Internal Revenue Bulletin 2004-3 (PDF rendition): IRS Revenue Procedures

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
4-3
January 20, 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.
INCOME TAX
Rev. Rul. 2004–5, page 295.
Charitable deductions.This ruling concludes that a trust is
not prohibited from taking a charitable deduction under sec-
tion 642(c) of the Code for the trust’s distributive share of a
charitable contribution made by a partnership from the partner-
ship’s gross income even though the trust’s governing instru-
ment does not authorize the trustee to make charitable contri-
butions.
T.D. 9100, page 297.
REG–116664–01, page 319.
Final, temporary, and proposed regulations under section 6011
of the Code are designed to eliminate regulatory impediments
to the electronic filing of certain income tax returns and other
forms.
T.D. 9103, page 306.
Final regulations under section 6045 of the Code provide that
brokers must file information returns and furnish information
statements to individuals who receive substitute payments in
lieu of dividends on or after January 1, 2003.
EMPLOYMENT TAX
Announcement 2004–2, page 322.
The Service announces a new reporting code to be used begin-
ning with the 2004 Form W–2. Employer contributions to an
employee’s Health Savings Account (HSA) must be reported on
Form W–2 in box 12 using Code W.
ADMINISTRATIVE
Notice 2004–6, page 308.
Capitalization, business expenses, tangible property.
The Service and Treasury Department intend to propose
regulations that clarify the application of sections 162 and
263 of the Code to expenditures paid or incurred to repair,
improve, or rehabilitate tangible property. This notice requests
comments on issues relating to such expenditures by March
1, 2004.
Notice 2004–7, page 310.
Charitable contributions; intellectual property.This no-
tice advises taxpayers that, in appropriate cases, the Service
intends to disallow improper charitable contribution deductions
claimed by taxpayers in connection with the transfer of patents
or other intellectual property to charitable organizations. In par-
ticular, the IRS has become aware of purported charitable con-
tributions of intellectual property in which one or more of the
following issues (which may affect the availability or amount of
a deduction) are present: 1) transfer of a nondeductible partial
interest in intellectual property; 2) the taxpayer’s expectation
or receipt of a benefit in exchange for the transfer; 3) inade-
quate substantiation of the contribution; and 4) overvaluation
of the intellectual property transferred.
Rev. Proc. 2004–11, page 311.
This procedure provides an automatic consent procedure al-
lowing a taxpayer to make a change in method of accounting
for certain depreciable or amortizable property after its dispo-
sition, waives the two-year rule in Rev. Rul. 90–38 with respect
to certain changes in depreciation or amortization, and modi-
fies other revenue procedures to conform with regulations sec-
tion 1.446–1T(e)(2)(ii)(d). Rev. Procs. 2000–38, 2000–50,
and 2002–9 modified.
Announcements of Disbarments and Suspensions begin on page 322.
Fi
nding Lists begin on page ii.

The IRS Mission
Provide Americ
a’s taxpayers top quality service by helping
them understa
nd and meet their tax responsibilities and by
applying the ta
x 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. Bul-
letin contents are consolidated 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.
* Beginning with Internal Revenue Bulletin 2003–43, we are publishing the index at the end of the month, rather than at the beginning.
January 20, 20042004-3 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 170.—
Charitable,
etc., Contributions and Gifts
Is a charitable deduction under section 642(c) for
a trust’s distributive share of a charitable contribution
made by a partnership from the partnership’s gross in-
come prohibited because the trust’s governing instru-
ment does not authorize the trustee to make charitable
contributions? See Rev. Rul. 2004-5, page 295.
Regulations eliminate impediments to the elec-
tronic filing of certain income tax returns and other
forms. See T.D. 9100, page 297.
Section 446.—General Rule
for Methods of Accounting
26 CFR 1.446-1T: General rule for methods of ac-
counting (temporary).
If a taxpayer used an impermissible method of ac-
counting for depreciation or amortization for certain
depreciable or amortizable property that has been dis-
posed of by the taxpayer, is a change to a permissible
method of accounting for depreciation or amortiza-
tion for that property after its disposition a change in
method of accounting under §446(e) of the Internal
Revenue Code? See Rev. Proc. 2004-11, page 311.
Section 556.—Undistributed
Foreign Personal Holding
Company Income
Regulations eliminate impediments to the elec-
tronic filing of certain income tax returns and other
forms. See T.D. 9100, page 297.
Section 565.—Consent
Dividends
Regulations eliminate impediments to the elec-
tronic filing of certain income tax returns and other
forms. See T.D. 9100, page 297.
Section 642.—Special
RulesforCreditsand
Deductions
26 CFR 1.642(c)–1: Unlimited deduction for
amounts paid for a charitable purpose.
(Also §§ 170, 651, 652, 681, 702; 1.651(a)–1,
1.651(a)–4, 1.702–1.)
C
haritable deductions.This ruling
c
oncludes that a trust is not prohibited
from taking a c
haritable deduction under
section 642(c
)oftheCodeforthetrust’s
distributive
share of a charitable contri-
bution made b
y a partnership from the
partnership
’s gross income even though
the trust’s g
overning instrument does not
authorize th
e trustee to make charitable
contributi
ons.
Rev. Rul. 2004–5
ISSUE
Is a charitable deduction under § 642(c)
of the Internal Revenue Code for a trust’s
distributive share of acharitable contribu-
tion made by a partnership from the part-
nership’s gross income prohibited because
the trust’s governing instrument does not
authorize the trustee to make charitable
contributions?
FACTS
The governing instrument of trustTR
provides that all the income is to be dis-
tributed annually toAfor life and uponA’s
death,TRwill terminate and all the assets
will pass toB.TR’s governing instrument
does not authorize the trustee to make char-
itable contributions.
One ofTR’s assets is an interest in part-
nershipPRS. During the taxable year,PRS
contributes cash from its gross income to a
charitable organization for a purpose spec-
ified in § 170(c). None ofTR’s income for
the taxable year is “unrelated business in-
come” within the meaning of § 681(a). In
computing its income tax for the taxable
year,TRtakes into account its distributive
share ofPRS’s income, gain, loss, deduc-
tions (including charitable contributions),
and credits.
LAW AND ANALYSIS
Secti
on 642(c)(1) provides that a trust
(othe
r than a trust subject to §§ 651 and
652) i
s allowed a deduction in computing
its ta
xable income for any amount of the
gros
s income, without limitation, that pur-
suan
t to the terms of the governing instru-
ment
is, during the taxable year, paid for a
purp
ose specified in § 170(c) (determined
without regar
d to § 170(c)(2)(A)). The de-
ductionisinl
ieu of the charitable deduc-
tion allowed b
y§170(a).
A trust subjec
tto§§651and652is
known as a simp
le trust. A trust that is
not a simple t
rust is known as a complex
trust and is s
ubject to the provisions of
§§ 661–663. S
ection 1.651(a)–1 of the
Income Tax Re
gulations provides that a
trust may be
a simple trust for one year and
a complex tr
ust for another year.
Under § 651(
a), the terms of a simple
trust (1) pr
ovide that all of the trust’s in-
come is to be
distributed currently and (2)
do not provi
de that any amounts are to be
paid, perm
anently set aside, or used for the
charitabl
e purposes specified in § 642(c).
Under § 1.6
51(a)–4, a trust is not consid-
ered to be a
trust that may pay, permanently
set aside
, or use any amount for charitable
purposes
for any taxable year in which the
trust is n
ot allowed a charitable deduction
under § 64
2(c).
Section 7
02(a)(4) provides that in deter-
mining a p
artner’s income tax, each part-
ner shall
take into account separately the
partner
’s distributive share of the partner-
ship’s c
haritable contributions (as defined
in § 170(
c)).
Section
1.702–1(a)(4) provides that
each par
tner shall take into account, as
part of t
he charitable contributions paid
by the pa
rtner, the partner’s distributive
share o
f each class of charitable contribu-
tions p
aid by the partnership within the
partne
rship’s taxable year. Section 170
determ
ines the extent to which the amount
may be a
llowed as a deduction to the part-
ner.
Sectio
n 1.702–1(b) provides that the
chara
cter in the hands of a partner of any
item o
f income, gain, loss, deduction, or
credi
t described in § 702(a)(1) through (8)
shall
be determined as if that item were re-
alize
d directly from the source from which
real
ized by the partnership or incurred in
the s
ame manner as incurred by the part-
ners
hip.
Sect
ion 1.702–1(c)(1) provides that if
it is
necessary to determine the amount or
char
acter of the gross income of a part-
ner,
the partner’s gross income shall in-
clu
de the partner’s distributive share of the
2004-3 I.R.B.295January 20, 2004

gross income of the partnership, that is, the
amount of gross income of the partnership
from which was derived the partner’s dis-
tributive share of partnership taxable in-
come or loss (including items described in
§ 702(a)(1) through (8)).
For a trust to claim a charitable deduc-
tion under § 642(c) for amounts of gross
income that it contributes for charitable
purposes, the governing instrument of the
trust must give the trustee the authority
to make charitable contributions. This re-
quirement is an essential element to qual-
ify the trust to claim a deduction for a
charitable contribution made directly by
the trust. In the case of a trust’s invest-
ment in a partnership, the partnership may
make a charitable contribution from the
partnership’s gross income, and that in-
come is never available to the trust. For
federal tax purposes, however, the trust
must take into account its distributive share
of the partnership’sincome, gain, loss,
deductions (including charitable contribu-
tions), and credits. Under these circum-
stances, a trust’s deduction for its distribu-
tive share of a charitable contribution made
by a partnership will not be disallowed un-
der § 642(c) merely because the trust’s
governing instrument does not authorize
the trustee to make charitable contribu-
tions.See Estate of Bluestein v. Commis-
sioner, 15 T.C. 770 (1950),acq., 1951–1
C.B. 1, andEstate of Lowenstein v. Com-
missioner12 T.C. 694 (1949),acq.1949–2
C.B. 2,aff’d sub nom,First National Bank
of Mobile v. Commissioner, 183 F.2d 172
(5th Cir. 1950), reaching similar conclu-
sions under the statutory predecessor to
§ 642(c).
In the present situation,PRS’s charita-
ble contribution is made fromPRS’s gross
income.TRis allowed a charitable deduc-
tion for its distributive share of this contri-
bution, even thoughTR’s governing instru-
ment does not authorize the trustee to make
charitable contributions. Because none of
TR’s income for the taxable year would
be considered “unrelated business income”
for purposes of § 681(a), the amount of the
charitable deduction is not limited under
§ 681.TRis a complex trust for the tax-
able year because it is allowed a charitable
deduction under § 642(c) for that year.
The same result would apply ifTRwere
always a complex trust because it was not
required to distribute all its income cur-
rently.
HOLDING
A charitable deduction under § 642(c)
for a trust’s distributive share of a chari-
table contribution made by a partnership
from the partnership’s gross income is not
prohibited even though the trust’s gov-
erning instrument does not authorize the
trustee to make charitable contributions.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Charlotte Chyr of the Associate
Chief Counsel (Passthroughs & Special In-
dustries). For further information regard-
ing this revenue ruling, contact Charlotte
Chyr at (202) 622–3080 (not a toll-free
call).
Section 651.—Deduction
for Trusts Distributing
Current Income Only
26 CFR 1.651(a)-1: Simple trusts; deductions for dis-
tributions; in general.
26 CFR 1.651(a)-4: Charitable purposes.
Is a charitable deduction under section 642(c) for
a trust’s distributive share of a charitable contribution
made by a partnership from the partnership’s gross in-
come prohibited because the trust’s governing instru-
ment does not authorize the trustee to make charitable
contributions? See Rev. Rul. 2004-5, page 295.
Section 652.—Inclusion
of Amounts in Gross
Income of Beneficiaries of
Trusts Distributing Current
Income Only
Is a charitable deduction under section 642(c) for
a trust’s distributive share of a charitable contribution
made by a partnership from the partnership’s gross in-
come prohibited because the trust’s governing instru-
ment does not authorize the trustee to make charitable
contributions? See Rev. Rul. 2004-5, page 295.
Section 681.—Limitation on
Charitable Deduction
Is a charitable deduction under section 642(c) for
a trust’s distributive share of a charitable contribution
made by a partnership from the partnership’s gross in-
come prohibited because the trust’s governing instru-
ment does not authorize the trustee to make charitable
contributions? See Rev. Rul. 2004-5, page 295.
Section 702.—Income and
Credits of Partner
26 CFR 1.702-1: Income and credits of partner.
Is a charitable deduction under section 642(c) for
a trust’s distributive share of a charitable contribution
made by a partnership from the partnership’s gross in-
come prohibited because the trust’s governing instru-
ment does not authorize the trustee to make charitable
contributions? See Rev. Rul. 2004-5, page 295.
Section 936.—Puerto Rico
and Possession Tax Credit
Regulations eliminate impediments to the elec-
tronic filing of certain income tax returns and other
forms. See T.D. 9100, page 297.
Section 1016.—Adjustment
to Basis
26 CFR 1.1016-3T: Exhaustion, wear and tear, ob-
solescence, amortization, and depletion for periods
since February 28, 1913 (temporary).
Whether § 1016(a)(2) of the Internal Revenue
Code permanently affects a taxpayer’s lifetime in-
come for purposes of determining whether a change
in depreciation or amortization is a change in method
of accounting under § 446(e)? See Rev. Proc.
2004-11, page 311.
Section 1017.—Discharge
of Indebtedness
Regulations eliminate impediments to the elec-
tronic filing of certain income tax returns and other
forms. See T.D. 9100, page 297.
Section 1368.—Distri-
butions
Regulations eliminate impediments to the elec-
tronic filing of certain income tax returns and other
forms. See T.D. 9100, page 297.
Section 1377.—Definitions
and Special Rule
Regulations eliminate impediments to the elec-
tronic filing of certain income tax returns and other
forms. See T.D. 9100, page 297.
Section 1502.—Regulations
Regulations eliminate impediments to the elec-
tronic filing of certain income tax returns and other
forms. See T.D. 9100, page 297.
January 20, 20042962004-3 I.R.B.

