1442 as if that amount were received on
the last day of the partnership’s taxable
year, except to the extent that some or all
2006–35 I.R.B.335August 28, 2006

of the amount is required to be taken into
account by the foreign partner at an earlier
time under section 860G(b) as a result of
a distribution by the partnership to the for-
eign partner or a disposition of the foreign
partner’s indirect interest in the REMIC
residual interest. A disposition in whole
or in part of the foreign partner’s indirect
interest in the REMIC residual interest
may occur as a result of a termination of
the REMIC, a disposition of the partner-
ship’s residual interest in the REMIC, a
disposition of the foreign partner’s interest
in the partnership, or any other reduction
in the foreign partner’s allocable share
of the portion of the REMIC net income
or deduction allocated to the partnership.
See §1.871–14(d)(2) for the treatment of
interest received on a regular or residual
interest in a REMIC. For a partnership’s
withholding obligations with respect to
excess inclusion amounts described in this
paragraph (b)(1), see §1.1441–2T(b)(5),
§1.1441–2T(d)(4), §1.1441–5(b)(2)(i)(A)
and §§1.1446–1 through 1.1446–7.
(2)Excess inclusion income allocated
by certain pass-through entities to a for-
eign person. If an amount is allocated un-
der section 860E(d)(1) to a foreign person
that is a shareholder of a real estate invest-
ment trust or a regulated investment com-
pany, a participant in a common trust fund,
or a patron of an organization to which
part I of subchapter T applies and if the
amount so allocated is governed by sec-
tion 860E(d)(2) (treating it “as an excess
inclusion with respect to a residual inter-
est held by” the taxpayer), the amount shall
be taken into account for purposes of sec-
tions 871(a), 881, 1441, and 1442 at the
same time as the time prescribed for other
income of the shareholder, participant, or
patron from the trust, company, fund, or
organization.
Par. 7. Section 1.863–0 table of con-
tentsisamendedasfollows:
1. The entries for §1.863–1(e) are re-
vised.
2. Entries for §1.863–1T are added.
The revisions and additions read as fol-
lows:
§1.863–0 Table of contents.
*****
§1.863–1 Allocation of gross income
under section 863(a).
*****
(e) Residual interest in a REMIC.
(1) REMIC inducement fees.
(2) Excess inclusion income and net
losses.
*****
§1.863–1T Allocation of gross income
under section 863(a).
(a) through (d) [Reserved].
(e) Residual interest in a REMIC.
(1) REMIC inducement fees.
(2) Excess inclusion income and net
losses.
(f) Effective date.
Par. 8. Section 1.863–1 is amended as
follows:
1. The paragraph heading for paragraph
(e) is revised.
2. The text of paragraph (e) is redesig-
nated as (e)(1).
3. A new paragraph heading for para-
graph (e)(1) is added.
4. A new paragraph (e)(2) is added.
5. The last sentence of paragraph (f) is
revised and a new sentence is added to the
end.
The revisions and additions read as fol-
lows:
§1.863–1 Allocation of gross income
under section 863(a).
*****
(e)Residual interest in a REMIC—(1)
REMIC inducement fees.***
(2)Excess inclusion income and net
losses. [Reserved]. For further guidance,
see §1.863–1T(e)(2).
(f) * * * Paragraph (e)(1) of this section
is applicable for taxable years ending on or
after May 11, 2004. For further guidance,
see §1.863–1T(f).
Par. 9. Section 1.863–1T is added to
read as follows:
§1.863–1T Allocation of gross income
under section 863(a) (temporary).
(a) through (d) [Reserved]. For further
guidance, see §1.863–1(a) through (d).
(e)Residual interest in a REMIC—(1)
REMIC inducement fees.[Reserved].For
further guidance, see §1.863–1(e)(1).
(2)Excess inclusion income and net
losses. An excess inclusion (as defined in
section 860E(c)) shall be treated as income
from sources within the United States. To
the extent of excess inclusion income pre-
viously taken into account with respect to
a residual interest (reduced by net losses
previously taken into account under this
paragraph), a net loss (described in section
860C(b)(2)) with respect to the residual in-
terest shall be allocated to the class of gross
income and apportioned to the statutory
grouping(s) or residual grouping of gross
income to which the excess inclusion in-
come was assigned.
(f)Effective date. Paragraph (e)(2) of
this section applies for taxable years end-
ing after August 1, 2006. For further guid-
ance, see §1.863–1(f). This section will
expire July 31, 2009.
Par. 10. Section 1.1441–0 is amended
by adding entries for §§1.1441–2(b)(5),
1.1441–2(d)(4), and 1.1441–2T to read as
follows:
§1.1441–0 Outline of regulation
provisions for section 1441.
*****
§1.1441–2
Amounts subject to
withholdi
ng.
*****
(b) * * *
(5) REMIC residual interests.
*****
(d) * * *
(4) Withholding exemption inapplica-
ble.
*****
§1.1441–2T Amounts subject to
withholding.
(a) through (b)(4) [Reserved].
(5) REMIC residual interests.
(c) through (d)(3) [Reserved].
(d)(4) Withholding exemption inappli-
cable.
(e) [Reserved].
(f) Effective date.
*****
Par. 11. Section 1.1441–2 is amended
by adding paragraphs (b)(5) and (d)(4),
and a sentence to the end of paragraph (f),
to read as follows:
August 28, 20063362006–35 I.R.B.

§1.1441–2 Amounts subject to
withholding.
*****
(b) * * *
(5)REMIC residual interest.[Re-
served]. For further guidance, see
§1.1441–2T(b)(5).
*****
(d) * * *
(4)Withholding exemption inap-
plicable. For further guidance, see
§1.1441–2T(d)(4).
*****
(f)***Forfurtherguidance,see
§1.1441–2T(f).
Par. 12. Section 1.1441–2T is added to
read as follows:
§1.1441–2T Amounts subject to
withholding (temporary).
(a) through (b)(4) [Reserved]. For fur-
ther guidance, see §1.1441–2(a) through
(b)(4).
(5)REMIC residual interests.Amounts
subject to withholding include an excess
inclusion described in §1.860G–3T(b)(2)
and the portion of an amount described in
§1.860G–3T(b)(1) that is an excess inclu-
sion.
(c) through (d)(3) [Reserved]. For fur-
ther guidance, see §1.1441–2(c) through
(d)(3).
(4)Withholding exemption inapplica-
ble. The exemption in §1.1441–2(d) from
the obligation to withhold shall not apply
to amounts described in §1.860G–3T(b)(1)
(regarding certain partnership allocations
of REMIC net income with respect to a
REMIC residual interest).
(e) [Reserved]. For further guidance,
see §1.1441–2(e).
(f)Effective date. This section applies
after August 1, 2006. This section will
expire July 31, 2009.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved July 14, 2006.
Eric Solomon,
Acting Deputy Assistant
Secretary of the Treasury.
(Filed by the Office of the Federal Register on July 31, 2006,
8:45 a.m., and published in the issue of the Federal Register
for August 1, 2006, 71 F.R. 43363)
Section 6332.—Surrender
of Property Subject to Levy
Levy on bank account.This ruling
explains that a superpriority lien argument
is not a defense to a levy. If a bank has
such an argument, it must file a wrongful
levy suit within nine months of the levy.
Otherwise, the statute of limitations bars
such a suit.
Rev. Rul. 2006–42
ISSUE
After receiving a levy, does either a
bank’s setoff of a taxpayer’s deposit ac-
count or a bank’s claim of a security in-
terest that has priority over the federal tax
lien under section 6323(b)(10) of the Inter-
nal Revenue Code relieve the bank of its
obligation to honor the levy?
FACTS
Situation 1. T, a construction company,
has a business deposit account with Bank
A in State Z. Under the laws of State Z,
Bank A owes a debt to T for the funds de-
posited into the account. On January 5,
2004, the Service filed a Notice of Fed-
eral Tax Lien (NFTL), providing public
notice of T’s unpaid Federal tax liability
and of the statutory lien arising under sec-
tion 6321. On April 1, 2004, Bank A
loaned $50,000 to T. As part of the trans-
action, T gave Bank A a promissory note
payable on demand. Prior to making the
loan to T, Bank A did not have actual no-
tice or knowledge of the existence of the
federal tax lien.
As security for the loan, on April 1,
2004, Bank A perfected a security interest
in T’s deposit account under the laws of
State Z, which adopt revised Article 9 of
the Uniform Commercial Code (U.C.C.).
RevisedArticle9allowsabanktocreate
a security interest in a deposit account as
the original collateral for a business loan.
U.C.C. 9–109(a)(1) (1999).
On June 1, 2004, after providing T
with notice and an opportunity for hear-
ing, the Service issued a notice of levy
in the amount of $100,000 to Bank A;
at that time, T’s deposit account in Bank
A totaled $15,000. After receiving the
notice of levy, on June 1, 2004, Bank A
made demand for full payment of the loan
($50,000) and, after not receiving pay-
ment, set off all of T’s account against
T’s liability for the loan. Under the laws
of State Z, when two parties have mutual
indebtedness, either of them may cancel or
extinguish one debt with the other. Bank
A did not send any funds to the Service
in response to the notice of levy. On July
1, 2004, Bank A contacted the Service
and provided proof that it met all of the
requirements for claiming a superpriority
interest under section 6323(b)(10) and
requested that the levy be released.
Situation 2. The facts are the same
as inSituation 1, except that Bank A did
not prove its superpriority interest under
section 6323(b)(10) to the Service and,
on May 1, 2005, the government filed
suit against Bank A pursuant to section
6332(d) to enforce the levy.
LAW AND ANALYSIS
Section 6321 provides that if any person
liable to pay any tax neglects or refuses
to pay after demand, the amount shall be
a lien in favor of the United States upon
all property and rights to property, whether
real or personal, belonging to such person.
Section 6323(a) provides that the lien
imposed by section 6321 generally shall
not be valid against any purchaser, holder
of a security interest, mechanic’s lienor,
or judgment lien creditor until the Service
files its NFTL. Section 6323(b) affords
protection for certain interests even if a
NFTL has been filed. Section 6323(b)(10)
provides that the federal tax lien shall not
be valid with respect to a savings deposit,
share, or other account, with an institution
described in section 581 or 591 of the In-
ternal Revenue Code, to the extent of any
loan made by such institution without ac-
tual notice or knowledge of the existence
of such lien, as against such institution, if
such loan is secured by such account. Sec-
tions 581 and 591 describe the following
institutions: banks, trust companies, mu-
tual savings banks, cooperative banks, do-
mestic building and loan associations, and
similar saving and loans associations.
Subject to the notice and opportunity
for hearing provisions of section 6330, sec-
tion 6331(a) provides that if any person
2006–35 I.R.B.337August 28, 2006

