Internal Revenue Bulletin 2004-15 (PDF rendition): IRS Notices

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

Bulletin No. 200
4-15
April 12, 2004
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.
SPECIAL ANNOUNCEMENT
Announcement 2004–26, page 743.
This document contains the annual report to the public con-
cerning Advance Pricing Agreements (APAs) and the experi-
ence of the APA program during calendar year 2003. This
document does not provide guidance regarding the application
of the arm’s length standard; rather, it reports on the structure
and activities of the APA program.
Announce
ment 2004–29, page 772.
The defini
tion of tax shelter opinion for purposes of section
10.35 of T
reasury Department Circular No. 230 (31 CFR part
10) will n
ot apply, if at all, to written advice concerning munici-
pal bonds
rendered less than 120 days after the publication of
the final
regulations in the Federal Register.
INCOME TAX
Rev. Rul. 2004–38, page 717.
Health Savings Accounts (HSAs).This ruling provides that
if an individual is covered by both a high deductible health plan
(HDHP) that does not cover prescription drugs and by a sep-
arate prescription drug plan (or rider) that provides benefits
before the minimum annual deductible of the HDHP has been
satisfied, that individual is not an eligible individual under sec-
tion 223(c)(1)(A) of the Code and may not make contributions
to a Health Savings Account.
Rev. Ru
l. 2004–40, page 716.
Low-in
come housing credit; satisfactory bond; “bond
factor
” amounts for the period April through June 2004.
This ru
ling announces the monthly bond factor amounts to
be used by taxpayers who dispose of qualified low-income
buildings or interests therein during the period April through
June 2004.
T.D. 9117, page 721.
REG–167265–03, page 730.
Final, temporary, and proposed regulations under section 1502
of the Code, as applied under sections 108 and 1245, gov-
ern the timing of certain basis adjustments when a member
of a consolidated group realizes discharge of indebtedness in-
come that is excluded from gross income and the reduction
of attributes when there is excluded income. In addition, the
regulations govern the timing and calculations of certain basis
adjustments to prevent circular basis adjustments on the dis-
position of stock of a group member.
T.D. 9118, page 718.
REG–153172–03, page 729.
Final, temporary, and proposed regulations under section 337
of the Code clarify that in computing the amount of stock loss
attributable to the recognition of built-in gain, gain recognized
on the disposition of an asset may be reduced by expenses
directly attributable to the recognition of that gain. These regu-
lations also clarify that a worthless stock deduction in stock of
a member of a consolidated group results in the elimination of
that member’s apportioned losses only if, following the year in
which the worthless stock deduction is claimed, the member
has no separate return year. The regulations further clarify that
stock of a member of a consolidated group may be treated as
worthless, provided it otherwise qualifies for such treatment un-
der the Code immediately prior to the time that the subsidiary
ceases to be a member of the group.
(Continued on the next page)
Fi
nding Lists begin on page ii.

Notice 2004–23, page 725.
This notice provides a safe harbor for preventive care benefits
allowed to be provided by a high deductible health plan (HDHP)
under section 223(c)(2) of the Code.
Notice 2004–25, page 727.
This notice provides transition relief from the rule in Notice
2004–2, 2004–2 I.R.B. 269, Q&A 26, that a Health Savings
Account (HSA) must pay or reimburse on a tax-free basis only
qualified medical expenses incurred after the HSA has been
established. The notice provides that for calendar year 2004,
an HSA established on or before April 15, 2005, may pay or
reimburse otherwise qualified medical expenses on a tax-free
basis if the expenses were incurred on or after the later of
(1) January 1, 2004, or (2) the first day of the first month the
taxpayer became eligible to establish an HSA. Notice 2004–2
modified.
Rev. Proc. 2004–22, page 727.
This procedure provides transition relief from Rev. Rul.
2004–38 for determining an “eligible individual” under section
223 of the Code who may make contributions to a Health
Savings Account (HSA). The transition relief covers the months
before January 1, 2006, in the case of an individual who is
covered by both a high deductible health plan (HDHP) and
by a separate plan or rider that provides prescription drug
benefits before the minimum annual deductible of the HDHP is
satisfied. Rev. Rul. 2004–38 modified.
EXEMPT ORGANIZATIONS
Announcement 2004–25, page 737.
A list is provided of organizations now classified as private foun-
dations.
April 12, 20042004-15 I.R.B.

The IRS Mission
Provide America’s taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Sec-
retary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2004-15 I.R.B.April 12, 2004

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 42.—Low-Income
Housing Credit
Low-income housing credit; satis-
factory bond; “bond factor” amounts
for the period April through June 2004.
This ruling announces the monthly bond
factor amounts to be used by taxpay-
ers who dispose of qualified low-income
buildings or interests therein during the
period April through June 2004.
Rev. Rul. 2004–40
In Rev. Rul. 90–60, 1990–2 C.B.
3, the Internal Revenue Service provided
guidance to taxpayers concerning the gen-
eral methodology used by the Treasury
Department in computing the bond factor
amounts used in calculating the amount of
bond considered satisfactory by the Secre-
tary under § 42(j)(6) of the Internal Rev-
enue Code. It further announced that the
Secretary would publishintheInternal
Revenue Bulletin a table of bond factor
amounts for dispositions occurring during
each calendar month.
Rev. Proc. 99–11, 1999–1 C.B. 275,
established a collateral program as an al-
ternative to providing a surety bond for
taxpayers to avoid or defer recapture of
the low-income housing tax credits under
§ 42(j)(6). Under this program, taxpayers
may establish a Treasury Direct Account
and pledge certain United States Treasury
securities to the Internal Revenue Service
as security.
This revenue ruling provides in Table
1 the bond factor amounts for calculating
the amount of bond considered satisfactory
under § 42(j)(6) or the amount of United
States Treasury securities to pledge in a
Treasury Direct Account under Rev. Proc.
99–11 for dispositions of qualified low-in-
come buildings or interests therein during
the period April through June 2004.
Table 1
Rev. Rul. 2004–40
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition
19901991199219931994199519961997199819992000
Apr ’0415.5528.8840.3450.1258.4557.8457.8757.9958.2558.5658.98
May ’0415.5528.8840.3450.1258.4557.7157.7557.8758.1358.4558.87
Jun ’0415.5528.8840.3450.1258.4557.5957.6357.7558.0258.3458.77
Table 1 (cont’d)
Rev. Rul. 2004–40
Monthly Bond Factor Amounts for Dispositions Expressed
As a Percentage of Total Credits
Calendar Year Building Placed in Service
or, if Section 42(f)(1) Election Was Made,
the Succeeding Calendar Year
Month of
Disposition
2001200220032004
Apr ’0459.7460.7962.0462.68
May ’0459.6460.6961.9362.68
Jun ’0459.5560.5961.8462.68
For a list of bond factor amounts ap-
plicable to dispositions occurring during
other calendar years, see: Rev. Rul.
98–3, 1998–1 C.B. 248; Rev. Rul.
2001–2, 2001–1 C.B. 255; Rev. Rul.
2001–53, 2001–2 C.B. 488; Rev. Rul.
2002–72, 2002–2 C.B. 759; and Rev. Rul.
2003–117, 2003–46 I.R.B. 1051. For
dispositions occurring during the period
January through March 2004, see Rev.
Rul. 2004–16, 2004–8 I.R.B. 503.
2004-15 I.R.B.716April 12, 2004

DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Gregory N. Doran of the Office
of Associate Chief Counsel (Passthroughs
and Special Industries). For further infor-
mation regarding this revenue ruling, con-
tact Mr. Doran at (202) 622–3040 (not a
toll-free call).
Section 223.—Health
Savings Accounts
Health Savings Accounts (HSAs).
This ruling provides that if an individual is
covered by both a high deductible health
plan (HDHP) that does not cover prescrip-
tion drugs and by a separate prescription
drug plan (or rider) that provides benefits
before the minimum annual deductible of
the HDHP has been satisfied, that indi-
vidual is not an eligible individual under
section 223(c)(1)(A) of the Code and may
not make contributions to a Health Sav-
ings Account.
Rev. Rul. 2004–38
ISSUE
May an individual contribute to a
Health Savings Account (HSA) under
section 223 of the Internal Revenue Code
if the individual is covered by both a high
deductible health plan (HDHP) that does
not cover prescription drug benefits and
by a separate prescription drug plan (or
rider) that does not qualify as an HDHP
because the plan provides benefits before
the individual has satisfied the minimum
annual deductible required by section
223(c)(2)(A)?
FACTS
Individual A is covered by a health
plan that satisfies the requirements for an
HDHP under section 223(c)(2), including
the minimum annual deductible required
by section 223(c)(2)(A). The HDHP does
not include coverage for prescription drug
benefits. Individual A is also covered by
another plan (or rider) which provides
prescription drug benefits. The prescrip-
tion drug coverage is not subject to a
deductible, but requires a copayment for
each prescription. Individual A has no
other health coverage, is not eligible for
Medicare and may not be claimed as a
dependent on another’s return.
LAW AND ANALYSIS
Section 223(a) allows a deduction for
contributions to anHSA for an “eligible
individual.” Section 223(c)(1)(A) provides
that an “eligible individual” means, with
respect to any month, any individual who,
in addition to other requirements, is cov-
ered under an HDHP on the first day of
such month and is not, while covered un-
der an HDHP, “covered under any health
plan which is not a high deductible health
plan, and which provides coverage for any
benefit which is covered under the high de-
ductible health plan.”
Section 223(c)(2)(A) defines an HDHP
as a health plan that satisfies certain re-
quirements with respect to minimum
annual deductibles and maximum annual
out-of-pocket expenses.
Section 223(c)(1)(B) provides that, in
addition to coverage under an HDHP, an
eligible individual may also have specif-
ically enumerated coverage that is dis-
regarded for purposes of the deductible.
Disregarded coverageincludes “permitted
insurance” and other specified cover-
age (“permitted coverage”). “Permitted
insurance” is coverage under which sub-
stantially all of the coverage provided
relates to liabilitiesincurred under work-
ers’ compensation laws, tort liabilities,
liabilities relating to ownership or use of
property, insurance for a specified disease
or illness, and insurance that pays a fixed
amount per day (or other period) of hospi-
talization. “Permitted coverage” (whether
through insurance or otherwise) is cover-
age for accidents, disability, dental care,
vision care or long-term care. Prescription
drug benefits are not listed as permitted
insurance or as permitted coverage under
section 223(c)(1)(B).
The legislative history of section 223
explains these provisions by stating that
“eligible individuals for HSAs are individ-
uals who are covered by a high deductible
health plan and no other health plan that
is not a high deductible health plan.” The
legislative history also explains that, “[a]n
individual with other coverage in addition
to a high deductible health plan is still el-
igible for an HSA if such other coverage
is certain permitted insurance or permit-
ted coverage.” H.R. Conf. Rep. No. 391,
108
th
Cong., 1st Sess. 841 (2003).
Under section 223, an eligible individ-
ual cannot be covered by a health plan that
is not an HDHP unless that health plan pro-
vides coverage for permitted insurance or
permitted coverage. A plan that provides
benefits for prescription drugs is a health
plan. Prescription drug benefits are not in
the list of permitted insurance or permit-
ted coverage. Consequently, an individual
who is covered by both an HDHP and by a
prescription drug plan is not an eligible in-
dividual for the purpose of contributing to
an HSA unless the prescription drug cover-
age is also an HDHP (i.e., the prescription
drug plan does not provide benefits unless
the required minimum annual deductible
under section 223(c)(2)(A) for an HDHP
has been satisfied).
HOLDINGS
Individual A is covered by both an
HDHP that does not cover prescription
drugs and by a separate prescription drug
plan (or rider) that provides benefits be-
fore the minimum annual deductible of the
HDHP has been satisfied. Individual A is
not an “eligible individual” under section
223(c)(1)(A) and may not make contribu-
tions to an HSA. The result is the same if
this prescription drug benefit is provided
as a benefit under a health plan (and not
separately) or as a benefit for Individual A
under a spouse’s plan.
However, if a separate prescription drug
plan (or rider) does not provide benefits
until the minimum annual deductible of the
HDHP has been satisfied, or the prescrip-
tion drug plan is part of an HDHP and sub-
ject to the minimum annual deductible, In-
dividual A is an eligible individual under
section 223(c)(1)(A).
See Rev. Proc. 2004–22, published
elsewhere in this Internal Revenue Bul-
letin for information concerning transition
relief.
DRAFTING INFORMATION
The principal author of this Rev. Rul.
is Shoshanna Tanner of the Office of Di-
vision Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
For further information regarding this
Rev. Rul., contact Ms. Tanner at (202)
622–6080 (not a toll-free call).
April 12, 20047172004-15 I.R.B.

Section 337.—Nonrecogni-
tion for Property Distributed
to Parent in Complete Liq-
uidation of Subsidiary
26 CFR 1.337(d)–2T: Loss limitation window period
(temporary).
T.D. 9118
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Loss Limitation Rules
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
amendments relating to certain aspects
of the temporary regulations addressing
the deductibility of losses recognized on
dispositions of subsidiary stock by mem-
bers of a consolidated group and to the
consequences of treating subsidiary stock
as worthless. In addition, this document
contains temporary regulations that clarify
when stock of a member of a consolidated
group may be treated as worthless. These
regulations apply to corporations filing
consolidated returns. The text of these
regulations also serves as the text of the
proposed regulations (REG–153172–03)
set forth in the notice of proposed rule-
making on this subject in this issue of the
Bulletin.
DATES
:Effective Date:These regulations
are ef
fective March 18, 2004.
Appli
cability Date:For dates of
appli
cability, see §§1.337(d)–2T(g),
1.150
2–35T(f) and 1.1502–80T(c).
FOR FURTHER INFORMATION
CONTACT:Regarding the amend-
ments under section 337(d), Mark Weiss
(202–622–7790) of the Office of Associate
Chief Counsel (Corporate), and, regarding
the amendments under section 1502, Lola
L. Johnson (202–622–7550) of the Office
of Associate Chief Counsel (Corporate)
(neither is a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On March 12, 2002, the IRS and Trea-
sury published T.D. 8984, 2002–1 C.B.
668 [67 FR 11034]), which included tem-
porary regulations under sections 337(d)
and 1502 that limit the deductibility of loss
recognized by a consolidated group on the
disposition of stock of a subsidiary and
that require certain basis reductions on the
deconsolidation of stock of a subsidiary.
Those regulations are intended to prevent a
corporation from avoiding the recognition
of gain on the disposition of assets through
the use of the consolidated return regula-
tions.
Section 1.337(d)–2T disallows loss rec-
ognized by a member of a consolidated
group with respect to the disposition of
stock of a subsidiary to the extent that such
loss is attributable to the recognition of
built-in gain on the disposition of an as-
set. For this purpose, built-in gain is gain
recognized on the disposition of an asset
to the extent attributable, directly or indi-
rectly, in whole or in part, to any excess
of value over basis that is reflected, before
the disposition of the asset, in the basis of
the share, directly or indirectly, in whole or
in part, after applying section 1503(e) and
other applicable provisions of the Internal
Revenue Code and regulations.
On March 14, 2003, the IRS and Trea-
sury published T.D. 9048, 2003–1 C.B.
645 [68 FR 12287]), which included tem-
porary regulations generally intended to
prevent consolidated groups from ob-
taining more than one tax benefit from
a single economic loss. In particular,
§1.1502–35T(f) of those temporary regu-
lations prescribes rules that are intended
to prevent groups from obtaining more
than one tax benefit from a single eco-
nomic loss when a group member claims
a worthless stock deduction with respect
to stock of a subsidiary. In such cases,
the regulation requires an apportionment
of the group’s consolidated net operating
loss (CNOL) to the subsidiary under the
principles of §1.1502–21T(b), and then
treats the apportioned losses as expired.
On August 15, 1994, the IRS and Trea-
sury Department published T.D. 8560,
1994–2 C.B. 200 [59 FR 41666]) adding
paragraph (c) to §1.1502–80. Section
1.1502–80(c) provides that, for consoli-
dated return years beginning on or after
January 1, 1995, stock of a member is not
treated as worthless under section 165 be-
fore the stock is treated as disposed of un-
der the principles of §1.1502–19(c)(1)(iii).
Under §1.1502–19(c)(1)(iii), stock of a
subsidiary is treated as disposed of, by
reason of worthlessness, at the time sub-
stantially all of the subsidiary’s assets
are treated as disposed of, abandoned,
or destroyed for federal income tax pur-
poses, at the time of certain discharges of
indebtedness of the subsidiary, or at the
time a member takes into account cer-
tain deductions and losses with respect to
indebtedness of the subsidiary. Section
1.1502–80(c) was promulgated to more
fully implement the single entity treatment
of consolidated groups. It also had the
effects of preventing certain inappropri-
ate disallowances of loss that occurred
when §1.1502–20 governed the allowance
of stock losses and of alleviating con-
cerns regarding protecting the attributes of
bankrupt subsidiaries.
Explanation of Provisions
Taxpayers have raised several questions
regarding the interpretation and applica-
tion of §§1.337(d)–2T, 1.1502–35T(f), and
1.1502–80(c). The following paragraphs
describe these questions and the manner in
which they are addressed in these tempo-
rary regulations.
A. §1.337(d)–2T
Taxpayers have questioned whether, in
computing the amount of stock loss that is
attributable to the recognition of built-in
gain, gain recognized on the disposition
of an asset may be reduced by expenses
directly attributable to the recognition of
that gain. The IRS and Treasury Depart-
ment believe that, because expenses attrib-
utable to the recognition of built-in gain
reduce the basis of the subsidiary’s stock,
the computation of the amount of stock
loss that is attributable to the recognition
of built-in gain should take such expenses
into account. Accordingly, this document
amends §1.337(d)–2T to provide that stock
loss is not disallowed to the extent the tax-
payer establishes that the loss or basis is
not attributable to recognized built-in gain
reduced by expenses directly related to the
recognition of that gain, including, in cer-
tain cases, federal income taxes related
2004-15 I.R.B.718April 12, 2004

to the recognition of such gain. In addi-
tion, this document makes a non-substan-
tive technical correction to the example set
forth in §1.337(d)–2T(c)(4).
The IRS and Treasury Department con-
tinue to consider alternative methods of
implementing section 337(d) in the consol-
idated return context.
B. §1.1502–35T(f)
Taxpayers have commented that, in cer-
tain cases, §1.1502–35T(f) may eliminate
losses where there is no risk of duplication.
In particular, taxpayers are concerned that
the rule appears to eliminate a subsidiary’s
apportioned part of the CNOL even if the
subsidiary has a separate return year fol-
lowing the year in which a member of the
group claims a worthless stock deduction
with respect to the subsidiary’s stock. The
IRS and Treasury Department believe that
the elimination of a subsidiary’s appor-
tioned CNOL is generally necessary to
prevent duplication only if a member of
the group claims a worthless stock deduc-
tion with respect to subsidiary stock and
the subsidiary has no separate return year
following the year in which the worth-
less stock deduction is claimed. These
temporary regulations, therefore, amend
§1.1502–35T(f) to provide that the sub-
sidiary’s apportioned part of the CNOL is
treated as expired if a member (the claim-
ing member) claims a worthless stock
deduction with respect to the subsidiary’s
stock and, immediately following the tax-
able year in which the worthless stock
deduction is claimed, the subsidiary is
a member of a group that includes any
corporation (other than a lower-tier sub-
sidiary of the member the stock of which
was treated as worthless) that, during that
taxable year, was a member of the group
that includes the claiming member.
The IRS and the Treasury Department
continue to consider methods of prevent-
ing groups from obtaining more than a
single tax benefit from a single economic
loss other than the methods employed in
§1.1502–35T.
C. §1.1502–80(c)
Taxpayers have also raised con-
cerns that, in certain circumstances,
§1.1502–80(c) may prevent a group from
claiming a worthless stock deduction with
respect to subsidiary stock that is worth-
less within the meaning of section 165 if
the subsidiary ceases to be a member of the
group before it satisfies the requirements
of §1.1502–19(c)(1)(iii). For example,
assume that the stock of a subsidiary is
worthless within the meaning of section
165 but the subsidiary has not disposed
of, abandoned, or destroyed substantially
all of its assets and the requirements of
§1.1502–19(c)(1)(iii) are not otherwise
satisfied. At that time, §1.1502–80(c)
would prevent the group from treating
the subsidiary’s stockas worthless. If the
subsidiary then cancels its outstanding
shares and issues new shares to its credi-
tors, which are not members of the group,
the subsidiary will cease to be a member
of the group before it satisfies the require-
ments of §1.1502–80(c). Taxpayers are
concerned that, unless §1.1502–80(c) is
treated as inapplicable immediately prior
to the cancellation of the subsidiary’s
stock, the group will never be entitled to
claim a worthless stock deduction with
respect to that stock.
Section 1.1502–80(c) is intended to
defer, not disallow, worthless stock
deductions with respect to subsidiary
stock. Therefore, these temporary reg-
ulations amend §1.1502–80(c) and add
§1.1502–80T(c) to clarify that the deferral
of an otherwise allowable loss under sec-
tion 165 terminates immediately prior to
the time that the subsidiary ceases to be
a member of the group. Accordingly, in
the example above, the group would be
entitled to the worthless stock deduction
in the taxable year in which the subsidiary
ceases to be a member of the group.
Taxpayers have questioned whether
§1.1502–80(c) remains necessary given
that §1.1502–20 no longer governs the
allowance of loss on sales of subsidiary
stock. The IRS and Treasury are evalu-
ating whether the rule of §1.1502–80(c)
continues to be necessary or appropriate.
Effective Date
The amendments set forth in these tem-
porary regulations are applicable to tax
years beginning after March 18, 2004.
However, taxpayers may apply these tem-
porary regulations to certain prior periods.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. These temporary
regulations are necessary to provide tax-
payers with immediate guidance regarding
allowable loss and basis reductions in con-
nection with dispositions and deconsolida-
tions of subsidiary stock. These temporary
regulations clarify existing rules and sim-
plify their application in order to ease
taxpayer compliance.Accordingly, good
cause is found for dispensing with notice
and public procedure pursuant to 5 U.S.C.
553(b)(B) and with a delayed effective
date pursuant to 5 U.S.C. 553(d)(1) and
(3). For the applicability of the Regula-
tory Flexibility Act (5 U.S.C. chapter 6),
refer to the Special Analyses section of
the preamble to the cross-reference notice
of proposed rulemaking published in the
Bulletin. Pursuant to section 7805(f) of
the Internal Revenue Code, these tempo-
rary regulations will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Drafting Information
The principal author of the regulations
under section 337(d) is Mark Weiss, Office
of Associate Chief Counsel (Corporate).
The principal author of the regulations un-
der section 1502 is Lola L. Johnson, Of-
fice of Associate Chief Counsel (Corpo-
rate). However, other personnel from the
IRS and Treasury participated in their de-
velopment.
*****
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.337(d)–2T is
amended by revising paragraph (c)(2)
and the example in paragraph (c)(4) to
read as follows:
April 12, 20047192004-15 I.R.B.

§1.337(d)–2T Loss limitation window
period (temporary).
*****
(c) * * *
(2)General rule.Lossisnotdisallowed
under paragraph (a)(1) of this section and
basis is not reduced under paragraph (b)(1)
of this section to the extent the taxpayer es-
tablishes that the loss or basis is not attrib-
utable to the recognition of built-in gain,
net of directly related expenses, on the dis-
position of an asset (including stock and
securities). Loss or basis may be attrib-
utable to the recognition of built-in gain
on the disposition of an asset by a prior
group. For purposes of this section, gain
recognized on the disposition of an asset
is built-in gain to the extent attributable,
directly or indirectly, in whole or in part,
to any excess of value over basis that is
reflected, before the disposition of the as-
set, in the basis of the share, directly or in-
directly, in whole or in part, after apply-
ing section 1503(e) and other applicable
provisions of the Internal Revenue Code
and regulations. Federal income taxes may
be directly related to built-in gain recog-
nized on the disposition of an asset only
to the extent of the excess (if any) of the
group’s income tax liability actually im-
posed under Subtitle A of the Internal Rev-
enue Code for the taxable year of the dis-
position of the asset over the group’s in-
come tax liability for the taxable year re-
determined by not taking into account the
built-in gain recognized on the disposition
of the asset. For this purpose, the group’s
income tax liability actually imposed and
its redetermined income tax liability are
determined without taking into account the
foreign tax credit under section 27(a) of the
Internal Revenue Code. This paragraph
(c)(2) applies to dispositions and deconsol-
idations on or after March 18, 2004. Tax-
payers, however, may choose to apply this
paragraph (c)(2) to dispositions and decon-
solidations on or after March 7, 2002; oth-
erwise, paragraph (c)(2) of §1.337(d)–2T
as contained in 26 CFR part 1 edition re-
vised as of April 1, 2003, shall apply.
*****
(4) * * *
Example.Loss offsetting built-in gain in a prior
group. (i) P buys all the stock of T for $50 in Year
1, and T becomes a member of the P group. T has
2 assets. Asset 1 has a basis of $50 and a value of
$0, and asset 2 has a basis of $0 and a value of $50.
T sells asset 2 during Year3 for $50 and recognizes
a $50 gain. Under the investment adjustment system,
P’s basis in the T stock increased to $100 as a result of
the recognition of gain. In Year 5, all of the stock of P
is acquired by the P1 group, and the former members
of the P group become members of the P1 group. T
then sells asset 1 for $0,and recognizes a $50 loss.
Under the investment adjustment system, P’s basis in
the T stock decreases to $50 as a result of the loss.
T’s assets decline in value from $50 to $40. P then
sells all the stock of T for $40 and recognizes a $10
loss.
(ii) P’s basis in the T stock reflects both T’s un-
recognized gain and unrecognized loss with respect
to its assets. The gain T recognizes on the disposi-
tion of asset 2 is built-in gain with respect to both the
P and P1 groups for purposes of paragraph (c)(2) of
this section. In addition, the loss T recognizes on the
disposition of asset 1 is built-in loss with respect to
the P and P1 groups for purposes of paragraph (c)(2)
of this section. T’s recognition of the built-in loss
while a member of the P1 group offsets the effect on
T’s stock basis of T’s recognition of the built-in gain
while a member of the P group. Thus, P’s $10 loss on
the sale of the T stock is not attributable to the recog-
nition of built-in gain, and the loss is therefore not
disallowed under paragraph (c)(2) of this section.
(iii) The result would be the same if, instead of
having a $50 built-in loss in asset 1 when it becomes a
member of the P group, T has a $50 net operating loss
carryover and the carryover is used by the P group.
*****
Par. 3. Section 1.1502–35T is amended
by revising paragraph (f)(1) to read as fol-
lows:
§1.1502–35T Transfers of subsidiary
member stock and deconsolidations of
subsidiary members (temporary).
***
(f)Worthlessness not followed by sep-
arate return years—(1)General rule.
Notwithstanding any other provision in
the regulations under section 1502, if a
member of a group (the claiming group)
treats stock of a subsidiary as worthless
under section 165 (taking into account
the provisions of §1.1502–80(c)) and,
on the day following the last day of the
claiming group’s taxable year in which the
worthless stock deduction is claimed, the
subsidiary (or its successor, determined
without regard to paragraphs (d)(5)(iii)
and (iv) of this section) is a member
of a group that includes any corpora-
tion that, during that taxable year, was
a member of the claiming group (other
than a lower-tier subsidiary of the sub-
sidiary) or is a successor (determined
without regard to paragraphs (d)(5)(iii)
and (iv) of this section) of such a mem-
ber, then all losses treated as attributable
to the subsidiary under the principles of
§1.1502–21T(b)(2)(iv) shall be treated as
expired as of the day following the last
day of the claiming group’s taxable year
in which the worthless stock deduction is
claimed. In addition, notwithstanding any
other provision in the regulations under
section 1502, if a member recognizes a
loss with respect to subsidiary stock and
on the following day the subsidiary is not
a member of the group and does not have a
separate return year, then all losses treated
as attributable to the subsidiary under the
principles of §1.1502–21T(b)(2)(iv) shall
be treated as expired as of the day follow-
ing the last day of the group’s taxable year
in which the stock loss is claimed. For
purposes of this paragraph (f), the deter-
mination of the losses attributable to the
subsidiary shall be made after computing
the taxable income of the group for the
taxable year in which the group treats the
stock of the subsidiary as worthless or
the subsidiary liquidates and after com-
puting the taxable income for any taxable
year to which such losses may be carried
back. The loss treated as expired under
this paragraph (f) shall not be treated as a
noncapital, nondeductible expense under
§1.1502–32(b)(2)(iii). This paragraph (f)
applies to worthlessness determinations
and liquidations that occur after March 18,
2004, and before March 12, 2006. How-
ever, the group may apply this paragraph
(f) to worthlessness determinations and
liquidations that occur on or after March
7, 2002, and before March 18, 2004; oth-
erwise, paragraph (f) of §1.1502–35T as
contained in 26 CFR part 1 edition revised
as of April 1, 2003, shall apply to such
determinations of worthlessness and liqui-
dations.
*****
Par. 4. Section 1.1502–80 is amended
by adding a sentence to the end of para-
graph (c) to read as follows:
§1.1502–80 Applicability of other
provisions of law.
*****
(c) * * * For further guidance, see
§1.1502–80T(c).
Par. 5. Section 1.1502–80T is added to
read as follows:
2004-15 I.R.B.720April 12, 2004