Section 1503.—Computa-
tion and Payment of Tax
Regulations eliminate impediments to the elec-
tronic filing of certain income tax returns and other
forms. See T.D. 9100, page 297.
Section 6011.—General
Requirement of Return,
Statement, or List
26 CFR 1.6011–1: General requirement of return,
statement, or list.
T.D. 9100
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 301 and 602
Guidance Necessary to
Facilitate Business Electronic
Filing
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains reg-
ulations designed to eliminate regulatory
impediments to the electronic filing of cer-
tain income tax returns and other forms.
These regulations affect business taxpay-
ers who file income tax returns electron-
ically. The text of the temporary regula-
tions also serves as the text of the proposed
regulations (REG–116664–01) set forth in
this issue of the Bulletin.
DATES:Effective Date: These regulations
are effective on December 19, 2003.
Applicability Date: These regulations
apply with respect to taxable years be-
ginning after December 31, 2002. The
applicability of §§1.170A–11T, 1.556–2T,
1.565–1T,1.936–7T,1.1017–1T,
1.1368–1T, 1.1377–1T, 1.1502–21T,
1.1502–75T, 1.1503–2T, 1.6038B–1T,
and 301.7701–3T will expire on or before
December 18, 2006.
FOR FURTHER INFORMATION
CONTACT: Nathan Rosen, (202)
622–4910 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These regulations are being issued
without prior notice and public procedure
pursuant to the Administrative Procedure
Act (5 U.S.C. 553). For this reason, the
collection of information contained in
these regulations has been reviewed and
pending receipt and evaluation of pub-
lic comments, approved by the Office of
Management and Budget under control
number 1545–1868. Responses to this
collection of information are mandatory.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
control number.
For further information concerning this
collection of information, and where to
submit comments on the collection of in-
formation and the accuracy of the esti-
mated burden, and suggestions for reduc-
ing this burden, please refer to the pream-
ble to the cross-referencing notice of pro-
posedrulemakingpublishedinthisissueof
the Bulletin.
Books and records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and tax
return information are confidential, as re-
quired by 26 U.S.C. 6103.
Background
This document contains amendments to
the Income Tax Regulations (26 CFR part
1) and the Procedure and Administration
Regulations (26 CFR part 301) designed
to eliminate regulatory impediments to the
electronic submission of tax returns and
other forms filed by corporations, partner-
ships and other businesses.
In 1998, Congress enacted the Inter-
nal Revenue Service Restructuring and Re-
form Act of 1998 (RRA 1998), Public Law
105–206 (112 Stat. 685) (1998). In rel-
evant part, RRA 1998 states that the pol-
icy of Congress is to promote the paper-
less filing of Federal tax returns. Section
2001(a) of RRA 1998 sets a long-range
goal for the IRS to have at least 80 per-
cent of all Federal tax returns filed elec-
tronically by 2007. Section 2001(b) of
RRA 1998 requires the IRS to establish a
10-year strategic plan to eliminate barriers
to electronic filing. On January 30, 2003,
the IRS published final regulations (T.D.
9040, 2003–10 I.R.B. 568) eliminating a
number of regulatory impediments to the
electronic filing of Form 1040, “U.S. Indi-
vidual Income Tax Return.”
The IRS has identified a number of reg-
ulatory provisions that impede the ability
of business entities to file returns electroni-
cally. Some of these regulations, for exam-
ple, impede electronic filing by requiring
taxpayers to include third-party signatures
on their tax returns or by requiring tax-
payers to attach documents or statements
generatedbyathirdparty. Othersrequire
ataxpayertosignanIRSformandfileit
as an attachment to the taxpayer’s income
tax return. These regulations eliminate the
impediments for taxable years beginning
after December 31, 2002. The regulations
generally affect taxpayers who must file
any of the following forms: Form 926,
“Return by a U.S. Transferor of Property
to a Foreign Corporation”; Form 972,
“Consent of Shareholder To Include Spe-
cific Amount in Gross Income”; Form 973,
“Corporation Claim for Deduction for
Consent Dividends”; Form 982, “Reduc-
tion of Tax Attributes Due to Discharge of
Indebtedness (and Section 1082 Basis Ad-
justment)”; Form 1120, “U.S. Corporation
Income Tax Return”; Form 1120S, “U.S.
Income Tax Return for an S Corporation”;
Form 1122, “Authorization and Consent of
Subsidiary Corporation To Be Included in
a Consolidated Income Tax Return”; Form
5471, “Information Return of U.S. Persons
With Respect To Certain Foreign Corpo-
rations”; Form 5712–A, “Election and
Verification of the Cost Sharing or Profit
Split Method Under Section 936(h)(5)”;
and Form 8832, “Entity Classification
Election.”
Explanation of Provisions
1.Form 926: Return by a U.S. Transferor
of Property to a Foreign Corporation
Section 6038B provides that transferors
of property to foreign corporations must,
in certain circumstances, file information
returns with the Secretary regarding such
transactions. Section 1.6038B–1(b)(1)(i)
requires the transferor to file the return on
Form 926 as an attachment to its income
2004-3 I.R.B.297January 20, 2004

tax return. Under §1.6038B–1(b)(1)(i) and
(ii), filers of Form 926 must sign the form
and attachments to the form are subject to
the declaration under penalties of perjury
that the information submitted is true, cor-
rect, and complete. The signature require-
ment impedes electronic filing of the trans-
feror’s income tax return because Form
926 cannot yet be signed electronically.
These regulations eliminate the obligation
to sign Form 926 and provide, instead, that
Form 926 and any attachments to the form
are verified by signing the income tax re-
turn with which the form and attachments
are filed.
2.Form 972: Consent of Shareholder To
Include Specific Amount in Gross Income
Section 565 allows a corporation and its
shareholders to treat certain hypothetical
corporate distributions as actual dividends.
Section 1.565–1(b)(1)requires sharehold-
ers to use Form 972 to elect such treat-
ment and requires each consenting share-
holder (or an authorized agent) to sign
the form. Section 1.565–1(b)(3) requires
the corporation to attach the signed Form
972toitsincometaxreturnforthetax-
able year in which it claims the dividends
paid deduction for the hypothetical divi-
dends. Requiring corporations to attach
a signed Form 972 impedes electronic fil-
ing of their income tax returns because
third-party signatures cannot be incorpo-
ratedintoanelectronic return. These reg-
ulations provide that an unsigned copy of
Form 972 may be submitted with the cor-
poration’s income tax return if the cor-
poration retains the signed original in its
records.
3.Form 973: Corporation Claim for
Deduction for Consent Dividends
A corporation uses Form 973 to claim
the dividend treatment permitted by sec-
tion 565. Section 1.565–1(b)(3) requires
the corporation to sign Form 973 under
penalties of perjury and submit the form
with its tax return. This signature require-
ment impedes electronic filing of a corpo-
ration’s income tax return because Form
973 cannot yet be signed electronically.
These regulations eliminate the obligation
to sign Form 973 and provide, instead, that
Form 973 is verified by signing the income
tax return with which the form is filed.
4.Form 982: Reduction of Tax Attributes
Due to Discharge of Indebtedness (and
Section1082BasisAdjustment)
Section 1017 provides for basis reduc-
tions when income from discharge of in-
debtedness is excluded from gross income.
If a partnership has income from discharge
of indebtedness, §1.1017(g) permits its
partners to request that the partnership
reduce the basis of partnership deprecia-
ble property with respect to the partners.
Section 1.1017–1(g)(2)(iii)(A) requires a
partnership that consents to this basis re-
duction to prepare a statement describing,
among other things, the amount of the
reduction. Section 1.1017–1(g)(2)(iii)(B)
requires the affected partners to attach a
copy of that statement to their income tax
returns.
Requiring partners to attach the partner-
ship consent statement impedes the elec-
tronic filing of their income tax returns be-
cause the partnershipstatement cannot yet
be incorporated into all electronic returns.
To remedy this impediment, these regula-
tions eliminate the obligation to attach the
partnership consent statement and provide,
instead, that taxpayers must retain the con-
sent statement in their records.
5.Form 1120: U.S. Corporation Income
Tax Return
Section 1503 prescribes certain rules
for computing tax for corporations filing
consolidated returns.Section 1.1503–2(g)
permits dual consolidated losses of dual
resident corporations to offset the income
of domestic affiliates under specified cir-
cumstances, includingentryintoanagree-
ment described in §1.1503–2(g)(2)(i).
The corporation entering into the agree-
ment must attach the agreement to its
timely filed U.S. income tax return for
the taxable year in which the loss is in-
curred. The agreement must be signed
under penalties of perjury by the person
who signs the income tax return. Section
1.1503–2(g)(2)(iv)(B)(3)(iii) also requires
a successor corporation to file an agree-
ment described in §1.1503–2(g)(2)(i) to
prevent recapture of the dual consoli-
dated loss in certain circumstances. The
new agreement must be signed under
penalties of perjury by the person who
signs the income tax return. Section
1.1503–2(g)(2)(vi)(B) requires corpora-
tions to file annual certifications with
respect to dual consolidated losses. The
annual certification must be signed un-
der penalties of perjury by the person
who signs the corporation’s income tax
return. The signature requirements in
§1.1503–2(g)(2)(i), (g)(2)(iv)(B)(3)(iii),
and (g)(2)(vi)(B) impede electronic filing
of the corporation’s income tax return
because neither the agreement nor the
annual certification can be signed elec-
tronically. These regulations eliminate the
obligations under §1.1503–2(g)(2)(i) and
(iv)(B)(3)(iii) to attach a signed agreement
and provide, instead, that an unsigned
copy of the agreement may be submitted
with the corporation’s income tax return if
the corporation retains the signed original
in its records. These regulations also elim-
inate the obligation under §1.1503–2(g)(2)
(vi)(B) to sign the annual certification and
provide, instead, that the annual certifica-
tion is verified by signing the income tax
return with which the certification is filed.
Section 170 addresses the tax de-
ductibility of charitable contributions and
gifts. Section 1.170A–11(b)(1) provides
that, under certain conditions, corpora-
tions may treat a charitable contribution as
paid during a taxable year even if the con-
tribution occurs in the following taxable
year. A corporation claiming a charitable
deduction for a taxable year under this
provision must attach a copy of the resolu-
tion of the board of directors authorizing
the contribution to its return for the year.
In addition, the corporation must attach a
declaration, signed under penalties of per-
jury, that the resolution was adopted during
the taxable year. See§1.170A–11(b)(2).
Requiring taxpayers to attach a signed
declaration impedes electronic filing of
Form 1120 because the declaration cannot
be signed electronically. The regulations
eliminate the requirement of a signed
declaration and provide, instead, that the
declaration is verified by signing the re-
turn. The regulations also slightly expand
the content of the declaration by requiring
that it state the date on which the board
of directors authorized the contribution.
Requiring taxpayers to attach a copy of
the resolution authorizing the contribution
may also impede electronic filing of Form
1120 because including the resolution in-
creases the size of the electronic return file
in a potentially burdensome manner. The
regulations eliminate this requirement and
January 20, 20042982004-3 I.R.B.