liable to pay any tax neglects or refuses
to pay within 10 days after notice and
demand, the Service may levy upon all
property and rights to property belong-
ingtosuchpersonoronwhichthereis
a federal tax lien. The levy does not de-
termine whether the government’s claim
is superior to the claims of other parties.
Rather, levy authority is designed to en-
able the government “promptly to secure
its revenues” while competing claims are
resolved.United States v. National Bank
of Commerce, 472 U.S. 713, 721 (1985).
Section 6332(a) provides that any
levied-upon person in possession of, or
obligated with respect to, the taxpayer’s
property or rights to property must sur-
render such property or rights to property,
or discharge such obligation, except such
part of the property or rights to property
subject to an attachment or execution un-
der any judicial process.
Section 6332(d) provides that any per-
son who fails or refuses to surrender prop-
erty or rights to property subject to levy
upon demand shall be liable to the United
States in a sum equal to the value of prop-
erty or rights not surrendered and, absent
reasonable cause, provides for a penalty
equal to 50 percent of that sum.
Section 7426(a)(1) provides that any
person (other than the person against
whom is assessed the tax out of which
such levy arose) who claims an interest in
or lien on the levied upon property may
file a wrongful levy suit against the gov-
ernment. An administrative request for
return of property under section 6343(b) is
not a prerequisite to filing suit for wrong-
ful levy under section 7426.
Section 6532(c)(1) states the general
rule that no wrongful levy suit shall be be-
gun after the expiration of 9 months from
the date of the levy. Section 6532(c)(2)
sets forth a limited exception to this gen-
eral rule and provides that if an admin-
istrative request is made for the return
of property described in section 6343(b),
the 9-month period prescribed in section
6532(c)(1) shall be extended for a period
of 12 months from the date of filing of
such request or for a period of 6 months
from the date of mailing by registered
or certified mail by the Secretary to the
person making such request of a notice
of disallowance of the part of the request
to which the action relates, whichever is
shorter.
There are only two defenses to an action
brought by the United States to enforce a
levy pursuant to section 6332(d). The first
is that the levied-upon party is neither in
possession of nor obligated with respect to
the taxpayer’s property or rights to prop-
erty. The second is that the taxpayer’s
property is subject toa prior judicial at-
tachment or execution.National Bank of
Commerce, 472 U.S. at 721–22. Lien pri-
ority is not one of the two defenses to a
levy recognized byNational Bank of Com-
merce.E.g.,Virgin Islands Bureau of In-
ternal Revenue v. Chase Manhattan Bank,
312 F.3d 131, 139 (3rd Cir. 2002);United
States v. Citizens and Southern National
Bank, 538 F.2d 1101, 1106 (5th Cir. 1976);
United States v. Sterling National Bank
& Trust Co., 494 F.2d 919, 921 (2d Cir.
1974);United States v. AmSouth Bank,
947 F. Supp. 459, 461 (M.D. Fl. 1996).
After receiving a levy, a bank’s setoff
of a taxpayer’s account does not excuse
the bank from honoring the levy; a bank’s
liability for honoring a levy is determined
as of the time that it receives the notice of
levy.E.g.,State Bank of Fraser v. United
States, 861 F.2d 954, 961 (6th Cir. 1988).
Situation 1. Bank A’s setoff does not
relieve the bank of its obligation to honor
the levy. When the IRS served the levy
on June 1, 2004, Bank A owed a debt
of $15,000 to T, which the notice of levy
seized.State Bank of Fraser, 861 F.2d at
961. At that point in time, Bank A was li-
able to the IRS for the amount of the debt.
IRC § 6332(d)(1). The subsequent setoff
does not eliminate Bank A’s liability to the
Service. Additionally, Bank A’s priority
interest under section 6323(b)(10) does not
relieve the bank of its obligation to honor
the levy.
Bank A, however, prudently contacted
the Service in a timely manner to resolve
its dispute informally. In this situation,
Bank A was able to prove its section
6323(b)(10) priority claim to the Service.
In the exercise of its administrative discre-
tion, the Service may release a levy when a
bank proves its superpriority interest under
section 6323(b)(10). Since it would serve
no purpose to require Bank A to surrender
T’s funds to the Service when Bank A and
the Service agree that Bank A has a pri-
ority interest under section 6323(b)(10),
the Service will generally release the levy.
If Bank A had not contacted the Service
informally, it could have timely filed a
wrongful levy suit in federal district court
pursuant to section 7426(a)(1).
Situation 2. Bank A has no defense to
the notice of levy for the reasons discussed
inSituation 1. Here, Bank A did not con-
tact the Service to pursue informal reso-
lution of its section 6323(b)(10) priority
claim, nor did Bank A timely file a wrong-
ful levy suit pursuant to section 7426(a)(1)
to challenge the levy. Bank A’s failure to
act in a timely manner has left it in a po-
sition where it cannot assert its superpri-
ority claim, as a court does not have juris-
diction to hear an untimely wrongful levy
suit.E.g.,LaBonte v. United States,233
F.3d 1049, 1051 (7th Cir. 2000).
HOLDING
A bank’s setoff of a taxpayer’s deposit
account after receiving a levy or a bank’s
claim of a priority security interest under
section 6323(b)(10) of the Internal Rev-
enue Code does not relieve the bank of
its obligation to honor the levy. InSitu-
ation 1, however, the Service exercised it
administrative discretion and released the
levy after Bank A timely established that
it had a superpriority interest under section
6323(b)(10). In contrast, inSituation 2,
Bank A failed to take any action to protect
its security interest, and it is barred from
asserting superpriority as a defense against
the government’s suit to enforce the levy.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Walter Ryan of the Office of
Associate Chief Counsel (Procedure &
Administration). For further informa-
tion regarding this revenue ruling, contact
Walter Ryan at (202) 622–3610 (not a
toll-free call).
Section 7805.—Rules
and Regulations
26 CFR 301.7805–1: Rules and regulations.
Whether prospective relief will be given to a cer-
tain government pick-up plans within the meaning
of section 414(h)(2) of the Code. See Rev. Rul.
2006-43, page 329.
August 28, 20063382006–35 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Revision of Forms 8898 and
8840
Notice 2006–73
PURPOSE
This notice effects interim revisions to
Forms 8898 and 8840. Taxpayers required
to file these forms should disregard cer-
tain line items. The Treasury Department
(Treasury) and Internal Revenue Service
(IRS) plan to revise Forms 8898 and 8840
and the corresponding instructions in ac-
cordance with this notice. Until revised
forms are issued, taxpayers may rely on
this notice when completing these forms.
BACKGROUND
Section 937(a) requires that, except as
provided in regulations, to be abona fide
resident of American Samoa, Guam, the
Northern Mariana Islands, Puerto Rico, or
the United States Virgin Islands, an in-
dividual must be present in the relevant
U.S. possession for at least 183 days dur-
ing the taxable year, must not have a tax
home outside the possession during the
taxable year, and must not have a closer
connection to the United States or a for-
eign country than to the possession. The
principles of section 7701(b)(3)(B)(ii) and
Treas. Reg. § 301.7701(b)–2(d) apply to
determine whether an individual has such a
closer connection. See § 937(a)(2); Treas.
Reg. § 1.937–1(e)(1)(i).
Section 937(c) generally requires indi-
viduals who take the position for U.S. in-
come tax reporting purposes that they be-
came, or ceased to be, abona fideresident
of one of the specified possessions to file
notice of such position. On April 18, 2006,
the IRS released Form 8898,Statement for
Individuals Who Begin or End Bona Fide
Residence in a U.S. Possession,onwhich
thenoticerequiredby§937(c)istobe
made. Taxpayers who changed their res-
idence to or from a U.S. possession dur-
ing any of the tax years 2001, 2002, 2003,
2004, or 2005 generally must file Form
8898 by October 16, 2006, for any such tax
year. See Notice 2006–57, 2006–27 I.R.B.
13.
Section 7701(b) generally provides
that an alien is treated as a resident of
the United States for U.S. income tax
purposes if the individual (1) has entered
the United States as a lawful permanent
resident and is such a resident at any time
during the calendar year; (2) is present in
the United States for a substantial period
of time (the “substantial presence test”);
or (3) makes an election to be treated as
a resident of the United States. An ex-
ception to the substantial presence test
under section 7701(b)(3)(B) provides that
an alien may still be treated as a nonres-
ident alien if the individual (1) is present
in the United States for fewer than 183
days during the current year; (2) has a
taxhomeinaforeigncountryduringthe
year; and (3) has a closer connection to
that country than to the United States.
Treas. Reg. § 301.7701(b)–2(d) provides
a facts-and-circumstances test to deter-
mine whether an individual has such a
closer connection. This facts-and-circum-
stances test provides a non-exclusive list
of factors to be taken into consideration
when making this determination. See
Treas. Reg. § 301.7701(b)–2(d)(1)(i)
through (x).
An alien individual who otherwise
meets the substantial presence test must
file a statement for each tax year for which
the alien claims a closer connection to
a foreign country to explain the basis of
the individual’s claim. See Treas. Reg.
§ 301.7701(b)–8(a)(1). For this purpose,
the Commissioner has prescribed the use
of Form 8840,Closer Connection Excep-
tion Statement for Aliens.
REVISION OF FORMS
Part III of Form 8898 elicits informa-
tion relevant to determining whether an
individual has closer connections to the
United States or a foreign country than to
the relevant possession for purposes of the
closer connection test of § 937(a). Part
IV of Form 8840 elicits substantially the
same information for determining whether
an individual has a closer connection
to a foreign country for purposes of the
closer connection test of § 7701(b). Much
of the information elicited reflects the
facts and circumstances specifically set
forth in the regulations. See Treas. Reg.
§§ 1.937–1(e)(1)(i); 301.7701(b)–2(d).
Since the release of Form 8898, Trea-
sury and the IRS have received comments
concerning the reporting burden with re-
spect to some of the information that indi-
viduals are required to provide on the form.
In light of these comments, Treasury and
the IRS intend to revise Forms 8898 and
8840, and the corresponding instructions,
to modify the information required on lines
17and29ofForm8898andlines20and
31 of Form 8840. Until such time, tax-
payers required to file Form 8898 or Form
8840 should disregard those line items.
Because the closer connection tests of
§§ 937(a) and 7701(b) are facts-and-cir-
cumstances tests, all of the factors de-
scribed in Forms 8898 and 8840 are ma-
terial in the determination of whether an
individual is considered, respectively, a
bona fideresident of a U.S. possession or
a resident of the United States. Therefore,
filers are required to retain the information
previously elicited on lines 17 and 29 of
Form 8898 or on lines 20 and 31 of Form
8840 in their books and records along with
any other relevant information so that the
information may be readily available for
inspection in the event of an examination.
See Treas. Reg. § 1.6001–1.
DRAFTING INFORMATION
The principal author of this notice is
J. David Varley of the Office of Associate
Chief Counsel (International). For further
information regarding this notice, contact
Mr. Varley at (202) 435–5262 (not a toll-
free call).
Weighted Average Interest
Rate Update
Notice 2006–74
Sections 412(b)(5)(B) and 412(l)(7)
(C)(i) of the Internal Revenue Code gen-
erally provide that the interest rates used
to calculate current liability for purposes
of determining the full funding limitation
under § 412(c)(7) and the required con-
tribution under § 412(l) must be within
a permissible range around the weighted
average of the rates of interest on 30-year
Treasury securities during the four-year
2006–35 I.R.B.339August 28, 2006