§1.1502–80T Applicability of other
provisions of law (temporary).
(a) and (b) [Reserved]. For further
guidance, see §1.1502–80(a) and (b).
(c)Deferral of section 165.Stockof
a member is not treated as worthless un-
der section 165 before the stock is treated
as disposed of under the principles of
§1.1502–19(c)(1)(iii). If stock of a mem-
ber would otherwise be treated as worth-
less under the principles of section 165,
then, notwithstanding the previous sen-
tence, such stock may be treated as worth-
less under section 165 immediately prior
to the time such member ceases to be a
member of the group. See §§1.1502–11(c)
and 1.1502–35T for additional rules re-
lating to stock loss. This paragraph (c)
applies to taxable years beginning after
March 18, 2004, and before March 18,
2007. Taxpayers, however, may apply this
paragraph (c) to taxable years beginning
on or after January 1, 1995, and before
March 18, 2004; otherwise, paragraph (c)
of §1.1502–80 as contained in 26 CFR
part 1 edition revised as of April 1, 2003,
shall apply to taxable years beginning on
or after January 1, 1995, and on or before
March 18, 2004.
(d) through (f) [Reserved]. For further
guidance, see §1.1502–80(d) through (f).
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved March 9, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on March 17,
2004, 8:45 a.m., and published in the issue of the Federal
Register for March 18, 2004, 69 F.R. 12799)
Section 1502.—Regulations
26 CFR 1.1502–13: Intercompany transactions.
T.D. 9117
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Guidance Under Section 1502;
Application of Section 108 to
Members of a Consolidated
Group
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary and final regula-
tions.
SUMMARY: This document contains tem-
porary regulations under section 1502 that
govern the application of section 108 when
a member of a consolidated group realizes
discharge of indebtedness income. These
regulations affect corporations filing con-
solidated returns.
DATES:Effective Date: These regulations
are effective March 15, 2004.
Applicability Dates:Fordatesof
applicability, see §§1.1502–13T(l) and
1.1502–28T(d).
FOR FURTHER
INFORMATION
CONTACT: Ca
ndace Ewell or Marie
Milnes-Vas
quez at (202) 622–7530 (not a
toll-free
number).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
On September 4, 2003, the IRS and
Treasury Department published in the
Federal Registera notice of proposed
rulemaking (REG–132760–03, 2003–43
I.R.B. 933 [68 FR 52542]) and temporary
regulations (T.D. 9089, 2003–43 I.R.B.
906 [68 FR 52487]) under section 1502
of the Internal Revenue Code. The tem-
porary regulations added §1.1502–28T,
which provides guidance regarding the
determination of the attributes that are
available for reduction when a member
of a consolidated group realizes discharge
of indebtedness income that is excluded
from gross income (excluded COD in-
come) and the method for reducing those
attributes. Section 1.1502–28T reflects
a consolidated approach that is intended
to make available for reduction attributes
that are available to the debtor member.
The regulations contain a rule governing
the order in which attributes are reduced
and a look-through rule that provides that
when the basis of stock of a member (the
lower-tier member) that is owned by an-
other member is reduced, the lower-tier
member must reduce its attributes as if it
had realized excluded COD income in the
amount of the basis reduction.
On December 11, 2003, the IRS and
Treasury Department published in the
Federal Registera notice of proposed
rulemaking (REG–153319–03, 2003–52
I.R.B. 1256 [68 FR 69062]) and tem-
porary regulations (T.D. 9098, 2003–52
I.R.B. 1248 [68 FR 69024]) under section
1502 amending §1.1502–28T. Those reg-
ulations clarify thatcertain attributes that
arise (or are treated as arising) in a sep-
arate return year are subject to reduction
when no SRLY limitation applies to the
use of such attributes.
The IRS and Treasury Department have
received comments regarding certain tech-
nical issues that arise under the regula-
tions. The temporary regulations included
in this document address certain issues re-
latedtotheapplicationofsection1245and
the matching rule of §1.1502–13, and cer-
tain issues related to the inclusion of ex-
cess loss accounts in cases in which ex-
cluded COD income is not fully applied to
reduce attributes. The IRS and Treasury
Department anticipate that there may be
further changes to the regulations but be-
lieve that immediate guidance on these is-
sues is desirable. The following sections
describe these issues and the manner in
which they are addressed in these tempo-
rary regulations.
A.Application of Section 1245
Under section 108(b), asset basis is an
attribute that is subject to reduction in re-
spect of excluded COD income. Under
section 108(b)(5), the taxpayer may elect
to apply any portion of excluded COD in-
come to reduce basis in depreciable assets
under the rules of section 1017 prior to re-
ducing other attributes.
Section 1017 provides rules that apply
in cases in which excluded COD income
is applied to reduce the basis of property.
Under section 1017(d)(1), any property the
basis of which is reduced and which is
April 12, 20047212004-15 I.R.B.

neither section 1245 property nor section
1250 property is treated as section 1245
property and the basis reduction is treated
as a deduction allowed for depreciation.
Under section 1017(b)(3)(D), if a corpo-
ration that has excluded COD income is
a member of a consolidated group, it can
elect to treat the stock of another member
as depreciable property if that other mem-
ber consents to a corresponding reduction
in the basis of its depreciable property.
Generally, if section 1245 property is
disposed of, the amount by which the
lowerof(1)therecomputedbasisofthe
property, or (2) in the case of a sale, ex-
change or involuntary conversion, the
amount realized, or (3) in the case of any
other disposition, the fair market value
of such property, exceeds the adjusted
basis of such property is treated as ordi-
nary income (the recapture amount). The
recomputed basis is the adjusted basis
of property increased by adjustments re-
flected in that basis that are attributable to
deductions allowed or allowable for de-
preciation or amortization. Application of
the recapture rule of section 1245 to prop-
erty the basis of which has been reduced
by reason of the realization of excluded
COD income ensures that the character of
the income deferred by reason of attribute
reduction (i.e., the extra gain that may be
recognized on the disposition of an asset
the basis of which has been reduced) will
be ordinary (even if the asset is held as
a capital asset), which character the ex-
cluded COD income would have had if it
had been included in income when real-
ized.
Commentators have noted that if the ba-
sis of subsidiary stock is reduced in re-
spect of a member’s excluded COD in-
come and then the basis of the assets of
that subsidiary are reduced pursuant to the
look-through rule, both the stock of the
subsidiary as well as its assets would be
treated as section 1245 property. As a
result of that treatment, in certain cases,
the group may be required to include in
income an inappropriate amount of ordi-
nary income. A similar result may ob-
tain if a member consents under section
1017(b)(3)(D) to reduce the basis of its de-
preciable property when stock of the sub-
sidiary is treated as depreciable property.
For example, assume a member (a
higher-tier member) realizes excluded
COD income that is applied to reduce the
higher-tier member’s basis in the stock
of another member (a lower-tier mem-
ber) and, as a result, a corresponding
reduction to the basis of property of the
lower-tier member is made. The follow-
ing year, the lower-tier member transfers
all of its assets to the higher-tier mem-
ber in a liquidation to which section 332
applies. Under section 1245, recapture
on the lower-tier member’s property that
is treated as section 1245 property by
reason of section 1017(d)(1) is limited
to the amount of the gain recognized by
the lower-tier member in the liquidation.
However, no similar limitation applies to
the stock of the lower-tier member that
is also treated as section 1245 property.
Therefore, the higher-tier member would
be required to include as ordinary income
the entire recapture amount with respect
to the lower-tier member stock. In addi-
tion, when the higher-tier member sells
the assets of the former lower-tier mem-
ber the bases of which were reduced, the
higher-tier member would be required to
include as ordinary income the recapture
amount with respect to such assets. In
that case, the group may be required to
include in consolidated taxable income the
amounts representing the same excluded
COD income more than once.
The IRS and Treasury Department be-
lieve that it is appropriate for the group
to include in income as ordinary income
amounts reflecting previously excluded
COD income only once. Therefore, to
prevent a double inclusion of ordinary
income amounts representing the same
excluded COD income, these regulations
provide that a reduction of the basis of
subsidiary stock is treated as a deduction
allowed for depreciation only to the extent
that the amount by which the basis of the
subsidiary stock is reduced exceeds the
total amount of the attributes attributable
to such subsidiary that are reduced pur-
suant to the subsidiary’s consent under
section 1017(b)(3)(D) or as a result of the
application of the look-through rule. This
rule has the effect of limiting the ordinary
income recapture amount to the amount
of the stock basis reduction that does not
result in a corresponding reduction of the
tax attributes attributable to the subsidiary.
B.Application of Matching Rule
If the member that realizes excluded
COD income is the creditor with respect
to an intercompany obligation, it is pos-
sible that the basis of that intercompany
obligation would be reduced under sec-
tions 108 and 1017, and §1.1502–28T.
Section 1.1502–13 provides rules relating
to the treatment of transactions between
members of a consolidated group. In gen-
eral, in the case of a transaction between
two members (S and B) of a consolidated
group, the regulations operate to match
the items of both members. In particular,
under §1.1502–13(c)(1)(i), the separate
entity attributes of S’s intercompany items
and B’s corresponding items are redeter-
mined to the extent necessary to produce
the same effect on consolidated taxable
income (and consolidated tax liability) as
if S and B were divisions of a single corpo-
ration, and the intercompany transaction
were a transaction between divisions. Un-
der paragraph §1.1502–13(c)(6)(i), subject
to certain limitations, S’s intercompany
item might be redetermined to be excluded
from gross income or treated as a noncap-
ital, nondeductible amount.
Some commentators have asked
whether the rule of §1.1502–13(c)(6)(i)
operates to excludefromgrossincome
any income recognized that is attribut-
able to the application of excluded COD
income to reduce the basis of an intercom-
pany obligation. The application of the
rule of §1.1502–13(c)(6)(i) in this manner
would render without consequence the
reduction of the basis of the intercompany
obligation. These temporary regulations,
therefore, reflect the IRS’s and Treasury
Department’s position that, if the basis of
an intercompany obligation held by a cred-
itor member is reduced in respect of ex-
cluded COD income, §1.1502–13(c)(6)(i)
will not apply to exclude income of the
creditor member attributable to the basis
reduction in the intercompany obligation.
C.Taking into Account of Excess Loss
Account
Under §§1.1502–19 and 1.1502–19T,
when an indebtedness of a subsidiary is
discharged and any part of the amount dis-
charged is not included in gross income
and is not treated as tax-exempt income
under §1.1502–32, if there is an excess loss
2004-15 I.R.B.722April 12, 2004

account in the stock of the subsidiary, that
excess loss account must be included in
income to the extent of the amount dis-
charged that is not treated as tax-exempt
income. Questions have arisen regarding
the timing of the taking into account of
excess loss accounts required pursuant to
§§1.1502–19 and 1.1502–19T.
The IRS and Treasury Department have
considered whether an excess loss account
that is required to be included as a result of
the application of §1.1502–19(c)(1)(iii)(B)
is properly included in the group’s consol-
idated taxable income for the taxable year
that includes the date on which the member
realizes the excluded COD income. Some
have suggested that, because pursuant to
section 108(b)(4)(A) attributes are reduced
only after the computation of tax for the
year of the excluded COD income and,
therefore, whether an excess loss account
must be included in income is determined
only after the computation of tax, the in-
clusion of the excess loss account should
not be required on the return for the tax-
able year that includes the date on which
the excluded COD income was realized.
Because the inclusion of the excess loss
account is required in connection with the
realization of the excluded COD income,
the IRS and Treasury Department believe
that it is properly included on the return for
the taxable year that includes the date on
which the excluded COD income was re-
alized.
Some have suggested that inclusion
of the excess loss account on the return
for the taxable year that includes the date
on which the excluded COD income was
realized could result in circular calcula-
tions. That is, the inclusion of the excess
loss account would be offset by losses that
would have otherwise been subject to re-
duction, potentiallyincreasing the amount
of excluded COD income that is not ap-
plied to reduce attributes and, therefore,
the amount of excess loss account required
to be taken into account. To address this
concern, contemporaneously with the is-
suance of these temporary regulations, the
IRS and Treasury Department are propos-
ing regulations (REG–167265–03) that
address these and other circular compu-
tations that would otherwise arise when
there is an actual disposition of sub-
sidiary stock, or an event that is treated
as a disposition of subsidiary stock under
§1.1502–19, in the year that a member of
the group realizes excluded COD income.
Those regulations are published elsewhere
in this issue of the Bulletin.
Special Analysis
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. These temporary regula-
tions are necessary to provide taxpayers
with immediate guidance regarding the ap-
plication of section 108 when a member
of a consolidated group realizes discharge
of indebtedness income that is excluded
from gross income and the consequences
of such application. Accordingly, good
cause is found for dispensing with notice
and public procedure pursuant to 5 U.S.C.
553(b)(B) and with a delayed applicabil-
ity date pursuant to 5 U.S.C. 553(d)(3).
For applicability of the Regulatory Flexi-
bility Act, please refer to the cross-refer-
ence notice of proposed rulemaking pub-
lished elsewhere in this issue of the Bul-
letin. Pursuant to section 7805(f) of the
Internal Revenue Code, these temporary
regulations will be submitted to the Chief
Counsel for Advocacy of the Small Busi-
ness Administration for comment on their
impact on small business.
Drafting Information
The principal author of these regula-
tions is Marie C. Milnes-Vasquez of the
Office of Associate Chief Counsel (Corpo-
rate). However, other personnel from the
IRS and Treasury Department participated
in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Section 1.1502–13T also issued under
26 U.S.C. 1502. * * *
Par. 2. Paragraph (g)(3)(ii)(B) of
§1.1502–13 is revised to read as follows:
§1.1502–13 Intercompany transactions.
***
(g) * * *
(3) * * *
(ii) * * *
(B) [Reserved]. For further guidance,
see §1.1502–13T(g)(3)(ii)(B).
*****
Par. 3. Section 1.1502–13T is added to
read as follows:
§1.1502–13T Intercompany transactions
(temporary).
(a) through (g)(3)(ii)(A) [Reserved].
For further guidance, see §1.1502–13(a)
through (g)(3)(ii)(B).
(g)(3)(ii)(B)Timing and attributes.For
purposes of applying the matching rule and
the acceleration rule —
(1) Paragraph (c)(6)(ii) of this section
(limitation on treatment of intercompany
income or gain as excluded from gross in-
come) does not apply to prevent any inter-
company income or gain from being ex-
cluded from gross income;
(2) Any gain or loss from an intercom-
pany obligation is not subject to section
108(a), section 354 or section 1091;
(3) The reduction of the basis of an
intercompany obligation pursuant to sec-
tions 108 and 1017 and §1.1502–28T does
not result in the realization of any amount
with respect to such obligation; and
(4) Paragraph (c)(6)(i) of this sec-
tion (treatment of intercompany items if
corresponding items are excluded or non-
deductible) will not apply to exclude any
amount of income or gain attributable to a
reduction of the basis of an intercompany
obligation pursuant to sections 108 and
1017 and §1.1502–28T.
(g)(3)(iii) through (k) [Reserved].
For further guidance, see §1.1502–13
(g)(3)(iii) through (k).
(l)Effective dates.Paragraph
(g)(3)(ii)(B) of this section applies to
transactions or events occurring during a
taxable year the original return for which
is due (without extensions) after March
12, 2004.
Par. 4. Section 1.1502–28T is amended
by:
1. Adding paragraphs (b)(4), (b)(5),
and (b)(6).
2. Revising paragraph (d).
April 12, 20047232004-15 I.R.B.

The additions and revision read as fol-
lows:
§1.1502–28T Consolidated section 108
(temporary).
*****
(b) * * *
(4)Application of section 1245.Not-
withstanding section 1017(d)(1)(B), a re-
duction of the basis of subsidiary stock is
treated as a deduction allowed for depreci-
ationonlytotheextentthattheamountby
which the basis of the subsidiary stock is
reduced exceeds the total amount of the at-
tributes attributable to such subsidiary that
are reduced pursuant to the subsidiary’s
consent under section 1017(b)(3)(D) or as
a result of the application of paragraph
(a)(3)(ii) of this section.
(5)Reduction of basis of inter-
company obligations. See §1.1502–
13T(g)(3)(ii)(B)(3) and (4) for spe-
cial rules related to the application of
the matching and acceleration rules of
§1.1502–13 when the basis of an inter-
company obligation is reduced pursuant
to sections 108 and 1017 and paragraph
(a)(2) or (3) of this section.
(6)Taking into account of excess loss
account—(i)Determination of inclusion.
[Reserved.]
(ii)Timing of inclusion.Totheex-
tent an excess loss account in a share of
stock of a subsidiary that realizes excluded
COD income is required to be taken into
account as a result of the application of
§1.1502–19(c)(1)(iii)(B), such amount
shall be included on the group’s tax return
for the taxable year that includes the date
on which the subsidiary realizes such ex-
cluded COD income.
*****
(d)Effective dates. (1) This section,
other than paragraphs (a)(4), (b)(4), (b)(5),
and (b)(6) of this section, applies to dis-
charges of indebtedness that occur after
August 29, 2003.
(2) Paragraph (a)(4) of this section ap-
plies to discharges of indebtedness that oc-
cur after August 29, 2003, but only if the
discharge occurs during a taxable year the
original return for which is due (without
regard to extensions) after December 11,
2003. However, groups may apply para-
graph (a)(4) of this section to discharges
of indebtedness that occur after August 29,
2003, and during a taxable year the origi-
nal return for which is due (without regard
to extensions) on or before December 11,
2003. For discharges of indebtedness that
occur after August 29, 2003, and during a
taxable year the original return for which
is due (without regard to extensions) on
or before December 11, 2003, paragraph
(a)(4) of this section shall apply as in ef-
fect on August 29, 2003.
(3) Paragraphs (b)(4), (b)(5), and
(b)(6)(ii) of this section apply to dis-
charges of indebtedness that occur after
August 29, 2003, but only if the discharge
occurs during a taxable year the original
return for which is due (without regard to
extensions) after March 12, 2004. How-
ever, groups may apply paragraphs (b)(4),
(b)(5), and (b)(6) of this section to dis-
charges of indebtedness that occur after
August 29, 2003, and during a taxable
year the original return for which is due
(without regard to extensions) on or before
March 12, 2004.
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved March 4, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on March 12,
2004, 8:45 a.m., and published in the issue of the Federal
Register for March 15, 2004, 69 F.R. 12069)
2004-15 I.R.B.724April 12, 2004

Part III. Administrative, Procedural, and Miscellaneous
Health Savings
Accounts—Preventive Care
Notice 2004–23
PURPOSE
This notice provides a safe harbor for
preventive care benefits allowed to be
provided by a high deductible health plan
(HDHP) without satisfying the minimum
deductible under section 223(c)(2) of the
Internal Revenue Code.
BACKGROUND
Section 1201 of the Medicare Prescrip-
tion Drug, Improvement, and Moderniza-
tion Act of 2003, Pub. L. No. 108–173,
added section 223 to the Internal Revenue
Code to permit eligible individuals to es-
tablish Health Savings Accounts (HSAs)
for taxable years beginning after Decem-
ber 31, 2003.
Among the requirements for an individ-
ual to qualify as an eligible individual un-
der section 223(c)(1) (and thus to be eli-
gible to make tax-favored contributions to
an HSA) is the requirement that the in-
dividual be covered under an HDHP. An
HDHP is a health plan that satisfies cer-
tain requirements with respect to minimum
deductibles and maximum out-of-pocket
expenses. Generally, an HDHP may not
provide benefits for any year until the de-
ductible for that year is satisfied. How-
ever, section 223(c)(2)(C) provides a safe
harbor for the absence of a preventive care
deductible. That section states, “[a] plan
shall not fail to be treated as a high de-
ductible health plan by reason of failing
to have a deductible for preventive care
(within the meaning of section 1871 of
the Social Security Act, except as oth-
erwise provided by the Secretary).” An
HDHP may therefore provide preventive
care benefits without a deductible or with a
deductible below the minimum annual de-
ductible. On the other hand, there is no
requirement in section 223 that an HDHP
provide benefits for preventive care or pro-
vide preventive care with a deductible be-
low the minimum annual deductible.
PREVENTIVE CARE SAFE HARBOR
Preventive care for purposes of section
223(c)(2)(C) includes, but is not limited to,
the following:
•Periodic health evaluations, includ-
ing tests and diagnostic procedures
ordered in connection with routine ex-
aminations, such as annual physicals.
•Routine prenatal and well-child care.
•Child and adult immunizations.
•Tobacco cessation programs.
•Obesity weight-loss programs.
•Screening services (see attached
APPENDIX).
However, preventive care does not gener-
ally include any service or benefit intended
to treat an existing illness, injury, or condi-
tion (See below for request for comments
regarding drug treatments.)
INTERACTION WITH STATE LAW
HEALTH CARE REQUIREMENTS
Section 220(c)(2)(B)(ii) allows a high
deductible health plan for purposes of an
Archer Medical Savings Account to pro-
vide preventive care without a deductible
if required by state law. However, sec-
tion 220 does not define preventive care
for this purpose. Section 223(c)(2)(C), for
purposes of an HSA, does not condition
the exception for preventive care on state
law requirements. State insurance laws of-
ten require health plans to provide certain
health care without regard to a deductible
or on terms no less favorable than other
care provided by the health plan. The de-
termination of whether health care that is
required by state law to be provided by
an HDHP without regard to a deductible
is “preventive” for purposes of the ex-
ception for preventive care under section
223(c)(2)(C) will be based on the stan-
dards set forth in this notice and other guid-
ance issued by the IRS, rather than on how
that care is characterized by state law.
COMMENTS REQUESTED
Notice 2004–2, 2004–2 I.R.B. 269, re-
quested comments concerning the appro-
priate standard for preventive care in sec-
tion 223(c)(2)(C). We continue to request
comments on the appropriate standard for
preventive care, and in particular, recom-
mendations concerning any benefit or ser-
vice that should be added to those set forth
in this notice and appendix. In addition, we
request comments on the extent to which
benefits provided by an employee assis-
tance program, mental health program or
wellness program may qualify as preven-
tive care, including comments regarding
the scope of treatments provided as bene-
fits through counseling and health assess-
ments. In particular, we request comments
on the extent to which drug treatments, ei-
ther solely by prescription or as part of
an overall treatment regimen should be
treated as preventivecare and the appropri-
ate standards for differentiating between
drug treatments that would be considered
preventive care and those that would not
be considered preventive care.
Send comments to: CC:PA:LPD:PR
(Notice 2004–2), Room 5203, Inter-
nal Revenue Service, POB 7604, Ben
Franklin Station, Washington, DC 20044.
Comments may be hand-delivered be-
tween the hours of 8 a.m. and 4 p.m.
to: CC:PA:LPD:PR (Notice 2004–2),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, D.C. Alternatively, taxpay-
ers may submit comments electronically
at:Notice.2004.2.Comments@irscoun-
sel.treas.gov(a Service Comments e-mail
address).
DRAFTING INFORMATION
The principal author of this notice
is Shoshanna Tanner of the Office of
Division Counsel/Associate Chief Coun-
sel (Tax Exempt and Government Enti-
ties). For further information regarding
this notice, contact Ms. Tanner at (202)
622–6080 (not a toll-free call).
April 12, 20047252004-15 I.R.B.

APPENDIX
Safe Harbor Preventive Care Screening Services
Cancer Screening
Breast Cancer (e.g., Mammogram)
Cervical Cancer (e.g., Pap Smear)
Colorectal Cancer
Prostate Cancer (e.g.,PSATest)
Skin Cancer
Oral Cancer
Ovarian Cancer
Testicular Cancer
Thyroid Cancer
Heart and Vascular Diseases Screening
Abdominal Aortic Aneurysm
Carotid Artery Stenosis
Coronary Heart Disease
Hemoglobinopathies
Hypertension
Lipid Disorders
Infectious Diseases Screening
Bacteriuria
Chlamydial Infection
Gonorrhea
Hepatitis B Virus Infection
Hepatitis C
Human Immunodeficiency Virus (HIV) Infection
Syphilis
Tuberculosis Infection
Mental Health Conditions and Substance Abuse Screening
Dementia
Depression
Drug Abuse
Problem Drinking
Suicide Risk
Family Violence
Metabolic, Nutritional, and Endocrine Conditions Screening
Anemia, Iron Deficiency
Dental and Periodontal Disease
Diabetes Mellitus
ObesityinAdults
Thyroid Disease
Musculoskeletal Disorders Screening
Osteoporosis
Obstetric and Gynecologic Conditions Screening
Bacterial Vaginosis in Pregnancy
Gestational Diabetes Mellitus
Home Uterine Activity Monitoring
Neural Tube Defects
Preeclampsia
Rh Incompatibility
Rubella
Ultrasonography in Pregnancy
2004-15 I.R.B.726April 12, 2004

APPENDIX
Safe Harbor Preventive Care Screening Services — Continued
Pediatric Conditions Screening
Child Developmental Delay
Congenital Hypothyroidism
Lead Levels in Childhood and Pregnancy
Phenylketonuria
Scoliosis, Adolescent Idiopathic
Vision and Hearing Disorders Screening
Glaucoma
Hearing Impairment in Older Adults
Newborn Hearing
Health Savings
Accounts—Transition Relief
Notice 2004–25
PURPOSE
This notice provides transition relief for
calendar year 2004 for eligible individuals
whoestablishanHSAoronbeforeApril
15, 2005, from the requirement that qual-
ified medical expenses may only be paid
or reimbursed by an HSA if incurred after
the HSA has been established. This notice
modifies prior guidance in Q&A 26 of No-
tice 2004–2, 2004–2 I.R.B. 269.
Section 1201 of the Medicare Prescrip-
tion Drug, Improvement, and Moderniza-
tion Act of 2003, Pub. L. No. 108–173,
added section 223 to the Internal Revenue
Code to permit eligible individuals to es-
tablish Health Savings Accounts (HSAs)
for taxable years beginning after Decem-
ber 31, 2003. Because of the short period
between the enactment of HSAs and the ef-
fective date of section 223, many taxpayers
who otherwise would be eligible to estab-
lish and contribute to HSAs (i.e., generally,
individuals covered by a high deductible
health plan (HDHP)) have been unable to
do so because they cannot locate trustees
or custodians who are willing and able to
open HSAs at this time.
BACKGROUND
Contributions to an HSA may only be
made by or on behalf of eligible individu-
als as defined in section 223(c)(1)(A). For
any month, an eligible individual must,
among other requirements, be covered on
the first day of the month by a HDHP (as
defined by section 223(c)(2)). Although
the amount of the contribution to an HSA
is based on the number of months an indi-
vidual is an eligible individual (i.e.,iscov-
ered by the HDHP), contributions up to the
annual maximum limit generally may be
made to the HSA as early as the first day of
the taxable year and as late as April 15 of
the year following the year for which con-
tributions are made. Notice 2004–2, Q&A
21.
On January 12, 2004, Notice 2004–2
was published, providing general guidance
concerning HSAs under section 223. The
notice provides that distributions from an
HSA exclusively to pay or reimburse qual-
ified medical expenses of the account ben-
eficiary, his or her spouse, or dependents,
are excluded from gross income. Answer
26 of the notice states that, “The qualified
medical expenses must be incurred only
after the HSA has been established.” How-
ever, after an HSA is established, distribu-
tions from the HSA exclusively to pay or
reimburse qualified medical expenses con-
tinue to be excluded from the account ben-
eficiary’s gross income whether or not the
account beneficiary continues to be an eli-
gible individual. Notice 2004–2, Q&A 28.
TRANSITION RELIEF FOR HSAs
ESTABLISHED FOR CALENDAR
YEAR 2004
For calendar year 2004, an HSA estab-
lished by an eligible individual on or be-
fore April 15, 2005, may pay or reimburse
on a tax-free basis an otherwise qualified
medical expense if the qualified medical
expense was incurred on or after the later
of: (1) January 1, 2004, or (2) the first day
of the first month that the individual be-
came an eligible individual under section
223.
EFFECT ON OTHER DOCUMENTS
Therulein
the second sentence of No-
tice 2004–
2, Q&A 26, which states that,
“The quali
fied medical expenses must be
incurred
only after the HSA has been es-
tablishe
d,” is suspended and replaced by
the trans
ition relief in this notice. That rule
continue
s to apply to HSAs established for
calenda
r year 2005 and later years.
DRAFTING INFORMATION
The principal author of this notice
is Shoshanna Tanner of the Office of
Division Counsel/Associate Chief Coun-
sel (Tax Exempt and Government Enti-
ties). For further information regarding
this notice, contact Ms. Tanner at (202)
622–6080 (not a toll-free call).
Section 223.—Health Savings
Accounts
Rev.
Proc. 2004–22
SECTION 1. PURPOSE
This revenue procedure provides transi-
tion relief from Revenue Ruling 2004–38
for determining an “eligible individual”
under section 223 who may make con-
tributions to a Health Savings Account
(HSA). The transition relief covers the
months before January 1, 2006, in the case
of an individual who is covered by both a
high deductible health plan (HDHP) and
by a separate plan or rider that provides
prescription drug benefits before the min-
imum annual deductible of the HDHP is
satisfied.
April 12, 20047272004-15 I.R.B.