provide, instead, that the resolution must
be retained in the taxpayer’s records.
Section 1.1502–21(b)(3)(i) provides
that a consolidated group of corporations
may elect to relinquish carryback treat-
ment with respect to a consolidated net
operating loss for any consolidated return
year. The consolidated group elects this
treatment by attaching a statement to the
group’s income tax return for the relevant
year. The regulations require the state-
ment to be signed by the common parent.
This signature requirement impedes elec-
tronic filing of Form 1120 because the
statement cannot be signed electronically.
These regulations eliminate the signature
requirement and permit the election to be
made in an unsigned statement.
Section 1.1502–21(b)(3)(ii)(B) pro-
vides that a group of corporations acquir-
ing a new member may elect to relinquish
part of the carryback period with respect
to certain net operating losses of the new
member. The election is made in a state-
ment attached to the group’s income tax
return. The statement must be signed by
the common parent, the new member, and
any other corporation joining the group
with the new member. This signature
requirement impedeselectronic filing of
Form 1120 because third-party signatures
cannot be incorporatedinto an electronic
return. These regulations eliminate the
signature requirement and permit the elec-
tion to be made in an unsigned statement.
6.Form 1120S: U.S. Income Tax Return
for an S Corporation
Section 1377 provides that under cer-
tain circumstances an S Corporation may
elect to treat a taxable year as if it consisted
of two separate taxable years. Section
1.1377–1(b)(5) provides that an S Corpo-
ration elects this treatment by attaching a
signed statement to its income tax return.
This signature requirement impedes elec-
tronic filing of Form 1120S because the
statement described in §1.1377–1(b)(5)
cannot be signed electronically. These
regulations eliminate the signature re-
quirement and permit the election to be
made in an unsigned statement that is ver-
ified by signing the return.
Section 1.1368–1(g)(2)(i) provides a
similar election for purposes of determin-
ing the treatment of distributions by an S
Corporation in the event of certain owner-
ship changes. Section 1.1368–1(g)(2)(iii)
provides that an S Corporation makes
this election by attaching a statement,
signed by an officer of the corporation,
to its income tax return for the relevant
taxable year. This signature require-
ment impedes electronic filing of Form
1120S because the statement described
in §1.1368–1(g)(2)(iii) cannot be signed
electronically. These regulations eliminate
the signature requirement and permit the
election to be made in an unsigned state-
ment that is verified by signing the return.
Section 1.1368–1(f) allows an S cor-
poration to make certain elections relating
to the source of its distributions. Section
1.1368–1(f)(5)(iii) provides that an S cor-
poration makes these elections by attach-
ing a statement containing specified infor-
mation to its income tax return. An offi-
cer of the corporation must sign the state-
ment under penalties of perjury. This sig-
nature requirement impedes electronic fil-
ing of Form 1120S because the statement
described in §1.1368–1(f)(5)(iii) cannot be
signed electronically. These regulations
eliminate the signature requirement and
permit the election to be made in an un-
signed statement that is verified by signing
the return.
7.Form 1122: Authorization and Consent
of Subsidiary Corporation To Be Included
in a Consolidated Income Tax Return
Section 1.1502–75(h)(2) provides that,
when an affiliated group of corporations
files a consolidated return for the first time,
each subsidiary must consent to the filing
by signing Form 1122 and the signed con-
sent forms must be attached to the con-
solidated return. Requiring the group to
file signed consent forms impedes elec-
tronic filing of consolidated returns be-
cause Form 1122 cannot yet be signed
electronically. These regulations retain the
requirement that each subsidiary consent
to filing a consolidated return but elimi-
nate the impediment to electronic filing by
permitting the group to submit unsigned
copies of the consents with its return if it
retains the signed originals in its records.
8.Form 5471: Information Return of U.S.
Persons With Respect to Certain Foreign
Corporations.
Section 1.556–2(e)(2) provides that cer-
tain U.S. shareholders of a foreign per-
sonal holding company must attach a num-
ber of items to their income tax returns re-
lating to property the company owns or op-
erates. In particular, §1.556–2(e)(2)(vii)
requires certain shareholders to attach a
copy of the contract, lease or rental agree-
ment covering the property. A shareholder
attaches these items to Form 5471, and in
turn attaches that form to its return. Re-
quiring shareholders to attach a copy of
these documents to an income tax return
impedes electronic filing because the doc-
uments cannot yet be incorporated into
all electronic returns. These regulations
eliminate this requirement and provide, in-
stead, that a copy of the contract, lease or
rental agreement must be retained in the
shareholder’s records.
9.Form 5712–A: Election and Verification
of the Cost Sharing or Profit Split Method
Under Section 936(h)(5)
Section 1.936–7(a), Q&A 1 provides
that a possessions corporation makes the
election under section 936(h)(5) to use the
cost sharing or profit split method by filing
a signed Form 5712-A that includes a dec-
laration that all affiliated group members
have consented to the election. The elect-
ing corporation attaches the Form 5712-A
to Form 5735, “Possessions Corporation
Tax Credit,”whichinturnmustbeattached
to the corporation’s income tax return. Re-
quiring taxpayers to sign Form 5712–A
impedes electronic filing of corporate in-
come tax returns because Form 5712–A
cannot yet be signed electronically. These
regulations eliminate the signature require-
ment and permit the election to be made
using an unsigned Form 5712–A that is
verified by signing the return.
10.Form 8832: Entity Classification
Election
An eligible business entity may file
Form 8832 to specify the way in which it
is to be classified for federal tax purposes.
The form must be signed under penalties
of perjury. Section 301.7701–3(c)(1)(ii)
provides that in certain circumstances the
entity must attach a copy of Form 8832
to its tax or information returns. The re-
quirement to attach a copy of Form 8832
impedes electronic filing of tax and in-
formation returns because a copy of the
signed form cannot yet be incorporated
into all electronic returns. These regula-
2004-3 I.R.B.299January 20, 2004

tions provide that the requirement to attach
a copy of Form 8832 to a return may be
satisfied with an unsigned copy.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations. For
the applicability of the Regulatory Flexi-
bility 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 this issue of the
Bulletin. Pursuant to section 7805(f) of
the Code, these temporary and final regula-
tions will be submitted to the Chief Coun-
sel for Advocacy of the Small Business
Administration for comment on their im-
pact on small business.
Drafting Information
The principal author of these regula-
tions is Nathan Rosen, Office of Associate
Chief Counsel (Procedure and Administra-
tion), Administrative Provisions and Judi-
cial Practice Division.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 301, and
602 are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.170A–11 is amended
by revising paragraph (b)(2) to read as fol-
lows:
§1.170A–11 Limitation on, and carryover
of, contributions by corporations.
*****
(b) * * *
(2) [Reserved]. For further guidance
see §1.170A–11T(b)(2).
*****
Par. 3. Section 1.170A–11T is added to
read as follows:
§1.170A–11T Limitation on, and
carryover of, contributions by
corporations (temporary).
(a) [Reserved]. For further guidance,
see §1.170A–11(a).
(b) Election by corporations on an ac-
crual method—(1) [Reserved]. For further
guidance, see §1.170A–11(b)(1).
(2) The election must be made at the
time the return for the taxable year is filed,
by reporting the contribution on the return.
There shall be attached to the return when
filed a written declaration stating that the
resolution authorizing the contribution was
adopted by the board of directors during
the taxable year. For taxable years begin-
ning before January 1, 2003, the declara-
tion shall be verified by a statement signed
by an officer authorized to sign the return
that it is made under penalties of perjury,
and there shall also be attached to the re-
turn when filed a copy of the resolution of
the board of directors authorizing the con-
tribution. For taxableyears beginning after
December 31, 2002, the declaration must
also include the date of the resolution, the
declaration shall be verified by signing the
return, and a copy of the resolution of the
board of directors authorizing the contri-
bution is a record that the taxpayer must
retain and keep available for inspection in
the manner required by §1.6001–1(e).
(c) through (d) [Reserved]. For further
guidance, see §1.170A–11(c) through (d).
Par. 4. Section 1.556–2 is amended by
revising paragraph (e)(2)(vii) and adding
paragraph (e)(3) to read as follows:
§1.556–2 Adjustments to taxable income.
*****
(e) * * *
(2) * * *
(vii) [Reserved]. For further guidance,
see §1.556–2T(e)(2)(vii) and (3).
*****
(3) [Reserved]. For further guidance,
see §1.556–2T(e)(3).
*****
Par. 5. Section 1.556–2T is added to
read as follows:
§1.556–2T Adjustments to taxable income
(temporary).
(a) through (e)(2)(vi) [Reserved]. For
further guidance, see §1.556–2(a) through
(e)(2)(vi).
(e)(2)(vii) In the case of a return for
a taxable year beginning before January
1, 2003, a copy of the contract, lease, or
rental agreement;
(e)(2)(viii) through (xi) [Reserved]. For
further guidance, see §1.556–2(e)(2)(viii)
through (xi).
(3) If the statement described in
§1.556–2(e)(2) is attached to a taxpayer’s
income tax return for a taxable year be-
ginning after December 31, 2002, a copy
of the applicable contract, lease or rental
agreement is not required to be submitted
with the return, but must be retained by the
taxpayer and kept available for inspection
in the manner required by §1.6001–1(e).
(f) [Reserved]. For further guidance,
see §1.556–2(f).
Par. 6. Section 1.565–1 is amended
by revising paragraph (b)(3) to read as fol-
lows:
§1.565–1 General rule.
*****
(b) * * *
(3) [Reserved]. For further guidance,
see §1.565–1T(b)(3).
*****
Par. 7. Section 1.565–1T is added to
read as follows:
§1.565–1T General rule (temporary).
(a) through (b)(2) [Reserved]. For fur-
ther guidance, see §1.565–1(a) through
(b)(2).
(b)(3) A consent may be filed at any
time not later than the due date of the cor-
poration’s income tax return for the tax-
able year for which the dividends paid de-
duction is claimed. With such return, and
not later than the due date thereof, the
corporation must file Forms 972 for each
consenting shareholder, and a return on
Form 973 showing by classes the stock
outstanding on the first and last days of the
taxable year, the dividend rights of such
stock, distributions made during the tax-
able year to shareholders, and giving all
the other information required by the form.
For taxable years beginning before Jan-
uary 1, 2003, the Form 973 filed with the
January 20, 20043002004-3 I.R.B.

corporation’s income tax return shall con-
tain or be verified by a written declaration
that is made under the penalties of per-
jury and the Forms 972 filed with the re-
turn must be duly executed by the consent-
ing shareholders. For taxable years begin-
ning after December 31, 2002, the Form
973 filed with the corporation’s income tax
return shall be verified by signing the re-
turn and the Forms 972 filed with the re-
turn must be duly executed by the consent-
ing shareholders or, if unsigned, must con-
tain the same information as the duly ex-
ecuted originals. If the corporation sub-
mits unsigned Forms 972 with its return
for a taxable year beginning after Decem-
ber 31, 2002, the duly executed originals
are records that the corporation must re-
tain and keep available for inspection in the
manner required by §1.6001–1(e).
(c) [Reserved]. For further guidance,
see §1.565–1(c).
Par. 8. Section 1.936–7 is amended by:
1. Designating the undesignated intro-
ductory text as paragraph (a).
2.Redesignating paragraphs (a)
through (c) as paragraphs (b) through
(d), respectively.
3. Revising newly designated para-
graph (b), Q. & A. 1.
The revision reads as follows:
§1.936–7 Manner of making election
under section 936(h)(5); special election
for export sales; revocation of election
under section 936(a).
*****
(b) * * *
Q. 1. [Reserved]. For further guidance,
see §1.936–7T(b) Q. 1.
A. 1. [Reserved]. For further guidance,
see §1.936–7T(b) A. 1.
*****
Par. 9. Section 1.936–7T is added to
read as follows:
§1.936–7T Manner of making election
under section 936(h)(5); special election
for export sales; revocation of election
under section 936(a) (temporary).
(a) [Reserved]. For further guidance,
see §1.936–7 (a).
(b)Manner of making election.
Q. 1: How does a possessions corpora-
tion make an election to use the cost shar-
ing method or profit split method?
A. 1: A possessions corporation makes
an election to use the cost sharing or
profit split method by filing Form 5712–A
(“Election and Verification of the Cost
Sharing or Profit Split Method Under Sec-
tion 936(h)(5)”) and attaching it to its tax
return. Form 5712–A must be filed on or
before the due date (including extensions)
of the tax return of the possessions corpo-
ration for its first taxable year beginning
after December 31, 1982. The electing
corporation must set forth on the form
the name and the taxpayer identification
number or address of all members of the
affiliated group (including foreign affili-
ates not required to file a U.S. tax return).
All members of the affiliated group must
consent to the election. For elections filed
with respect to taxable years beginning
before January 1, 2003, an authorized of-
ficer of the electing corporation must sign
the statement of election and must declare
that he has received a signed statement of
consent from an authorized officer, direc-
tor, or other appropriate official of each
member of the affiliated group. Elections
filed for taxable years beginning after
December 31, 2002, will incorporate a
declaration by the electing corporation
that it has received a signed consent from
an authorized officer, director, or other
appropriate official of each member of
the affiliated group and will be verified
by signing the return. The election is not
valid for a taxable year unless all affiliates
consent. A failure to obtain an affiliate’s
written consent will not invalidate the
election out if the possessions corporation
made a good faith effort to obtain all the
necessary consents or the failure to obtain
the missing consent was inadvertent. Sub-
sequently created or acquired affiliates are
bound by the election. If an election out
is revoked under section 936(h)(5)(F)(iii),
a new election out with respect to that
product area cannot be made without the
consent of the Commissioner. The pos-
sessions corporation shall file an amended
Form 5712–A with its timely filed income
tax return to reflect any changes in the
names or number of the members of the
affiliated group for any taxable year after
the first taxable year to which the election
out applies. By consenting to the election
out, all affiliates agree to provide informa-
tion necessary to compute the cost sharing
payment under the cost sharing method or
combined taxable income under the profit
split method, and failure to provide such
information shall be treated as a request
to revoke the election out under section
936(h)(5)(F)(iii).
Q. & A. 2 through 8 [Reserved]. For
further guidance, see §1.936–7(b), Q. & A.
2 through 8.
(c) and (d) [Reserved]. For further
guidance, see §1.936–7(c) and (d).
Par. 10. Section 1.1017–1 is amended
by revising paragraph (g)(2)(iii)(B) to read
as follows:
§1.1017–1 Basis reductions following a
discharge of indebtedness.
*****
(g) * * *
(2) * * *
(iii) * * *
(B) [Reserved]. For further guidance,
see §1.1017–1T(g)(2)(iii)(B).
*****
Par. 11. Section 1.1017–1T is amended
by revising paragraphs (c) through (i) to
read as follows:
§1.1017–1T Basis reductions following a
discharge of indebtedness (temporary).
*****
(c) through (g)(2)(iii)(A) [Reserved].
For further guidance, see §1.1017–1(c)
through (g)(2)(iii)(A).
(g)(2)(iii)(B)Taxpayer’s requirement.
For taxable years beginning before Jan-
uary 1, 2003, statements described in
§1.1017–1(g)(2)(iii)(A) must be attached
to a taxpayer’s timely filed (including ex-
tensions) Federal income tax return for
the taxable year in which the taxpayer has
COD income that is excluded from gross
income under section 108(a). For taxable
years beginning after December 31, 2002,
taxpayers must retain the statements and
keep them available for inspection in the
manner required by §1.6001–1(e), but are
not required to attach the statements to
their returns.
(g)(2)(iv) through (i) [Reserved]. For
further guidance, see §1.1017–1(g)(2)(iv)
through (i).
Par. 12. Section 1.1368–1 is amended
by revising paragraphs (f)(5)(iii) and
(g)(2)(iii) to read as follows:
2004-3 I.R.B.301January 20, 2004