period ending on the last day before the
beginning of the plan year.
Notice 88–73, 1988–2 C.B. 383, pro-
vides guidelines for determining the
weighted average interest rate and the
resulting permissible range of interest
rates used to calculate current liability for
the purpose of the full funding limitation
of § 412(c)(7) of the Code.
Section 417(e)(3)(A)(ii)(II) defines
the applicable interest rate, which must
be used for purposes of determining the
minimum present value of a participant’s
benefit under § 417(e)(1) and (2), as the
annual rate of interest on 30-year Treasury
securities for the month before the date
of distribution or such other time as the
Secretary may by regulations prescribe.
Section 1.417(e)–1(d)(3) of the Income
Tax Regulations provides that the applica-
bleinterestrateforamonthistheannual
interest rate on 30-year Treasury securi-
ties as specified by the Commissioner for
that month in revenue rulings, notices or
other guidance published in the Internal
Revenue Bulletin.
The rate of interest on 30-year Trea-
sury securities for July 2006 is 5.13 per-
cent. The Service has determined this rate
as the monthly average of the daily deter-
mination of yield on the 30-year Treasury
bond maturing in February 2036.
The following 30-year Treasury rates
were determined for the plan years begin-
ning in the month shown below.
For Plan Years
30-Year
Treasury90% to 105%90% to 110%
Beginning in:WeightedPermissiblePermissible
MonthYearAverageRangeRange
August20064.844.35 to 5.084.35 to 5.32
Drafting Information
The principal authors of this notice
are Paul Stern and Tony Montanaro of
the Employee Plans, Tax Exempt and
Government Entities Division. For fur-
ther information regarding this notice,
please contact the Employee Plans’ tax-
payer assistance telephone service at
1–877–829–5500 (a toll-free number),
between the hours of 8:30 a.m. and
4:30 p.m. Eastern time, Monday through
Friday. Mr. Stern may be reached at
202–283–9703. Mr. Montanaro may be
reached at 202–283–9714. The telephone
numbers in the preceding sentences are
not toll-free.
August 28, 20063402006–35 I.R.B.

Part IV. Items of General Interest
Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulations
REMIC Residual Interests —
Accounting for REMIC Net
Income (Including Any Excess
Inclusions (Foreign Holders)
REG–159929–02
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. 9272) relating to the income that
is associated with a residual interest in a
Real Estate Mortgage Investment Conduit
(REMIC) and that is allocated through cer-
tain entities to foreign persons who have
invested in those entities. The regulations
accelerate the time when income is recog-
nized for withholding tax purposes to con-
form to the timing of income recognition
for general tax purposes. The foreign per-
sons covered by these regulations include
partners in domestic partnerships, share-
holders of real estate investment trusts,
shareholders of regulated investment com-
panies, participants in common trust funds,
and patrons of subchapter T cooperatives.
These regulations are necessary to prevent
inappropriate avoidance of current income
tax liability by foreign persons to whom
income from REMIC residual interests is
allocated. The regulations clarify the tim-
ing of income under section 860G for pur-
poses of determining a domestic partner-
ship’s responsibility under sections 1441
and 1442 for withholding tax with respect
to a foreign partner’s share of REMIC net
income as a result of indirectly holding
a residual interest. The regulations also
provide that an excess inclusion is treated
as income from sources within the United
States. The text of those temporary regu-
lations also serves as the text of these pro-
posed regulations.
DATES: Written or electronic comments
and requests for a public hearing must be
received by October 30, 2006.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–159929–02),
room 5203, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Alternatively, tax-
payers may submit electronic com-
ments directly to the IRS Internet site
atwww.irs.gov/regsor the Federal eRule-
making Portal atwww.regulations.gov
(IRS-REG–159929–02).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed reg-
ulations, Dale Collinson, (202) 622–3900
(not a toll-free number); concerning
the submission of comments, or a re-
quest for a public hearing, Kelly Banks
(Kelly.D.Banks@irscounsel.treas.gov).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
Temporary regulations in the Rules and
Regulations section of this issue of the
Bulletin amend the Income Tax Regula-
tions (26 CFR Part 1) relating to sections
860A; 860G, 863, 1441, and 1442 of the
Internal Revenue Code (Code). The tem-
porary regulations provide rules relating
to the recognition and sourcing of income
and related withholding issues associated
with a Real Estate Mortgage Investment
Conduit (REMIC) residual interest that is
allocated to a foreignperson, including a
foreign partner in a domestic partnership.
The text of the temporary regulations also
serves as the text of these proposed regula-
tions. The preamble to the temporary reg-
ulations explains the amendments.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Ex-
ecutive Order 12866. Therefore, a reg-
ulatory assessment is not required. It is
hereby certified that these regulations will
not have a significant economic impact
on a substantial number of small entities.
This certification is based upon the fact
that the regulations do not impose any new
or different requirements on small entities.
Therefore, a Regulatory Flexibility Anal-
ysis under the Regulatory Flexibility Act
(5 U.S.C. chapter 6) is not required. Pur-
suant to section 7805(f) of the Code, this
notice of proposed rulemaking will be sub-
mitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(a signed original and eight (8) copies)
or electronic comments that are submitted
timely to the IRS. The IRS and Treasury
Department request comments on the clar-
ity of the proposed rules and how they can
be made easier to understand. All com-
ments will be available for public inspec-
tion and copying. A public hearing will be
scheduled if requested in writing by any
person that timely submits written com-
ments. If a public hearing is scheduled, no-
tice of the date, time and place for the pub-
lic hearing will be published in theFederal
Register.
Drafting Information
The principal author of these regula-
tions is Dale Collinson, Office of the As-
sociate Chief Counsel (Financial Institu-
tions and Products). However, other per-
sonnel from the IRS and Treasury Depart-
ment participated in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
§1.860A–1 also issued under 26 U.S.C.
860G(b) and 860G(e). * * *
2006–35 I.R.B.341August 28, 2006

