Internal Revenue Bulletin 2005-24 (PDF rendition): IRS Announcements

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

Bulletin No. 200
5-24
June 13, 2005
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2005–35, page 1214.
Interest rates; underpayments and overpayments.The
rate of interest determined under section 6621 of the Code
for the calendar quarter beginning July 1, 2005, will be 6 per-
cent for overpayments (5 percent in the case of a corporation),
6 percent for underpayments, and 8 percent for large corpo-
rate underpayments. The rate of interest paid on the portion of
a corporate overpayment exceeding $10,000 will be 3.5 per-
cent.
T.D. 9202
, page 1213.
Final reg
ulations under section 1031 of the Code replace the
Standard
Industrial Classification (SIC) system of codes with
the North
American Industry Classification System (NAICS) for
purposes
of determining what depreciable tangible personal
propert
y is like-kind to other property.
REG–100420–03, page 1236.
Proposed regulations under section 475 of the Code set forth
an elective safe harbor for dealers in securities and/or com-
modities and traders in securities and commodities that per-
mits these taxpayers to make an election pursuant to which
the values of the positions reported on certain financial state-
ments are the fair market values of those positions. The safe
harbor is based upon the principle that if the mark-to-market
method used for financial reporting is sufficiently consistent
with the mark-to-market method required by section 475, then
the values used for financial reporting should be acceptable val-
ues for purposes of section 475, even if those values are not
fair market values under general tax principles. To ensure min-
imal divergence from fair market values under tax principles,
the regulations impose certain restrictions on the financial ac-
counting methods and statements that are eligible for the safe
harbor and may require certain adjustments to values used in
the safe harbor. This safe harbor attempts to reduce the com-
pliance burden upon taxpayers and to improve the administra-
bility of valuations for the IRS. A public hearing is scheduled for
September 15, 2005.
REG–105346–03, page 1244.
Proposed regulations under section 83 of the Code withdraw
the remaining portion of the notice of proposed rulemaking pub-
lished in the Federal Register on June 3, 1971 (36 FR 10787)
and contain proposed regulations relating to the tax treatment
of certain transfers of partnership equity in connection with
the performance of services. The regulations provide that the
transfer of a partnership interest in connection with the perfor-
mance of services is subject to section 83 and provide rules
for coordinating section 83 with partnership taxation principles.
The regulations also provide that no gain or loss is recognized
by a partnership on the transfer or vesting of an interest in the
transferring partnership in connection with the performance of
services for the transferring partnership. A public hearing is
scheduled for October 5, 2005.
REG–127740–04, page 1254.
Proposed regulations under sections 367(a) and (b) of the Code
relate to certain transfers of stock involving foreign corpora-
tions pursuant to section 304(a)(1).
Notice 2005–43, page 1221.
This notice includes a proposed revenue procedure providing
additionalrulesfortheelectivesafeharborundertheproposed
regulations under section 83 of the Code governing the appli-
cation of section 83 to the transfer of a partnership interest in
connection with the performance of services.
(Continued on the next page)
Fi
nding Lists begin on page ii.

Notice 2005–45, page 1228.
Deductions for entertainment use of aircraft.This notice
provides interim guidance to taxpayers on the limitation under
section 274(e) of the Code on the deductible amount of trade
or business expenses incurred after October 22, 2004, for use
of a business aircraft for entertainment.
ESTATE TAX
Rev. Proc. 2005–33, page 1231.
This procedure provides guidance on exhausting administrative
remedies prior to seeking a declaratory judgment pursuant to
section 7479 of the Code.
EMPLOYMENT TAX
Rev. Proc. 2005–34, page 1233.
This procedure sets forth updated procedures for appeals of
proposed trust fund recovery penalty assessments arising un-
der section 6672 of the Code. The procedures apply to trust
fund recovery penalty cases relating to employment and ex-
cise taxes imposed under the Code, except when collection is
in jeopardy. Rev. Proc. 84–78 superseded.
EXCISE TAX
Rev. Proc. 2005–34, page 1233.
This procedure sets forth updated procedures for appeals of
proposed trust fund recovery penalty assessments arising un-
der section 6672 of the Code. The procedures apply to trust
fund recovery penalty cases relating to employment and ex-
cise taxes imposed under the Code, except when collection is
in jeopardy. Rev. Proc. 84–78 superseded.
ADMINISTRATIVE
REG–100420–03, page 1236.
Proposed regulations under section 475 of the Code set forth
an elective safe harbor for dealers in securities and/or com-
modities and traders in securities and commodities that per-
mits these taxpayers to make an election pursuant to which
the values of the positions reported on certain financial state-
ments are the fair market values of those positions. The safe
harbor is based upon the principle that if the mark-to-market
method used for financial reporting is sufficiently consistent
with the mark-to-market method required by section 475, then
the values used for financial reporting should be acceptable val-
ues for purposes of section 475, even if those values are not
fair market values under general tax principles. To ensure min-
imal divergence from fair market values under tax principles,
the regulations impose certain restrictions on the financial ac-
counting methods and statements that are eligible for the safe
harbor and may require certain adjustments to values used in
the safe harbor. This safe harbor attempts to reduce the com-
pliance burden upon taxpayers and to improve the administra-
bility of valuations for the IRS. A public hearing is scheduled for
September 15, 2005.
Rev. Proc. 2005–33, page 1231.
This procedure provides guidance on exhausting administrative
remedies prior to seeking a declaratory judgment pursuant to
section 7479 of the Code.
Rev. Proc. 2005–34, page 1233.
This procedure sets forth updated procedures for appeals of
proposed trust fund recovery penalty assessments arising un-
der section 6672 of the Code. The procedures apply to trust
fund recovery penalty cases relating to employment and ex-
cise taxes imposed under the Code, except when collection is
in jeopardy. Rev. Proc. 84–78 superseded.
Announcement 2005–42, page 1257.
This announcement contains the annual report concerning the
Pre-Filing Agreement program of the Large and Mid-Size Busi-
ness Division of the Service for Calendar Year 2004.
June 13, 20052005–24 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2005–24 I.R.B.June 13, 2005

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 1031.—Exchange
of Property Held for
Productive Use or
Investment
26 CFR 1.1031(a)–2: Additional rules for exchanges
of personal property.
T.D. 9202
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Additional Rules for
Exchanges of Personal
Property under Section
1031(a)
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains final
regulations that replace the use of the Stan-
dard Industrial Classification (SIC) system
with the North American Industry Clas-
sification System (NAICS) for determin-
ing what properties are of a like class for
purposes of section 1031 of the Internal
Revenue Code (Code). The regulations af-
fect taxpayers that engage in like-kind ex-
changes of depreciable tangible personal
property.
DATES:Effective Date:These regulations
are effective May 19, 2005.
Applicability Dates:For dates of appli-
cability, see §1.1031(a)–2(d).
FOR FURTHER INFORMATION
CONTACT: J. Peter Baumgarten, (202)
622–4920 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to 26 CFR Part 1. On August 13, 2004,
the IRS and Treasury Department pub-
lished in theFederal Registeranoticeof
proposed rulemaking (REG–116265–04,
2004–38 I.R.B. 501 [69 FR 50108]) by
cross reference to temporary regulations
(T.D. 9151, 2004–38 I.R.B. 489 [69 FR
50067]) under section 1031(a). These
amendments relate to the transition from
the use of the four-digit codes under the
SIC system to the six-digit NAICS for de-
termining product classes of depreciable
tangible personal property exchanged un-
der section 1031. No written or electronic
comments in response to the proposed
regulations or requests to speak at a public
hearing were received, and no hearing
was held. The proposed regulations under
section 1031 are adopted by this Treasury
decision, and the temporary regulations
are removed.
Effective Date
These fin
al regulations apply to trans-
fers of pr
operty made by taxpayers on or
after Aug
ust 12, 2004. However, taxpay-
ers may ap
ply the regulations to transfers
of proper
ty made by taxpayers on or after
January
1, 1997, in taxable years for which
the peri
od of limitation for filing a claim
for refu
nd or credit under section 6511 has
not expi
red. Additionally, taxpayers may
treat pr
operties within the same product
classe
s under a 4-digit SIC code as prop-
erties
of like class for transfers of property
made by
taxpayers on or before May 19,
2005.
Special Analysis
It has been determined that these fi-
nal regulations are not a significant regu-
latory action as defined in Executive Or-
der 12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations, and,
because the regulations do not impose a
collection of information on small entities,
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to sec-
tion 7805(f) of the Code, the notice of pro-
posed rulemaking that preceded these reg-
ulations was submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on its impact
on small business.
Drafting Information
The principal author of these final regu-
lations is J. Peter Baumgarten of the Office
of the Associate Chief Counsel (Income
Tax and Accounting). 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
part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 2. Section 1.1031(a)–2 is amended
by:
1. Revising paragraphs (b)(3) through
(b)(6),Example 3andExample 4of para-
graph (b)(7), and paragraph (d).
2. Adding paragraph (b)(8).
The revisions and addition read as fol-
lows.
§1.1031(a)–2 Additional rules for
exchanges of personal property.
*****
(b)***
(3)Product classes. Except as provided
in paragraphs (b)(4) and (5) of this sec-
tion, or as provided by the Commissioner
in published guidance of general applica-
bility, property within a product class con-
sists of depreciable tangible personal prop-
erty that is described in a 6-digit prod-
uct class within Sectors 31, 32, and 33
(pertaining to manufacturing industries) of
the North American Industry Classifica-
tion System (NAICS), set forth in Exec-
utive Office of the President, Office of
Management and Budget,North Ameri-
can Industry Classification System,United
States, 2002 (NAICS Manual), as peri-
odically updated. Copies of the NAICS
Manual may be obtained from the National
2005–24 I.R.B.1213June 13, 2005

Technical Information Service, an agency
of the U.S. Department of Commerce, and
may be accessed on the internet. Sectors
31 through 33 of the NAICS Manual con-
tain listings of specialized industries for
the manufacture of described products and
equipment. For this purpose, any 6-digit
NAICS product class with a last digit of 9
(a miscellaneous category) is not a prod-
uct class for purposes of this section. If a
property is listed in more than one prod-
uct class, the property is treated as listed in
any one of those product classes. A prop-
erty’s 6-digit product class is referred to as
the property’s NAICS code.
(4)Modifications of NAICS product
classes. The product classes of the NAICS
Manual may be updated or otherwise mod-
ified from time to time as the manual is
updated, effective on or after the date of
the modification. The NAICS Manual
generally is modified every five years, in
yearsendingina2or7(suchas2002,
2007, and 2012). The applicability date of
the modified NAICS Manual is announced
in theFederal Registerand generally is
January 1 of the year the NAICS Manual
is modified. Taxpayers may rely on these
modifications as they become effective
in structuring exchanges under this sec-
tion. Taxpayers may rely on the previous
NAICS Manual for transfers of property
made by a taxpayer during the one-year
period following the effective date of the
modification. For transfers of property
made by a taxpayer on or after January 1,
1997, and on or before January 1, 2003,
the NAICS Manual of 1997 may be used
for determining product classes of the ex-
changed property.
(5)Administrative procedures for re-
vising general asset classes and product
classes. The Commissioner may, through
published guidance of general applicabil-
ity, supplement, modify, clarify, or update
the guidance relating to the classification
of properties provided in this paragraph
(b). (See §601.601(d)(2) of this chapter.)
For example, the Commissioner may de-
termine not to follow (in whole or in part)
a general asset class for purposes of iden-
tifying property of like class, may deter-
mine not to follow (in whole or in part)
any modification of product classes pub-
lished in the NAICS Manual, or may deter-
mine that other properties not listed within
the same or in any product class or gen-
eral asset class nevertheless are of a like
class. The Commissioner also may de-
termine that two items of property that
are listed in separate product classes or in
product classes with a last digit of 9 are
of a like class, or that an item of property
that has a NAICS code is of a like class
to an item of property that does not have a
NAICS code.
(6)No inference outside of section
1031. The rules provided in this section
concerning the use of general asset classes
or product classes are limited to exchanges
under section 1031. No inference is in-
tended with respect to the classification
of property for other purposes, such as
depreciation.
(7)Examples.***
*****
Example 3. Taxpayer E transfers a grader to F in
exchange for a scraper. Neither property is within any
of the general asset classes. However, both proper-
ties are within the same product class (NAICS code
333120). The grader and scraper are of a like class
and deemed to be of a like kind for purposes of sec-
tion 1031.
Example 4. Taxpayer G transfers a personal
computer (asset class 00.12), an airplane (asset class
00.21) and a sanding machine (NAICS code 333210),
to H in exchange for a printer (asset class 00.12), a
heavy general purpose truck(asset class 00.242) and
a lathe (NAICS code 333210). The personal com-
puter and the printer are of a like class because they
are within the same general asset class. The sanding
machine and the lathe are of a like class because they
are within the same product class (although neither
property is within any of the general asset classes).
The airplane and the heavy general purpose truck are
neither within the same general asset class nor within
the same product class, and are not of a like kind.
(8)Transition rule. Properties within
the same product classes based on the
4-digit codes contained in Division D of
the Executive Office of the President, Of-
fice of Management and Budget, Standard
Industrial Classification Manual (1987),
will be treated as property of a like class
for transfers of property made by taxpay-
ers on or before May 19, 2005.
*****
(d)Effective date. Except as otherwise
provided in this paragraph (d), this section
applies to exchanges occurring on or after
April 11, 1991. Paragraphs (b)(3) through
(b)(6),Example 3andExample 4of para-
graph (b)(7), and paragraph (b)(8) of this
section apply to transfers of property made
by taxpayers on or after August 12, 2004.
However, taxpayers may apply paragraphs
(b)(3) through (b)(6), andExample 3and
Example 4of paragraph (b)(7) of this sec-
tion to transfers of property made by tax-
payers on or after January 1, 1997, in tax-
able years for which the period of limita-
tion for filing a claim for refund or credit
under section 6511 has not expired.
§1.1031(a)–2T [Removed]
Par. 3. Section 1.1031(a)–2T is re-
moved.
§1.1031(j)–1 [Amended]
Par. 4. Section 1.1031(j)–1(d) is
amended by removing the language “(SIC
Code 3531)” inExample 3(ii)(C) and
Example 5(i) and adding “(NAICS code
333120)” in its place.
Cono R. Namorato,
Acting Deputy Commissioner for
Services and Enforcement.
Approved May 12, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on May 18, 2005,
8:45 a.m., and published in the issue of the Federal Register
for May 19, 2005, 70 F.R. 28818)
Section 6621.—Determina-
tion of Rate of Interest
26 CFR 301.6621–1: Interest rate.
Interest rates; underpayments and
overpayments.The rate of interest de-
termined under section 6621 of the Code
for the calendar quarter beginning July 1,
2005, will be 6 percent for overpayments
(5 percent in the case of a corporation), 6
percent for underpayments, and 8 percent
for large corporate underpayments. The
rate of interest paid on the portion of a
corporate overpayment exceeding $10,000
will be 3.5 percent.
Rev. Rul. 2005–35
Section 6621 of the Internal Revenue
Code establishes the rates for interest
on tax overpayments and tax underpay-
ments. Under section 6621(a)(1), the
overpayment rate is the sum of the federal
short-term rate plus 3 percentage points (2
percentage points in the case of a corpo-
ration), except the rate for the portion of
a corporate overpayment of tax exceeding
June 13, 200512142005–24 I.R.B.

$10,000 for a taxable period is the sum of
the federal short-term rate plus 0.5 of a
percentage point for interest computations
made after December 31, 1994. Under
section 6621(a)(2), the underpayment rate
is the sum of the federal short-term rate
plus 3 percentage points.
Section 6621(c) provides that for pur-
poses of interest payable under section
6601 on any large corporate underpay-
ment, the underpayment rate under section
6621(a)(2) is determined by substituting
“5 percentage points” for “3 percentage
points.” See section 6621(c) and section
301.6621–3 of the Regulations on Proce-
dure and Administration for the definition
of a large corporate underpayment and
for the rules for determining the appli-
cable date. Section 6621(c) and section
301.6621–3 are generally effective for
periods after December 31, 1990.
Section 6621(b)(1) provides that the
Secretary will determine the federal
short-term rate for the first month in each
calendar quarter.
Section 6621(b)(2)(A) provides that the
federal short-term rate determined under
section 6621(b)(1) for any month applies
during the first calendar quarter beginning
after such month.
Section 6621(b)(3) provides that the
federal short-term rate for any month is
the federal short-term rate determined
during such month by the Secretary in
accordance with § 1274(d), rounded to the
nearest full percent (or, if a multiple of
1
/2
of 1 percent, the rate is increased to the
next highest full percent).
Notice 88–59, 1988–1 C.B. 546, an-
nounced that, in determining the quarterly
interest rates to be used for overpayments
and underpayments of tax under section
6621, the Internal Revenue Service will
use the federal short-term rate based on
daily compounding because that rate is
most consistent with section 6621 which,
pursuant to section 6622, is subject to daily
compounding.
Rounded to the nearest full percent, the
federal short-term rate based on daily com-
pounding determined during the month of
April 2005 is 3 percent. Accordingly, an
overpayment rate of 6 percent (5 percent
in the case of a corporation) and an under-
payment rate of 6 percent are established
for the calendar quarter beginning July 1,
2005. The overpayment rate for the por-
tion of a corporate overpayment exceeding
$10,000 for the calendar quarter beginning
July 1, 2005, is 3.5 percent. The under-
payment rate for large corporate underpay-
ments for the calendar quarter beginning
July 1, 2005, is 8 percent. These rates ap-
ply to amounts bearing interest during that
calendar quarter.
Interest factors for daily compound in-
terest for annual rates of 3.5 percent, 5 per-
cent, 6 percent, and 8 percent are published
in Tables 12, 15, 17, and 21 of Rev. Proc.
95–17, 1995–1 C.B. 556, 566, 569, 571,
and 575.
Annual interest rates to be compounded
daily pursuant to section 6622 that apply
for prior periods are set forth in the tables
accompanying this revenue ruling.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Crystal Foster of the Office of Asso-
ciate Chief Counsel (Procedure & Admin-
istration). For further information regard-
ing this revenue ruling, contact Ms. Foster
at (202) 622–7198 (not a toll-free call).
TABLE OF INTEREST RATES
PERIODS BEFORE JUL. 1, 1975 — PERIODS ENDING DEC. 31, 1986
OVERPAYMENTS AND UNDERPAYMENTS
PERIODRATE
In 1995–1 C.B.
DAILY RATE TABLE
Before Jul. 1, 19756%Table 2, pg. 557
Jul. 1, 1975—Jan. 31, 19769%Table 4, pg. 559
Feb. 1, 1976—Jan. 31, 19787%Table 3, pg. 558
Feb. 1, 1978—Jan. 31, 19806%Table 2, pg. 557
Feb. 1, 1980—Jan. 31, 198212%Table 5, pg. 560
Feb. 1, 1982—Dec. 31, 198220%Table 6, pg. 560
Jan. 1, 1983—Jun. 30, 198316%Table 37, pg. 591
Jul. 1, 1983—Dec. 31, 198311%Table 27, pg. 581
Jan. 1, 1984—Jun. 30, 198411%Table 75, pg. 629
Jul. 1, 1984—Dec. 31, 198411%Table 75, pg. 629
Jan. 1, 1985—Jun. 30, 198513%Table 31, pg. 585
Jul. 1, 1985—Dec. 31, 198511%Table 27, pg. 581
Jan. 1, 1986—Jun. 30, 198610%Table 25, pg. 579
Jul. 1, 1986—Dec. 31, 19869%Table 23, pg. 577
2005–24 I.R.B.1215June 13, 2005

TABLE OF INTEREST RATES
FROM JAN. 1, 1987 — Dec. 31, 1998
OVERPAYMENTSUNDERPAYMENTS
1995–1 C.B.1995–1 C.B.
RATE TABLEPGRATE TABLEPG
Jan. 1, 1987—
Mar. 31, 1987
8%215759%23577
Apr. 1, 1987—Jun. 30, 19878%215759%23577
Jul. 1, 1987—Sep. 30, 19878%215759%23577
Oct. 1, 1987
—Dec. 31, 1987
9%2357710%25579
Jan. 1, 1988—Mar. 31, 198810%7362711%75629
Apr. 1, 1988—Jun. 30, 19889%7162510%73627
Jul. 1, 198
8—Sep. 30, 1988
9%7162510%73627
Oct. 1, 1988—Dec. 31, 198810%7362711%75629
Jan. 1, 1989—Mar. 31, 198910%2557911%27581
Apr. 1, 19
89—Jun. 30, 1989
11%2758112%29583
Jul. 1, 1989—Sep. 30, 198911%2758112%29583
Oct. 1, 1989—Dec. 31, 198910%2557911%27581
Jan. 1, 19
90—Mar. 31, 1990
10%2557911%27581
Apr. 1, 1990—Jun. 30, 199010%2557911%27581
Jul. 1, 1990—Sep. 30, 199010%2557911%27581
Oct. 1, 1
990—Dec. 31, 1990
10%2557911%27581
Jan. 1, 1991—Mar. 31, 199110%2557911%27581
Apr. 1, 1991—Jun. 30, 19919%2357710%25579
Jul. 1,
1991—Sep. 30, 1991
9%2357710%25579
Oct. 1, 1991—Dec. 31, 19919%2357710%25579
Jan. 1, 1992—Mar. 31, 19928%696239%71625
Apr. 1
, 1992—Jun. 30, 1992
7%676218%69623
Jul. 1, 1992—Sep. 30, 19927%676218%69623
Oct. 1, 1992—Dec. 31, 19926%656197%67621
Jan.
1, 1993—Mar. 31, 1993
6%175717%19573
Apr. 1, 1993—Jun. 30, 19936%175717%19573
Jul. 1, 1993—Sep. 30, 19936%175717%19573
Oct
. 1, 1993—Dec. 31, 1993
6%175717%19573
Jan. 1, 1994—Mar. 31, 19946%175717%19573
Apr. 1, 1994—Jun. 30, 19946%175717%19573
Ju
l. 1, 1994—Sep. 30, 1994
7%1957
3
8%2157
5
Oct. 1, 1994—Dec. 31, 19948%215759%23577
Jan. 1, 1995—Mar. 31, 19958%215759%23577
Ap
r. 1, 1995—Jun. 30, 1995
9%2357
7
10%2557
9
Jul. 1, 1995—Sep. 30, 19958%215759%23577
Oct. 1, 1995—Dec. 31, 19958%215759%23577
J
an. 1, 1996—Mar. 31, 1996
8
%
6
9
6
23
9
%
7
1
6
25
Apr. 1, 1996—Jun. 30, 19967%676218%69623
Jul. 1, 1996—Sep. 30, 19968%696239%71625
Oct. 1, 1996—Dec. 31, 19968%696239%71625
Jan. 1, 1997—Mar. 31, 19978%215759%23577
Apr. 1, 1997—Jun. 30, 19978%215759%23577
Jul. 1, 1997—Sep. 30, 19978%215759%23577
Oct. 1, 1997—Dec. 31, 19978%215759%23577
Jan. 1, 1998—Mar. 31, 19988%215759%23577
Apr. 1, 1998—Jun. 30, 19987%195738%21575
Jul. 1, 1998—Sep. 30, 19987%195738%21575
Oct. 1, 1998—Dec. 31, 19987%195738%21575
June 13, 200512162005–24 I.R.B.

TABLE OF INTEREST RATES
FROM JANUARY 1, 1999 — PRESENT
NONCORPORATE OVERPAYMENTS AND UNDERPAYMENTS
1995–1 C.B.
RATETABLEPG
Jan. 1, 1999—Mar. 31, 19997%19573
Apr. 1, 1999—Jun. 30, 19998%21575
Jul. 1, 1999—Sep. 30, 19998%21575
Oct. 1, 1999—Dec. 31, 19998%21575
Jan. 1, 2000—Mar. 31, 20008%69623
Apr. 1, 2000—Jun. 30, 20009%71625
Jul. 1, 2000—Sep. 30, 20009%71625
Oct. 1, 2000—Dec. 31, 20009%71625
Jan. 1, 2001—Mar. 31, 20019%23577
Apr. 1, 2001—Jun. 30, 20018%21575
Jul. 1, 2001—Sep. 30, 20017%19573
Oct. 1, 2001—Dec. 31, 20017%19573
Jan. 1, 2002—Mar. 31, 20026%17571
Apr. 1, 2002—Jun. 30, 20026%17571
Jul. 1, 2002—Sep. 30, 20026%17571
Oct. 1, 2002—Dec. 31, 20026%17571
Jan. 1, 2003—Mar. 31, 20035%15569
Apr. 1, 2003—Jun. 30, 20035%15569
Jul. 1, 2003—Sep. 30, 20035%15569
Oct. 1, 2003—Dec. 31, 20034%13567
Jan. 1, 2004—Mar. 31, 20044%61615
Apr. 1, 2004—Jun. 30, 20045%63617
Jul. 1, 2004—Sep. 30, 20044%61615
Oct. 1, 2004—Dec. 31, 20045%63617
Jan. 1, 2005—Mar. 31, 20055%15569
Apr. 1, 2005—Jun. 30, 20056%17571
Jul. 1, 2005—Sep. 30, 20056%17571
TABLE OF INTEREST RATES
FROM JANUARY 1, 1999 — PRESENT
CORPORATE OVERPAYMENTS AND UNDERPAYMENTS
OVERPAYMENTSUNDERPAYMENTS
1995–1 C.B.1995–1 C.B.
RATE TABLEPGRATE TABLEPG
Jan. 1, 1999—Mar. 31, 19996%175717%19573
Apr. 1, 1999—Jun. 30, 19997%195738%21575
J
ul. 1, 1999—Sep. 30, 1999
7
%
1
9
5
73
8
%
2
1
5
75
Oct. 1, 1999—Dec. 31, 19997%195738%21575
Jan. 1, 2000—Mar. 31, 20007%676218%69623
Apr. 1, 2000—Jun. 30, 20008%696239%71625
Jul. 1, 2000—Sep. 30, 20008%696239%71625
Oct. 1, 2000—Dec. 31, 20008%696239%71625
Jan. 1, 2001—Mar. 31, 20018%215759%23577
Apr. 1, 2001—Jun. 30, 20017%195738%21575
Jul. 1, 2001—Sep. 30, 20016%175717%19573
Oct. 1, 2001—Dec. 31, 20016%175717%19573
Jan. 1, 2002—Mar. 31, 20025%155696%17571
Apr. 1, 2002—Jun. 30, 20025%155696%17571
Jul. 1, 2002—Sep. 30, 20025%155696%17571
Oct. 1, 2002—Dec. 31, 20025%155696%17571
2005–24 I.R.B.1217June 13, 2005

TABLE OF INTEREST RATES
FROM JANUARY 1, 1999 — PRESENT – Continued
CORPORATE OVERPAYMENTS AND UNDERPAYMENTS
OVERPAYMENTSUNDERPAYMENTS
1995–1 C.B.1995–1 C.B.
RATE TABLEPGRATE TABLEPG
Jan. 1, 2003—Mar. 31, 20034%135675%15569
Apr. 1, 2003—Jun. 30, 20034%135675%15569
Jul. 1, 2003
—Sep. 30, 2003
4%135675%15569
Oct. 1, 2003—Dec. 31, 20033%115654%13567
Jan. 1, 2004—Mar. 31, 20043%596134%61615
Apr. 1, 2004
—Jun. 30, 2004
4%616155%63617
Jul. 1, 2004—Sep. 30, 20043%596134%61615
Oct. 1, 2004—Dec. 31, 20044%616155%63617
Jan. 1, 200
5—Mar. 31, 2005
4%135675%15569
Apr. 1, 2005—Jun. 30, 20055%155696%17571
Jul. 1, 2005—Sep. 30, 20055%155696%17571
TABLE OF INTEREST RATES FOR
LARGE CO
RPORATE UNDERPAYMENTS
FROM JANUARY 1, 1991 — PRESENT
1995–1 C.B.
RATETABLEPG
Jan. 1, 1991—Mar. 31, 199113%31585
Apr. 1, 1991—Jun. 30, 199112%29583
Jul. 1
, 1991—Sep. 30, 1991
12%29583
Oct. 1, 1991—Dec. 31, 199112%29583
Jan. 1, 1992—Mar. 31, 199211%75629
Apr.
1, 1992—Jun. 30, 1992
10%73627
Jul. 1, 1992—Sep. 30, 199210%73627
Oct. 1, 1992—Dec. 31, 19929%71625
Jan.
1, 1993—Mar. 31, 1993
9%23577
Apr. 1, 1993—Jun. 30, 19939%23577
Jul. 1, 1993—Sep. 30, 19939%23577
Oct
. 1, 1993—Dec. 31, 1993
9%23577
Jan. 1, 1994—Mar. 31, 19949%23577
Apr. 1, 1994—Jun. 30, 19949%23577
Ju
l. 1, 1994—Sep. 30, 1994
10%2557
9
Oct. 1, 1994—Dec. 31, 199411%27581
Jan. 1, 1995—Mar. 31, 199511%27581
A
pr. 1, 1995—Jun. 30, 1995
1
2
%2
9
5
83
Jul. 1, 1995—Sep. 30, 199511%27581
Oct. 1, 1995—Dec. 31, 199511%27581
Jan. 1, 1996—Mar. 31, 199611%75629
Apr. 1, 1996—Jun. 30, 199610%73627
Jul. 1, 1996—Sep. 30, 199611%75629
Oct. 1, 1996—Dec. 31, 199611%75629
Jan. 1, 1997—Mar. 31, 199711%27581
Apr. 1, 1997—Jun. 30, 199711%27581
Jul. 1, 1997—Sep. 30, 199711%27581
Oct. 1, 1997—Dec. 31, 199711%27581
Jan. 1, 1998—Mar. 31, 199811%27581
Apr. 1, 1998—Jun. 30, 199810%25579
Jul. 1, 1998—Sep. 30, 199810%25579
Oct. 1, 1998—Dec. 31, 199810%25579
Jan. 1, 1999—Mar. 31, 19999%23577
Apr. 1, 1999—Jun. 30, 199910%25579
June 13, 200512182005–24 I.R.B.

TABLE OF INTEREST RATES FOR
LARGE CORPORATE UNDERPAYMENTS
FROM JANUARY 1, 1991 — PRESENT – Continued
1995–1 C.B.
RATETABLEPG
Jul. 1, 1999—Sep. 30, 199910%25579
Oct. 1, 1999—Dec. 31, 199910%25579
Jan. 1, 2000—Mar. 31, 200010%73627
Apr. 1, 2000—Jun. 30, 200011%75629
Jul. 1, 2000—Sep. 30, 200011%75629
Oct. 1, 2000—Dec. 31, 200011%75629
Jan. 1, 2001—Mar. 31, 200111%27581
Apr. 1, 2001—Jun. 30, 200110%25579
Jul. 1, 2001—Sep. 30, 20019%23577
Oct. 1, 2001—Dec. 31, 20019%23577
Jan. 1, 2002—Mar. 31, 20028%21575
Apr. 1, 2002—Jun. 30, 20028%21575
Jul. 1, 2002—Sep. 30, 20028%21575
Oct. 1, 2002—Dec. 30, 20028%21575
Jan. 1, 2003—Mar. 31, 20037%19573
Apr. 1, 2003—Jun. 30, 20037%19573
Jul. 1, 2003—Sep. 30, 20037%19573
Oct. 1, 2003—Dec. 31, 20036%17571
Jan. 1, 2004—Mar. 31, 20046%65619
Apr. 1, 2004—Jun. 30, 20047%67621
Jul. 1, 2004—Sep. 30, 20046%65619
Oct. 1, 2004—Dec. 31, 20047%67621
Jan. 1, 2005—Mar. 31, 20057%19573
Apr. 1, 2005—Jun. 30, 20058%21575
Jul. 1, 2005—Sep. 30, 20058%21575
TABLE OF INTEREST RATES FOR CORPORATE
OVERPAYMENTS EXCEEDING $10,000
FROM JANUARY 1, 1995 — PRESENT
1995–1 C.B.
RATETABLEPG
Jan. 1, 1995—Mar. 31, 19956.5%18572
Apr. 1, 1995—Jun. 30, 19957.5%20574
Jul. 1, 1995—Sep. 30, 19956.5%18572
Oct. 1, 1995—Dec. 31, 19956.5%18572
Jan. 1, 1996—Mar. 31, 19966.5%66620
Apr. 1, 1996—Jun. 30, 19965.5%64618
Jul. 1, 1996—Sep. 30, 19966.5%66620
Oct. 1, 1996—Dec. 31, 19966.5%66620
Jan. 1, 1997—Mar. 31, 19976.5%18572
Apr. 1, 1997—Jun. 30, 19976.5%18572
Jul. 1, 1997—Sep. 30, 19976.5%18572
Oct. 1, 1997—Dec. 31, 19976.5%18572
Jan. 1, 1998—Mar. 31, 19986.5%18572
Apr. 1, 1998—Jun. 30, 19985.5%16570
Jul. 1, 1998—Sep. 30, 19985.5%16570
Oct. 1, 1998—Dec. 31, 19985.5%16570
Jan. 1, 1999—Mar. 31, 19994.5%14568
Apr. 1, 1999—Jun. 30, 19995.5%16570
Jul. 1, 1999—Sep. 30, 19995.5%16570
Oct. 1, 1999—Dec. 31, 19995.5%16570
Jan. 1, 2000—Mar. 31, 20005.5%64618
2005–24 I.R.B.1219June 13, 2005