§1.1368–1 Distributions by S
corporations.
*****
(f) * * *
(5) * * *
(iii) [Reserved]. For further guidance,
see §1.1368–1T(f)(5)(iii).
*****
(g) * * *
(2) * * *
(iii) [Reserved]. For further guidance,
see §1.1368–1T(g)(2)(iii).
*****
Par. 13 Section 1.1368–1T is added to
read as follows:
§1.1368–1T Distributions by S
corporations (temporary).
(a) through (f)(5)(ii) [Reserved].
For further guidance, see §1.1368–1(a)
through (f)(5)(ii).
(f)(5)(iii)Corporate statement regard-
ing elections. A corporation makes
an election for a taxable year under
§1.1368–1(f) by attaching a statement
to a timely filed original or amended re-
turn required to be filed under section 6037
for that taxable year. In the statement, the
corporation must identify the election it is
making under §1.1368–1(f) and must state
that each shareholder consents to the elec-
tion. In the case of elections for taxable
years beginning before January 1, 2003,
an officer of the corporation must sign
under penalties of perjury the statement
on behalf of the corporation. In the case of
elections for taxable years beginning after
December 31, 2002, the statement de-
scribed in this paragraph (f)(5)(iii) shall be
verified by signing the return. A statement
of election to make a deemed dividend un-
der §1.1368–1(f) must include the amount
of the deemed dividend that is distributed
to each shareholder.
(f)(5)(iv) through (g)(2)(ii) [Re-
served]. For further guidance, see
§1.1368–1(f)(5)(iv) through (g)(2)(ii).
(g)(2)(iii)Time and manner of making
election. A corporation makes an election
under §1.1368–1(g)(2)(i) for a taxable
year by attaching a statement to a timely
filed original or amended return required
to be filed under section 6037 for a taxable
year (without regard to the election under
§1.1368–1(g)(2)(i)). In the statement, the
corporation must state that it is electing for
the taxable year under §1.1368–1(g)(2)(i)
to treat the taxable year as if it consisted
of separate taxable years. The corporation
also must set forth facts in the statement
relating to the qualifying disposition (e.g.,
sale, gift, stock issuance, or redemption),
and state that each shareholder who held
stockinthecorporationduringthetax-
able year (without regard to the election
under §1.1368–1(g)(2)(i)) consents to this
election. For purposes of this election,
a shareholder of the corporation for the
taxable year is a shareholder as described
in section 1362(a)(2). A single election
statement may be filed for all elections
made under §1.1368–1(g)(2)(i) for the
taxable year. An election made under
§1.1368–1(g)(2)(i) of this section is ir-
revocable. In the case of elections for
taxable years beginning before January
1, 2003, the statement through which
a corporation makes an election under
§1.1368–1(g)(2)(i) must be signed by an
officer of the corporation under penalties
of perjury. In the case of elections for
taxable years beginning after December
31, 2002, the statement described in the
preceding sentence shall be verified by
signing the return.
(g)(2)(iv) [Reserved]. For further guid-
ance, see §1.1368–1(g)(2)(iv).
Par. 14. Section 1.1377–1 is amended
by revising paragraph (b)(5)(i)(C) to read
as follows:
§1.1377–1 Pro rata share.
*****
(b) * * *
(5) * * *
(i) * * *
(C) [Reserved]. For further guidance,
see §1.1377–1T(b)(5)(i)(C).
*****
Par. 15. Section 1.1377–1T is added to
read as follows:
§1.1377–1T Pro rata share (temporary).
(a) through (b)(5)(i)(B) [Reserved].
For further guidance, see §1.1377–1(a)
through (b)(5)(i)(B).
(b)(5)(i)(C) The signature on behalf of
the S corporation of an authorized officer
of the corporation under penalties of per-
jury, except that for taxable years begin-
ning after December 31,2002, the election
statement describedin §1.1377–1(b)(5)(i)
shall be verified, and the requirement of
this paragraph (b)(5)(i)(C) is satisfied, by
the signature on the Form 1120S filed by
the S corporation.
(b)(5)(i)(D) through (c) [Reserved].
For further guidance, see §1.1377–1
(b)(5)(i)(D) through (c).
Par. 16. Section 1.1502–21 is amended
by revising paragraphs (b)(3)(i) and
(b)(3)(ii)(B) to read as follows:
§1.1502–21 Net operating losses.
*****
(b) * * *
(3) * * * (i) [Reserved]. For further
guidance, see §1.1502–21T(b)(3)(i).
(ii)(A) * * *
(b)(3)(ii)(B) [Reserved]. For further
guidance, see §1.1502–21T(b)(3)(ii)(B).
*****
Par. 17. Section 1.1502–21T is
amended by revising paragraphs (b)(3)
through (b)(3)(ii)(B) to read as follows:
§1.1502–21T Net operating losses
(temporary).
*****
(b)(3)Special rules—(i)Election to
relinquish carryback. A group may make
an irrevocable election under section
172(b)(3) to relinquish the entire car-
ryback period with respect to a CNOL for
any consolidated return year. Except as
provided in paragraph (b)(3)(ii)(B) of this
section, the election may not be made sep-
arately for any member (whether or not it
remains a member), and must be made in
a separate statement entitled “THIS IS AN
ELECTION UNDER §1.1502–21(b)(3)(i)
TO WAIVE THE ENTIRE CARRYBACK
PERIOD PURSUANT TO SECTION
172(b)(3) FOR THE [insert consolidated
return year] CNOLs OF THE CONSOL-
IDATEDGROUPOFWHICH[insert
name and employer identification number
of common parent] IS THE COMMON
PARENT”. The statement must be filed
with the group’s income tax return for the
consolidated return year in which the loss
arises. If the consolidated return year in
which the loss arises begins before Jan-
uary 1, 2003, the statement making the
election must be signed by the common
parent. If the consolidated return year in
January 20, 20043022004-3 I.R.B.

which the loss arises begins after Decem-
ber 31, 2002, the election may be made in
an unsigned statement.
(b)(3)(ii)through(b)(3)(ii)(A)
[Reserved].For further guidance,
see§1.1502–21(b)(3)(ii)through
(b)(3)(ii)(A).
(B)Acquisition of member from an-
other consolidated group. If one or more
members of a consolidated group becomes
a member of another consolidated group,
the acquiring group may make an irrevo-
cable election to relinquish, with respect
to all consolidated net operating losses
attributable to the member, the portion of
the carryback period for which the cor-
poration was a member of another group,
provided that any other corporation join-
ing the acquiring group that was affiliated
with the member immediately before it
joined the acquiring group is also included
in the waiver. This election is not a yearly
election and applies to all losses that
would otherwise be subject to a carryback
to a former group under section 172. The
election must be made in a separate state-
ment entitled “THIS IS AN ELECTION
UNDER §1.1502–21(b)(3)(ii)(B)(2)TO
WAIVE THE PRE-[insert first taxable
year for which the member (or members)
was not a member of another group] CAR-
RYBACK PERIOD FOR THE CNOLs
attributable to [insert names and employer
identification number of members].” The
statement must be filed with the acquiring
consolidated group’s original income tax
return for the year the corporation (or cor-
porations) became a member. If the year
in which the corporation (or corporations)
became a member begins before January
1, 2003, the statement must be signed
by the common parent and each of the
members to which it applies. If the year
in which the corporation (or corporations)
became a member begins after December
31, 2002, the election may be made in an
unsigned statement.
*****
Par. 18. Section 1.1502–75 is amended
by revising paragraph (h)(2) to read as fol-
lows:
§1.1502–75 Filing of consolidated
returns.
*****
(h) * * *
(2) [Reserved]. For further guidance,
see §1.1502–75T(h)(2).
*****
Par. 19. Section 1.1502–75T is added
to read as follows:
§1.1502–75T F
iling of consolidated
returns (temp
orary).
(a) through (h)(1) [Reserved]. For fur-
ther guidance, see §1.1502–75(a) through
(h)(1).
(2)Filing of Form 1122 for first year.If,
under the provisions of §1.1502–75 (a)(1),
a group wishes to file a consolidated re-
turn for a taxable year, then a Form 1122
(“Authorization and Consent of Subsidiary
Corporation To Be Included in a Consoli-
dated Income Tax Return”) must be exe-
cuted by each subsidiary. For taxable years
beginning before January 1, 2003, the exe-
cuted Forms 1122 must be attached to the
consolidated return for the taxable year.
For taxable years beginning after Decem-
ber 31, 2002, the group must attach either
executed Forms 1122 or unsigned copies
of the completed Forms 1122 to the con-
solidated return. If the group submits un-
signed Forms 1122 with its return, it must
retain the signed originals in its records
in the manner required by §1.6001–1(e).
Form 1122 is not required for a taxable
year if a consolidated return was filed (or
was required to be filed) by the group for
the immediately preceding taxable year.
(h)(3) through (k) [Reserved]. For
further guidance, see §1.1502–75(h)(3)
through (k).
Par. 20. Section 1.1503–2 is amend-
ed by revising paragraphs (g)(2)(i),
(g)(2)(iv)(B)(3)(iii) and (g)(2)(vi)(B) to
read as follows:
§1.1503–2 Dual consolidated loss.
*****
(g) * * *
(2) * * *
(i) [Reserved]. For further guidance,
see §1.1503–2T(g)(2)(i).
*****
(iv)***
(B)***
(3)***
(iii) [Reserved]. For further guidance,
see §1.1503–2T(g)(2)(iv)(B)(3)(iii)
*****
(vi)***
(B) [Reserved]. For further guidance,
see §1.1503–2T(g)(2)(vi)(B).
*****
Par. 21. Section 1.1503–2T is added to
read as follows:
§1.1503–2T Dual consolidated loss
(temporary).
(a) through (g)(1) [Reserved]. For fur-
ther guidance, see §1.1503–2(a) through
(g)(1).
(2)Elective relief provision—(i)In
general. Paragraph (b) of this section shall
not apply to a dual consolidated loss if
the consolidated group, unaffiliated dual
resident corporation, or unaffiliated do-
mestic owner elects to be bound by the
provisions of §1.1503–2(g)(2) and this
paragraph (g)(2). In order to elect relief
under §1.1503–2(g)(2) and this paragraph
(g)(2), the consolidated group, unaffiliated
dual resident corporation, or unaffiliated
domestic owner must attach to its timely
filed U.S. income tax return for the tax-
able year in which the dual consolidated
loss is incurred an agreement described in
paragraph (g)(2)(i)(A) of this section. The
agreement must be signed under penal-
ties of perjury by the person who signs
the return. For taxable years beginning
after December 31, 2002, the agreement
attached to the income tax return of the
consolidated group, unaffiliated dual resi-
dent corporation or unaffiliated domestic
owner pursuant to the preceding sentence
may be an unsigned copy. If an unsigned
copy is attached to the return, the consoli-
dated group, unaffiliated dual resident cor-
poration, or unaffiliated domestic owner
must retain the original in its records in
the manner specified by §1.6001–1(e).
The agreement must include the following
items, in paragraphs labeled to correspond
with the items set forth in paragraphs
(g)(2)(i)(A) through (F) of this section:.
(A) A statement that the document sub-
mitted is an election and an agreement un-
der the provisions of §1.1503–2(g)(2) of
the Income Tax Regulations.
(B) The name, address, identifying
number, and place and date of incorpo-
ration of the dual resident corporation,
and the country or countries that tax the
dual resident corporation on its worldwide
income or on a residence basis, or, in the
2004-3 I.R.B.303January 20, 2004