Par. 2. In §1.860A–1, paragraph (b)(5)
is added to read as follows:
§1.860A–1 Effective dates and transition
rules.
*****
(b) * * *
(5) [The text of the proposed amend-
ment to §1.860A–1(b)(5) is the same as the
text of §1.860A–1T(b)(5) published else-
where in this issue of the Bulletin].
Par. 3. In §1.860G–3, paragraph (b) is
added to read as follows:
§1.860G–3 Treatment of foreign persons.
*****
(b) [The text of the proposed amend-
ment to §1.860G–3(b) is the same as the
text of §1.860G–3T(b) published else-
where in this issue of the Bulletin].
Par. 4. Section 1.863–1 is amended as
follows:
1. The paragraph heading for paragraph
(e) is revised.
2. The text of paragraph (e) is redesig-
nated as (e)(1).
3. A new paragraph heading for para-
graph (e)(1) is added.
4. A new paragraph (e)(2) is added.
5. The last sentence of paragraph (f) is
revised and a new sentence is added to the
end.
The revisions and additions read as fol-
lows:
§1.863–1 Allocation of gross income
under section 863(a).
*****
(e)Residual interest in a REMIC—(1)
REMIC inducement fees.***
(2) [The text of the proposed amend-
ment to §1.863–1(e)(2) is the same as the
text of §1.863–1T(e)(2) published else-
where in this issue of the Bulletin].
(f) [The text of proposed amendment
to §1.863–1(f) is the same as the text of
§1.863–1T(f) published elsewhere in this
issue of the Bulletin].
Par. 5. Section 1.1441–2 is amended by
adding paragraphs (b)(5) and (d)(4) and a
sentence to the end of paragraph (f) to read
as follows:
§1.1441–2 Amounts subject to
withholding.
*****
(b) * * *
(5) [The text of the proposed amend-
ment to §1.1441–2(b)(5) is the same as the
text of §1.1441–2T(b)(5) published else-
whereinthisissueoftheBulletin].
*****
(d) * * *
(4) [The text of the proposed amend-
ment to §1.1441–2(d)(4) is the same as the
text of §1.1441–2T(d)(4) published else-
whereinthisissueoftheBulletin.]
*****
(f) [The text of the proposed amend-
ment to §1.1441–2T(f)(1) is the same as
the text of §1.1441–2T(f)(1) published
elsewhere in this issue of the Bulletin.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on July 31, 2006,
8:45 a.m., and published in the issue of the Federal Register
for August 1, 2006, 71 F.R. 43398)
Deletions From Cumulative
List of Organizations
Contributions to Which
are Deductible Under Section
170 of the Code
Announcement 2006–55
The Internal Revenue Service has re-
voked its determination that the organi-
zations listed below qualify as organiza-
tions described in sections 501(c)(3) and
170(c)(2) of the Internal Revenue Code of
1986.
Generally, the Service will not disallow
deductions for contributions made to a
listed organization on or before the date
of announcement in the Internal Revenue
Bulletin that an organization no longer
qualifies. However, the Service is not
precluded from disallowing a deduction
for any contributions made after an or-
ganization ceases to qualify under section
170(c)(2) if the organization has not timely
filed a suit for declaratory judgment under
section 7428 and if the contributor (1) had
knowledge of the revocation of the ruling
or determination letter, (2) was aware that
such revocation was imminent, or (3) was
in part responsible for or was aware of the
activities or omissions of the organization
that brought about this revocation.
If on the other hand a suit for declara-
tory judgment has been timely filed, con-
tributions from individuals and organiza-
tions described in section 170(c)(2) that
are otherwise allowable will continue to
be deductible. Protection under section
7428(c) would begin on August 28, 2006,
and would end on the date the court first
determines that the organization is not de-
scribed in section 170(c)(2) as more partic-
ularly set forth in section 7428(c)(1). For
individual contributors, the maximum de-
duction protected is $1,000, with a hus-
band and wife treated as one contributor.
This benefit is not extended to any indi-
vidual, in whole or in part, for the acts or
omissions of the organization that were the
basis for revocation.
Aviation Safety Council, Inc.
Pasadena, CA
Budget and Credit Counseling
Services, Inc.
New York, NY
Mason Credit Counseling, Inc.
Hauppauge, NY
Computer Software Under
Section 199(c)(5)(B);
Correction
Announcement 2006–56
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Correcting amendments.
SUMMARY: This document contains a
correction to temporary regulations (T.D.
9262, 2006–24 I.R.B. 1040) that were
published in theFederal Registeron
Thursday, June 1, 2006 (71 FR 31074)
concerning the application of section 199
of the Internal Revenue Code, which
provides a deduction for income attribut-
able to domestic production activities, to
certain transactions involving computer
software.
DATES: These corrections are effective
June 1, 2006.
FOR FURTHER INFORMATION
CONTACT: Paul Handleman or
Lauren Ross Taylor, (202) 622–3040 (not
a toll-free number).
August 28, 20063422006–35 I.R.B.

SUPPLEMENTARY INFORMATION:
Background
The correction notice that is the subject
of this document is under section 199 of
the Internal Revenue Code.
Need for Correction
As published, the correction notice
(T.D. 9262) contains errors that may prove
to be misleading and are in need of clarifi-
cation.
*****
Correction of Publication
Accordingly, 26 CFR Part 1 is cor-
rected by making the following correcting
amendments:
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 * * *
§ 1.199–3T [Corrected]
Par. 2. Section 1.199–3T is amended
by revising paragraphs (i)(6)(iii) introduc-
tory text andExample 5to read as follows:
§ 1.199–3T Domestic production gross
receipts (temporary).
*****
(i) * * *
(6) * * *
(iii)Exceptions. Notwithstanding para-
graph (i)(6)(ii) of this section, if a taxpayer
derives gross receipts from providing to
customers computer software MPGE in
whole or in significant part by the taxpayer
within the United States for the customers’
direct use while connected to the Internet
(online software), then such gross receipts
will be treated as being derived from the
lease, rental, license, sale, exchange, or
other disposition of computer software
only if —
*****
Example 5. The facts are the same as inExam-
ple 4, except that O does not sell the tax prepara-
tion computer software to customers affixed to a com-
pact disc or by download and O’s only method of
providing the tax preparation computer software to
customers is over the Internet. P, an unrelated per-
son, derives, on a regular and ongoing basis in its
business, gross receipts from the sale to customers of
P’s substantially identical tax preparation computer
software that has been affixed to a compact disc as
well as from the sale to customers of P’s substan-
tially identical tax preparation computer software that
customers have downloaded from the Internet. Un-
der paragraph (i)(6)(iii)(B) of this section, O’s gross
receipts derived from providing its tax preparation
computer software to customers over the Internet will
be treated as derived from the lease, rental, license,
sale, exchange, or other disposition of computer soft-
ware and are DPGR (assuming all the other require-
ments of § 1.199–3 are met).
§ 1.199–8T [Corrected]
Par. 3. Section 1.199–8T is amended
by revising paragraph (i)(4) to read as fol-
lows:
§ 1.199–8T Other rules (temporary).
*****
(i) * * *
(4)Computer software.Section
1.199–3T(i)(6)(ii) through (v) are ap-
plicable for taxable years beginning on or
after June 1, 2006. Taxpayers may apply
these temporary regulations to taxable
years beginning after December 31, 2004,
and before June 1, 2006. The applicability
of § 1.199–3T(i)(6)(ii) through (v) expires
on or before May 22, 2009.
Guy R. Traynor,
Chief, Publications and
Regulations Branch,
Legal Processing Division,
Associate Chief Counsel
(Procedure and Administration).
(Filed by the Office of the Federal Register on July 5, 2006,
8:45 a.m., and published in the issue of the Federal Register
for July 6, 2006, 71 F.R. 38262)
Announcement of Disciplinary Actions Involving
Attorneys, Certified Public Accountants, Enrolled Agents,
and Enrolled Actuaries — Suspensions, Censures,
Disbarments, and Resignations
Announcement 2006-57
Under Title 31, Code of Federal Regu-
lations, Part 10, attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries may not accept assistance from,
or assist, any person who is under disbar-
ment or suspension from practice before
the Internal Revenue Service if the assis-
tance relates to a matter constituting prac-
tice before the Internal Revenue Service
and may not knowingly aid or abet another
person to practice before the Internal Rev-
enue Service during a period of suspen-
sion, disbarment, or ineligibility of such
other person.
To enable attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries to identify persons to whom
these restrictions apply, the Director, Of-
fice of Professional Responsibility, will
announce in the Internal Revenue Bulletin
their names, their city and state, their pro-
fessional designation, the effective date
of disciplinary action, and the period of
suspension. This announcement will ap-
pear in the weekly Bulletin at the earliest
practicable date after such action and will
continue to appear in the weekly Bulletins
for five successive weeks.
2006–35 I.R.B.343August 28, 2006

Consent Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, an attorney, certified pub-
lic accountant, enrolled agent, or enrolled
actuary, in order to avoid the institution
or conclusion of a proceeding for his or
her disbarment or suspension from prac-
tice before the Internal Revenue Service,
may offer his or her consent to suspension
from such practice. The Director, Office
of Professional Responsibility, in his dis-
cretion, may suspend an attorney, certified
public accountant, enrolled agent, or en-
rolled actuary in accordance with the con-
sent offered.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue Ser-
vice:
NameAddressDesignationDate of Suspension
Crane, StephenPalm Springs, CAEnrolled AgentMay 4, 2006
to
August 3, 2007
Cohen, Ronald J.Newburgh, NYAttorneyIndefinite
from
June 21, 2006
Layson, David A.Corydon, INAttorneyApril 7, 2006
to
October 6, 2007
Brough, Donald L.Salem, INCPAJuly 1, 2006
to
June 30, 2010
Gulian, YervantGreat Neck, NYCPAApril 17, 2006
to
December 16, 2007
Rivera-Smith, DawnBrick, NJCPAMay 30, 2006
to
November 29, 2008
Eckstein, MatthewWoodbury, NYCPAJune 15, 2006
to
March 14, 2007
Hecht, Jodee L.Clifton, VACPAIndefinite
from
June 19, 2006
Finch, Phillip W.Yorktown, VACPAIndefinite
from
June 22, 2006
Troese Jr., Henry A.Clarion, PAEnrolled AgentIndefinite
from
June 22, 2006
Robbins, Ronald E.Pittsford, VTCPAJune 24, 2006
to
June 23, 2008
Shapiro, Sidney C.West Palm Beach, FLCPAIndefinite
from
July 1, 2006
August 28, 20063442006–35 I.R.B.