TABLE OF INTEREST RATES FOR CORPORATE
OVERPAYMENTS E
XCEEDING $10,000
FROM JANUARY 1, 1995 — PRESENT – Continued
1995–1 C.B.
RATETABLEPG
Apr. 1, 2000—Jun. 30, 20006.5%66620
Jul. 1, 2000—Sep. 30, 20006.5%66620
Oct. 1, 2000—Dec. 31, 20006.5%66620
Jan. 1, 2001—Mar. 31, 20016.5%18572
Apr. 1, 2001—Jun. 30, 20015.5%16570
Jul. 1, 2001—Sep. 30, 20014.5%14568
Oct. 1, 2001—Dec. 31, 20014.5%14568
Jan. 1, 2002—Mar. 31, 20023.5%12566
Apr. 1, 2002—Jun. 30, 20023.5%12566
Jul. 1, 2002—Sep. 30, 20023.5%12566
Oct. 1, 2002—Dec. 31, 20023.5%12566
Jan. 1, 2003—Mar. 31, 20032.5%10564
Apr. 1, 2003—Jun. 30, 20032.5%10564
Jul. 1, 2003—Sep. 30, 20032.5%10564
Oct. 1, 2003—Dec. 31, 20031.5%8562
Jan. 1, 2004—Mar. 31, 20041.5%56610
Apr. 1, 2004—Jun. 30, 20042.5%58612
Jul. 1, 2004—Sep. 30, 20041.5%56610
Oct. 1, 2004—Dec. 31, 20042.5%58612
Jan. 1, 2005—Mar. 31, 20052.5%10564
Apr. 1, 2005—Jun. 30, 20053.5%12566
Jul. 1, 2005—Sep. 30, 20053.5%12566
June 13, 200512202005–24 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
Proposed Revenue Procedure
Regarding Partnership
Interests Transferred
in Connection With the
Performance of Services
Notice 2005–43
Purpose
This notice addresses the taxation of a
transfer of a partnership interest in con-
nection with the performance of services.
In conjunction with this notice, the Trea-
sury Department and the Internal Revenue
Service are proposing regulations under
§ 83 of the Internal Revenue Code. The
proposed regulations grant the Commis-
sioner authority to issue guidance of gen-
eral applicability related to the taxation
of the transfer of a partnership interest in
connection with the performance of ser-
vices. This notice includes a proposed rev-
enue procedure under that authority. The
proposed revenue procedure provides ad-
ditional rules for the elective safe harbor
under proposed § 1.83–3(l) for a partner-
ship’s transfers of interests in the partner-
ship in connection with the performance of
services for that partnership. The safe har-
bor is intended to simplify the application
of§83topartnershipinterestsandtocoor-
dinate the provisions of § 83 with the prin-
ciples of partnership taxation. Upon the
finalization of the proposed revenue pro-
cedure, Rev. Proc. 93–27, 1993–2 C.B.
343, and Rev. Proc. 2001–43, 2001–2
C.B. 191, (described below) will be obso-
leted. Until that occurs, taxpayers may not
rely upon the safe harbor set forth in the
proposed revenue procedure, but taxpay-
ers may continue to rely upon current law,
including Rev. Proc. 93–27, 1993–2 C.B.
343, and Rev. Proc. 2001–43, 2001–2
C.B. 191.
Effective Date
The Treasury Department and the Ser-
vice intend for the revenue procedure pro-
posed in this notice to be finalized and
made effective in conjunction with the fi-
nalization of the related proposed regula-
tions under § 83 and subchapter K of chap-
ter 1 of the Internal Revenue Code (sub-
chapter K).
Request for Comments
Comments are requested on the pro-
posed revenue procedure in this notice.
Although the Treasury Department and the
Service request comments on all aspects
of the proposed revenue procedure, com-
ments are requested specifically on the fol-
lowing:
1. Whether additional guidance is
needed to address the transfer of an
interest in a partnership to a person
who is not rendering services directly
to such partnership (for example, an
upper-tier partnership transfers an in-
terest in a lower-tier partnership to
a person for services rendered to the
upper-tier partnership).
2. Whether election of the safe harbor
described in proposed § 1.83–3(l)
and the proposed revenue procedure
should be permitted on Form 1065,
U.S. Return of Partnership Income,
and whether continued use of the safe
harbor should be reported annually on
Form 1065 and Schedule K–1, Part-
ner’s Share of Income, Deductions,
Credits, etc.
Commentsmaybesubmittedonor
before August 22, 2005 to Internal Rev-
enue Service, PO Box 7604, Washington,
DC 20044, Attn: CC:PA:LPD:PR (Notice
2005–43), Room 5203. Submissions may
also be hand-delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to the Courier’s Desk at 1111
Constitution Avenue, NW, Washington
DC 20224, Attn: CC:PA:LPD:PR (No-
tice 2005–43), Room 5203. Submissions
may also be sent electronically via the
internet to the following email address:
Notice.comments@irscounsel.treas.gov.
Include the notice number (Notice
2005–43) in the subject line.
Drafting Information
The principal authors of this notice
are Stephen Tackney of the Office of As-
sociate Chief Counsel (Tax Exempt and
Government Entities); and Audrey Ellis
and Demetri Yatrakis of the Office of As-
sociate Chief Counsel (Passthroughs and
Special Industries).For further informa-
tion regarding this notice and the applica-
tion of § 83, contact Stephen Tackney at
(202) 622–6030 (not a toll-free call). For
further information regarding this notice
and the application of the rules contained
in subchapter K, contact Audrey Ellis or
Demetri Yatrakis at (202) 622–3060 (not
a toll-free call).
PROPOSED REVENUE
PROCEDURE
SECTION 1. PURPOSE
Proposed § 1.83–3(l) of the Income Tax
Regulations allows taxpayers to elect to
apply special rules (the Safe Harbor) to a
partnership’s transfers of interests in the
partnership in connection with the perfor-
mance of services for the partnership. The
Treasury Department and the Internal Rev-
enue Service intend for the Safe Harbor to
simplify the application of § 83 of the In-
ternal Revenue Code to partnership inter-
ests transferred in connection with the per-
formance of services and to coordinate the
principles of § 83 with the principles of
partnership taxation. This revenue proce-
dure sets forth additional rules for the elec-
tive safe harbor under proposed § 1.83–3(l)
for a partnership’s transfer of interests in
the partnership in connection with the per-
formance of services for that partnership.
SECTION 2. LAW AND DISCUSSION
Section 83(a) provides that if, in con-
nection with the performance of services,
property is transferred to any person other
than the person for whom such services
are performed, the excess of (1) the fair
market value of such property (determined
without regard to any restriction other
than a restriction which by its terms will
never lapse) at the first time the rights of
the person having the beneficial interest
in such property are transferable or are
not subject to a substantial risk of forfei-
ture, whichever occurs earlier, over (2) the
amount (if any) paid for such property, is
included in the gross income of the person
who performed such services in the first
taxable year in which the rights of the
person having the beneficial interest in
such property are transferable or are not
2005–24 I.R.B.1221June 13, 2005

subject to a substantialrisk of forfeiture,
whichever is applicable.
Section 1.83–3(e) provides that, for
purposes of § 83 and the regulations there-
under, the term property includes real
and personal property other than either
money or an unfunded and unsecured
promisetopaymoneyorpropertyinthe
future. For these purposes, under proposed
§ 1.83–3(e) property includes a partner-
ship interest. Generally, a mere right
to allocations or distributions described in
§ 707(a)(2)(A) is not a partnership interest.
Proposed § 1.83–3(e) also provides that, in
the case of a transfer of a partnership inter-
est in connection with the performance of
services, the Commissioner may prescribe
generally applicable administrative rules
to address the application of § 83 to the
transfer.
Section 83(b) provides that a service
provider may elect to include in his or her
gross income, for the taxable year in which
substantially nonvested property is trans-
ferred, the excess of (1) the fair market
valueofthepropertyatthetimeofthe
transfer (determined without regard to any
restriction other than a restriction which
by its terms will never lapse), over (2) the
amount (if any) paid for the property. If
such an election is made, § 83(a) does not
apply with respect to the transfer of the
property upon vesting and, if the property
is subsequently forfeited, no deduction is
allowed to the service provider in respect
of the forfeiture.
Section 1.83–2(b) provides that an elec-
tion under § 83(b) must be filed not later
than 30 days after the date the property was
transferred and may be filed prior to the
date of the transfer. Section 1.83–2(c) pro-
vides that the election is made by filing one
copy of a written statement with the Inter-
nal Revenue Service Center with which the
service provider files his or her return. In
addition, one copy of such statement must
be submitted with the service provider’s
income tax return for the taxable year in
which the property was transferred.
Section 1.83–1(a) provides that, un-
less an election under § 83(b) is made,
the transferor is regarded as the owner
of substantially nonvested property trans-
ferred in connection with the performance
of services until such property becomes
substantially vested, and any income from
such property received by the service
provider (or beneficiary thereof), or the
right to the use of such property by the
service provider, constitutes additional
compensation and is included in the gross
income of the service provider for the tax-
able year in which the income is received
or the use is made available. Under this
rule, a partnership must treat as unissued
any substantially nonvested partnership
interest transferred in connection with
the performance of services for which
an election under § 83(b) has not been
made. If the service provider who holds
such an interest receives distributions
from the partnership with respect to that
interest while the interest is substantially
nonvested, the distributions are treated as
compensation in the capacity in which the
service provider performed the services.
Forexample,ifaserviceproviderthat
is not a pre-existing partner holds a sub-
stantially nonvested partnership interest
that the service provider received in con-
nection with the performance of services
and the service provider did not make an
election under § 83(b)with respect to that
interest, then any distributions made to the
service provider on account of such inter-
est are treated as additional compensation
and not partnership distributions. If, in-
stead, the service provider who receives
a substantially nonvested partnership in-
terest in connection with the performance
of services makes a valid election un-
der § 83(b), then the service provider is
treated as the owner of the property.See
Rev. Rul. 83–22, 1983–1 C.B. 17. The
service provider is treated as a partner with
respect to such an interest, and the part-
nership must allocate partnership items to
the service provider as if the partnership
interest were substantially vested.
Section 1.83–3(b) provides that prop-
erty is substantially nonvested for § 83 pur-
poses when it is subject to a substantial risk
of forfeiture and is nontransferable. Prop-
erty is substantially vested for § 83 pur-
poses when it is either transferable or not
subject to a substantialrisk of forfeiture.
Section 1.83–3(c) provides that, for
§ 83 purposes, whether a risk of forfei-
ture is substantial or not depends upon
the facts and circumstances. A substan-
tial risk of forfeiture exists where rights
in property that are transferred are con-
ditioned, directly or indirectly, upon the
future performance (or refraining from
performance) of substantial services by
any person, or the occurrence of a condi-
tion related to a purpose of the transfer,
and the possibility of forfeiture is substan-
tial if such condition is not satisfied.
Section 1.83–3(d) provides that, for
§ 83 purposes, the rights of a person in
property are transferable if such person
can transfer any interest in the property
to any person other than the transferor of
the property, but only if the rights in such
property of such transferee are not subject
to a substantial risk of forfeiture.
Proposed § 1.83–3(l) provides that,
subject to such additional conditions,
rules, and procedures that the Commis-
sioner may prescribe in regulations, rev-
enue rulings, notices, or other guidance
published in the Internal Revenue Bul-
letin, a partnership and all of its partners
may elect a safe harbor under which the
fair market value of a partnership interest
that is transferred in connection with the
performance of services is treated as being
equal to the liquidation value of that inter-
est for transfers on or after the date final
regulations are published in the Federal
Register if the following conditions are
satisfied: (1) the partnership must prepare
a document, executed by a partner who
has responsibility for federal income tax
reporting by the partnership, stating that
the partnership is electing, on behalf of
the partnership and each of its partners, to
have the safe harbor apply irrevocably as
of the stated effective date with respect to
all partnership interests transferred in con-
nection with the performance of services
while the safe harbor election remains in
effect and attach the document to the tax
return for the partnership for the taxable
year that includes the effective date of the
election; (2) except as provided below, the
partnership agreement must contain pro-
visions that are legally binding on all of
the partners stating that (a) the partnership
is authorized and directed to elect the safe
harbor, and (b) the partnership and each of
its partners (including any person to whom
a partnership interest is transferred in con-
nection with the performance of services)
agrees to comply withall requirements
of the safe harbor with respect to all part-
nership interests transferred in connection
with the performance of services while the
election remains effective; and (3) if the
partnership agreement does not contain
the provisions described in clause (2) of
this sentence, or the provisions are not
legally binding on all of the partners of
June 13, 200512222005–24 I.R.B.

the partnership, then each partner in a
partnership that transfers a partnership in-
terest in connection with the performance
of services must execute a document con-
taining provisions that are legally binding
on that partner stating that (a) the partner-
ship is authorized and directed to elect the
safe harbor, and (b) the partner agrees to
comply with all requirements of the safe
harbor with respect toall partnership in-
terests transferred in connection with the
performance of services while the election
remains effective. The specified effective
date of the safe harbor election may not
be prior to the date that the safe harbor
election is executed. Proposed § 1.83–3(l)
provides that the partnership must retain
such records as may be necessary to in-
dicate that an effective election has been
made and remains in effect, including a
copy of the partnership’s election state-
ment under this paragraph (l), and, if
applicable, the original of each document
submitted to the partnership by a partner
under this paragraph (l). If the partner-
ship is unable to produce a record of a
particular document, the election will be
treated as not made, generally resulting
in termination of the election. The safe
harbor election also may be terminated
by the partnership preparing a document,
executed by a partner who has respon-
sibility for federalincome tax reporting
by the partnership, which states that the
partnership, on behalf of the partnership
and each of its partners, is revoking the
safe harbor election on the stated effective
date, and attaching the document to the tax
return for the partnership for the taxable
year that includes the effective date of the
revocation.
Section 83(h) provides that, in the case
of a transfer of property in connection
with the performance of services or a
cancellation of a restriction described in
§ 83(d), there is allowed as a deduction
under § 162, to the person for whom the
services were performed (the service re-
cipient), an amount equal to the amount
included under § 83(a), (b), or (d)(2) in
the gross income of the service provider.
The deduction is allowed for the taxable
year of the service recipient in which or
with which ends the taxable year in which
such amount is included in the gross
income of the service provider. Under
§ 1.83–6(a)(3), if property is substantially
vested upon the transfer, the deduction is
allowed to the service recipient in accor-
dance with its method of accounting (in
conformity with §§ 446 and 461).
Section 1.83–6(c) provides that if, un-
der § 83(h) and § 1.83–6(a), a deduction,
an increase in basis, or a reduction of gross
income was allowable (disregarding the
reasonableness of the amount of compen-
sation) in respect of a transfer of prop-
erty and such property is subsequently for-
feited, the amount of such deduction, in-
crease in basis, or reduction of gross in-
come shall be includible in the gross in-
come of the person to whom it was allow-
able for the taxable year of the forfeiture.
The basis of such property in the hands of
the person to whom it is forfeited shall in-
clude any such amount includible in the
gross income of such person, as well as any
amount such person pays upon forfeiture.
Section 704(b) requires that a partner’s
distributive share of income, gain, loss, de-
duction, or credit (or item thereof) be de-
termined in accordance with the partner’s
interest in the partnership, determined by
taking into account all facts and circum-
stances, if (1) the partnership agreement
does not provide otherwise as to the part-
ner’s distributive share, or (2) the alloca-
tion to a partner under the agreement does
not have substantial economic effect.
Proposed § 1.704–1(b)(2)(iv)(b)(1)
provides that a partner’s capital account
includes the amount contributed by that
partner to the partnership, and, in the case
of a compensatory partnership interest
that is transferred on or after the date final
regulations are published in theFederal
Register, the amount included on or after
that date as the partner’s compensation
income under § 83(a), (b), or (d)(2). For
these purposes, a compensatory partner-
ship interest is an interest in the trans-
ferring partnership that is transferred in
connection with the performance of ser-
vices for that partnership (either before
or after the formation of the partnership),
including an interest that is transferred on
theexerciseofacompensatorypartner-
ship option. A compensatory partnership
option is an option to acquire an interest
in the issuing partnership that is granted
in connection with the performance of
services for that partnership (either before
or after the formation of the partnership).
Seeproposed § 1.721–1(b)(4).
Proposed § 1.704–1(b)(4)(xii)(a)pro-
vides that if a § 83(b) election has been
made with respect to a substantially non-
vested interest, allocations of partnership
items while the interest is substantially
nonvested cannot have economic effect.
Proposed § 1.704–1(b)(4)(xii)(b)pro-
vides that allocations of partnership items
to a holder of a substantially nonvested in-
terest for which a § 83(b) election has been
made will be deemed to be in accordance
with the partners’ interests in the partner-
ship if the partnership agreement requires
that: (1) in the event that the interest for
which the § 83(b) election is made is
later forfeited, the partnership shall make
forfeiture allocations in the year of the
forfeiture; and (2) all material allocations
and capital account adjustments under the
partnership agreement not pertaining to
substantially nonvested partnership in-
terests for which a § 83(b) election has
been made are recognized under § 704(b).
Proposed § 1.704–1(b)(4)(xii)(e) provides
that proposed § 1.704–1(b)(4)(xii)(b)does
not apply to allocations of partnership
items made with respect to a substantially
nonvested interest for which the holder
has made a § 83(b) election if, at the time
of the § 83(b) election, there is a plan that
the interest will be forfeited. In determin-
ing whether there is a plan that the interest
will be forfeited, the Commissioner will
consider all of the facts and circumstances
(including the tax status of the holder of
the forfeitable compensatory partnership
interest).
Proposed § 1.704–1(b)(4)(xii)(c)de-
fines forfeiture allocations as allocations
to the service provider (consisting of apro
rataportion of each item) of gross income
andgainorgrossdeductionandloss(to
the extent such items are available) for the
taxable year of the forfeiture in a positive
or negative amount equal to (1) the excess
(not less than zero) of (a) the amount of
the distributions (including deemed distri-
butions under § 752(b) and the adjusted
tax basis of any property so distributed)
to the partner with respect to the forfeited
partnership interest (to the extent such
distributions are not taxable under § 731),
over (b) the amounts paid for the interest
and the adjusted tax basis of property con-
tributed by the partner (including deemed
contributions under § 752(a)) to the part-
nership with respect to the forfeited part-
nership interest, minus (2) the cumulative
net income (or loss) allocated to the partner
with respect to the forfeited partnership
2005–24 I.R.B.1223June 13, 2005

interest. Proposed § 1.704–1(b)(4)(xii)(d)
provides that for purposes of proposed
§ 1.704–1(b)(4)(xii)(c), items of income
and gain are reflected as positive amounts,
and items of deduction and loss are re-
flected as negative amounts.
Section 721(a) provides that no gain or
loss is recognized to a partnership or to any
of its partners in the case of a contribution
of property to the partnership in exchange
for an interest in the partnership.
Proposed § 1.721–1(b)(1) provides that
§ 721 generally does not apply to the trans-
fer of a partnership interest in connection
with the performance of services. Such
a transfer constitutes a transfer of prop-
erty to which § 83 and the regulations
thereunder apply. However, under pro-
posed § 1.721–1(b)(2), except as provided
in § 83(h) or § 1.83–6(c), no gain or loss is
recognized by a partnership upon: (i) the
transfer or substantial vesting of a compen-
satory partnership interest, or (ii) the for-
feiture of a compensatory partnership in-
terest.
Proposed § 1.761–1(b) provides that if
a partnership interest is transferred in con-
nection with the performance of services,
and that partnership interest is substan-
tially nonvested (within the meaning of
§ 1.83–3(b)), then the holder of the part-
nership interest is not treated as a partner
solely by reason of holding the interest, un-
less the holder makes an election with re-
spect to the interest under § 83(b).
Rev. Proc. 93–27, 1993–2 C.B. 343,
provides generally that if a person receives
a profits interest for the provision of ser-
vices to or for the benefit of a partner-
ship in a partner capacity or in anticipa-
tion of becoming a partner, the Service
will not treat the receipt of such an inter-
est as a taxable event for the partner or the
partnership. The revenue procedure does
not apply if (1) the profits interest relates
to a substantially certain and predictable
stream of income from partnership assets,
such as income from high-quality debt se-
curities or a high-quality net lease; (2)
within two years of receipt, the partner dis-
poses of the profits interest; or (3) the prof-
its interest is a limited partnership interest
in a “publicly traded partnership” within
the meaning of § 7704(b).
Rev. Proc. 2001–43, 2001–2 C.B.
191, clarifies Rev. Proc. 93–27 and pro-
vides that, for purposes of Rev. Proc.
93–27, if a partnership grants a substan-
tially nonvested profits interest in the part-
nership to a service provider, the service
provider will be treated as receiving the
interest on the date of its grant, provided
that: (1) the partnership and the service
provider treat the service provider as the
owner of the partnership interest from the
date of its grant and the service provider
takes into account the distributive share of
partnership income, gain, loss, deduction
and credit associated with that interest in
computing the service provider’s income
tax liability for the entire period during
which the service provider has the inter-
est; (2) upon the grant of the interest or at
the time that the interest becomes substan-
tially vested, neither the partnership nor
any of the partners deducts any amount (as
wages, compensation, or otherwise) for the
fair market value of the interest; and (3) all
other conditions of Rev. Proc. 93–27 are
satisfied.
SECTION 3. SCOPE
.01In General. The Safe Harbor in sec-
tion 4 of this revenue procedure applies to
any Safe Harbor Partnership Interest trans-
ferred by a partnership if the transfer is
made during the period in which the Safe
Harbor Election is in effect (whether or not
the Safe Harbor Partnership Interest is sub-
stantially vested on the date of transfer).
Thus, for example, sections 4.02 through
4.04 of this revenue procedure apply to
a Safe Harbor Partnership Interest that is
transferred during the period in which the
Safe Harbor Election is in effect, even if
that Safe Harbor Partnership Interest does
not become substantially vested until af-
ter the Safe Harbor Election is terminated,
a § 83(b) election is made after the Safe
Harbor Election is terminated, or that Safe
Harbor Partnership Interest is forfeited af-
ter the Safe Harbor Election is terminated.
Further, a Safe Harbor Election is binding
on the partnership, all of its partners, and
the service provider. The Safe Harbor in-
cludes all of the rules set forth in section
4 of this revenue procedure, and a partner-
ship, its partners, and the service provider
may not choose to apply only certain of the
rules in section 4 of this revenue procedure
or to apply the Safe Harbor only to certain
partners, service providers, or partnership
interests.
.02Safe Harbor Partnership Interest.
(1) Except as otherwise provided in sec-
tion 3.02(2) of this revenue procedure, a
Safe Harbor Partnership Interest is any in-
terest in a partnership that is transferred to
a service provider by such partnership in
connection with services provided to the
partnership (either before or after the for-
mation of the partnership), provided that
the interest is not (a) related to a substan-
tially certain and predictable stream of in-
come from partnership assets, such as in-
come from high-quality debt securities or
a high-quality net lease, (b) transferred in
anticipation of a subsequent disposition, or
(c) an interest in a publicly traded part-
nership within the meaning of § 7704(b).
Unless it is established by clear and con-
vincing evidence that the partnership in-
terest was not transferred in anticipation of
a subsequent disposition, a partnership in-
terest is presumed to be transferred in an-
ticipation of a subsequent disposition for
purposes of the preceding clause (b) if the
partnership interest is sold or disposed of
within two years of the date of receipt of
the partnership interest (other than a sale or
disposition by reason of death or disability
of the service provider) or is the subject,
at any time within two years of the date
of receipt, of a right to buy or sell regard-
less of when the right is exercisable (other
than a right to buy or sell arising by rea-
son of the death or disability of the service
provider). For the purposes of this revenue
procedure, “disability” means a condition
which causes a service provider to be un-
able to engage in any substantial gainful
activity by reason of a medically deter-
minable physical or mental impairment ex-
pected to result in death or to last for a con-
tinuous period of not less than 12 months.
(2)Aninterestinapartnershipisnot
a Safe Harbor Partnership Interest unless
at the date of transfer the requirements of
section 3.03 of this revenue procedure are
satisfied and a Safe Harbor Election has
not terminated pursuant to section 3.04 of
this revenue procedure. For the first tax-
able year that a partnership is subject to a
Safe Harbor Election, a partnership inter-
est may be a Safe Harbor Partnership In-
terest if a Safe Harbor Election is attached
to the partnership tax return for the taxable
year including the date of transfer, pro-
vided that the other requirements of sec-
tion 3.03 of this revenue procedure are sat-
isfied on or before the date of such transfer.
.03Required Conditions for Safe Har-
bor Election. In order to effect and main-
June 13, 200512242005–24 I.R.B.

tain a valid Safe Harbor Election, the fol-
lowing conditions must be satisfied:
(1) The partnership must prepare a doc-
ument, executed by a partner who has re-
sponsibility for federal income tax report-
ing by the partnership, stating that the part-
nership is electing, on behalf of the part-
nership and each of its partners, to have
the Safe Harbor described in Rev. Proc.
200X–XX apply irrevocably with respect
to all partnership interests transferred in
connection with the performance of ser-
vices while the Safe Harbor Election re-
mains in effect. The Safe Harbor Election
must specify the effective date of the Safe
Harbor Election, and the effective date for
the Safe Harbor Election may not be prior
to the date that the Safe Harbor Election is
executed. The Safe Harbor Election must
be attached to the tax return for the partner-
ship for the taxable year that includes the
effective date of the Safe Harbor Election.
(2) Except as provided in section
3.03(3) of this revenue procedure, the
partnership agreement must contain pro-
visions that are legally binding on all of
the partners stating that (a) the partnership
is authorized and directed to elect the Safe
Harbor described in this revenue proce-
dure, and (b) the partnership and each of
its partners (including any person to whom
a partnership interest is transferred in con-
nection with the performance of services)
agrees to comply with all requirements of
the Safe Harbor described in this revenue
procedure with respectto all partnership
interests transferred in connection with the
performance of services while the elec-
tion remains effective. If a partner that
is bound by these provisions transfers a
partnership interest to another person, the
requirement that each partner be bound
by these provisions is satisfied only if the
person to whom the interest is transferred
assumes the transferring partner’s obliga-
tions under the partnership agreement. If
an amendment to the partnership agree-
ment is required, the amendment must
be effective before the date on which a
transfer occurs for the Safe Harbor to be
applied to such transfer.
(3) If the partnership agreement does
not contain the provisions described in sec-
tion 3.03(2) of this revenue procedure, or
the provisions are not legally binding on
all of the partners of the partnership, then
each partner in a partnership that transfers
a partnership interest in connection with
the performance of services must execute
a document containing provisions that are
legally binding on each partner stating that
(a) the partnership is authorized and di-
rected to elect the Safe Harbor described in
this revenue procedure, and (b) the partner
agrees to comply with all requirements of
the Safe Harbor described in this revenue
procedure with respect to all partnership
interests transferred in connection with the
performance of services while the election
remains effective. Each person classified
as a partner must execute the document re-
quired by this paragraph (3), and the docu-
ment must be effective, before the date on
which a transfer occurs, for the Safe Har-
bortobeappliedtosuchtransfer.Ifapart-
ner who has submitted the required docu-
ment transfers a partnership interest to an-
other person, the condition that each part-
ner submit the necessary document is sat-
isfied only if the person to whom the in-
terest is transferred either submits the re-
quired document or assumes the transfer-
ring partner’s obligations under a docu-
ment required by this paragraph that was
previously submitted with respect to the
transferred interest.
.04Termination of Safe Harbor Elec-
tion. A Safe Harbor Election continues
in effect until terminated. A Safe Harbor
Election terminates automatically on the
date that a partnership fails to satisfy the
conditions and requirements described in
sections 3.02 and 3.03 of this revenue pro-
cedure. A Safe Harbor Election also ter-
minates automatically in the event that the
partnership, a partner, or service provider
reports income tax effects of a Safe Harbor
Partnership Interest in a manner inconsis-
tent with the requirements of this revenue
procedure, including a failure to provide
appropriate information returns. A part-
nership may affirmatively terminate a Safe
Harbor Election by preparing a document,
executed by a partner who has responsi-
bility for federal income tax reporting by
the partnership, indicating that the partner-
ship, on behalf of the partnership and each
of its partners, is revoking its Safe Harbor
Election under Rev. Proc. 200X–XX and
theeffectivedateoftherevocation,pro-
vided that the effective date may not be
prior to the date the election to terminate is
executed. Such termination election must
be attached to the tax return for the partner-
ship for the taxable year that includes the
effective date of the election. The rules of
the Safe Harbor in section 4 of this revenue
procedure do not apply to any partnership
interests transferred on or after the date of
a termination of the Safe Harbor Election
under this paragraph but continue to apply
to any Safe Harbor Partnership Interests
transferred while the Safe Harbor Election
was in effect.
.05Election After Termination.Ifa
partnership has made a Safe Harbor Elec-
tion and if such Safe Harbor Election has
been terminated under section 3.04 of this
revenue procedure, then, absent the con-
sent of the Commissioner, the partnership
(and any successor partnerships) are not
eligible to make a Safe Harbor Election
for any taxable year that begins before
the fifth calendar year after the calendar
year during which such termination oc-
curs. For purposes of this paragraph, a
successor partnership is any partnership
that (1) on the date of termination, is re-
lated (within the meaning of § 267(b) or
§ 707(b)) to the partnership whose Safe
Harbor Election has terminated (or, if the
partnership whose Safe Harbor Election
has terminated does not exist on the date
of termination would be related if it ex-
isted on such date), and (2) acquires (either
directly or indirectly) a substantial portion
of the assets of the partnership whose Safe
Harbor Election has terminated.
.06Recordkeeping Requirement.Un-
der proposed § 1.83–3(l), the partnership
is required to keep as records: (1) a copy
of the Safe Harbor Election submitted by
the partnership to the Service under sec-
tion 3.03(1) of this revenue procedure, and
(2) if applicable, the original of each doc-
ument submitted to the partnership by a
partner under section 3.03(3) of this rev-
enue procedure. If the partnership is un-
able to produce a record of a particular
document, the election will be treated as
not made, generally resulting in termina-
tion of the Safe Harbor Election under sec-
tion 3.04 of this revenue procedure.
SECTION 4. SAFE HARBOR
.01Safe Harbor. For purposes of § 83,
the rules in sections 4.02 through 4.04 of
this revenue procedure apply to any Safe
Harbor Partnership Interest for which a
Safe Harbor Election is in effect.
.02Liquidation Value. Under the Safe
Harbor, the fair market value of a Safe Har-
bor Partnership Interest is treated as being
2005–24 I.R.B.1225June 13, 2005

equal to the liquidation value of that in-
terest. For this purpose, liquidation value
is determined without regard to any lapse
restriction (as defined at § 1.83–3(i)) and
means the amount of cash that the recip-
ient of the Safe Harbor Partnership Inter-
est would receive if, immediately after the
transfer, the partnership sold all of its as-
sets (including goodwill, going concern
value, and any other intangibles associated
with the partnership’s operations) for cash
equal to the fair market value of those as-
sets and then liquidated.
.03Vesting. Under the Safe Harbor, a
Safe Harbor Partnership Interest is treated
as substantially vested if the right to the
associated capital account balance equiv-
alent is not subject to a substantial risk of
forfeiture or the interest is transferable. A
Safe Harbor Partnership Interest is treated
as substantially nonvested only if, under
the terms of the interest at the time of
the transfer, the interest terminates and
the holder may be required to forfeit the
capital account balance equivalent cred-
ited to the holder under conditions that
would constitute a substantial risk of for-
feiture, and the interest is not transfer-
able. For these purposes, the capital ac-
count balance equivalent is the amount of
cash that the recipient of the Safe Harbor
Partnership Interest would receive if, im-
mediately prior to the forfeiture, the inter-
est vested and the partnership sold all of its
assets (including goodwill, going concern
value, or any other intangibles associated
with the partnership’s operations) for cash
equal to the fair market value of those as-
sets and then liquidated. Notwithstanding
the previous sentence, a Safe Harbor Part-
nership Interest will not be considered sub-
stantially nonvested if the sole portion of
the capital account balance equivalent for-
feited is the excess of the capital account
balance equivalent at the date of termina-
tion of services over the capital account
balance equivalent at the end of the prior
partnership tax year or any later date be-
fore the date of termination of services.
.04Forfeiture Subsequent to § 83(b)
Election. If a Safe Harbor Partnership In-
terest with respect to which a § 83(b) elec-
tion has been made is forfeited, the ser-
vice provider must include as ordinary in-
come in the taxable year of the forfei-
ture an amount equal to the excess, if any,
of (1) the amount of income or gain that
the partnership would be required to al-
locate to the service provider under pro-
posed § 1.704–1(b)(4)(xii) if the partner-
ship had unlimited items of gross income
and gain, over (2) the amount of income
or gain that the partnership actually allo-
cated to the service provider under pro-
posed §1.704–1(b)(4)(xii).
SECTION 5. APPLICATION OF
SAFE HARBOR TO SERVICE
PROVIDER AND SERVICE
RECIPIENT
.01Application of Safe Harbor to the
Service Provider. Under the Safe Harbor,
the service providerrecognizes compen-
sation income upon the transfer of a sub-
stantially vested Safe Harbor Partnership
Interest in an amount equal to the liquida-
tion value of the interest, less any amount
paid for the interest. If the service provider
receives a Safe Harbor Partnership Inter-
est that is substantially nonvested, does not
make an election under § 83(b), and holds
the interest until it substantially vests, the
service provider recognizes compensation
income in an amount equal to the liqui-
dation value of the interest on the date
the interest substantially vests, less any
amount paid for the interest. If the service
provider receives a Safe Harbor Partner-
ship Interest that is substantially nonvested
and makes an election under § 83(b), the
service provider recognizes compensation
income on the date of transfer equal to
the liquidation value of the interest, deter-
mined as if the interest were substantially
vested, pursuant to the rules of § 83(b) and
§ 1.83–2, less any amount paid for the in-
terest.
.02Application of Safe Harbor to the
Service Recipient. Under § 83(h), the
service recipient generally is entitled to a
deduction equal to the amount included
as compensation in the gross income of
the service provider under § 83(a), (b), or
(d)(2), but only to the extent the amount
meets the requirements of § 162 or § 212.
Under the Safe Harbor, the amount in-
cluded in the service provider’s gross
income in accordance with section 4.02 of
this revenue procedure is considered the
amount included as compensation in the
gross income of the service provider un-
der§83(a)or(b)forpurposesof§83(h).
The deduction generally is allowed for the
taxable year of the partnership in which
or with which ends the taxable year of
the service provider in which the amount
is included in gross income as compen-
sation. However, in accordance with
§ 1.83–6(a)(3), where the deduction re-
lates to the transfer of substantially vested
property, the deduction is available in
accordance with the service recipient’s
method of accounting.
SECTION 6. EXAMPLES
The following facts apply for all of the
examples below:
SPis an individual with a calendar year
taxable year.PRSis a partnership with
a calendar year taxable year. Except as
otherwise stated,PRS’s partnership agree-
ment provides for all partnership items to
be allocated to the partners in proportion
to the partners’ interests in the partnership.
PRS’s partnership agreement provides that
the partners’ capital accounts will be de-
termined and maintained in accordance
with § 1.704–1(b)(2)(iv), that liquidation
proceeds will be distributed in accordance
with the partners’ positive capital ac-
count balances, and that any partner with
a deficit balance in the partner’s capital
account following the liquidation of the
partner’s interest must restore that deficit
to the partnership. All allocations and dis-
tributions to all parties are not recast under
§ 707(a)(2), and § 751(b) does not apply
to any distribution. The partnership, its
members, and the service providers elect
the Safe Harbor provided in section 4 of
this revenue procedure and file all affected
returns consistent with the Safe Harbor,
and each partnership interest transferred
constitutes a Safe Harbor Partnership In-
terest under section 3.02 of this revenue
procedure. The issuance of the partnership
interest in each example is not required to
be capitalized under the rules of § 263 or
other applicable provision of the Code. In
examples in which the partnership interest
transferred to the service provider is not
substantially vested, there is not a plan
that the service provider will forfeit the
partnership interest.
(1)Example 1: Substantially Vested Profits Inter-
est
Facts:PRShas two partners,AandB, each with a
50% interest inPRS. On March 1, 2005,SPagrees to
perform services for the partnership in exchange for
a partnership interest. Under the terms of the part-
nership agreement,SPis entitled to 10% of the future
profits and losses ofPRS, but is not entitled to any
of the partnership’s capital as of the date of transfer.
June 13, 200512262005–24 I.R.B.