SECTION 2. BACKGROUND
Section 1201 of the Medicare Prescrip-
tion Drug, Improvement, and Moderniza-
tion Act of 2003, Pub. L. No. 108–173,
added section 223 to the Internal Revenue
Code to permit eligible individuals to es-
tablish HSAs for taxable years beginning
after December 31, 2003. Generally, an
“eligible individual” is an individual who
iscoveredbyanHDHPandnohealth
plan that is not an HDHP. Revenue Rul-
ing 2004–38, clarifies that an individual
who is covered by a health plan that pro-
vides prescription drug benefits before the
minimum annual deductible of an HDHP
has been satisfied, is not an “eligible in-
dividual” under section 223(c)(1)(A) and
may not make contributions to an HSA.
Because of the short period between the
enactment of HSAs and the effective date
of section 223, many employers and health
insurance providers have been unable to
modify the benefits provided under their
existing health plans to conform to the
statutory requirements for an HDHP. Thus,
it is appropriate to provide transition re-
lief to allow individuals to contribute to
an HSA who would otherwise qualify as
eligible individuals but for coverage by a
prescription drug benefit provided under a
separate plan or rider that is not an HDHP.
SECTION 3. APPLICATION
For months before January 1, 2006,
an individual who would otherwise be
an “eligible individual” under section
223(c)(1)(A), but is covered by both an
HDHP that does not provide benefits for
prescription drugs and by a separate health
plan or rider that provides prescription
drug benefits before the minimum annual
deductible of the HDHP is satisfied (i.e.,
the separate prescription drug plan is not
an HDHP), will continue to be an “eligible
individual” and may make contributions
to an HSA based on the annual deductible
of the HDHP.
SECTION 4. EFF
ECT ON OTHER
DOCUMENTS
The holding of Revenue Ruling
2004–38 is suspended in part and re-
placed by the transition relief provided in
this revenue procedure for months before
January 1, 2006.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Shoshanna Tanner of the Of-
fice of Division Counsel/Associate Chief
Counsel (Tax Exempt and Government
Entities). For further information re-
garding this revenue procedure, contact
Ms. Tanner at (202) 622–6080 (not a
toll-free call).
2004-15 I.R.B.728April 12, 2004

Part IV. Items of General Interest
Notice of Proposed
Rulemaking by
Cross-Reference to
Temporary Regulations
Loss Limitation Rules
REG–153172–03
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing temporary regulations
(T.D. 9118) under sections 337(d) and
1502 of the Internal Revenue Code relat-
ingtothedeductibilityoflossesrecog-
nized on dispositions of subsidiary stock
by members of a consolidated group, the
consequences of treating subsidiary stock
as worthless, and when stock of a member
of a consolidated group may be treated
as worthless. The temporary regulations
apply to corporations filing consolidated
returns. The text of the temporary regula-
tions published in this issue of the Bulletin
also serves as the text of these proposed
regulations.
DATES: Written or electronic comments
must be received by June 16, 2004.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–153172–03), room
5203, Internal Revenue Service, POB
7604, Ben Franklin Station, Washing-
ton, DC 20044. Submissions may be
hand delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–153172–03),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Washing-
ton, DC 20044. Alternatively, taxpayers
may submit electronic comments directly
to the IRS Internet site atwww.irs.gov/regs.
FOR FURTHER INFORMATION
CONTACT: Regarding the regula-
tions under section 337(d), Mark Weiss
(202–622–7790) of the Office of Associate
Chief Counsel (Corporate), and regarding
the regulations under section 1502, Lola
L. Johnson (202–622–7550) of the Office
of Associate Chief Counsel (Corporate);
regarding submission of comments and/or
requests for a hearing, Sonya M. Cruse
(202–622–4693) of the Office of Pro-
cedure and Administration (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
Temporary regulations in this issue of
the Bulletin amend the Income Tax Regu-
lations (26 CFR part 1) relating to section
337(d) and section 1502. The text of those
regulations also serves as the text of these
proposed regulations. The preamble to the
temporary regulationsexplains the amend-
ments.
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 is hereby cer-
tified that these regulations will not have a
significant economic impact on a substan-
tial number of small entities. This certifi-
cation is based on the fact that these regula-
tions will primarily affect affiliated groups
of corporations, which tend to be larger
businesses. Therefore a Regulatory Flex-
ibility Analysis is not required. Pursuant
to section 7805(f) of the Internal Revenue
Code, this notice of proposed rulemaking
will be submitted to the Chief Counsel for
Advocacy of the Small Business Adminis-
tration for comment on its impact on small
business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments (a
signed original and eight (8) copies) or
electronic comments that are submitted
timely to the IRS. The IRS and the Trea-
sury Department request comments on the
clarity of the proposed regulations and
how they may be made easier to under-
stand. All comments will be available for
public inspection and copying. A public
hearing may be scheduled if requested by
any person who timely submits comments.
If a public hearing is scheduled, notice of
the date, time and place for the hearing
will be published in theFederal Register.
Drafting Information
The principal author of the regulations
under section 337(d) is Mark Weiss, Office
of Associate Chief Counsel (Corporate).
The principal author of the regulations un-
der section 1502 is Lola L. Johnson, Of-
fice of Associate Chief Counsel (Corpo-
rate). However, other personnel from the
IRS and Treasury participated in their de-
velopment.
Proposed 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 as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.337(d)–2(c)(2) is
added to read as follows:
§1.337(d)–2 Loss limitation window
period.
[The text of this proposed section is the
same as the text of §1.337(d)–2T published
elsewhere in this issue of the Bulletin].
Par. 3. Section 1.1502–35(f)(1) is
added to read as follows:
§1.1502–35 Transfers of subsidiary
member stock and deconsolidations of
subsidiary members.
[The text of this proposed section is the
same as the text of §1.1502–35T published
elsewhere in this issue of the Bulletin].
Par. 4. In §1.1502–80, paragraph (c) is
revised to read as follows:
§1.1502–80 Applicability of other
provisions of law.
(c) [The text of this proposed
§1.1502–80(c) is the same as the text
April 12, 20047292004-15 I.R.B.

of §1.1502–80T(c) published elsewhere in
this issue of the Bulletin].
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on March 17,
2004, 8:45 a.m., and published in the issue of the Federal
Register for March 18, 2004, 69 F.R. 12811)
Notice of Proposed
Rulemaking; Notice of
Proposed Rulemaking by
Cross Reference to Temporary
Regulations
Guidance Under Section 1502;
Application of Section 108 to
Members of a Consolidated
Group; Computation of
Taxable Income When Section
108 Applies to a Member of a
Consolidated Group
REG–167265–03
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking;
notice of proposed rulemaking by cross
reference to temporary regulations.
SUMMARY: This document contains pro-
posed regulations under section 1502 that
govern the timing of certain basis adjust-
ments in respect of the realization of dis-
charge of indebtedness income that is ex-
cluded from gross income and the reduc-
tion of attributes in respect of that ex-
cluded income. In addition, the text of
the temporary regulations (T.D. 9117) pub-
lished elsewhere in this issue of the Bul-
letin serves as the text of these proposed
regulations with respect to the application
of section 108 when a member of a consol-
idated group realizes discharge of indebt-
edness income. The proposed regulations
affect corporations filing consolidated re-
turns.
DATES: Written or electronic comments
must be received by June 14, 2004.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–167265–03), room
5203, Internal Revenue Service, POB
7604 Ben Franklin Station, Washington,
DC 20044. Submissions may be hand
delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m.
to: CC:PA:LPD:PR (REG–167265–03),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW, Wash-
ington, DC. Alternatively, taxpayers may
submit comments electronically directly to
the IRS Internet site atwww.irs.gov/regs.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Candace B. Ewell or Marie C.
Milnes-Vasquez at (202) 622–7530; con-
cerning submission of comments, Treena
Garrett at (202) 622–3401 (not toll-free
numbers).
Background and Explanation of
Provisions
On September 4, 2003, the IRS and
Treasury Department published in the
Federal Registera notice of proposed
rulemaking (REG–132760–03, 2003–43
I.R.B. 933 [68 FR 52542]) and temporary
regulations (T.D. 9089, 2003–43 I.R.B.
906 [68 FR 52487]) under section 1502
of the Internal Revenue Code. The tem-
porary regulations added §1.1502–28T,
which provides guidance regarding the
determination of the attributes that are
available for reduction when a member of
a consolidated group realizes discharge of
indebtedness income that is excluded from
gross income (excluded COD income) and
the method for reducing those attributes.
The text of the temporary regulations
published in this issue of the Bulletin
amend the Income Tax Regulations (26
CFR part 1) relating to section 1502. The
temporary regulations address certain is-
sues related to the application of section
1245 and the matching rule of §1.1502–13,
and the inclusion of excess loss accounts
in cases in which excluded COD is not
fully applied to reduce attributes. The
text of those regulations also serves as the
text of these proposed regulations with
respect to those issues. The preamble to
the temporary regulations explains those
amendments.
These regulations also propose amend-
ments to §§1.1502–28T and 1.1502–11 to
address certain issues that have been raised
regarding the computation of gain or loss
on the disposition of member stock and re-
garding the computation of the portion of
an excess loss account that must be taken
into account when excluded COD income
is not fully applied to reduce attributes. In
particular, if the stock of the subsidiary
that realizes excluded COD income is sold,
the reduction of other members’ attributes
will cause an increase in the basis of the
stock of the subsidiary, thus reducing the
gain (or increasing the loss) on the stock
sale that might otherwise have been off-
set by attributes and possibly making more
attributes available for reduction. If the
stock of a subsidiary other than one that re-
alizes excluded COD income is sold, the
reduction of such subsidiary’s attributes
in respect of the excluded COD income
will cause a decrease in the basis of the
sold subsidiary stock, thus increasing the
gain (or reducing the loss) on the stock
sale, possibly resulting in the absorption
of more attributes and making fewer at-
tributes available for reduction.
In addition, the amount of the excess
loss account in the stock of a subsidiary
that is required to be taken into account
can only be determined after the compu-
tation of tax for the year of the discharge
and the reduction of attributes. Pursuant to
§1.1502–28T(b)(6)(ii), however, that ex-
cess loss account must be included on the
group’s tax return for the taxable year that
includes the date on which the subsidiary
realizes the excluded COD income. If that
excess loss account were offset by losses
that could be reduced in respect of the
excluded COD income, the inclusion of
that amount could result in fewer attributes
available for reduction. The availability
of fewer attributes for reduction might in-
crease the excluded COD income that was
not applied to reduce attributes and, there-
fore, the amount of the excess loss ac-
count in the subsidiary’s stock required to
be taken into account.
These regulations provide guidance
regarding the timing of stock basis ad-
justments, the calculation of stock gain
or loss (including the amount of an ex-
cess loss account required to be taken into
account), and the reduction of attributes
when a member (P) disposes of stock of
a subsidiary (S) during a year in which a
member realizes excluded COD income.
In particular, these regulations propose the
steps used to compute the group’s con-
solidated taxable income and to effect the
2004-15 I.R.B.730April 12, 2004

reduction of attributes. In order to avoid
circular calculations, these proposed reg-
ulations adopt an approach that limits the
reduction of attributes in certain cases in
which a disposition of subsidiary stock
occurs during a year in which one or more
members realize excluded COD income.
This methodology applies not only
when there is an actual disposition of
subsidiary stock, but also when there is
a deemed disposition, including a dispo-
sition that results by reason of the appli-
cation of §1.1502–19(c)(1)(iii)(B) when
excluded COD income is not fully applied
to reduce attributes. However, in order to
know whether there has been a disposition
of stock by reason of the application of
§1.1502–19(c)(1)(iii)(B), the group must
have computed its consolidated taxable
income (or loss) and applied the rules of
sections 108 and 1017 and §1.1502–28T.
Therefore, as discussed below, a number
of the steps proposed will have a slightly
different application when there is such
a deemed disposition of subsidiary stock
rather than an actual disposition of sub-
sidiary stock. The following paragraphs
outline the proposed steps.
First, the extent to which S’s deductions
and losses for the tax year of the dispo-
sition(anditsdeductions and losses car-
ried over from prior years) may offset in-
come and gain is computed pursuant to
the current rules of §1.1502–11(b)(2) and
(3). Those rules require a tentative com-
putation of the group’s taxable income,
without regard to the stock gain or loss.
In the case of a disposition of subsidiary
stock that results from the application of
§1.1502–19(c)(1)(iii)(B) (which will only
be apparent after the application of the
sixth step described below), the applica-
tion of §1.1502–11(b)(2) and (3) will not
result in the imposition of a limitation on
the use of S’s deductions and losses.
Second, §§1.1502–32 and 1.1502–32T
are tentatively applied to adjust the basis
of the S stock to reflect the amount of S’s
unlimited deductions and losses that are
absorbed in the tentative computation of
taxable income (or loss) for the year of the
disposition (and any prior years to which
the deductions or losses may be carried)
that is made pursuant to §1.1502–11(b)(2).
The basis of the S stock is not adjusted
to reflect the realization of excluded COD
income and the reduction of attributes in
respect thereof.
Third, in the case of a disposition of S
stock that does not result from excluded
COD income not being fully applied to
reduce attributes, P’s income, gain, or loss
from the disposition of S stock is computed
using the basis of such stock computed in
the preceding step.
Fourth, taxable income (or loss) for the
year of disposition (and any prior years
to which the deductions or losses may be
carried) is tentatively computed. For this
purpose, in the case of a disposition of S
stock that does not result from excluded
COD income not being fully applied to re-
duce attributes, the tentative computations
of taxable income (or loss) take into ac-
count P’s income, gain, or loss from the
disposition of S stock computed in the pre-
ceding step. Any excess loss account that
is taken into account as a result of excluded
COD income not being fully applied to re-
duce attributes is not included in this ten-
tative computation of taxable income (or
loss).
Fifth, the excluded COD income is
tentatively applied to reduce attributes
pursuant to the rules of sections 108 and
1017 and §1.1502–28T. Only those at-
tributes that remain after the tentative
computations of taxable income (or loss)
in the fourth step are subject to reduction.
Sixth, §§1.1502–32 and 1.1502–32T
are applied to adjust the basis of the S stock
to reflect the amount of S’s unlimited de-
ductions and losses that are absorbed in the
tentative computation of taxable income
(or loss) for the year of the disposition (and
any prior years to which the deductions
or losses may be carried) made pursuant
to the fourth step, and the excluded COD
income that is applied to reduce attributes
and the attributes reduced in respect of
the excluded COD income pursuant to the
fifth step.
Seventh, the group’s actual gain or loss
on the disposition of S stock is computed
using the basis of such stock computed in
the preceding step. At this point, whether
and to what extent an excess loss account
in the stock of a subsidiary that realizes ex-
cluded COD income must be taken into ac-
count is computed. In many cases, taking
into account the basis consequences of the
excluded COD income prior to comput-
ing the amount of an excess loss account
required to be taken into account may be
favorable to taxpayers because those con-
sequences might decrease or even elimi-
nate an excess loss account and, therefore,
reduce the amount of excess loss account
required to be taken into account. The
IRS and Treasury Department are aware
that taking into account the basis effects
of the excluded COD income of all mem-
bers of the group may increase the excess
loss account in the subsidiary stock. This
result may occur in a case in which the
excluded COD income of one subsidiary
(the first subsidiary) is not fully applied
to reduce attributes and the excluded COD
income of another subsidiary (the second
subsidiary) is applied to reduce attributes
in the first subsidiary’s chain. The IRS and
Treasury Department nevertheless believe
that this result is not inappropriate as the
reduction of an attribute in the first sub-
sidiary’s chain in respect of excluded COD
income of the second subsidiary may avoid
taking into account an excess loss account
in the second subsidiary’s stock.
Eighth, the taxable income (or loss)
for the year of the disposition (and any
prior years to which the deductions or
losses may be carried) is computed. These
amounts are calculated by applying the
limitation on the use of S’s deductions and
losses to offset income computed pursuant
to the first step, and by including the gain
or loss recognized on the disposition of
S stock computed pursuant to the preced-
ing step. However, attributes that were
tentatively used to offset income in the
tentative computation of taxable income
(or loss) in the fourth step and attributes
that were tentatively reduced in the fifth
step cannot offset any excess loss account
taken into account as a result of excluded
COD income not being fully applied to
reduce attributes. This limitation gives ef-
fect to the requirement that the excess loss
account be taken into account and avoids
circular calculations. If an excess loss ac-
count that is taken into account as a result
of excluded income could be offset by
attributes that could be reduced in respect
of the excluded COD income, the use of
attributes to offset the excess loss account
could result in fewer attributes available
for reduction and a greater amount of ex-
cluded COD income that was not applied
to reduce attributes, which, in turn, would
increase the amount of the excess loss
account required to be taken into account.
Ultimately, the inclusion of the excess loss
account and the realization of excluded
COD income could have no effect on the
April 12, 20047312004-15 I.R.B.

overall tax liability of the group, thereby
rendering meaningless the requirement to
take into account the excess loss account.
Ninth, the excluded COD income is
actually applied to reduce attributes pur-
suant to the rules of sections 108 and 1017
and §1.1502–28T. Only those attributes re-
maining after the actual computations of
taxable income (or loss) pursuant to the
eighth step are subject to reduction in the
ninth step. In certain cases, however, the
reduction of attributes will be limited to
prevent circular calculations. The pro-
posed regulations include two rules in this
regard.
The first rule provides that when S
or a subsidiary of S realizes excluded
COD income, the aggregate amount of
excluded COD income that is applied to
reduce attributes attributable to members
other than S and any lower-tier corpo-
ration of S cannot exceed the aggregate
amount of excluded COD income that is
applied to reduce attributes attributable to
members other than S and any lower-tier
corporation of S pursuant to the fifth step
(tentative reduction of attributes). Without
this limitation, the amount of excluded
COD income applied to reduce attributes
could exceed the amount of excluded
COD income applied to reduce attributes
in the fifth step, which would result in
a greater positive adjustment (or a lesser
negative adjustment) to the basis of the S
stock compared to that made in the sixth
step, and reduce the gain (or increase the
loss) recognized on the disposition of the S
stock, which might increase the attributes
available for reduction and the amount of
excluded COD income applied to reduce
attributes.
The second rule provides that when a
member other than S or a subsidiary of S
realizes excluded COD income, the aggre-
gate amount of excluded COD income that
is applied to reduce attributes (other than
credits) attributable to S and any lower-tier
corporation of S cannot exceed the aggre-
gate amount of excluded COD income that
is applied to reduce attributes (other than
credits) attributable to S and any lower-tier
corporation of S in the fifth step. Without
this limitation, the amount of excluded
COD income applied to reduce the at-
tributes (other than credits) attributable to
S or a subsidiary of S could exceed the
amount of excluded COD income applied
to reduce the attributes(other than credits)
attributable to S or a subsidiary of S in the
fifthstep,whichwouldresultinalesser
positive adjustment (or a greater negative
adjustment) to the basis of the S stock
compared to that made in the sixth step,
and increase the gain (or decrease the loss)
recognized on the disposition of the S
stock, which might decrease the attributes
of S’s shareholder available for reduction,
increase the reduction of S’s attributes,
and result in a lesser positive adjustment
(or a greater negative adjustment) to the
basis of the S stock.
The IRS and Treasury Department
are aware that the foregoing methodology
does not prevent circular calculations in all
cases, specifically certain cases in which
there is a disposition of the stock of more
than one subsidiary. The IRS and Treasury
Department request comments regarding
whether rules preventing circular calcu-
lations in these other cases are necessary.
If such rules are necessary, the IRS and
Treasury Department request comments
regarding the approach that those rules
should adopt.
Given the difficulty of the problem ad-
dressed by these regulations, the IRS and
Treasury Department request comments
regarding these rules prior to making them
effective. Therefore, the rules described
above are proposed. Before these rules are
adopted as temporary or final regulations,
taxpayers may rely on the rules proposed
in these regulations.
Special Analysis
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. Further, it is
hereby certified that these regulations will
not have a significant economic impact on
a substantial number of small entities. This
certification is based on the fact that these
regulations will primarily affect affiliated
groups of corporations that have elected to
file consolidated returns, which tend to be
larger businesses. Accordingly, a Regula-
tory Flexibility Analysis under the Regula-
tory Flexibility Act (5 U.S.C. chapter 6) is
not required. Pursuant to section 7805(f)
of the Internal Revenue Code, this notice
of proposed rulemaking will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
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 will be sched-
uled if requested in writing by any person
that timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the hearing will
be published in theFederal Register.
Drafting Information
The principal author of these regula-
tions is Marie C. Milnes-Vasquez of the
Office of Associate Chief Counsel (Corpo-
rate). However, other personnel from the
IRS and Treasury Department participated
in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is 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 1.1502–28 also issued under 26
U.S.C. 1502. * * *
Par. 2. Section 1.1502–11 is amended
by:
1. Revising paragraph (b)(1).
2. Redesignating paragraph (c) as para-
graph (d).
3. Adding new paragraph (c).
The revision and addition read as fol-
lows:
§1.1502–11 Consolidated taxable income.
*****
(b)Elimination of circular stock ba-
sis adjustments when there is no excluded
2004-15 I.R.B.732April 12, 2004

COD income—(1)In general. If one mem-
ber (P) disposes of the stock of another
member (S), this paragraph (b) limits the
use of S’s deductions and losses in the year
of disposition and the carryback of items
to prior years. The purpose of the lim-
itation is to prevent P’s income or gain
from the disposition of S’s stock from in-
creasing the absorption of S’s deductions
and losses, because the increased absorp-
tion would reduce P’s basis (or increase
its excess loss account) in S’s stock under
§1.1502–32 and, in turn, increase P’s in-
come or gain. See paragraph (b)(3) of this
section for the application of these princi-
ples to P’s deduction or loss from the dis-
position of S’s stock, and paragraph (b)(4)
of this section for the application of these
principles to multiple stock dispositions.
This paragraph (b) applies only when no
member realizes discharge of indebtedness
income that is excluded from gross income
under section 108(a) (excluded COD in-
come) during the taxable year of the dispo-
sition. See paragraph (c) of this section for
rules that apply when a member realizes
excluded COD income during the taxable
year of the disposition. See §1.1502–19(c)
for the definition of disposition.
*****
(c)Elimination of circular stock basis
adjustments when there is excluded COD
income—(1)In general.Ifonemember
(P) disposes of the stock of another mem-
ber (S) in a year during which any mem-
ber realizes excluded COD income, this
paragraph (c) limits the use of S’s deduc-
tions and losses in the year of disposi-
tion and the carryback of items to prior
years, the amount of the attributes of cer-
tain members that can be reduced in re-
spect of excluded COD income of cer-
tain other members, and the attributes that
can be used to offset an excess loss ac-
count taken into account by reason of the
application of §1.1502–19(c)(1)(iii)(B). In
addition to the purpose set forth in para-
graph (b)(1) of this section, the purpose
of these limitations is to prevent the re-
duction of tax attributes in respect of ex-
cluded COD income from affecting P’s
income, gain, or loss on the disposition
of S stock (including a disposition of S
stock that results from the application of
§1.1502–19(c)(1)(iii)(B)) and, in turn, af-
fecting the attributesavailable for reduc-
tion pursuant to sections 108 and 1017 and
§1.1502–28T.
(2)Computation of taxable income,
reduction of attributes, and computation
of limits on absorption and reduction
of attributes. If a member realizes ex-
cluded COD income in the taxable year
during which P disposes of S stock, the
steps used to compute taxable income
(or loss), to effect the reduction of at-
tributes, and to compute the limitations
on the absorption and reduction of at-
tributes are as follows. These steps also
apply to determine whether and to what
extent an excess loss account must be
taken into account as a result of the ap-
plication of §§1.1502–19(c)(1)(iii)(B) and
1.1502–19T(b)(1).
(i)Limitation on deductions and losses
to offset income or gain. First, the deter-
mination of the extent to which S’s de-
ductions and losses for the tax year of the
disposition (and its deductions and losses
carried over from prior years) may off-
set income and gain is made pursuant to
§1.1502–11(b)(2) and (3).
(ii)Tentative adjustment of stock basis.
Second, §§1.1502–32 and 1.1502–32T are
tentatively applied to adjust the basis of the
S stock to reflect the amount of S’s un-
limited deductions and losses that are ab-
sorbed in the tentative computation of tax-
able income (or loss) for the year of the
disposition (and any prior years to which
the deductions or losses may be carried)
that is made pursuant to §1.1502–11(b)(2),
but not to reflect the realization of ex-
cluded COD income and the reduction of
attributes in respect thereof.
(iii)Tentative computation of stock gain
or loss. Third, in the case of a disposition
of S stock that does not result from the ap-
plication of §1.1502–19(c)(1)(iii)(B), P’s
income, gain, or loss from the disposi-
tion of S stock is computed. For this pur-
pose, the result of the computation pur-
suant to paragraph (c)(2)(ii) of this section
is treated as the basis of such stock.
(iv)Tentative computation of taxable
income (or loss). Fourth, taxable in-
come (or loss) for the year of disposition
(and any prior years to which the de-
ductions or losses may be carried) is
tentatively computed. For this purpose,
in the case of a disposition of S stock
that does not result from the application
of §1.1502–19(c)(1)(iii)(B), the tenta-
tive computation of taxable income (loss)
takes into account P’s income, gain, or
loss from the disposition of S stock com-
puted pursuant to paragraph (c)(2)(iii) of
this section. The tentative computation
of taxable income (loss) is made with-
out regard to whether all or a portion of
an excess loss account in a share of S
is required to be taken into account pur-
suant to §§1.1502–19(c)(1)(iii)(B) and
1.1502–19T(b)(1).
(v)Tentative reduction of attributes.
Fifth, the rules of sections 108 and 1017
and §1.1502–28T are tentatively applied
to reduce the attributes remaining after the
tentative computation of taxable income
(or loss) pursuant to paragraph (c)(2)(iv)
of this section.
(vi)Actual adjustment of stock basis.
Sixth, §§1.1502–32 and 1.1502–32T are
applied to reflect the amount of S’s un-
limited deductions and losses that are ab-
sorbed in the tentative computation of tax-
able income (or loss) for the year of the dis-
position (and any prior years to which the
deductions or losses may be carried) made
pursuant to paragraph (c)(2)(iv) of this sec-
tion, and the excluded COD income ap-
plied to reduce attributes and the attributes
tentatively reduced in respect of the ex-
cluded COD income pursuant to paragraph
(c)(2)(v) of this section.
(vii)Actual computation of stock gain
or loss. Seventh, the group’s actual gain
or loss on the disposition of S stock (in-
cluding a disposition that results from the
application of §1.1502–19(c)(1)(iii)(B)) is
computed. The result of the computation
pursuant to paragraph (c)(2)(vi) of this sec-
tion is treated as the basis of such stock.
(viii)Actual computation of taxable
income (or loss). Eighth, taxable income
(or loss) for the year of the disposition
(and any prior years to which the deduc-
tions or losses may be carried) is com-
puted. The group’s actual consolidated
taxable income (or loss) for the year of
the disposition is computed by apply-
ing the limitation computed pursuant to
paragraph (c)(2)(i) of this section, and
by including the gain or loss recognized
on the disposition of S stock computed
pursuant to paragraph (c)(2)(vii) of this
section. However, attributes that were
tentatively used to offset income pursuant
to paragraph (c)(2)(iv) of this section and
attributes that were tentatively reduced
pursuant to paragraph (c)(2)(v) of this sec-
tion cannot offset any excess loss account
April 12, 20047332004-15 I.R.B.