NameAddressDesignationDate of Suspension
Martini, AnthonyStamford, CTCPAJune 18, 2006
to
December, 17, 2007
Cunningham, WilliamPhiladelphia, PACPAJuly 1, 2006
to
March 31, 2007
Simontacchi, Joseph F.Morris Plains, NJCPAIndefinite
from
July 1, 2006
Carroccio, Ronald P.Staten Island, NYCPAIndefinite
from
July 1, 2006
Miller, Walter P.Roanoke, VACPAIndefinite
from
July 1, 2006
Aneji, PatrickHouston, TXCPAIndefinite
from
June 22, 2006
Rosenbloom, Mark L.Chicago, ILAttorneyAugust 15, 2006
to
August 14, 2007
Viener, Ira S.Fort Lee, NJCPAIndefinite
from
August 1, 2006
Ganz, Sheldon M.Great Neck, NJCPAIndefinite
from
August 1, 2006
Tomasulo, MariaWantagh, NYCPAIndefinite
from
August 7, 2006
Galpern, Joel G.North Miami, FLCPAIndefinite
from
September 1, 2006
2006–35 I.R.B.345August 28, 2006

Expedited Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, the Director, Office of Pro-
fessional Responsibility, is authorized to
immediately suspend from practice before
the Internal RevenueService any practi-
tioner who, within five years from the date
the expedited proceeding is instituted (1)
has had a license to practice as an attor-
ney, certified public accountant, or actuary
suspended or revoked for cause or (2) has
been convicted of certain crimes.
The following individuals have been
placed under suspension from practice be-
fore the Internal Revenue Service by virtue
of the expedited proceeding provisions:
NameAddressDesignationDate of Suspension
Dolan Jr., John L.Memphis, TNAttorneyIndefinite
from
April 3, 2006
St. Mary, Randall L.Snohomish, WAAttorneyIndefinite
from
April 3, 2006
Theriault, Michael J.Bel Air, MDAttorneyIndefinite
from
April 3, 2006
Smith, Bernard P.Marblehead, MAAttorneyIndefinite
from
April 3, 2006
Bradley, Phillip M.West Point, VAAttorneyIndefinite
from
April 3, 2006
Haefele, Richard J.Wayzata, MNAttorneyIndefinite
from
April 3, 2006
Decker, William E.Mandeville, LAAttorneyIndefinite
from
April 3, 2006
Arbour, John J.Monroe, LAAttorneyIndefinite
from
April 3, 2006
Keller, John S.Martin Kenner, LAAttorneyIndefinite
from
April 3, 2006
Fallon, Charles D.Neptune, NJAttorneyIndefinite
from
April 3, 2006
Agresti, Thomas J.Centennial, COAttorneyIndefinite
from
April 3, 2006
Kirsch, Craig F.Pittsburgh, PACPAIndefinite
from
April 3, 2006
August 28, 20063462006–35 I.R.B.

NameAddressDesignationDate of Suspension
Hall, Lenny G.McDowell, KYCPAIndefinite
from
April 11, 2006
Hultgren, Jerry R.Fresno, CAAttorneyIndefinite
from
April 11, 2006
Loutos, Peter A.Chicago,ILAttorneyIndefinite
from
April 11, 2006
Smith III, Frank L.Bushnell, FLAttorneyIndefinite
from
April 11, 2006
Morley, Michael J.Springfield, PACPAIndefinite
from
April 11, 2006
Waters, Richard W.Smithfield, UTCPAIndefinite
from
April 11, 2006
Hartgraves, Travis M.Abilene, TXAttorneyIndefinite
from
April 14, 2006
Dunn, George T.Lockhart, TXAttorneyIndefinite
from
April 14, 2006
Adkins, Thomas R.Houston, TXAttorneyIndefinite
from
April 14, 2006
Hairston, John W.Sugar Land, TXAttorneyIndefinite
from
April 26, 2006
Marcone, Frank J.Upper Providence, PAAttorneyIndefinite
from
May 1, 2006
Fraley, Donald J.Minneapolis, MNAttorneyIndefinite
from
May 3, 2006
Tooke, S. JuddShreveport, LAAttorneyIndefinite
from
May 3, 2006
Reilly, Michael G.Council Bluffs, IAAttorneyIndefinite
from
May 3, 2006
Faneuil, Robert ANewton, MAAttorneyIndefinite
from
May 3, 2006
2006–35 I.R.B.347August 28, 2006

NameAddressDesignationDate of Suspension
Maignan, Peter R.Upper Marlboro, MDAttorneyIndefinite
from
May 3, 2006
Son, DavidPhoenix, AZAttorneyIndefinite
from
May 5, 2006
Susman, Warren I.New York, NYAttorneyIndefinite
from
May 8, 2006
Wurst, JeromeArlington, TXAttorneyIndefinite
from
May 8, 2006
O’Shea, Joseph G.Jackson Heights, NYAttorneyIndefinite
from
May 8, 2006
Biegelson, AlanBrooklyn, NYAttorneyIndefinite
from
May 8, 2006
Leonard, Robert K.Winston-Salem, NCAttorneyIndefinite
from
May 8, 2006
Cassidy, Michael M.Madison, WIAttorneyIndefinite
from
May 8, 2006
Dobkin, Daniel B.New Hyde Park, NYAttorneyIndefinite
from
May 8, 2006
Nealy, Joseph L.Sugarland, TXAttorneyIndefinite
from
May 16, 2006
Conmey, Edwin W.Oconomowoc, WIAttorneyIndefinite
from
May 16, 2006
Knott Jr., Robert T.Los Angeles, CAAttorneyIndefinite
from
May 16, 2006
Diamond, Howard S.Mendham, NJAttorneyIndefinite
from
May 16, 2006
Fitzgerald, Bill L.Lubbock, TXAttorneyIndefinite
from
May 16, 2006
Brubaker, Gregory A.San Francisco, CAAttorneyIndefinite
from
May 18, 2006
Dodenbier, Robert F.Lehi, UTAttorneyIndefinite
from
May 18, 2006
August 28, 20063482006–35 I.R.B.

NameAddressDesignationDate of Suspension
Young, Paul J.Taft, CAAttorneyIndefinite
from
June 8, 2006
Dahodwala, FatemaAndover, MAAttorneyIndefinite
from
June 8, 2006
Mendola, Joseph E.Monessen, PACPAIndefinite
from
June 8, 2006
Rooney, Edward F.Minneapolis, MNAttorneyIndefinite
from
June 8, 2006
Long, Rebecca L.Wichita,KSAttorneyIndefinite
from
June 8, 2006
West, Clifton C.Fayetteville, NCAttorneyIndefinite
from
June 8, 2006
Silva, Zoilo I.City Island, NYAttorneyIndefinite
from
June 8, 2006
Tyler Jr., Earle S.Bangor, MEAttorneyIndefinite
from
June 12, 2006
Horneber, Alice S.Sioux City, IAAttorneyIndefinite
from
June 12, 2006
Donnelly, Christine M.Blue Springs, MOAttorneyIndefinite
from
June 12, 2006
Driscoll Jr., PeterColumbia, MDAttorneyIndefinite
from
June 12, 2006
Souza, John C.Pocatello, IDAttorneyIndefinite
from
June 12, 2006
Crockett, Kevin J.Midvale, UTAttorneyIndefinite
from
June 12, 2006
White, Debra M. WyattNavasota, TXCPAIndefinite
from
June 12, 2006
Wilkins, Daniel J.Chelmsford, MAAttorneyIndefinite
from
June 12, 2006
Merica, Chad L.Murray, UTCPAIndefinite
from
June 12, 2006
2006–35 I.R.B.349August 28, 2006

NameAddressDesignationDate of Suspension
Wintroub, David S.Omaha,NEAttorneyIndefinite
from
June 12, 2006
Smith, Roderick E.Kansas City, MOAttorneyIndefinite
from
June 12, 2006
Guida, Joseph M.Aberdeen, MDAttorneyIndefinite
from
June 12, 2006
Sonibare, NashSt. Paul, MNCPAIndefinite
from
June 12, 2006
Braun, Marc W.St. Louis, MOAttorneyIndefinite
from
June 12, 2006
Coffey, John J.Rye, NHAttorneyIndefinite
from
June 12, 2006
Whitehead, H. AllenNew York, NYAttorneyIndefinite
from
June 12, 2006
Lansky, SidneyMattapoisett, MAAttorneyIndefinite
from
June 12, 2006
Pazniokas, Paul M.Norwood, MAAttorneyIndefinite
from
June 12, 2006
Bajgrowicz, James J.Santa Rosa, CAAttorneyIndefinite
from
June 12, 2006
Davis, Bret J.Los Angeles, CAAttorneyIndefinite
from
June 12, 2006
McAvoy, TimothyChicago, ILAttorneyIndefinite
from
June 12, 2006
Loffadelli, Thomas C.Studio City, CAAttorneyIndefinite
from
June 12, 2006
Emeziem, Kelechi C.Antioch, CAAttorneyIndefinite
from
June 12, 2006
Pugh, William C.Wayzata,MNAttorneyIndefinite
from
June 12, 2006
Lamanna, Eugene C.Reading, PAAttorneyIndefinite
from
June 12, 2006
August 28, 20063502006–35 I.R.B.