AlthoughSPmust surrender the partnership interest
upon termination of services to the partnership,SP
will not surrender any share of the profits accumu-
lated through the end of the partnership taxable year
preceding the partnership taxable year in whichSP
terminates services.
Conclusion: Under section 4.03 of this revenue
procedure,SP’s interest inPRSis treated as substan-
tially vested at the time of transfer. Under section
4.02 of this revenue procedure, the fair market value
of the interest for purposes of § 83 is treated as be-
ing equal to its liquidation value (zero). Therefore,
SPdoes not recognize compensation income under
§ 83(a) as a result of the transfer,PRSis not entitled
to a deduction, andSPis not entitled to a capital ac-
count balance.
(2)Example 2: Substantially Vested Interest
Facts:PRShas two partners,AandB, each with
a 50% interest inPRS. On March 1, 2005,SPpays
the partnership $10 and agrees to perform services
for the partnership in exchange for a 10% partner-
ship interest that is treated as substantially vested un-
der section 4.03 of this revenue procedure. Immedi-
ately beforeSP’s $10 payment toPRSand the transfer
of the partnership interest toSPin connection with
the performance of services, the value of the part-
nership’s assets (including goodwill, going concern
value, and any other intangibles associated with the
partnership’s operations) is $990.
Conclusion: Under section 4.02 of this revenue
procedure, the fair market value ofSP’s interest in
PRSat the time the interest becomes substantially
vested is treated as being equal to its liquidation
value at that time for purposes of § 83. Therefore, in
2005,SPincludes $90 ($100 liquidation value less
$10 amount paid for the interest) as compensation
income under § 83(a),PRSis entitled to a deduction
of $90 under § 83(h), andSP’s initial capital account
is $100 ($90 included in income plus $10 amount
paid for the interest).
(3)Example 3: Substantially Nonvested Interest;
No § 83(b) Election; Pre-Existing Partner
Facts:PRShas two partners,AandSP,eachwith
a 50% interest inPRS. On December 31, 2004,SP
agrees to perform services for the partnership in ex-
change for a 10% increase inSP’s interest in the part-
nership from 50% to 60%.SPis not required to
pay any amount in exchange for the additional 10%
interest. Under the termsof the partnership agree-
ment, ifSPterminates serviceson or before January
1, 2008,SPforfeits any right to any share of accumu-
lated, undistributed profits with respect to the addi-
tional 10% interest. The partnership interest trans-
ferred toSPis not transferable and no election is
made under § 83(b).SPcontinues performing ser-
vices through January 1, 2008.PRShas taxable in-
come of $500 in 2005 and $1,000 in each of 2006
and 2007. No distributions are made toAorSPdur-
ing such period. On January 1, 2008, the value of the
partnership’s assets (including goodwill, going con-
cern value, and any other intangibles associated with
the partnership’s operations) is $3,500.
Conclusion: Under section 4.03 of this revenue
procedure, the 10% partnership interest transferred to
SPon December 31, 2004, is treated as substantially
nonvested at the time of transfer. Because a § 83(b)
election is not made,SPdoes not include any amount
as compensation income attributable to the transfer,
and correspondingly,PRSis not entitled to a deduc-
tion under § 83(h).
In accordance with the partnership agreement,
PRS’s taxable income for 2005 is allocated $250 toA
and $250 toSP,andPRS’s taxable income for each
of 2006 and 2007 is allocated $500 toAand $500 to
SP.
On January 1, 2008,SP’s additional 10% inter-
est inPRSis treated as becoming substantially vested
under section 4.03 of this revenue procedure. At that
time, the additional 10% interest in the partnership
has a liquidation value of $350 (10% of $3,500). Un-
der section 4.02 of this revenue procedure, the fair
market value of the interest at the time it becomes
substantially vested is treated as being equal to its
liquidation value at that time for purposes of § 83.
Therefore, in 2008,SPincludes $350 as compensa-
tion income under § 83(a),PRSis entitled to a deduc-
tion of $350 under § 83(h), andSP’s capital account
is increased by $350.
(4)Example 4: Substantially Nonvested Interest;
No § 83(b) Election
Facts:PRShas two partners,AandB, each with
a 50% interest inPRS. On December 31, 2004,SP
pays the partnership $10 and agrees to perform ser-
vices for the partnership in exchange for a 10% part-
nership interest. Under the terms of the partnership
agreement, ifSPterminates services on or before Jan-
uary 1, 2008,SPforfeits any rights to any share of
accumulated, undistributed profits, but is entitled to
areturnofSP’s $10 initial contribution.SP’s part-
nership interest is not transferable and no election is
made under § 83(b).SPcontinues performing ser-
vices through January 1, 2008.PRSearns $500 of
taxable income in 2005, and $1,000 in each of 2006
and 2007.AandBeach receive distributions of $225
in 2005, but neitherAnorBreceive distributions in
2006 and 2007.PRStransfers $50 toSPin 2005, but
does not make any transfers toSPin 2006 or 2007.
On January 1, 2008,SP’s partnership interest has a
liquidation value of $300 (taking into account the un-
paid partnership income credited toSPthrough that
date).
Conclusion: Under section 4.03 of this revenue
procedure,SP’s partnership interest is treated as sub-
stantially nonvested at the time of transfer. Because
a § 83(b) election is not made,SPdoes not include
any amount as compensation income attributable to
the transfer and, correspondingly,PRSis not enti-
tled to a deduction under § 83(h). Under proposed
§ 1.761–1(b),SPis not a partner inPRS; therefore,
none ofPRS’s taxable income for the years in which
SP’s interest is substantially nonvested may be allo-
cated toSP.Rather,PRS’s taxable income is allocated
exclusively toAandB. In addition, the $50 paid by
PRStoSPin 2005 is compensation income toSP,and
PRSis entitled to a deduction of $50 under § 162 in
accordance with its method of accounting.
On January 1, 2008,SP’s interest inPRSis treated
as becoming substantiallyvested under section 4.03
of this revenue procedure. Under section 4.02 of this
revenue procedure, the fair market value of the in-
terest at the time the interest becomes substantially
vested is treated as being equal to its liquidation value
at that time for § 83 purposes. Therefore, in 2008,
SPincludes $290 ($300 liquidation value less $10
amount paid for the interest) as compensation income
under § 83(a),PRSis entitled to a $290 deduction,
andSP’s capital account is increased to $300 ($290
included in income plus $10 amount paid for the in-
terest).
(5)Example 5: Substantially Nonvested Interest;
§ 83(b) Election
Facts: The facts are the same as inExample 4,
except thatSPmakes an election under § 83(b) with
respect toSP’s interest inPRS. The liquidation value
of the interest is $100 at the time the interest inPRS
is transferred toSP.SPcontinues performing services
through January 1, 2008.
Conclusion: Under section 4.02 of this revenue
procedure, the fair market value (disregarding lapse
restrictions) ofSP’s interest inPRSat the time of
transfer is treated as being equal to its liquidation
value (disregarding lapse restrictions) at that time for
§ 83 purposes. Because a § 83(b) election is made,
in 2004SPincludes $90 ($100 liquidation value less
$10 amount paid for the interest) as compensation in-
come,PRSis entitled to a $90 deduction, andSP’s
initial capital account is $100 ($90 included inSP’s
income plus $10 amount paid for the interest). Un-
der proposed § 1.761–1(b), as a result ofSP’s elec-
tion under § 83(b),SPis treated as a partner starting
from the date of the transfer of the interest toSP.Ac-
cordingly,SPincludes in 2005 taxable incomeSP’s
$50 distributive share ofPRSincome, and the $50
payment toSPbyPRSin 2005 is a partnership dis-
tribution under § 731.SPincludes in 2006 and 2007
taxable incomeSP’s $100 distributive shares ofPRS
income for those years.
(6)Example 6: Substantially Nonvested Interest;
§ 83(b) Election; Forfeiture; Net Profit
Facts: The facts are the same as inExample 5,
except thatSPterminates services on September 30,
2007, and is repaid the $10 thatSPpaid for thePRS
interest in 2004. The partnership agreement provides
that ifSP’s partnership interest is forfeited,SP’s dis-
tributive share of all partnership items (other than for-
feiture allocations) will be zero with respect to the in-
terest for the taxable year of the partnership in which
the interest is forfeited.
Conclusion: The tax consequences for 2004
through 2006 are the same as inExample (5).As
a result of the forfeiture in 2007,PRSis required
under § 1.83–6(c) to include in gross income $90 (the
amount of the allowable deduction on the transfer of
the interest toSP). In accordance with the partnership
agreement,PRSalso makes forfeiture allocations in
2007 to offset partnership income and loss that was
allocated toSPand partnership distributions toSP
prior to the forfeiture. Cumulative net income of
$150 was allocated toSPprior to the forfeiture ($50
in 2005 and $100 in 2006) andSPreceived a total of
$60 of distributions fromPRS($50 in 2005 and $10
in 2007 (the repayment ofSP’s initial contribution to
PRS)). Under proposed § 1.704–1(b)(4)(xii), the total
forfeiture allocations toSPis $100 of partnership
loss and deduction, the difference between $50 ($60
of distributions toSPless $10 of contributions toPRS
bySP) and $150 (cumulative net income allocated to
SP). Pursuant to the partnership agreement, none of
the partnership income for the year 2007 is allocated
toSP. In accordance with § 83(b)(1) (last sentence),
SPdoes not receive a deduction or capital loss for the
amount ($90) that was included asSP’s compensa-
tion income as a result of the election under § 83(b).
(7)Example 7: Substantially Nonvested Interest;
§ 83(b) Election; Forfeiture; Net Loss
2005–24 I.R.B.1227June 13, 2005

Facts:PRShas two partners,AandB, each with
a 50% interest inPRS. On December 31, 2004,SP
pays the partnership $10 and agrees to perform ser-
vices for the partnership in exchange for a 10% part-
nership interest. Under the terms of the partnership
agreement, ifSPterminates services before January
1, 2008,SPforfeits any right to any share of accu-
mulated, undistributed profits, but is entitled to a re-
turn ofSP’s $10 initial contribution.SP’s partnership
interest is not transferable. The partnership agree-
ment provides that ifSP’s partnership interest is for-
feited,SP’s distributive share of all partnership items
(other than forfeiture allocations) will be zero with
respect to the interest for the taxable year of the part-
nership in which the interest is forfeited. At the time
of the transfer, the liquidation value of the 10% part-
nership interest is $100, andSPmakes an election un-
der § 83(b) with respect to the interest. In 2005,PRS
earns $500 of taxable income, which is allocated and
distributed $225 to each of A and B and $50 toSP.
In 2006,PRShas net taxable loss of $1,000, $100 of
which is allocated toSP.PRSdoes not make any dis-
tributions in 2006.PRShas no items of income, gain,
loss, or deduction in 2007, other than gross income
recognized under § 1.83–6(c).SPterminates services
on September 30, 2007, and is repaid the $10 thatSP
paid for thePRSinterest in 2004.PRSdoes not make
any distributions in 2007, other than the return ofSP’s
$10 contribution.
Conclusion: Under section 4.02 of this revenue
procedure, the fair market value (disregarding lapse
restrictions) ofSP’s interest inPRSat the time of
transfer is treated as being equal to its liquidation
value (disregarding lapse restrictions) at that time for
purposes of § 83. Because a § 83(b) election is made,
SPincludes as compensation income in 2004 $90
($100 liquidation value less $10 amount paid for the
interest),PRSis entitled to a $90 deduction under
§ 83(h), andSP’s initial capital account is $100 ($90
compensation income plus $10 amount paid for the
interest). Under proposed § 1.761–1(b), as a result of
SP’s election under § 83(b),SPis treated as a partner
starting from the date of the transfer of the interest
toSP. Accordingly,SPincludes in 2005 taxable in-
comeSP’s $50 distributive share ofPRS’s income,
and the $50 payment toSPin 2005 is a partnership
distribution under § 731.SPincludes in computing
2006 taxable incomeSP’s $100 distributive share of
PRS’s loss.
As a result of the forfeiture in 2007,PRSis re-
quired under § 1.83–6(c) to include in gross income
$90 (the amount of the allowable deduction on the
transfer of the interest toSP). In accordance with the
partnership agreement,PRSalso makes forfeiture al-
locations in 2007 to offset partnership income and
loss that was allocated toSPand partnership distri-
butions toSPprior to the forfeiture. Cumulative net
loss of $50 was allocated toSPprior to the forfeiture
($50 of income in 2005 and $100 of loss in 2006) and
SPreceived a total of $60 of partnership distributions
($50 in 2005 and $10 in 2007 (the repayment ofSP’s
initial contribution toPRS)). IfPRShad unlimited
items of gross income and gain, the total forfeiture al-
locations toSPunder proposed § 1.704–1(b)(4)(xii)
would be $100 of partnership income and gain, the
difference between $50 ($60 distributions toSPless
$10 of contributions toPRSbySP) and -$50 (cumu-
lative net loss allocated toSP). However,PRS’s only
income in 2007 is the $90 of income recognized by
PRSunder § 1.83–6(c), all of which must be used to
make forfeiture allocations toSP. Under section 4.04
of this revenue procedure, in 2007,SPmust include in
ordinary income $10 (the difference between the for-
feiture allocations that would be required under pro-
posed § 1.704–1(b)(4)(xii) ifPRShad an unlimited
amount of gross income and gain, $100, and the ac-
tual forfeiture allocations toSP, $90).PRSis not en-
titled to a deduction for the amount ($10) thatSPis
required to include in income under section 4.04 of
this revenue procedure.
SECTION 7. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 93–27, 1993–2 C.B. 343,
and Rev. Proc. 2001–43, 2001–2 C.B.
191, are obsoleted.
Deductions for Entertainment
Use of Business Aircraft
Notice 2005–45
This notice provides interim guid-
ance to taxpayers on the limitation under
§ 274(e) of the Internal Revenue Code on
the deductible amount of trade or business
expenses for use of a business aircraft
for entertainment. Section 274(e) was
amended by § 907 of the American Jobs
Creation Act of 2004 (AJCA), effective
for amounts incurred after October 22,
2004. The rules provided in this notice
apply until regulations are effective.
A. BACKGROUND
Under § 274(a)(1)(A), no deduction is
allowed for an activity generally consid-
ered to be entertainment, amusement, or
recreation, unless the taxpayer establishes
that the activity is directly related to or (in
certain cases) associated with the active
conduct of the taxpayer’s trade or busi-
ness. Section 274(a)(1)(B) disallows de-
ductions for facilities used in connection
with entertainment,amusement, or recre-
ational activity, regardless of connection to
the taxpayer’s trade or business.
Section 1.274–2(b)(1) of the Income
Tax Regulations provides that entertain-
ment means any activity of a type gen-
erally considered to constitute entertain-
ment, amusement, or recreation, such
as entertaining at night clubs, cocktail
lounges, theaters, country clubs, golf and
athletic clubs, sporting events, and on
hunting, fishing, vacation and similar
trips. Similar activities relating solely to
the taxpayer’s family also may constitute
entertainment. Entertainment may include
an activity that satisfies the personal, liv-
ing, or family needs of an individual,
such as providing food and beverages or
a hotel suite to a business customer or the
customer’s family. Entertainment does
not include activities, however, that are
clearly not regarded as constituting enter-
tainment, such as the provision of supper
moneybyanemployertoanemployee
working overtime, the maintenance of a
hotel room by an employer for lodging of
employees while in business travel status,
or the use of an automobile in the active
conduct of a trade or business even though
also used for routine personal purposes
such as commuting to and from work. Un-
der § 1.274–2(b)(1)(ii), an objective test is
used to determine whether an activity is of
a type generally considered to constitute
entertainment.
Section 274(e) provides exceptions
to the general disallowance provisions
of § 274(a). Prior to amendment by the
AJCA, § 274(e)(2) excepted expenses
from § 274(a) “to the extent that the ex-
penses are treated by the taxpayer” as
compensation to the employee/recipient
of the entertainment activity. Section
274(e)(9) similarly excepted expenses to
the extent that the expenses are treated by
the taxpayer as income to persons who are
not employees.
Section 274(o) provides that the Secre-
tary shall prescribe regulations necessary
to carry out the purposes of the section.
Generally, § 1.61–21(b) requires an
employee to include in gross income
the fair market value of a fringe benefit,
such as an entertainment flight (reduced
by any reimbursement or statutory ex-
clusion). For employee flights on em-
ployer-provided noncommercial aircraft,
§ 1.61–21(g) provides that an employer
may value such flights using the Stan-
dard Industry Fare Level (SIFL) formula.
Under § 1.61–21(g)(14)(i), an employer
that uses the SIFL formula in a calendar
year to value any flight provided to an
employee during a calendar year must
use the SIFL formula to value all flights
provided to employees during that calen-
dar year. The fringe benefit rules under
§ 1.61–21(g) generally apply to all service
providers, including employees, indepen-
dent contractors, partners, and directors.
June 13, 200512282005–24 I.R.B.

The regulations do not permit valuation
of a flight by reference to the employer’s
costs.
Ann. 85–113, 1985–31 I.R.B. 31, al-
lows an employer to elect the frequency at
which in-kind fringe benefits are treated as
paid. The benefits must be treated as paid
no later than the end of each calendar year,
but in-kind fringe benefits provided during
the last two months of a calendar year may
be treated as paid during the subsequent
calendar year. See Ann. 85–113, sections
1 and 5(a).
InSutherland Lumber-Southwest, Inc.
v. Comm’r, 114 T.C. 197 (2000),aff’d
255F.3d495(8
th
Cir. 2001), acq. AOD
2002–02 (Feb. 11, 2002), the Tax Court
held that the amount a taxpayer may
deduct for the cost of entertainment-re-
lated flights under the § 274(e)(2) excep-
tion is not limited to the amount included
in the income of the employees and corpo-
rate officers who took the flights. Rather,
the court held that a taxpayer may deduct
the full cost of an employee’s or offi-
cer’s non-business flight on the taxpayer’s
aircraft if the taxpayer includes in the re-
cipient’s income the value of the flights
computed under the rules of § 1.61–21.
As a result, a deduction greater than the
amount included in the recipient’s income
was allowable.
The ACJA amendment to § 274(e)(2)
and (9) is intended to overturnSutherland
Lumber-Southwest, Inc. v. Comm’r.H.R.
Conf. Rep. No. 108–755, at 798 (2004).
Specifically, as amended by § 907 of the
AJCA, the § 274(e)(2) and (9) exceptions
to the § 274(a) disallowance apply in the
case of a “specified individual” only “to
the extent that the expenses do not exceed
the amount of expenses” that are treated
as compensation to the specified individ-
ual. A specified individual is any individ-
ual who is subject to the requirements of
§ 16(a) of the Securities Exchange Act of
1934 (15 U.S.C. § 78p(a)) with respect to
the taxpayer, or who would be subject to
those requirements if the taxpayer were an
issuer of equity securities referred to in that
section. Section 274(e)(2)(B).
Thus, in the case of a specified indi-
vidual, the § 274(e)(2) and (9) exceptions
apply only to the extent that a taxpayer
treats as compensation to the specified in-
dividual an amount equal to or greater than
the amount of deductible entertainment ex-
penses allocable to entertainment provided
to the specified individual. Expenses al-
locable to entertainment provided to the
specified individualthat are not treated as
compensation to the specified individual
are disallowed.
This notice specifically addresses ex-
penses paid or incurred in connection with
the use of aircraft as entertainment. Sec-
tion 274(e)(2) and (9), however, apply to
all expenses subject to § 274(a). Taxpay-
ers may apply the principles of this notice
to expenses paid or incurred in connection
with other entertainment activities.
B. APPLICATION
(1)In general
In general, the use of an aircraft for an
employee’s or other recipient’s entertain-
ment, amusement, or recreation is subject
to § 274(a) unless excepted by § 274(e).
Expenses for entertainment use of an air-
craft by a specified individual are disal-
lowed except to the extent of the amount
treated as compensation to the specified in-
dividual, as provided in this notice. The
amount disallowed with regard to a spe-
cific flight also is reduced by any amount
that a specified individual reimburses the
taxpayer for that flight.
(2)Use of aircraft for entertainment
Whether an aircraft is used for enter-
tainment of a specified individual is deter-
mined without regard to the ownership of
the aircraft. Therefore, the costs of leased
or chartered aircraft are subject to disal-
lowance under § 274(a) (unless excepted
by § 274(e)) and this notice. Furthermore,
§ 274(a) and (e) and this notice apply to
the costs of aircraft operated on a regu-
lar schedule or used forbona fidesecurity
concerns (as provided in § 1.132–5(m)).
(3)Specified individuals
A “specified individual” is either an in-
dividual who is subject to § 16(a) of the
Securities Exchange Act of 1934 with re-
spect to the taxpayer, or an individual who
would be subject to § 16(a) if the taxpayer
were an issuer of equity securities referred
to in that section. “Specified individual”
includes every person who (a) is the direct
or indirect beneficial owner of more than
10 percent of any class of any registered
equity security (otherthan an exempted se-
curity), (b) is a director or officer of the is-
suer of the security, (c) would be the direct
or indirect beneficial owner of more than
10 percent of any class of a registered eq-
uity security if the taxpayer were an issuer
of equity securities, or (d) is comparable to
an officer or director of an issuer of equity
securities. Thus, a “specified individual”
is an officer, director, or more than 10%
owner of a corporation taxed under sub-
chapter C or subchapter S, or a personal
service corporation. For partnership pur-
poses, “specified individual” includes any
partner that holds a more than 10% equity
interest in the partnership, general partner,
officer, or managing member of a partner-
ship. “Specified individual” also includes
a director or officer of a tax-exempt entity.
The provisions of this notice apply to
the use of an aircraft for the entertain-
ment of a specified individual of a party
related to the taxpayer within the meaning
of § 267(b) or § 707(b). Thus, if X and Y
are related corporations within the mean-
ing of § 267(b) and Y provides entertain-
ment use of an aircraft to A, who is a speci-
fied individual as to X, Y’s costs are disal-
lowed (except to the extent treated as com-
pensation to A or reimbursed by A) under
§ 274(e)(2)(B).
For purposes of this notice, a speci-
fied individual is the recipient of entertain-
ment provided to a spouse or family mem-
ber of the specified individual or to an-
other person because of the person’s rela-
tionship to the specified individual. See
§ 1.61–21(a)(4). Thus, costs allocable to
entertainment provided to a spouse, family
member, or other person are attributed to
the specified individual for purposes of de-
termining the amount of disallowed costs.
As used hereafter in this notice, the term
“specified individual” includes any person
to whom a taxpayer has provided enter-
tainment that is attributable to a specified
individual under this paragraph.
(4)Expenses of aircraft subject to
disallowance
For purposes of calculating the amount
of expenses for entertainment use of an
aircraft that are disallowed (except to the
extent treated as compensation to or re-
imbursed by a specified individual) under
§ 274(e)(2)(B) or (9), taxpayers must take
into account all of the expenses of main-
taining and operating the aircraft (all fixed
2005–24 I.R.B.1229June 13, 2005

and operating costs). These expenses in-
clude, but are not limited to, fuel costs;
salaries for pilots, maintenance personnel,
and other personnel assigned to the air-
craft; meal and lodging expenses of flight
personnel; take-off and landing fees; costs
for maintenance and maintenance flights;
costs of on board refreshments, amenities,
or gifts; hangar fees (at home or away);
management fees; depreciation; amounts
deductible under § 179; in the case of char-
tered aircraft, all costs billed for the charter
(including amounts for flight time, waiting
time, fuel, and overnight expenses); and,
in the case of leased aircraft or other leased
equipment, lease payments.
(5)Method of allocating expenses to
flights
For purposes of § 274(e)(2)(B) and (9),
the total deductible expenses attributable
to the aircraft must be allocated to ex-
penses for use of the aircraft for entertain-
ment of specified individuals and expenses
for all other uses. A taxpayer must allocate
expenses for each taxable year using either
occupied seat hours or occupied seat miles
flownbytheaircraftandmustapplythe
chosen method consistently for all usage
for the taxable year. Occupied seat hours
or miles is the sum of the hours or miles
flown by an aircraft multiplied by the num-
ber of seats occupied for each hour or mile.
For example, a flight of 6 hours with three
passengers aboard results in 18 occupied
seat hours. See the special rule for “dead-
head” flights, below.
Taxpayers must aggregate all fixed and
variable expenses to determine the total
expenses paid or incurred during the tax-
able year and divide the amount of total ex-
penses by total occupied seat hours or oc-
cupied seat miles flown to determine the
cost per occupied seat hour or occupied
seat mile. Taxpayers may calculate the
cost per occupied seat hour or occupied
seat mile separately for each aircraft or
may aggregate the costs of aircraft of simi-
lar cost profiles. For example, the costs of
a turboprop aircraft may not be aggregated
with the costs of a jet aircraft and the costs
of a two-engine jet aircraft may not be ag-
gregated with the costs of a four-engine jet
aircraft.
The amount disallowed under § 274 is
the sum of (a) the cost of each occupied
seat hour (or mile) flown by a specified
individual for entertainment purposes, less
(b) the sum of the amount treated as com-
pensation and the amount reimbursed for
each specified individual and each flight.
Therefore, to determine the amount sub-
ject to disallowance, taxpayers must al-
locate the costs to the specific entertain-
ment flight provided to a specified individ-
ual and compare the cost of each flight to
the amount treated as compensation to or
reimbursed by the specified individual for
that flight.
Example
A taxpayer’s aircraft is used for Flights 1, 2, and
3, of 5 hours, 5 hours, and 4 hours, respectively, dur-
ing the taxpayer’s taxable year. On Flight 1, there
are four passengers, none of whom are specified in-
dividuals or traveling for entertainment. On Flight
2, passengers A and B are specified individuals trav-
eling for entertainment and passengers C and D are
not specified individuals or are not traveling for en-
tertainment. On Flight 3, all four passengers (A, B,
E, and F) are specified individuals traveling for enter-
tainment. The taxpayer incurs $56,000 in expenses
for the operation of the aircraft for the taxable year.
The aircraft is operated for a total of 56 occu-
pied seat hours for the period (four passengers times 5
hours or 20 occupied seat hours for Flight 1, plus four
passengers times 5 hours or 20 occupied seat hours
for Flight 2, plus four passengers times 4 hours or 16
occupied seat hours for Flight 3). The cost per occu-
pied seat hour is $1,000 ($56,000/56 hours). The total
entertainment usage of the aircraft for specified indi-
viduals subject to disallowance is 26 occupied seat
hours (two passengers for 5 hours each on Flight 2
and four passengers for 4 hours each on Flight 3) and
the total cost subject to disallowance is $26,000 (26
occupied seat hours X $1,000).
For purposes of determining the amount disal-
lowed (to the extent not treated as compensation or
reimbursed), $5,000 ($1,000 X 5 hours) each is allo-
cable to A and B for Flight 2, and $4,000 ($1,000 X 4
hours) each is allocable to A, B, E, and F for Flight 3.
For Flight 2, the taxpayer treats $1,200 (the fair
market value of the flight) as compensation to A, and
B reimburses the taxpayer $500. The taxpayer may
deduct $1,700 of the cost of Flight 2 allocable to A
and B. The deduction for the remaining $8,300 cost
allocable to entertainment provided to A and B on
Flight 2 is disallowed (with respect to A, $5,000 less
the $1,200 treated as compensation, and with respect
to B, $5,000 less the $500 reimbursed). For Flight
3, the taxpayer treats $1,300 (the fair market value of
the flight) each as compensation to A, B, E, and F.
The taxpayer may deduct $5,200 of the cost of Flight
3. The deduction for the remaining $10,800 cost allo-
cable to entertainment provided to A, B, E, and F on
Flight 3 is disallowed ($4,000 less the $1,300 treated
as compensation to each specified individual).
(6)Special rule for “deadhead” flights
For purposes of this notice, an aircraft
returning empty from a flight after dis-
charging passengers or traveling empty
to pick up passengers (deadheading) is
treated as having the same number and
character of occupied seat miles or hours
as the leg or legs of the trip on which
passengers are aboard.
(7)Allocation of expenses on trips of
a specified individual involving both
business and entertainment
The costs of a flight provided to a spec-
ified individual that includes a segment or
segments for business and for entertain-
ment must be allocated to the business and
entertainment use. The entertainment cost
is the excess of the total cost of the flights
(by occupied seat hours or miles) over the
cost of the flights that would have been
taken without the entertainment segment
or segments.
Example. G, a specified individual, is the sole
passenger on an aircraft on a two-hour flight from
City A to City B. The flight from City A to City B
is for business. G then travels on a three-hour flight
from City B to City C for entertainment purposes, and
returns from City C to City A on a four-hour flight.
G’s flights have resulted in nine occupied seat hours
(two for the first segment, plus three for the second
segment, plus four for the third segment). If G had
returned directly to City A from City B, the flights
would have resulted in four occupied seat hours. Five
occupied seat hours are allocable to G’s entertain-
ment use of the aircraft (nine total occupied seat hours
less four occupied seat hours). If the taxpayer’s cost
per occupied seat hour is $1,000, $5,000 must be allo-
cated to G’s entertainment use of the aircraft ($1,000
X five occupied seat hours). The amount disallowed
is $5,000 less any amount the taxpayer treats as com-
pensation to G or G reimburses the taxpayer for this
flight.
(8)Non-commercial flight valuation
consistency rule
Under § 1.61–21(g)(14)(i), a taxpayer
who uses the SIFL formula in a calendar
year to value any flight provided to an em-
ployee must use the SIFL formula to value
all flights provided to employees during
that calendar year. The Internal Revenue
Service and the Treasury Department plan
to amend these regulations to permit tax-
payers to value the entertainment use of
aircraft by specified individuals under the
fair market value rules of § 1.61–21(b), but
continue to value flights for other employ-
ees and for specified individuals not trav-
eling for entertainment using the SIFL for-
mula. Until regulations are published, tax-
payersmayrelyonthisnoticetoallowthis
inconsistency in the treatment of specified
and non-specified individuals for income
inclusion purposes. If the amount treated
June 13, 200512302005–24 I.R.B.

as compensation is greater than the amount
of the taxpayer’s costs (as determined un-
der this notice) for a flight, however, the
taxpayer’s deduction is limited to the tax-
payer’s costs.
(9)Interaction with § 162(m)
Any amount for the entertainment use
of an aircraft that is treated by the tax-
payer as compensation to a specified indi-
vidual who is also a “covered employee”
(as defined in § 162(m)(3)) is subject to
§ 162(m). Thus, to the extent the covered
employee’s “applicable employee remu-
neration” (as defined in § 162(m)(4)), in-
cluding remuneration related to entertain-
ment, exceeds $1,000,000, the taxpayer’s
deduction is disallowed under § 162(m).
(10)Costs treated as compensation
The amount of costs to which this notice
applies is reduced by an amount treated
as compensation to a specified individ-
ual who is an employee of the taxpayer if
the amount is treated as compensation for
the flight on the taxpayer’s income tax re-
turn as originally filed and as wages for
purposes of chapter 24 (relating to with-
holding of income tax at the source on
wages). See § 1.274–2(f)(2)(iii)(A) and
Ann. 85–113. For a specified individ-
ual who is not the taxpayer’s employee,
costs are treated ascompensation if the
amount for the flight is included in an in-
formation return under Part III of subchap-
ter A of chapter 61 (unless not required to
be reported under those provisions). See
§ 1.274–2(f)(2)(iii)(B).
C. REQUEST FOR COMMENTS
The Service and the Treasury Depart-
ment request comments on issues arising
under this notice. Comments should be
submitted in writing on or before August
1, 2005, and should include a reference
to Notice 2005–45. Comments may be
submitted to CC:PA:LPD:PR (Notice
2005–45), Room 5203, Internal Revenue
Service, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044. Alterna-
tively, comments may be submitted elec-
tronically via the following e-mail address:
Notice.Comments@irscounsel.treas.gov.
Please include “Notice 2005–45” in the
subject line of any electronic communica-
tions.
Submissions may be hand delivered
Monday through Friday between the hours
of8a.m. and4p.m. toCC:PA:LPD:PR
(Notice 2005–45), Courier’s Desk, Inter-
nal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC 20224. All
comments are available for public inspec-
tion and copying.
D. EFFECTIVE DATE
This notice applies to expenses incurred
after June 30, 2005. The Service will not
challenge a reasonable method of deter-
mining disallowed expenses incurred after
October 22, 2004, and before July 1, 2005.
Application of this notice to determine dis-
allowed expenses is a reasonable method.
E. TRANSITION RULE FOR
REPORTING DISALLOWED
EXPENSES
A taxpayer that incurs expenses to
which § 274(e), as amended by the AJCA,
applies in a taxable year ending after Oc-
tober 22, 2004, but on or before May
27, 2005, may apply the disallowance
of expenses for that taxable year against
expenses incurred in the taxpayer’s first
taxable year ending after May 27, 2005.
Thus, for example, a calendar year tax-
payer may choose to adjust its taxable
income either (a) for its 2005 taxable year
to reflect the disallowance of expenses to
which this notice applies that are incurred
after October 22, 2004, and before January
1, 2006, or (b) for its 2004 taxable year
to reflect the disallowance of the portion
of the expenses incurred after October 22,
2004, and before January 1, 2005, and for
its 2005 taxable year to reflect the disal-
lowance of the portion of the expenses
incurred after December 31, 2004, and
before January 1, 2006.
DRAFTING INFORMATION
The principal author of this notice is
Michael A. Nixon of the Office of the
Associate Chief Counsel (Income Tax &
Accounting). For further information re-
garding this notice, contact Mr. Nixon or
Christian Wood at (202) 622–4930 (not a
toll-free call).
26 CFR 601.106: Appeals functions.
(Also Part I, §§ 6166, 7479.)
Rev. Proc. 2005–33
SECTION 1. PURPOSE
This revenue procedure provides guid-
ance on exhausting administrative reme-
dies prior to seeking a declaratory judg-
ment pursuant to section 7479 of the In-
ternal Revenue Code. A declaratory judg-
ment may be requested from the United
States Tax Court when an executor has
made an election under section 6166 to ex-
tend the time for payment of estate tax with
respect to an interest in a closely held busi-
ness, and the Internal Revenue Service has
(1) made a determination that the election
cannot be made with respect to the estate
or with respect to any property included
therein, (2) failed to make a determination
with respect to the estate or with respect to
any property included therein within 180
calendar days after the executor’s filing of
the election, or (3) made a determination
that the extension of time for payment un-
der section 6166 has ceased to apply with
respect to the estate or with respect to any
property included therein.
SECTION 2. DEFINITIONS
For purposes of this revenue proce-
dure—
(1) any reference to “executor” refers to
the executor as defined in section 2203;
(2) any reference to “applicant” refers
to the person (or persons) authorized to file
a petition with the Tax Court pursuant to
section 7479;
(3) any reference to “determination”
refers to a determination by the Service as
to whether an election may be made un-
der section 6166 for one or more closely
held business interests or whether a valid
election under section 6166 to extend the
time for payment has ceased to apply;
such term, however, does not include
a private letter ruling, technical advice
memorandum, or technical expedited ad-
vice memorandum issued by the Office of
Chief Counsel;
(4) any reference to a “request for a
determination” refers to an election filed
under section 6166(a) (and, if applicable,
an election under section 6166(b)(7), (8) or
(10)) or section 6166(h);
2005–24 I.R.B.1231June 13, 2005