case of a separate unit, identification of the
separate unit, including the name under
which it conducts business, its principal
activity, and the country in which its prin-
cipal place of business is located.
(C) An agreement by the consolidated
group, unaffiliated dual resident corpo-
ration, or unaffiliated domestic owner
to comply with all of the provisions of
paragraphs (g)(2)(iii) through (vii) of
§1.1503–2 and this section.
(D) A statement of the amount of the
dual consolidated loss covered by the
agreement.
(E) A certification that no portion of
the dual resident corporation’s or sepa-
rate unit’s losses, expenses, or deductions
taken into account in computing the dual
consolidated loss has been, or will be, used
to offset the income of any other person un-
der the income tax laws of a foreign coun-
try.
(F) A certification that arrangements
have been made to ensure that no portion
of the dual consolidated loss will be used to
offset the income of another person under
the laws of a foreign country and that the
consolidated group, unaffiliated dual res-
ident corporation, or unaffiliated domestic
owner will be informed of any such foreign
use of any portion of the dual consolidated
loss.
(g)(2)(ii) through (iv)(B)(3)(ii)[Re-
served] For further guidance, see
§1.1503–2(g)(2)(ii) through (iv)(B)(3)(ii).
(g)(2)(iv)(B)(3)(iii) The unaffiliated
domestic corporation or new consoli-
dated group must file, with its timely
filed income tax return for the taxable
year in which the event described in
§1.1503–2(g)(2)(iv)(B)(1)or(2) occurs,
an agreement described in paragraph
(g)(2)(i) of this section (new (g)(2)(i)
agreement), whereby it assumes the same
obligations with respect to the dual consol-
idated loss as the corporation or consoli-
dated group that filed the original (g)(2)(i)
agreement with respect to that loss. The
new (g)(2)(i) agreement must be signed
under penalties of perjury by the person
who signs the return and must include a
reference to §1.1503–2(g)(2)(iv)(B)(3)(iii)
or this paragraph (g)(2)(iv)(B)(3)(iii). For
taxable years beginning after December
31, 2002, the agreement attached to the
return pursuant to the preceding sentence
may be an unsigned copy. If an unsigned
copy is attached to the return, the corpo-
ration or consolidated group must retain
the original in its records in the manner
specified by §1.6001–1(e).
(g)(2)(iv)(C) through (vi)(A) [Re-
served]. For further guidance, see
§1.1503–2(g)(2)(iv)(C) through (vi)(A).
(B)Annual certification. Except as
provided in §1.1503–2(g)(2)(vi)(C), until
and unless Form 1120 or the Schedules
thereto contain questions pertaining to
dual consolidated losses, the consolidated
group, unaffiliated dual resident corpora-
tion, or unaffiliated domestic owner must
file with its income tax return for each of
the 15 taxable years following the taxable
year in which the dual consolidated loss
is incurred a certification that the losses,
expenses, or deductions that make up the
dual consolidated loss have not been used
to offset the income of another person
under the tax laws of a foreign country.
For taxable years beginning before Jan-
uary 1, 2003, the annual certification must
be signed under penalties of perjury by a
person authorized to sign the agreement
described in paragraph (g)(2)(i) of this
section. For taxable years beginning after
December 31, 2002, the certification is
verified by signing the return with which
the certification is filed. The certification
for a taxable year must identify the dual
consolidated loss to which it pertains by
setting forth the taxpayer’s year in which
the loss was incurred and the amount of
such loss. In addition, the certification
must warrant that arrangements have been
made to ensure that the loss will not be
used to offset the income of another per-
son under the laws of a foreign country
and that the taxpayer will be informed of
any such foreign use of any portion of
the loss. If dual consolidated losses of
more than one taxable year are subject to
the rules of this paragraph (g)(2)(vi)(B),
the certifications for those years may be
combined in a single document but each
dual consolidated loss must be separately
identified.
(g)(2)(vii) through (h) [Reserved]. For
further guidance, see §1.1503–2(g)(2)(vii)
through (h).
Par. 22. Section 1.6038B–1 is amended
by revising paragraphs (b)(1)(i) and
(b)(1)(ii) to read as follows:
§1.6038B–1 Reporting of certain transfers
to foreign corporations.
*****
(b)(1)(i) and (ii) [Reserved]. For fur-
ther guidance, see §1.6038B–1T(b)(1)(i)
and (ii).
*****
Par. 23. Section 1.6038B–1T is
amended by revising paragraphs (a)
through (b)(3) to read as follows:
§1.6038B–1T Reporting of certain
transactions to foreign corporations
(temporary).
(a) [Reserved]. For further guidance,
see §1.6038B–1(a).
(b)Time and manner of reporting—(1)
In general—(i)Reporting procedure.
Except for stock or securities qualify-
ing under the special reporting rule of
§1.6038B–1(b)(2) , and certain exchanges
describedinsection354(listedbelow),
any U.S. person that makes a transfer
described in section 6038B(a)(1)(A),
367(d) or (e), is required to report pur-
suant to section 6038B and the rules of
§1.6038B–1 and this section and must at-
tach the required information to Form 926,
“Return by a U.S. Transferor of Property
to a Foreign Corporation.” For special
rules regarding cash transfers made in tax
years beginning after February 5, 1999,
see §1.6038B–1(b)(3) and (g) . For pur-
poses of determining a U.S. transferor
that is subject to section 6038B, the rules
of §1.367(a)–1T(c) and §1.367(a)–3(d)
shall apply with respect to a transfer de-
scribedinsection367(a),andtherules
of §1.367(a)–1T(c) shall apply with re-
spect to a transfer described in section
367(d). Additionally, if in an exchange
described in section 354, a U.S. person
exchanges stock of a foreign corporation
in a reorganization described in section
368(a)(1)(E), or a U.S. person exchanges
stock of a domestic or foreign corporation
for stock of a foreign corporation pur-
suant to an asset reorganization described
in section 368(a)(1)(C), (D), or (F), that
is not treated as an indirect stock trans-
fer under section 367(a), then the U.S.
person exchanging stock is not required
to report under section 6038B. Notwith-
standing any statement to the contrary on
Form 926, the form and attachments must
be attached to, and filed by the due date
January 20, 20043042004-3 I.R.B.

(including extensions) of the transferor’s
income tax return for the taxable year that
includes the date of the transfer (as defined
in §1.6038B–1T(b)(4)). For taxable years
beginning before January 1, 2003, any at-
tachment to Form 926 required under the
rules of this section is filed subject to the
transferor’s declaration under penalties of
perjury on Form 926 that the information
submitted is true, correct and complete to
the best of the transferor’s knowledge and
belief. For taxable years beginning after
December 31, 2002, Form 926 and any
attachments shall be verified by signing
the income tax return with which the form
and attachments are filed.
(ii)Reporting by corporate transferor.
For transfers by corporations in taxable
years beginning before January 1, 2003,
Form 926 must be signed by an authorized
officer of the corporation if the transferor is
not a member of an affiliated group under
section 1504(a)(1) thatfiles a consolidated
Federal income tax return and by an autho-
rized officer of the common parent corpo-
ration if the transferor is a member of such
an affiliated group. For transfers by cor-
porations in taxable years beginning after
December 31, 2002, Form 926 shall be ver-
ified by signing the income tax return to
which the form is attached.
(b)(2) through (b)(3) [Reserved]. For
further guidance, see §1.6038B–1(b)(2)
through (b)(3).
*****
PART 301 — PROCEDURE AND
ADMINISTRATION
Par. 24. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 25. Section 301.7701–3 is
amended by revising paragraph (c)(1)(ii)
to read as follows:
§301.7701–3 Classification of certain
business entities.
*****
(c)***(1)***
(ii) [Reserved]. For further guidance,
see §301.7701–3T(c)(1)(ii).
*****
Par. 26. Section 301.7701–3T is added
to read as follows:
§301.7701–3T Classification of certain
business entities (temporary).
(a) through (c)(1)(i) [Reserved]. For
further guidance, see §301.7701–3(a)
through (c)(1)(i).
(ii)Further notification of elections.
An eligible entity required to file a federal
tax or information return for the taxable
year for which an election is made un-
der §301.7701–3(c)(1)(i) must attach a
copy of its Form 8832 to its federal tax
or information return for that year. If the
entityisnotrequiredtofileareturnfor
that year, a copy of its Form 8832 (“Entity
Classification Election”) must be attached
to the federal income tax or information
return of any direct or indirect owner of
the entity for the taxable year of the owner
that includes the date on which the elec-
tion was effective. An indirect owner of
the entity does not have to attach a copy
of the Form 8832 to its return if an en-
tity in which it has an interest is already
filing a copy of the Form 8832 with its
return. If an entity, or one of its direct or
indirect owners, fails to attach a copy of a
Form 8832 to its return as directed in this
section, an otherwise valid election under
§301.7701–3(c)(1)(i) will not be invali-
dated, but the non-filing party may be sub-
ject to penalties, including any applicable
penalties if the federal tax or information
returns are inconsistent with the entity’s
election under §301.7701–3(c)(1)(i). In
the case of returns for taxable years begin-
ning after December 31, 2002, the copy of
Form 8832 attached to a return pursuant to
this paragraph (c)(1)(ii) is not required to
be a signed copy.
(c)(1)(iii) through (h) [Re-
served]. For further guidance, see
§301.7701–3(c)(1)(iii) through (h).
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 27. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805
Par. 28. In §602.101, paragraph (b)
isamendedbyaddingthefollowingentry
in numerical order to the table to read as
follows:
§602.101 OMB Control numbers
*****
(b) * * *
CFR part or section where
identified and described
Current OMB
control No.
*****
1.170A–11T.......................................................................... 1545–1868
*****
Robert E. Wenzel,
Deputy Commissioner for
Services and Enforcement.
Approved December 2, 2003.
Gregory F. Jenner,
Deputy Assistant Secretary
of the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on December 18,
2003, 8:45 a.m., and published in the issue of the Federal
Register for December 19, 2003, 68 F.R. 70701)
Section 6038B.—Notice
of Certain Transfers to
Foreign Persons
Regulations eliminate impediments to the elec-
tronic filing of certain income tax returns and other
forms. See T.D. 9100, page 297.
2004-3 I.R.B.305January 20, 2004