NameAddressDesignationDate of Suspension
Bartels, John R.St. Paul, MNAttorneyIndefinite
from
June 12, 2006
Shapiro, Kenneth S.Bala Cynwyd, PACPAIndefinite
from
June 14, 2006
Stone, Jerry W.Austin, TXAttorneyIndefinite
from
June 21, 2006
Vanriper, Philip E.Binghamton, NYAttorneyIndefinite
from
June 21, 2006
Simuro, Valerie T.Gardiner, NYAttorneyIndefinite
from
June 21, 2006
Simms, William K.Brooklyn, NYAttorneyIndefinite
from
June 21, 2006
Weaver, Terring M.Clarksburg, WVCPAIndefinite
from
July 1, 2006
Norman, ClarenceBrooklyn, NYAttorneyIndefinite
from
August 3, 2006
Knight, John G.Winston-Salem, NCAttorneyIndefinite
from
August 3, 2006
Kronegold, Sheldon H.Englewood, NJAttorneyIndefinite
from
August 3, 2006
Foushee, Wayne H.Winston-Salem, NCAttorneyIndefinite
from
August 3, 2006
Suspensions From Practice Before the Internal Revenue
Service After Notice and an Opportunity for a Proceeding
Under Title 31, Code of Federal Reg-
ulations, Part 10, after notice and an op-
portunity for a proceeding before an ad-
ministrative law judge, the following indi-
viduals have been placed under suspension
from practice before the Internal Revenue
Service:
NameAddressDesignationEffective Date
Kahn, HaroldHollis, NYCPAJune 26, 2006
to
June 25, 2010
2006–35 I.R.B.351August 28, 2006

Disbarments From Practice Before the Internal Revenue
Service After Notice and an Opportunity for a Proceeding
Under Title 31, Code of Federal Regu-
lations, Part 10, after notice and an oppor-
tunity for a proceeding before an adminis-
trative law judge, the following individu-
als have been disbarred from practice be-
fore the Internal Revenue Service:
NameAddressDesignationEffective Date
Gailey, James N.Huntersville, NCCPAJune 5, 2006
Censure Issued by Consent
Under Title 31, Code of Federal Reg-
ulations, Part 10, in lieu of a proceeding
being instituted or continued, an attorney,
certified public accountant, enrolled agent,
or enrolled actuary, may offer his or her
consent to the issuance of a censure. Cen-
sure is a public reprimand.
The following individuals have con-
sented to the issuance of a Censure:
NameAddressDesignationDate of Censure
Williams, Daniel S.Carlsbad, CAAttorneyMarch 29, 2006
Azan, Reinaldo L.Miami Beach, FLCPAJuly 24, 2006
Golub, Stephen B.Norwalk, CTCPAAugust 3, 2006
August 28, 20063522006–35 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
2006–35 I.R.B.iAugust 28, 2006

Numerical Finding List
1
Bulletins 2006–27 through 2006–35
Announcements:
2006-42, 2006-27 I.R.B.48
2006-43, 2006-27 I.R.B.48
2006-44, 2006-27 I.R.B.49
2006-45, 2006-31 I.R.B.121
2006-46, 2006-28 I.R.B.76
2006-47, 2006-28 I.R.B.78
2006-48, 2006-31 I.R.B.135
2006-49, 2006-29 I.R.B.89
2006-50, 2006-34 I.R.B.321
2006-51, 2006-32 I.R.B.222
2006-52, 2006-33 I.R.B.254
2006-53, 2006-33 I.R.B.254
2006-54, 2006-33 I.R.B.254
2006-55, 2006-35 I.R.B.342
2006-56, 2006-35 I.R.B.342
2006-57, 2006-35 I.R.B.343
Notices:
2006-56, 2006-28 I.R.B.58
2006-57, 2006-27 I.R.B.13
2006-58, 2006-28 I.R.B.59
2006-59, 2006-28 I.R.B.60
2006-60, 2006-29 I.R.B.82
2006-61, 2006-29 I.R.B.85
2006-62, 2006-29 I.R.B.86
2006-63, 2006-29 I.R.B.87
2006-64, 2006-29 I.R.B.88
2006-65, 2006-31 I.R.B.102
2006-66, 2006-30 I.R.B.99
2006-67, 2006-33 I.R.B.248
2006-68, 2006-31 I.R.B.105
2006-69, 2006-31 I.R.B.107
2006-70, 2006-33 I.R.B.252
2006-71, 2006-34 I.R.B.316
2006-73, 2006-35 I.R.B.339
2006-74, 2006-35 I.R.B.339
Proposed Regulations:
REG-135866-02, 2006-27 I.R.B.34
REG-146893-02, 2006-34 I.R.B.317
REG-159929-02, 2006-35 I.R.B.341
REG-148864-03, 2006-34 I.R.B.320
REG-109512-05, 2006-30 I.R.B.100
REG-112994-06, 2006-27 I.R.B.47
REG-118775-06, 2006-28 I.R.B.73
REG-118897-06, 2006-31 I.R.B.120
Revenue Procedures:
2006-29, 2006-27 I.R.B.13
2006-30, 2006-31 I.R.B.110
2006-31, 2006-27 I.R.B.32
Revenue Procedures— Continued:
2006-32, 2006-28 I.R.B.61
2006-33, 2006-32 I.R.B.140
Revenue Rulings:
2006-35, 2006-28 I.R.B.50
2006-37, 2006-30 I.R.B.91
2006-38, 2006-29 I.R.B.80
2006-39, 2006-32 I.R.B.137
2006-40, 2006-32 I.R.B.136
2006-41, 2006-35 I.R.B.331
2006-42, 2006-35 I.R.B.337
2006-43, 2006-35 I.R.B.329
Treasury Decisions:
9265, 2006-27 I.R.B.1
9266, 2006-28 I.R.B.52
9267, 2006-34 I.R.B.313
9268, 2006-30 I.R.B.94
9269, 2006-30 I.R.B.92
9270, 2006-33 I.R.B.237
9271, 2006-33 I.R.B.224
9272, 2006-35 I.R.B.332
9274, 2006-33 I.R.B.244
9275, 2006-35 I.R.B.327
9277, 2006-33 I.R.B.226
9278, 2006-34 I.R.B.256
1
A cumulative list of all revenue rulings, revenueprocedures, Treasury decisions, etc., publishedin Internal Revenue Bulletins 2006–1 through 2006–26 is in Internal Revenue Bulletin
2006–26, dated June 26, 2006.
August 28, 2006ii2006–35 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2006–27 through 2006–35
Announcements:
2005-59
Updated and superseded by
Ann. 2006-45, 2006-31 I.R.B.121
Notices:
2006-20
Supplemented and modified by
Notice 2006-56, 2006-28 I.R.B.58
2006-53
Modified by
Notice 2006-71, 2006-34 I.R.B.316
Proposed Regulations:
REG-134317-05
Corrected by
Ann. 2006-47, 2006-28 I.R.B.78
Revenue Procedures:
2002-9
Modified and amplified by
Notice 2006-67, 2006-33 I.R.B.248
2005-41
Superseded by
Rev. Proc. 2006-29, 2006-27 I.R.B.13
2005-49
Superseded by
Rev. Proc. 2006-33, 2006-32 I.R.B.140
Revenue Rulings:
81-35
Amplified and modified by
Rev. Rul. 2006-43, 2006-35 I.R.B.329
81-36
Amplified and modified by
Rev. Rul. 2006-43, 2006-35 I.R.B.329
87-10
Amplified and modified by
Rev. Rul. 2006-43, 2006-35 I.R.B.329
2003-43
Amplified by
Notice 2006-69, 2006-31 I.R.B.107
Treasury Decisions:
9254
Corrected by
Ann. 2006-44, 2006-27 I.R.B.49
Treasury Decisions— Continued:
9258
Corrected by
Ann. 2006-46, 2006-28 I.R.B.76
9262
Corrected by
Ann. 2006-56, 2006-35 I.R.B.342
9264
Corrected by
Ann. 2006-46, 2006-28 I.R.B.76
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2006–1 through 2006–26 is in Internal Revenue Bulletin 2006–26, dated June 26, 2006.
2006–35 I.R.B.iiiAugust 28, 2006