(5) any reference to a “preliminary de-
termination letter” refers to a Letter 950
issued by the Service (also known as a
30-day letter or notice of preliminary de-
termination) or a letter issued by the Ser-
vice Center which is captioned “prelimi-
nary determination letter” and which con-
tains a notice of Appeal rights in language
similar to that in a Letter 950; and
(6) any reference to a “final determi-
nation letter” refers to a Letter 3570,No-
ticeofDeterminationAsProvidedinIRC
§ 7479 That Extension of Time for Payment
Under IRC § 6166 Has Ceased To Apply,
or Letter 3571,Notice of Determination
As Provided in IRC § 7479 That Election
Under IRC § 6166 Has Been Denied,is-
sued by the Service (each of which is also
known as a 90-day letter or notice of final
determination).
SECTION 3. BACKGROUND
.01 Pursuant to section 6166(a), an ex-
ecutor may elect to pay part or all of the
estate tax in two or more (but not exceed-
ing ten) equal installments if: (1) the dece-
dent was a citizen or resident of the United
States at the date of death; and (2) the value
included in the decedent’s gross estate for
either (i) an interest in a closely held busi-
ness or (ii) interests in two or more closely
held businesses that are treated as an inter-
est in a single closely held business pur-
suant to section 6166(c), exceeds 35 per-
cent of the adjusted gross estate. Section
6166(b) sets forth definitions and, in para-
graphs (7), (8), and (10), special rules that
allow an executor to make an election to
pay part or all of the estate tax in install-
ments under section 6166(a) in certain cir-
cumstances that would not otherwise qual-
ify for the election under section 6166(a).
Generally, the executor must make an elec-
tion under section 6166(a) (and, if applica-
ble, an election under section 6166(b)(7),
(8) or (10)) no later than the due date for
filing the estate tax return (including any
extensions of time to file).SeeI.R.C.
§ 6166(d).
.02 Section 6166(e) provides that, if an
election was made under section 6166(a)
to pay any part of the estate tax in install-
ments and a deficiency is assessed, the de-
ficiency, subject to applicable limitations
on the amount of tax deferred, generally
will be prorated to the installments already
paid or due prior to the date the deficiency
is assessed, as well as to the installments
not yet due.
.03 After a valid section 6166 election is
made, certain events may trigger the accel-
eration of the deferred estate tax payments.
Section 6166(g) identifies events that ter-
minate the extension of time for payment
and require the payment of the unpaid por-
tion of the estate tax upon notice and de-
mand.
.04 Under section 6166(h), the executor
of an estate may elect to pay in installments
an assessed deficiency of estate tax for an
estate that qualifies under section 6166(a),
even though the executor did not make an
election under section 6166(a). The execu-
tor must make the section 6166(h) election
with respect to the deficiency no later than
60 calendar days after the Service has is-
sued a notice and demand for the payment
of that deficiency.
.05 Section 7479 provides that the Tax
Court may issue a declaratory judgment in
the case of an actual controversy involv-
ing a determination by the Service (or a
failure of the Service to make a determina-
tion within 180 calendar days) with respect
to the initial validity of a section 6166
election, or a determination by the Ser-
vice with respect to the continuing valid-
ity of a section 6166 election. Under sec-
tion 7479(b)(2), however, the Tax Court
may not issue a declaratory judgment un-
less the applicant has exhausted all ad-
ministrative remedies within the Service.
Section 7479(b)(2) further provides that,
with respect to a failure of the Service to
make a determination, an applicant shall
be deemed to have exhausted the appli-
cant’s administrative remedies upon the
expiration of 180 calendar days after the
request for such determination was made,
provided that the applicant has taken in a
timely manner all reasonable steps to se-
cure that determination.
.06 Rule 210(c) of the Tax Court Rules
of Practice and Procedure provides that the
Tax Court will not have jurisdiction over
an action for declaratory judgment unless
the Service has issued a determination let-
ter, or the Service has been requested to
make a determination and has failed to do
so for a period of at least 180 calendar
days after the request for such determina-
tion was made. For information relating to
the filing of a petition with the Tax Court
for a declaratory judgment under section
7479, see Tax Court Rule 211(f).
SECTION 4. EXHAUSTION OF
ADMINISTRATIVE REMEDIES
.01Actions Required to be Taken. Sec-
tion 7479(b)(2) provides that the Tax Court
shall not issue a declaratory judgment or
decree in any section 7479 proceeding
unless the applicant has exhausted all
available administrative remedies within
the Service.See alsoTax Court Rule
210(c)(4). The reasonable steps required
to be taken by the applicant, whether the
petition is based on the Service’s deter-
mination or the Service’s failure to make
a determination, are listed below. All of
these steps need not be completed by the
same person. The actions taken (and no-
tices received) by the executor, as well as
any actions taken (and notices received)
by others, will be attributed to, and thus
deemed to have been performed (or re-
ceived) by, the applicant.
(1) The executor must timely file (in-
cluding extensions of time to file granted
by the Service) a Form 706,United States
Estate (and Generation-Skipping Trans-
fer) Tax Return, on behalf of the estate
and attach the election to extend the time
to pay pursuant to section 6166(a) (and,
if applicable, an election under section
6166(b)(7), (8) or (10)). In the case of
a deficiency assessed with respect to an
estate for which the executor did not make
a section 6166 election on the Form 706, if
the executor wishes to pay the deficiency
in installments, the executor must elect
to extend the time to pay the deficiency
pursuant to section 6166(h) by filing a
notice of election with the Service within
60 calendar days after the date that notice
and demand for payment of the deficiency
is made.
(a) If the election is tentatively denied in
whole or in part, or if the Service proposes
under section 6166(g) to terminate an elec-
tion, the Service will issue a preliminary
determination letter to the applicant, advis-
ing the applicant of theapplicant’s right to
appeal the determination by requesting a
conference with the Service’s Appeals Of-
fice (an “Appeals conference”).
(b) Similarly, if during the Service’s
examination of the Form 706, the Ser-
vice concludes that an election should have
been denied, the Service will issue a pre-
liminary determination letter to the appli-
cant, advising the applicant of the appli-
June 13, 200512322005–24 I.R.B.

cant’s right to appeal the determination by
requesting an Appeals conference.
(2) The applicant must request, in writ-
ing, an Appeals conference within 30 cal-
endar days after the mailing date of the pre-
liminary determination letter, or by such
later date for responding to the prelimi-
nary determination letter as is agreed to be-
tween the applicant and the Service. The
applicant must participate fully in an Ap-
peals conference, including, without lim-
itation, submitting all additional informa-
tion related to the section 6166 determina-
tion (if any) that is requested by the Ser-
vice in connection with (or as a follow-up
to) the Appeals conference.
(a) If the applicant does not timely re-
quest an Appeals conference and fully par-
ticipate in any conference that is held, the
applicant will not be deemed to have ex-
hausted all administrative remedies.
(b) Appeals conferences may be con-
ducted by telephone, correspondence,
face-to-face meetings, or by a combina-
tion of these methods.
(c) Upon reaching a final decision, Ap-
peals will issue a final determination letter
to the applicant. The determination by Ap-
peals, regarding the estate’s initial or con-
tinuing eligibility under section 6166, is fi-
nal and may not be appealed further within
the Service.
.02When Remedies Deemed Ex-
hausted. An applicant will be deemed
to have exhausted all administrative reme-
dies upon the applicant’s completion of
the actions in section 4.01 of this rev-
enue procedure and the expiration of a
reasonable time for the Service to issue
a final determination letter subsequent to
the Appeals conference. For this purpose,
a reasonable time shall be deemed to have
expired on the 61st calendar day after the
later of the date of the Appeals conference
or the date of receipt by Appeals of the
applicant’s submission of all additional
information requested, if any.
.03Remedies Deemed Exhausted With-
out Appeals Conference. An applicant
who has taken all reasonable steps to
secure the determination as provided in
section 4.01 of this revenue procedure will
be deemed to have exhausted all admin-
istrative remedies within the Service for
purposes of section 7479 in the following
situations:
(1) upon the issuance of a final determi-
nation letter, if the applicant did not pre-
viously receive a preliminary determina-
tion letter, provided that the failure to re-
ceive the preliminary determination letter
was not due to actions or inactions of the
applicant (such as a failure to supply re-
quested information or a current mailing
address to the Service);
(2) upon the expiration of 180 calendar
days after the date on which the request for
a determination was made, if the applicant
has received neither a preliminary determi-
nation letter nor a final determination letter
within that period, provided that the failure
to receive any such letter was not due to ac-
tions or inactions of the applicant; or
(3) upon the expiration of a reasonable
period of time that is not less than 61 cal-
endar days after a timely request for an Ap-
peals conference was made in response to
a preliminary determination letter, during
which the Service has failed to respond to
the request for an Appeals conference.
SECTION 5. EXAMPLES
The following examples illustrate the
exhaustion of administrative remedies re-
quirement, but do not address any other
possible jurisdictional defects.
.01Example 1: The executor timely files a Form
706 and makes an election under section 6166(a)(1).
The Service issues a preliminary determination letter,
tentatively granting the election. The Service subse-
quently conducts an examination of the estate’s Form
706, determines that the estate is not entitled to pay
the tax in installments pursuant to section 6166, and
sends a second preliminary determination letter to the
executor denying the election. The applicant, within
30 calendar days after the mailing date of the second
preliminary determination letter, submits a written re-
quest for an Appeals conference. The applicant pro-
vides all materials requested by Appeals in a timely
fashion. Appeals denies the election and sends the ap-
plicant a final determination letter. Upon the issuance
of the final determination letter, the applicant has ex-
hausted all available administrative remedies within
the Service.
.02Example 2: The executor timely files a Form
706, makes elections under section 6166(a) and sec-
tion 6166(b)(8), and tenders with the return the first
installment payment of the tax. The executor receives
evidence of the Service’s receipt of the Form 706
(i.e., a date-stamped receiptfrom hand-carrying the
return in accordance withTreas. Reg. §§ 20.6091–1
or 20.6091–2, a return receipt from certified or regis-
tered mail, a certification by a private delivery service
of receipt of a signature upon delivery to the Service,
or a written or other subsequent acknowledgment of
receipt from the Service). The applicant does not re-
ceive any correspondence from the Service relating to
the request for a determination. On the 181st calendar
day after the filing of the Form 706, the applicant files
a petition with the Tax Court requesting a declaratory
judgment pursuant to section 7479. Due to the failure
of the Service to make a determination regarding the
section 6166 election within 180 calendar days after
the filing of the Form 706, the applicant is deemed to
have exhausted all available administrative remedies
within the Service.
.03Example 3: The executor timely files a Form
706 and makes an election under section 6166(a). Af-
ter an examination of the Form 706, the Service issues
a final determination letter recognizing the validity
of the election. Subsequently, the Service determines
that more than 50 percent of the interest in the closely
held business has been disposed of during the deferral
period. Pursuant to section 6166(g), the Service is-
sues a preliminary determination letter proposing to
terminate the section 6166 election. Within 30 cal-
endar days after the mailing date of the preliminary
determination letter, the applicant submits a written
request for an Appeals conference. The applicant
timely provides all requested information to Appeals.
After considering the information provided, Appeals
issues a final determination letter that the extension
previously granted has ceased to apply. The appli-
cant has exhausted all available administrative reme-
dies within the Service.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective for
all section 6166 elections filed on or af-
ter May 20, 2005. For any section 6166
election filed before May 20, 2005, an
applicant may rely on section 4 of this
revenue procedure to demonstrate that
applicant has exhausted all administrative
remedies within the Service.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Tracey B. Leibowitz of the
Office of the Associate Chief Counsel,
Procedure and Administration (Admin-
istrative Provisions and Judicial Practice
Division). For further information re-
garding this revenue procedure, contact
Ms. Leibowitz at (202) 622–4940 (not a
toll-free call).
26 CFR 601.104: Collection functions.
(Also Part I, §§ 6672; 301.6672.)
Rev. Proc. 2005–34
SECTION 1. PURPOSE
This revenue procedure sets forth up-
dated procedures for appeals of proposed
trust fund recovery penalty assessments
arising under section 6672 of the Internal
Revenue Code.
2005–24 I.R.B.1233June 13, 2005

SECTION 2. BACKGROUND
.01 Section 6672(a) imposes a penalty
against any person required to collect,
truthfully account for, and pay over any
tax imposed by the Code who willfully
fails to collect, or truthfully account for
and pay over the tax, or who willfully
attempts in any manner to evade or defeat
the tax.
.02 Under section 6671(b), the term
“person” includes an officer or employee
of a corporation or a member or employee
of a partnership, who, as an officer, em-
ployee, or member of the corporation or
partnership, is under a duty to perform
the act in respect of which the violation
occurs.
.03 Section 6672(b), as amended by the
Taxpayer Bill of Rights 2, Pub. L. No.
104–168, 110 Stat. 1465 (TBOR 2), pro-
vides that the Internal Revenue Service is
required to send a notice of proposed as-
sessment to any taxpayer against whom
it intends to assess a trust fund recovery
penalty. In this context, section 6672(b)
uses the broader term “taxpayer” because
the notice of proposed assessment must be
sent to taxpayers who may not ultimately
fit within the definition of “person” as set
forthinsection6671(b)andasusedinsec-
tions 6672(a), (c), (d) and (e).
.04 Rev. Proc. 84–78, 1984–2 C.B.
754, which sets forth procedures for appeal
of the trust fund recovery penalty, does not
reflect the amendments made to section
6672 by TBOR 2.
SECTION 3. SCOPE
The procedures in this revenue proce-
dure apply to trust fund recovery penalty
cases relating to employment and excise
taxes imposed under the Internal Revenue
Code, except when collection is in jeop-
ardy.
See section 6672(c) for procedures re-
lating to a stay of collection if a bond is
furnished. See section 6672(d) for provi-
sions regarding the right to contribution if
more than one person is liable for the trust
fund recovery penalty. See section 6672(e)
for rules regarding the exception for volun-
tary board members of tax-exempt organi-
zations.
SECTION 4. PROCEDURE IN AREA
COLLECTION DIVISIONS
.01 If the Service determines that a tax-
payer is liable for the trust fund recovery
penalty, the Service will propose the as-
sessment of the penalty and inform the tax-
payer of the determination by notice. The
notice of proposed assessment will pro-
vide the taxpayer an opportunity to sign a
form agreeing to the proposed assessment
or to dispute the proposed assessment by
appealing the proposed assessment within
60 days of the date on the notice (75 days
if the notice is addressed to the taxpayer
outside of the United States) and request-
ing an Appeals conference.
.02 The Service will assess the penalty
if the taxpayer fails to appeal the proposed
assessment within the period specified in
Section 4.01 of this revenue procedure
and the Service has not received a signed
agreement from the taxpayer agreeing to
the assessment. If the taxpayer submits a
timely appeal in response to the notice of
proposed assessment and requests that the
case be referred to Appeals, the case will
be reviewed in the appropriate compliance
office to determine whether further action
or development is required before refer-
ring the case to Appeals.
SECTION 5. PROCEDURE FOR
APPEALING A PROPOSED
ASSESSMENT AND REQUESTING
AN APPEALS CONFERENCE
.01Small Case Appeals. If the pro-
posed penalty assessment for any tax
period is $25,000 or less, the taxpayer
may appeal the proposed assessment by
completing and submitting in writing two
copies of a small case appeal request. The
request should be mailed to the attention
of the IRS officer or employee named on
the notice of proposed assessment as the
“Person to Contact” at the address shown
on the front of the notice. The request
must include the following:
(1) A copy of the notice of proposed as-
sessment or the date and number of the no-
tice and the taxpayer’s name and social se-
curity number, alongwith any information
that will help the Service locate the tax-
payer’s file;
(2) A statement that the taxpayer is re-
questing an Appeals conference; and
(3) A list of the issues that the taxpayer
is contesting and an explanation of the ba-
sis for the taxpayer’s disagreement. The
explanation should include the following:
(a) The taxpayer’s duties and responsi-
bilities during the tax periods listed in the
notice of proposed assessment. In particu-
lar, the taxpayer should describe whether
the taxpayer had the duty and authority
to collect, account for, and pay over trust
fund taxes; and
(b) If the taxpayer contests the Service’s
calculation of the penalty, the taxpayer
should identify the dates and amounts of
payments that the taxpayer believes the
Service failed to consider and/or any com-
putational errors made by the Service.
.02Large Case Appeals. If the pro-
posed penalty for any tax period is more
than $25,000, the taxpayer may appeal the
proposed assessment by submitting a for-
mal written protest. In addition to the
items required by section 5.01(1) and (2)
of this revenue procedure, the formal writ-
ten protest must include the following:
(1) The tax period(s) involved;
(2) A list of the findings the taxpayer is
contesting;
(3) A statement of facts that describes
the following:
(a) The basis for the taxpayer’s dis-
agreement with the proposed assessment,
including specific facts that support the
taxpayer’s arguments;
(b) The taxpayer’s duties and responsi-
bilities during the tax periods listed in the
notice of proposed assessment. In particu-
lar, the taxpayer should describe whether
the taxpayer had the duty and authority
to collect, account for, and pay trust fund
taxes; and
(c) If the taxpayer contests the Service’s
calculation of the penalty, the dates and
amounts of payments that the taxpayer be-
lieves the Service failed to consider and/or
any computational errors made by the Ser-
vice;
(4) An explanation of any law or other
supporting authorities on which the tax-
payer relies; and
(5) The following signed declaration
under penalties of perjury that the state-
ment of facts required by section 5.02(3)
is true:
“Under penalties of perjury, I declare
that I have examined the facts presented in
this statement and any accompanying in-
formation, and to the best of my knowl-
June 13, 200512342005–24 I.R.B.

edge and belief, they are true, correct, and
complete.”
.03 A taxpayer may contest all of the pe-
riods listed in the notice in a single protest;
however, if the proposed penalty for any
one of the periods is more than $25,000,
the taxpayer must submit a formal written
protest described in section 5.02.
SECTION 6. REPRESENTATION AT
CONFERENCE
A taxpayer may represent himself at an
Appeals conference or be represented by
someone who is authorized to represent
taxpayers under Treasury Circular 230,
Regulations Governing the Practice of
Attorneys, Certified Public Accountants,
Enrolled Agents, Enrolled Actuaries,
and Appraisers before the Internal Rev-
enue Service (31 C.F.R. Part 10). If an
authorized representative attends an Ap-
peals conference without the taxpayer, the
representative must have filed a power
of attorney,see26 C.F.R. §§ 601.501
through 601.509, which also will autho-
rize the representative to receive or inspect
confidential tax information. If a repre-
sentative prepares and signs a request for
appeal or a written protest on behalf of the
taxpayer, the representative must submit
a declaration stating whether he or she
knows personally that the facts stated in
the protest and accompanying documents
are true and correct.
SECTION 7. EXTENSION OF THE
PERIOD OF LIMITATIONS FOR
ASSESSMENT
If the notice of proposed assessment is
mailed or delivered before the period for
assessing the trust fund recovery penalty
ends, the assessment period will not end
before the later of:
(1) The date that is 90 days after the
Service mailed or delivered the notice of
proposed assessment; or
(2) If the taxpayer has filed a timely ap-
peal in response to the notice of proposed
assessment, the date that is 30 days after
the Secretary makes a final determination
regarding the appeal.
SECTION 8. PROCEDURE IN
AREA DIRECTOR’S OFFICE FOR
DISPOSING OF CLAIMS
.01 If the Service has assessed the trust
fund recovery penalty because of the fail-
ure of the taxpayer to respond to the notice
of proposed assessment within the 60-day
period (or 75-day period, if applicable) or
on the basis of the decision of Appeals, the
taxpayer generally must pay the appropri-
ate portion of the penalty and file a claim
for refund in order to pursue judicial re-
view.
.02 Once an assessment has been made,
the Service generally will not consider
any claim for abatement unless the tax-
payer establishes to the compliance area
director’s satisfaction that unusual cir-
cumstances merit consideration of such
a claim. If the compliance area director
decides not to consider a taxpayer’s abate-
ment claim, the taxpayer will be notified
of that decision.
.03 Only Appeals may consider a claim
for abatement if the assessment was made
on the basis of a decision of Appeals. If
the assessment was made based on a deci-
sion of Appeals, the area director will for-
ward the claim to Appeals for considera-
tion. The taxpayer will be notified if Ap-
peals decides not to consider a taxpayer’s
abatement claim.
SECTION 9. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 84–78is superceded.
SECTION 10. EFFECTIVE DATE
This revenue procedure is effective for
all trust fund recovery penalties proposed
on or after May 20, 2005.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Kevin Connelly of the Office
of the Associate Chief Counsel (Procedure
& Administration). For further informa-
tion regarding this revenue procedure,
contact Mr. Connelly at (202) 622–3630
(not a toll-free call).
2005–24 I.R.B.1235June 13, 2005

Part IV. Items of General Interest
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Safe Harbor for Valuation
Under Section 475
REG–100420–03
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document sets forth an
elective safe harbor for dealers in securi-
ties, dealers in commodities, and traders
in securities and commodities that permits
these taxpayers to make an election pur-
suant to which the values of positions re-
ported on certain financial statements are
the fair market values of those positions
for purposes of section 475 of the Internal
Revenue Code. This safe harbor attempts
to reduce the compliance burden upon tax-
payers and to improve the administrability
of the valuation aspect of section 475 for
the Internal Revenue Service. This doc-
ument also provides a notice of a public
hearing on these proposed regulations.
DATES: Written or electronic comments
must be received by August 22, 2005. Out-
lines of topics to be discussed at the public
hearing scheduled for September 15, 2005
at 10 a.m. must be received by August 23,
2005.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–100420–03),
room 5203, Internal Revenue Ser-
vice, PO Box 7604, Ben Franklin Sta-
tion, Washington, DC 20044. Submis-
sions may be hand delivered Monday
through Friday between the hours of
8 a.m. and 4 p.m. to: CC:PA:LPD:PR
(REG–100420–03), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue N.W., Washington, DC, or sent
electronically, via the IRS Internet site at
www.irs.gov/regsor via the Federal eRule-
making Portal atwww.regulations.gov
(IRS-REG–100420–03).
FOR FURTHER INFORMATION
CONTACT: Concerning submissions of
comments, the hearing or to be placed on
the building access list to attend the hear-
ing, Treena Garrett at (202) 622–7180;
concerning the proposals, Marsha A. Sabin
or John W. Rogers III (202) 622–3950 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in this notice of proposed rulemaking has
been submitted to the Office of Manage-
ment and Budget for review in accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)). Comments on the
collection of information should be sent to
theOffice of Management and Budget,
Attn: Desk Officer of the Department of
Treasury, Office of Information and Reg-
ulatory Affairs, Washington, D.C. 20503,
with copies to theInternal Revenue Ser-
vice, Attn: IRS Reports Clearance Offi-
cer, SE:W:CAR:MP:T:T:SP, Washington,
D.C. 20224. Comments on the collection
of information should be received by July
25, 2005. Comments are specifically re-
quested concerning:
Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the functions of the IRS, in-
cluding whether the information will have
practical utility;
The accuracy of the estimated burden
associated with the proposed collection of
information (see below);
How the quality, utility, and clarity of
the information to be collected may be en-
hanced;
How the burden of complying with
the proposed collection of the informa-
tion may be minimized, including through
the application of automated collection
techniques or other forms of information
technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of services to provide informa-
tion.
The collection of information
in these proposed regulations is in
§1.475(a)–4(f)(1) and §1.475(a)–4(k).
This information is required by the IRS to
avoid any uncertainty about whether a tax-
payer has made an election and to verify
compliance with section 475 and the safe
harbor method of accounting described in
§1.475(a)–4(d). This information will be
used to facilitate audits and to determine
whether the amount of tax has been cal-
culated correctly. The collection of the
informationisrequiredtoproperlydeter-
mine the amount of income or deduction
to be taken into account. The respondents
are sophisticated dealers or traders in se-
curities or commodities.
Estimated total annual recordkeeping
burden: 49,232 hours.
Estimated average annual burden per
recordkeeper: 4 to 6 hours.
Estimated number of recordkeepers:
12,308.
Estimated frequency of recordkeeping:
annually.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number assigned by the Of-
fice of Management and Budget.
Books or records relating to a collection
of information must be retained as long as
their contents may be material in the ad-
ministration of any internal revenue law.
Generally, tax returns and tax return infor-
mation are confidential, as required by 26
U.S.C. 6103.
Background
This document contains proposed
amendments to 26 CFR Part 1 under
section 475 of the Internal Revenue Code
(Code). Section 475 was added to the
Code by section 13223(a) of the Omnibus
Budget Reconciliation Act of 1993 (Pub-
lic Law 103–66, 107 Stat. 312). Section
475(a) generally provides that the securi-
ties held by dealers in securities shall be
valued as of the last business day of the
year at fair market value. Section 475(g)
provides that the Secretary shall prescribe
regulations as may be necessary or appro-
priate to carry out the purposes of section
475. The legislative history of section 475
indicates that, under this authority, the
Secretary may issue regulations to permit
the use of valuation methodologies that
reduce the administrative burden of com-
pliance on the taxpayer but clearly reflect
June 13, 200512362005–24 I.R.B.

income for federal income tax purposes.
On May 5, 2003, the Treasury Depart-
ment and the IRS published in theFederal
Registeran Advance Notice of Proposed
Rulemaking (Safe Harbor for Satisfying
Certain Statutory Requirements for Valua-
tion under Section 475 for Certain Securi-
ties and Commodities) (REG–100420–03)
[68 FR 23632] (the ANPRM); Announce-
ment 2003–35, 2003–1 C.B. 956 (see
§601.601(d)(2)). The ANPRM solicited
comments on whether a safe harbor ap-
proachusingvaluesreportedonanappli-
cable financial statement for certain secu-
rities may be used for purposes of section
475. The ANPRM set forth a possible safe
harbor for valuing these securities and
asked for comments on various aspects of
such a safe harbor.
Explanation of Provisions
Overview
Section 475(a) requires dealers in se-
curities to mark their securities to market.
Sections 475(e) and (f) allow dealers in
commodities and traders in securities or
commodities to elect similar treatment for
their securities or commodities. If the se-
curity or commodity is inventory, it must
be included in inventory at its fair market
value, and if it is not inventory and is held
at the end of the taxable year, gain or loss is
recognized as if the security or commodity
had been sold for its fair market value on
the last business day of the taxable year.
Although the term “fair market value”
has a long-standing and well-established
meaning within the tax law, it is some-
times difficult to determine the fair market
value of certain securities and commodi-
ties, particularly those that have no com-
parable sales. This has impeded the effi-
cient administration of the mark-to-market
system under section 475. Consequently,
with a view to improving the administra-
bility of the valuation requirements of sec-
tion 475, the Treasury Department and the
IRS issued the ANPRM, which set forth
some principles upon which a safe harbor
for valuation could be constructed. Using
these principles, and incorporating a num-
ber of comments received from the pub-
lic, these proposed regulations set forth a
safe harbor for valuing securities and com-
modities under section 475.
Safe Harbor
The safe harbor generally permits eli-
gible taxpayers to elect to have the val-
ues that are reported for eligible positions
on certain financial statements treated as
the fair market values reported for those
eligible positions for purposes of section
475, if certain conditions are met. The
safe harbor is based upon the principle that
if the mark-to-market method used for fi-
nancial reporting is sufficiently consistent
with the mark-to-market method required
by section 475, then the values used for fi-
nancial reporting should be acceptable val-
ues for purposes of section 475, even if
those values are not fair market values un-
der general tax principles. To ensure mini-
mal divergence from fair market value un-
der tax principles, these proposed regula-
tions impose certain restrictions on the fi-
nancial accounting methods and financial
statements that are eligible for the safe har-
bor and also require certain adjustments to
the values of the eligible positions on those
financial statements that may be used un-
der the safe harbor.
The safe harbor requires that financial
statement values be adjusted to comply
with the requirements of section 482 or
section 482 principles when applicable.
For example, section 482 principles may
require the revision of estimates of future
cash flows used in valuing certain finan-
cial instruments to reflect the appropriate
arm’s length pricing ofinter-branch trans-
actions as of their origination date. In
addition, these proposed regulations do
not alter the treatment of interest expense.
See sections 861 and 882 and regulations
thereunder.
Eligible Taxpayers and Eligible Positions
The safe harbor is available to any tax-
payer subject to the mark-to-mark regime
under section 475, whether the taxpayer is
a dealer in securities under section 475(a),
a dealer in commodities under section
475(e), or a trader in either securities or
commodities under section 475(f). The
Commissioner will issue a revenue proce-
dure that lists the types of securities and
commodities that are subject to the safe
harbor. It is anticipated that the revenue
procedure will apply to every security po-
sition and every commodity position sub-
ject to mark-to-market under section 475.
Comments are requested as to whether any
types of securities or commodities should
be excluded from the safe harbor.
It is important to note, however, that the
valuation methodology under the safe har-
bor applies only for positions that are prop-
erly marked under section 475. The safe
harbor only addresses valuation and does
not expand or contract the scope of appli-
cation of section 475. For example, if a
security is not marked under section 475
because it has been identified as held for
investment, then under the safe harbor it
may not be marked for federal income tax
purposes even though it is properly marked
on the financial statement in accordance
with U.S. Generally Accepted Accounting
Principles (U.S. GAAP). Similarly, if a se-
curity is not marked on the applicable fi-
nancial statement because it is a hedge but
section 475(a) applies because the security
was not identified as a hedge, then the se-
curity must still be marked under section
475.
Eligible Method
To qualify for the safe harbor, a finan-
cial accounting method must satisfy cer-
tain basic requirements. First, it must mark
eligible positions to market through valu-
ations made as of the last business day of
each taxable year. Second, it must recog-
nize into income on the income statement
any gain or loss from marking eligible po-
sitions to market. Third, it must recognize
into income on the income statement any
gain or loss on disposition of an eligible
position as if a year-end mark occurred im-
mediately before the disposition. Fourth, it
must arrive at fair value in accordance with
U.S. GAAP.
In addition to the basic requirements,
the safe harbor also imposes certain limita-
tions that ensure minimal divergence from
fair market value. Under the first lim-
itation, which applies only to securities
and commodities dealers, except for eli-
gible positions that are traded on a quali-
fied board or exchange (as defined in sec-
tion 1256(g)(7)), the financial accounting
method must not result in values at or
near the bid or ask values, even if the
use of bid or ask values is permissible in
accordance with U.S. GAAP. This limi-
tation is based upon the business model
for derivative contracts held by dealers in
those derivatives, the model underlying
2005–24 I.R.B.1237June 13, 2005

most of the public comments received in
response to the ANPRM.
According to the comments, dealers
seek to capture and profit from bid-ask
spreads by entering into positions that,
in the aggregate, offset each other. The
bid-ask spread contains the dealer’s profit
and compensates the dealer for all risks
and expenses. The origination of such a
balanced portfolio may, therefore, be seen
as creating a synthetic annuity, with a value
that is largely immune from market-related
changes in the values of the component
securities. For these eligible positions,
such as interest rate swap contracts, use of
bid or ask values approximates realization
accounting and, therefore, fails to cause
recognition of the present value of the syn-
thetic annuity in the taxable year that the
annuity is created. Consequently, the valu-
ation method described in §1.471–4(a)(1)
generally fails to satisfy the limitation set
forth in paragraph (d)(3)(i) of these pro-
posed regulations.
The Treasury Department and the IRS
request comments on whether dealers in
commodities and traders in either securi-
ties or commodities operate under different
business models and on how the rules set
forth in these proposed regulations should
be modified, if at all, to accommodate
those business models.
Under the second limitation, if the
method of valuation consists of determin-
ing the present value of projected cash
flows from an eligible position or po-
sitions, then the method must not take
into account any cash flows of income or
expense that are attributable to a period
or time before the valuation date. This
limitation ensures that items of income or
expense will not be accounted for twice,
first through current realization and then
again in the mark.
Under the third limitation, no cost or
risk is accounted for more than once, ei-
ther directly or indirectly. For example,
a financial accounting method that allows
a special adjustment for credit risk gener-
ally satisfies this limitation. It would not
satisfy this limitation, however, if it com-
puted the present value of projected cash
flows using a discount rate that takes into
account any amount of credit risk that is
also taken into account by the special ad-
justment. Thus, if a dealer in securities en-
ters into an interest rate swap contract with
a counterparty with aAA/aa rating, tak-
ing credit enhancement and netting agree-
ments into account, then the dealer cannot
take a special adjustment to the value of the
contract for all of the risk between a coun-
terparty with a risk-free rating and the ac-
tual counterparty if the dealer determines
the present value of projected cash flows
from the contract using a mid-market swap
curve based upon the LIBOR AA rate. The
Treasury Department and the IRS under-
stand, however, that there may be degrees
of credit quality within an established rat-
ing level, such as AA/aa, and that valuation
methodologies used currently may reflect
these nuances in credit quality. Accord-
ingly, a credit adjustment reflecting these
nuances may satisfy this limitation.
Election and Revocation
The election to use the safe harbor is
made by filing a statement with the tax-
payer’s timely filed Federal income tax
return for the taxable year for which the
election is first effective. The statement
must declare that the taxpayer makes the
safe harbor election for all of its eligi-
ble positions. In addition to any other in-
formation that the Commissioner may re-
quire, the statement must describe the tax-
payer’s applicable financial statement for
the first taxable year for which the elec-
tion is effective and must state that the tax-
payer agrees to timely provide upon the re-
quest of the Commissioner all information,
records, and schedules required by the safe
harbor. The election continues to be in ef-
fect for all subsequent taxable years unless
it is revoked.
A taxpayer cannot revoke the election
without the consent of the Commissioner.
The Commissioner, however, can revoke
the election if the taxpayer fails to com-
ply with any of the recordkeeping and pro-
duction requirements and cannot show rea-
sonable cause for the failure, the taxpayer
ceases to use an eligible method, the tax-
payer ceases to have an applicable finan-
cial statement, as described below, or the
taxpayer holds ade minimisquantity of el-
igible positions that are subject to the safe
harbor. No revocation is necessary if the
taxpayer ceases to qualify as an eligible
taxpayer, or section 475 does not otherwise
apply, because the safe harbor may only
be used to determine values and cannot be
used unless section 475 applies. Once re-
voked by either the Commissioner or the
taxpayer, neither the taxpayer nor any of its
successors may make the election for any
taxable year that begins before the date that
is six years after the first day of the earli-
est taxable year affected by the revocation
without the consent of the Commissioner.
Applicable Financial Statements
Not all financial statements qualify un-
der the safe harbor. Consequently, these
proposed regulations set forth a system
that enables a taxpayer to determine which
one of its financial statements, if any, may
be used when applyingthesafeharbor.
Three categories of financial statements
qualify under the safe harbor and are set
forth in order of priority, from highest to
lowest. In the first and highest category
are those financial statements that must
be filed with the Securities and Exchange
Commission (SEC), such as the 10-K and
the Annual Statement to Shareholders. In
the second category are those financial
statements that must be provided to the
Federal government or any of its agen-
cies other than the IRS. In this category
are statements filed by foreign-controlled
financial institutions engaged in trade or
business within the United States who
report their mark-to-market results to
the Federal Reserve or the Office of the
Comptroller of the Currency. In the third
category are certified audited financial
statements that are provided to creditors
to make lending decisions, that are pro-
vided to equity holders to evaluate their
investment, or that are provided for other
substantial non-taxpurposes and are rea-
sonably anticipated to be directly relied on
for the purposes for which the statements
were created. For a financial statement
described in any of the three categories
above to qualify as an applicable financial
statement, it must be prepared in accor-
dance with U.S. GAAP. If a taxpayer has
two statements in the same category, each
of which would qualify under the safe
harbor, then the statement that results in
the highest aggregate valuation of eligible
positions is the only financial statement
that may qualify for the safe harbor.
Statements filed with the SEC pro-
vide a high degree of confidence that
the values used on those statements re-
flect reasonable approximations of fair
value. Consequently, there are no ad-
ditional business use requirements for
June 13, 200512382005–24 I.R.B.