Section 6045.—Returns
of Brokers
26 CFR 1.6045–2: Furnishing statement required
with respect to certain substitute payments.
T.D. 9103
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Information Statements for
Certain Substitute Payments
AGENCY: Internal Revenue Service (IRS)
Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations under section 6045(d) that re-
flect the changes to information reporting
for payments in lieu of dividends effected
by the Jobs and Growth Tax Relief Rec-
onciliation Act of 2003 (JGTRRA). These
regulations provide that brokers must file
information returns and furnish informa-
tion statements reporting substitute pay-
ments in lieu of dividends to individuals
who receive substitute payments in lieu of
dividends on or after January 1, 2003.
DATES:Effective Date: These final regu-
lations are effective December 29, 2003.
Applicability Date: These regulations
apply to information returns required to be
filed, and information statements required
to be furnished, after December 31, 2003.
FOR FURTHER INFORMATION
CONTACT: Michael Hara of the Office of
Associate Chief Counsel (Procedure and
Administration), (202) 622–4910 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Section 302 of the Jobs and Growth
Tax Relief Reconciliation Act of 2003 (the
JGTRRA), Public Law No. 108–27 (117
Stat. 752), reduced the tax rate for “quali-
fied dividends” paid to an individual share-
holder to the same tax rate as capital gains
for taxable years beginning after Decem-
ber 31, 2002, and beginning before Jan-
uary 1, 2009. The legislative history states,
however, “Payments in lieu of dividends
are not eligible for the lower rates.” See
H.R. REP. NO. 108–94, 108th Cong., 1st
Sess. 31 n.36 (2003).
Explanation of Provisions
Section 6045(a) of the Internal Rev-
enue Code (Code) provides that every per-
son doing business as a broker shall, when
required by the Secretary, make a return
showing the name and address of each
customer, together with information as re-
quired by forms and regulations. Section
6045(d) provides that brokers who trans-
fer a customer’s securities for use in a
short sale or similar transaction, and re-
ceive payments in lieu of a dividend, tax-
exempt interest, or other items set forth
in regulations (substitute payments), must
furnish the customer with a written state-
ment identifying the payment as being in
lieu of the dividend, tax-exempt interest,
or other item. This section authorizes the
Secretary to prescribe regulations that re-
quire brokers to file information returns
that include the information contained in
the written statement.
Section 1.6045–2 of the existing In-
come Tax Regulations provides rules
for reporting substitute payments un-
der section 6045(d).In general,
§1.6045–2(a)(3)(i) of the existing reg-
ulations excludes payments in lieu of
dividends received by a broker on behalf
of an individual from the broker reporting
requirements of section 6045(d). Sec-
tion 1.6045–2(a)(3)(ii) of the existing
regulations requires reporting for certain
dividend substitute payments received by
abrokeronbehalfofanindividual,such
as payments in lieu of exempt interest div-
idends distributed by regulated investment
companies.
These regulations contain amendments
to the existing regulations to require re-
porting under section 6045(d) for pay-
ments in lieu of dividends made to in-
dividuals on or after January 1, 2003.
For taxable years beginning on or after
January 1, 2003, brokers must use Form
1099–MISC, “Miscellaneous Income”, to
report substitute payments to individuals,
including payments in lieu of dividends.
The IRS issued interim guidance re-
garding provisions of the JGTRRA that
affect information reporting for payments
in lieu of dividends in Notice 2003–67,
2003–40 I.R.B. 752. The notice also
provided guidance on the definition of
loanable shares and the allocation and
selection of transferred shares (that is,
shares giving rise to payments in lieu of
dividends to customers). The IRS in-
tends to issue comprehensive regulations
amending §1.6045–2 in the future. The
IRS anticipates that these regulations will
define payments in lieu of dividends, pro-
vide rules for determining loanable shares,
and provide rules for allocating and se-
lecting transferred shares to customers.
Pending issuance of further amendments
to §1.6045–2 of the existing regulations,
brokers may rely on Notice 2003–67
to comply with the requirements of the
JGTRRA and section 6045(d).
In addition, pending issuance of fur-
ther amendments to §1.6045–2, the IRS
will permit brokers to continue to use the
rules of §1.6045–2 of the existing regu-
lations for allocating transferred shares to
customers. A broker may continue to al-
locate transferred shares to shares of stock
that the broker has borrowed under a secu-
rity agreement with the customer. In addi-
tion, if a broker uses the lottery method of
allocation and selection of loanable shares
specified in §1.6045–2(f)(2)(ii), the bro-
ker may make the selection of the trans-
ferred shares within the individual pool de-
scribed in §1.6045–2(f)(2)(ii)(C) using the
methods of selection of transferred shares
used within the nonindividual pool as pre-
scribed in §1.6045–2(f)(2)(ii)(B).
Special Analyses
These final regulations are necessary to
provide brokers and taxpayers with imme-
diate guidance regarding provisions in the
JGTRRA that affect information report-
ing for substitute payments in lieu of divi-
dends. The regulations apply to informa-
tion returns required to be filed, and in-
formationstatementsrequiredtobefur-
nished, after December 31, 2003. Based
on these considerations, it is determined
that these final regulations will provide
brokers and taxpayers with the necessary
guidance and authority to comply with the
tax laws. Because of the need for immedi-
ate guidance, notice and public procedure
are impracticable and contrary to the pub-
lic interest pursuant to 5 U.S.C. 553(b)(B)
and delayed effective date is not required
pursuant to 5 U.S.C. 553(d)(3).
January 20, 20043062004-3 I.R.B.

Because no notice of proposed rule-
making is required, the provisions of the
Regulatory Flexibility Act, 5 U.S.C. 601
(et seq.) do not apply. Further, it has been
determined that this Treasury decision is
not a significant regulatory action as de-
fined in Executive Order 12866. There-
fore, a regulatory assessment is not re-
quired. Pursuant to section 7805(f) of the
Code, these regulations were submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on their impact on small business.
Drafting Information
The principal author of these regula-
tions is Michael Hara, Office of Associate
Chief Counsel (Procedures and Adminis-
tration), Administrative Provisions and Ju-
dicial Practice.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.6045–2 is amended
by:
1. Paragraph (a)(3)(i) is revised.
2. The heading for paragraph (a)(3)(ii)
is revised.
The revisions read as follows:
§1.6045–2 Furnishing statement required
with respect to certain substitute
payments.
(a) * * *
(3)***(i)In general.Except as oth-
erwise provided in paragraph (a)(3)(ii) of
this section, for taxable years beginning
before January 1, 2003, a broker that re-
ceives a substitute payment in lieu of a div-
idend on behalf of a customer who is an in-
dividual (“individual customer”) need not
furnish a statement to the customer.
(ii)Reporting for certain dividends.
***
*****
Mark E. Matthews,
Deputy Commissioner for Services
and Enforcement.
Approved December 18, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on December 24,
2003, 8:45 a.m., and published in the issue of the Federal
Register for December 29, 2003, 68 F.R. 74847)
Section 7701.—Definitions
Regulations eliminate impediments to the elec-
tronic filing of certain income tax returns and other
forms. See T.D. 9100, page 297.
2004-3 I.R.B.307January 20, 2004

Part III. Administrative, Procedural, and Miscellaneous
Request for Comments
Concerning the Application
of Sections 162 and 263 to
Tangible Property
Notice 2004–6
The Internal Revenue Service and
Treasury Department intend to propose
regulations that clarify the application of
§§ 162 and 263 of the Internal Revenue
Code to expenditures paid or incurred to
repair, improve, or rehabilitate tangible
property. This notice identifies issues the
Service and Treasury Department may
address in the regulations. The Service
and Treasury Department want to provide
clear, consistent and administrable rules
that will reduce the uncertainty and con-
troversyinthisarea,whilealsopreventing
the distortion of income. Accordingly,
the Service and Treasury Department re-
quest public comments on whether these
or other issues should be addressed in the
regulations and, if so, what specific rules
and principles should be provided.
ISSUES ON WHICH COMMENTS ARE
REQUESTED
1.What general principles of capi-
talization should apply to expenditures
to repair or improve tangible property?
The regulations currently require capital-
ization for expenditures that materially in-
crease the value of property, substantially
prolong the useful life of property, or adapt
property to a new or different use. Sections
1.162–4; 1.263(a)–1(b) of the Income Tax
Regulations. Are these the appropriate
tests for capitalization? If so, how should
the forthcoming guidance clarify the appli-
cation of these standards? Alternatively,
should different standards apply? If so,
what different standards?
2.In applying the general principles,
what is the appropriate “unit of prop-
erty”?Should any of the following fac-
tors be determinative or relevant in analyz-
ing what is the appropriate unit of prop-
erty: (1) whether the property is manufac-
tured, marketed, or purchased separately;
(2) whether the property is treated as a sep-
arate unit by a regulatory agency, in in-
dustry practice, or by the taxpayer in its
books and records; (3) whether the prop-
erty is designed to be easily removed from
a larger assembly, is regularly or period-
ically replaced, or is one of a fungible
set of interchangeable or rotable assets;
(4) whether the property must be removed
from a larger assembly to be fixed or im-
proved; (5) whether the property has a dif-
ferent economic life than the larger assem-
bly; (6) whether the property is subject to
a separate warranty; (7) whether the prop-
erty serves a discrete purpose or functions
independently from a larger assembly; or
(8) whether the property serves a dual pur-
pose function, (e.g., inventory)?See Smith
v. Commissioner, 300 F.3d 1023 (9
th
Cir.
2002);Hawaiian Indep. Ref. Inc. v.
United States, 697 F.2d 1063 (Fed. Cir.
1983),cert. denied, 464 U.S. 816 (1983);
Electric Energy, Inc. v. United States,
13 Cl. Ct. 644 (1987);FedEx Corp. v.
United States, No. 01–2200 (W.D. Tenn.
August 28, 2003);Ingram Indus., Inc. v.
Commissioner, T.C.M. 2000–323;LaSalle
Trucking Co. v. Commissioner, T.C.M.
1963–274. Are there other facts or circum-
stances that should be taken into account?
3.In determining whether an expen-
diture materially increases the value
of property or substantially prolongs
theusefullifeofproperty,whatisthe
proper starting point for comparison?
Should the forthcoming guidance adopt
the test inPlainfield-Union Water Co.
v. Commissioner, 39 T.C. 333 (1962),
nonacq. 1964–2 C.B. 8, which looks at
“whether the expenditure materially en-
hances the value, use, life expectancy,
strength, or capacity as compared with the
status of the asset prior to the condition ne-
cessitating the expenditure”? Should the
starting point be different depending on
whether the expenditure was necessitated
by a single event, such as a casualty, or
from gradual wear and tear?See Ingram
Indus.; Rev. Rul. 2001–4, 2001–1 C.B.
295. If the expenditure relates to a com-
ponent part, does the relative importance
of the component part to the functionality
of the underlying asset affect the starting
point?See Smith, 300 F.3d at 1031–32.
Should the test inPlainfield-Unionapply
as well to expenditures incurred upon ac-
quisition of the property and, if so, how
would the test apply?
4.What is “value” for purposes of the
“material increase in value” rule?Does
“value” refer solely to the fair market value
of the property? Alternatively, should any
“enhanced functionality” of the property in
the taxpayer's business (e.g., an enhance-
ment to capacity, productivity, quality, or
efficiency) be treated as an additional ba-
sis for capitalization?See Vanalco, Inc.
v. Commissioner, T.C.M. 1999–265,aff'd
sub nom.,Smith v. Commissioner,300
F.3d 1023 (9
th
Cir. 2001).
5.How should it be determined
whether there has been a “material in-
crease” in value?Should an increase
in the fair market value of property after
the expenditure be compared to the fair
market value of the property before the
expenditure or the cost of equivalent new
property? Should the regulations create a
presumption that an addition to fair market
value is material (or immaterial) if it ex-
ceeds (or is less than) a certain percentage
of the fair market value of the property or
the cost of equivalent new property?
If enhanced functionality constitutes a
basis for requiring capitalization, should
the regulations require a certain percent-
age of improvement before the expendi-
tures are required to be capitalized (e.g.,an
X% increase in capacity, productivity, or
efficiency)? If the enhanced functionality
cannot be measured by a percentage of im-
provement (e.g., enhancements to safety)
how should a “material increase” be deter-
mined?
6.What is “useful life” for purposes
of the “substantially prolongs useful
life” rule?Is “useful life” the period the
taxpayer may reasonably expect to use
the property in its trade or business (see
§ 1.167(a)–1(b)) or the period of use inher-
ent in the property? Should the following
factors be considered in determining a
property's useful life: (1) wear and tear or
decay and decline from natural causes; (2)
normal progress of art, economic changes,
inventions, and current developments
within the industry or the taxpayer's trade
or business; (3) climatic and other local
conditions specific to the taxpayer's trade
or business; (4) the taxpayer's policy as
to repairs, renewals, and replacements;
and (5) whether the asset was subject to
unusual wear and tear, for example, heavy
January 20, 20043082004-3 I.R.B.