taken into account as a result of the ap-
plication of §§1.1502–19(c)(1)(iii)(B) and
1.1502–19T(b)(1).
(ix)Actual reduction of attributes.
Ninth, the rules of sections 108 and 1017
and §1.1502–28T are actually applied to
reduce the attributes remaining after the
actual computation of taxable income (or
loss) pursuant to paragraph (c)(2)(viii) of
this section.
(A)S or a lower-tier corporation re-
alizes excluded COD income.IfSor
a lower-tier corporation of S realizes
excluded COD income, the aggregate
amount of excluded COD income that is
applied to reduce attributes attributable to
members other than S and any lower-tier
corporation of S pursuant to this paragraph
(c)(2)(ix) shall not exceed the aggregate
amount of excluded COD income that was
tentatively applied to reduce attributes
attributable to members other than S and
any lower-tier corporation of S pursuant
to paragraph (c)(2)(v) of this section. The
amount of the actual reduction of attributes
attributable to S and any lower-tier corpo-
ration of S that may be reduced in respect
of the excluded COD income of S or a
lower-tier corporation of S shall not be so
limited.
(B)A member other than S or a
lower-tier corporation realizes excluded
COD income. If a member other than
S or a lower-tier corporation of S real-
izes excluded COD income, the aggregate
amount of excluded COD income that
is applied to reduce attributes (other than
credits) attributable to S and any lower-tier
corporation of S pursuant to this paragraph
(c)(2)(ix) shall not exceed the aggregate
amount of excluded COD income that was
tentatively applied to reduce attributes
(other than credits) attributable to S and
any lower-tier corporation of S pursuant
to paragraph (c)(2)(v) of this section. The
amount of the actual reduction of attributes
attributable to any member other than S
and any lower-tier corporation of S that
may be reduced in respect of the excluded
COD income of S or a lower-tier corpora-
tion of S shall not be so limited.
(3)Special rules. (i) If the reduction
of attributes attributable to a member is
prevented as a result of a limitation de-
scribed in paragraph (c)(2)(ix)(B) of this
section, the excluded COD income that
would have otherwise been applied to
reduce such attributes is applied to re-
duce the remaining attributes of the same
type that are available for reduction under
§1.1502–28T(a)(4), on apro ratabasis,
prior to reducing attributes of a different
type. The reduction of such remaining
attributes, however, is subject to any ap-
plicable limitation described in paragraph
(c)(2)(ix)(B) of this section.
(ii) To the extent S’s deductions and
losses in the year of disposition (or those
of a lower-tier corporation of S) cannot
offset income or gain because of the lim-
itation under paragraph (b) of this sec-
tion or this paragraph (c) and are not re-
duced pursuant to sections 108 and 1017
and §1.1502–28T, such items are carried
to other years under the applicable provi-
sions of the Internal Revenue Code and
regulations as if they were the only items
incurred by S (or a lower-tier corporation
of S) in the year of disposition. For ex-
ample, to the extent S incurs an operating
loss in the year of disposition that is lim-
ited and is not reduced pursuant to section
108 and §1.1502–28T, the loss is treated as
a separate net operating loss attributable to
S arising in that year.
(4)Definition of lower-tier corporation.
A corporation is a lower-tier corporation of
S if all of its items of income, gain, deduc-
tion, and loss (including the absorption of
deduction or loss and the reduction of at-
tributes other than credits) would be fully
reflected in P’s basis in S’s stock under
§1.1502–32.
(5)Examples. For purposes of the ex-
amples in this paragraph (c), unless other-
wise stated, the tax year of all persons is
the calendar year, all persons use the ac-
crual method of accounting, the facts set
forth the only corporate activity, all trans-
actions are between unrelated persons, tax
liabilities are disregarded, and no election
under section 108(b)(5) is made. The prin-
ciples of this paragraph (c) are illustrated
by the following examples:
Example 1. Departing member realizes excluded
COD income.(i)Facts. P owns all of S’s stock with
a $90 basis. For Year 1, P has ordinary income of
$30, and S has an $80 ordinary loss and $100 of ex-
cluded COD income from the discharge of non-inter-
company indebtedness. P sells the S stock for $20 at
the close of Year 1. As of the beginning of Year 2, S
has Asset A with a basis of $0 and a fair market value
of $20.
(ii)Analysis. The steps used to compute the
group’s consolidated taxable income, to effect the re-
duction of attributes, and to compute the limitations
on the use and reduction of attributes are as follows:
(A)Computation of limitation on deductions and
losses to offset income or gain.Todeterminethe
amount of the limitation under paragraph (c)(2)(i)
of this section on S’s loss and the effect of the ab-
sorption of S’s loss on P’s basis in S’s stock under
§1.1502–32(b), P’s gain or loss from the disposition
of S’s stock is not taken into account. The group is
tentatively treated as having a consolidated net oper-
ating loss of $50 (P’s $30 of income minus S’s $80
loss). Under the principles of §1.1502–21T(b)(2)(iv),
all of such loss is attributable to S.
(B)Tentative adjustment of stock basis. Then,
pursuant to paragraph (c)(2)(ii) of this section,
§§1.1502–32 and 1.1502–32T are tentatively applied
to adjust the basis of S stock. For this purpose,
however, adjustments attributable to the excluded
COD income and the reduction of attributes in re-
spect thereof are not taken into account. Under
§1.1502–32(b), the absorption of $30 of S’s loss
decreases P’s basis in S’s stock by $30 to $60.
(C)Tentative computation of stock gain or loss.
Then, P’s income, gain, or loss from the sale of S
stock is computed pursuant to paragraph (c)(2)(iii) of
this section using the basis computed in the previous
step. Thus, P is treated as recognizing a $40 loss from
thesaleofSstock.
(D)Tentative computation of taxable income (or
loss). Pursuant to paragraph (c)(2)(iv) of this sec-
tion, taxable income (or loss) for the year of dispo-
sition (and any prior years to which the deductions or
losses may be carried) is then tentatively computed,
taking into account P’s $40 loss on the sale of the S
stock computed pursuant to paragraph (c)(2)(iii) of
this section. The group has a $50 consolidated net
operating loss for Year 1 that, under the principles
of §1.1502–21T(b)(2)(iv), is wholly attributable to S
and a consolidated capital loss of $40 that, under the
principles of §1.1502–21T(b)(2)(iv), is wholly attrib-
utable to P.
(E)Tentative reduction of attributes. Next, pur-
suant to paragraph (c)(2)(v) of this section, the rules
of sections 108 and 1017 and §1.1502–28T are ten-
tatively applied to reduce attributes remaining after
the tentative computation of taxable income (or loss).
Pursuant to §1.1502–28T(a)(2), the tax attributes at-
tributable to S would first be reduced to take into ac-
count its $100 of excluded COD income. Accord-
ingly, the consolidated net operating loss for Year 1
would be reduced by $50 to $0. Then, pursuant to
§1.1502–28T(a)(4), S’s remaining $50 of excluded
COD income would reduce the consolidated capital
loss attributable to P of $40 by $40 to $0. The re-
maining $10 of excluded COD income would have
no effect.
(F)Actual adjustment of stock basis.Pursuantto
paragraph (c)(2)(vi) of this section, §§1.1502–32 and
1.1502–32T are applied to reflect the amount of S’s
unlimited deductions and losses that are absorbed in
the tentative computation of taxable income (or loss)
for the year of the disposition (and any prior years to
which the deductions or losses may be carried) and
the excluded COD income tentatively applied to re-
duce attributes and the attributes reduced in respect of
the excluded COD income pursuant to the previous
step. Under §1.1502–32(b), the absorption of $30 of
S’s loss, the application of $90 of S’s excluded COD
income to reduce attributes of P and S, and the re-
duction of the $50 loss attributable to S in respect of
the excluded COD income results in a positive adjust-
2004-15 I.R.B.734April 12, 2004

ment of $10 to P’s basis in the S stock. P’s basis in
the S stock, therefore, is $100.
(G)Actual computation of stock gain or loss.Pur-
suant to paragraph (c)(2)(vii) of this section, P’s ac-
tual gain or loss on the sale of the S stock is com-
puted using the basis computed in the previous step.
Accordingly, P recognizes an $80 loss on the dispo-
sition of the S stock.
(H)Actual computation of taxable income (or
loss). Pursuant to paragraph (c)(2)(viii) of this sec-
tion, taxable income (or loss) is computed by taking
into account P’s $80 loss from the sale of S stock.
Before the application of §1.1502–28T, the group,
therefore, has a consolidated net operating loss of $50
that is wholly attributable to S under the principles
of §1.1502–21T(b)(2)(iv), and a consolidated capital
loss of $80 that is wholly attributable to P under the
principles of §1.1502–21T(b)(2)(iv).
(I)Actual reduction of attributes.Pursuantto
paragraph (c)(2)(ix) of this section, sections 108 and
1017 and §1.1502–28T are then actually applied to
reduce attributes remaining after the actual computa-
tion of taxable income (or loss). Pursuant to section
108(b)(4)(B) and §1.1502–28T(a), the consolidated
net operating loss attributable to S under the princi-
ples of §1.1502–21T(b)(2)(iv) is reduced first. Ac-
cordingly, the operating loss for Year 1 that S would
otherwise carry forward is reduced by $50 to $0.
Then, pursuant to §1.1502–28T(a)(4), S’s remaining
$50 of excluded COD income reduces consolidated
tax attributes. In particular, without regard to the
limitation imposed by paragraph (c)(2)(ix)(A) of
this section, the $80 consolidated capital loss, which
under the principles of §1.1502–21T(b)(2)(iv) is at-
tributable to P, would be reduced by $50 from $80 to
$30. However, the limitation imposed by paragraph
(c)(2)(ix)(A) of this section prevents the reduction of
the consolidated capital loss attributable to P by more
than $40. Therefore, the consolidated capital loss
attributable to P is reduced by only $40 in respect of
S’s excluded COD income. The remaining $10 of
excluded COD income has no effect.
Example 2.Member other than departing mem-
ber realizes excluded COD income.(i)Facts.Powns
all of S1’s and S2’s stock. P’s basis in S2’s stock is
$600. For Year 1, P has ordinary income of $30, S1
has a $100 ordinary loss and $100 of excluded COD
income from the discharge of non-intercompany in-
debtedness, and S2 has $200 of ordinary loss. P sells
the S2 stock for $600 at the close of Year 1. As of the
beginning of Year 2, S1 has Asset A with a basis of
$0 and a fair market value of $10.
(ii)Analysis. The steps used to compute the
group’s consolidated taxable income, to effect the re-
duction of attributes, and to compute the limitations
on the use and reduction of attributes are as follows:
(A)Computation of limitation on deductions and
losses to offset income or gain. To determine the
amount of the limitation under paragraph (c)(2)(i) of
this section on S2’s loss and the effect of the absorp-
tion of S2’s loss on P’s basis in S2’s stock under
§1.1502–32(b), P’s gain or loss from the sale of S2
stock is not taken into account. The group is tenta-
tively treated as having a consolidated net operating
loss of $270 (P’s $30 of income minus S1’s $100 loss
and S2’s $200 loss). Consequently, $20 of S2’s loss
from Year 1 is unlimited and $180 of S2’s loss from
Year 1 is limited under paragraph (c)(2)(i) of this sec-
tion.
(B)Tentative adjustment of stock basis. Then,
pursuant to paragraph (c)(2)(ii) of this section,
§§1.1502–32 and 1.1502–32T are tentatively applied
to adjust the basis of S2 stock. For this purpose,
however, adjustments to the basis of S2 stock attrib-
utable to the reduction of attributes in respect of S1’s
excluded COD income are not taken into account.
Under §1.1502–32(b), the absorption of $20 of S2’s
loss decreases P’s basis in S2’s stock by $20 to $580.
(C)Tentative computation of stock gain or loss.
Then, P’s income, gain, or loss from the disposition of
S2 stock is computed pursuant to paragraph (c)(2)(iii)
of this section using the basis computed in the previ-
ous step. Thus, P is treated as recognizing a $20 gain
from the sale of the S2 stock.
(D)Tentative computation of taxable income (or
loss). Pursuant to paragraph (c)(2)(iv) of this section,
taxable income (or loss) for the year of disposition
(and any prior years to which the deductions or losses
may be carried) is then tentatively computed, taking
into account P’s $20 gain from the sale of S2 stock.
P’s $20 gain from the sale of S2’s stock is offset by
$20 of S1’s loss. Therefore, the group is tentatively
treated as having a consolidated net operating loss of
$250, $70 of which is attributable to S1 and $180
of which is attributable to S2 under the principles of
§1.1502–21T(b)(2)(iv).
(E)Tentative reduction of attributes.Next,pur-
suant to paragraph (c)(2)(v) of this section, the rules
of sections 108 and 1017 and §1.1502–28T are ten-
tatively applied to reduce attributes remaining after
the tentative computation of taxable income (or loss).
Pursuant to §1.1502–28T(a)(2), the tax attributes at-
tributable to S1 would first be reduced to take into
account its $100 of excluded COD income. Accord-
ingly, the consolidated net operating loss for Year 1
would be reduced by $70, the portion of the con-
solidated net operating loss attributable to S1 under
the principles of §1.1502–21T(b)(2)(iv), to $0. Then,
pursuant to §1.1502–28T(a)(4), S1’s remaining $30
of excluded COD income would reduce the consoli-
dated net operating loss attributable to S2 of $180 by
$30 to $150.
(F)Actual adjustment of stock basis.Pursuantto
paragraph (c)(2)(vi) of this section, §§1.1502–32 and
1.1502–32T are applied to reflect the amount of S2’s
unlimited deductions and losses that are absorbed in
the tentative computation of taxable income (or loss)
for the year of the disposition (and any prior years to
which the deductions or losses may be carried) and
the excluded COD income tentatively applied to re-
duce attributes and the attributes reduced in respect of
the excluded COD income pursuant to the previous
step. Under §1.1502–32(b), the absorption of $20 of
S2’s loss and the application of $30 of S1’s excluded
COD income to reduce attributes attributable to S2
results in a negative adjustment of $50 to P’s basis in
the S2 stock. P’s basis in the S2 stock, therefore, is
$550.
(G)Actual computation of stock gain or loss.Pur-
suant to paragraph (c)(2)(vii) of this section, P’s ac-
tual gain or loss on the sale of the S2 stock is com-
puted using the basis computed in the previous step.
Therefore, P recognizes a $50 gain on the disposition
of the S2 stock.
(H)Actual computation of taxable income (or
loss). Pursuant to paragraph (c)(2)(viii) of this sec-
tion, taxable income (or loss) is computed by taking
into account P’s $50 gain from the disposition of the
S2 stock. Before the application of §1.1502–28T,
therefore, the group has a consolidated net operating
loss of $220, $40 of which is attributable to S1 and
$180 of which is attributable to S2 under the princi-
ples of §1.1502–21T(b)(2)(iv).
(I)Actual reduction of attributes. Pursuant to
paragraph (c)(2)(ix) of this section, sections 108
and 1017 and §1.1502–28T are then actually ap-
plied to reduce attributes remaining after the actual
computation of taxable income (or loss). Pursuant
to §1.1502–28T(a)(2), the tax attributes attributable
to S1 must first be reduced to take into account its
$100 of excluded COD income. Accordingly, pur-
suant to section 108(b)(4)(B) and §1.1502–28T(a),
the net operating loss attributable to S1 under the
principles of §1.1502–21T(b)(2)(iv) is reduced first.
The consolidated net operating loss for Year 1 is
reduced by $40, the portion of the consolidated net
operating loss attributable to S1 under the principles
of §1.1502–21T(b)(2)(iv), to $0. Then, pursuant to
§1.1502–28T(a)(4), without regard to the limitation
imposed by paragraph (c)(2)(ix)(B) of this sec-
tion, S1’s remaining $60 of excluded COD income
would reduce S2’s net operating loss of $180 to
$120. However, the limitation imposed by paragraph
(c)(2)(ix)(B) of this section prevents the reduction
of S2’s loss by more than $30. Therefore, S2’s loss
of $180 is reduced by $30 to $150 in respect of
S1’s excluded COD income. The remaining $30 of
excluded COD income has no effect.
Example 3.Lower-tier corporation of departing
member realizes excluded COD income.(i)Facts.P
owns all of S1’s stock, S2’s stock, and S3’s stock. S1
owns all of S4’s stock. P’s basis in S1’s stock is $50
and S1’s basis in S4 stock is $50. For Year 1, P has
$50 of ordinary loss, S1 has $100 of ordinary loss,
S2 has $150 of ordinary loss, S3 has $50 of ordinary
loss, and S4 has $50 of ordinary loss and $80 of ex-
cluded COD income from the discharge of non-inter-
company indebtedness. P sells the S1 stock for $100
at the close of Year 1. As of the beginning of Year 2,
S4 has Asset A with a basis of $0 and a fair market
value of $10.
(ii)Analysis. The steps used to compute the
group’s consolidated taxable income, to effect the re-
duction of attributes, and to compute the limitations
on the use and reduction of attributes are as follows:
(A)Computation of limitation on deductions and
losses to offset income or gain.Todeterminethe
amount of the limitation under paragraph (c)(2)(i) of
this section on S1’s and S4’s losses and the effect of
the absorption of S1’s and S4’s losses on P’s basis in
S1’s stock under §1.1502–32(b), P’s gain or loss from
the disposition of S1’s stock is not taken into account.
The group is tentatively treated as having a consoli-
dated net operating loss of $400. Consequently, $100
of S1’s loss and $50 of S4’s loss is limited under para-
graph (c)(2)(i) of this section.
(B)Tentative adjustment of stock basis. Then,
pursuant to paragraph (c)(2)(ii) of this section,
§§1.1502–32 and 1.1502–32T are tentatively applied
to adjust the basis of S stock. For this purpose,
adjustments to the basis of S1 stock attributable to
S4’s realization of excluded COD income and the
reduction of attributes in respect of such excluded
COD income are not taken into account. There is no
adjustment under §1.1502–32 to the basis of the S1
stock. Therefore, P’s basis in the S1 stock for this
purpose is $50.
April 12, 20047352004-15 I.R.B.

(C)Tentative computation of stock gain or loss.
Then,P’sincome,gain,orlossfromthesaleofS1
stock is computed pursuant to paragraph (c)(2)(iii) of
this section using the basis computed in the previous
step. Thus, P is treated as recognizing a $50 gain from
thesaleoftheS1stock.
(D)Tentative computation of taxable income (or
loss). Pursuant to paragraph (c)(2)(iv) of this section,
taxable income (or loss) for the year of disposition
(and any prior years to which the deductions or losses
may be carried) is tentatively computed, taking into
accountP’s$50gainfromthesaleoftheS1stock
computed pursuant to the previous step. P’s $50 gain
from the sale of the S1 stock is offset by $10 of P’s
loss, $30 of S2’s loss, and $10 of S3’s loss. There-
fore, the group is tentatively treated as having a con-
solidated net operating loss of $350, $40 of which is
attributable to P, $100 of which is attributable to S1,
$120 of which is attributable to S2, $40 of which is
attributable to S3, and $50 of which is attributable to
S4 under the principles of §1.1502–21T(b)(2)(iv).
(E)Tentative reduction of attributes.Next,pur-
suant to paragraph (c)(2)(v) of this section, the rules
of sections 108 and 1017 and §1.1502–28T are ten-
tatively applied to reduce attributes remaining after
the tentative computation of taxable income (or loss).
Pursuant to §1.1502–28T(a)(2), the tax attributes at-
tributable to S4 would first be reduced to take into ac-
count its excluded COD income in the amount of $80.
Accordingly, the consolidated net operating loss at-
tributable to S4 would be reduced by $50 to $0. Then,
pursuant to §1.1502–28T(a)(4), S4’s remaining $30
of excluded COD income would reduce the consoli-
dated net operating loss for Year 1 that is attributable
to other members. Therefore, the consolidated net op-
erating loss for Year 1 would be reduced by $30. Of
that amount, $4 is attributable to P, $10 is attributable
to S1, $12 is attributable to S2, and $4 is attributable
to S3.
(F)Actual adjustment of stock basis. Pursuant to
paragraph (c)(2)(vi) of this section, §§1.1502–32 and
1.1502–32T are applied to reflect the amount of S1’s
and S4’s unlimited deductions and losses that are ab-
sorbed in the tentative computation of taxable income
(or loss) for the year of the disposition (and any prior
years to which the deductions or losses may be car-
ried) and the excluded COD income tentatively ap-
plied to reduce attributes and the attributes reduced in
respect of the excluded COD income pursuant to the
previous step. Under §1.1502–32(b), the application
of $80 of S4’s excluded COD income to reduce at-
tributes, and the reduction of S4’s loss in the amount
of $50 and S1’s loss in the amount of $10 in respect of
the excluded COD income results in a positive adjust-
ment of $20 to P’s basis in the S1 stock. Accordingly,
P’s basis in S1 stock is $70.
(G)Actual computation of stock gain or loss.Pur-
suant to paragraph (c)(2)(vii) of this section, P’s ac-
tual gain or loss on the sale of the S1 stock is com-
puted using the basis computed in the previous step.
Accordingly, P recognizes a $30 gain on the disposi-
tion of the S1 stock.
(H)Actual computation of taxable income (or
loss). Pursuant to paragraph (c)(2)(viii) of this
section, the group’s taxable income or loss is then
computed by taking into account P’s $30 gain from
the sale of S1 stock. Before the application of
§1.1502–28T, therefore, the group has a consoli-
dated net operating loss of $370, $44 of which is
attributable to P, $100 of which is attributable to S1,
$132 of which is attributable to S2, $44 of which is
attributable to S3, and $50 of which is attributable to
S4.
(I)Actual reduction of attributes. Pursuant to
paragraph (c)(2)(ix) of this section, sections 108 and
1017 and §1.1502–28T are then actually applied to
reduce attributes remaining after the actual com-
putation of taxable income (or loss). Pursuant to
§1.1502–28T(a)(2), the tax attributes attributable to
S4 must first be reduced to take into account its $80
of excluded COD income. Accordingly, the consoli-
dated net operating loss attributable to S4 is reduced
by $50 to $0. Then, pursuant to §1.1502–28T(a)(4),
S4’s remaining $30 of excluded COD income re-
duces the consolidated net operating loss for Year 1.
Therefore, without regard to the limitation imposed
by paragraph (c)(2)(ix)(B) of this section, the consol-
idated net operating loss for Year 1 would be reduced
by $30 ($4.12 of the consolidated net operating loss
attributable to P, $9.38 of the consolidated net operat-
ing loss attributable to S1, $12.38 of the consolidated
net operating loss attributable to S2, and $4.12 of the
consolidated net operating loss attributable to S3) to
$290. However, the limitation imposed by paragraph
(c)(2)(ix)(B) of this section prevents the reduction of
the consolidated net operating loss attributable to P,
S2, and S3 by more than $4, $12, and $4 respectively.
The $.62 of excluded COD income that would have
otherwise reduced the consolidated net operating
loss attributable to P, S2, and S3 is applied to reduce
the consolidated net operating loss attributable to S1.
Therefore, S1 carries forward $90 of loss.
Example 4.Excess loss account taken into ac-
count.(i)Facts. P is the common parent of a con-
solidated group. On Day 1 of Year 2, P acquired all
of the stock of S1. As of the beginning of Year 2, S1
had a $30 net operating loss carryover from Year 1,
a separate return limitation year. A limitation under
§1.1502–21(c) applies to the use of that loss by the P
group. For Years 1 and 2, the P group had no con-
solidated taxable income or loss. On Day 1 of Year
3, S1 acquired all of the stock of S2 for $10. In Year
3, P had ordinary income of $10, S1 had ordinary in-
come of $25, and S2 had an ordinary loss of $50. In
addition, in Year 3, S2 realized $20 of excluded COD
income from the discharge of non-intercompany in-
debtedness. After the discharge of this indebtedness,
S2 had no liabilities. As of the beginning of Year 4,
S2 had Asset A with a basis of $0 and a fair market
value of $10. S2 had no taxable income (or loss) for
Year 1 and Year 2.
(ii)Analysis. The steps used to compute the
group’s consolidated taxable income, to effect the re-
duction of attributes, and to compute the limitations
on the use and reduction of attributes are as follows:
(A)Computation of limitation on deduction and
losses to offset income or gain, tentative basis ad-
justments, tentative computation of stock gain or loss.
Because it is not initially apparent that there has been
a disposition of stock, paragraph (c)(2)(i) of this sec-
tion does not limit the use of deductions to offset in-
come or gain, no adjustments to the basis are required
pursuant to paragraph (c)(2)(ii) of this section, and no
stock gain or loss is computed pursuant to paragraph
(c)(2)(iii) of this section or taken into account in the
tentative computation of taxable income pursuant to
paragraph (c)(2)(iv) of this section.
(B)Tentative computation of taxable income (or
loss). Pursuant to paragraph (c)(2)(iv) of this section,
the group’s taxable income (or loss) for Year 3 (and
any prior years to which the deductions or losses may
be carried) is tentatively computed. For Year 3, the
P group has a consolidated taxable loss of $15, all
of which is attributable to S2 under the principles of
§1.1502–21T(b)(2)(iv).
(C)Tentative reduction of attributes. Next, pur-
suant to paragraph (c)(2)(v) of this section, the rules
of sections 108 and 1017 and §1.1502–28T are tenta-
tively applied to reduce attributes remaining after the
tentative computation of consolidated taxable loss.
Pursuant to §1.1502–28T(a)(2), the tax attributes at-
tributable to S2 would first be reduced to take into
account its excluded COD income of $20. Accord-
ingly, the net operating loss attributable to S2 under
the principles of §1.1502–21T(b)(2)(iv) is reduced
first. Therefore, the consolidated net operating loss
for Year 3 is reduced by $15, the portion of the con-
solidated net operating loss attributable to S2, to $0.
The remaining $5 of excluded COD income is not ap-
plied to reduce attributes as there are no remaining at-
tributes that are subject to reduction.
(D)Actual adjustment of stock basis.Pursuantto
paragraph (c)(2)(vi) of this section, §§1.1502–32 and
1.1502–32T are applied to reflect the amount of S2’s
unlimited deductions and losses that are absorbed in
the tentative computation of taxable income (or loss)
for the year of the disposition (and any prior years to
which the deductions or losses may be carried) and
the excluded COD income tentatively applied to re-
duce attributes and the attributes reduced in respect
of the excluded COD income pursuant to the previ-
ous step. Pursuant to §§1.1502–32 and 1.1502–32T,
the absorption of $35 of S2’s loss, the application of
$15 in respect of S2’s excluded COD income to re-
duce attributes, and the reduction of $15 in respect of
the loss attributable to S2 reduced in respect of the ex-
cluded COD income results in a negative adjustment
of $35 to the basis of the S2 stock. Therefore, S1 has
an excess loss account of $25 in the S2 stock.
(E)Actual computation of stock gain or loss.Pur-
suant to paragraph (c)(2)(vii) of this section, S1’s ac-
tual gain or loss, if any, on the S2 stock is computed.
Because S2 realized $5 of excluded COD income
that was not applied to reduce attributes, pursuant to
§§1.1502–19(c)(1)(iii)(B) and 1.1502–19T(b)(1), S1
is required to take into account $5 of its excess loss
account in the S2 stock.
(F)Actual computation of taxable income (or
loss). Pursuant to paragraph (c)(2)(viii) of this sec-
tion, the group’s taxable income or loss is computed
taking into account the $5 of the excess loss account
in the S2 stock required to be taken into account. See
§1.1502–28T(b)(6) (requiring an excess loss account
that is required to be taken into account as a result of
the application of §1.1502–19(c)(1)(iii)(B) to be in-
cluded in the group’s consolidated taxable income for
the year that includes the date of the debt discharge).
However, pursuant to paragraph (c)(2)(viii) of this
section, such amount may not be offset by any of the
consolidated net operating loss attributable to S2. It
may, however, subject to applicable limitations, be
offset by the separate net operating loss of S1 from
Year 1.
(G)Actual reduction of attributes.Pursuantto
paragraph (c)(2)(ix) of this section, sections 108 and
1017 and §1.1502–28T are then actually applied to
2004-15 I.R.B.736April 12, 2004

reduce attributes remaining after the actual computa-
tion of taxable income (or loss). Attributes will be
actually reduced in the same way that they were ten-
tatively reduced.
(6)Additional rules for multiple dispo-
sitions. [Reserved].
(7)Effective date. This paragraph (c)
applies to dispositions of subsidiary stock
that occur after the date these regulations
are published as temporary or final regula-
tions in theFederal Register.Taxpayers
may apply this paragraph (c), as contained
in these proposed regulations, in whole,
but not in part, to any disposition of sub-
sidiary stock that occurs before the date
these regulations are published as tempo-
rary or final regulations in theFederal
Register.
Par. 3. Section 1.1502–13 is revised to
read as follows:
§1.1502–13 Intercompany transactions.
[The text of this proposed sec-
tion is the same as the text of
§1.1502–13T(g)(3)(ii)(B) published else-
where in this issue of the Bulletin].
Par. 4. Section 1.1502–28 is amended
to read as follows:
1. Adding paragraphs (b)(4), (b)(5),
(b)(6) and (b)(7).
2. Revising paragraph (d).
3. The additions and revision read as
follows:
§1.1502–28 Consolidated section 108.
*****
(b)(4) and (5) [The text of paragraphs
(b)(4) and(5) is the same as the text of
§1.1502–28T(b)(4) and (5) published else-
where in this issue of the Bulletin].
(6)Taking into account of excess loss
account—(i)Determination of inclusion.
The determination of whether any portion
of an excess loss account in a share of
stock of a subsidiary that realizes excluded
COD income is required to be taken into
account as a result of the application of
§1.1502–19(c)(1)(iii)(B) is made after the
determination of taxable income (or loss)
for the year during which the member re-
alizes excluded COD income (without re-
gard to whether any portion of an excess
loss account in a share of the subsidiary
is required to be taken into account) and
any prior years to which the deductions or
losses of the subsidiary may be carried, af-
ter the reduction of tax attributes pursuant
to sections 108 and 1017, and this section,
and after the adjustment of the basis of the
share of stock of the subsidiary pursuant
to §1.1502–32 to reflect the amount of the
subsidiary’s deductions and losses that are
absorbed in the computation of taxable in-
come (or loss) for the year of the disposi-
tion and any prior years to which the de-
ductions or losses may be carried, and the
excluded COD income applied to reduce
attributes and the attributes reduced in re-
spect thereof. See §1.1502–11(c) for spe-
cial rules related to the computation of tax-
able income (or loss) that apply when an
excess loss account is required to be taken
into account.
(ii) [The text of paragraph
(b)(6)(ii) is the same as the text of
§1.1502–28T(b)(6)(ii) published else-
whereinthisissueoftheBulletin].
*****
(7)Dispositions of stock.See
§1.1502–11(c) for limitations on the re-
duction of tax attributes when a member
disposes of stock of another member (in-
cluding dispositions that result from the
application of §1.1502–19(c)(1)(iii)(B))
during a taxable year in which any mem-
ber realizes excluded COD income.
*****
(d)Effective dates. (1) This section,
other than paragraphs (a)(4), (b)(4), (b)(5),
(b)(6), and (b)(7) of this section, applies to
discharges of indebtedness that occur after
August 29, 2003.
(2) Paragraph (a)(4) of this section ap-
plies to discharges of indebtedness that oc-
cur after August 29, 2003, but only if the
discharge occurs during a taxable year the
original return for which is due (without
regard to extensions) after December 11,
2003. However, groups may apply para-
graph (a)(4) of this section to discharges
of indebtedness that occur after August 29,
2003, and during a taxable year the origi-
nal return for which is due (without regard
to extensions) on or before December 11,
2003. For discharges of indebtedness that
occur after August 29, 2003, and during a
taxable year the original return for which
is due (without regard to extensions) on
or before December 11, 2003, paragraph
(a)(4) of this section shall apply as in ef-
fect on August 29, 2003.
(3) Paragraphs (b)(4), (b)(5), and
(b)(6)(ii) of this section apply to dis-
charges of indebtedness that occur after
August 29, 2003, but only if the discharge
occurs during a taxable year the original
return for which is due (without regard to
extensions) after March 12, 2004. How-
ever, groups may apply paragraphs (b)(4),
(b)(5), and (b)(6)(ii) of this section to dis-
charges of indebtedness that occur after
August 29, 2003, and during a taxable
year the original return for which is due
(without regard to extensions) on or before
March 12, 2004.
(4) Paragraphs (b)(6)(i) and (b)(7) of
this section apply to discharges of indebt-
edness that occur after August 29, 2003,
but only if the discharge occurs during a
taxable year the original return for which
is due (without regard to extensions) after
the date these regulations are published as
temporary or final regulations in theFed-
eral Register. However, groups may ap-
ply paragraphs (b)(6)(i)and(b)(7)ofthis
section to discharges of indebtedness that
occur after August 29, 2003, and during a
taxable year the original return for which
is due (without regard to extensions) on or
before the date these regulations are pub-
lished as temporary or final regulations in
theFederal Register.
*****
Par. 5. The last sentence of paragraph
(c) of §1.1502–80 is revised to read as fol-
lows:
§1.1502–80 Applicability of other
provisions of law.
*****
(c) * * * See §§1.1502–11(d) and
1.1502–35T for additional rules relating
to stock loss.
*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on March 12,
2004, 8:45 a.m., and published in the issue of the Federal
Register for March 15, 2004, 69 F.R. 12091)
Foundations Status of Certain
Organizations
Announcement 2004–25
The following organizations have failed
to establish or have been unable to main-
tain their status as public charities or as op-
April 12, 20047372004-15 I.R.B.