those statements. For the second category
(statements filed with other agencies of
the Federal government) and the third
category of statements (the other certified
audited financial statements), this degree
of confidence is ensured by requiring some
substantial non-tax use in the taxpayer’s
business. This determination of use must
take into account whether the taxpayer’s
reliance on the values exposes the tax-
payer to material adverse consequences if
the values are incorrect. Accordingly, the
safe harbor requires that the values for eli-
gible positions contained in these financial
statements be used by the taxpayer in most
of the significant management functions
of all or substantially all of its business.
This use includes activities such as se-
nior management review of business-unit
profitability, market risk measurement or
management, credit risk measurement or
management, internal allocation of cap-
ital, and compensation of personnel but
does not include either tax accounting or
reporting the results of operations to other
persons. Significance of use is tested by
examining all the facts and circumstances
in light of the stated purpose of the busi-
ness use requirement.
The IRS and Treasury understand that
some dealers maintain internal books of
account, not prepared in accordance with
U.S. GAAP, for separate segments of their
business and that these internal books of
account may include a charge to each oper-
ating segment of an internal “cost of carry”
calculated in the manner of interest (and
the derivatives dealer book may be treated
as a separate business segment for that pur-
pose). The purpose of this cost-of-carry
charge is to assess profitability or to re-
flect the cost of capital in maintaining the
positions held in that business segment.
The amounts so charged do not reduce
the fair value of eligible positions on a
balance sheet prepared in accordance with
U.S. GAAP. The maintenance of these
segmented accounts, which may apply an
accounting approach that does not qualify
as an eligible accounting method, does
not prevent some other financial statement
prepared in accordance with U.S. GAAP
from qualifying as the taxpayer’s applica-
ble financial statement.
Record Retention and Production; Use of
Different Values
The safe harbor can be administrable
only if the IRS can readily verify that the
values used on financial statements are
also appropriately used on the Federal in-
come tax return. Consequently, record-
keeping and record production are critical
to the safe harbor. These proposed regula-
tions provide specific requirements for the
types of records that must be maintained
and provided to enable ready verification.
In general, electing taxpayers must clearly
show: (1) that the same value used for fi-
nancial reporting was used on the Federal
income tax return; (2) that no eligible po-
sition subject to section 475 is excluded
from the application of the safe harbor;
and (3) that only eligible positions sub-
ject to section 475 are carried over to the
Federal income tax return under the safe
harbor. These proposed regulations out-
line what records must be retained and pro-
duced, including certain forms and sched-
ules filed with the Federal income tax re-
turn, such as the Schedule M–1, “Net In-
come (Loss) Reconciliation for Corpora-
tions With Total Assets of $10 Million or
More,” Schedule M–3, “Net Income (Loss)
Reconciliation for Corporations With To-
tal Assets of $10 Million or More,” and
Form 1120F, “U.S. Income Tax Return of
a Foreign Corporation.” These proposed
regulations also provide that the Commis-
sioner may enter into an advance agree-
ment with a taxpayer on how records are
to be maintained and how long the records
are to be retained. All of the necessary
records must be retained as long as their
contents may become material in the ad-
ministration of any internal revenue law.
To encourage rapid examinations of the
Federal income tax returns of electing tax-
payers, these proposed regulations require
that all necessary records be produced
within 30 days after the Commissioner
requests them. If the required records are
not provided as required, the regulations
permit the Commissioner to use his dis-
cretion to: (1) extend the 30-day period;
(2) excuse minor or inadvertent failures to
provide the requested records; (3) require
use of values that clearly reflect income
but which are different from those used
on the applicable financial statement; or
(4) revoke the election (as described un-
der “Election and Revocation” above) if
a taxpayer does not demonstrate reason-
able cause for the failure to maintain and
produce the required records.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Execu-
tive Order 12866. Therefore, a regulatory
assessment is not required. It is hereby
certified that the collection of information
in these regulations will not have a sig-
nificant economic impact on a substantial
number of small entities. This certifica-
tion is based upon the fact that it is an-
ticipated that the safe harbor will be used
primarily by dealers in securities that are
financial institutions with a sophisticated
understanding of the capital markets. Be-
cause section 475 is elective for traders
in securities or commodities or dealers in
commodities, some small businesses could
qualify for the safe harbor if they make
two voluntary elections: (1) an election
to mark to market securities or commodi-
ties under section 475 and (2) an election
to apply the safe harbor. Because both
elections are voluntary, it is unlikely any
small business taxpayer who thinks the
reporting and recordkeeping requirements
are too burdensome will make these elec-
tions. Furthermore, the total average esti-
mated burden per taxpayer is small, as re-
ported earlier in the preamble. This is be-
cause most of the recordkeeping require-
ments do not require taxpayers to generate
new records, but instead require records
used for financial reporting purposes to be
kept for tax reporting purposes. For all
of these reasons, a Regulatory Flexibility
Analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Code,
this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administration
for comment on their impact on small busi-
ness.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(a signed original and eight (8) copies)
or electronic comments that are submitted
timelytotheIRS.TheIRSandtheTrea-
sury Department specifically request com-
2005–24 I.R.B.1239June 13, 2005

ments on the clarity of these proposed reg-
ulations and how they may be made easier
to understand. All comments will be avail-
able for inspection and copying.
A public hearing has been scheduled
for September 15, 2005, beginning at 10
a.m. in the Auditorium, Internal Revenue
Building, 1111 Constitution Avenue, NW,
Washington, DC. Due to building security
procedures, visitors must enter at the Con-
stitution Avenue entrance. In addition, all
visitors must presentphoto identification
to enter the building. Because of access
restriction, visitors will not be admitted
beyond the immediate entrance area more
than 30 minutes before the hearing starts.
For information about having your name
placed on the building access list to attend
the hearing, see “FOR FURTHER INFOR-
MATION CONTACT” section of this pre-
amble.
Drafting Information
The principal authors of these proposed
regulations are Marsha A. Sabin and
John W. Rogers III, Office of the Asso-
ciate Chief Counsel (Financial Institutions
and Products). However, other personnel
from the IRS and the Treasury Department
participated in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.475(a)–4 also issued under 26
U.S.C. 475(g). * * *
Par. 2. Section 1.475–0 is amended by:
1. Revising the introductory text.
2. Adding entries to the table for
§1.475(a)–4.
The revision and addition reads as fol-
lows:
§1.475–0 Table of contents.
This section lists the major captions in
§§1.475(a)–3, 1.475(a)–4, 1.475(b)–1,
1.475(b)–2, 1.475(b)–4, 1.475(c)–1,
1.475(c)–2, 1.475(d)–1 and 1.475(e)–1.
*****
§1.475(a)–4 Safe harbor for valuation
under section 475.
(a) Overview.
(1) Purpose.
(2) Summary of paragraphs.
(b) Safe harbor.
(1) General rule.
(2) Scope of the safe harbor.
(c) Eligible taxpayer.
(d) Eligible method.
(1) Sufficient consistency.
(2) General requirements.
(i) Frequency.
(ii) Recognition at the mark.
(iii) Recognition on disposition.
(iv) Fair value standard.
(3) Limitations.
(i) Bid-ask method.
(ii) Valuations based on present values
of projected cash flows.
(iii) Accounting for costs and risks.
(4) Examples.
(e) Compliance with other rules.
(f) Election.
(1) Making the election.
(2) Duration of the election.
(3) Revocation.
(i) By the taxpayer.
(ii) By the Commissioner.
(4) Re-election.
(g) Eligible positions.
(h) Applicable financial statement.
(1) Definition.
(2) Primary financial statement.
(i) Statement required to be filed with
Securities and Exchange Commission.
(ii) Statement filed with a Federal
agency other than the IRS.
(iii) Certified audited financial state-
ment.
(3) Example.
(4) Financial statements of equal prior-
ity.
(5) Consolidated groups.
(6) Supplement or amendment to a fi-
nancial statement.
(7) Certified audited financial state-
ment.
(i) [Reserved.]
(j) Significant business use.
(1) In general.
(2) Financial statement value.
(3) Management of a business as a
dealer or trader.
(4) Significant use.
(k) Retention and production of
records.
(1) In general.
(2) Specific requirements.
(i) Reconciliation.
(A) In general.
(B) Values on books and records with
supporting schedules.
(C) Consolidation schedules.
(ii) Instructions provided by the Com-
missioner.
(3) Time for producing records.
(4) Retention period for records.
(5) Agreements with the Commis-
sioner.
(l) [Reserved.]
(m) Use of different values.
*****
Par. 3. Section 1.475(a)–4 is added to
read as follows:
§1.475(a)–4 Safe harbor for valuation
under section 475.
(a)Overview—(1)Purpose. This sec-
tion sets forth a safe harbor that under
certain circumstances permits taxpayers to
make an election pursuant to which the
values of positions reported on certain fi-
nancial statements are the fair market val-
ues of those positions for purposes of sec-
tion 475. This safe harbor is based on the
principle that, if a mark-to-market method
used for financial reporting is sufficiently
consistent with the requirements of section
475 and if the financial statement employ-
ing that method has certainindiciaof reli-
ability, then the values used on that finan-
cial statement should be appropriate val-
ues for purposes of section 475. If other
provisions of the Code or regulations re-
quire adjustments to fair market value, use
of the safe harbor does not obviate the need
for those adjustments. See paragraph (e) of
this section.
(2)Summary of paragraphs. Paragraph
(b) of this section sets forth the safe harbor.
To determine who may use the safe harbor,
paragraph (c) of this section defines the
term “eligible taxpayer” for purposes of
the safe harbor. Paragraph (d) of this sec-
tion sets forth the basic requirements for
determining whether the method used for
financial reporting is sufficiently consis-
tent with the requirements of section 475.
June 13, 200512402005–24 I.R.B.

Paragraph (e) of this section describes ad-
justments to the financial statement values
that may be required for purposes of apply-
ing section 475. Paragraph (f) of this sec-
tion describes how to make the safe harbor
election and the conditions under which
the election may be revoked. Paragraph
(g) of this section provides that the Com-
missioner will issue a revenue procedure
that lists the types of securities and com-
modities that may qualify as “eligible posi-
tions” for purposes of the safe harbor. Us-
ing rules for determining priorities among
financial statements, paragraph (h) of this
section defines the term “applicable finan-
cial statement” and so describes the finan-
cial statement, if any, whose values may
be used in the safe harbor. In some cases,
as required by paragraph (j) of this sec-
tion, the safe harbor is available only if
the taxpayer’s operations make significant
business use of financial statement values.
Paragraph (k) of this section sets forth re-
quirements for record retention and record
production. Paragraph (m) of this section
provides that the Commissioner may use
fair market values that clearly reflect in-
come, but which differ from values used on
the applicable financial statement, if a tax-
payer fails to comply with the recordkeep-
ing and record production requirements of
paragraph (k) of this section.
(b)Safe harbor—(1)General rule.
Subject to any adjustment required by
paragraph (e) of this section, if an eligi-
ble taxpayer uses an eligible method for
the valuation of an eligible position on
its applicable financial statement and the
eligible taxpayer is subject to the election
described in paragraph (f) of this section,
the value that the eligible taxpayer assigns
to that eligible position in its applicable
financial statement is the fair market value
of the eligible position for purposes of
section 475, even if that value is not the
fair market value of the position for any
other purpose of the internal revenue laws.
Notwithstanding the rule set forth in this
paragraph, the Commissioner may, in cer-
tain circumstances, use fair market values
that clearly reflect income but which are
different than the values used on the appli-
cable financial statement. See paragraph
(m)ofthissection.
(2)Scope of the safe harbor.Thesafe
harbormaybeusedonlytodetermineval-
ues for eligible positions that are properly
marked to market under section 475. It
does not determine whether any positions
may or may not be subject to mark-to-mar-
ket accounting under section 475.
(c)Eligible taxpayer. An eligible tax-
payer is a dealer in securities as defined
in section 475(c)(1) and §1.475(c)–1, a
dealer in commodities as defined in sec-
tion 475(e), or a trader in securities or com-
modities as defined in section 475(f).
(d)Eligible Method—(1)Sufficient
consistency. An eligible method is a
mark-to-market method that is sufficiently
consistent with the requirements of a
mark-to-market method under section
475. To be sufficiently consistent, the
eligible method must satisfy all of the
requirements of paragraph (d)(2) and
paragraph (d)(3) of this section.
(2)General requirements.The
method—
(i)Frequency. Must require a valuation
of the eligible position no less frequently
than annually, including a valuation as of
the last business day of the taxable year;
(ii)Recognition at the mark. Must rec-
ognize into income on the income state-
ment for each taxable year mark-to-mar-
ket gain or loss based upon the valuation or
valuations described in paragraph (d)(2)(i)
of this section;
(iii)Recognition on disposition.Must
require, on disposition of the eligible po-
sition, recognition into income (on the in-
come statement for the taxable year of dis-
position) as if a year-end mark occurred
immediately before such disposition; and
(iv)Fair value standard. Must require
use of a valuation standard that arrives at
fair value in accordance with U.S. Gener-
ally Accepted Accounting Principles (U.S.
GAAP) as established by the Financial Ac-
counting Standards Board.
(3)Limitations—(i)Bid-ask method.
Except for eligible positions that are traded
on a qualified board or exchange, as de-
fined in section 1256(g)(7), the valuation
standard used for the applicable finan-
cial statement of an eligible taxpayer
must not permit values at or near the bid
or ask value. Consequently, the valuation
method described in §1.471–4(a)(1) gener-
ally fails to satisfy this paragraph (d)(3)(i).
The restriction in this paragraph (d)(3)(i)
is satisfied if a resulting value is closer to
the mid-market value than it is to the bid
or ask value.
(ii)Valuations based on present values
of projected cash flows. If the method of
valuation consists of projecting cash flows
from an eligible position or positions and
determining the present value of those cash
flows, the method must not take into ac-
count any cash flows (income or expense)
attributable to a period or time prior to the
valuation date. In addition, adjustment of
the gain or loss recognized on the mark
may be required with respect to payments
on notional principal contracts that will oc-
cur after the valuation date to the extent
that portions of the payments have been
recognized for tax purposes prior to the
valuation date and appropriate adjustment
has not been made for purposes of deter-
mining financial statement value.
(iii)Accounting for costs and
risks—(A)General rule. In a determi-
nation of fair value, appropriate costs and
risks may be taken into account, but no
cost or risk may be accounted for more
than once, either directly or indirectly. If
appropriate, the costs and risks that may be
accounted for, include, but are not limited
to, credit risk (appropriately adjusted for
any credit enhancement), future adminis-
trative costs, and model risk. In the case
of credit risk, an adjustment is implicit
in computing the present value of cash
flows using a discount rate greater than
a risk-free rate. Accordingly, a determi-
nation of whether any further downward
adjustment to value for credit risk is war-
ranted, or whether an upward adjustment
is required, must take that implicit adjust-
ment into consideration.
(4)Examples. The following examples
illustrate this paragraph (d).
Example 1. (i) A, a calendar year taxpayer, is
a dealer in securities within the meaning of section
475(c)(1). A generally maintains a balanced port-
folio of interest rate swaps and other interest rate
derivatives, capturing bid-ask spreads and keeping its
market exposure within desired limits (using, if nec-
essary, additional derivatives for this purpose). A
uses a mark-to-market method on a statement that
it is required to file with the United States Securi-
ties and Exchange Commission (Securities and Ex-
change Commission or SEC) and that satisfies para-
graph (d)(2) of this section with respect to both the
contracts with customers and the additional deriva-
tives. None of the derivatives is traded on a qualified
board or exchange, as defined in section 1256(g)(7).
When determining the amount of any gain or loss re-
alized on a sale, exchange, or termination of a posi-
tion, A makes a proper adjustment for amounts taken
into account respecting payments or receipts. All of
A’s counterparties on the derivatives have credit qual-
ity ratings of AA/aa, according to standard credit rat-
ings obtained from private credit rating agencies.
(ii) Under A’s valuation method, as of each valua-
tion date A determines a mid-market probability dis-
2005–24 I.R.B.1241June 13, 2005

tribution of future cash flows under the derivatives
and computes the present values of these cash flows.
In computing these present values, A uses an indus-
try standard yield curve that is appropriate for obliga-
tions by persons with credit quality ratings of AA/aa.
In addition, based on information including its own
knowledge about the counterparties, A adjusts some
of these present values either upward or downward
to reflect A’s reasonable judgment about the extent
to which the true credit status of each counterparty’s
obligation, taking credit enhancements into account,
differs from AA/aa.
(iii) A’s methodology does not violate the require-
ment in paragraph (d)(3)(iii) of this section that the
same cost or risk not be taken into account, directly
or indirectly, more than once.
Example 2. (i) The facts are the same as inExam-
ple 1, except that A uses risk-free rates to discount the
payments to be received under the derivatives. Based
on information, including its own knowledge about
the counterparties, A adjusts these present values to
reflect A’s reasonable judgment about the extent to
which the true credit status of each counterparty’s
obligation, taking credit enhancements into account,
differs from a risk-free obligation.
(ii) A’s methodology does not violate the require-
ment in paragraph (d)(3)(iii) of this section that the
same cost or risk not be taken into account, directly
or indirectly, more than once.
Example 3. (i)ThefactsarethesameasinEx-
ample 1, except that, after computing present values
using the discount rates that are appropriate for oblig-
ors with credit quality ratings of AA/aa, A, based on
information including its own knowledge about the
counterparties, adjusts some of these present values
either upward or downward to reflect A’s reasonable
judgment about the extent to which the true credit
status of each counterparty’s obligation, taking credit
enhancements into account, differs from AAA/aaa.
(ii) A’s methodology violates the requirement in
paragraph (d)(3)(iii) of this section that the same cost
or risk not be taken into account, directly or indirectly,
more than once. By using a AA/aa discount rate,
A’s method takes into account the difference between
risk-free obligations and AA/aa obligations. This dif-
ference includes the difference between a rating of
AAA/aaa and one of AA/aa. By adjusting values for
the difference between a rating of AAA/aaa and one
of AA/aa, A takes into account risks that it had al-
ready accounted for through the discount rates that it
used. The same result would occur if A judged some
of its counterparties’ obligations to be of AAA/aaa
quality but A failed to adjust the values of those obli-
gations to reflect the difference between a rating of
AAA/aaa and one of AA/aa.
Example 4. (i) The facts are the same as inExam-
ple 1, except that A determines the mid-market value
for each derivative and thensubtracts the correspond-
ing part of the bid-ask spread.
(ii) A’s methodology violates the rule in para-
graph (d)(3)(i) of this section that forbids valuing the
derivatives at or near the bid or ask value.
Example 5. (i) The facts are the same as inExam-
ple 1, and, in addition, A’s adjustments for all risks
and costs, including credit risk, future administrative
costs, and model risk, consistently cause the adjusted
value to be at or near the bid value or ask value.
(ii) A’s methodology violates the rule in para-
graph (d)(3)(i) of this section that forbids valuing the
derivatives at or near the bid or ask value.
(e)Compliance with other rules.Not-
withstanding any other provisions of this
section, the fair market values for purposes
ofthesafeharbormustbeconsistentwith
section 482 or rules that adopt section 482
principles, when applicable. Thus applica-
ble financial statement values must be ad-
justed as necessary for purposes of the safe
harbor. For example, if a notional prin-
cipal contract is subject to section 482 or
section 482 principles, the values of future
cash flows taken into account in determin-
ing the value of the contract for purposes
of section 475 must be consistent with sec-
tion 482.
(f)Election—(1)Making the election.
Unless the Commissioner prescribes oth-
erwise, an eligible taxpayer elects under
this section by filing with the Commis-
sioner a statement declaring that the tax-
payer makes the safe harbor election in
this section for all its eligible positions. In
addition to any other information that the
Commissioner may require, the statement
must describe the taxpayer’s applicable fi-
nancial statement for the first taxable year
for which the election is effective and must
state that the taxpayer agrees to timely pro-
vide upon the request of the Commissioner
all information, records, and schedules re-
quired by paragraph (k) of this section.
The statement must be attached to a timely
filed Federal income tax return (including
extensions) for the taxable year for which
the election is first effective.
(2)Duration of the election.Once
made, the election continues in effect for
all subsequent taxable years unless re-
voked.
(3)Revocation—(i)By the taxpayer.
An eligible taxpayer that is subject to an
election under this section may revoke
it only with the consent of the Commis-
sioner.
(ii)By the Commissioner.TheCom-
missioner, after consideration of all rele-
vant facts and circumstances, may revoke
an election under this section, effective be-
ginning with the first open year for which
the election is effective or with any subse-
quent year, if—
(A) The taxpayer fails to comply with
paragraph (k) of this section (concerning
record retention and production) and the
taxpayer does not show reasonable cause
for this failure;
(B) The taxpayer ceases to have an ap-
plicable financial statement or ceases to
use an eligible method; or
(C) For any other reason, no more than a
de minimisnumber of eligible positions, or
no more than ade minimisfraction of the
taxpayer’s eligible positions, are covered
by the safe harbor in paragraph (b) of this
section.
(4)Re-election. Ifanelectionisre-
voked, either by the Commissioner or by
the taxpayer, the taxpayer (or any succes-
sor of the taxpayer) may not make the elec-
tion for any taxable year that begins be-
fore the date that is six years after the first
day of the earliest taxable year affected by
the revocation without the consent of the
Commissioner.
(g)Eligible positions. Eligible posi-
tions mean those types or classes of se-
curities or commodities that are marked
to market under section 475 and are de-
scribed by the Commissioner as eligible
positions for purposes of this safe harbor
in a revenue procedure or other published
guidance.
(h)Applicable financial statement—(1)
Definition. An eligible taxpayer’s applica-
ble financial statement for a taxable year is
the taxpayer’s primary financial statement
for that year if the statement is described
in paragraph (h)(2)(i) of this section (con-
cerning statements required to be filed
with the SEC) or if the statement is both
described in either paragraph (h)(2)(ii)
or (iii) of this section and also meets the
requirements of paragraph (j) of this sec-
tion (concerning significant business use).
Otherwise, or if the taxpayer does not
have a primary financial statement for the
taxable year, the taxpayer does not have
an applicable financial statement for the
taxable year.
(2)Primary financial statement.For
any taxable year, an eligible taxpayer’s
primary financial statement is the finan-
cial statement, if any, described in one or
more of paragraphs (h)(2)(i) through (iii)
of this section. If more than one financial
statement of the taxpayer for the year is
so described, the primary financial state-
ment is the one first described in para-
graphs (h)(2)(i) through (iii) of this sec-
tion. A taxpayer has only one primary fi-
nancial statement for any year.
June 13, 200512422005–24 I.R.B.

(i)Statement required to be filed with
the Securities and Exchange Commission.
A financial statement that is prepared in
accordance with U.S. GAAP and that is
required to be filed with the SEC, such
as the 10-K or the Annual Statement to
Shareholders.
(ii)Statement filed with a Federal
agency other than the IRS.Afinancial
statement that is prepared in accordance
with U.S. GAAP and that is required to
be provided to the Federal government or
any of its agencies other than the IRS.
(iii)Certified audited financial state-
ment. A certified audited financial state-
ment that is prepared in accordance with
U.S. GAAP; that is given to creditors for
purposes of making lending decisions,
given to equity holders for purposes of
evaluating their investment in the eligible
taxpayer, or provided for other substantial
non-tax purposes; and that the taxpayer
reasonably anticipates will be directly re-
lied on for the purposes for which it was
created.
(3)Example. A prepares a financial statement,
FS1, that is required to be filed with a Federal gov-
ernment agency other than the SEC or the IRS, and
is thus described in paragraph (h)(2)(ii) of this sec-
tion. A also prepares a second financial statement,
FS2, that is a certified audited financial statement
that is given to creditors and that A reasonably antic-
ipates will be relied on for purposes of making lend-
ing decisions, and that is thus described in paragraph
(h)(2)(iii) of this section. Because FS1, which is de-
scribed in paragraph (h)(2)(ii) of this section, is de-
scribed before FS2, which is described in paragraph
(h)(2)(iii) of this section, FS1 is A’s primary financial
statement.
(4)Financial statements of equal prior-
ity. If two or more financial statements are
of equal priority, after applying the rules
of paragraph (h)(2) of this section, then the
statement that results in the highest aggre-
gate valuation of eligible positions being
marked to market under section 475 is the
primary financial statement.
(5)Consolidated groups. If the tax-
payer is a member of an affiliated group
that files a consolidated return, the primary
financial statement of the taxpayer is the
primary financial statement of the com-
mon parent (within the meaning of section
1504(a)(1)) of the consolidated group.
(6)Supplement or amendment to a fi-
nancial statement. For purposes of para-
graph (b)(1) of this section and this para-
graph (h), a financial statement includes
any supplement or amendment to the fi-
nancial statement.
(7)Certified audited financial state-
ment. For purposes of this paragraph (h),
a financial statement is a certified audited
financial statement if it is certified by
an independent certified public accoun-
tant from a Registered Public Accounting
firm, as defined in section 2(a)(12) of the
Sarbanes-Oxley Act of 2002, Public Law
107–204, 116 Stat. 746 (July 30, 2002),
15 U.S.C. §7201(a)(12), and rules promul-
gated under that Act, and is—
(i)Certifiedtobefairlypresented(a
“clean” opinion);
(ii) Certified to be fairly presented sub-
ject to a concern about a contingency, other
than a contingency relating to the value of
eligible positions (a qualified “subject to”
opinion); or
(iii) Certified to be fairly presented
except for a method of accounting with
which the Certified Public Accountant dis-
agrees and which is not a method used to
determine the value of an eligible position
held by an eligible taxpayer (a qualified
“except for” opinion).
(i) [Reserved].
(j)Significant business use—(1)In gen-
eral. A financial statement is described in
this paragraph (j) if—
(i) The financial statement contains val-
ues for eligible positions;
(ii) The eligible taxpayer makes signif-
icant use of financial statement values in
most of the significant management func-
tions of its business; and
(iii) That use is related to the manage-
ment of all or substantially all of the eligi-
ble taxpayer’s business.
(2)Financial statement value. For pur-
poses of this paragraph (j), the termfinan-
cial statement valuemeans—
(i) A value that is taken from the finan-
cial statement; or
(ii) A value that is produced by a
process that is in all respects identical to
the process that produces the values that
appear on the financial statement but that
is not taken from the statement because
either—
(A) The value was determined as of a
date for which the financial statement does
not value eligible positions; or
(B) The value is used in the manage-
ment of the business before the financial
statement has been prepared.
(3)Management of a business as a
dealer or trader. For purposes of this
paragraph (j), the termmanagement of a
business as a dealer or traderrefers to
the financial and commercial oversight of
the business. Oversight includes, but is
not limited to, senior management review
of business-unit profitability, market risk
measurement or management, credit risk
measurement or management, internal al-
location of capital, and compensation of
personnel. Management of a business as
a dealer or trader does not include either
tax accounting or reporting the results of
operations to other persons.
(4)Significant use.Ifaneligibletax-
payer uses financial statement values
for some significant management func-
tions and uses values that are not financial
statement values for other significant man-
agement functions, then the determination
of whether the taxpayer has made signifi-
cant use of the financial statement values
is made on the basis of all the facts and
circumstances. This determination must
particularly take into account whether
the taxpayer’s reliance on the financial
statement values exposes the taxpayer to
material adverse economic consequences
if the values are incorrect.
(k)Retention and production of
records—(1)In general. In addition to
all records that section 6001 otherwise re-
quires to be retained, an eligible taxpayer
subject to the election provided by this
section must keep, and timely provide to
the Commissioner upon request, records
and books of account that are sufficient to
establish that the values used for eligible
positions for purposes of section 475 are
the values used in the applicable financial
statement. This obligation extends to all
books and records that are required to be
maintained for any period for financial
or regulatory reporting purposes, even if
these books or records may not otherwise
be specifically covered by section 6001.
All records described in this paragraph (k)
must be maintained for the period de-
scribed in paragraph (k)(4) of this section,
even if a lesser period of retention applies
for financial statement or regulatory pur-
poses.
(2)Specific requirements—(i)Recon-
ciliation. Unless the Commissioner other-
wise provides—
(A)In general. An eligible taxpayer
must provide reconciliation schedules
between the applicable financial state-
ment for the taxable year and Federal
income tax return for that year. The re-
2005–24 I.R.B.1243June 13, 2005

quired reconciliation schedules include all
supporting schedules, exhibits, computer
programs and any other information used
in producing the values and schedules,
documentation of rules and procedures
governing determination of the values.
The required schedules also include a
detailed explanation of any adjustments
necessitated by imperfect overlap between
the eligible positions that the taxpayer
marks to market under section 475 and
the eligible positions for which the appli-
cable financial statement uses an eligible
method. A corporate taxpayer subject to
this paragraph (k) must reconcile the net
income amount reported on its applicable
financial statement to the amount reported
on the applicable forms and schedules on
its Federal income tax return (such as the
Schedule M–1, “Net Income (Loss) Rec-
onciliation for Corporations With Total
Assets of $10 Million or More”; Schedule
M–3, “Net Income (Loss) Reconciliation
for Corporations With Total Assets of $10
Million or More”; and Form 1120F, “U.S.
Income Tax Return of a Foreign Corpora-
tion”) in the time and manner provided by
the Commissioner. Eligible taxpayers that
are not otherwise required to file a Sched-
ule M–1 or Schedule M–3 must reconcile
net income using substitute schedules sim-
ilar to Schedule M–1 and Schedule M–3,
and these substitute schedules must be
attached to the return.
(B)Values on books and records with
supporting schedules. The books and
records must state the value used for
each eligible position separately from the
value used for any other eligible position.
However, an eligible taxpayer may make
adjustments to values on a pooled basis,
if the taxpayer demonstrates that it can
compute gain or loss attributable to the
sale or other disposition of an individual
eligible position.
(C)Consolidation schedules. The tax-
payer must provide a schedule showing
consolidation and de-consolidation that is
used in preparing the applicable financial
statement, along with exhibits and subor-
dinate schedules. This schedule must pro-
vide information that addresses the differ-
ences for consolidation between the appli-
cable financial statement and the Federal
income tax return.
(ii)Instructions provided by the Com-
missioner. The Commissioner may pro-
vide an alternative time or manner in
which an eligible taxpayer subject to this
paragraph (k) must establish that the same
values used for eligible positions on the
applicable financial statement are also the
values used for purposes of section 475 on
the Federal income tax return.
(3)Time for producing records.All
documents described in this paragraph
(k) must be produced within 30 days of a
request by the Commissioner, unless the
Commissioner grants a written extension.
Generally, the Commissioner will exer-
cise his discretion to excuse a minor or
inadvertent failure to provide requested
documents if the taxpayer shows reason-
able cause for the failure, has made a good
faith effort to comply with the requirement
to produce records, and promptly reme-
dies the failure. For failures to maintain,
or timely produce, records, see para-
graph (m) of this section (allowing the
Commissioner, but not the taxpayer, to use
fair market values which clearly reflect
income, but which are different from those
values used on the applicable financial
statement, for eligible positions that other-
wise might be subject to the safe harbor)
and paragraph (f)(3)(ii) of this section
(allowing the Commissioner to revoke the
election).
(4)Retention period for records.All
materials required by this paragraph (k)
and section 6001 must be retained as long
as their contents may become material in
the administration of any internal revenue
law.
(5)Agreements with the Commissioner.
The Commissioner and an eligible tax-
payer may enter into a written agreement
that establishes, for purposes of this para-
graph (k), which records must be main-
tained, how they must be maintained, and
for how long they must be maintained.
(l) [Reserved].
(m)Use of different values.Ifthe
taxpayer fails to satisfy paragraph (k) of
this section (concerning record retention
and record production) with respect to
the records that relate to certain eligible
positions for a taxable year, the Commis-
sioner may, for those eligible positions
for that year, use fair market values un-
der section 475 that are different from
those values reported for those positions
on the applicable financial statement and
are values the Commissioner determines
to be appropriate to clearly reflect income.
See paragraph (f)(3)(ii) of this section
concerning revocation of the election by
the Commissioner, when a taxpayer does
not produce required records and fails to
demonstrate reasonable cause for such
failure.
Par. 4. Section 1.475(e)–1 is amended
by redesignating paragraphs (d) through (j)
as paragraphs (e) through (k), respectively
and adding a new paragraph (d) to read as
follows:
§1.475(e)–1 Effective dates.
*****
(d)Effective date. Section 1.475(a)–4
(concerning a safe harbor to use applicable
financial statement values for purposes of
section 475) applies to taxable years end-
ing on or after the date on which the Trea-
sury decision promulgating these regula-
tions is published in theFEDERAL REG-
ISTER.
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on May 20, 2005,
8:45 a.m., and published in the issue of the Federal Register
for May 24, 2005, 70 F.R. 29663)
Partial Withdrawal of Notice of
Proposed Rulemaking, Notice
of Proposed Rulemaking, and
Notice of Public Hearing
Partnership Equity for
Services
REG–105346–03
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Partial withdrawal of notice of
proposed rulemaking, notice of proposed
rulemaking, and notice of public hearing.
SUMMARY: This document withdraws
the remaining portion of the notice of pro-
posed rulemaking published in theFederal
Registeron June 3, 1971 (36 FR 10787)
and contains proposed regulations relating
to the tax treatment of certain transfers of
partnership equity in connection with the
performance of services. The proposed
regulations provide that the transfer of
June 13, 200512442005–24 I.R.B.

a partnership interest in connection with
the performance of services is subject to
section 83 of the Internal Revenue Code
(Code) and provide rules for coordinat-
ingsection83withpartnershiptaxation
principles. The proposed regulations also
provide that no gain or loss is recognized
by a partnership on the transfer or vesting
of an interest in the transferring partner-
ship in connection with the performance
of services for the transferring partnership.
This document also provides a notice of
public hearing on these proposed regula-
tions.
DATES: Written or electronic comments
must be received by August 22, 2005. Out-
lines of topics to be discussed at the public
hearing scheduled for October 5, 2005, at
10 a.m. must be received by September 14,
2005.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–105346–03),
room 5203, Internal Revenue Ser-
vice, PO Box 7604, Ben Franklin Sta-
tion, Washington, DC 20044. Submis-
sions may be hand-delivered Monday
through Friday between the hours of
8 a.m. and 4 p.m. to CC:PA:LPD:PR
(REG–105346–03), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC, or sent
electronically, via the IRS Internet site at
www.irs.gov/regsor via the Federal eRule-
making Portal atwww.regulations.gov
(IRS REG–105346–03).
FOR FURTHER INFORMATION
CONTACT: Concerning the section
83 regulations, Stephen Tackney at
(202) 622–6030; concerning the sub-
chapter K regulations, Audrey Ellis or
Demetri Yatrakis at (202) 622–3060; con-
cerning submissions, the hearing, and/or
to be placed on the building access list
to attend the hearing, Robin Jones, (202)
622–7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in this notice of proposed rulemaking has
been submitted to the Office of Manage-
ment and Budget for review in accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)). Comments on the
collection of information should be sent to
theOffice of Management and Budget,
Attn: Desk Officer for the Department
of the Treasury, Office of Information
and Regulatory Affairs, Washington, DC
20503, with copies to theInternal Rev-
enue Service, Attn: IRS Reports Clear-
ance Officer, SE:W:CAR:MP:T:T:SP,
Washington, DC 20224. Comments on
the collection of information should be
received by July 25, 2005. Comments are
specifically requested concerning:
Whether the proposed collection of in-
formation is necessary for the proper per-
formance of the functions of the IRS, in-
cluding whether the information will have
practical utility;
The accuracy of the estimated burden
associated with the proposed collection of
information (see below);
How the quality, utility, and clarity of
the information to be collected may be en-
hanced;
How the burden of complying with the
proposed collection of information may be
minimized, including through the appli-
cation of automated collection techniques
or other forms of information technology;
and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of services to provide informa-
tion.
The following collections of informa-
tion in this proposed regulation are in
§1.83–3(l):
(1) Requirement that electing partner-
ships submit an election with the partner-
ship tax return.
(2) Requirement that certain partners
submit a document to the partnership;
(3) Requirement that such documents
be retained; and
(4) Requirement that partnerships sub-
mit a termination document with the part-
nership tax return as one method of termi-
nating the election.
These collections of information are re-
quired by the IRS to determine whether
the amount of tax has been calculated cor-
rectly. The respondents are partnerships
and partners or other service providers.
The estimated total annual reporting
and/or recordkeeping burden is 112,500
hours.
The estimated annual burden per re-
spondent/recordkeeper varies from .10
hours to 10 hours, depending on indi-
vidual circumstances, with an estimated
average of 1 hour for partnerships and .25
hour for a partner or service provider. The
estimated number of respondents and/or
recordkeepers is 100,000 partnerships and
50,000 partners or other service providers.
The estimated annual frequency of re-
sponses (used for reporting requirements
only) is on occasion.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number assigned by theOf-
fice of Management and Budget.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential as required by
26 U.S.C. 6103.
Background
Partnerships issue a variety of instru-
ments in connection with the performance
of services. These instruments include
interests in partnership capital, interests in
partnership profits, and options to acquire
such interests (collectively, partnership
equity). On June 5, 2000, the Treasury
Department and the IRS issued Notice
2000–29, 2000–1 C.B. 1241, inviting
public comment on the Federal income tax
treatment of the exercise of an option to ac-
quire a partnership interest, the exchange
of convertible debt for a partnership in-
terest, and the exchange of a preferred
interest in a partnership for a common
interest in that partnership. On January
22, 2003, the Treasury Department and
the IRS published in theFederal Register
(REG–103580–02, 2003–1 C.B. 543 [68
FR 2930]), proposed regulations regard-
ing the Federal income tax consequences
of noncompensatory partnership options,
convertible equity, and convertible debt.
In the preamble to those proposed reg-
ulations, the Treasury Department and
the IRS requested comments on the pro-
posed amendment to §1.721–1(b)(1) that
was published in theFederal Registeron
June 3, 1971 (36 FR 10787), and on the
Federal income tax consequences of the
issuance of partnership capital interests in
connection with the performance of ser-
vices and options to acquire such interests.
2005–24 I.R.B.1245June 13, 2005