or extraordinary use.See§ 1.167(a)–1(b).
Should the recovery periods under § 168
be relevant to the determination of “useful
life” for capitalization purposes?
7.How should it be determined
whether an expenditure “substantially
prolongs” the useful life of the property?
If the expenditure prolongs the useful life
of property for a fixed number of years
is that sufficient to require capitalization?
Alternatively, does the expenditure need
to prolong the property's initial or remain-
ing useful life by a relative amount (e.g.,
by a certain percentage)? Should the test
be whether the expenditure essentially re-
sults in a rebuilding?See Ingram Indus.;
Vanalco.Isitrelevantatwhatpointinthe
useful life of the property the expenditure
is incurred? Are there presumptions or
safe harbors that would be useful, for ex-
ample, a presumption that an expenditure
that prolongs the useful life of the property
for less thanXmonths or by less thanY%
is not “substantial”?
8.Is § 263(a)(2) a different test from
the “substantially prolongs the useful
life of the property” test?If so, what
rules should be provided for determining
whether an expenditure “restores property
or makes good the exhaustion thereof for
which an allowance is or has been made”
within the meaning of § 263(a)(2)?
9.What factors are relevant in deter-
mining whether an expenditure adapts
property to a new or different use?
10.What other factors should be con-
sidered in determining whether an ex-
penditure must be capitalized?For ex-
ample, should the following factors affect
the analysis of whether an expenditure in-
creases the value of property, prolongs the
useful life, or adapts the property to a new
or different use and, if so, how: (1) the na-
ture and extent of the work performed (e.g.,
the time and effort required to perform the
work, whether the property had to be taken
out of service for the work, and the portion
of the property affected by the work); (2)
the use of materials that reflect product en-
hancements, improved materials, or tech-
nological improvements; (3) the existence
of regulatory mandates; (4) the frequency
of the expenditure (e.g.,whethertheex-
penditure is incurred once or every couple
of years); (5) the taxpayer's knowledge of
pre-existing defects at the time the prop-
erty was acquired; (6) whether a substan-
tial percentage of the parts of the property
or large or significant parts of the prop-
erty are replaced; (7) whether the prop-
erty was functioning immediately before
the expenditure; (8) the absolute or rela-
tive amount of the expenditure; (9) the rel-
ative importance of a component and the
“essential functional nature” of a compo-
nent (see Smith, 300 F.3d at 1031–32); and
(10) whether the expenditure is for an ac-
tivity described in a manufacturer's sug-
gested maintenance program?
11.Should the regulations provide
“repair allowance” type rules?For ex-
ample, should the regulations provide rules
similar to the percentage repair allowance
system, since repealed, that is described in
§ 1.167(a)–11(d)(2)? If so, should the al-
lowance be an annual amount based on a
percentage of the unadjusted basis of the
asset or should the allowance be an annual
amount based on gross receipts or net in-
come? Should a repair allowance be struc-
tured as a safe harbor? Should a safe har-
bor apply to both personal property and
real property?See Alacare Home Health
Serv.Inc.v.Commissioner, T.C.M.
2001–149.
12.Should the regulations provide a
de minimisrule?If so, what should thede
minimisamount be (e.g., a fixed amount, a
percentage of the fair market value of the
property, a percentage of the unadjusted
or adjusted basis of the property, or a per-
centage of the cost of equivalent new prop-
erty)? Should ade minimisrule be struc-
tured as a safe harbor? Should ade min-
imisrule apply to both personal property
and real property? Should thede min-
imisamount be periodically increased (or
decreased), and if so, how?See Cincin-
nati, New Orleans and Texas Pac. Ry. Co.
v. United States, 424 F.2d 563 (Ct. Cl.
1970);Alacare.
13.What facts are relevant in deter-
mining whether a repair must be cap-
italized under the “plan of rehabilita-
tion” doctrine?Should the regulations
adopt a facts and circumstances analysis
that looks to the purpose, nature, extent,
and value of the work done?See United
States v. Wehrli, 400 F.2d 686 (10
th
Cir.
1968). What connectionisrequiredbe-
tween the repairs and the capital improve-
ments for the plan of rehabilitation doc-
trine to apply? That is, must repairs be
incident to, integral to, contemporaneous
with, or because of the capital improve-
ments? How extensive do the capital im-
provements have to be to result in a plan of
rehabilitation (e.g., is at least one capital
expenditure required before the doctrine
applies and may a single capital expendi-
ture cause the doctrine to apply)? Are re-
pairs part of a plan of rehabilitation when
the repairs are done in preparation for or
as part of a remodeling project?See Nor-
west Corp. v. Commissioner, 108 T.C. 265
(1997). If so, what constitutes a remod-
eling project? Does the doctrine apply if
the work is part of a continuous or ongo-
ing process of replacing an asset over time
(e.g., if normal operation requires ongo-
ing repainting and repapering, do repaint-
ing and repapering costs become capital if
they correspond with acapital remodeling
project)?See Moss v. Commissioner,831
F.2d 833 (9
th
Cir. 1987). Should the reg-
ulations establish a bright-line test that re-
pairs of property are considered part of a
plan of rehabilitation if the property is, at
the time the repairs are made, not suitable
for its intended use, in a general state of
disrepair, or at the end of its useful life?
Should the regulations address other is-
sues, such as whether a written plan is re-
quired and whether the existence of a writ-
ten plan indicates a plan of rehabilitation?
14.Should the regulations provide
specific rules for any particular type or
category of expenditure?
15.Are there any situations in which
the tax treatment of an expenditure to
repair, improve, or rehabilitate tangi-
ble property should follow the financial
or regulatory accounting treatment for
that expenditure?
DATES: Written and electronic comments
must be submitted by March 1, 2004.
ADDRESSES: Send submissions to:
CC:PA:LDP:PR (Notice 2004–6), room
5203, Internal Revenue Service, P.O. Box
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:ITA:PR (Notice 2004–6), Courier's
Desk, Internal Revenue Service, 1111
Constitution Avenue, N.W., Washington,
DC. Alternatively, taxpayers may send
submissions electronically directly to the
Service at:Notice.comments@irscoun-
sel.treas.govAll materials submitted will
be available for public inspection and
copying.
2004-3 I.R.B.309January 20, 2004

FOR FURTHER INFORMATION
CONTACT: Concerning submissions,
Guy Traynor (202) 622–7180; concerning
this notice, Grace K. Matuszeski (202)
622–7327 (not toll-free numbers).
Charitable Contributions of
Patents and Other Intellectual
Property
Notice 2004–7
The Internal Revenue Service (IRS) is
aware that some taxpayers that transfer
patents or other intellectual property to
charitable organizations are claiming char-
itable contribution deductions in excess of
the amounts to which they are entitled un-
der § 170 of the Internal Revenue Code.
In particular, the IRS has become aware of
purported charitable contributions of intel-
lectual property in which one or more of
the following issues are present: 1) transfer
of a nondeductible partial interest in intel-
lectual property; 2) the taxpayer’s expec-
tation or receipt of a benefit in exchange
for the transfer; 3) inadequate substantia-
tion of the contribution; and 4) overvalua-
tion of the intellectual property transferred.
The purpose of this notice is to advise tax-
payers that, in appropriate cases, the IRS
intends to disallow all or part of these im-
proper deductions and may impose penal-
ties under § 6662. In addition, this no-
tice advises promoters and appraisers that
the IRS intends to review promotions of
transactions involving these improper de-
ductions, and that the promoters and ap-
praisers of the intellectual property may be
subject to penalties under §§ 6700, 6701,
and 6694.
Section 170(a)(1) allows as a deduction,
subject to certain limitations and restric-
tions, any charitable contribution (as de-
fined in § 170(c)) that is made within the
taxable year.
However, § 170(f)(3) provides gener-
ally that no charitable contribution deduc-
tion is allowed for a transfer to a charitable
organization of less than the taxpayer’s en-
tire interest in property. For example, if a
donation agreement states that a transfer to
the donee of the taxpayer’s interests in a
patent is subject to a right retained by the
taxpayer to manufacture or use any prod-
uct covered by the patent, the taxpayer has
transferred a nondeductible partial interest
in the patent. For other examples of non-
deductible partial interests, see Situations
1 and 2 of Rev. Rul. 2003–28, 2003–11
I.R.B. 594.
Generally, to be deductible as a charita-
ble contribution under § 170, a transfer to
a charitable organization must be a gift. A
gift to a charitable organization is a trans-
fer of money or property without receipt
of adequate consideration, made with char-
itable intent.SeeU.S.v. AmericanBar
Endowment, 477 U.S. 105, 117–18 (1986)
(citing Rev. Rul. 67–246, 1967–2 C.B.
104, with approval);Hernandez v. Com-
missioner, 490 U.S. 680, 690 (1989); and
§ 1.170A–1(h)(1) and (2) of the Income
Tax Regulations. A transfer to a charita-
ble organization is not made with chari-
table intent if the transferor expects a re-
turn commensurate with the amount of the
transfer.Hernandezat 690;see also Amer-
ican Bar Endowmentat 116.
If a taxpayer receives a benefit in re-
turn for a transfer to a charitable organi-
zation, the transfer may be deductible as
a charitable contribution, but only to the
extent the amount transferred exceeds the
fair market value of the benefit received,
and only if the excess amount was trans-
ferred with the intent of making a gift (a
“dual character” transfer).See American
Bar Endowmentat 118 (the taxpayer must
“at a minimum demonstrate that he pur-
posely contributed money or property in
excess of the value of any benefit he re-
ceived in return.”) In other words, the tax-
payer must establish that it knew at the
time of the transfer that the value of what it
gave was greater than the value of what it
received.See id. In this situation, the bur-
den is on the taxpayer to show that all or
part of the payment was a charitable con-
tribution.See§ 1.170A–1(h). All consid-
eration provided by the charitable organi-
zation (other than benefits disregarded un-
der § 1.170A–13(f)(8)) must be taken into
account, including non-cash benefits.
For example, if a donation agreement
states that the donee assumes a taxpayer’s
liability for a lease of a research facility,
this assumption of liability is considera-
tion from the donee. Likewise, a donee’s
promise to make available to the taxpayer
the results of the donee’s research, such as
laboratory notebooks, data, and research
files, is consideration from the donee.
Similarly, a charitable organization’s
promise to hold a patent and maintain
it for a period of time is consideration
to a taxpayer if the taxpayer is benefited
when others are prevented from purchas-
ing or licensing the patent.Cf.Rev. Rul.
2003–28, Situation 3 (taxpayer received
no benefit from restriction on donated
patent). In each of these examples, the
taxpayer has the burden of showing that it
knew, at the time of the transfer, that the
value of the donated property exceeded
the value of the consideration it received
from the donee. The taxpayer may deduct
no more than this excess amount.
A charitable contribution is allowable
as a deduction only if substantiated in ac-
cordance with regulations prescribed by
the Secretary. Section 170(a)(1) and (f)(8).
Under § 170(f)(8), a taxpayer must sub-
stantiate its contributions of $250 or more
by obtaining from the donee a statement
that includes: (1) a description of any re-
turn benefit provided by the donee; and (2)
a good faith estimate of the benefit’s fair
market value. (See § 1.170A–13 for ad-
ditional substantiation requirements.) The
IRS intends, in appropriate cases, to disal-
low deductions if the taxpayer fails to com-
ply with the substantiation requirements.
See, e.g., Addis v. Commissioner, 118 T.C.
528 (2002).
If all requirements of § 170 are satisfied,
including those discussed above, and a de-
duction is thereby allowed, the amount of
the deduction may not exceed the fair mar-
ket value of the contributed property on the
date of contribution (reduced by the fair
market value of any consideration received
by the taxpayer).See§ 1.170A–1(c)(1).
Fair market value is the price at which
the property would change hands between
a willing buyer and a willing seller, nei-
ther being under any compulsion to buy or
sell and both having reasonable knowledge
of relevant facts. Section 1.170A–1(c)(2).
For example, the fair market value of a
patent must be determined after taking into
account, among other factors: (1) whether
the patented technology has been made
obsolete by other technology; (2) any re-
strictions on the donee’s use of, or abil-
ity to transfer, the patented technology (see
Rev. Rul. 2003–28, Situation 3); and (3)
the length of time remaining before the
patent’s expiration.
January 20, 20043102004-3 I.R.B.