erating foundations. Accordingly, grantors
and contributors may not, after this date,
rely on previous rulings or designations
in the Cumulative List of Organizations
(Publication 78), or on the presumption
arising from the filing of notices under sec-
tion 508(b) of the Code. This listing does
notindicate that the organizations have lost
their status as organizations described in
section 501(c)(3), eligible to receive de-
ductible contributions.
Former Public Charities.The follow-
ing organizations (which have been treated
as organizations thatare not private foun-
dations described in section 509(a) of the
Code) are now classified as private foun-
dations:
1–2–3 Health Access, Inc.,
Milwaukee, WI
31st December Womens Movement,
Washington, DC
1898 Foundation, Inc., Rockville, MD
ABC XXI-Child Awareness Program for
Poland, Inc., Alexandria, VA
Academy of Missouri Educational
Network of Graduate Dogs, Inc.,
Warrenton, MO
Accept the Challenge, Inc.,
Minneapolis, MN
Achievements Worldwide, Inc.,
Waldorf, MD
Adopt a Grandparent Foundation,
Fairfield, IA
AFD Foundation, Inc., Southfield, MI
African American Institute for
Empowerment, Inc., Waterbury, CT
African Heritage Foundation, Inc.,
Washington, DC
African Wholistic Health Association,
Washington, DC
Afrikan Rites of Passage Delaware
Kollective, Inc., Wilmington, DE
Alva Consortium, Inc., Washington, DC
Amani Clergy Coalition, Milwaukee, WI
America-China International Exchange
Foundation, Inc., Washington, DC
American Charities Research Institute,
Lincoln, NE
American Heritage Rivers Alliance, Inc.,
Washington, DC
American Recreational Services
Association, Inc., Twin Falls, ID
American Service Dog Association,
Manchester, MO
American Submarine Memorial
Restoration Foundation, Inc.,
Fairfax, VA
Americans for Self Determination, Inc.,
Arlington, VA
Angels for Children Foundation,
Incorporated, Northfield, MN
Apex Booster Club, Roseland, KS
Apocalypse Outreach Center, Inc.,
White Pigeon, MI
Apostolic Ministerial Alliance, Inc.,
Randallstown, MD
Ariadne Press of Maryland, Inc.,
Rockville, MD
Ark of Safety Center, Inc., St. Louis, MO
Arka Ballet, Takoma Park, MD
Arrowhead RegionalEntrepreneurship
Project, Inc., Duluth, MN
Artist on the Edge Ice Theater Company,
Minneapolis, MN
Asnew Disability Support Services,
Ames, IA
Association for Children and Infants With
Digestive Disorders, Newark, DE
B. Tate Hibschman Memorial Scholarship
Fund, Inc., Abingdon, MD
Backroads for Books, Olathe, KS
Baldwin City Clear Foundation,
Baldwin City, KS
Baltimore Committee for International
Wrestling, Inc., Cockeysville, MD
Baltimore Select, Inc., Baltimore, MD
Baltimore Teacher Network,
Baltimore, MD
Bandoneon Association, Incorporated,
Bethesda, MD
Bangladeshi-American Foundation, Inc.,
Potomac, MD
Baraboo Firefighters Fundraising
Association, Inc., Baraboo, WI
Bea Gaddy Human Resources Center,
Inc., Baltimore, MD
Beer Museum, Ltd., Oconomowoc, WI
Beginning Environment for Addiction
Recovery, Fargo, ND
Bel Sogno, Inc., Waleska, GA
Benevolence Alliance International, Inc.,
West Union, IA
Benjamin Welch Owens Monument Fund,
Inc., Upper Marlboro, MD
Berkley Community League, Inc.,
Norfolk, VA
Bertha Hughes Concert Series, Inc.,
Topeka, KS
Bethel A M E Church Foundation, Inc.,
Ann Arbor, MI
Better Community Foundation,
Clayton, MO
Bible Search Publications, Inc.,
Winona, MN
Bigga Enterprises, Inc., St. Louis, MO
Bishop Bush Home Care, Clinton, MD
Black College Information Network, Inc.,
Washington, DC
Black West Presentations, Inc.,
Harrisonville, MO
Bobby Zipper Foundation, Inc.,
Baltimore, MD
Bolling View Corporation, Inc.,
Washington, DC
Boys and Girls Club of Dane County, Inc.,
Madison, WI
Branson Gospel Music Association,
Branson, MO
Bread of Life Ministries International,
Inc., Burnsville, MN
Brice Transitional Care Home, Inc.,
Baltimore, MD
Brighton Lions Community Den,
Brighton, MI
Buchanan County Humane Society,
Vansant, VA
Buffalo KS Historical Society, Inc.,
Buffalo, KS
Building Eminence Schools for
Tomorrow, Eminence, MO
Busy Bee Early Learning Center, Inc.,
Linden, NJ
Butler County Veterans Memorial Fund,
Poplar Bluff, MO
Butler Youth Wrestling Club, Butler, MO
C D E O, Laytonsville, MD
Cadott Hunter-Education Association,
Inc., Cadott, WI
Calumet County Tourism Association,
Inc., Chilton, WI
Cameras for Students, Silver Spring, MD
Camp Crystal Foundation, St. Louis, MO
Camp Grayling Historical Society,
Camp Grayling, MI
Cannon Vermillion Watersheds Protection
League, Welch, MN
Capital Area Astronomy Association,
Potterville, MI
Capital Press Club, Washington, DC
Carlton Corporation I, Milwaukee, WI
Carpenter Medical Publishing, Inc.,
Washington, DC
Carroll County Genealogical Association,
Carrollton, MO
Carrollsburg Residence Council, Inc.,
Washington, DC
Caryl Proud Horty Scholarship Fund Tr.,
Wilmington, DE
Cat Wrestling Club, Inc., Cedar Falls, IA
Cedar Vale Teen Center, Inc.,
Cedar Vale, KS
Celebration of Life Art Program,
Minneapolis, MN
2004-15 I.R.B.738April 12, 2004

Center for Humanity,
Montgomery Village, MD
Center for Patient Advocacy Foundation,
McLean, VA
Center for Timett, Inc., Howell, NJ
Center for Workers Compensation
Studies, Inc., Lacey, WA
Champbuilder Amateur Wrestling, Inc.,
Middleton, WI
Changing Faces, Inc., Baltimore, MD
Charles County Community Youth Center,
Inc., Bryantown, MD
Chesapeake Deep Creek Hornets AAU
Baseball Club, Chesapeake, VA
Chesapeake Dispute Resolution Center,
Inc., Annapolis, MD
Chesapeake Habit Restoration Trust,
Silver Spring, MD
Child Access Center, Inc., Baltimore, MD
Child Care Development, Inc.,
Wichita, KS
Child Intervention Center, Superior, WI
Childrens Book Bank, Kalamazoo, MI
Childrens Community Foundation,
Shawnee Mission, KS
Childrens Rainbow Foundation,
Parkville, MO
Childs Eyes Ministries, Hart, MI
Chilton Youth Football Association, Inc.,
Hilbert, WI
Choice Leaders of Tomorrow, Inc.,
St. Louis, MO
Christ the King Institute Women
Auxiliary and Legionary Group,
Silver Spring, MD
Christian Foundation, Inc., Madison, WI
Christian Law Enforcement Fellowship,
Ann Arbor, MI
Citizens for Learning Everything-Amoco
Negligence & Underground Clean Up,
Sugar Creek, MO
Coldwater Scholarship Bowling, Inc.,
Coldwater, MI
Colesville Sports Association,
Silver Spring, MD
Combat Disabled American Veterans,
Stacy, MN
Community Care Programs, Inc.,
Middleton, WI
Community Caring for People, Inc.,
Sterling, VA
Community Credit Counseling Services,
Inc., Beltsville, MD
Community Development Corporation of
Benton Harbor, Benton Harbor, MI
Community Institute for Family
Resources, Inc., Milwaukee, WI
Community Stabilization,
Los Angeles, CA
Comparative Government Forum,
Washington, DC
Conrath Housing, Inc., Almena, WI
Contemplative Outreach of Metropolitan
Washington, Inc., Washington, DC
Core City Planning Group,
Des Moines, IA
Council for Global Education,
Kingstowne, VA
Crayon, Inc., Milwaukee, WI
Creative Writing Education Foundation,
Inc., Green Bay, WI
Crime Victims for a Just Society,
Mason, MI
Cross Border Network for Justice and
Solidarity, Kansas City, MO
Cross Foundation, Inc., Baltimore, MD
Crossing Ministries, St. Paul, MN
Crow River BMX, Inc.,
Saint Michael, MN
CSE Foundation Corporation,
New Berlin, WI
Cuyuna Range Fire Chiefs Association,
Brainerd, MN
CWE Housing Corporation,
St. Louis, MO
D C Parents for School Choice,
Washington, DC
D L Youth Wrestling Organization, Inc.,
Detroit Lakes, MN
Damali, Inc., Capitol Heights, MD
Daniel Boone Baseball Association,
St. Peters, MO
Danville Soccer Club, Inc., Danville, VA
David Goliath Foundation, Inc.,
Saint Louis, MO
Daystar Commission, Des Moines, IA
Deaf Choices, Inc., Minneapolis, MN
Deaf Services Foundation, Inc.,
Grand Island, NE
Derrick Hale Foundation, Detroit, MI
Dining on the Word Ministries,
Houston, MS
Direct Impact 10–40, South St. Paul, MN
Directors of Continuation Services, Inc.,
Milwaukee, WI
Dwayne Friend Crusades, Inc.,
Rogersville, MO
East Buchanan Parent Teacher
Organization PTO, Winthrop, IA
East Troy Area Lakes Land Trust, Inc.,
East Troy, MI
Economic Development Forum,
Southfield, MI
Edina Youth Softball Association,
Edina, MN
Educational Discovery Programming,
Washington, DC
Elishas Rock Educational, Inc.,
Columbia, MO
Emmanuel MinistriesInternational, Inc.,
Baltimore, MD
Enter the Walls Ministry, Ltd.,
Suitland, MD
Environment Development and
Educational Fund, Washington, DC
Ethiopian Gospel Mission Association
NC, Arlington, VA
Excellence in Catholic & Christian
Education, Inc., Alexandria, VA
Exodus, Isanti, MN
Experiential Endeavors, Inc.,
Columbia, MO
Faith Builders S D A International Corp.,
Metairie, LA
Family Harbor, Omaha, NE
Family Recreational Park of Georgetown,
Georgetown, DE
Family Violence Council of the City of
St. Louis, St. Louis, MO
Family Watch, Alexandria, VA
First Presbyterian Church of Ferguson
Transitional Housing Corp.,
Ferguson, MO
First Promise Foundation, Inc.,
Pawleys, SC
First State YHEC Program, Inc.,
Hockessin, DE
Fish Rod, Inc., Washington, DC
Fishes & Loaves from Jesus Christ, Inc.,
Fargo, ND
Fleming Huner Foundation, Inc.,
Randallstown, MD
Florida Avenue Renaissance Project, Inc.,
Washington, DC
Fort Dodge Senior High Choir Boosters,
Inc., Fort Dodge, IA
Foundation for Global Catholic
Communications, Washington, DC
Foundation for Sustainable Development
With Human Values, Inc.,
Washington, DC
Four Chaplains Foundation,
Minneapolis, MN
Franciscan Servants of Jesus, Prescott, WI
Franklin County Youth Athletic
Association, Inc., Washington, MO
Freedom Fest Celebration, Inc.,
Earlham, IA
Friends Foundation, Annapolis, MD
Friends of Carter Rockwell Museum,
New Hope, MN
Friends of Governor Nelson State Park,
Inc., Madison, WI
April 12, 20047392004-15 I.R.B.

Friends of India, Inc., Hyattsville, MD
Friends of Quivira National Wildlife
Refuge, Inc., St. John, KS
Friends of Takoma Recreation Center,
Washington, DC
Friends of the Babbitt Public Library, Inc.,
Babbitt, MN
Friends of the Collins Public Library,
Collins, IA
Friends of the Madison County Fair,
Madison, NE
Friends of the National Institute of
Dental & Craniofacial Research,
Washington, DC
Friends of the Saline Area Fire
Department, Inc., Ypsilanti, MI
Friends of Thomas G. Pullen K-8 Arts
Magnet School, Inc., Bethesda, MD
Friends of Wilderness Park, Inc.,
Lincoln, NE
Friends Project, Inc., Washington, DC
From House to Home, Inc.,
Baltimore, MD
Frontier Wild, Ankeny, IA
Future Foundation Home, Inc.,
Milwaukee, WI
Garden Community Development, Inc.,
Wilmington, DE
Gathered in His Name, Perryville, MO
Genesis Company USA, Lebanon, MO
Genesis Ministries, Inc., St. Albans, WV
Georgetown MBA Community Service
Fund, Washington, DC
German Shepherd Rescue of Maryland,
Inc., Riverdale, MD
Ghana Health Foundation,
Washington, DC
Gibson-Chestnut Eney Memorial
Tournament, Inc., Arlington, VA
Gibson Network, Inc., Minneapolis, MN
Glenville-Emmons School & Community
Foundation, Inc., Glenville, MN
Global Development Center,
Washington, DC
Global Youth Development, Inc.,
Kansas City, MO
Glorious Light Christian Foundation,
Newark, DE
Gods Wheels, Inc., Kansas City, MO
Good Samaritan Assisted Living, Inc.,
St. Louis, MO
Good Samaritan Independent Living, Inc.,
Valley Park, MO
Good Samaritan Network of Maryland,
Front Royal, VA
Goshen Staff Alumni Association, Inc.,
Gaithersburg, MD
Gospel Music Arts Coalition,
St. Louis, MO
Government Training Institute
Foundation, Inc., Alexandria, VA
Granville Sharpe Institute, Inc.,
Lanham, MD
Great Lakes Ancient Field Musick,
Ray, MI
Greater Harvest Housing Corp.,
Baltimore, MD
Green Central Safe Haven,
Minneapolis, MN
Greenmount Computer Center, Inc.,
Baltimore, MD
Gretna Gro Foundation, Gretna, NE
Grodno Genealogy Group, Inc.,
Minneapolis, MN
Ground Zero Foundation, Bear, DE
Gwendolyn, Inc., Salisbury, NC
Hallsville Community Betterment,
Hallsville, MO
Hampton Roads Youth Foundation,
Alexandria, VA
Harpers Ferry Conservancy,
Harpers Ferry, WV
Haven of Hope, Kansas City, MO
Hayman House, Inc., New Castle, DE
Health and Wealth Group of Maryland,
Columbia, MD
Healthcare Roundtable Institute,
Westlake Village, CA
Heartland Peony Society,
Kansas City, MO
Helping Hand of Goodwill Industries of
Kansas, Inc., Topeka, KS
Heritage Achievement Foundation,
Centreville, VA
Herlihy Resident Council, Inc.,
Wilmington, DE
Hesperia Fire Department Auxiliary,
Hesperia, MI
Hesston Area Teens, Inc., Hesston, KS
Historic Educational Concepts, Inc.,
Salem, MO
Historic Fell Point Foundation, Inc.,
Baltimore, MD
Hospitality Center for Renewed Hope,
Inc., Timonium, MD
Humanitarian Relief Foundation of
the Am Cham Dominican Republic,
Washington, DC
HWS Therapy, Inc., Wichita, KS
Impact Twin Cities, Inc., St. Paul, MN
Inca Imports Corp., Warrenton, VA
Independence Neighborhood Watch, Inc.,
Independence, MO
Independent Demining Assessment
Center, Inc., Washington, DC
India Forum for Liberty & Justice, Inc.,
Takoma Park, MD
Indigenous Games Sports and Events
Management, Fargo, ND
Indigenous Stewardship Systems,
Manderson, SD
Inter-Agency Council on Child Abuse and
Neglect, Columbia, MO
Intercollegiate Taiwanese American
Students Association, Providence, RI
Interfacing, Sewickley, PA
International Charitable Assistance
Council, Inc., Rockville, MD
International Fund for the 21st Century,
Southgate, MI
International Society of Agile
Manufacturing, Lafayette, LA
Intersection, Maple Grove, MN
Islamic Knowledge Services, Inc.,
Chesterfield, MO
Iyas Community House, Detroit, MI
Jacobs Ladder, Inc., St. Louis, MO
James Madison Project, Washington, DC
Jasper County Youth Fair Foundation,
Inc., Joplin, MO
Joshua M. Gordon SMA Foundation, Inc.,
Rockville, MD
Journeymakers, Urbandale, IA
Juma Trust, Inc., New York, NY
Kansans Respond, Topeka, KS
Kansas City Arts Initiative, Inc.,
Kansas City, MO
Kansas City International Art Museum,
Inc., Kansas City, MO
Kansas Mental Health Association,
Topeka, KS
Karl Potach Foundation, Austin, MN
KC Fury, Inc., De Soto, KS
Kendall Burrows Foundation, Inc.,
Lutherville, MD
Kickapoo Color Guard Booster Club,
Springfield, MO
Kids N Bits Therapeutic Riding Program,
Teays, WV
Kidsway Booster Club, Coffeyville, KS
Kidzarts, Inc., Manitowoc, WI
KK and Friends, Inc., Rockville, MD
Kujichagulia, Inc., Baltimore, MD
L Eagles, Inc., Olathe, KS
Lakes Area Not for Profit Council,
Branson W, MO
Langston Dwelling Resident Council
Foundation, Silver Spring, MD
Last Call Ministries, Lincoln, NE
Lavista West Parent Auxiliary Wolf Staff,
Lavista, NE
Leading Image Development Corporation,
Clinton, MD
2004-15 I.R.B.740April 12, 2004

Lean on Me Community Services and
Outreach, Dallas, TX
Life Changers, Inc., Newport, DE
Lift for Life, Peculiar, MO
Light Up the Bridges, Inc.,
Charleston, WV
Lincoln Park Historical Foundation, Inc.,
Rockville, MD
Linn County Community Foundation,
La Cygne, KS
Literacy Roundtable, St. Louis, MO
Logan Community Foundation, Logan, IA
Lome Foundation, Inc., Gaithersburg, MD
Lord & Svensen, Inc., Delavan, WI
Loudoun Heritage Farm Museum,
Leesburg, VA
Madison Idea Foundation, Inc.,
Madison, WI
Madison Revitalization and Community
Development Corporation, Madison, WI
Magic City Junior Golf Association,
Minot, ND
Mahkato Mdewakanton Association,
St. Paul, MN
Main Street Revue, Inc., Coleman, WI
Manhattan Area Football Association,
Manhattan, KS
Marko Foundation, Ltd.,
Clinton Township, MI
Martial Arts Serving Kids, Excelsior, MN
Maryland Family Christian Center
Church, Capitol Heights, MD
Mayo Island Cultural and Recreational
Association, Inc., Richmond, VA
McDowell County F A C E S, Welch, WV
Meca Foundation, Bowie, MD
Medasyst Caring Foundation, Inc.,
Ottumwa, IA
Mercers Mills, Inc., Newark, DE
Message of the Heart, Inc., Richfield, MN
Messiah Ministries International, Inc.,
Front Royal, VA
Metro Western Trailriders,
Washington, DC
Metropolitan A M E Church
Community Development Corporation,
Washington, DC
Michigan School Board Leaders
Association, Davison, MI
Michigan Spartans Boys & Girls
Basketball Association, Inc.,
Lathrup Vlg, MI
Michigan Urban Search & Rescue
Training Foundation, Inc.,
Ann Arbor, MI
Midwest Media Arts Foundation,
Kansas City, MO
Mihan Foundation, New York, NY
Mills Godwin Honorary Foundation,
Norfolk, VA
Milwaukee Allstar Basketball &
Youth Development Association,
Milwaukee, WI
Milwaukee National Organization
for Women Education Fund, Inc.,
Milwaukee, WI
Minnesota Men of Color,
Minneapolis, MN
Minnesota Policy Forum, St. Paul, MN
Miracle of Women, Washington, DC
Missourians for Clean Government,
Saint Louis, MO
Mobile Care for Africa, Inc., McLean, VA
Monitors Foundation, Eagan, MN
Mothers Touch, Minneapolis, MN
MS Wheelchair Maryland, Inc.,
Chevy Chase, MD
Mt. Horeb Professional Police
Association, Inc., Mt. Horeb, WI
Multilateral Middle East Initiative,
Bloomington, MN
Mzuzu Womens and Childrens Health
Center USA, Inc., Silver Spring, MD
National Capital Community Service
Academy, Washington, DC
National Public Health Forum, Inc.,
Columbia, MD
Native American Development
Association, Incorporated, Keshena, WI
Nautic Sceptor, Brownstown, MI
Nebraska Youth Sports Organization, Inc.,
Omaha, NE
Neighbors Concerned About Yacht Club
Expansion, Grosse Pointe Shores, MI
Neutral Zone, Inc., Ewing, VA
New Beginnings Family Development
Centre, Inc., Willard, MO
New Cornerstone, Inc., St. Louis, MO
New Generation Training & Learning
Center, Washington, DC
New Promise Home for Children,
Olathe, KS
Nice Shot Tennis Association,
Kalamazoo, MI
Ninth Street Phyllis Wheatley Association,
Wichita, KS
No More Victims, Grand Rapids, MI
Nomads of Annapolis, Inc.,
Ellicott City, MD
North Basketball Association, Inc.,
Rapid City, SD
North Dakota Labor Education Council,
Bismarck, ND
Northeast Community Development
Corporation, Wilmington, DE
Northern Flight Assist, Inc., Shawano, WI
Northern Waters Library Foundation, Inc.,
Ashland, WI
Northland Family & Children Support
Council, Inc., Kansas City, MO
Northside Inner City Environmental Task
Force, Minneapolis, MN
Northwest Middle Schools Cheerleading
Association, High Ridge, MO
Not Failing at Life, Arthurdale, WV
Olrayma, Inc., St. Louis, MO
Omaha Elite Girls Fastpitch Association,
Omaha, NE
Omaha World Herald Branching Out
Charitable Foundation, Omaha, NE
Ondo Grammar School Old Students
Association, Washington, DC
One Step Ahead Day Care, Inc.,
Racine, WI
Open Word Teaching Ministries,
Maryland Heights, MO
Our Savior Lutheran Church Foundation,
Wayne, NE
Outside the Walls Foundation, Eagan, MN
Ozark Competition Soccer League, Inc.,
Webb City, MO
Ozarks Angels Basketball, Inc.,
Springfield, MO
Page County Senior Alliance, Inc.,
Luray, VA
Pamaro Arts Society, Overland Park, KS
Parenting 2000, Inc., Clayton, MO
Parish Net, Inc., Kensington, MD
Parish Nurse Institute, Minneapolis, MN
Paws for People, Blaine, MN
Penelope 38 Charitable Tr., Elkhart, IA
Peoples Alternative Service System, Inc.,
Baltimore, MD
Philantrotech, Inc., Lowell, MI
Pinckney Community Center,
Pinckney, MI
Pine Island Union for Youth, Inc.,
Pine Island, MN
Pioneer Acres Lodge, Inc., Appleton, WI
Play for Peace, Washington, DC
Playmates Christian Learning Center,
Fargo, ND
Plymouth Westside Players,
Plymouth, MN
Polish Heritage Society of Nebraska, Inc.,
Papillion, NE
Pop Sustainability, Inc., New York, NY
Prairie Haven, Inc., Sioux City, IA
Preservation Management Institute,
Monticello, MN
Pro K9, Inc., Omaha, NE
Professor Pockets Ministries, Inc.,
Poca, WV
April 12, 20047412004-15 I.R.B.