INDEX
Internal Revenue Bulletins 2006–27 through
2006–35
The abbreviation and number in parenthesis following the index entry
refer to the specific item; numbers in roman and italic type following
the parenthesis refers 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, additional postponement under section 7508A for
filing certain 2004 and 2005 individual tax returns by certain
taxpayers affected by Hurricane Katrina (Notice 56) 28,58
Exempt organization employees, minimum coverage require-
mentsofsection410(b)(TD9275)35,327
Full funding limitations, weighted average interest rate for:
July 2006 (Notice 66) 30,99
August 2006 (Notice 74) 35,339
Nonbank trustee and nonbank custodian, approval list (Ann 45)
31,122
Qualified retirement plans:
Government pick-up plans, employer contributions (RR 43)
35,329
Prohibited transaction excise tax, amount involved in elective
deferral (RR 38) 29,80
Regulations:
26 CFR 1.410(b)–0, –6, –10, amended; exclusion of employ-
ees of 501(c)(3) organizations in 401(k) and 401(m) plans
(TD 9275) 35,327
Roth IRAs, distributions of designated Roth contributions, public
hearing on REG–146459–05 (Ann 42) 27,48
EMPLOYMENT TAX
Controlled services transactionsunder section 482, treatment, al-
location of income and deductions from intangibles, and stew-
ardship expense (TD 9278) 34,256; (REG–146893–02) 34,
317
EMPLOYMENT TAX—Cont.
Disaster relief:
Additional postponement under section 7508A for filing cer-
tain 2004 and 2005 individual tax returns by certain taxpay-
ers affected by Hurricane Katrina (Notice 56) 28,58
Leave-sharing plans (Notice 59) 28,60
Disclosure of return information, Bureau of Economic Analysis
(TD 9267) 34,313; (REG–148864–03) 34,320
Federal Insurance Contributions Act (FICA), application to pay-
ments made for certain services (TD 9266) 28,52
Offers in compromise, nonrefundable down payments required
(Notice 68) 31,105
Proposed Regulations:
26 CFR 31.3121(s)–1, amended; treatment of services under
section 482, allocation of income and deductions from in-
tangibles, stewardship expense (REG–146893–02) 34,317
26 CFR 301.6103(j)(1)–1, amended; disclosure of re-
turn information to the Bureau of Economic Analysis
(REG–148864–03) 34,320
Regulations:
26 CFR 31.3102–1, amended; 31.3121(a)–2, (a)(7)–1,
(a)(8)–1, (i)–1, amended; 31.3121(a)(10)–1, revised; ap-
plication of the Federal Insurance Contributions Act to
payments made for certain services (TD 9266) 28,52
26 CFR 31.3121(s)–1, amended; 31.3121(s)–1T, added; treat-
ment of services under section 482, allocation of income
and deductions from intangibles, stewardship expense (TD
9278) 34,256
26 CFR 301.6103(j)(1)–1, amended; 301.6103(j)(1)–1T,
added; disclosure of return information to the Bureau of
Economic Analysis (TD 9267) 34,313
Tip reporting, Attributed Tip Income Program (ATIP) (RP 30)
31,110
ESTATE TAX
Disaster relief, additional postponement under section 7508A for
filing certain 2004 and 2005 individual tax returns by certain
taxpayers affected by Hurricane Katrina (Notice 56) 28,58
Disclosure of return information, Bureau of Economic Analysis
(TD 9267) 34,313; (REG–148864–03) 34,320
Offers in compromise, nonrefundable down payments required
(Notice 68) 31,105
Proposed Regulations:
26 CFR 301.6103(j)(1)–1, amended; disclosure of re-
turn information to the Bureau of Economic Analysis
(REG–148864–03) 34,320
Regulations:
26 CFR 301.6103(j)(1)–1, amended; 301.6103(j)(1)–1T,
added; disclosure of return information to the Bureau of
Economic Analysis (TD 9267) 34,313
August 28, 2006iv2006–35 I.R.B.

EXCISE TAX
Disaster relief, additional postponement under section 7508A for
filing certain 2004 and 2005 individual tax returns by certain
taxpayers affected by Hurricane Katrina (Notice 56) 28,58
Disclosure of return information, Bureau of Economic Analysis
(TD 9267) 34,313; (REG–148864–03) 34,320
Disclosure requirements with respect to prohibited tax shelter
transactions to which tax-exempt entities are parties (Notice
65) 31,102
Excise taxes with respect to prohibited tax shelter transactions to
which tax-exempt entities are parties (Notice 65) 31,102
Health Savings Accounts (HSAs) under section 4980G, em-
ployer comparable contributions (TD 9277) 33,226
Offers in compromise, nonrefundable down payments required
(Notice 68) 31,105
Proposed Regulations:
26 CFR 301.6103(j)(1)–1, amended; disclosure of re-
turn information to the Bureau of Economic Analysis
(REG–148864–03) 34,320
Regulations:
26 CFR 54.4980G–0 thru –5, added; employer comparable
contributions to Health Savings Accounts under section
4980G (TD 9277) 33,226
26 CFR 301.6103(j)(1)–1, amended; 301.6103(j)(1)–1T,
added; disclosure of return information to the Bureau of
Economic Analysis (TD 9267) 34,313
EXEMPT ORGANIZATIONS
Disaster relief, additional postponement under section 7508A for
filing certain 2004 and 2005 individual tax returns by certain
taxpayers affected by Hurricane Katrina (Notice 56) 28,58
Disclosure requirements with respect to prohibited tax shelter
transactions to which tax-exempt entities are parties (Notice
65) 31,102
Excise taxes with respect to prohibited tax shelter transactions to
which tax-exempt entities are parties (Notice 65) 31,102
List of organizations classifiedas private foundations (Ann 51)
32,222
Revocations (Ann 48) 31,136; (Ann 54) 33,254;(Ann55)35,
342
GIFT TAX
Disaster relief, additional postponement under section 7508A for
filing certain 2004 and 2005 individual tax returns by certain
taxpayers affected by Hurricane Katrina (Notice 56) 28,58
Disclosure of return information, Bureau of Economic Analysis
(TD 9267) 34,313; (REG–148864–03) 34,320
Offers in compromise, nonrefundable down payments required
(Notice 68) 31,105
Proposed Regulations:
26 CFR 301.6103(j)(1)–1, amended; disclosure of re-
turn information to the Bureau of Economic Analysis
(REG–148864–03) 34,320
GIFT TAX—Cont.
Regulations:
26 CFR 301.6103(j)(1)–1, amended; 301.6103(j)(1)–1T,
added; disclosure of return information to the Bureau of
Economic Analysis (TD 9267) 34,313
INCOME TAX
Accounting methods, revised instructions for Form 3115, Appli-
cation for Change in Accounting Method (Ann 52) 33,254
Computer software, domestic production activities deduction un-
der section 199(c)(5)(B):
Change in hearing location for REG–111578–06 (Ann 53) 33,
254
Correction to TD 9262 (Ann 56) 35,342
Consolidated returns, basis reallocation, loss suspension, and ex-
piration of losses on certain stock dispositions, correction to
TD 9254 (Ann 44) 27,49
Controlled services cost method under section 482 regulations,
identification of specified eligible covered services (Ann 50)
34,321
Controlled services transactions under section 482, treatment, al-
location of income and deductions from intangibles, and stew-
ardship expense (TD 9278) 34,256; (REG–146893–02) 34,
317
Corporations:
Attribution of earnings and profits to stock of controlled for-
eign corporations (REG–135866–02) 27,34
Distributions of interests in a loss corporation from qualified
trusts (TD 9269) 30,92
Information returns required with respect to certain foreign
corporations and certain foreign-owned domestic corpora-
tions (TD 9268) 30,94; (REG–109512–05) 30,100
Inversions, surrogate foreign corporations (Notice 70) 33,252
Surrogate foreign corporation status for purposes of section
7874 (TD 9265) 27,1; (REG–112994–06) 27,47
Credits:
Enhanced oil recovery credit, 2006 inflation adjustment (No-
tice 62) 29,86
Low-income housing credit, satisfactory bond, “bond factor”
amounts for the period:
January through September 2006 (RR 37) 30,91
New markets tax credit, low-income community business
(Notice 60) 29,82
Nonbusiness energy property, siding not component specifi-
cally and primarily designedto reduce heat loss or gain of
dwelling (Notice 71) 34,316
Work opportunity and welfare-to-work tax credits (Ann 49)
29,89
Debit cards used to reimburse participants in self-insured medical
reimbursement plans and dependent care assistance programs
(Notice 69) 31,107
Disaster relief:
Additional postponement under section 7508A for filing cer-
tain 2004 and 2005 individual tax returns by certain taxpay-
ers affected by Hurricane Katrina (Notice 56) 28,58
2006–35 I.R.B.vAugust 28, 2006