In response to the comments received,
the Treasury Department and the IRS are
withdrawing the proposed amendment to
§1.721–1(b)(1) and issuing these proposed
regulations, which prescribe rules on the
application of section83topartnership
interests and the Federal income tax con-
sequences associated with the transfer,
vesting, and forfeiture of partnership in-
terests transferred in connection with the
performance of services.
Explanation of Provisions
1. Application of Section 83 to Partnership
Interests
Section 83 generally applies to a trans-
fer of property by one person to another
in connection with the performance of ser-
vices. The courts have held that a partner-
ship capital interest is property for this pur-
pose. SeeSchulman v. Commissioner,93
T.C. 623 (1989) (section 83 governs the is-
suance of an option to acquire a partner-
ship interest as compensation for services
provided as an employee);Kenroy, Inc.
v. Commissioner, T.C. Memo 1984–232.
Therefore, the proposed regulations pro-
vide that a partnership interest is property
within the meaning of section 83, and that
the transfer of a partnership interest in con-
nection with the performance of services is
subject to section 83.
The proposed regulations apply section
83 to all partnership interests, without
distinguishing between partnership capital
interests and partnership profits interests.
Although the application of section 83 to
partnership profits interests has been the
subject of controversy, see,e.g.,Campbell
v. Commissioner, T.C. Memo 1990–162,
aff’d in part and rev’d in part, 943 F.2d
815 (8
th
Cir. 1991), n. 7;St. John v. U.S.,
84–1 USTC 9158 (C.D. Ill. 1983), the
Treasury Department and the IRS do not
believe that there is a substantial basis for
distinguishing among partnership interests
for purposes of section 83. All partnership
interests constitute personal property un-
der state law and give the holder the right
to share in future earnings from partner-
ship capital and labor. Moreover, some
commentators have suggested that the
same tax rules should apply to both part-
nership profits interests and partnership
capital interests. These commentators
have suggested that taxpayers may ex-
ploit any differences in the tax treatment
of partnership profits interests and part-
nership capital interests. The Treasury
Department and the IRS agree with these
comments. Therefore, all of the rules in
these proposed regulations and the ac-
companying proposed revenue procedure
(described below) apply equally to part-
nership capital interests and partnership
profits interests. However, a right to re-
ceive allocations and distributions from
a partnership that is described in section
707(a)(2)(A) is not a partnership interest.
In section 707(a)(2)(A), Congress directed
that such an arrangement should be char-
acterized according to its substance, that
is, as a disguised payment of compensa-
tion to the service provider. See S. Rep.
No. 98–169, 98 Cong. 2d Sess., at 226
(1984).
Section 83(b) allows a person who re-
ceives substantially nonvested property in
connection with the performance of ser-
vices to elect to include in gross income
the difference between: (A) the fair mar-
ket value of the property at the time of
transfer (determined without regard to a
restriction other than a restriction which
by its terms will never lapse); and (B) the
amount paid for such property. Under sec-
tion 83(b)(2), the election under section
83(b) must be made within 30 days of the
date of the transfer of the property to the
service provider.
Consistent with the principles of sec-
tion 83, the proposed regulations provide
that, if a partnership interest is transferred
in connection with the performance of
services, and if an election under section
83(b) is not made, then the holder of the
partnership interest is not treated as a
partner until the interest becomes substan-
tially vested. If a section 83(b) election
is made with respect to such an interest,
the service provider will be treated as
a partner for purposes of Subtitle A of
the Code. These rules are similar to the
current rules pertaining to substantially
nonvested stock in a subchapter S cor-
poration. See §1.1361–1(b)(3) (upon an
election under section 83(b), the service
provider becomes a shareholder for pur-
poses of subchapter S).
These principles differ from Rev. Proc.
2001–43. Under that revenue procedure, if
a partnership profits interest is transferred
in connection with the performance of ser-
vices, then the holder of the partnership in-
terest may be treated as a partner even if
no section 83(b) election is made, provided
that certain conditions are met.
Certain changes to the regulations un-
der both subchapter K and section 83 are
needed to coordinate the principles of sub-
chapter K with the principles of section 83.
Among the changes that are proposed in
these regulations are: (1) conforming the
subchapter K rules to the section 83 timing
rules; (2) revising the section 704(b) reg-
ulations to take into account the fact that
allocations with respect to an unvested in-
terest may be forfeited; and (3) providing
that a partnership generally recognizes no
gain or loss on the transfer of an interest in
the partnership in connection with the per-
formance of services for that partnership.
In addition, Rev. Procs. 93–27, 1993–2
C.B. 343, and 2001–43, 2001–2 C.B. 191,
which generally provide for nonrecogni-
tion by both the partnership and the ser-
vice provider on the transfer of a profits
interest in the partnership for services per-
formed for that partnership, must be modi-
fied to be consistent with these proposed
regulations. Accordingly, in conjunction
with these proposed regulations, the IRS
is issuing Notice 2005–43, 2005–24 I.R.B.
1221. That notice contains a proposed rev-
enue procedure that, when finalized, will
obsolete Rev. Procs. 93–27 and 2001–43.
The Treasury Department and the IRS in-
tend for these proposed regulations and the
proposed revenue procedure to become ef-
fective at the same time. The proposed
amendments to the regulations under sec-
tion 83 and subchapter K, as well as the no-
tice, are described in further detail below.
The proposed revenue procedure and
certain parts of the proposed regulations
(as described below) only apply to a trans-
fer by a partnership of an interest in that
partnership in connection with the per-
formance of services for that partnership
(compensatory partnership interests). The
Treasury Department and the IRS request
comments on the income tax consequences
of transactions involving related persons,
such as, for example, the transfer of an
interest in a lower-tier partnership in
exchange for services provided to the up-
per-tier partnership.
2. Timing of Partnership’s Deduction
Except as otherwise provided in
§1.83–6(a)(3), if property is transferred
June 13, 200512462005–24 I.R.B.

in connection with the performance of
services, then the service recipient’s de-
duction, if any, is allowed only for the
taxable year of that person in which or
with which ends the taxable year of the
service provider in which the amount is
included as compensation. See section
83(h). In contrast, under section 706(a)
and §1.707–1(c), guaranteed payments
described in section 707(c) are included
in the partner’s income in the partner’s
taxable year within or with which ends
the partnership’s taxable year in which the
partnership deducted the payments. Under
§1.721–1(b)(2) of the current regulations,
an interest in partnership capital issued by
the partnership as compensation for ser-
vices rendered to the partnership is treated
as a guaranteed payment under section
707(c). Some commentators suggested
that the proposed regulations should re-
solve the potential conflict between the
timing rules of section 83 and the timing
rules of section 707(c).
Under the proposed regulations, part-
nership interests issued to partners for
services rendered to the partnership are
treated as guaranteed payments. Also,
the proposed regulations provide that the
section 83 timing rules override the timing
rules of section 706(a) and §1.707–1(c) to
the extent they are inconsistent. Accord-
ingly, if a partnershiptransfers property
to a partner in connection with the per-
formance of services, the timing and the
amount of the related income inclusion
and deduction is determined by section 83
and the regulations thereunder.
In drafting these regulations, the Trea-
sury Department and the IRS considered
alternative approaches for resolving the
timing inconsistency between section 83
and section 707(c). One alternative ap-
proach considered was to provide that the
transfer of propertyin connection with the
performance of services is not treated as
a guaranteed payment within the meaning
of section 707(c). This approach was not
adopted in the proposed regulations due
to, among other things, concern that such
a characterization of these transfers could
have unintended consequences on the ap-
plication of provisions of the Code outside
of subchapter K that refer to guaranteed
payments. The Treasury Department and
the IRS request comments on alternative
approaches for resolving the timing incon-
sistency between section 83 and section
707(c).
3. Allocation of Partnership’s Deduction
The proposed regulations provide guid-
ance regarding the allocation of the part-
nership’s deduction for the transfer of
property in connection with the perfor-
mance of services. Some commentators
suggested that the proposed regulations
require that the partnership’s deduction
be allocated among the partners in accor-
dance with their interests in the partnership
prior to the transfer.
Section 706(d)(1) provides generally
that, if, during any taxable year of a part-
nership, there is a change in any partner’s
interest in the partnership, each partner’s
distributive share of any item of income,
gain, loss, deduction, or credit of the
partnership for such taxable year shall
be determined by the use of any method
prescribed by regulations which takes into
account the varying interests of the part-
ners in the partnership during the taxable
year. Regulations have not yet been issued
describing the rules for taking into account
the varying interests of the partners in the
partnership during a taxable year. Section
1.706–1(c)(2)(ii) provides that, in the case
of a sale, exchange, or liquidation of a
partner’s entire interest in a partnership,
the partner’s share of partnership items
for the taxable year may be determined by
either: (1) closing the partnership’s books
as of the date of the transfer (closing of
the books method); or (2) allocating to the
departing partner that partner’spro rata
part of partnership items that the partner
would have included in the partner’s tax-
able income had the partner remained a
partner until the end of the partnership
taxable year (proration method). The
Treasury Department and the IRS believe
that section 706(d)(1) adequately ensures
that partnership deductions that are attrib-
utable to the portion of the partnership’s
taxable year prior to a new partner’s entry
into the partnership are allocated to the
historic partners.
Section 706(d)(2), however, places ad-
ditional limits on how partnerships may
allocate these deductions. Under section
706(d)(2)(B), payments for services by a
partnership using the cash receipts and dis-
bursements method of accounting are al-
locable cash basis items. Under section
706(d)(2)(A), if during any taxable year
of a partnership there is a change in any
partner’s interest in the partnership, then
(except to the extent provided in regu-
lations) each partner’s distributive share
of any allocable cash basis item must be
determined under the proration method.
To allow partnerships to allocate deduc-
tions with respect to property transferred
in connection with the performance of ser-
vices under a closing of the books method,
the proposed regulations provide that sec-
tion 706(d)(2)(A) does not apply to such a
transfer.
4. Accounting for Compensatory
Partnership Interests
A. Transfer of compensatory partnership
interest
Under the proposed regulations, the ser-
vice provider’s capital account is increased
by the amount the service provider takes
into income under section 83 as a result
of receiving the interest, plus any amounts
paid for the interest. Some commenta-
tors suggested that the amount included in
the service provider’s income under sec-
tion 83, plus the amount paid for the inter-
est, may differ from the amount of capital
that the partnership has agreed to assign to
the service provider. These commentators
contend that the substantial economic ef-
fect safe harbor in the section 704(b) reg-
ulations should be amended to allow part-
nerships to reallocate capital between the
historic partners and the service provider
to accord with the economic agreement of
the parties.
The reallocation of partnership capital
in these circumstances is not consistent
with the policies underlying the substan-
tial economic effect safe harbor and the
capital account maintenance rules. The
purpose of the substantial economic effect
safe harbor is to ensure that, to the extent
that there is an economic benefit or bur-
den associated with a partnership alloca-
tion, the partner to whom the allocation
is made receives the economic benefit or
bears the economic burden. Under sec-
tion 83, the economic benefit of receiving a
partnership interest in connection with the
performance of services is the amount that
is included in the compensation income of
the service provider, plus the amount paid
for the interest. This is the amount by
2005–24 I.R.B.1247June 13, 2005

which the service partner’s capital account
should be increased.
As explained in section 6 below, a
proposed revenue procedure issued con-
currently with these proposed regulations
would allow a partnership, its partners,
and the service provider to elect to treat
the fair market value of a partnership in-
terest as equal to the liquidation value of
that interest. If such an election is made,
the capital account of a service provider
receiving a partnership interest in connec-
tion with the performance of services is
increased by the liquidation value of the
partnership interest received.
B. Forfeiture of certain compensatory
partnership interests
If an election under section 83(b) has
been made with respect to a substan-
tially nonvested interest, the holder of the
nonvested interest may be allocated part-
nership items that may later be forfeited.
For this reason, allocations of partnership
items while the interest is substantially
nonvested cannot have economic effect.
Under the proposed regulations, such
allocations will be treated as being in
accordance with the partners’ interests
in the partnership if: (a) the partnership
agreement requires that the partnership
make forfeiture allocations if the interest
for which the section 83(b) election is
made is later forfeited; and (b) all material
allocations and capital account adjust-
ments under the partnership agreement not
pertaining to substantially nonvested part-
nership interests for which a section 83(b)
election has been made are recognized un-
der section 704(b). This safe harbor does
not apply if, at the time of the section 83(b)
election, there is a plan that a substantially
nonvested interest will be forfeited. All of
the facts and circumstances (including the
tax status of the holder of the substantially
nonvested interest) will be considered in
determining whether there is a plan that
the interest will be forfeited. In such a
case, the partners’ distributive shares of
partnership items shall be determined in
accordance with the partners’ interests in
the partnership under §1.704–1(b)(3).
Generally, forfeiture allocations are
allocations to the service provider of part-
nership gross income and gain or gross de-
duction and loss (to the extent such items
are available) that offset prior distributions
and allocations of partnership items with
respect to the forfeited partnership inter-
est. These rules are designed to ensure
that any partnership income (or loss) that
was allocated to the service provider prior
to the forfeiture is offset by allocations on
the forfeiture of the interest. Also, to carry
out the prohibition under section 83(b)(1)
on deductions with respect to amounts
included in income under section 83(b),
these rules generally cause a forfeiting
partner to be allocated partnership income
to offset any distributions to the partner
that reduced the partner’s basis in the
partnership below the amount included in
income under section 83(b).
Forfeiture allocations may be made out
of the partnership’s items for the entire tax-
able year. In determining the gross income
of the partnership in the taxable year of the
forfeiture, the rules of §1.83–6(c) apply.
As a result, the partnership generally will
have gross income in the taxable year of
the forfeiture equal to the amount of the al-
lowable deduction to the service recipient
partnership upon the transfer of the inter-
est as a result of the making of the section
83(b) election, regardless of the fair mar-
ket value of the partnership’s assets at the
time of forfeiture.
In certain circumstances, the partner-
ship will not have enough income and gain
to fully offset prior allocations of loss to
the forfeiting service provider. The pro-
posed revenue procedure includes a rule
that requires the recapture of losses taken
by the service provider prior to the forfei-
ture of the interest to the extent that those
losses are not recaptured through forfeiture
allocations of income and gain to the ser-
vice provider. This rule does not provide
the other partners in the partnership with
the opportunity to increase their shares of
partnership loss (or reduce their shares of
partnership income) for the year of the for-
feiture by the amount of loss that was pre-
viously allocated to the forfeiting service
provider.
In other circumstances, the partnership
will not have enough deductions and loss
to fully offset prior allocations of income
to the forfeiting service provider. It ap-
pears that, in such a case, section 83(b)(1)
may prohibit the service provider from
claiming a loss with respect to partnership
income that was previously allocated to
the service provider. However, a forfeit-
ing partner is entitled to a loss for any
basis in a partnership that is attributable
to contributions of money or property to
the partnership (including amounts paid
for the interest) remaining after the for-
feiture allocations have been made. See
§1.83–2(a).
Comments are requested as to whether
the regulations should require or allow
partnerships to create notional tax items
to make forfeiture allocations where the
partnership does not have enough actual
tax items to make such allocations. Com-
ments are also requested as to whether
section 83(b)(1) should be read to allow
a forfeiting service provider to claim a
loss with respect to partnership income
that was previously allocated to the ser-
vice provider and not offset by forfeiture
allocations of loss and deduction and, if
so, whether it is appropriate to require the
other partners in the partnership to recog-
nize income in the year of the forfeiture
equal to the amount of the loss claimed by
the service provider. In particular, com-
ments are requested as to whether section
83 or another section of the Code provides
authority for such a rule.
5. Valuation of Compensatory Partnership
Interests
Commentators requested guidance re-
garding the valuation of partnership inter-
ests transferred in connection with the per-
formance of services. Section 83 gener-
ally provides that the recipient of prop-
erty transferred in connection with the per-
formance of services recognizes income
equal to the fair market value of the prop-
erty, disregarding lapse restrictions. See
Schulman v. Commissioner,93T.C.623
(1989). However, some authorities have
concluded that, under the particular facts
and circumstances of the case, a partner-
ship profits interest had only a speculative
value or that the fair market value of a part-
nership interest should be determined by
reference to the liquidation value of that
interest. See §1.704–1(e)(1)(v);Campbell
v. Commissioner, 943 F.2d 815 (8
th
Cir.
1991);St. John v. U.S., 1984–1 USTC
9158 (C.D. 111. 1983). But seeDiamond
v. Commissioner, 492 F.2d 286 (7
th
Cir.
1974) (holding under pre-section 83 law
that the receipt of a profits interest with a
determinable value at the time of receipt
resulted in immediate taxation);Campbell
v. Commissioner, T.C. Memo 1990–162,
June 13, 200512482005–24 I.R.B.

aff’dinpartandrev’dinpart,943F.2d815
(8
th
Cir. 1991).
The Treasury Department and the IRS
have determined that, provided certain re-
quirements are satisfied, it is appropriate to
allow partnerships and service providers to
value partnership interests based on liqui-
dation value. This approach ensures con-
sistency in the treatment of partnership
profits interests and partnership capital in-
terests, and accords with other regulations
issued under subchapter K, such as the reg-
ulations under section 704(b).
In accordance with these proposed reg-
ulations, the revenue procedure proposed
in Notice 2005–43, 2005–24 I.R.B. 1221,
will, when finalized, provide additional
rules that partnerships, partners, and per-
sons providing services to the partnership
in exchange for interests in that partnership
would be required to follow when electing
under §1.83–3(l) of these proposed regula-
tions to treat the fair market value of those
interests as being equal to the liquidation
value of those interests. For this purpose,
the liquidation value of a partnership inter-
est is the amount of cash that the holder
of that interest would receive with respect
to the interest if, immediately after the
transfer of the interest, the partnership sold
all of its assets (including goodwill, go-
ing concern value, and any other intangi-
bles associated with the partnership’s op-
erations) for cash equal to the fair market
value of those assets, and then liquidated.
6. Application of Section 721 to
Partnership on Transfer
There is a dispute among commentators
as to whether a partnership should recog-
nize gain or loss on the transfer of a com-
pensatory partnership interest. Some com-
mentators believe that, on the transfer of
such an interest, the partnership should be
treated as satisfying its compensation obli-
gation with a fractional interest in each as-
set of the partnership. Under this deemed
sale of assets theory, the partnership would
recognize gain or loss equal to the ex-
cess of the fair market value of each par-
tial asset deemed transferred to the service
provider over the partnership’s adjusted
basis in that partial asset. Other commen-
tators believe that a partnership should not
recognize gain or loss on the transfer of a
compensatory partnership interest. They
argue, among other things, that the transfer
of such an interest is not properly treated as
a realization event for the partnership be-
cause no property owned by the partner-
ship has changed hands. They also argue
that taxing a partnership on the transfer of
such an interest would result in inappropri-
ate gain acceleration,would be difficult to
administer, and would cause economically
similar transactions to be taxed differently.
Generally, when appreciated property
is used to pay an obligation, gain on the
property is recognized. The Treasury De-
partment and the IRS are still analyzing
whether an exception to this general rule is
appropriate on the transfer of an interest in
the capital or profits of a partnership to sat-
isfy certain partnership obligations (such
as the obligations to pay interest or rent).
However, the Treasury Department and the
IRS believe that partnerships should not
be required to recognize gain on the trans-
fer of a compensatory partnership inter-
est. Sucharuleismoreconsistentwith
the policies underlying section 721 — to
defer recognition of gain and loss when
persons join together to conduct a business
— than would be a rule requiring the part-
nership to recognize gain on the transfer
of these types of interests. Therefore, the
proposed regulations provide that partner-
ships are not taxed on the transfer or sub-
stantial vesting of a compensatory partner-
ship interest. Under §1.704–1(b)(4)(i) (re-
verse section 704(c) principles), the his-
toric partners generally will be required to
recognize any income or loss attributable
to the partnership’s assets as those assets
are sold, depreciated, or amortized.
The rule providing for nonrecognition
of gain or loss does not apply to the transfer
orsubstantialvestingofaninterestinanel-
igible entity, as defined in §301.7701–3(a)
of the Procedure and Administration Reg-
ulations, that becomes a partnership under
§301.7701–3(f)(2) as a result of the trans-
ferorsubstantialvestingoftheinterest.
SeeMcDougal v. Commissioner,62T.C.
720 (1974) (holding that the service re-
cipient recognized gainon the transfer of
a one-half interest in appreciated property
to the service provider, immediately prior
to the contribution by the service recipient
and the service provider of their respective
interests in the property to a newly formed
partnership).
7. Revaluations of Partnership Property
The proposed regulations concern-
ing noncompensatory partnership options
published on January 22, 2003, contained
special rules regarding the revaluations of
partnership property while noncompen-
satory partnershipoptions were outstand-
ing. Specifically, the regulations proposed
modifications to §1.704–1(b)(2)(iv)(f)and
(h) to provide that any revaluation during
the period in which there are outstanding
noncompensatory options generally must
take into account the fair market value, if
any, of outstanding options. These pro-
posed regulations do not contain similar
provisions, because under recently pro-
posed modifications to the regulations
under §1.7041(b)(2)(iv), the obligation
to issue a partnership interest in satisfac-
tion of an option agreement is a liability
that is taken into account in determin-
ing the fair market value of partnership
assets as a result of a revaluation. See
REG–106736–00, 2003–2 C.B. 60 [68
FR 37434] (June 24, 2003) (relating to
the assumption of certain obligations by
partnerships from partners).
8. Characterization Rule
The proposed regulations concern-
ing noncompensatory partnership options
published on January 22, 2003, contained
a rule (§1.761–3) providing that the holder
of a noncompensatory option is treated
as a partner under certain circumstances.
However, the Treasury Department and
the IRS have concluded that these pro-
posed regulations should not contain a
similar rule for partnership options trans-
ferred in connection with the performance
of services because ofthe possibility that
constructive transfers of property, subject
to section 83, may occur under circum-
stances other than those described in the
proposed rules for treating the holder of a
noncompensatory option as a partner. The
Treasury Department and the IRS request
comments on whether anti-abuse rules are
necessary to prevent taxpayers from using
the rules in these proposed regulations or
the rules in Notice 2005–43 to inappropri-
ately shift items of partnership income or
loss between the service provider and the
other partners.
2005–24 I.R.B.1249June 13, 2005

9. Retroactive Allocations
Section 761(c) generally allows a part-
nership to modify its agreement at any time
on or prior to the due date for the part-
nership’s return for the taxable year (with-
out regard to extensions). Thus, for exam-
ple, a partnership could, at the end of its
taxable year, amend its partnership agree-
ment to provide that a service provider was
entitled to a substantially vested or non-
vested interest in partnership profits and
losses from the beginning of the partner-
ship’s taxable year. It is expected that, if
a substantially vested compensatory part-
nership interest is transferred to an em-
ployee or independent contractor (or an
election under section 83(b) is made with
respect to the transfer of a substantially
nonvested compensatory partnership inter-
est to an employee or independent contrac-
tor), the partnership will report the trans-
fer on Form W–2, “Wage and Tax State-
ment,” or Form 1099–MISC, “Miscella-
neous Income,” as appropriate. The Form
W–2 or Form 1099–MISC would be is-
sued to the service provider by the partner-
ship by January 31 of the year following
the calendar year in which the partnership
interest is transferred, and the partnership
would file such forms with the Social Se-
curity Administration or IRS, respectively,
by February 28 (March 31 if filed elec-
tronically) of the year following the calen-
dar year in which the partnership interest is
transferred. The service provider would be
required to report any income recognized
on the transfer of the partnership interest
on the service provider’s return for the tax-
able year (of the service provider) in which
the transfer occurs.
It is unclear whether the retroactive
commencement date of such an interest
should be treated as the date of the transfer
of the interest for purposes of section 83
and other provisions of the Code outside of
subchapter K. If the retroactive effective
date of the interest is treated as the transfer
date for all purposes, a number of admin-
istrative concerns arise. For example, the
partnership may not, by the January 31
deadline, have the information necessary
to issue Form W–2 or Form 1099–MISC
to the service provider. Also, the service
provider may not, by the due date for fil-
ing the section 83(b) election, have the
information necessary to file the election.
The Treasury Department and the IRS
request comments on the timing for sec-
tion 83 purposes of retroactive transfers
of partnership interests and on any actions
that may be appropriate to address the
associated administrative concerns.
10. Information Reporting to Partners
As explained above, the proposed reg-
ulations treat the transfer of a partnership
interest to a partner in connection with
the performance of services as a guaran-
teed payment. To ensure that the service
provider partner has the information nec-
essary to include the transfer in income
for the taxable year in which the transfer
occurs (rather than the taxable year in
which or with which ends the partnership
taxable year in which the transfer occurs),
the Treasury Department and the IRS are
considering the possibility of amending
the section 6041 regulations to provide
that this type of guaranteed payment must
be reported by the partnership on Form
1099–MISC, which is required to be is-
sued to the service provider on or before
January 31 of the year following the cal-
endar year of such transfer. The Treasury
Department and the IRS request com-
ments on whether such a requirement is
appropriate andadministrable.
Proposed Effective Date
These regulations are proposed to apply
to transfers of property on or after the date
final regulations are published in theFed-
eral Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to these regulations.
It is hereby certified that the collection of
information in 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
reporting burden, as discussed earlier in
this preamble, is not expected to be signif-
icant. Partnerships with partnership agree-
ments that contain the binding provisions
referred to in §1.83–3(l) only will be re-
quired to submit a single election form in
order to rely on the safe harbor described
in that paragraph. Partnerships that desire
to elect to use the safe harbor described
in §1.83–3(l), but which do not have part-
nership agreements containing these pro-
visions, are required to obtain partner-level
consents to the election. However, these
partnerships are expected to be rare. More-
over, in most cases the partners in such
partnerships are not expected to be small
businesses. Therefore, a Regulatory Flexi-
bility Analysis under the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) is not re-
quired. Pursuant to section 7805(f) of the
Code, this notice of proposed rulemaking
will be submitted to the Chief Counsel for
Advocacy of the Small Business Adminis-
tration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any electronic or writ-
ten comments (a signed original and eight
(8) copies) that are submitted timely to the
IRS. The IRS and the Treasury Department
request comments on the clarity of the pro-
posed rules and how they can be made eas-
ier to understand. All comments will be
available for public inspection and copy-
ing.
A public hearing has been scheduled
for October 5, 2005, beginning at 10 a.m.
in the IRS Auditorium, Internal Revenue
Building, 1111 Constitution Avenue, NW,
Washington, DC. Due to building security
procedures, visitors must enter at the Con-
stitution Avenue entrance. In addition, all
visitors must present photo identification
to enter the building. Because of access
restrictions, visitors will not be admitted
beyond the immediateentrance area more
than 30 minutes before the hearing starts.
For information about having your name
placed on the building access list to attend
the hearing, see the “FOR FURTHER IN-
FORMATION CONTACT” portion of this
preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments must submit writ-
ten comments and an outline of the topics
to be discussed and the time to be devoted
to each topic (a signed original and eight
June 13, 200512502005–24 I.R.B.

(8) copies) by September 14, 2005. A pe-
riod of 10 minutes will be allotted to each
person for making comments. An agenda
showing the scheduling of the speakers
will be prepared after the deadline for re-
viewing outlines has passed. Copies of the
agenda will be available free of charge at
the hearing.
Drafting Information
The principal authors of these
regulations are Audrey Ellis and
Demetri Yatrakis of the Office of As-
sociate Chief Counsel (Passthroughs and
Special Industries),and Stephen Tackney
of the Office of Associate Chief Counsel
(Tax Exempt and Government Entities).
However, other personnel from the IRS
and Treasury Department participated in
their development.
Withdrawal of Notice of Proposed
Rulemaking
Accordingly, under the authority of 26
U.S.C. 7805, §1.721–1(b) of the notice of
proposed rulemaking that was published in
theFederal Registeron June 3, 1971 (36
FR 10787) is withdrawn.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.83–3 is amended as
follows:
1. Paragraph (e) is amended by adding
two new sentences after the first sentence.
2. Paragraph (l) is added.
The revision and addition read as fol-
lows:
§1.83–3 Meaning and use of certain
terms.
*****
(e)Property. * * * Accordingly, prop-
erty includes a partnership interest. The
previous sentence is effective for transfers
on or after the date final regulations are
published in theFederal Register.***
*****
(l)Special rules for the transfer of
a partnership interest. (1) Subject to
such additional conditions, rules, and
procedures that the Commissioner may
prescribe in regulations, revenue rul-
ings, notices, or other guidance published
in the Internal Revenue Bulletin (see
§601.601(d)(2)(ii)(b)ofthischapter),a
partnership and all of its partners may
elect a safe harbor under which the fair
market value of a partnership interest that
istransferredinconnectionwiththeper-
formance of services is treated as being
equal to the liquidation value of that inter-
est for transfers on or after the date final
regulations are published in theFederal
Registerif the following conditions are
satisfied:
(i) The partnership must prepare a doc-
ument, executed by a partner who has re-
sponsibility for Federal income tax report-
ing by the partnership, stating that the part-
nership is electing, on behalf of the part-
nership and each of its partners, to have
the safe harbor apply irrevocably as of
the stated effective date with respect to
all partnership interests transferred in con-
nection with the performance of services
while the safe harbor election remains in
effect and attach the document to the tax
return for the partnership for the taxable
year that includes the effective date of the
election.
(ii) Except as provided in paragraph
(l)(1)(iii) of this section, the partnership
agreement must contain provisions that are
legally binding on all of the partners stat-
ing that—
(A) The partnership is authorized and
directed to elect the safe harbor; and
(B) The partnership and each of its
partners (including any person to whom a
partnership interest is transferred in con-
nection with the performance of services)
agrees to comply withall requirements
ofthesafeharborwith respect to all part-
nership interests transferred in connection
with the performance of services while the
election remains effective.
(iii) If the partnership agreement does
not contain the provisions described in
paragraph (l)(1)(ii) of this section, or the
provisions are not legally binding on all
of the partners of the partnership, then
each partner in a partnership that transfers
a partnership interest in connection with
the performance of services must execute
a document containing provisions that
are legally binding on that partner stating
that—
(A) The partnership is authorized and
directed to elect the safe harbor; and
(B) The partner agrees to comply with
all requirements of the safe harbor with re-
spect to all partnership interests transferred
in connection with the performance of ser-
vices while the election remains effective.
(2) The specified effective date of the
safe harbor election may not be prior to
the date that the safe harbor election is ex-
ecuted. The partnership must retain such
records as may be necessary to indicate
that an effective election has been made
and remains in effect, including a copy of
the partnership’s election statement under
this paragraph (l), and, if applicable, the
original of each document submitted to the
partnership by a partner under this para-
graph (l). If the partnership is unable to
produce a record of a particular document,
the election will be treated as not made,
generally resulting in termination of the
election. The safe harbor election also may
be terminated by the partnership prepar-
ing a document, executed by a partner who
has responsibility for Federal income tax
reporting by the partnership, which states
that the partnership, on behalf of the part-
nership and each of its partners, is revok-
ing the safe harbor election on the stated
effective date, and attaching the document
to the tax return for the partnership for the
taxable year that includes the effective date
of the revocation.
Par. 3. Section 1.83–6 is amended by
revising the first sentence of paragraph (b)
to read as follows:
§1.83–6 Deduction by employer.
*****
(b)Recognition of gain or loss.Ex-
cept as provided in section 721 and sec-
tion 1032, at the time of a transfer of prop-
erty in connection with the performance of
services the transferor recognizes gain to
the extent that the transferor receives an
amount that exceeds the transferor’s basis
in the property. * * *
*****
Par. 4. Section 1.704–1 is amended as
follows:
1. In paragraph (b)(0), an entry is added
to the table for §1.704–1(b)(4)(xii).
2005–24 I.R.B.1251June 13, 2005

2. In paragraph (b)(1)(ii)(a), a sentence
is added at the end of the paragraph.
3. Paragraph (b)(2)(iv)(b)(1) is revised.
4. Paragraph (b)(2)(iv)(f)(5)(iii)isre-
vised.
5. Paragraph (b)(4)(xii) is added.
6. Paragraph (b)(5)Example 29is
added.
The additions and revisions read as fol-
lows:
§1.704–1 Partner’s distributive share.
*****
(b) * * *(0) * * *
*****
Substantiallynonvestedinter-
ests......................1.704–1(b)(4)(xii)
*****
(1) * * *
(ii)***(a) * * * In addition, para-
graph (b)(4)(xii) and paragraph (b)(5)Ex-
ample 29of this section apply to com-
pensatory partnership interests (as defined
in §1.721–1(b)(3)) that are transferred on
or after the date final regulations are pub-
lished in theFederal Register.
*****
(2) * * *
(iv) * * *
(b)***
(1) the amount of money contributed by
that partner to the partnership and, in the
case of a compensatory partnership inter-
est (as defined in §1.721–1(b)(3)) that is
transferred on or after the date final regu-
lations are published in theFederal Reg-
ister, the amount included on or after that
date in the partner’s compensation income
under section 83(a), (b), or (d)(2).
*****
(f)***
(5)***
(iii) In connection with the transfer or
vesting of a compensatory partnership in-
terest (as defined in §1.721–1(b)(3)) that is
transferred on or after the date final regu-
lations are published in theFederal Reg-
ister, but only if the transfer or vesting re-
sults in the service provider recognizing
income under section 83 (or would result
in such recognition if the interest had a fair
market value other than zero).
*****
(4) * * *
(xii)Substantially nonvested inter-
ests—(a)In general. If a section 83(b)
election has been made with respect to a
substantially nonvested interest, the holder
of the nonvested interest may be allocated
partnership income, gain, loss, deduction,
or credit (or items thereof) that will later
be forfeited. For this reason, allocations
of partnership items while the interest is
substantially nonvested cannot have eco-
nomic effect.
(b)Deemed Compliance with Partners’
Interests in the Partnership. If a section
83(b) election has been made with respect
to a substantially nonvested interest, al-
locations of partnership items while the
interest is substantially nonvested will be
deemed to be in accordance with the part-
ners’ interests in the partnership if—
(1) The partnership agreement requires
that the partnership make forfeiture alloca-
tions if the interest for which the section
83(b) election is made is later forfeited;
and
(2) All material allocations and capital
account adjustments under the partnership
agreement not pertaining to substantially
nonvested partnership interests for which
a section 83(b) election has been made are
recognized under section 704(b).
(c)Forfeiture allocations. Forfeiture
allocations are allocations to the service
provider (consisting of apro rataportion
of each item) of gross income and gain or
gross deduction and loss (to the extent such
items are available) for the taxable year
of the forfeiture in a positive or negative
amount equal to—
(1) The excess (not less than zero) of
the—
(i) Amount of distributions (including
deemed distributions under section 752(b)
and the adjusted tax basis of any property
so distributed) to the partner with respect
to the forfeited partnership interest (to the
extent such distributions are not taxable
under section 731); over
(ii) Amounts paid for the interest and
the adjusted tax basis of property con-
tributed by the partner (including deemed
contributions under section 752(a)) to the
partnership with respect to the forfeited
partnership interest; minus
(2) The cumulative net income (or loss)
allocated to the partner with respect to the
forfeited partnership interest.
(d)Positive and negative amounts.For
purposes of paragraph (b)(4)(xii)(c)ofthis
section, items of income and gain are re-
flected as positive amounts, and items of
deduction and loss are reflected as nega-
tive amounts.
(e)Exception. Paragraph (b)(4)(xii)(b)
of this section shall not apply to alloca-
tions of partnership items made with re-
spect to a substantially nonvested interest
for which the holder has made a section
83(b) election if, at the time of the section
83(b) election, there is a plan that the in-
terest will be forfeited. In such a case, the
partners’ distributive shares of partnership
items shall be determined in accordance
with the partners’ interests in the partner-
ship under paragraph (b)(3) of this section.
In determining whether there is a plan that
the interest will be forfeited, the Commis-
sioner will consider all of the facts and
circumstances (including the tax status of
the holder of the forfeitable compensatory
partnership interest).
(f)Cross references. Forfeiture alloca-
tionsmaybemadeoutofthepartnership’s
items for the entire taxable year of the for-
feiture. See §1.706–3(b) and paragraph
(b)(5)Example 29of this section.
*****
(5) * * *
Example 29. (i) In Year 1, A and B each con-
tribute cash to LLC, a newly formed limited liability
company classified as a partnership for Federal tax
purposes, in exchange for equal units in LLC. Under
LLC’s operating agreement, each unit is entitled to
participate equally in the profits and losses of LLC.
The operating agreement also provides that the part-
ners’ capital accounts will be determined and main-
tained in accordance with paragraph (b)(2)(iv) of this
section, that liquidation proceeds will be distributed
in accordance with the partners’ positive capital ac-
count balances, and that any partner with a deficit
balance in that partner’s capital account following the
liquidation of the partner’s interest must restore that
deficit to the partnership. At the beginning of Year 3,
SP agrees to perform servicesforLLC.Inconnection
with the performance of SP’s services and a payment
of $10 by SP to LLC, LLC transfers a 10% interest in
LLC to SP. SP’s interest in LLC is substantially non-
vested (within the meaning of §1.83–3(b)). At the
time of the transfer of the LLC interest to SP, LLC’s
operating agreement is amended to provide that, if
SP’s interest is forfeited, then SP is entitled to a re-
turn of SP’s $10 initial contribution, and SP’s dis-
tributive share of all partnership items (other than for-
feiture allocations under §1.704–1(b)(4)(xii)) will be
zero with respect to that interest for the taxable year
of the partnership in which the interest was forfeited.
The operating agreement isalso amended to require
that LLC make forfeiture allocations if SP’s interest
is forfeited. Additionally, the operating agreement is
amended to provide that no part of LLC’s compensa-
tion deduction is allocated to the service provider to
whom the interest is transferred. SP makes an elec-
tion under section 83(b) withrespect to SP’s interest
in LLC. Upon receipt, the fair market value of SP’s
interest in LLC is $100. In each of Years 3, 4, 5,
June 13, 200512522005–24 I.R.B.