Progressive Advocacy Support Services,
Traverse City, MI
Project for Helping Other People Evolve,
Inc., Washington, DC
Project on Liberty and the Workplace,
Washington, DC
Project Taney, Inc., Hollister, MO
Project Tough, Inc., Baltimore, MD
Providers at Midnight Organization,
Maplewood, MN
Pulaski County Library Building
Corporation, Lebanon, MO
Quaker Workcamps International,
Washington, DC
Radiant Ministries, Westphalia, KS
Radio Fair America, Washington, DC
Raemar Early Childhood Services, Inc.,
Parkersburg, WV
Rails on Wheels, Saline, MI
Rainbow Academy, Inc.,
Ft. Washington, MD
Rainbow Refuge, Inc., St. Louis, MO
Rainforest Cafe Friends of the Future
Foundation, Houston, TX
Raymore-Peculiar Soccer Club,
Raymore, MO
Recovered Wishes, Inc., Springfield, MO
Research Institutes Faculty of Arch
Museology Relics of Bejing University,
Inc., Washington, DC
Resident Council of the James Building,
Washington, DC
Resources, Inc., Houston, TX
Restoration House of America, Inc.,
Rancho Santa Margari, CA
Rich Recovery, Inc., Madison, WI
Richard Allen Housing Corporation,
Milwaukee, WI
Richard L. Danforth Foundation, Inc.,
Lenexa, KS
Rise Zing Akh Unsickle Cell Corp.,
Norfolk, VA
Road Home Ministries, Inc.,
Baltimore, MD
Rockwood Summit In-Line Hockey Club,
Fenton, MO
Sadoi, Inc., Ann Arbor, MI
Safety-ID, Inc., Rockville, MD
Saints Wrestling Club, Inc., Sioux City, IA
Salina Rescue Mission Foundation,
Salina, KS
Saline Area Fibromyalgia Syndrome &
Chronic Fatigue Syndrome, Salina, KS
School Choice Michigan, Midland, MI
Second Chance Dobes, Clinton, MI
Second Chance Saint Bernard Rescue,
Inc., Andover, MN
Self Reliance Foundation, Greendale, WI
Senior Objective Foundation,
Washington, DC
Sentinel the Guarded Place, Inc.,
Baltimore, MD
Sevastopol Community Auditorium
Foundation, Inc., Sturgeon Bay, WI
Shared Housing, Inc., Poynette, WI
Sheepgate Ministries, Richmond, VA
Sherman Street Community
Empowerment Center,
Grand Rapids, MI
Shield of Faith Full Gospel Baptist
Church, St. Louis, MO
Sig Jacobson Museum, Brocket, ND
Silex Improvement Program, Silex, MO
Small Wonders Foundation, Lincoln, NE
Smithville Arts Council, Smithville, MO
Somali Bravan Community of Minnesota,
Inc., Minneapolis, MN
Somali Resource Center,
Minneapolis, MN
South Dakota Nonprofit Association,
Sioux Falls, SD
Space Business Archives, Alexandria, VA
Speaking in Tongues, Maple Grove, MN
Spirituality Resource Center, Salina, KS
Sportsworks, Inc., High Ridge, MO
St. Louis Archaeology, Inc.,
St. Louis, MO
St. Louis German Golf Classic,
St. Louis, MO
St. Louis Lightning Fastpitch Softball
Club, Inc., Chesterfield, MO
St. Louis Stars, Chesterfield, MO
St. Louis Torah Federation, St. Louis, MO
Storybook Farms, Inc., Montgomery, MO
Sudanese Community Center, Inc.,
Falls Church, VA
Support Centers of America, McLean, VA
Sweet Springs Community Food Pantry,
Sweet Springs, MO
Systems, Inc., Kansas City, MO
Teen Centers, Inc., Wichita, KS
Tender Loving Care, Inc., Pacific Jct., IA
TLC Respite Care, Sparta, VA
Topeka Siamese Rescue of Kansas, Inc.,
Topeka, KS
Total Debt Management, Inc.,
Pikesville, MD
Tour Bandits Inline Hockey Club, Inc.,
Saint Charles, MO
Traditional African Peoples Institute, Inc.,
Kansas City, MO
Transitional Concepts, St. Paul, MN
Treat, Inc., Washington, DC
Tri-State Office of Juvenile Justice
& Delinquency Prevention, Inc.,
Huntington, WV
Twin Bridges Development Corporation,
Crane, MO
Umjima Prison Adoption, Incorporated,
St. Louis, MO
United Parents, Inc., Wichita, KS
Upenzi Kwetu Here There is Love,
St. Paul, MN
Valley Community Foundation for
Lifelong Learning, Inc., Elgin, IA
Vietnam Center for Community Activity,
Chesterfield, MO
Virginia Forward, Inc., Arlington, VA
Virtual Association of Lotus Users Across
the Enterprise, Inc., Wayne, PA
Visually Impaired Students Congressional
Internship Program, Washington, DC
WACIF Initiatives, Inc., Washington, DC
Walkers in Darkness, Inc., Columbia, MD
Waokiye, Inc., Wilmington, DE
Washington D C African American
Museum, Washington, DC
Waterbearer Missions International, Inc.,
Beckley, WV
WCOE Resource Center, Inc.,
Washington, DC
Web of Time, Inc., Williamsburg, VA
West Anne Arundel County Chamber
Foundation, Inc., Odenton, MD
West End Business Revitalization
Corporation, St. Paul, MN
West Virginia Celtic Society, Ltd.,
Hurricane, WV
West Virginia Youth Basketball
Corporation, Dunbar, WV
Westside Warrior Basketball Club,
Omaha, NE
White Buffalo Gazette, Inc., Haysville, KS
Wholeness Center, Richfield, MN
Wilderness Kingdom Zoo, Inc.,
Bloomfield, IA
Winterset Quarterback Club, Inc.,
Winterset, IA
Women on a Mission, Kansas City, MO
Women With Hope, Incorporated,
Falls Church, VA
Womens Prison Chapel Foundation,
Mitchellville, IA
World Evangelism Association, Inc.,
Urbandale, IA
Worldwide Coalition for the Spiritual
Development of African Church,
Washington, DC
Wyandotte County Grief Resources
and Information Program, Inc.,
Kansas City, KS
Yes Lord Community Development
Corporation, Inc., Newark, NJ
2004-15 I.R.B.742April 12, 2004

Young Peoples Center, Inc.,
Point Pleasant, WV
Youth Basketball Association,
Gordon, NE
Youth Outreach, Inc., Blue Springs, MO
Youth Performance Concepts, Inc.,
Lynchburg, VA
Youth Sports Initiative, Inc.,
Kansas City, MO
Youthway Ministries, Blaine, MN
If an organization listed above submits
information that warrants the renewal of
its classification as a public charity or as
a private operating foundation, the Inter-
nal Revenue Service will issue a ruling or
determination letter with the revised clas-
sification as to foundation status. Grantors
and contributors may thereafter rely upon
such ruling or determination letter as pro-
videdinsection1.509(a)–7oftheIncome
Tax Regulations. It is not the practice of
the Service to announce such revised clas-
sification of foundation status in the Inter-
nal Revenue Bulletin.
Announcement and Report Concerning Advance Pricing Agreements
Announcement 2004–26
March 3
0, 2004
This Announcement is issued pursuant to § 521(b) of Pub. L. 106–170, the Ticket to Work and Work Incentives Improvement Act
of 1999, which requires the Secretary of the Treasury to report annually to the public concerning Advance Pricing Agreements
(APAs) and the APA Program. The first report covered calendar years 1991 through 1999. Subsequent reports covered calendar
years 2000, 2001, and 2002. This fifth report describes the experience, structure and activities of the APA Program during
calendar year 2003. It does not provide guidance regarding the application of the arm’s length standard.
Matthew W. Frank
Director, Advance Pricing Agreement Program
Backg
round
Internal Revenue Code (IRC) § 482 providesthat the Secretary may distribute, apportion, or allocate gross income, deductions,
credits, or allowances between or among two or more commonly controlled businesses if necessary to reflect clearly the income
of such businesses. Under the regulations, the standard to be applied in determining the true taxable income of a controlled
business is that of a business dealing at arm’s length with an unrelated business. The arm’s length standard also has been
adopted by the international community and is incorporated intothe transfer pricing guidelines issued by the Organization for
Economic Cooperation and Development (OECD). OECD,TRANSFER PRICING GUIDELINES FOR MULTINATIONAL
ENTERPRISES AND TAX ADMINISTRATORS (1995). Transfer pricing issues by their nature are highly factual and have
traditionally been one of the largest issues identified by the IRS in its audits of multinational corporations. The APA Program
is designed to resolve actual or potential transfer pricing disputes in a principled, cooperative manner, as an alternative to the
traditional examination process. An APA is a binding contract between the IRS and a taxpayer by which the IRS agrees not to
seek a transfer pricing adjustment under IRC § 482 for a covered transaction if the taxpayer files its tax return for a covered year
consistent with the agreed transfer pricing method (TPM). In2003, the IRS and taxpayers executed 58 APAs and amended 4 APAs.
Since 1991, with the issuance of Rev. Proc. 91–22, 1991–1 C.B. 526, the IRS has offered taxpayers through the APA Program
the opportunity to reach an agreement in advance of filing a tax return on the appropriate TPM to be applied to related party
transactions. In 1996, the IRS issued internal procedures for processing APA requests. Chief Counsel Directives Manual
(CCDM), ¶¶ 42.10.10 - 42.10.16 (November 15, 1996). Also in 1996, the IRS updated Rev. Proc. 91–22 with the release of Rev.
Proc. 96–53, 1996–2 C.B. 375. The APA Program continues to operate under the provisions of Rev.Proc. 96–53, which provides
taxpayers with instructions of how to apply for an APA, and what to expect in the processing of the case. In addition, in 1998,
the IRS published Notice 98–65, 1998–2 C.B. 803, which set forth streamlined APA procedures for Small Business Taxpayers
(SBTs). That Notice also expanded the availability of the lowest APA user fee in an effort to attract taxpayers who may not have
the resources to do the sophisticated economic studies normallyrequired in APA submissions.
A
dvance Pricing Agreements
An APA generally combines an agreement between a taxpayer andthe IRS on an appropriate TPM for the transactions at issue
(Covered Transactions) with an agreement between the U.S. andone or more foreign tax authorities (under the authority of the
mutual agreement process of our income tax treaties) that the TPM is correct. With such a“bilateral” APA, the taxpayer ordinarily
is assured that the income associated with the Covered Transactions will not be subject to double taxation by the IRS and the
foreign tax authority. It is the policy of the United States, as reflected in § 7 of Rev. Proc. 96–53 to encourage taxpayers that enter
the APA program to seek bilateral or multilateral APAs when competent authority procedures are available with respect to the
foreign country or countries involved. However, the IRS may execute anAPA with a taxpayer without reaching a competent
authority agreement (a “unilateral” APA).
April 12, 20047432004-15 I.R.B.

A unilateral APA is an agreement between a taxpayer and the IRS establishing an approved TPM for U.S. tax purposes. A
unilateral APA binds the taxpayer and the IRS, but obviously doesnot prevent foreign tax administrations from taking different
positions on the appropriate TPM for a transaction. As stated inRev. Proc. 96–53, should a transaction covered by a unilateral
APA be subject to double taxation as the result of an adjustment by a foreign tax administration,the taxpayer may seek relief by
requesting that the U.S. Competent Authority consider initiating a mutual agreement proceeding,provided there is an applicable
income tax treaty in force with the other country.
When a unilateral APA involves taxpayers operating in a country that is a treaty partner, information relevant to the APA
(including a copy of the APA and APA annual reports) may be provided to the treaty partner under normal rules and principles
governing the exchange of information under income tax treaties.
The APA Program
An IRS team headed by an APA team leader is responsible for the consideration of each APA. As of December 31, 2003, the
APA program had 18 team leaders. The team leader is responsible for organizing the IRS APA team. The IRS APA team
arranges meetings with the taxpayer, secures whatever information is necessary from the taxpayer to analyze the taxpayer’s
related party transactions and the available facts under the arm’s length standard of IRC § 482 and the regulations thereunder
(Treas. Reg.), and leads the discussions with the taxpayer.
The APA team generally includes an economist, an internationalexaminer, LMSB field counsel, and, in a bilateral case, a U.S.
Competent Authority analyst who leads the discussions with the treaty partner. The economist may be from the APA Program or
the IRS field organization. As of December 31, 2003, the APAProgram had 7 economists. The APA team may also include an
LMSB International Technical Advisor, other LMSB exam personnel, and an Appeals officer.
The APA Process
The APA process is voluntary. Taxpayers submit an application for an APA, together with a user fee as set forth in Rev. Proc.
96–53. The APA process can be broken into five phases: (1) application; (2) due diligence; (3) analysis; (4) discussion and
agreement; and (5) drafting, review, and execution.
(1)A
pplication
In many APA cases, the taxpayer’s application is preceded by a pre-file conference with the APA staff in which the taxpayer
can solicit the informal views of the APA Program. Pre-file conferences can occur on an anonymous basis, although a taxpayer
must disclose its identity when it applies for an APA. Taxpayers must file the appropriate user fee on or before the due date
of the tax return for the first taxable year that the taxpayer proposes to be covered by the APA. Many taxpayers file a user
fee first and then follow up with a full application later. The procedures for pre-file conferences, user fees, and applications
can be found in Rev. Proc. 96–53.
The APA application can be a relatively modest document for a small business taxpayer. Notice 98–65 describes the special
APA procedures for small businesses. For most taxpayers, however, the APA application is a substantial document filling
several binders. The APA Program makes every effort to reachagreement on the basis of theinformation provided in the
taxpayer’s application.
The application is assigned to an APA team leader who is responsible for the case. The APAteam leader’s first responsibility is to
organize the APA team. This involves contacting the appropriate LMSB International Territory Manager to secure the assignment
of an international examiner to the APA case and the LMSB Counsel’s office to secure a field counsel lawyer. In a bilateral case,
the U.S. Competent Authority will assign a U.S. Competent Authority analyst to the team. In a large APA case, the international
examiner may invite his or her manager and other LMSB personnel familiar with the taxpayer to join the team. When the APA
may affect taxable years in Appeals, the appropriate appellate conferee will be invited to join the team. In all cases, the team
leader contacts the Manager, LMSB International Technical Advisors, to determine whether to include a technical advisor on
the team. The IRS APA team will generally include a technical advisor if the APA request concerns cost-sharing, intangibles
or services. The APA team leader then distributes copies of the APA application to all team members and sets up an opening
conference with the taxpayer. The APA office strives to hold this opening conference within 45 days of the assignment of the case
to a team leader. At the opening conference, the APA team leaderproposes a case plan designed to complete the recommended
U.S. negotiating position for a bilateral APA within 9 months from the date the full application was filed and to complete a
unilateral APA within 12 months from the application date. In 2003, the median for completing negotiating positions was 15.2
months (average 15.3), and the median for completing unilateral APAs was 9.2 months (average 20.0).
2004-15 I.R.B.744April 12, 2004

(2)DueDiligence
The APA team must satisfy itself that the relevant facts submittedby the taxpayer are complete and accurate. This due diligence
aspect of the APA is vital to the process.It is because of this due diligence that the IRS can reachadvance agreements with
taxpayers in the highly factual setting of transfer pricing. Due diligence can proceed in a number of ways. Typically, the taxpayer
and the APA team will agree to dates for future meetings during theopening conference. In advance of the opening conference,
the APA team leader will submit a list of questions to the taxpayer for discussion. The opening conference may result in a second
set of questions. These questions are developed by the APA teamand provided to the taxpayer through the APA team leader. It is
important to note that this due diligence is not an audit and is focused on the transfer pricing issues associated with the transactions
in the taxpayer’s application, or such other transactions that the taxpayer and the IRS may agree to add.
(3)A
nalysis
A significant part of the analytical workassociated with an APA is done typically by the APA or IRS field economist assigned to
the case. The analysis may result in the need for additional information. Once the IRS APA team has completed its due diligence
and analysis, it begins negotiations with the taxpayer over the various aspects of the APA including the selection of comparable
transactions, asset intensity and other adjustments, the TPM, whichtransactions to cover, the appropriate critical assumptions, the
APA term, and other key issues. The APA team leader will discuss particularly difficult issues with his or her managers, but
generally the APA team leader is empowered to negotiate the APA.
(4)D
iscussionandAgreement
This phase differs for bilateral and unilateral cases. In a bilateral case, the discussions proceedin two parts and involve two IRS
offices — the APA Program and the U.S. Competent Authority. In the first part, the APA team will attempt to reach a consensus
with the taxpayer regarding the recommended position that the U.S. Competent Authority should take in negotiations with its
treaty partner. This recommended U.S. negotiating position is a paper drafted by the APA team leader and signed by the APA
Director that provides the APAProgram’s view of the best TPM for the covered transaction, taking into account IRC § 482 and
the regulations thereunder, the relevanttax treaty, and the U.S. Competent Authority’s experience with the treaty partner.
The experience of the APA office and the U.S. Competent Authority is that APA negotiations are likely to proceed more rapidly
with a foreign competent authority if the U.S. negotiating position is fully supported by the taxpayer. Consequently, the APA
Office works together with the taxpayer in developing the recommended U.S. negotiating position. On occasion, the APA team
will agree to disagree with a taxpayer. In these cases, the APA office will send a recommended U.S. negotiating position to the
U.S. Competent Authority thatincludes elements with which the taxpayer does not agree. This disagreement is noted in the
paper. The APA team leader also solicits the views of the field members of the APA team, and, in the vast majority of APA
cases, the international examiner, LMSB field counsel, and other IRS field team members concur in the position prepared by
the APA team leader.
Once the APA Program completes the recommended U.S. negotiating position, the APA process shifts from the APA Program
to the U.S. Competent Authority. The U.S. Competent Authority analyst assigned to theAPA takes the recommended U.S.
negotiating position and prepares the final U.S. negotiating position, which is then transmitted to the foreign competent authority.
The negotiations with the foreign competent authority are conducted by the U.S. Competent Authority analyst, most often in
face-to-face negotiating sessions conducted periodically throughout the year. At the request of the U.S. Competent Authority
analyst, the APA team leader may continue to assist the negotiations.
In unilateral APA cases, the discussions proceed solely betweenthe APA Program and the taxpayer. In a unilateral case, the
taxpayer and the APA Program must reach agreement to conclude an APA. Like the bilateral cases, the APA team leader almost
always will achieve a consensus with the IRS field personnel assigned to the APA team regarding the final APA. The APA
Program has a procedure in which the IRS field personnel are solicited formally for their concurrence in the final APA. This
concurrence, or any items in disagreement, is noted in a cover memorandum prepared by the APAteam leader that accompanies
the final APA sent forwardfor review and execution.
(5)D
rafting,Review,andExecution
Once the IRS and the taxpayer reach agreement, the drafting of the final APA generally takes little time because the APA
Program has developed standard language that is incorporatedinto every APA. The current version of this language is found in
Attachment A. APAs are reviewed by the Branch Chief and the APA Director. In addition, the team leader prepares a summary
memorandum for the Associate Chief Counsel (International)(ACC(I)). On March 1, 2001, the ACC(I) delegated to the APA
Director the authority to execute APAs on behalf of the IRS.SeeChief Counsel Notice CC–2001–016. The APA is executed for
the taxpayer by an appropriate corporate officer.
April 12, 20047452004-15 I.R.B.

Model APA at Attachment A
[§ 521(b)(2)(B)]
Attachment A contains the current version of the model APA language. As part of its continuing effort to improve its work
product, the APA Program has revised the model language to reflect the program’s collective experience with substantive
anddraftingissues.
The Current APA Office Structure, Composition, and Operation
In 2003, the APA Office consisted of four branches with Branches 1 and 3 staffed with APA team leaders and Branch 2 staffed
with economists and a paralegal. Branch 4, the APA West Coast branch, is headquartered in Laguna Niguel, California, with an
additional office in San Francisco, and is presently staffed with both team leaders and an economist.
Overall, the APA staff increased from 34 to 36. The APA Program hired a new APA Director and a new team leader. In addition,
one team leader transferred to the APA Office from another Chief Counsel function, and one teamleader transferred from the
APA Office to another Chief Counsel function. The number of APA team leaders increased from 17 to 18, while the number of
economists remained constant at 7.
As of December 31, 2003, the APA staff was as follows:
Director’s Office
1 Director
1 Special Counsel to the Director
1 Secretary to the Director
Branch 1Branch 2Branch 3Branch 4
1 Branch Chief1 Branch Chief1 Branch Chief1 Branch Chief
1 Secretary1 Paralegal1 Secretary1 Secretary
8 Team Leaders6 Economists8 Team Leaders2 Team Leaders
1Economist
APATraining
In 2003, the APA Office continued to emphasize training as a high priority. Training sessions regarded APA-related current
developments, new APA office practices and procedures, and international tax law issues. The APA New Hire Training materials
were updated, as necessary, throughout the year. The updated materials are available to the public through the APA internet site on
the IRS Digital Daily (www.irs.gov). These materials do not constitute guidance onthe application of the arm’s length standard.
APA Program Statistical Data
[§ 521(b)(2)(C) and (E)]
The statistical information required under § 521(b)(2)(C) is contained in Tables 1 and 9 below; the information required under
§ 521(b)(2)(E) is contained in Tables 2 and 3 below:
2004-15 I.R.B.746April 12, 2004

TABLE 1: APA APPLICATIONS, EXECUTED APAs, AND PENDING APAs
1
UnilateralBilateralMultilateral
Year
Total
Cumulative
Total
APA applications filed during year
2003
444690766
APAs executed
• Year 2003213758492
• 1991–20022062217434
APA renewals executed during year
2003
8917108
Revised or Amended APAs executed
during year 2003
31425
Pending requests for APAs67162229
• Pending Requests for new
APAs
46109155
• Pending requests for renewal
APAs
215374
APAs canceled or revoked0005
APAs withdrawn21383
TABLE 2: MONTHS TO COMPLETE APAs
2
Months to Complete Advance Pricing Agreements in Year 2003
Combined Unilateral, Bilateral, Multilateral: Average33.7
Combined Unilateral, Bilateral, Multilateral: Median32.0
Unilateral NewUnilateral RenewalUnilateral Combined
Average22.3Average16.2Average20.0
Median8.5Median9.8Median9.2
Bilateral/Multilateral
New
Bilateral/Multilateral
Renewal
Bilateral/Multilateral
Combined
Average41.2Average42.3Average41.5
Median35.4Median50.2Median39.4
1
In 2003:
•The APA Office and taxpayers agreed to amend four APAs (three unilateral andone bilateral). In one of these, the taxpayer reorganized its business. Inthree, the changes reflected technical corrections or
modifications to minor aspects of the APA.
•Reasons for withdrawals included settling principal issues through other venues, jurisdictional issues, taxpayer reorganizations, and changes in facts and circumstances.
2
The average time required to conclude a bilateral APA has historically been split roughly equally between the APA and U.S. Competent Authority Offices.
April 12, 20047472004-15 I.R.B.

TABLE 3: APA COMPLETION TIME – MONTHS PER APA
Months
Number
of APAsMonths
Number
of APAsMonths
Number
of APAsMonths
Number
of APAs
10260513760
20271522770
30281531781
40290540790
51301552800
62313560810
75320570820
81331580830
92343591840
104351601850
110361610860
120371620870
131380630880
140391641890
151402650900
161410660910
170421670921
181430680930
191440690941
200451700950
211460710960
221471720970
230480730981
240490740990
2515017501000
TABLE 4: RECOMMENDED NEGOTIATING POSITIONS
Recommended Negotiating Positions Completed in Year 200319
TABLE 5: MONTHS TO COMPLETE RECOMMENDED NEGOTIATING POSITIONS
NewRenewalCombined
Average14.5Average15.3Average15.3
Median15.2Median13.1Median15.2
2004-15 I.R.B.748April 12, 2004

TABLE 6: RECOMMENDED NEGOTIATING POSITIONS COMPLETION TIME – MONTHS PER APA
Months
Number
of APAsMonths
Number
of APAsMonths
Number
of APAsMonths
Number
of APAs
10111210310
20120221320
30132230330
40141242340
51153250350
62160261360
71171271370
80180280380
91191290390
100200300400
TABLE 7: SMALL BUSINESS TAXPAYER APAs
3
Small Business Taxpayer APAs Completed in Year 200312
Renewals8
New4
Unilateral8
Bilateral4
TABLE 8: MONTHS TO COMPLETE SMALL BUSINESS TAXPAYER APAs
Months to Complete Small Business Taxpayer APAs in Year 2003
NewRenewalCombined
Average12.5Average13.8Average13.0
Median11.5Median11.9Median11.5
3
Small Business Taxpayer APAs are processed under the special procedures set forth in Notice 98–65.
April 12, 20047492004-15 I.R.B.

TABLE 9: INDUSTRIES COVERED
4
Industry Involved – NAICS CodesNumber
Electronic equipment, appliance and component manufacturing – 3357–9
Wholesale trade, nondurable goods – 4224–6
Chemical manufacturing – 3254–6
Wholesale trade, durable goods – 4214–6
Credit intermediation and related activities – 5224–6
Computer and electronic product manufacturing – 3344–6
Machinery manufacturing – 3331–3
Broadcasting and telecommunications – 5131–3
Information service and data processing services – 5141–3
Securities, commodity contracts and other intermediary and related activities – 5231–3
Oil and gas extraction – 2121–3
Motor vehicle and parts dealers – 4411–3
Food manufacturing – 3111–3
Apparel manufacturing – 3151–3
Beverage and tobacco manufacturing – 3121–3
Fabricated metal manufacturing – 3321–3
Transportation equipment manufacturing – 3361–3
Miscellaneous manufacturing – 3391–3
Sporting goods, hobby, book and music stores – 4511–3
Air transportation – 4811–3
Accommodation – 7211–3
Food services and drinking places – 7221–3
Trades or Businesses
[§ 521(b)(2)(D)(i)]
The nature of the relationships between the related organizations, trades, or businesses covered by APAs executed in 2003 is
set forth in Table 10 below:
TABLE 10: NATURE OF RELATIONSHIPS BETWEEN RELATED ENTITIES
RelationshipNumber of APAs
Foreign Parent – U.S. Subsidiary (-ies)31
U.S. Parent – Foreign Subsidiary (-ies)23
Foreign Company and U.S. branch(es)4
4
The categories in this table are drawn from the North American Industry Classification System (NAICS), which has replaced the U.S. Standard Industrial Classification (SIC) system. NAICS
was developed jointly by the U.S., Canada, and Mexico to provide new comparability in statistics about business activity across North America.
2004-15 I.R.B.750April 12, 2004

Covered Transactions
[§ 521(b)(2)(D)(ii)]
The controlled transactions covered by APAs executed in 2003 are set forth in Table 11 and Table 12 below:
TABLE 11: TYPES OF COVERED TRANSACTIONS
Transaction TypeNumber
Sale of tangible property into the U.S.23
Performance of services by Non-U.S. entity16
Performance of services by U.S. entity12
Sale of tangible property from the U.S.9
Use of intangible property by U.S. entity7
Use of intangible property by Non-U.S. entity6
Financial products - Non-U.S. parent2
Financial products - U.S. branch of foreign company2
Other11
TABLE 12: TYPES OF SERVICES INCLUDED IN COVERED TRANSACTIONS
Intercompany Services Involved in the Covered TransactionsNumber
Administrative10
Accounting9
Marketing9
Distribution9
Manufacturing services8
Management7
Research and development7
Legal6
Technical support services6
Product support5
Logistical support5
Headquarters costs4
Communication service3
Contract research & development3
Billing services3
Purchasing3
License administration services2
Assembly2
April 12, 20047512004-15 I.R.B.

Business Functions Performed and Risks Assumed
[§ 521(b)(2)(D)(ii)]
The general descriptions of the business functions performed and risks assumed by the organizations, trades, or businesses whose
results are tested in the covered transactions in the APAs executed in 2003 are set forth in Tables 13 and 14 below:
TABLE 13: FUNCTIONS PERFORMED BY THE TESTED PARTY
Functions PerformedNumber
Manufacturing33
Distribution functions28
Marketing functions23
Transportation and warehousing12
Managerial, legal, accounting, finance, personnel, and other support services11
Research and development10
Product assembly and/or packaging9
Trading and risk management of financial products7
Purchasing and materials management7
Product design and engineering6
Licensing of intangibles6
Technical training and tech support for salesstaff (including sub-distributors)5
Product testing and quality control4
Process engineering3
Telecom services2
TABLE 14: RISKS ASSUMED BY THE TESTED PARTY
Risks AssumedNumber
General business risks (e.g., related to ownership of PP&E)57
Market risks, including fluctuations incosts, demand, pricing, & inventory52
Credit and collection risks37
Financial risks, including interest rates & currency31
Product liability risks22
R&D risks21
2004-15 I.R.B.752April 12, 2004

Discussion
The vast majority of APAs have covered transactions that involve numerous business functions and risks. For instance, with
respect to functions, companies that manufacture products have typically conducted research and development, engaged in
product design and engineering, manufactured the product, marketed and distributed the product, and performed support functions
such as legal, finance, and human resources services. Regardingrisks, companies have been subject to market risks, R&D risks,
financial risks, credit and collection risks, product liability risks, and general business risks. In the APA evaluation process a
significant amount of time and effort is devoted to understanding how the functions and risks are allocated amongst the controlled
group of companies that are party to the covered transactions.
In its APA submission, the taxpayer must provide a functional analysis. The functional analysis identifies the economic activities
performed, the assets employed, the economic costs incurred, and the risks assumed by each of the controlled parties. The
importance of the functional analysis derives from the fact that economic theory posits that there is a positive relationship between
risk and expected return and that different functions provide different value and have different opportunity costs associated with
them. It is important that the functional analysis go beyond simplycategorizing the tested party as,say, a distributor. It should
provide more specific information since, in the example of distributors, not all distributors undertake similar functions and risks.
Thus, the functional analysis is critical in determining the TPM (including the selection of comparables). Although functional
comparability is an essential factor in evaluating the reliability of the TPM (including the selection of comparables), the APA
evaluation process also involves consideration of economic conditions such as the economic condition of the particular industry.
In evaluating the functional analysis, the APA program considers contractual terms between the controlled parties and the
consistency of the conduct of the parties with respect to the allocation of risk. In accord with the section 482 regulations, the
APA program also gives consideration to the ability of controlled parties to fund losses that might be expected to occur as the
result of the assumption of risk. Another relevant factor considered in evaluating the functional analysis is the extent to which
each controlled party exercises managerial or operational controlover the business activities thatdirectly influence the amount
of income or loss realized. The section 482 regulations posit thatparties at arm’s length will ordinarily bear a greater share of
those risks over which they have relatively more control.
Related Organizations, Trades, or Businesses Whose Prices or Results are Tested to Determine
Compliance with APA Transfer Pricing Methods
[§ 521(b)(2)(D)(iii)]
The related organizations, trades, or businesses whose prices orresults are tested to determine compliance with TPMs prescribed
in APAs executed in 2003 are set forth in Table 15 below:
TABLE 15: RELATED ORGANIZATIONS, TRADES,
OR BUSINESSES WHOSE PRICES OR RESULTS ARE TESTED
5
Type of OrganizationNumber
U.S. distributor20
Multiple tested parties16
U.S. provider of services11
Non-U.S. provider of services9
Non-U.S. manufacturer8
U.S. manufacturer7
U.S. licensor of intangible property4
Non-U.S. distributor4
U.S. dealer in financial products3
5
“Multiple tested parties” includes covered transactions that utilize profit splits, CUPs, and CUTs.
April 12, 20047532004-15 I.R.B.