INCOME TAX—Cont.
Casualty and theft loss deductions attributable to Hurricanes
Katrina, Rita, and Wilma, safe harbor methods for individ-
uals, personal-use residential real property and certain per-
sonal belongings (RP 32) 28,61
Depreciation, Gulf Opportunity (GO) Zone additional first
year depreciation deduction (Notice 67) 33,248
Leave-sharing plans (Notice 59) 28,60
Disciplinary actions involving attorneys, certified public accoun-
tants, enrolled agents, and enrolled actuaries (Ann 57) 35,343
Disclosure of return information:
Bureau of Economic Analysis (TD 9267) 34,313;
(REG–148864–03) 34,320
By certain officers and employeesfor investigative purposes
(TD 9274) 33,244
E-file, guidance necessary to facilitate business electronic filing
and burden reduction, correction to TD 9264 (Ann 46) 28,76;
correction to REG–134317–05 (Ann 47) 28,78
Effect of elections in certain multi-step transactions (TD 9271)
33,224
Exempt organization employees, minimum coverage require-
mentsofsection410(b)(TD9275)35,327
Forms:
1098, 1099, 5498 and W-2G, requirements for filing electron-
ically or magnetically (revised 8-2006) (RP 33) 32,140
3115, Application for Change in Accounting Method, instruc-
tions revised May 2006 (Ann 52) 33,254
8027, Employer’s Annual Information Return of Tip Income
and Allocated Tips, specifications for filing electronically
or magnetically (RP 29) 27,13
8840, Closer Connection Exception Statement for Aliens, re-
vision (Notice 73) 35,339
8898, Statement for Individuals Who Begin or End Bona Fide
Residence in a U.S. Possession, postponement of filing date
for tax years 2001 through 2005 (Notice 57) 27,13;revision
(Notice 73) 35,339
Health Savings Accounts (HSAs) under section 4980G, em-
ployer comparable contributions (TD 9277) 33,226
Information reporting for payments to attorneys, reporting of
gross proceeds payments (TD 9270) 33,237
Insurance companies, life-nonlife tacking rule, correction to TD
9258 (Ann 46) 28,76
Interest:
Investment:
Federal short-term, mid-term, and long-term rates for:
July 2006 (RR 35) 28,50
August 2006 (RR 39) 32,137
Portfolio interest rules as applied to payments made to part-
nerships and simple or grantor trusts (REG–118775–06) 28,
73
Inventory:
LIFO, price indexes used by department stores for:
May 2006 (RR 40) 32,136
June 2006 (RR 41) 35,331
Levy, use of superpriority lien arguments as a defense to (RR 42)
35,337
Marginal production rates, 2006 (Notice 61) 29,85
INCOME TAX—Cont.
Nonqualified deferred compensation, permitted accelerated pay-
ment (Notice 64) 29,88
Offers in compromise, nonrefundable down payments required
(Notice 68) 31,105
Partnerships, portfolio interest rules as applied to payments made
to partnerships and simple or grantor trusts (REG–118775–06)
28,73
Postponement of filing date forForm 8898, Statement for Indi-
viduals Who Begin or End Bona Fide Residence in a U.S. Pos-
session, for tax years 2001 through 2005 (Notice 57) 27,13
Private foundations, organizations now classified as (Ann 51) 32,
222
Proposed Regulations:
26 CFR 1.367(b)–2, –4, revised; 1.1248–1, –2, –3, –7, re-
vised; 1.1248–8, added; section 1248 attribution principles
(REG–135866–02) 27,34
26 CFR 1.482–0, –1, –2, –4, –6, –8, amended; 1.482–9,
added; 1.861–8, amended; 1.6038A–3(a)(3), amended;
1.6662–6, amended; treatment of services under section
482, allocation of income and deductions from intangibles,
stewardship expense (REG–146893–02) 34,317
26 CFR 1.860A–1, amended; 1.860G–3, amended; 1.863–1,
amended; 1.1441–2, amended; REMIC residual interests-
accounting for REMIC net income (including any excess
inclusions (foreign holders) (REG–159929–02) 35,341
26 CFR 1.871–14, amended; 1.881–2, amended; revisions to
regulations relating to repeal of tax on interest of nonres-
ident alien individuals and foreign corporations received
from certain portfolio debt investments (REG–118775–06)
28,73
26 CFR 1.985–3, amended; United States dollar approximate
separate transactions method (REG–118897–06) 31,121
26 CFR 1.6038–2, amended; 1.6038A–2, amended; informa-
tion returns required with respect to certain foreign cor-
porations and certain foreign-owned domestic corporations
(REG–109512–05) 30,100
26 CFR 1.7874–2, added; guidance regarding expatriated en-
tities and their foreign parents (REG–112994–06) 27,47
26 CFR 301.6103(j)(1)–1, amended; disclosure of re-
turn information to the Bureau of Economic Analysis
(REG–148864–03) 34,320
Publications:
1220, Specifications for Filing Forms 1098, 1099, 5498 and
W-2G Electronically or Magnetically, 2006 revision (RP
33) 32,140
1239, Specifications for Filing Form 8027, Employer’s An-
nual Information Return of TipIncome and Allocated Tips,
Electronically or Magnetically, revised (RP 29) 27,13
Real Estate Investment Trust (REIT) income tests, rents from real
property (Notice 58) 28,59
Real Estate Mortgage Investment Conduit (REMIC), allocation
of income to foreign persons by certain entities (TD 9272) 35,
332; (REG–159929–02) 35,341
Record retention requirements for tax-exempt bonds (Notice 63)
29,87
August 28, 2006vi2006–35 I.R.B.

INCOME TAX—Cont.
Regulations:
26 CFR 1.199–3T, –8T, amended; computer software under
section199(c)(5)(B),correctiontoTD9262(Ann56)35,
342
26 CFR 1.338–3, amended; 1.338(h)(10)–1, amended;
1.338(h)(10)–1T, removed; effect of elections in certain
multi-step transactions (TD 9271) 33,224
26 CFR 1.382–1, amended; 1.382–10, added; 1.382–10T, re-
moved; distributions of interests in a loss corporation from
qualified trusts (TD 9269) 30,92
26 CFR 1.410(b)–0, –6, –10, amended; exclusion of employ-
ees of 501(c)(3) organizations in 401(k) and 401(m) plans
(TD 9275) 35,327
26 CFR 1.482–0, –1, –2, –4, –6, –8, amended; 1.482–0T, –1T,
–2T, –4T, –6T, –8T, –9T, added; 1.861–8, –8T, amended;
1.6038–3(a)(3), amended; 1.6038A–3T, added; 1.6662–6,
amended; 1.6662–6T, added; treatment of services under
section 482, allocation of income and deductions from in-
tangibles, stewardship expense (TD 9278) 34,256
26 CFR 1.860A–0, –1, amended; 1.860A–1T, added;
1.860G–3, amended; 1.860G–3T, added; 1.863–0, –1,
amended; 1.863–1T, added; 1.1441–0, –2, amended;
1.1441–2T, added; REMIC residual interests-accounting
for REMIC net income (including any excess inclusions)
(foreign holders) (TD 9272) 35,332
26 CFR 1.1502–76T, amended; 1.1563–1, amended; 602.101,
amended; amendment of tacking rule requirements of life-
nonlife consolidated regulations, and guidance necessary to
facilitate business electronic filing and burden reduction,
correction to TD 9258 and TD 9264 (Ann 46) 28,76
26 CFR 1.6038–2, –2T, amended; 1.6038A–2, –2T, amended;
602.101(b), amended; information returns required with re-
spect to certain foreign corporations and certain foreign-
owned domestic corporations (TD 9268) 30,94
26 CFR 1.6041–1, –3, amended; 1.6045–5, added; reporting
of gross proceeds payments to attorneys (TD 9270) 33,237
26 CFR 1.7874–2T, added; guidance regarding expatriated
entities and their foreign parents (TD 9265) 27,1
26 CFR 54.4980G–0 thru –5, added; employer comparable
contributions to Health Savings Accounts under section
4980G (TD 9277) 33,226
26 CFR 301.6103(j)(1)–1, amended; 301.6103(j)(1)–1T,
added; disclosure of return information to the Bureau of
Economic Analysis (TD 9267) 34,313
26 CFR 301.6103(k)(6)–1, added; 301.6103(k)(6)–1T, re-
moved; disclosure of return information by certain officers
and employees for investigative purposes (TD 9274) 33,
244
Revocations, exempt organizations (Ann 48) 31,136;(Ann54)
33,254; (Ann 55) 35,342
Revoking an election under section 83(b) (RP 31) 27,32
Tax Exempt Bond (TEB) Mediation Pilot Program, one-year re-
newal (Ann 43) 27,48
United States dollar approximate separate transactions method
(DASTM) (REG–118897–06) 31,121
SELF-EMPLOYMENT TAX
Disaster relief, additional postponement under section 7508A for
filing certain 2004 and 2005 individual tax returns by certain
taxpayers affected by Hurricane Katrina (Notice 56) 28,58
Offers in compromise, nonrefundable down payments required
(Notice 68) 31,105
2006–35 I.R.B.viiAugust 28, 2006

August 28, 20062006–35 I.R.B.

INTERNAL REVENUE BULLETIN
The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletin is sold on a yearly subscription basis by the Superintendent of Documents. Current subscribers are notified by the Superin-
tendent of Documents when their subscriptions must be renewed.
CUMULATIVE BULLETINS
The contents of this weekly Bulletin are consolidated semiannually into a permanent, indexed, Cumulative Bulletin. These are
sold on a single copy basis andare notincluded as part of the subscription to the Internal Revenue Bulletin. Subscribers to the weekly
Bulletin are notified when copies of the Cumulative Bulletin are available. Certain issues of Cumulative Bulletins are out of print
and are not available. Persons desiring available Cumulative Bulletins, which are listed on the reverse, may purchase them from the
Superintendent of Documents.
ACCESS THE INTERNAL REVENUE BULLETIN ON THE INTERNET
You may view the Internal Revenue Bulletin on the Internet at www.irs.gov. Under information for: select Businesses. Under
related topics, select More Topics. Then select Internal Revenue Bulletins.
INTERNAL REVENUE BULLETINS ON CD-ROM
Internal Revenue Bulletins are available annually as part ofPublication 1796 (Tax Products CD-ROM). The CD-ROM can be
purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders)
or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.
HOW TO ORDER
Check the publications and/or subscription(s) desired on the reverse, complete the order blank, enclose the proper remittance,
detach entire page, and mail to the Superintendent of Documents, P.O. Box 371954, Pittsburgh PA, 15250–7954. Please allow two to
six weeks, plus mailing time, for delivery.
WE WELCOME COMMENTS ABOUT THE INTERNAL
REVENUE BUL
LETIN
If you have c
omments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it,
we would be p
leased to hear from you. You can e-mail us your suggestions or comments through the IRS Internet Home Page
(www.irs.g
ov) or write to the IRS Bulletin Unit, SE:W:CAR:MP:T:T:SP, Washington, DC 20224
Internal Revenue Service
W
ashington,DC20224
Official B
usiness
Penalty for
Private Use, $300