and 6, LLC has operating income of $100 (consisting
of $200 of gross receipts and $100 of deductible ex-
penses), and makes no distributions. SP forfeits SP’s
interest in LLC at the beginning of Year 6. At the
time of the transfer of the interest to SP, there is no
plan that SP will forfeit the interest in LLC.
(ii) Because a section 83(b) election is made, SP
recognizes compensation income in the year of the
transfer of the LLC interest. Therefore, SP recog-
nizes $90 of compensation income in the year of the
transfer of the LLC interest (the excess of the fair
market value of SP’s interest in LLC, $100, over the
amount SP paid for the interest, $10). Under para-
graph (b)(2)(iv)(b)(1) of this section, in Year 3, SP’s
capital account is initially credited with $100, the
amount paid for the interest ($10) plus the amount in-
cluded in SP’s compensation income upon the trans-
fer under section 83(b) ($90). Under §§1.83–6(b) and
1.721–1(b)(2), LLC does not recognize gain on the
transfer of the interest to SP. LLC is entitled to a com-
pensation deduction of $90 under section 83(h). Un-
der the terms of the operating agreement, the deduc-
tion is allocated equally to A and B.
(iii) As a result of SP’s election under section
83(b), SP is treated as a partner starting from the date
of the transfer of the LLC interest to SP in Year 3.
Section 1.761–1(b). In each of years 3, 4 and 5, SP’s
distributive share of partnership income is $10 (10%
of $100), A’s distributive share of partnership income
is $45 (45% of $100), and B’s distributive share of
partnership income is$45 (45% of $100). In accor-
dance with the operating agreement, SP’s capital ac-
count is increased (to $130) by the end of Year 5 by
the amounts allocated to SP, and A’s and B’s capi-
tal accounts are increased by the amounts allocated
to A and B. Because LLC satisfies the requirements
of paragraph (b)(4)(xii) of this section, LLC’s alloca-
tions in years 3, 4 and 5 are deemed to be in accor-
dance with the partners’ interests in the partnership.
(iv) As a result of the forfeiture of the LLC in-
terest by SP in year 6, LLC is required to recognize
income ($90) equal to the amount of the allowable de-
duction on the transfer of the LLC interest to SP under
§1.83–6(c). LLC repays SP’s $10 capital contribu-
tion to SP, reducing SP’s capital account to $120. Un-
der the terms of the operating agreement, because SP
forfeited SP’s interest, SP’s distributive share of all
partnership items (other than forfeiture allocations)
is zero for Year 6. To reverse SP’s prior allocations
of LLC income, LLC makes forfeiture allocations of
$30 of deductions ($0 (the difference between the $10
distributed to SP and the $10 contributed to LLC by
SP) minus $30 (the cumulative net LLC income allo-
cated to SP) to SP in Year 6. Notwithstanding section
706(c) and (d), these allocations may be made out of
LLC’s partnership items for the entire taxable year of
the forfeiture. Thus, in Year 6, $30 of deductions are
allocatedtoSP,andtheremaining$220ofnetoperat-
ing income ($200 of gross receipts and $90 of income
under §1.83–6(c) less $70 of remaining deductions)
are allocated to A and B equally for tax purposes. In
accordance with section 83(b)(1) (last sentence), SP
does not receive a deduction or capital loss for the
amount ($90) that was included in SP’s compensa-
tion income. Because LLC satisfies the requirements
of paragraph (b)(4)(xii) of this section, LLC’s alloca-
tions in year 6 are deemed to be in accordance with
the partners’ interests in the partnership.
*****
Par. 5. Section 1.706–3 is added to read
as follows.
§1.706–3 Property transferred in
connection with the performance of
services.
(a)Allocations of certain deductions
under section 83(h). The transfer of prop-
erty subject to section 83 in connection
with the performance of services is not
an allocable cash basis item within the
meaning of section 706(d)(2)(B).
(b)Forfeiture allocations. If an elec-
tion under section 83(b) is made with re-
spect to a partnership interest that is sub-
stantially nonvested (within the meaning
of §1.83–3(b)), and that interest is later for-
feited, the partnership must make forfei-
ture allocations to reverse prior allocations
made with respect to the forfeited inter-
est. See §1.704–1(b)(4)(xii). Although the
person forfeiting the interest may not have
been a partner for theentire taxable year,
forfeiture allocations may be made out of
the partnership’s items for the entire tax-
able year.
(c)Effective date. This section applies
to transfers of property on or after the date
final regulations are published in theFed-
eral Register.
Par. 6. In §1.707–1, paragraph (c) is
amended by revising the second sentence
to read as follows:
§1.707–1 Transactions between partner
and partnership.
*****
(c)Guaranteed Payments. ***How-
ever, except as otherwise provided in sec-
tion 83 and the regulations thereunder, a
partner must include such payments as or-
dinary income for that partner’s taxable
year within or with which ends the partner-
ship taxable year in which the partnership
deducted such payments as paid or accrued
under its method of accounting. * * *
*****
Par. 7. In §1.721–1, paragraph (b) is
revised to read as follows.
§1.721–1 Nonrecognition of gain or loss
on contribution.
*****
(b)(1) Except as otherwise provided in
this section or §1.721–2, section 721 does
not apply to the transfer of a partnership in-
terest in connection with the performance
of services or in satisfaction of an obliga-
tion. The transfer of a partnership interest
to a person in connection with the perfor-
mance of services constitutes a transfer of
property to which section 83 and the regu-
lations thereunder apply. To the extent that
a partnership interest transferred in con-
nection with the performance of services
rendered by a decedent prior to the dece-
dent’s death is transferred after the dece-
dent’s death to the decedent’s successor in
interest, the fair market value of such in-
terest is an item of income in respect of a
decedent under section 691.
(2) Except as provided in section 83(h)
and 1.83–6(c), no gain or loss shall be rec-
ognized by a partnership upon—
(i) The transfer or substantial vesting of
a compensatory partnership interest; or
(ii) The forfeiture of a compensatory
partnership interest. See §1.704–1(b)(4)
(xii) for rules regarding forfeiture alloca-
tions of partnership items that may be re-
quired in the taxable year of a forfeiture.
(3) For purposes of this section, a
compensatory partnership interest is an
interest in the transferring partnership
that is transferred in connection with the
performance of services for that partner-
ship (either before or after the formation
of the partnership), including an inter-
est that is transferred on the exercise of
a compensatory partnership option. A
compensatory partnership option is an op-
tion to acquire an interest in the issuing
partnership that is granted in connection
with the performanceof services for that
partnership (either before or after the for-
mation of the partnership).
(4) To the extent that a partnership in-
terest is—
(i) Transferred to a partner in connec-
tion with the performance of services ren-
dered to the partnership, it is a guaranteed
payment for services under section 707(c);
(ii) Transferred in connection with the
performance of services rendered to a part-
ner, it is not deductible by the partnership,
but is deductible only by such partner to
the extent allowable under Chapter 1 of the
Code.
(5) This paragraph (b) applies to inter-
ests that are transferred on or after the date
final regulations are published in theFed-
eral Register.
2005–24 I.R.B.1253June 13, 2005

*****
Par. 8. Section 1.761–1(b) is amended
by adding two sentences to the end of the
paragraph to read as follows.
§1.761–1 Terms defined.
*****
(b) * * * If a partnership interest is trans-
ferred in connection with the performance
of services, and that partnership interest is
substantially nonvested (within the mean-
ing of §1.83–3(b)), then the holder of the
partnership interest is not treated as a part-
ner solely by reason of holding the interest,
unless the holder makes an election with
respect to the interest under section 83(b).
The previous sentence applies to partner-
ship interests that are transferred on or af-
ter the date final regulations are published
in theFederal Register.*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on May 20, 2005,
8:45 a.m., and published in the issue of the Federal Register
for May 24, 2005, 70 F.R. 29675)
Notice of Proposed
Rulemaking
Application of Section 367
in Cross Border Section
304 Transactions; Certain
Transfers of Stock Involving
Foreign Corporations
REG–127740–04
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains pro-
posed amendments to the regulations un-
der section 367 relating to certain trans-
fers of stock involving foreign corpora-
tions in transactions governed by section
304. Specifically, these proposed regula-
tions provide that if, pursuant to section
304(a)(1), a U.S person is treated as trans-
ferring stock of a domestic or foreign cor-
poration to a foreign corporation in ex-
change for stock of such foreign corpo-
ration in a transaction to which section
351(a) applies, such deemed section 351
exchange is not a transfer to a foreign cor-
poration subject to section 367(a). These
proposed regulations also provide that if,
pursuant to section 304(a)(1), a foreign ac-
quiring corporation is treated as acquiring
the stock of a foreign acquired corporation
in a transaction to which section 351(a)
applies, such deemed section 351 acquisi-
tion is not an acquisition subject to section
367(b).
DATES: Written or electronic comments
and requests for a public hearing must be
received by August 23, 2005.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR(REG–127740–04),
room 5203, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may
be hand delivered between the hours of
8 a.m. and 4 p.m. to: CC:PA:LPD:PR
(REG–127740–04), Courier’s Desk, In-
ternal Revenue Service, 1111 Consti-
tution Avenue, NW, Washington, DC.
Alternatively, taxpayers may submit
electronic comments directly to the
IRS internet site atwww.irs.gov/regs
or via the Federal eRulemaking Por-
tal atwww.regulations.gov(IRS and
REG–127740–04).
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Tasheaya L. Warren Ellison,
(202) 622–3870; concerning submis-
sions of comments, Sonya Cruse, (202)
622–4693 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
A. Section 367(a)
A U.S. person’s transfer of appreciated
property (including stock) to a foreign cor-
poration in connection with any exchange
described in sections 332, 351, 354, 356,
or 361 generally is treated under section
367(a)(1) as a taxable transaction, unless
an exception applies. Congress enacted
section 367(a) to prevent the avoidance of
U.S. tax on transfers of appreciated prop-
erty outside the United States in nonrecog-
nition transfers involving foreign corpora-
tions. S.R. Rep. No. 169, Vol. 1, 98
th
Cong. 2d Sess., at 360 (Apr. 2, 1984).
In the case of a U.S. person’s transfer
of stock to a foreign corporation in an
exchange described in section 367(a)(1),
§1.367(a)–3 provides exceptions to the
general gain recognition rule of section
367(a)(1), if certain conditions are satis-
fied including, in some instances, the filing
of a gain recognition agreement (GRA).
See§1.367(a)–3(b) (transfer of stock in a
foreign corporation) and (c) (transfer of
stock in a domestic corporation).
B. Section 367(b)
Section 367(b) addresses transactions
covered by sections 332, 351, 354, 355,
356, and 361 in which there is no trans-
fer of property described in section 367(a).
Section 367(b) provides that a foreign cor-
poration shall be considered to be a corpo-
ration for purposes of these subchapter C
provisions, except to the extent provided in
regulations. The status of a foreign corpo-
ration as a corporation for these purposes
may allow various participants to the trans-
action to qualify for nonrecognition treat-
ment.
One of the underlying policies of sec-
tion 367(b) is the preservation of the poten-
tial application of section 1248. H. R. Rep.
No. 94–658, 94
th
Cong., 1
st
Sess., at 242
(November 12, 1975). Section 1248 gen-
erally recharacterizes gain recognized by a
U.S. person (a section 1248 shareholder)
that owns 10 percent or more of the to-
tal combined voting power of a controlled
foreign corporation, as defined in section
957, or, in certain instances, stock of a for-
mer controlled foreign corporation, upon
the disposition of the stock of such corpo-
ration as dividend income to the extent of
the earnings and profits that are attribut-
able to such stock (section 1248 amount).
Consequently, §1.367(b)–4(b)(1) gen-
erally requires a section 1248 shareholder
(or, in certain instances, a foreign corpora-
tion that has a section 1248 shareholder) to
include in income its section 1248 amount
as a result of certain section 367(b) trans-
actions, including certain section 351 ex-
changes, if as a result of the transaction
June 13, 200512542005–24 I.R.B.

section 1248 shareholder status or con-
trolled foreign corporation status is lost.
C. Section 304
Section 304 was enacted to prevent
withdrawals of corporate earnings by con-
trolling shareholders in transactions that
result in capital gains treatment. See H.R.
Rep. No. 2014, 105
th
Cong. 1st Sess.,
at 465 (June 24, 1997). Section 304(a)(1)
generally provides that, for purposes of
sections 302 and 303, if one or more per-
sons are in control of each of two corpora-
tions and in return for property one of the
corporations (the acquiring corporation)
acquires stock in the other corporation
(the issuing corporation) from the person
(or persons) so in control, then such prop-
erty shall be treated as a distribution in
redemption of the acquiring corporation
stock.
Prior to 1997, section 304(a)(1) pro-
vided that, to the extent of a distribution
treated as a distribution to which section
301 applies, the issuing corporation stock
would be treated as having been trans-
ferred by the person from whom acquired,
and as having been received by the ac-
quiring corporationas a contribution to
the capital of the acquiring corporation.
Section 304 was amended by section 1013
of the Taxpayer Relief Act of 1997, Public
Law 105–34 (111 Stat. 788, 918) (August
5, 1997) to provide that, to the extent that
a stock acquisition covered by section
304(a)(1) is treatedas a distribution to
which section 301 applies, the transferor
and the acquiring corporation are treated
as if (1) the transferor transferred the stock
of the issuing corporation to the acquiring
corporation in exchange for stock of the
acquiring corporation in a transaction to
which section 351(a) applies, and (2) the
acquiring corporation then redeemed the
stock it is treated as having issued. Be-
cause the acquiring corporation is treated
as receiving the stock of the issuing cor-
poration in a transaction to which section
351 applies, the transferor’s basis in the
stock of the issuing corporation carries
over to the acquiring corporation under
section 362.
In the case of an acquisition to which
section 304(a) applies, section 304(b)(2)
generally provides that the determination
of the amount that is a dividend (and the
source thereof) is made as if the property
were distributed first by the acquiring cor-
poration to the extent of its earnings and
profits, and then by the issuing corpora-
tion to the extent of its earnings and prof-
its. In a transaction involving a foreign ac-
quiring corporation, section 304(b)(5) may
limit the amount of the earnings and prof-
its of the foreign acquiring corporation that
will be taken into account for purposes of
section 304(b)(2)(A).
D. Application of Section 367 to Section
304(a)(1) Transactions
The application of section 367(a) and
(b) to certain section 304(a)(1) transac-
tions involving a foreign corporation has
been addressed in various published guid-
ance.See,e.g., Rev. Rul. 91–5, 1991–1
C.B. 114 (holding that section 367 ap-
plied to the deemed contribution to capital
of target corporation stock under prior
law because section 367(c)(2) resulted
in the stock transfer constituting a sec-
tion 351 exchange). Moreover, in the
preamble to the proposed regulations re-
garding redemptions taxable as dividends
(REG–150313–01, 2002–2 C.B. 777 [67
FR 64331] October 18, 2002), the IRS
and Treasury indicated that certain inter-
national provisions may apply to section
304(a)(1) transfers, and provided as an ex-
ample the application of section 367 and
the regulations promulgated thereunder to
a deemed section 351 exchange involving
foreign corporations. The IRS and Trea-
sury also stated that further guidance on
the application of the international pro-
visions to section 304(a)(1) transactions
would be forthcoming.
The IRS and Treasury have determined
that the policies underlying section 304
(prevention of withdrawals of corporate
earnings through the use of transactions
that result in capital gains treatment),
section 367(a) (prevention of U.S. tax
avoidance through transfers of appreci-
ated property to foreign corporations), and
section 367(b) (inter alia,preservationof
the potential application of section 1248)
are preserved if section 367(a) and (b) are
not applied to a deemed section 351 ex-
change resulting from a section 304(a)(1)
transaction. In addition, the IRS and Trea-
sury believe that the interests of sound tax
administration are served by not apply-
ing section 367(a) and (b) to a deemed
section 351 exchangeresulting from a sec-
tion 304(a)(1) transaction. Consequently,
these proposed regulations provide that
section 367(a) and (b) will not apply to
a deemed section 351 exchange result-
ing from a section 304(a)(1) transaction.
These proposed regulations do not ad-
dress section 351 transactions other than
those exchanges treated as section 351
exchanges by reason of section 304(a)(1).
1. Application of section 367(a)
In a section 304(a)(1) transaction in
which a U.S. person transfers the stock of
anissuingcorporationtoaforeignacquir-
ing corporation, without the application of
section 367(a), the U.S. person will nev-
ertheless recognize an amount of income
that is at least equal to the inherent gain
in the stock of the issuing corporation that
is being transferred to the foreign acquir-
ing corporation. This income recognition
results from the construct of the transac-
tion as a distribution in redemption of the
acquiring corporation shares. The income
recognized may be in the form of dividend
income, gain on the disposition of stock,
or both. Section 301(c)(1), (3). Thus, the
policy underlying section 367(a), which
is to prevent the avoidance of U.S. tax on
transfers of appreciated property to a for-
eign corporation incertain nonrecognition
transactions, is maintained through the
operation of subchapter C principles even
if section 367(a) is not applied to a section
304(a)(1) transaction. Moreover, as dis-
cussed below, the application of section
367(a) to a section 304(a)(1) transaction
may, in certain instances where the U.S.
transferor files a GRA, result in a total
income inclusion that is greater than the
fair market value of the stock being trans-
ferred. The IRS and Treasury believe that
this result is inconsistent with the policies
of section 367.
For instance, in order to avoid recogniz-
ing gain on a section 351 transfer of ap-
preciated foreign stock to a foreign corpo-
ration under section 367(a)(1), a U.S. per-
son may be required to enter into a GRA.
See§1.367(a)–3(b)(1)(ii). As noted, when
a U.S. person transfers stock of a wholly
owned foreign corporation (the foreign is-
suing corporation) to a wholly owned for-
eign acquiring corporation in exchange for
property, section 304(a)(1) treats the U.S.
person as having received foreign acquir-
ing corporation stock in a deemed sec-
2005–24 I.R.B.1255June 13, 2005

tion 351 exchange, and then as having that
stock immediately redeemed by the for-
eign acquiring corporation. If the U.S. per-
son were to enter into a GRA, the appli-
cation of section 367(a) to such a trans-
action will likely result in the GRA re-
maining in existence after the deemed re-
demption of the foreign acquiring corpora-
tion’s stock. A U.S. person may, in fact,
recognize income but, as a result of the
GRA, not recognize any gain in the sec-
tion 304(a)(1) transaction (e.g., the sec-
tion 304(a)(1) transaction results in divi-
dend income to the U.S. corporate trans-
feror equal to the consideration paid by the
foreign acquiring corporation). In such a
case, because the U.S. person has not rec-
ognized the inherent gain in the transferee
foreign corporation’s stock deemed to be
received in the section 304(a)(1) transac-
tion, the GRA will not be terminated. See
§1.367(a)–8(h)(1) (requiring a transaction
in which all realized gain (if any) is rec-
ognized currently to terminate a GRA). As
a result, the U.S. transferor would remain
subject to the GRA provisions contained
in §1.367(a)–8. If the GRA subsequently
were triggered pursuant to §1.367(a)–8(e)
(e.g., if the foreign issuing corporation dis-
poses of substantially all of its assets to an
unrelated party during the 5-year GRA pe-
riod), the U.S. transferor may be subject
to a total income inclusion that is greater
than the fair market value of the stock be-
ing transferred.
The application of section 367(a) to the
transaction described above also results in
administrative burdens for both the IRS
and taxpayers. For instance, the condi-
tions contained in §1.367(a)–3(b) and (c)
require a determination of the value and
class of stock either received by the U.S.
person in the transaction or owned by the
U.S. person immediately after the trans-
fer.See,e.g., §1.367(a)–3(b)(1)(i) and (ii)
and (c)(1)(i), (ii), and (iii). To the ex-
tent the transaction is described in section
304(a)(1), the foreign acquiring corpora-
tion does not actually issue any stock to the
U.S. person. Therefore, in order to apply
the above provisions, the IRS and taxpay-
ers must make determinations based on the
stock that is deemed to be issued by the for-
eign acquiring corporation.
For the reasons stated above, the IRS
and Treasury have decided to exercise their
regulatory authority under section 367(a)
such that section 367(a) will not apply to
deemed section 351 exchanges resulting
from section 304(a)(1) transactions.
2. Application of section 367(b)
As discussed above in the preamble
under heading B, §1.367(b)–4(b)(1) pro-
vides that, in the case of a section 351
exchange of stock of a foreign acquired
corporation by a U.S. person that is a
section 1248 shareholder of such corpo-
ration (or a controlled foreign corporation
that has a section 1248 shareholder) to a
foreign acquiring corporation, the section
1248 shareholder (or a controlled foreign
corporation that has a section 1248 share-
holder) must include in income its section
1248 amount, unless the requisite sec-
tion 1248 shareholder status or controlled
foreign corporation status is maintained
immediately after the exchange. How-
ever, in a section 304(a)(1) transaction in
which section 1248 shareholder status and
controlled foreign corporation status is
maintained immediately after the deemed
section 351 exchange, such that there is
no section 1248 inclusion, the transferor
may be treated as receiving a dividend
from the foreign acquired corporation pur-
suant to section 304(b)(2)(B). Thus, in a
section 304(a)(1) transaction, some or all
of the earnings that make up the section
1248 amount that section 367(b) seeks to
preserve may be immediately included in
income by the exchanging shareholder.
Additionally, application of §1.367(b)–
4(b)(1) can, in some instances, create
administrative burdens and be problem-
atic. Section 1.367(b)–4(b)(1) requires a
determination of the type and amount of
stock received in the deemed section 351
exchange to determine whether the neces-
sary section 1248 shareholder status and
controlled foreign corporation status is
maintained. Moreover, the application of
§1.367(b)–4(b)(1) to a section 304(a)(1)
transaction often can be problematic be-
cause the necessary section 1248 share-
holder status and controlled foreign cor-
poration status may be treated as satisfied
in the construct of the deemed section
351 exchange even though such status is
immediately lost as a result of the deemed
redemption transaction. For instance, the
necessary section 1248 shareholder status
and controlled foreign corporation status
may be satisfied immediately after the
deemed section 351 exchange when a U.S.
corporation transfers a controlled foreign
corporation (the foreign issuing corpora-
tion) to a foreign acquiring corporation
in a section 304(a)(1) transaction, by tak-
ing into consideration the deemed issued
stock by the foreign acquiring corpora-
tion. However, if both the U.S. corporate
transferor and the foreign acquiring cor-
poration are wholly owned by the same
foreign parent, the necessary section 1248
shareholder status and controlled foreign
corporation status will not be satisfied
immediately after the deemed redemption
transaction.
For the reasons listed above, the IRS
and Treasury have decided to exercise their
regulatory authority under section 367(b)
such that section 367(b) will not apply to
deemed section 351 exchanges resulting
from section 304(a)(1) transactions.
E. Request for Comments
Section 304(b)(6) grants the Secretary
authority to prescribe regulations that are
appropriate in order to eliminate multiple
inclusions of any item of income by rea-
son of section 304(a) and to provide appro-
priate basis adjustments (including modi-
fications to the application of sections 959
and 961) in section 304(a) transactions in
which the acquiring or issuing corpora-
tion is a foreign corporation. The IRS and
Treasury are considering whether to issue
regulations under section 304(b)(6) to ad-
just (1) the acquiringcorporation’s basis
of the issuing corporation stock it acquires
in the transaction, and (2) the transferor’s
basis of the issuing corporation stock in
situations in which the transferor contin-
ues to own issuing corporation stock im-
mediately after the transaction, to the ex-
tent that the transferor is treated under sec-
tion 304(b)(2)(B) asreceiving a distribu-
tion from the earnings and profits of the
issuing corporation. Comments are re-
quested regarding how such adjustments
should be made, particularly if different
classes of issuing corporation stock are ac-
quired or retained in the section 304(a)(1)
transaction. Comments also are requested
as to how, and to what extent, these types
of adjustments should be made outside the
context of section 304(b)(6) (e.g., in a sec-
tion 304(a)(1) transaction in which both
the acquiring corporation and issuing cor-
poration are domestic corporations).
June 13, 200512562005–24 I.R.B.

Effective Dates
The proposed regulations are proposed
to apply to section 304(a)(1) transactions
occurring on or after the date of publica-
tion of these regulations as final in theFed-
eral Register.
Effect on other Documents
If these proposed regulations are
adopted as final regulations, Rev. Rul.
91–5, 1991–1 C.B. 114, and Rev. Rul.
92–86, 1992–2 C.B. 199, will be modified
to the extent inconsistent with such final
regulations.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory
assessment is not required. It has also
been determined thatsection 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regu-
lations and because these regulations do
not impose a collection of information
on small entities, a Regulatory Flexibility
Analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal
Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on its
impact.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written (a signed
original and eight (8) copies) or electronic
comments that are submitted timely to
the IRS. The IRS and Treasury Depart-
ment request comments on the clarity of
the proposed rules and how they can be
made easier to understand. All comments
will be available for public inspection and
copying. A public hearing may be sched-
uled if requested in writing by any person
who timely submits written comments. If
a public hearing is scheduled, notice of the
date, time, and place of the hearing will be
published in theFederal Register.
Drafting Information
The principal author of these regula-
tions is Tasheaya L. Warren Ellison, Of-
fice of the Associate Chief Counsel (Inter-
national). However, other personnel from
the IRS and Treasury Department partici-
pated in their development.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.367(a)–3 is amended
as follows:
1. A sentence is added to paragraph
(a) immediately following the second sen-
tence.
2. The new fourth sentence of para-
graph (a) is amended by removing the lan-
guage “However” and adding “Addition-
ally” in its place.
3. The first sentence of paragraph (e)(1)
is removed and two sentences are added in
its place.
The revision and additions read as fol-
lows:
§1.367(a)–3 Treatment of transfers of
stock or securities to foreign corporations.
(a)In general. * * * However, if, pur-
suant to section 304(a)(1), a U.S. person is
treated as transferring stock of a domestic
or foreign corporation to a foreign corpora-
tion in exchange for stock of such foreign
corporation in a transaction to which sec-
tion 351(a) applies, such deemed section
351 exchange is not a transfer to a foreign
corporation subject to section 367(a). * * *
*****
(e)Effective dates.(1)In general.The
rules in paragraphs (a), (b) and (d) of this
section generally apply to transfers occur-
ring on or after July 20, 1998. However,
the third sentence of paragraph (a) of this
section shall apply to section 304(a)(1)
transactions occurring on or after the date
these regulations are published as final
regulations in theFederal Register.***
*****
Par. 3. In §1.367(b)–4, a sentence is
added to the end of paragraph (a) to read
as follows:
§1.367(b)–4 Acquisition of foreign
corporate stock or assets by a foreign
corporation in certain nonrecognition
transactions.
(a)Scope. * * * However, if pursuant to
section 304(a)(1), a foreign acquiring cor-
poration is treated as acquiring the stock of
a foreign acquired corporation in a transac-
tion to which section 351(a) applies, such
deemed section 351 exchange is not an ac-
quisition subject to section 367(b).
*****
Par. 4. Sectio
n1.367(b)–6isamended
by revising p
aragraph (a)(1) to read as fol-
lows:
§1.367(b)–6 Effective dates and
coordination rules.
(a)Effective date—(1)In general.
Sections 1.367(b)–1 through 1.367(b)–5,
and this section, generally apply to section
367(b) exchanges that occur on or after
February 23, 2000. However, the last
sentence of paragraph (a) in §1.367(b)–4
shall apply to section 304(a)(1) transac-
tions occurring on or after the date these
regulations are published as final regula-
tions in theFederal Register.
*****
Cono R. Namorato,
Acting Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on May 20, 2005,
2:48 p.m., and published in the issue of the Federal Register
for May 25, 2005, 70 F.R. 30036)
Announcement and Report
Concerning Pre-Filing
Agreements
Announcement 2005–42
Introduction
This Announcement is issued pursuant
to the Conference Report to H.R. 4577
(Pub. L. No. 106–554),The Commu-
nity Renewal Tax Relief Act of 2000,which
2005–24 I.R.B.1257June 13, 2005

requires that the Secretary of the Trea-
sury make publicly available an annual re-
port relating to the Pre-Filing Agreement
(“PFA”) program operations for the pre-
ceding calendar year. The Conference Re-
port states that the report is to include:
(1) the number of pre-filing agreements
completed, (2) the number of applications
received, (3) the number of applications
withdrawn, (4) the types of issues which
are resolved by completed agreements, (5)
whether the program is being utilized by
taxpayers who were previously subject to
audit, (6) the average length of time re-
quired to complete an agreement, (7) the
number, if any, and subject of technical ad-
vice and Chief Counsel advice memoranda
issued to address issues arising in connec-
tion with any pre-filing agreement, (8) any
model agreements, and (9) any other in-
formation the Secretary deems appropri-
ate. This is the fifth annual report. It
provides information concerning activity
under the permanent PFA program (Rev.
Proc. 2001–22, 2001–1 C.B. 745), during
calendar year 2004.
Background
The Large and Midsize Business Di-
vision (LMSB) of the Internal Revenue
Service serves 170,000 of America’s
largest corporate and partnership entities
— businesses with assets of over $10
million. Their tax issues are among the
most complex, and their collective annual
tax liability approaches $159 billion. The
largest of these taxpayers deal with the
IRS on a continuous basis.
One of LMSB’s strategic initiatives is
issue management. Through effective is-
sue management, LMSB seeks to resolve
issues of tax controversy on a more current
basis. This includes, but is not limited to,
increasing the efficiency of the examina-
tion process and seeking alternative issue
resolution tools. The PFA program was
designed to support LMSB’s issue man-
agement initiative.LMSB believes the
PFA program reduces taxpayer burden and
makes more effective use of IRS resources
by resolving or eliminating controversies
before the tax return is filed.
The PFA program is designed to per-
mit a taxpayer to resolve, before the fil-
ing of a return, the treatment of an issue
that otherwise would likely be disputed in
a post-filing examination. The PFA pro-
gram is intended to produce agreement on
factual issues and apply settled legal prin-
ciples to those agreed-upon facts. A PFA is
a specific matter closing agreement under
§ 7121 of the Internal Revenue Code and
resolves the subject of the PFA for a spec-
ified taxable period. Execution of a PFA
that resolves issues prior to filing permits
taxpayers to avoid costs, burdens and de-
lays that are frequently incident to post-fil-
ing examination disputes between taxpay-
ers and the IRS.
PFA Program
The IRS established a permanent PFA
program with the issuance of Rev. Proc.
2001–22 and revised it on December 22,
2004, with the issuance of Rev. Proc.
2005–12, 2005–2 I.R.B. 311. Although
many of the procedures remained the
same, there were some significant changes
and clarifications:
•PFAsmaycoverthecurrentandupto
four future taxable years;
•PFAs are available to determine the ap-
propriate methodologies for determin-
ing tax consequences affecting future
years;
•PFAs are for completed transactions
only; and
•PFAs with international tax issues re-
quire concurrence of the Director, In-
ternational; certain international issues
listed in Rev. Proc. 2005–12 also
require concurrence of the Associate
Chief Counsel (International) in accep-
tance and execution.
PFA Process
The PFA process is managed and con-
ducted by LMSB Industry Directors and
field staff, with support from the Office
of Pre-Filing and Technical Guidance in
LMSB Headquarters. The PFA Program
Manager receives all applications and,
with the assistance of the Technical Ad-
visors and the Office of Chief Counsel,
ensures that the issues presented are appro-
priate for inclusion in the PFA program.
The Industry Director with jurisdiction
over the taxpayer makes the final decision
whether to accept a taxpayer’s request for
participation in the PFA program. The cri-
teria for selecting a request include:
a. The suitability of the issue presented
by the taxpayer;
b. The direct or indirect impact of a PFA
upon other years, issues, taxpayers, or
related cases;
c. The availability of IRS resources;
d. The ability and willingness of the tax-
payer to dedicate sufficient resources
to the process;
e. The likelihood that the PFA may result
in contrary positions with respect to an
item or transaction (“whipsaw”); and
f. The probability of completing the ex-
amination of the issue and entering
into a PFA by the target date.
For the cases selected for participation
in the PFA program, a mandatory orien-
tation session for the examination team
and the taxpayer is conducted. Subse-
quently, the taxpayer and the examination
team convene a joint planning meeting to
reach agreement on a proposed timeframe,
to identify and arrange for IRS access to
relevant records and testimony, and to de-
fine the potential scope and nature of the
PFA.
The examination team conducts the fac-
tual determination and issue development
consistent with IRS auditing standards.
Based upon an examination of the issue,
the Team Manager prepares a PFA recom-
mendation for the Industry Director. The
Industry Director’s decision to execute a
PFA closing agreement is based on the
Team Manager’s recommendation and
discussions with the PFA Program Man-
ager, Chief Counsel attorneys, appropriate
Technical Advisors, and the taxpayer. Fol-
lowing Chief Counsel review to ensure
that the proposed PFA closing agreement
conforms with guidance provided in Rev.
Proc. 68–16, 1968–1 C.B. 770 (regarding
closing agreements), the Industry Director
will execute a PFA if he or she determines
that:
a. Entering into the PFA is consistent
with the goals of the PFA program
as stated in Rev. Proc. 2001–22 (or
Rev. Proc 2005–12 for applications
received after December 22, 2004);
b. The resolution in the PFA reflects set-
tled legal principles and correctly ap-
plies those principles (or positions au-
thorized under Delegation Order Nos.
4–24 or 4–25) to facts found by the ex-
amination team; and
June 13, 200512582005–24 I.R.B.

c. There appears to be an advantage in
having the issue(s) permanently and
conclusively closed for the taxable pe-
riod covered by the PFA, or that the
taxpayer shows good and sufficient
reasons for desiring a closing agree-
ment and that the United States would
sustain no disadvantage through con-
summation of such an agreement (see
§ 301.7121–1(a) of the Procedure and
Administration Regulations).
Program Oversight
A designated PFA Program Manager
assigned to the Office of Pre-Filing and
Technical Guidance in LMSB Headquar-
ters provides oversight for the PFA pro-
gram. The PFA Program Manager pro-
vides assistance to taxpayers, Industry Di-
rectors, and Team Managers throughout
the process.
Pre-Filing Agreement Program
Accomplishments
Statistical Overview of PFA Program —
Calendar Year 2004
The tables below reflect the status of
PFA applications received in calendar year
2004.
PFA Applications Received in Calendar Year 2004Totals
Applications Withdrawn before Acceptance/Rejection in 20042
Applications Rejected in 200412
Applications in Screening Process on 12–31–041
Applications Pending Acceptance/Rejection on 12–31–041
Applications Accepted in 200422
Total Applications Received in 200438
Disposition of PFA Applications Accepted in Calendar Year 2004Totals
Applications Withdrawn after Acceptance in 20041
Applications for Which There Were Closing Agreements in 20048
Applications In Process on 12–31–0413
Total Applications Accepted in 200422
Description of Applications Received in
Calendar Year 2004
The applications received by the PFA
program in calendar year 2004 came from
taxpayers in each LMSB industry segment
and involved a variety of issues as pro-
vided in the tables below.
Number of Applications Received and Accepted by Industry Segment
Industry SegmentReceivedAccepted
Financial Services126
Retailers, Food, Pharmaceuticals & Healthcare74
Natural Resources & Construction65
Communications, Technology & Media63
Heavy Manufacturing & Transportation74
Total3822
Types of Issues Covered
IssueReceivedAccepted
Donation of Property41
Research and Experimental Credit97
Estimated Basis of the Stock of a Subsidiary11
2005–24 I.R.B.1259June 13, 2005

Type of Merger/Reorganization10
Valuation of Stock of a Target Corporation11
Worthless Securities and Bad Debts64
Income from Intercompany Notes10
Amount and Character of Partnership Investment Losses10
Deductibility of Fines and Penalties22
Deductibility of Interest to Purchase Tax Exempt Securities11
Merger — Tax Free Reorganization10
Tax Free Split-off10
Treatment of Transfer and Sale of Stock11
Cost Segregation Study — Asset Class Life and Recovery Period22
Synthetic Fuel Credit11
Taxability of Transfer of Rights to an LLC10
Apportionment of General and Administrative Expenses11
Characterization of Remuneration as Wages versus Partnership Distribution10
Transfer Pricing — Royalty10
Transfer of Stock under IRC § 8310
Total3822
Reasons Why Applications Received in
Calendar Year 2004 Were Not Accepted
Reasons for Non-acceptanceApplications
Not Well-Settled Law5
Not Enough Time to Complete2
Issue Not Suitable or Ineligible4
Currently in Litigation with Taxpayer on the Issue1
Total12
PFA Program Summary (2004 and Prior
Calendar Years)
Forty accepted applications (including
applications accepted in prior years) were
resolved or withdrawn in 2004.
Taxpayer Withdrawals (4)
In accordance with procedures set forth
in Rev. Proc. 2001–22, four taxpayers
withdrew from the PFA process in 2004
after their requests had been accepted
(three of these were accepted before 2004).
In one case the taxpayer and the Service
agreed that the timeline was too burden-
some. In the other cases, no explanation
for the withdrawal was given by the tax-
payer.
IRS Withdrawal (8)
In 2004, the Service withdrew from the
PFA process in eight cases accepted before
2004. In one case, the taxpayer did not
have adequate records to substantiate a de-
duction for the Research and Experimental
Credit. In the other seven cases, the tax-
payer and the Service were unable to reach
agreement.
Mutual Withdrawal (1)
The Service and the taxpayer mutually
agreed to terminate the PFA process in one
case. They agreed that it would be more
efficient to roll the issue into the normal
examination process rather than continu-
ing with the PFA process.
PFAs Executed (27)
Twenty seven PFAs were completed in
calendar year 2004 that resulted in the ex-
ecution of closing agreements. Eight of
these were for applications received and
accepted in 2004.
The Office of Chief Counsel provided
advice to the examination teams and as-
sisted in the drafting and review of the
PFA closing agreements. No Technical
Advice or Chief Counsel Advice Memo-
randa were issued for issues addressed in
the PFA process.
PFAs Executed in 2004
ThePFAsexecutedin2004involved
the following issues:
June 13, 200512602005–24 I.R.B.