Type of OrganizationNumber
Non-U.S. dealer in financial products2
Other4
Transfer Pricing Methods and the Circumstances Leading to the Use of Those Methods
[§ 521(b)(2)(D)(iv)]
The TPMs used in APAs executed in 2003 are set forth in Tables 16–20 below:
TABLE 16: TRANSFER PRICING METHODS USED FOR TRANSFERS OF
TANGIBLE AND INTANGIBLE PROPERTY
6
TPM UsedNumber
CPM: PLI is operating margin9
CPM: PLI is markup on total costs7
Unspecified method6
CUT (intangibles only)4
CPM: PLI is gross margin3
CPM: PLI is return on assets or capital employed3
CPM: PLI is Berry ratio3
CPM: PLI is other PLI3
Resale Price Method (tangibles only)3
Other profit split3
Residual profit split2
CUP (tangibles only) – not based on published market data2
Cost Plus Method (tangibles only)2
Other2
TABLE 17: TRANSFER PRICING METHODS USED FOR SERVICES
TPM UsedNumber
Cost plus a markup12
CPM: PLI is markup on total costs7
Cost with no markup5
CPM: PLI is Berry ratio3
Other3
6
Profit Level Indicators (“PLIs”) used with the Comparable Profit Method ofTreas. Reg. § 1.482–5, and as used in these TPM tables, are as follows: (1) operating margin (ratio of operating
profit to sales); (2) markup on total costs (comparative markup on total costs); (3) gross margin (ratio of gross profit to sales); (4) rate of return onassets or capital employed (ratio of operating
profit to operating assets); and (5) Berry ratio (gross profit to operating expenses).
2004-15 I.R.B.754April 12, 2004

TABLE 18: TRANSFER PRICING METHODS USED FOR FINANCIAL PRODUCTS
TPM UsedNumber
Interbranch allocation (using indirect evidence of CUPs)3
Profit split2
Discussion
The TPMs used in APAs completed during 2003 were based on the section 482 regulations. Under Treas. Reg. § 1.482–3, the
arm’s length amount for controlled transfers of tangible property may be determinedusing the Comparable Uncontrolled Price
(CUP) method, the Resale Price Method, the Cost Plus Method, the Comparable Profits Method (CPM), or the Profit Split
method. Under Treas. Reg. § 1.482–4, the arm’s length amount for controlled transfers of intangible property may be determined
using the Comparable Uncontrolled Transaction (CUT) method, CPM, or the Profit Split Method. An “Unspecified Method”
may be used for both tangible and intangible property if it provides a more reliable result than the enumerated methods under
the best method rule of Treas. Reg. § 1.482–1(c). For transfers involving the provision of services, Treas. Reg. § 1.482–2(b)
provides that services performed for the benefit of another member of a controlled group should bear an arm’s length charge,
either deemed to be equal to the cost of providing the services (when non-integral, see Treas. Reg. § 1.482–2(b)(3)) or which
should be an amount that would have been charged between independent parties.
In addition, Treas. Reg. § 1.482–2(a) provides rules concerning the proper treatment of loans or advances, and Treas. Reg.
§ 1.482–7 provides rules for qualified cost sharing arrangements under which the parties agree to share the costs of development
of intangibles in proportion to their shares of reasonably anticipated benefits. APAs involving cost sharing arrangements generally
address both the method of allocating costs among the parties as well as determining the appropriate amount of the “buy-in”
payment due for the transfer of intangibles to the controlled participants.
In reviewing the TPMs applicable to transfers of tangible and intangible property reflected in Table 16, the majority of the APAs
followed the specified methods. However,there are several distinguishing points that should be made. The Regulations note
that for transfers of tangible property, the Comparable Uncontrolled Price (CUP) method will generally be the most direct and
reliable measure of an arm’s length price for the controlled transaction if sufficiently reliable comparable transactions can be
identified. Treas. Reg. § 1.482–3(b)(2)(ii)(A). It was the experience of the APA Program in 2003 that in the cases that came into
the APA Program, sufficiently reliable CUP transactions were difficult to find. In APAs executed in 2003, there were two covered
transactions that used the CUP method; both used internal dataon transactions between the taxpayer and unrelated parties.
Similar to the CUP method, for transfers of intangible property, the CUT method will generally provide the most reliable measure
of an arm’s length result if sufficiently reliable comparables may be found. Treas. Reg. § 1.482–4(c)(2)(ii). It has generally been
difficult to identify external comparables, and APAs using the CUT method tend to rely on internal transactions between the
taxpayer and unrelated parties. In2003, there were four covered transactions that utilized the CUT TPM.
The Cost Plus Method (tangibles only) and Resale Price Methodwereappliedin2003intwoandthreeAPAsrespectively.
See Treas. Reg. § 1.482–3(c), (d).
The CPM is frequently applied in APAs. This is because reliablepublic data on comparable business activities of independent
companies may be more readily available than potential CUP data, and comparability of resources employed, functions, risks, and
other relevant considerations is more likely to exist than comparability of product. The CPM also tends to be less sensitive than
other methods to differences in accounting practices between the tested party and comparable companies,e.g., classification of
expenses as cost of goods sold or operating expenses. Treas. Reg. §1.482–3(c)(3)(iii)(B), and –3(d)(3)(iii)(B). In addition, the
degree of functional comparability required to obtain a reliable result under the CPM is generally less than required under the
Resale Price or Cost Plus methods, because differences in functions performed often are reflected in operating expenses, and
thus taxpayers performing different functions may have very different gross profit margins but earn similar levels of operating
profit. Treas. Reg. § 1.482–5(c)(2).
Table 16 reflects 28 uses of the CPM (with varying PLIs) in covered transactions involving tangible or intangible property. The
CPM was also used in some APAs concurrently with other methods.
April 12, 20047552004-15 I.R.B.

The CPM has proven to be versatile in partbecause of the various PLIs that can be used in connection with the method. Reaching
agreement on the appropriate PLI has beenthe subject of much discussion in many ofthe cases, and it depends heavily on the
facts and circumstances. Some APAs havecalled for different PLIs to apply to different parts of the covered transactions
or with one PLI used as a check against the primary PLI.
The CPM also was used regularly with services as the covered transactions in APAs executed in 2003. There were a total of 10
services covered transactions using the CPM method with various PLIs according to the specific facts of the taxpayers involved.
Table 17 reflects the methods used to determine the arm’s length results for APAs involving services transactions.
In 2003, there were two APAs involving tangible or intangible property that used the residual profit split, Treas. Reg.
§ 1.482–6(c)(3). In residual profit split cases, routine contributions by the controlled parties are allocated routine market returns,
and the residual income is allocated among the controlled taxpayers based upon the relative value of their contributions of
intangible property to the relevant business activity.
Profit splits have also been used in a number of financial product APAs in which the primary income-producing functions are
performed in more than one jurisdiction. Two APAs executed in 2003 applied such a profit split.
There were three financial product APAs involving interbranch allocations. These involve a single taxpayer with branches that act
autonomously with respectto the covered transactions, generally involving foreign currency exchanges. These particular APAs
determine the appropriate amountof profits attributable to each branch from the activity by reference to the branches’ internal
accounting methods. The results take into account all trades, and test the arms length results using statistical tests to verify that
controlled trades are priced the same as uncontrolled trades.
Critical Assumptions
[§ 521(b)(2)(D)(v)]
Critical Assumptions used in APAs executed in 2003 are described in Table 19 below:
TABLE 19: CRITICAL ASSUMPTIONS
Critic
al Assumptions involving the following:
Number
of APAs
Material changes to the business57
Material changes to tax and/or financial accounting practices57
Assets
will remain substantially same
16
Catastrophic events9
No discounts or rebates6
Use of
Mark-to-Market method
4
Other financial ratio3
Major regulatory changes2
Chan
ges in affiliated companies
2
Variation in budgeted v. actual expenses2
Changes in market shares2
Rat
io of R&D to sales
2
Material sales fluctuations2
Other13
2004-15 I.R.B.756April 12, 2004

Discussion
APAs include critical assumptions upon which their respective TPMs depend. A critical assumption is any fact (whether or not
within the control of the taxpayer) related to the taxpayer, a third party, an industry, or business and economic conditions, the
continued existence of which is material to the taxpayer’s proposed TPM. Critical assumptions might include, for example, a
particular mode of conducting business operations, a particularcorporate or business structure, or a range of expected business
volume. Rev. Proc. 96–53, § 5.07. Failure to meet a critical assumption may render an APA inappropriate or unworkable.
A critical assumption may change (and/or fail to materialize) due to uncontrollable changes in economic circumstances, such as a
fundamental and dramatic change in the economic conditions of aparticular industry. In addition, a critical assumption may
change (and/or fail to materialize) due to a taxpayer’s actions thatare initiated for good faith business reasons, such as a change in
business strategy, mode of conducting operations, or the cessation or transfer of a business segment or entity covered by the APA.
If a critical assumption has not been met, the APA may be revised by agreement of the parties. If such agreement cannot be
achieved, the APA may be canceled. If a critical assumption has notbeen met, it requires taxpayer’s notice to and discussion with
the Service, and, in the case of a bilateral APA, competent authority consideration. Rev. Proc. 96–53, § 11.07.
Sources of Comparables, Selection Criteria, and the Nature of Adjustments to Comparables and Tested Parties
[§ 521(b)(2)(D)(v), (vi), and (vii)]
The sources of comparables, selection criteria, and rationale used in determining the selection criteria for APAs executed in
2003 are described in Tables 20 through 22 below. Various formulas for making adjustments to comparables are included as
Attachment B.
TABLE 20: SOURCES OF COMPARABLES
Comparable Sources
Number of Times This
Source Used
Compustat44
Disclosure14
Moody’s5
Japan Company Handbook4
Worldscope4
Dun & Bradstreet3
Other8
TABLE 21: COMPARABLE SELECTION CRITERIA
Selection Criteria Considered
Number of Times This
Criterion Used
Comparable functions57
Comparable risks43
Comparable industry38
Comparable products25
Comparable intangibles21
Comparable terms4
April 12, 20047572004-15 I.R.B.

TABLE 22: ADJUSTMENTS TO COMPARABLES OR TESTED PARTIES
AdjustmentNumber of Times Used
Balance sheet adjustments
Inventory35
Payables33
Receivables33
Property, plant, equipment10
Accounting adjustments
LIFO to FIFO inventory accounting11
Accounting reclassifications (e.g., from COGS to operating expenses)9
Other1
Profit level indicator adjustments (used to “back into” one PLI from another)
Operating expense2
Other5
Miscellaneous adjustments
Foreign exchange3
Goodwill value or amortization2
Other4
Discussion
At the core of most APAs are comparables. The APA program works closely with taxpayers to find the best and most reliable
comparables for each covered transaction. In some cases, CUPs or CUTs can be identified. In other cases, comparable business
activities of independent companies are utilized in applying the CPM or residual profit split methods. Generally, in the APA
Program’s experience since 1991, CUPs and CUTs have been most often derived from the internal transactions of the taxpayer.
For profit-based methods in which comparable business activities or functions of independent companies are sought, the APA
Program typically has applied a three-part process. First, a pool of potential comparables has been identified through broad
searches. From this pool, companies having transactions that are clearly not comparable to those of the tested party have
been eliminated through the use of quantitative and qualitative analyses,i.e., quantitative screens and business descriptions.
Then, based on a review of available descriptive and financialdata, a set of comparable transactions or business activities of
independent companies has been finalized. The comparability of the finalized set has then been enhanced through the application
of adjustments.
S
ourcesofComparables
Comparables used in APAs can be U.S. or foreign. This depends onthe relevant market, the type oftransaction being evaluated,
and the results of the functional and risk analyses. In general, comparables have beenlocated by searching a variety of databases
that provide data on U.S. publicly traded companies and on a combination of public and private non-U.S. companies. Table 20
shows the various databases and other sources used in selecting comparables for the APAs executed in 2003.
Although comparables were most often identified from the databases cited in Table 20, in some cases comparables were found
from other sources, such as comparables derived internally from taxpayer transactions with third parties.
S
electingComparables
Initial pools of potential comparables generally are derived from the databases using a combination of industry and keyword
identifiers. Then, the pool is refined using a variety of selection criteria specific to the transaction or business activity being
tested and the TPM being used.
2004-15 I.R.B.758April 12, 2004

The listed databases allow for searches byindustrial classification, by keywords, or by both. These searches can yield a number of
companies whose business activities may or may not be comparable to those of the entity being tested. Therefore, comparables
based solely on industry classification or keyword searches are rarely used in APAs. Instead, the pool of comparables is examined
closely, and companies are selected based on a combination of screens, business descriptions, andotherinformationfoundinthe
companies’ Annual Reports to shareholders and filings with the U.S. Securities and Exchange Commission (SEC).
Business activities are required to meet certain basic comparability criteria to be considered comparables. Functions, risks,
economic conditions, and the property (product or intangible) and services associated with the transaction must be comparable.
Determining comparability can be difficult — the goal has been to use comparability criteria restrictive enough to eliminate
business activities that are not comparable, but yet not so restrictive as to have no comparables remaining. The APA Program
normally has begun with relatively strict comparability criteria and then has relaxed them slightly if necessary to derive a pool
of reliable comparables. A determination on the appropriate size of the comparables set, as well as the business activities that
comprise the set, is highly fact specific anddepends on the reliability of the results.
In addition, the APA Program, consistent with the section 482 regulations, generally has looked at the results of comparables over
a multi-year period. Sometimes this has beena three-year period, but it has been more or less, depending on the circumstances of
the controlled transaction. Using a shorter period might result inthe inclusion of comparables in different stages of economic
development or use of atypical years of a comparabledue to cyclical fluctuations in business conditions.
Many covered transactions have been tested with comparables that have been chosen using additional criteria and/or screens.
These include sales level criteria and testsfor financial distress and product comparability. These common selection criteria and
screens have been used to increase the overall comparability of a group of companies and as a basis for further research. The sales
level screen, for example, has been used to remove companies that, due to their size, mightface fundamentally different economic
conditions from those of the transaction or business activities being tested. In addition, APA analyses have incorporated selection
criteria related to removing companies experiencing “financial distress” due to concerns that companies in financial distress often
have experienced unusual circumstances thatrender them not comparable to the business activity being tested. These criteria
include: an unfavorable auditor’s opinion, bankruptcy, and, in certain circumstances, operating losses in a given number of years.
An additional important class of selection criteria is the development and ownership of intangible property. In some cases in
which the business activity being tested is a manufacturer, several criteria have been used to ensure, for example, that if the
controlled entity does not own significant manufacturing intangibles or conduct research and development (R&D), then neither
will the comparables. These selection criteria have included determining the importance of patents to a company or screening
for R&D expenditures as a percentage of sales. Again, quantitative screens related to identifying comparables with significant
intangible property generally have been used in conjunction with an understanding of the comparable derived from publicly
available business information.
Selection criteria relating to asset comparability and operating expense comparability have also been used at times. A screen of
property, plant, and equipment (PP&E) as a percentage of sales or assets, combined with a reading of a company’s SEC filings,
has been used to help ensure that distributors (generally lower PP&E) were not compared with manufacturers (generally higher
PP&E), regardless of their industry classification. Similarly, a test involving the ratio of operating expenses to sales has helped to
determine whether a company undertakes a significant marketing and distribution function.
Table 23 shows the number of times various screens were used in APAs executed in 2003:
April 12, 20047592004-15 I.R.B.

TABLE 23: COMPARABILITY SCREENS
Comparability/Financial Distress ScreenTime Used
Comparability screens used
Sales15
R&D/ sales11
Foreign sales/ total sales5
Operating expenses/ sales2
SG&A/ sales4
Non-startup or start-up2
Financial distress
Bankruptcy16
Unfavorable auditor’s opinion13
Losses in one or more years9
AdjustingComparables
After the comparables have been selected, theregulations require that “[i]f there are material differences between the controlled
and uncontrolled transactions, adjustments must be made if the effect of such differences on prices or profits can be ascertained
with sufficient accuracy to improve the reliability of the results.” Treas. Reg. § 1.482–1(d)(2). In almost all cases involving
income-statement-based PLIs, certain “asset intensity” or “balance sheet” adjustments for factors that have generally agreed-upon
effects on profits are calculated. In addition, in specific cases, additional adjustments are performed to improve reliability.
The most common balance sheet adjustments used in APAs are adjustments for differences in accounts receivable, inventories,
and accounts payable. The APA Program generally has required adjustments for receivables, inventory, and payables based on
the principle that there is an opportunity cost for holding assets. For these assets it is generally assumed that the cost is a
short-term debt interest rate.
To compare the profits of two business activities with different relative levels of receivables, inventory, or payables, the APA
Program estimates the carrying costs of eachitem and adjusts profits accordingly. Although different formulas have been used in
specific APA cases, Attachment B presents one set of formulas used in many APAs. Underlying these formulas are the notions that
(1) balance sheet items should be expressed as mid-year averages, (2) formulas should try to avoid using data items that are being
tested by the TPM (for example, if sales are controlled, then thedenominator of the balance sheetratio should not be sales), (3) a
short-term interest rate should be used, and (4) an interest factorshould recognize the average holding period of the relevant asset.
The APA Program also requires that data be compared on a consistent accounting basis. For example, although financial
statements may be prepared on a first-in first-out (FIFO) basis, cross-company comparisons are less meaningful if one or more of
the comparables use LIFO inventory accounting methods. This adjustment directly affects costs of goods sold and inventories,
and therefore affects both profitability measures and inventory adjustments.
Still important in some cases is the adjustment for differences in relative levels of PP&E between a tested business activity and
the comparables. Ideally, comparables and the business activity being tested will have fairly similar relative levels of PP&E,
since major differences can be a sign of fundamentally different functions and risks. Typically, the PP&E adjustment is made
using a medium term interest rate.
Additional adjustments used less frequently include those for differences in other balance sheet items, operating expenses, R&D,
or currency risk. Accounting adjustments,such as reclassifying items from cost of goods sold to operating expenses, for example,
are also made when warranted to increase reliability. Often, data is not available for both the controlled and uncontrolled
transactions in sufficient detail to allow for these types of adjustments.
The adjustments made to comparables or tested parties inAPAsexecutedin2003arereflectedinTable22above.
2004-15 I.R.B.760April 12, 2004

Nature of Ranges and Adjustment Mechanisms
[§ 521(b)(2)(D)(viii)-(ix)]
The types of ranges and adjustment mechanisms used in APAsexecuted in 2003 are described in Table 24 and 25 below.
TABLE 24: TYPES OF RANGES
7
Type of RangeNumber
Interquartile range31
Specific point (royalty)8
Floor (i.e., result must be no less than x)6
Specific point within CPM range (not floor or ceiling)3
Financial products - statistical confidenceinterval to test against internal CUPs2
Ceiling (i.e., result must be no more than x)2
Other7
TABLE 25: ADJUSTMENTS WHEN OUTSIDE OF THE RANGE
Adjustment mechanismNumber
Taxpayer makes an adjustment: to closest edge of single year15
Taxpayer makes an adjustment: to specified point11
Taxpayer makes an adjustment: to closest edge of multi-year average9
Taxpayer makes an adjustment: to median of current year7
Taxpayer makes an adjustment: to other6
Taxpayer makes an adjustment:to median of multi-year average3
Other3
Discussion
Treas. Reg. § 1.482–1(e)(1) states that sometimes a pricing method will yield “a single result that is the most reliable measure of
an arm’s length result.” Sometimes, however, a method may yield “a range of reliable results,” called the “arm’s length range.” A
taxpayer whose results fall within the arm’s length range will not be subject to adjustment.
Under Treas. Reg. § 1.482–1(e)(2)(i), such a range is normally derived by considering a set of more than one comparable
uncontrolled transaction of similar comparability and reliability. If these comparables are of very high quality, as defined in the
Regulations, then under Treas. Reg. § 1.482–1(e)(2)(iii)(A), the arm’s length range includes the results of all of the comparables
(from the least to the greatest). However, the APA Program has only rarely identified cases meeting the requirements for the full
range. If the comparables are of lesser quality, then under Treas. Reg. § 1.482–1(e)(2)(iii)(B), “the reliability of the analysis
must be increased, when it is possible to do so, by adjusting the range through application of a valid statistical method to the
results of all of the uncontrolled comparables.” One such method, the “interquartile range,” isordinarily acceptable, although
a different statistical method “may be applied if it provides a more reliable measure.” The “interquartile range” is defined as,
roughly, the range from the 25th to the 75th percentile of the comparables’ results. See Treas. Reg. § 1.482–1(e)(2)(iii)(C). The
interquartile range was used 31 times in 2003.
7
Numbers do not include TPMs with cost or cost-plus methodologies.
April 12, 20047612004-15 I.R.B.

Nineteen covered transactions reflected onTable 24 specified a single, specific result, or “point.” Three of these covered
transactions involved a CPM in which the taxpayer agreed toa specific result. Some APAs specify not a point or a range, but
a “floor” or a “ceiling”. When a floor is used, the tested party’s result must be greater than or equal to some particular value.
When a ceiling is used, the tested party’s result must be less than or equal to some particular value. Six APAs executed in 2003
used a floor and two used a ceiling.
Some APAs look to a tested party’s resultsover a period of years (multi-year averaging) to determine whether a taxpayer has
complied with the APA. In 2003, rolling multi-year averaging was used for 10 covered transactions. Seven of those used
three-year averages, one used a four-yearaverage, and the other two used five-year averages. Cumulative multi-year averages
were used for three covered transactions. Additionally, six coveredtransactions used term averages, and one covered transaction
used a partial term average.
Adjustments
Under Treas. Reg. § 1.482–1(e)(3), if a taxpayer’s results fall outside the arm’s length range, the Service may adjust the result “to
any point within the arm’s length range.” Accordingly, an APA may permit or require a taxpayer and its related parties to make an
adjustment after the year’s end to put the year’s results within the range, or at the point specified by the APA. Similarly, to enforce
the terms of an APA, the Service may make such an adjustment.When the APA specifies a range, the adjustment is sometimes to
the closest edge of the range, and sometimes to another point suchas the median of the interquartile range. Depending on the facts
of each case, such automatic adjustments are not always permitted.APAs may specify that in such a case there will be a negotiation
between the competent authorities involved to determine whether and to what extent an adjustment should be made. APAs may
permit automatic adjustments unless the result is far outside the range specified in the APA. Thus APAs provide flexibility and
efficiency, permitting adjustments when normal business fluctuations and uncertaintiespush the result somewhat outside the range.
In order to conform the taxpayer’s books to these tax adjustments, the APA usually permits a “compensating adjustment” as long
as certain requirements are met. Such compensating adjustmentsmay be paid between the related parties with no interest, and the
amount transferred will not be considered for purposes of penalties for failure to pay estimated tax. See § 11.02 Rev. Proc. 96–53.
APA Term and Rollback Lengths
[§ 521(b)(2)(D)(x)]
The various term lengths for APAs executed in 2003 are set forth in Table 26 below:
TABLE 26: TERMS OF APAs
APA Term in YearsNumber of APAs
11
20
33
411
529
65
75
83
90
100
111
Number of rollback years to which an APA TPM was applied in 2003 is set forth in Table 27 below:
2004-15 I.R.B.762April 12, 2004

TABLE 27: NUMBER OF YEARS COVERED BY ROLLBACK OF APA TPM
Number of Rollback YearsNumber of APAs
13
21
33
42
5ormore4
Nature of Documentation Required
[§ 521(b)(2)(D)(xi)]
APAs executed in 2003 required that taxpayers provide various documents with their annual reports. These documents are
described in Table 28 below:
TABLE 28: NATURE OF DOCUMENTATION REQUIRED
8
Documentation
Number of
Times
Required
Statement identifying all material differences between Taxpayer’s business operations during APA Year
and description of Taxpayer’s business operations contained in Taxpayer’s request for APA, or if there
have been no such material differences, a statement to that effect
57
Description of any failure to meet Critical Assumptions or, if there have been none, a statement to
that effect
57
Statement identifying all material changes in Taxpayer’s accounting methods and classifications,
and methods of estimation, from those described or used in Taxpayer’s request for APA, or if there
have been none, statement to that effect
57
Financial analysis demonstrating Taxpayer’s compliance with TPM57
Description of, reason for, and financial analysis of, any Compensating Adjustments with respect to
APA Year, including means by which any Compensating Adjustment has been or will be satisfied
57
Organizational chart51
Financial statements as prepared in accordance with US GAAP50
Certified public accountant’s opinion that financial statements present fairly financial position of
Taxpayer and the results of its operations, in accordance with US GAAP
49
Financial statements as prepared in accordance with a foreign GAAP15
Certified public accountant’s opinion that financial statements present fairly financial position of
Taxpayer and the results of its operations, in accordance with a foreign GAAP
14
Various work papers10
Book to tax reconciliations10
Profit & Loss statement6
Schedule of costs and expenses (e.g., intercompany allocations)6
Certified public accountant’s review of financial statements3
8
The first eight categories of documentation listed in this table were drawn from the standard APA language used in 2003. The facts and circumstances ofsome APAs may eliminate the need
for some standard documentation requirements.
April 12, 20047632004-15 I.R.B.

Documentation
Number of
Times
Required
Description of any matters economically or substantively related to the covered transactions, but that
are not subject to the APA
2
Other16
Approaches for Sharing of Currency or Other Risks
[§ 521(b)(2)(D)(xii)]
During 2003, there were 31 tested parties that faced financial risks, including interest rate and currency risks. Three APAs provide
specific approaches for dealing with currency risk, including adjustment mechanismsand critical assumptions.
Efforts to Ensure Compliance with APAs
[§ 521(b)(2)(F)]
As described in Rev. Proc. 96–53, section 11, APA taxpayers are required to file annual reports to demonstrate compliance with
the terms and conditions of the APA. The filing and review of annual reports is a critical part of the APA process. Through annual
report review, the APA program monitors taxpayer compliance with the APA on a contemporaneous basis. Annual report review
provides current information on the success or problems associated with the various TPMs adopted in the APA process.
All reports received by the APA Office are tracked by one designated APA team leader who also has the primary responsibility for
annual report review. One of the economists also spends a significant amount of time reviewing annual reports. Other APA team
leaders also assist in this review, especially when the team leader who negotiated thecase is available, since that person will
already be familiar with the relevant facts and terms of the agreement. Once received by the APA Office, the annual report is sent
out to the district personnel with exam jurisdiction over the taxpayer.
The statistics for the review of APA annual reports are reflected in Table 29 below. As of December 31, 2003, there were 222
pending annual reports. In 2003, there were 303 reports closed.
TABLE 29: STATISTICS OF ANNUAL REPORTS
Number of APA annual reports pending as of December 31, 2003222
Number of APA annual reports closed in Year 2003303
9
Number of APA annual reports requiring adjustment in Year 200311
Number of taxpayers involved in adjustments5
Number of APA annual reports required to be filed in Year 2003235
Number of APA annual reports actually filed in Year 2003235
Number of APA annual report cases over one year old66
9
This number differs from previously published figures because of annual reports closed but not yet entered on the system used to compile those statistics.
2004-15 I.R.B.764April 12, 2004

ATTACHMENT A
ADVANCE PRICING AGREEMENT
between
[Insert Taxpayer’s Name]
and
THE INTERNAL REVENUE SERVICE
PARTIES
The Parties to
this Advance Pricing Agreement (APA) are the Internal Revenue Service (IRS) and [Insert Taxpayer’s Name],
EIN
(Taxpayer
).
RECITALS
Taxpayer’s principal place of business is [City, State]. [Insert general description of taxpayer and other relevant parties].
This APA cont
ains the Parties’ agreement on the best method for determining arm’s-length prices of the Covered Transactions
under I.R.C.
section 482, any applicable tax treaties, and the Treasury Regulations.
Unless otherwise specified, terms in the plural include the singular and vice versa. Appendix D contains definitions for
capitalized terms not elsewhere defined in this APA.
{If renewal, add}[Taxpayer and IRS previously entered into an APA covering taxable years ending
to,
executed on
.]
AGREEMENT
The Parties agree as follows:
1.C
overedTransactions. This APA applies to the Covered Transactions, as defined in Appendix A.
2.T
ransf
erPricingMethod. Appendix A sets forth the Transfer Pricing Method (TPM) for the Covered Transactions.
3.T
erm. This APA applies to Taxpayer’s taxable years endingthrough(APA Term).
4.O
peration.
a. Revenu
e Procedure 96–53 governs the interpretation,legal effect, and administration of this APA.
b. Nonfactual oral and written representations, within themeaning of sections 10.04 and 10.05 of Revenue Procedure 96–53
(including any proposals to use particular TPMs), made in conjunction with the APA Request constitute statements made in
compromise negotiations within the meaning of Rule 408 of the Federal Rules of Evidence.
5.C
ompliance.
a. For e
ach taxable year covered by this APA (APA Year), if Taxpayer complies with the terms and conditions of this APA,
then th
e IRS will not make or propose any allocation or adjustment under I.R.C. section 482 to the Covered Transactions.
b. If Taxpayer does not comply, then the IRS may:
i. enforce the terms and conditions of this APA and make or propose allocations or adjustments under I.R.C. section 482
consistent with this APA;
ii. cancel or revoke this APA under section 11.05 or 11.06 of Revenue Procedure 96–53; or
iii. revise this APA, if the Parties agree.
c. Taxpayer must timely file an Annual Report for each APA Year in accordance with Appendix C and section 11.01 of
Revenue Procedure 96–53. Taxpayer must file an original and four copies of the Annual Report by the later of (a) 90 days after
the time prescribed by law (including extensions) for filing its federal income tax return for the APA Year covered by the report,
or (b) 90 days after the effective date of this APA. [The Service and the Taxpayer may agree to alternative filing dates.] The IRS
may request additional information reasonably necessary to clarify or complete the Annual Report.Taxpayer will provide all
requested information within 30 days. Additional time may be allowed for good cause.
April 12, 20047652004-15 I.R.B.

d. The IRS will determine whether Taxpayer has complied with this APA based on Taxpayer’s U.S. Returns, Financial
Statements, and other APA Records, for the APA Term and any other year necessary to verifycompliance. For Taxpayer to
comply with this APA, an independent certified public accountant must {use the following or an alternative} render an opinion
that the Taxpayer’s Financial Statements present fairly, in all material respects, Taxpayer’s financial position under U.S. GAAP.
e. In accordance with section 11.04 of Revenue Procedure 96–53, Taxpayer will (1) maintain its APA Records, and (2) make
them available to IRS in connection with an examination under section 11.03. Compliance with this subparagraph constitutes
compliance with the record-maintenanceprovisions of I.R.C. sections 6038A and 6038C for the Covered Transactions for any
taxable year during the APA Term.
f. If Taxpayer’s actual transactions do not result in compliance with the TPM, Taxpayer:
i. Must report its taxable income in an amount that is consistent with the TPM and all other requirements of this APA on
its timely filed U.S. Return. However, for any APA Year, if Taxpayer’s timely filed U.S. Return is filed no later than
60 days after the effective date of this APA, then Taxpayer may instead report its taxable income in an amount that is
consistent with the TPM and all other requirements of this APA on an amended U.S. Return filed no later than 120 days
after the effective date of this APA.
ii. May make compensating adjustments under Revenue Procedure 96–53, section 11.02, subject to any modifications or
restrictions in Appendix A or elsewhere in this APA.
g. {Insert when U.S. Group or Foreign Group contains more than one member.} [This APA addresses the arm’s-length nature
of prices charged or received in the aggregate between Taxpayer[s] and Foreign Participants. Except as explicitly provided, this
APA does not address and does not bind theIRS with respect to prices charged or received, or the relative amounts of income or
loss realized, by particular legal entities that are members of U.S. Group or that are members of Foreign Group.]
h. The True Taxable Income within the meaning of Treasury Regulations section 1.482–1(a)(1) of a member of an affiliated
group filing a U.S. consolidated return will be determinedunder the I.R.C. section 1502 Treasury Regulations.
i.{Optional for US Parent Signatories}To the extent that Taxpayer’s compliance with this APA depends on certain acts of
Foreign Group members, Taxpayer will ensure thateach Foreign Group member will perform such acts.
6.C
riticalAssumptions. This APA’s critical assumptions, within the meaning of Revenue Procedure 96–53, section 5.07, appear
in Appendix B. Revenue Procedure 96–53, section 11.07, governs if any critical assumption has not been met.
7.D
isclosure. This APA, and any background information related to this APA or the APA Request, are: (1) considered “return
information” under I.R.C. section 6103(b)(2)(C); and (2) not subject to public inspection as a “written determination” under I.R.C.
section 6110(b)(1). Section 521(b) of Pub. L. 106–170 provides that the Secretary of the Treasury must prepare a report for public
disclosure that includes certain specifically designated information concerning all APAs, including this APA, in a form that does
not reveal taxpayers’ identities, trade secrets, and proprietary or confidential business or financial information.
8.D
isputes. If a dispute arises concerning the interpretation of this APA, the Parties will seek a resolution by the IRS Associate
Chief Counsel (International), to the extent reasonably practicable, before seeking alternative remedies. If any dispute arises
that is not related to interpreting this APA, the Parties will seek to resolve the dispute in a manner consistent with Revenue
Procedure 96–53, section 11.03(4).
9.M
ateriality. In this APA the terms “material” and “materially” will be interpreted consistently with the definition of “material
facts” in Revenue Procedure 96–53, section 11.05(1).
10.S
ectionCaptions. This APA’s section captions, which appear initalics, are for convenience and reference only. The captions
do not affect in any way the interpretation or application of this APA.
11.E
ntireAgreementandSeverability. This APA is the complete statement of the Parties’ agreement. The Parties will sever,
delete, or reform any invalid or unenforceable provision in this APA to approximate the Parties’ intent as nearly as possible.
12.S
uccessorinInterest. This contract binds, and inures to the benefit of, any successor in interest to Taxpayer.
13.N
otice. Any notices required by this APA or Revenue Procedure 96–53 must be in writing. Taxpayer will send notices to the
IRS at the address and in the manner set forth in Revenue Procedure 96–53, section 5.13(2). The IRS will send notices to:
2004-15 I.R.B.766April 12, 2004

14.EffectivedateandCounterparts. This APA is effective starting on the date, or later date of the dates, upon which all Parties
execute this APA. The Parties may execute this APA in counterparts, with each counterpart constituting an original.
WITNESS,
The Parties have executed this APA on the dates below.
[Taxpayer Name in all caps]
By:
Date:,20
Jane Doe
Sr. Vice President (Taxes)
IRS
By:
Date:,20
Matthew W. Frank
Director, Advance Pricing Agreement Program
APPENDIX A
COVERED TRANSACTIONS AND TRANSFER PRICING METHOD (TPM)
1. Covered Transactions.
[Define the Covered Transactions.]
2. TPM.
{Note: If appropriate, adapt language from the following examples.}
•CUP Method
The TPM is the comparable uncontrolled price (CUP) method. The price charged for
must equal between
and(the Arm’s Length Range). Taxpayer must realize,recognize, and report results on its U.S. Returns
that clearly reflect such pricing.
•Resale Price Method (RPM)
The TPM is the resale price method (RPM). Taxpayer must realize, recognize, and report results on its U.S. Returns that
clearly reflect a gross margin (defined as gross profit divided bysales revenue as those terms are defined in Treasury Regulations
sections 1.482–5(d)(1) and (2)) of between
%and% (the Arm’s Length Range) for the Covered Transactions.
•Cost Plus Method
The TPM is the cost plus method. Taxpayermust realize, recognize,and report results on its U.S. Returns that clearly
reflect a ratio of gross profit to production costs (within the meaning of Treasury Regulations sections 1.482–3(d)(1) and (2)) of
between
%and% (the Arm’s Length Range) for the Covered Transactions.
•CPM with Berry Ratio PLI
The TPM is the comparable profits method (CPM). Taxpayermust realize, recognize, and report results on its U.S.
Returns that clearly reflect a gross profit tooperating expenses ratio (as those terms aredefined in Treasury Regulations sections
1.482–5(d)(2) and (3)) of between
and(the Arm’s Length Range) for the Covered Transactions.
April 12, 20047672004-15 I.R.B.

•CPM using an Operating Margin PLI
The TPM is the comparable profits method (CPM). The profit level indicator is an operating margin. Taxpayer’s reported
operating profit (within the meaning of Treasury Regulations sections 1.482–5(d)(5)) must clearly reflect an operating margin
(defined as the ratio of operating profit to sales revenue as those terms are defined in Treasury Regulations section 1.482–5(d)(1)
and (4)) of between
%and% (the Arm’s Length Range) for the Covered Transactions.
•CPM using a Three-year Rolling Average Operating Margin PLI
The TPM is the comparable profits method (CPM). The profit level indicator is an operating margin. Taxpayer’s Three-Year
Rolling Average operating margin is defined as follows for any APA Year: the sum of Taxpayer’s reported operating profit
(within the meaning of Treasury Regulations section 1.482–5(d)(5)) for that APA Year and the two preceding years, divided
by the sum of Taxpayer’s sales revenue (within the meaning of Treasury Regulations section 1.482–5(d)(1)) for that APA Year
and the two preceding years. Taxpayer’s Three-Year Rolling Average operating margin must be between
%and%
(the Arm’s Length Range.)
•Residual Profit Split Method
The TPM is the residual profit split method. Taxpayer must realize, recognize, and report results on its U.S. Returns that
clearly reflect the following: [insert description of profit-split mechanism].
[Insert additional provisions as needed.]
3. Adjustments.
{For use with a CPM}
For each APA Year, if Taxpayer’s year-end [Three-Year Rolling Average]{specify PLI used}for the Covered Transactions
is not in compliance with the TPM, Taxpayer will make an adjustment that brings its [Three-Year Rolling Average]{specify PLI
used}to{if the TPM specifies a point value, use that; if the TPM specifies an Arm’s Length Range, use the nearest edge of the
Arm’s Length Range or a point such as the median within the Arm’s Length Range}.
[Insert additional provisions as needed.]
APPEND
IX B
CRITICAL ASSUMPTIONS
This APA’s critical assumptions are:
1. The
business activities, functionsperformed, risks assumed, assets employed, and financial and tax accounting methods and
class
ifications [and methods of estimation] ofTaxpayer in relation to the Covered Transactions will remain materially the same as
descr
ibed or used in Taxpayer’s APA Request. A mere change in business results will not be a material change.
[Insert additional provisions as needed.]
APPENDIX C
APA R
ECORDS AND ANNUAL REPORT
APA RECORDS
The APA Records will consist of:
1. A
ll documents listed below for inclusion in the Annual Report, aswell as all documents, notes, work papers, records, or other
wri
tings that support the information provided in such documents.
2. [Insert here other records as required.]
ANNUAL REPORT
Th
e Annual Report will include a cover sheet and a table of contents. The cover sheet will specify:
i. the Parties to the APA;
ii. the APA Term (defined in section 3 of this APA);
ii
i. the APA’s effective date (defined in section 14 of this APA);
2004-15 I.R.B.768April 12, 2004

iv. whether the APA is a renewal, and if so the term of the prior APA;
v. whether the APA has been amended, and if so the amendment’s effective date;
vi. any information needed to distinguish the APA at issue from any other APAs involving the same parties;
vii. any changes to the Taxpayer notice information in section 13 of this APA.
The table of contents and the Annual Report will be organized as listed below. Taxpayer must include the following items in its
Annual Report for each APA Year.
1. Statements that fully identify,describe, analyze, and explain:
a. All material differences between any of Taxpayer’s business operations (including functions, risks, markets, contractual
terms, economic conditions, property or services, and assets employed) during the APA Year and the description of the business
operations contained in the APA Request. If there have been no material differences, the Annual Report will include a statement
to that effect.
b. All material changes in Taxpayer’s accounting methods and classifications, and methods of estimation, from those
described or used in Taxpayer’s request for this APA. If there have been no such material changes, the Annual Report will
include a statement to that effect.
c. Any failure to meet any critical assumption. If there have been no failures, the Annual Report will include a statement
to that effect.
d. Any change to any entity classification for federal income tax purposes (including any change that causes an entity to be
disregarded for federal income tax purposes) of any Worldwide Group member that is a party to the Covered Transactions or
is otherwise relevant to the TPM.
e. Any changes to Taxpayer’s financialaccounting methods that were made to conform to U.S. GAAP changes and that affect
the Covered Transactions.
f. The amount, reason for, and financial analysis of any compensating adjustments under paragraph 5(f)(ii) of this APA
for the APA Year, including but not limited to:
i. the amounts paid or received by each affected entity;
ii. the character (such as capital, ordinary, income, expense) and country source of the funds transferred, and the specific
affected line item(s) of any affected U.S. Return; and
iii. the date(s) and means by which the payments are or will be made.
g. The amounts, description, reason for, and financial analysis of any book-tax differences relevant to the TPM for the APA
Year, as reflected on Schedule M–1 ofthe U.S. Return for the APA Year.
2. The Financial Statements, and any necessary account detailto show compliance with the TPM, with a copy of the independent
certified public accountant’s opinion required by paragraph 5(d) of this APA.
3. A financial analysis that reflects Taxpayer’s TPM calculations for the APA Year. The calculations must reconcile with and
reference the Financial Statements in sufficient account detail to allow the IRS to determine whether Taxpayer has complied
with the TPM.
4. An organizational chart for the Worldwide Group, revised annually to reflect all ownership or structural changes of entities
that are parties to the Covered Transactions or are otherwise relevant to the TPM.
April 12, 20047692004-15 I.R.B.

APPENDIX D
DEFINITIONS
The following definitions control for all purposes of this APA. The definitions appear alphabetically below:
TermDefinition
Annual ReportA report within the meaning of Revenue Procedure 96–53, section 11.
APAThis Advance Pricing Agreement, which is an “advance pricing agreement” within the
meaning of Revenue Procedure 96–53, section 1.
APA RecordsThe records specified in Appendix C.
APA RequestTaxpayer’s request for this APA dated, including any amendments or
supplemental or additional information thereto.
Covered TransactionThis term is defined in Appendix A.
Financial StatementsThe financial statements prepared in accordance with U.S. GAAP and stated in U.S.
dollars.
Foreign GroupWorldwide Group members that are not U.S. persons.
Foreign Participants[namethe foreign entities involved in Covered Transactions].
I.R.C.The Internal Revenue Code of 1986, 26 U.S.C., as amended.
Pub. L. 106–170The Ticket to Work and Work Incentives Improvement Act of 1999.
Revenue Procedure 96–53Rev. Proc. 96–53, 1996–2 C.B. 375.
Transfer Pricing Method (TPM)Atransfer pricing method within the meaning of Treasury Regulations section 1.482–1(b)
and Revenue Procedure 96–53, section 3.02.
U.S. GAAPU.S. generally-accepted accounting principles.
U.S. GroupWorldwide Group members that are U.S. persons.
U.S. ReturnFor each taxable year, the “returns with respect to income taxes under subtitle A” that
Taxpayer must “make” in accordance with I.R.C. section 6012. {Or substitute for
partnership:For each taxable year, the “return” that Taxpayer must “make” in accordance
with I.R.C. section 6031.}
Worldwide GroupTaxpayer and all organizations, trades, businesses, entities, or branches (whether or not
incorporated, organized in the United States,or affiliated) owned or controlled directly or
indirectly by the same interests.
2004-15 I.R.B.770April 12, 2004

ATTACHMENT B
FORMULAS FOR B
ALANCE SHEET ADJUSTMENTS
D
efinitionsofVariables:
AP= average accounts payable
AR= average trade
accounts receivable, net of allowance for bad debt
cogs= cost of goods sold
INV= average inventory, stated on FIFO basis
opex= operating e
xpenses (general, sales, administrative, and depreciation expenses)
PPE= property, plant, and equipment,net of accumulated depreciation
sales= net sales
tc= total cost
(cogs + opex, as defined above)
h= average accounts payable or trade accounts receivable holding period, stated as a fraction of a year
i= interest rate
t= entity bei
ng tested
c= comparable
E
quations:
If Cost of Goods Sold is controlled (generally, sales in denominator of PLI):
Receivables Adjustment (“RA”):RA = {[(AR
t
/ sales
t
)xsales
c
]-AR
c
}x{i/[1+(ixh
c
)]}
Payables Adjustment (“PA”):PA = {[(AP
t
/ sales
t
)xsales
c
]-AP
c
}x{i/[1+(ixh
c
)]}
Inventory Adjustment (“IA”):IA = {[(INV
t
/ sales
t
)xsales
c
]-INV
c
}xi
PP&E Adjustment (“PPEA”):PPEA = {[(PPE
t
/ sales
t
)xsales
c
] - PPE
c
}xi
If Sales are controlled (generally, costs in the denominator of PLI):
10
Recei
vables Adjustment (“RA”):
RA = {[
(AR
t
/tc
t
)xtc
c
]-AR
c
} x {i/[1+(i x h
c
)]}
Payables Adjustment (“PA”):PA = {[(AP
t
/tc
t
)xtc
c
]-AP
c
} x {i/[1+(i x h
c
)]}
Inventory Adjustment (“IA”):IA = {[(INV
t
/tc
t
)xtc
c
]-INV
c
}xi
PP&E
Adjustment (“PPEA”):
PPEA
={[(PPE
t
/tc
t
)xtc
c
]-PPE
c
}xi
Then Adjust Comparables as Follows:
adjusted sales
c
= sales
c
+RA
adjusted cogs
c
= cogs
c
+PA-IA
adjusted opex
c
= opex
c
- PPEA
10
Depending on the specific facts, the equations below mayuse total costs (“tc”) or cost of goods sold (“cogs”).
April 12, 20047712004-15 I.R.B.

Application of Circular 230 to
Municipal Bond Opinions
Announcement 2004–29
On December 30, 2003, the Treasury
Department published a notice of pro-
posedrulemakingintheFederalRegister
(REG–122379–02, 2004–5 I.R.B. 392)
proposing modifications to rules govern-
ing practice before the Internal Revenue
Service (Circular 230). Section 10.35 (Re-
quirements for certain tax shelter opinions)
of the proposed regulations is proposed to
be effective for opinions rendered after the
date that final regulations are published in
the Federal Register.
The Treasury Department and the IRS
are continuing to consider all comments
on the proposed regulations. In the mean-
time, the Treasury Department and the
IRS announce that, in final regulations,
the definition of tax shelter opinion for
purposes of section 10.35 will not apply,
if at all, to written advice concerning mu-
nicipal bonds rendered less than 120 days
after the publication of such final regula-
tions in the Federal Register. Conforming
changes, if necessary, will be made to
section 10.36(b).
The principal author of this notice is
Heather L. Dostaler of the Office of the
Associate Chief Counsel (Procedure and
Administration), Administrative Provi-
sions and Judicial Practice Division, but
other personnel from the IRS and Treasury
Department participated in its develop-
ment. For further information regarding
this notice, contact Heather L. Dostaler at
(202) 622–4940 (not a toll-free number).
2004-15 I.R.B.772April 12, 2004

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
April 12, 2004i2004-15 I.R.B.

Numerical Finding List
1
Bulletins 2004–1 through 2004–15
Announcements:
2004-1, 2004-1 I.R.B.254
2004-2, 2004-3 I.R.B.322
2004-3, 2004-2 I.R.B.294
2004-4, 2004-4 I.R.B.357
2004-5, 2004-4 I.R.B.362
2004-6, 2004-3 I.R.B.322
2004-7, 2004-4 I.R.B.365
2004-8, 2004-6 I.R.B.441
2004-9, 2004-6 I.R.B.441
2004-10, 2004-7 I.R.B.501
2004-11, 2004-10 I.R.B.581
2004-12, 2004-9 I.R.B.541
2004-13, 2004-9 I.R.B.543
2004-14, 2004-10 I.R.B.582
2004-15, 2004-11 I.R.B.612
2004-16, 2004-13 I.R.B.668
2004-17, 2004-12 I.R.B.635
2004-18, 2004-12 I.R.B.639
2004-19, 2004-13 I.R.B.668
2004-20, 2004-13 I.R.B.673
2004-21, 2004-13 I.R.B.673
2004-22, 2004-14 I.R.B.709
2004-23, 2004-13 I.R.B.673
2004-24, 2004-14 I.R.B.714
2004-25, 2004-15 I.R.B.737
2004-26, 2004-15 I.R.B.743
2004-27, 2004-14 I.R.B.714
2004-29, 2004-15 I.R.B.772
Notices:
2004-1, 2004-2 I.R.B.268
2004-2, 2004-2 I.R.B.269
2004-3, 2004-5 I.R.B.391
2004-4, 2004-2 I.R.B.273
2004-5, 2004-7 I.R.B.489
2004-6, 2004-3 I.R.B.308
2004-7, 2004-3 I.R.B.310
2004-8, 2004-4 I.R.B.333
2004-9, 2004-4 I.R.B.334
2004-10, 2004-6 I.R.B.433
2004-11, 2004-6 I.R.B.434
2004-12, 2004-10 I.R.B.556
2004-13, 2004-12 I.R.B.631
2004-14, 2004-9 I.R.B.526
2004-15, 2004-9 I.R.B.526
2004-16, 2004-9 I.R.B.527
2004-17, 2004-11 I.R.B.605
2004-18, 2004-11 I.R.B.605
2004-19, 2004-11 I.R.B.606
2004-20, 2004-11 I.R.B.608
Notices— Continued:
2004-21, 2004-11 I.R.B.609
2004-22, 2004-12 I.R.B.632
2004-23, 2004-15 I.R.B.725
2004-24, 2004-13 I.R.B.642
2004-25, 2004-15 I.R.B.727
Proposed Regulations:
REG-106590-00, 2004-14 I.R.B.704
REG-116664-01, 2004-3 I.R.B.319
REG-122379-02, 2004-5 I.R.B.392
REG-139845-02, 2004-5 I.R.B.397
REG-165579-02, 2004-13 I.R.B.651
REG-166012-02, 2004-13 I.R.B.655
REG-115471-03, 2004-14 I.R.B.706
REG-126459-03, 2004-6 I.R.B.437
REG-126967-03, 2004-10 I.R.B.566
REG-149752-03, 2004-14 I.R.B.707
REG-153172-03, 2004-15 I.R.B.729
REG-156232-03, 2004-5 I.R.B.399
REG-156421-03, 2004-10 I.R.B.571
REG-167217-03, 2004-9 I.R.B.540
REG-167265-03, 2004-15 I.R.B.730
Revenue Procedures:
2004-1, 2004-1 I.R.B.1
2004-2, 2004-1 I.R.B.83
2004-3, 2004-1 I.R.B.114
2004-4, 2004-1 I.R.B.125
2004-5, 2004-1 I.R.B.167
2004-6, 2004-1 I.R.B.197
2004-7, 2004-1 I.R.B.237
2004-8, 2004-1 I.R.B.240
2004-9, 2004-2 I.R.B.275
2004-10, 2004-2 I.R.B.288
2004-11, 2004-3 I.R.B.311
2004-12, 2004-9 I.R.B.528
2004-13, 2004-4 I.R.B.335
2004-14, 2004-7 I.R.B.489
2004-15, 2004-7 I.R.B.490
2004-16, 2004-10 I.R.B.559
2004-17, 2004-10 I.R.B.562
2004-18, 2004-9 I.R.B.529
2004-19, 2004-10 I.R.B.563
2004-20, 2004-13 I.R.B.642
2004-21, 2004-14 I.R.B.702
2004-22, 2004-15 I.R.B.727
Revenue Rulings:
2004-1, 2004-4 I.R.B.325
2004-2, 2004-2 I.R.B.265
2004-3, 2004-7 I.R.B.486
2004-4, 2004-6 I.R.B.414
2004-5, 2004-3 I.R.B.295
2004-6, 2004-4 I.R.B.328
2004-7, 2004-4 I.R.B.327
2004-8, 2004-10 I.R.B.544
2004-9, 2004-6 I.R.B.428
2004-10, 2004-7 I.R.B.484
2004-11, 2004-7 I.R.B.480
2004-12, 2004-7 I.R.B.478
2004-13, 2004-7 I.R.B.485
2004-14, 2004-8 I.R.B.511
2004-15, 2004-8 I.R.B.515
2004-16, 2004-8 I.R.B.503
2004-17, 2004-8 I.R.B.516
2004-18, 2004-8 I.R.B.509
2004-19, 2004-8 I.R.B.510
2004-20, 2004-10 I.R.B.546
2004-21, 2004-10 I.R.B.544
2004-22, 2004-10 I.R.B.553
2004-23, 2004-11 I.R.B.585
2004-24, 2004-10 I.R.B.550
2004-25, 2004-11 I.R.B.587
2004-26, 2004-11 I.R.B.598
2004-27, 2004-12 I.R.B.625
2004-28, 2004-12 I.R.B.624
2004-29, 2004-12 I.R.B.627
2004-30, 2004-12 I.R.B.622
2004-31, 2004-12 I.R.B.617
2004-32, 2004-12 I.R.B.621
2004-33, 2004-12 I.R.B.628
2004-34, 2004-12 I.R.B.619
2004-35, 2004-13 I.R.B.640
2004-36, 2004-12 I.R.B.620
2004-37, 2004-11 I.R.B.583
2004-38, 2004-15 I.R.B.717
2004-39, 2004-14 I.R.B.700
2004-40, 2004-15 I.R.B.716
Tax Conventions:
2004-3, 2004-7 I.R.B.486
Treasury Decisions:
9099, 2004-2 I.R.B.255
9100, 2004-3 I.R.B.297
9101, 2004-5 I.R.B.376
9102, 2004-5 I.R.B.366
9103, 2004-3 I.R.B.306
9104, 2004-6 I.R.B.406
9105, 2004-6 I.R.B.419
9106, 2004-5 I.R.B.384
9107, 2004-7 I.R.B.447
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2003–27 through 2003–52 is in Internal Revenue Bulletin
2003–52, dated December 29, 2003.
2004-15 I.R.B.iiApril 12, 2004

Treasury Decisions— Continued:
9108, 2004-6 I.R.B.429
9109, 2004-8 I.R.B.519
9110, 2004-8 I.R.B.504
9111, 2004-8 I.R.B.518
9112, 2004-9 I.R.B.523
9113, 2004-9 I.R.B.524
9114, 2004-11 I.R.B.589
9115, 2004-14 I.R.B.680
9116, 2004-14 I.R.B.674
9117, 2004-15 I.R.B.721
9118, 2004-15 I.R.B.718
April 12, 2004iii2004-15 I.R.B.

Findings List of Current Actions on
Previously Published Items
1
Bulletins 2004–1 through 2004–15
Announcements:
2003-56
Modified by
Ann. 2004-11, 2004-10 I.R.B.581
Notices:
98-5
Withdrawn by
Notice 2004-19, 2004-11 I.R.B.606
2000-4
Obsoleted by
T.D. 9115, 2004-14 I.R.B.680
2003-76
Modified by
Notice 2004-19, 2004-11 I.R.B.606
2004–2
Modified by
Notice 2004–25, 2004–15 I.R.B.727
Proposed Regulations:
REG-110896-98
Corrected by
Ann. 2004-14, 2004-10 I.R.B.582
REG-115037-00
Corrected by
Ann. 2004-7, 2004-4 I.R.B.365
REG-138499-02
Partially withdrawn by
REG-106590-00, 2004-14 I.R.B.704
REG-143321-02
Withdrawn by
REG-156232-03, 2004-5 I.R.B.399
REG-146893-02
Corrected by
Ann. 2004-7, 2004-4 I.R.B.365
REG-163974-02
Corrected by
Ann. 2004-13, 2004-9 I.R.B.543
Revenue Procedures:
87-19
Obsoleted in part by
Rev. Proc. 2004-18, 2004-9 I.R.B.529
93-15
Obsoleted in part by
Rev. Proc. 2004-18, 2004-9 I.R.B.529
Revenue Procedures— Continued:
94-41
Superseded by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
94-55
Obsoleted in part by
Rev. Proc. 2004-18, 2004-9 I.R.B.529
98-16
Suspended by
Notice 2004-12, 2004-10 I.R.B.556
2000-38
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
2000-50
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
2001-10
Modified by
Ann. 2004-16, 2004-13 I.R.B.668
2001-23
Modified by
Ann. 2004-16, 2004-13 I.R.B.668
2002-9
Modified and amplified by
Rev. Rul. 2004-18, 2004-8 I.R.B.509
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
Ann. 2004-16, 2004-13 I.R.B.668
2002-28
Modified by
Ann. 2004-16, 2004-13 I.R.B.668
2002-71
Superseded by
Rev. Proc. 2004-13, 2004-4 I.R.B.335
2003-1
Superseded by
Rev. Proc. 2004-1, 2004-1 I.R.B.1
2003-2
Superseded by
Rev. Proc. 2004-2, 2004-1 I.R.B.83
2003-3
As amplified by Rev. Proc. 2003-14, and as
modified by Rev. Proc. 2003-48 superseded by
Rev. Proc. 2004-3, 2004-1 I.R.B.114
2003-4
Superseded by
Rev. Proc. 2004-4, 2004-1 I.R.B.125
2003-5
Superseded by
Rev. Proc. 2004-5, 2004-1 I.R.B.167
Revenue Procedures— Continued:
2003-6
Superseded by
Rev. Proc. 2004-6, 2004-1 I.R.B.197
2003-7
Superseded by
Rev. Proc. 2004-7, 2004-1 I.R.B.237
2003-8
Superseded by
Rev. Proc. 2004-8, 2004-1 I.R.B.240
2003-23
Modified and superseded by
Rev. Proc. 2004-14, 2004-7 I.R.B.489
2003-26
Supplemented by
Rev. Proc. 2004-17, 2004-10 I.R.B.562
2003-64
Modified by
Rev. Proc. 2004-21, 2004-14 I.R.B.702
2004-1
Corrected by
Ann. 2004-8, 2004-6 I.R.B.441
2004-4
Modified by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
2004-5
Modified by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
2004-6
Modified by
Rev. Proc. 2004-15, 2004-7 I.R.B.490
Revenue Rulings:
55-748
Modified and superseded by
Rev. Rul. 2004-20, 2004-10 I.R.B.546
92-19
Supplemented in part by
Rev. Rul. 2004-14, 2004-8 I.R.B.511
94-38
Clarified by
Rev. Rul. 2004-18, 2004-8 I.R.B.509
98-25
Clarified by
Rev. Rul. 2004-18, 2004-8 I.R.B.509
2004-38
Modified by
Rev. Proc. 2004-22, 2004-15 I.R.B.727
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2003–27 through 2003–52 is in Internal Revenue Bulletin 2003–52, dated December 29,
2003.
2004-15 I.R.B.ivApril 12, 2004
*U.S. Government Printing Office: 2004—304–778/60130