PFAs Executed by Issue
Year
Application
Received
IssueNumber
2002Deductibility and Fair Market Value of Donated Property1
2003Deductibility and Fair Market Value of Donated Property4
2004Deductibility and Fair Market Value of Donated Property1
2003Amount of Qualified Research and Experimental Credit4
2004Amount of Qualified Research and Experimental Credit2
2003Fair Market Value of Stock Exchanged1
2004Cost Segregation for Asset Class and Recovery Periods1
2003Treatment of License Fee Income1
2004Deductibility of Fees to Purchase Tax Exempt Securities1
2002Gain or Loss on Sale of Stock1
2002Worthless Securities and Bad Debts1
2003Worthless Securities and Bad Debts3
2004Worthless Securities and Bad Debts2
2002Fuel Credit1
2003Ordinary Versus Capital Loss on Property Sale1
2003Writedown of Inventory1
2004Deductibility of Fines and Penalties1
Total27
Deductibility and Fair Market Value of
Donated Property (6)
In each of these unrelated cases, the tax-
payer sought an agreement as to the fair
market value of property donated to qual-
ified organizations. Patents and technol-
ogy were donated in four cases and land
was donated in two other cases. In three
of the cases, a closing agreement was ex-
ecuted specifying the fair market value
of the property contributed. In the other
three cases, both fair market value and de-
ductibility were addressed, and in one of
these, no deduction was allowed.
Amount of Qualified Research and
Experimental Credit (6)
The taxpayers requested an agreement
regarding the proper amount of qualified
research expenses and the research credit
under IRC § 41. Closing agreements were
executed with all taxpayers. The closing
agreements did not address the methodol-
ogy to be used for subsequent years.
Fair Market Value of Stock Exchanged (1)
The taxpayer requested an agreement
concerning the value of preferred stock in
transactions intended to qualify as trans-
fers to a controlled corporation under IRC
§ 351. A closing agreement was executed
that specified the fair market value of the
transferred stock and provided that the IRS
would not challenge the value under IRC
§ 482 or other Code sections.
Cost Segregation for Asset Class and
Recovery Periods (1)
The taxpayer requested an agreement
concerning the proper class lives and re-
covery periods of property placed in ser-
vice during the tax year. The taxpayer and
Service agreed to use statistical sampling
techniques and came to agreement on the
depreciation deduction amount. A clos-
ing agreement was executed specifying the
amount allowed.
Treatment of License Fee Income (1)
The taxpayer requested an agreement
regarding the treatment of periodic fee in-
come from software licenses. A closing
agreement was executed specifying that
the licenses shall be treated as leases rather
than sales of software and that the fees
shall be included in income in the year due
and payable.
Deductibility of Fees to Purchase Tax
Exempt Securities (1)
The taxpayer requested an agreement
regarding the deductibility of periodic in-
terest and other costs on debt. Some of
the proceeds of this debt were temporar-
ily invested in tax exempt securities. A
closing agreement was executed specify-
ing that the interest and costs are not to be
disallowed under IRC § 265.
Gain or Loss on Sale of Stock (1)
The taxpayer requested an agreement
concerning the sale of the stock in its sub-
sidiary for cash. A closing agreement was
2005–24 I.R.B.1261June 13, 2005

executed specifying the amount of the IRC
§ 338 aggregate deemed sales price.
Worthless Securities and Bad Debts (6)
The taxpayers requested an agreement
regarding amounts deductible as ordinary
losses on the worthlessness of stock in its
subsidiary. A closing agreement was exe-
cuted for each of the PFAs specifying that
the stock was worthless and the amount to
be deducted.
Fuel Credit (1)
The taxpayer requested an agreement
regarding its fuel credits through consid-
eration of the “placed in service” question
and other issues bearing on the credits. A
closing agreement wasexecuted specify-
ing the amount of the fuel credit to be al-
lowed and how that amount was to be al-
located to the partners.
Ordinary Versus Capital Loss on Property
Sale (1)
The taxpayer requested an agreement
concerning the tax consequences of the
sale of two parcels of property. A clos-
ing agreement was executed specifying the
amount of the losses and that they are to be
characterized as ordinary losses under IRC
§ 1231.
Writedown of Inventory (1)
The taxpayer requested an agreement
regarding the proper treatment of inven-
tory write-downs. A closing agreement
was executed specifying the amount al-
lowable as a deduction reflected in the de-
termination of the cost of good sold.
Deductibility of Fines and Penalties (1)
The taxpayer requested an agreement
regarding the proper treatment of amounts
paid to the U.S. government in restitution,
civil damages, and fines. A closing agree-
ment was executed specifying the amount
allowable as restitution under IRC § 162
and the amount determined to be a fine or
penalty and therefore not allowable as a
deduction.
Closing Agreements
There is not apro formaor model
agreement for a PFA closing agreement.
A PFA represents a specific matter closing
agreement under IRC § 7121. The closing
agreements entered into under the PFA
program were prepared with assistance
from the Office of Chief Counsel and
conform to the guidance provided in Rev.
Proc. 68–16.
PFA Program Utilization
The PFA program is available to all tax-
payers under the jurisdiction of LMSB.
During calendar year 2004, 38 taxpayers
submitted PFA applications. These tax-
payers included both Coordinated Indus-
try Case (CIC) taxpayers that are typically
subject to examination on a continuing ba-
sis and Industry Case (IC) taxpayers that
are subject to examination on a less fre-
quent basis. Of the 38 applications, 30
were from CIC taxpayers and 8 were from
IC taxpayers. Of the 27 cases that resulted
in closing agreementsduring calendar year
2004, 25 were with CIC taxpayers and 2
were with IC taxpayers.
Processing Statistics
The average elapsed time to resolve the
27 cases that resulted in closing agree-
ments in calendar year 2004 was 360 days.
Processing Time for Twenty Seven
Closing Agreements Executed in 2004
Range
(Elapsed Days)
Average
(Elapsed Days)
Application Screening Process29–359*76
PFA Evaluation Process62–716285
Total Time to Close a PFA Case99–773360
*One case took 359 days to screen be-
cause the taxpayer had not yet completed
the transaction and the Service waited for
the transaction to be completed before ac-
cepting the PFA. The next highest number
of days for screening was 163.
Application Screening Process
The application screening process is the
process to determine if an application is
appropriate for inclusion in the PFA pro-
gram. This screening process includes
obtaining comments from various LMSB
functions and Chief Counsel, the review
of these comments, and the acceptance or
rejection of an application by the Industry
Director. The average time from the date
an application was received by the IRS un-
til the Industry Director rendered a deci-
sion to accept or reject an application was
76 days.
PFA Evaluation Process
The PFA evaluation process is the sec-
ond (and final) phase in the PFA program.
This phase begins when the Industry Di-
rector accepts an application into the PFA
program and ends when a PFA closing
agreement is executed or the process ter-
minates as a result of a withdrawal. The
average elapsed timeduring the PFA eval-
uation process for the 27 cases that re-
sulted in closing agreements in calendar
year 2004 was 285 days.
Program Evaluation
The PFA Program Manager ensures that
an evaluation of all of the PFA program
cases, based on feedback from LMSB em-
ployees and taxpayer participants, is so-
licited. As part of this program evalua-
tion, LMSB and taxpayer participants were
asked to provide the direct examination
time expended to complete the PFA and an
estimate of the direct examination time it
would have taken to resolve the issue in a
post-filing context. The table below indi-
cates the results for those that provided a
response since the program’s inception.
June 13, 200512622005–24 I.R.B.

Cumulative Hours on Executed PFAsTaxpayer
(Hours)
LMSB
(Hours)
Actual Hours Expended — PFA Process20,24316,897
Estimated Hours Required To Be Expended — Post-Filing Process38,61522,978
Time Savings — Actual PFA Process versus Estimated Post-Filing18,3726,081
Average Percentage Savings — Actual PFA Process versus Estimated
Post-Filing
47.6%26.5%
Comparative Analysis — Processing
Statistics
The average total time to conclude the
27 cases that resulted in closing agree-
ments in calendar year 2004 was 360 days.
Illustrated below are the processing statis-
tics for the cases that resulted in closing
agreements since the inception of the pro-
gram.
Average Processing Time
(Days)Overall
Pilot
(11 cases)
Program
CY 2001
(7 cases)
Program
CY 2002
(12 cases)
Program
CY 2003
(18 cases)
Program
CY 2004
(27 cases)
Application Screening Process3847535976
PFA Evaluation Process242126183240285
Total Time to Complete a PFA281173235299360
The increased processing time can be
attributed to the greater degree of com-
plexity of the issues and the time necessary
to develop the factual background. Gener-
ally, the more complex and fact intensive
the issue is, the greater the time necessary
to complete the process.
Taxpayer Satisfaction Survey
An additional aspect of the evalua-
tion process is soliciting feedback from
taxpayers regarding satisfaction with the
PFA process through a questionnaire.
Responses to the questionnaire were re-
ceived from 11 of the 27 taxpayers who
executed closing agreements for calendar
year 2004. Taxpayers were asked to rate
the PFA process on a scale of 1 to 5. The
responses are summarized below.
Overall level of satisfaction with the PFA process.Average 4.7
Ve
ry
Di
ssatisfied
Di
ssatisfied
Ne
ither
Sa
tisfied
Ve
ry
Sa
tisfied
Do
es Not
Ap
ply
number371
percentage27.363.69.1
L
ikelihood of taxpayer recommending the PFA process to others.
A
verage 4.6
Very UnlikelyUnlikelyPerhapsLikelyVery LikelyDoes not
Apply
number47
percentage36.463.6
The PFA process was clearly communicated during the orientation session.Average 4.4
Strongly
Disagree
DisagreeNeitherAgreeStrongly
Agree
Does Not
Apply
number641
percentage54.536.49.1
2005–24 I.R.B.1263June 13, 2005

During the orientation, questions regarding the PFA process were completely
addressed.Average 4.4
Strongly
Disagree
DisagreeNeitherAgreeStrongly
Agree
Does Not
Apply
number74
percentage63.636.4
The PFA audit plan was developed with input from both the IRS and the taxpayer.Average 4.5
Strongly
Disagree
DisagreeNeitherAgreeStrongly
Agree
Does Not
Apply
number65
percentage54.545.5
The IRS requests for information were relevant to resolve the PFA issue.Average 4.4
Strongly
Disagree
DisagreeNeitherAgreeStrongly
Agree
Does Not
Apply
number74
percentage63.636.4
ThetimetakenbytheIRStoreviewinformation during the entire “Factual
development” stage of the PFA process was appropriate.Average 4.3
Strongly
Disagree
DisagreeNeitherAgreeStrongly
Agree
Does Not
Apply
number155
percentage9.145.545.5
The time taken by the IRS to complete the “Closing Agreement” stage of the
PFA process was appropriate.Average 4.0
Strongly
Disagree
DisagreeNeitherAgreeStrongly
Agree
Does Not
Apply
number1163
percentage9.19.154.527.3
IRS team members were accessible during the process to resolve the PFA issue.Average 4.5
Strongly
Disagree
DisagreeNeitherAgreeStrongly
Agree
Does Not
Apply
number146
percentage9.136.654.5
June 13, 200512642005–24 I.R.B.

The total number of staff days or hours actually expended as compared to
expected staff days or hours.Average 4.0
Significantly
More
MoreAbout the
Same
LessSignificantly
Less
Does Not
Apply
number1244
percentage9.118.236.436.4
The total elapsed time to complete thePFA process as compared to the expected
time to complete the process.Average 3.8
Significantly
More
MoreAbout the
Same
LessSignificantly
Less
Does Not
Apply
number111341
percentage9.19.19.127.336.49.1
The spirit of cooperation between IRS and the company as a result of the PFA
process.Average 4.1
Significantly
Less
LessAbout the
Same
ImprovedSignificantly
Improved
Does Not
Apply
number263
percentage18.254.527.3
The ability to reach agreement at the lowest (managerial) level.Average 4.1
Significantly
Less
LessAbout the
Same
ImprovedSignificantly
Improved
Does Not
Apply
number263
percentage18.254.527.3
The ease of effort in reaching agreement compared to the expected ease on
post-filing.Average 4.0
Significantly
Less
LessAbout the
Same
ImprovedSignificantly
Improved
Does Not
Apply
number272
percentage18.263.618.2
Monetary costs incurred to resolve the issue compared to expected costs to resolve
issues through the post-filing process.Average 3.6
Significantly
More
MoreAbout the
Same
LessSignificantly
Less
Does Not
Apply
number2252
percentage18.218.245.518.2
2005–24 I.R.B.1265June 13, 2005

The ability to present an accurate tax return for financial statement purposes as a
result of the pre-filing process.Average 4.1
Significantly
Less
LessAbout the
Same
ImprovedSignificantly
Improved
Does Not
Apply
number2531
percentage18.245.527.39.1
Pre-Filing Agreement Program
Summary
Overall, the PFA program is meeting
the LMSB strategic program objectives as
provided in its issue management strategic
initiative. The following benchmarks re-
flect the overall progress of the PFA pro-
gram:
•The increasing number of issues re-
solved through the PFA program,
which has grown steadily since the
program became fully operational;
•The high degree of overall satisfac-
tion of taxpayers participating in the
PFA program and the likelihood that
those participants would recommend
this process to other taxpayers.
Although the number of cases resolved
in the PFA program increased in 2004, the
total processing time has also increased.
Revenue Procedure 2005–12 now im-
poses short time frames for evaluating
aPFA,soweexpectthetimeforthe
application screening process to decline
significantly. The time during the PFA
evaluation process continues to increase.
This trend, which is due in part to the
increasing complexity of issues presented
by taxpayers for PFA consideration, has
continued since the PFA program became
fully operational in 2001.
The principal author of this announce-
ment is Melanie Perrin, Office of Pre-Fil-
ing and Technical Guidance, Large and
Mid-Size Business Division. For further
information regarding this announcement,
contact Ms. Perrin at (202) 283–8408.
June 13, 200512662005–24 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
2005–24 I.R.B.iJune 13, 2005

Numerical Finding List
1
Bulletins 2005–1 through 2005–24
Announcements:
2005-1, 2005-1 I.R.B.257
2005-2, 2005-2 I.R.B.319
2005-3, 2005-2 I.R.B.270
2005-4, 2005-2 I.R.B.319
2005-5, 2005-3 I.R.B.353
2005-6, 2005-4 I.R.B.377
2005-7, 2005-4 I.R.B.377
2005-8, 2005-4 I.R.B.380
2005-9, 2005-4 I.R.B.380
2005-10, 2005-5 I.R.B.450
2005-11, 2005-5 I.R.B.451
2005-12, 2005-7 I.R.B.555
2005-13, 2005-8 I.R.B.627
2005-14, 2005-9 I.R.B.653
2005-15, 2005-9 I.R.B.654
2005-16, 2005-10 I.R.B.702
2005-17, 2005-10 I.R.B.673
2005-18, 2005-9 I.R.B.660
2005-19, 2005-11 I.R.B.744
2005-20, 2005-12 I.R.B.772
2005-21, 2005-12 I.R.B.776
2005-22, 2005-14 I.R.B.826
2005-23, 2005-14 I.R.B.845
2005-24, 2005-15 I.R.B.889
2005-25, 2005-15 I.R.B.891
2005-26, 2005-17 I.R.B.969
2005-27, 2005-16 I.R.B.918
2005-28, 2005-17 I.R.B.969
2005-29, 2005-17 I.R.B.969
2005-30, 2005-18 I.R.B.988
2005-31, 2005-18 I.R.B.996
2005-32, 2005-19 I.R.B.1012
2005-33, 2005-19 I.R.B.1013
2005-34, 2005-19 I.R.B.1014
2005-35, 2005-21 I.R.B.1095
2005-36, 2005-21 I.R.B.1095
2005-37, 2005-21 I.R.B.1096
2005-38, 2005-21 I.R.B.1097
2005-39, 2005-22 I.R.B.1151
2005-40, 2005-22 I.R.B.1152
2005-41, 2005-23 I.R.B.1212
2005-42, 2005-24 I.R.B.1257
Court Decisions:
2080, 2005-15 I.R.B.850
Notices:
2005-1, 2005-2 I.R.B.274
2005-2, 2005-3 I.R.B.337
2005-3, 2005-5 I.R.B.447
2005-4, 2005-2 I.R.B.289
Notices— Continued:
2005-5, 2005-3 I.R.B.337
2005-6, 2005-5 I.R.B.448
2005-7, 2005-3 I.R.B.340
2005-8, 2005-4 I.R.B.368
2005-9, 2005-4 I.R.B.369
2005-10, 2005-6 I.R.B.474
2005-11, 2005-7 I.R.B.493
2005-12, 2005-7 I.R.B.494
2005-13, 2005-9 I.R.B.630
2005-14, 2005-7 I.R.B.498
2005-15, 2005-7 I.R.B.527
2005-16, 2005-8 I.R.B.605
2005-17, 2005-8 I.R.B.606
2005-18, 2005-9 I.R.B.634
2005-19, 2005-9 I.R.B.634
2005-20, 2005-9 I.R.B.635
2005-21, 2005-11 I.R.B.727
2005-22, 2005-12 I.R.B.756
2005-23, 2005-11 I.R.B.732
2005-24, 2005-12 I.R.B.757
2005-25, 2005-14 I.R.B.827
2005-26, 2005-12 I.R.B.758
2005-27, 2005-13 I.R.B.795
2005-28, 2005-13 I.R.B.796
2005-29, 2005-13 I.R.B.796
2005-30, 2005-14 I.R.B.827
2005-31, 2005-14 I.R.B.830
2005-32, 2005-16 I.R.B.895
2005-33, 2005-17 I.R.B.960
2005-34, 2005-17 I.R.B.960
2005-35, 2005-21 I.R.B.1087
2005-36, 2005-19 I.R.B.1007
2005-37, 2005-20 I.R.B.1049
2005-38, 2005-22 I.R.B.1100
2005-39, 2005-21 I.R.B.1087
2005-40, 2005-21 I.R.B.1088
2005-41, 2005-23 I.R.B.1203
2005-42, 2005-23 I.R.B.1204
2005-43, 2005-24 I.R.B.1221
2005-45, 2005-24 I.R.B.1228
Proposed Regulations:
REG-108524-00, 2005-23 I.R.B.1209
REG-117969-00, 2005-7 I.R.B.533
REG-125443-01, 2005-16 I.R.B.912
REG-125628-01, 2005-7 I.R.B.536
REG-100420-03, 2005-24 I.R.B.1236
REG-105346-03, 2005-24 I.R.B.1244
REG-129709-03, 2005-3 I.R.B.351
REG-148701-03, 2005-13 I.R.B.802
REG-148867-03, 2005-9 I.R.B.646
REG-159243-03, 2005-20 I.R.B.1075
REG-160315-03, 2005-14 I.R.B.833
REG-163314-03, 2005-14 I.R.B.835
REG-122847-04, 2005-13 I.R.B.804
Proposed Regulations— Continued:
REG-127740-04, 2005-24 I.R.B.1254
REG-130370-04, 2005-8 I.R.B.608
REG-130671-04, 2005-10 I.R.B.694
REG-131128-04, 2005-11 I.R.B.733
REG-139683-04, 2005-4 I.R.B.371
REG-147195-04, 2005-15 I.R.B.888
REG-148521-04, 2005-18 I.R.B.995
REG-152354-04, 2005-13 I.R.B.805
REG-152914-04, 2005-9 I.R.B.650
REG-152945-04, 2005-6 I.R.B.484
REG-154000-04, 2005-19 I.R.B.1009
REG-159824-04, 2005-4 I.R.B.372
REG-162813-04, 2005-19 I.R.B.1010
Revenue Procedures:
2005-1, 2005-1 I.R.B.1
2005-2, 2005-1 I.R.B.86
2005-3, 2005-1 I.R.B.118
2005-4, 2005-1 I.R.B.128
2005-5, 2005-1 I.R.B.170
2005-6, 2005-1 I.R.B.200
2005-7, 2005-1 I.R.B.240
2005-8, 2005-1 I.R.B.243
2005-9, 2005-2 I.R.B.303
2005-10, 2005-3 I.R.B.341
2005-11, 2005-2 I.R.B.307
2005-12, 2005-2 I.R.B.311
2005-13, 2005-12 I.R.B.759
2005-14, 2005-7 I.R.B.528
2005-15, 2005-9 I.R.B.638
2005-16, 2005-10 I.R.B.674
2005-17, 2005-13 I.R.B.797
2005-18, 2005-13 I.R.B.798
2005-19, 2005-14 I.R.B.832
2005-20, 2005-18 I.R.B.990
2005-21, 2005-16 I.R.B.899
2005-22, 2005-15 I.R.B.886
2005-23, 2005-18 I.R.B.991
2005-24, 2005-16 I.R.B.909
2005-25, 2005-17 I.R.B.962
2005-26, 2005-17 I.R.B.965
2005-27, 2005-20 I.R.B.1050
2005-28, 2005-21 I.R.B.1093
2005-29, 2005-22 I.R.B.1118
2005-30, 2005-22 I.R.B.1148
2005-32, 2005-23 I.R.B.1206
2005-33, 2005-24 I.R.B.1231
2005-34, 2005-24 I.R.B.1233
Revenue Rulings:
2005-1, 2005-2 I.R.B.258
2005-2, 2005-2 I.R.B.259
2005-3, 2005-3 I.R.B.334
2005-4, 2005-4 I.R.B.366
2005-5, 2005-5 I.R.B.445
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin
2004–52, dated December 27, 2004.
June 13, 2005ii2005–24 I.R.B.

Revenue Rulings— Continued:
2005-6, 2005-6 I.R.B.471
2005-7, 2005-6 I.R.B.464
2005-8, 2005-6 I.R.B.466
2005-9, 2005-6 I.R.B.470
2005-10, 2005-7 I.R.B.492
2005-11, 2005-14 I.R.B.816
2005-12, 2005-9 I.R.B.628
2005-13, 2005-10 I.R.B.664
2005-14, 2005-12 I.R.B.749
2005-15, 2005-11 I.R.B.720
2005-16, 2005-13 I.R.B.777
2005-17, 2005-14 I.R.B.823
2005-18, 2005-14 I.R.B.817
2005-19, 2005-14 I.R.B.819
2005-20, 2005-14 I.R.B.821
2005-21, 2005-14 I.R.B.822
2005-22, 2005-13 I.R.B.787
2005-23, 2005-15 I.R.B.864
2005-24, 2005-16 I.R.B.892
2005-25, 2005-18 I.R.B.971
2005-26, 2005-17 I.R.B.957
2005-27, 2005-19 I.R.B.998
2005-28, 2005-19 I.R.B.997
2005-29, 2005-21 I.R.B.1080
2005-30, 2005-20 I.R.B.1015
2005-31, 2005-21 I.R.B.1084
2005-32, 2005-23 I.R.B.1156
2005-33, 2005-23 I.R.B.1155
2005-34, 2005-22 I.R.B.1098
2005-35, 2005-24 I.R.B.1214
Tax Conventions:
2005-3, 2005-2 I.R.B.270
2005-17, 2005-10 I.R.B.673
2005-22, 2005-14 I.R.B.826
2005-30, 2005-18 I.R.B.988
Treasury Decisions:
9164, 2005-3 I.R.B.320
9165, 2005-4 I.R.B.357
9166, 2005-8 I.R.B.558
9167, 2005-2 I.R.B.261
9168, 2005-4 I.R.B.354
9169, 2005-5 I.R.B.381
9170, 2005-4 I.R.B.363
9171, 2005-6 I.R.B.452
9172, 2005-6 I.R.B.468
9173, 2005-8 I.R.B.557
9174, 2005-9 I.R.B.629
9175, 2005-10 I.R.B.665
9176, 2005-10 I.R.B.661
9177, 2005-10 I.R.B.671
9178, 2005-11 I.R.B.708
9179, 2005-11 I.R.B.707
9180, 2005-11 I.R.B.714
9181, 2005-11 I.R.B.717
9182, 2005-11 I.R.B.713
Treasury Decisions— Continued:
9183, 2005-12 I.R.B.754
9184, 2005-12 I.R.B.753
9185, 2005-12 I.R.B.749
9186, 2005-13 I.R.B.790
9187, 2005-13 I.R.B.778
9188, 2005-15 I.R.B.883
9189, 2005-13 I.R.B.788
9190, 2005-15 I.R.B.855
9191, 2005-15 I.R.B.854
9192, 2005-15 I.R.B.866
9193, 2005-15 I.R.B.862
9194, 2005-20 I.R.B.1016
9195, 2005-17 I.R.B.958
9196, 2005-19 I.R.B.1000
9197, 2005-18 I.R.B.985
9198, 2005-18 I.R.B.972
9199, 2005-19 I.R.B.1003
9200, 2005-23 I.R.B.1158
9201, 2005-23 I.R.B.1153
9202, 2005-24 I.R.B.1213
2005–24 I.R.B.iiiJune 13, 2005

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2005–1 through 2005–24
Announcements:
2001-77
Modified by
Rev. Proc. 2005-16, 2005-10 I.R.B.674
2005-19
Supplemented by
Ann. 2005-39, 2005-22 I.R.B.1151
Notices:
88-30
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
88-132
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
89-29
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
89-38
Obsoleted by
Notice 2005-4, 2005-2 I.R.B.289
97-19
Obsoleted in part by
Notice 2005-36, 2005-19 I.R.B.1007
98-34
Obsoleted in part by
Notice 2005-36, 2005-19 I.R.B.1007
2002-45
Amplified by
Rev. Rul. 2005-24, 2005-16 I.R.B.892
2004-22
Modified and superseded by
Notice 2005-30, 2005-14 I.R.B.827
2004-38
Obsoleted by
T.D. 9186, 2005-13 I.R.B.790
2004-80
Clarified and modified by
Notice 2005-22, 2005-12 I.R.B.756
Updated by
Notice 2005-17, 2005-8 I.R.B.606
2005-4
Modified by
Notice 2005-24, 2005-12 I.R.B.757
2005-10
Modified by
Notice 2005-38, 2005-22 I.R.B.1100
Notices— Continued:
2005-17
Clarified and modified by
Notice 2005-22, 2005-12 I.R.B.756
Proposed Regulations:
REG-149519-03
Corrected by
Ann. 2005-11, 2005-5 I.R.B.451
REG-163314-03
Corrected by
Ann. 2005-32, 2005-19 I.R.B.1012
REG-114726-04
Corrected by
Ann. 2005-10, 2005-5 I.R.B.450
REG-152945-04
Corrected by
Ann. 2005-34, 2005-19 I.R.B.1014
Revenue Procedures:
84-58
Superseded by
Rev. Proc. 2005-18, 2005-13 I.R.B.798
84-78
Superseded by
Rev. Proc. 2005-34, 2005-24 I.R.B.1233
94-68
Modified and superseded by
Rev. Proc. 2005-32, 2005-23 I.R.B.1206
98-16
Modified and superseded by
Rev. Proc. 2005-11, 2005-2 I.R.B.307
2000-20
Modified and superseded by
Rev. Proc. 2005-16, 2005-10 I.R.B.674
2001-22
Superseded by
Rev. Proc. 2005-12, 2005-2 I.R.B.311
2002-9
Modified and amplified by
Rev. Proc. 2005-9, 2005-2 I.R.B.303
2003-32
Amplified and superseded by
Rev. Proc. 2005-20, 2005-18 I.R.B.990
2004-1
Superseded by
Rev. Proc. 2005-1, 2005-1 I.R.B.1
2004-2
Superseded by
Rev. Proc. 2005-2, 2005-1 I.R.B.86
Revenue Procedures— Continued:
2004-3
Superseded by
Rev. Proc. 2005-3, 2005-1 I.R.B.118
2004-4
Superseded by
Rev. Proc. 2005-4, 2005-1 I.R.B.128
2004-5
Superseded by
Rev. Proc. 2005-5, 2005-1 I.R.B.170
2004-6
Superseded by
Rev. Proc. 2005-6, 2005-1 I.R.B.200
2004-7
Superseded by
Rev. Proc. 2005-7, 2005-1 I.R.B.240
2004-8
Superseded by
Rev. Proc. 2005-8, 2005-1 I.R.B.243
2004-13
Superseded by
Rev. Proc. 2005-27, 2005-20 I.R.B.1050
2004-16
Modified and superseded by
Rev. Proc. 2005-25, 2005-17 I.R.B.962
2004-18
Obsoleted in part by
Rev. Proc. 2005-15, 2005-9 I.R.B.638
2004-24
Obsoleted by
Rev. Proc. 2005-22, 2005-15 I.R.B.886
2004-35
Corrected by
Ann. 2005-4, 2005-2 I.R.B.319
2004-60
Superseded by
Rev. Proc. 2005-10, 2005-3 I.R.B.341
2005-6
Modified by
Rev. Proc. 2005-16, 2005-10 I.R.B.674
2005-8
Modified by
Rev. Proc. 2005-16, 2005-10 I.R.B.674
2005-9
Modified by
Rev. Proc. 2005-17, 2005-13 I.R.B.797
Revenue Rulings:
69-516
Obsoleted by
T.D. 9182, 2005-11 I.R.B.713
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin 2004–52, dated December 27,
2004.
June 13, 2005iv2005–24 I.R.B.

Revenue Rulings— Continued:
76-96
Suspendedinpartby
Rev. Rul. 2005-28, 2005-19 I.R.B.997
77-415
Obsoleted by
T.D. 9182, 2005-11 I.R.B.713
77-479
Obsoleted by
T.D. 9182, 2005-11 I.R.B.713
79-335
Modified and superseded by
Rev. Rul. 2005-30, 2005-20 I.R.B.1015
82-34
Obsoleted by
T.D. 9182, 2005-11 I.R.B.713
92-19
Supplemented in part by
Rev. Rul. 2005-29, 2005-21 I.R.B.1080
92-63
Modified and superseded by
Rev. Rul. 2005-3, 2005-3 I.R.B.334
95-63
Modified and superseded by
Rev. Rul. 2005-3, 2005-3 I.R.B.334
2004-43
Revoked by
Rev. Rul. 2005-10, 2005-7 I.R.B.492
2004-103
Superseded by
Rev. Rul. 2005-3, 2005-3 I.R.B.334
Treasury Decisions:
8408
Corrected by
Ann. 2005-28, 2005-17 I.R.B.969
9130
Corrected by
Ann. 2005-29, 2005-17 I.R.B.969
9165
Revised by
T.D. 9201, 2005-23 I.R.B.1153
Corrected by
Ann. 2005-31, 2005-18 I.R.B.996
9166
Corrected by
Ann. 2005-33, 2005-19 I.R.B.1013
9170
Corrected by
Ann. 2005-13, 2005-8 I.R.B.627
Ann. 2005-35, 2005-21 I.R.B.1095
9187
Corrected by
Ann. 2005-25, 2005-15 I.R.B.891
Treasury Decisions— Continued:
9196
Corrected by
Ann. 2005-40, 2005-22 I.R.B.1152
9198
Corrected by
Ann. 2005-41, 2005-23 I.R.B.1212
2005–24 I.R.B.vJune 13, 2005
*U.S.Government Printing Office: 2005—314–048/20009