DRAFTING INFORMATION
The principal author of this notice is
Patricia Zweibel of the Office of Associate
Chief Counsel (Income Tax and Account-
ing). For further information regarding
this notice, please contact Ms. Zweibel at
(202) 622–5020 (not a toll-free call).
26 CFR 601.204: Changes in accounting periods and
in methods of accounting.
(Also Part I, §§ 446, 1016; 1.446–1T, 1.1016–3T.)
Rev. Proc. 2004–11
SECTION 1. PURPOSE
This revenue procedure provides an au-
tomatic consent procedure allowing a tax-
payer to make a change in method of ac-
counting under § 446(e) of the Internal
Revenue Code for depreciable or amorti-
zable property after its disposition. This
revenue procedure also waives the appli-
cation of the two-year rule set forth in Rev.
Rul. 90–38, 1990–1 C.B. 57, for certain
changes in depreciation or amortization.
Finally, this revenue procedure modifies
Rev. Proc. 2002–9, 2002–1 C.B. 327 (as
modified by Rev. Proc. 2002–54, 2002–2
C.B. 432, Rev. Proc. 2002–19, 2002–1
C.B. 696, Rev. Proc. 2002–33, 2002–1
C.B. 963, and as modified and clarified
by Announcement 2002–17, 2002–1 C.B.
561), and other revenue procedures to con-
form with § 1.446–1T(e)(2)(ii)(d)ofthe
temporary Income Tax Regulations.
SECTION 2. BACKGROUND
.01 Section 446(e) and § 1.446–1T(e)
provide that, except as otherwise pro-
vided, a taxpayer must secure the consent
of the Commissioner of Internal Revenue
before changing a method of accounting
for federal income tax purposes. Sec-
tion 1.446–1T(e)(3)(ii) authorizes the
Commissioner to prescribe administrative
procedures setting forth the limitations,
terms, and conditionsdeemed necessary
to permit a taxpayer to obtain consent to
change a method of accounting.
.02 Concurrently with the is-
suance of this revenue proce-
dure, §§ 1.446–1T(e)(2)(ii)(d)and
1.1016–3T(h) have been promulgated.
Section 1.446–1T(e)(2)(ii)(d)provides
the changes in depreciation or amorti-
zation (hereinafter, both are referred to
as “depreciation”) that are (and are not)
changes in method of accounting under
§ 446(e). Section 1.1016–3T(h) provides
that the “allowed or allowable” rule under
§ 1016(a)(2) does not permanently affect
a taxpayer’s lifetime income for purposes
of determining whether a change in
depreciation or amortization is a change
in method of accounting under § 446(e).
.03 If a taxpayer uses an impermissible
method of determining depreciation for a
depreciable or amortizable property, the
taxpayer adopts that method of accounting
for the property when the taxpayer treats
thepropertyinthesamewayindetermin-
ing gross income or deductions in two or
more consecutively filed federal tax re-
turns.SeeRev. Rul. 90–38. The Internal
Revenue Service and Treasury Department
recognize that this two-year rule increases
administrative and compliance costs as-
sociated with changes in depreciation
because many taxpayers changing from
an impermissible to permissible method
of accounting for depreciation used the
impermissible method for depreciable or
amortizable properties placed in service in
two or more taxable years before the year
of change as well as for depreciable and
amortizable properties placed in service
in the taxable year immediately preceding
the year of change. Accordingly, in the
interest of sound tax administration, the
Service and Treasury Department have
decided to waive the two-year rule in Rev.
Rul. 90–38 for a change in depreciation to
which § 1.446–1T(e)(2)(ii)(d) applies.
.04 If a depreciable or amortizable
property is transferred in a transaction
in which the transferee is treated as the
transferor for purposes of computing the
depreciation allowance for the property
with respect to so much of the basis in the
hands of the transferee as does not exceed
the adjusted depreciable basis in the hands
of the transferor (for example, in transac-
tions subject to § 168(i)(7) or § 381(c)(6)),
the transferee may file a Form 3115,Appli-
cation for Change in Accounting Method,
to change from an impermissible method
of accounting adopted by the transferor for
that portion of the basis of the property to a
permissible method of accounting for de-
preciation for the same portion of the basis
of the property, provided the impermissi-
ble method of accounting for that portion
of the basis of the property has not been
changed by the transferor (through filing,
for example, a Form 3115 or an amended
return) or by the Internal Revenue Service
upon examination of the transferor’s tax
returns. In this case, the § 481 adjustment
will include any necessary adjustments
since the property’s placed-in-service date
by the transferor.
SECTION 3. METHOD CHANGE
PROCEDURE FOR DISPOSED
DEPRECIABLE OR AMORTIZABLE
PROPERTY
.01Scope.
(1)Applicability. Except as provided in
section 3.01(2) of this revenue procedure,
section 3 of this revenue procedure applies
to a taxpayer that is changing from an im-
permissible method of accounting for de-
preciation to a permissible method of ac-
counting for depreciation for any item of
depreciable or amortizable property sub-
ject to § 1.446–1T(e)(2)(ii)(d):
(a) that has been disposed of by the tax-
payer during the year of change (as defined
in section 3.02(2)(b) of this revenue proce-
dure); and
(b) for which the taxpayer did not take
into account any depreciation allowance,
or did take into account some deprecia-
tion but less than the depreciation allow-
able (hereinafter, both are referred to as
“claimed less than the depreciation allow-
able”), in the year of change (as defined
in section 3.02(2)(b) of this revenue pro-
cedure) or any prior taxable year.
(2)Inapplicability. Section 3 of this
revenue procedure does not apply to:
(a) any property to which § 1016(a)(3)
(regarding property held by a tax-exempt
organization) applies;
(b) any property for which a taxpayer is
revoking a timely valid depreciation elec-
tion, or making a late depreciation elec-
tion, under the Code or regulations there-
under, or under other guidance published
in the Internal Revenue Bulletin (including
under § 13261(g)(2) or (3) of the Revenue
Reconciliation Act of 1993, 1993–3 C.B.
1, 128 (relating to amortizable § 197 intan-
gibles));
(c) any property for which the taxpayer
deducted the cost or other basis of the
property as an expense; or
(d) any property disposed of by the tax-
payer in a transaction to which a non-
recognition section of the Code applies
2004-3 I.R.B.311January 20, 2004

(for example, § 1031, transactions subject
to § 168(i)(7)(B)(i)). However, this sec-
tion 3.01(2)(d) does not apply to property
disposed of by the taxpayer in a § 1031 or
§ 1033 transaction if the taxpayer elects to
treat the entire basis (that is, both the car-
ryover and excess basis) of the acquired
MACRS property as property placed in
service by the taxpayer at the time of re-
placement and treat the adjusted deprecia-
ble basis of the exchanged or involuntarily
converted MACRS property as being dis-
posed of by the taxpayer at the time of dis-
position.
.02Change in method of accounting.
(1)In general. A taxpayer within the
scope of section 3 of this revenue proce-
dure may change from an impermissible
method of accounting for depreciation to a
permissible method of accounting for de-
preciation for any item of depreciable or
amortizable property within the scope of
section 3 of this revenue procedure, pro-
vided:
(a) the taxpayer files the original Form
3115 in accordance with section 3.02(2)(c)
of this revenue procedure, prior to the expi-
ration of the period of limitation for assess-
ment under § 6501(a) for the taxable year
in which the item of depreciable or amorti-
zable property was disposed of by the tax-
payer; and
(b) the taxpayer files an amended fed-
eral tax return for the year of change (as de-
fined in section 3.02(2)(b) of this revenue
procedure) that includes the adjustments
to taxable income and any collateral ad-
justments to taxable income or tax liability
(for example, adjustments to the amount or
character of the gain or loss of the disposed
depreciable or amortizable property) re-
sulting from the change in method of ac-
counting for depreciation made by the tax-
payer under this section 3.
(2)Application Procedures. A taxpayer
making a change in method of account-
ing under section 3 of this revenue proce-
dure must follow the automatic change in
method of accounting provisions in Rev.
Proc. 2002–9 (or its successor), with the
following modifications:
(a) The scope limitations in section 4.02
of Rev. Proc. 2002–9 do not apply. If the
taxpayer is under examination, before an
appeals office, or before a federal court at
the time that a copy of the Form 3115 is
filed with the national office, the taxpayer
must provide a copy of the Form 3115 to
the examining agent, appeals officer, or
counsel for the government, as appropri-
ate, at the time the copy of the Form 3115
is filed with the national office. The Form
3115 must contain the name(s) and tele-
phone number(s) of the examining agent,
appeals officer, or counsel for the govern-
ment, as appropriate.
(b) The year of change is the taxable
year in which the item of depreciable or
amortizable property was disposed of by
the taxpayer.
(c) Section 6.02(3)(a) of Rev. Proc.
2002–9 is modified to require the original
of the Form 3115 to be attached to the tax-
payer’s timely filed amended federal tax
return for the year of change and a copy
(with signature) of the Form 3115 to be
filed with the national office no later than
when the original Form 3115 is filed with
the amended federal tax return for the year
of change.
(d) For purposes of section 6.02(4)(a) of
Rev. Proc. 2002–9, the taxpayer should in-
clude on line 1a of the Form 3115 (revised
December 2003) the designated automatic
accounting method change number for the
change in method of accounting for depre-
ciation made under this section 3. This
number for this method change is “9.”
SECTION 4. WAIVER OF TWO-YEAR
RULE IN REV. RUL. 90–38
.01In general. Notwithstanding Rev.
Rul. 90–38, a taxpayer may file a Form
3115 under Rev. Proc. 97–27, 1997–1
C.B. 680 (or its successor), or Rev. Proc.
2002–9, as applicable, to change from
an impermissible method of account-
ingfordepreciationtoapermissible
method of accounting for depreciation
under § 1.446–1T(e)(2)(ii)(d) for any de-
preciable or amortizable property subject
to § 1.446–1T(e)(2)(ii)(d) and placed in
service by the taxpayer in the taxable
year immediately preceding the year of
change (as defined in section 5.02(2) of
Rev. Proc. 97–27 or section 5.02 of Rev.
Proc. 2002–9, as applicable) (hereinafter,
this property is referred to as “1-year
depreciable property”), provided the addi-
tional term and condition in section 4.02
of this revenue procedure is satisfied. Al-
ternatively, the taxpayer may make the
change from the impermissible depreci-
ation method to the permissible depreci-
ation method for the 1-year depreciable
property by filing an amended federal tax
return for the placed-in-service year prior
to the date the taxpayer files its federal tax
return for the taxable year succeeding the
placed-in-service year.
.02Additional term and condition for
filing a Form 3115. In addition to the
terms and conditions provided in Rev.
Proc. 97–27 or Rev. Proc. 2002–9, as
applicable, the § 481adjustment reported
on a Form 3115 that is filed by a taxpayer
in accordance with section 4.01 of this
revenue procedure to make a change in
method of accounting for depreciation un-
der § 1.446–1T(e)(2)(ii)(d) for any 1-year
depreciable property, must include the
amount of any adjustment attributable to
all property (including the 1-year depre-
ciable property) subject to the Form 3115.
SECTION 5. EFFECT ON OTHER
DOCUMENTS
.01 Rev. Proc. 2002–9 is modified
and amplified to include the accounting
method change provided under section 3
of this revenue procedure in section 2.05
of the APPENDIX. See section 4 of the
APPENDIX of this revenue procedure for
the text of section 2.05 of the APPENDIX
of Rev. Proc. 2002–9.
.02 The heading for section 2 of the
APPENDIX of Rev. Proc. 2002–9 is mod-
ified to read as follows: “SECTION 2.
DEPRECIATION OR AMORTIZATION
(§ 56(a)(1), 56(g)(4)(A), 167, 168, 197,
1400I, OR 1400L, OR FORMER § 168)”.
.03 Rev. Proc. 2002–9 (as modified
by Rev. Proc. 2002–33) is modified by
deleting sections 2.01, 2.02, and 2B of the
APPENDIX and replacing them with the
text in, respectively, sections 1, 2, and 3 of
the APPENDIX of this revenue procedure.
.04 Section 6.03 of Rev. Proc.
2000–38, 2000–2 C.B. 310, 313,
is modified by deleting “See
§ 1.446–1(e)(2)(ii)(b).” and replacing
it with “See§ 1.446–1T(e)(2)(ii)(d)(3)(i).”
.05 Section 8.01 of Rev. Proc.
2000–50, 2000–2 C.B. 601, is modi-
fied to read as follows: “A change in
a taxpayer’s treatment of costs paid or
incurred to develop, purchase, lease, or
license computer software to a method
described in section 5, 6, or 7 of this rev-
enue procedure is a change in method
of accounting to which §§ 446 and 481
apply. Further, a change in useful life
January 20, 20043122004-3 I.R.B.

under the method described in section
5.01(2) or 6.01(2) of this revenue proce-
dure is a change in method of account-
ing.See§ 1.446–1T(e)(2)(ii)(d)(3)(i)
and, for the effective date,see
§ 1.446–1T(e)(4)(ii)(A).”
SECTION 6. EFFECTIVE DATE
.01In general. Except as provided in
section 6.02 of this revenue procedure, this
revenue procedure is effective for a Form
3115 filed for taxable years ending on or
after December 30, 2003.
.02Transition rule for previously filed
Forms 3115 for automatic consent.
(1) For a taxable year ending on or after
December 30, 2003, a taxpayer may make
a change in method of accounting pre-
viously authorized in section 2.01, 2.02,
or 2B of the APPENDIX of Rev. Proc.
2002–9 before any amendments were
made to those sections by this revenue
procedure if:
(a) before December 30, 2003, the tax-
payer filed a completed Form 3115 with
the national office to make that change in
method of accounting; and
(b) the taxpayer makes that change in
method of accounting in compliance with
all the applicable provisions of Rev. Proc.
2002–9 for the requested year of change
(as defined in section 5.02 of Rev. Proc.
2002–9) on that Form 3115.
(2) If a taxpayer filed a Form 3115 with
thenationalofficetomakeachangein
method of accounting previously autho-
rized in section 2.01, 2.02, or 2B of the
APPENDIX of Rev. Proc. 2002–9 be-
fore any amendments were made to those
sections by this revenue procedure for
a year of change for which this revenue
procedure is effective (see section 6.01 of
this revenue procedure) and the taxpayer’s
original federal tax return for that year of
change was not filed before December 30,
2003, the taxpayer may make the change
in method of accounting authorized under
section 2.01, 2.02, or 2B, as applicable, of
the APPENDIX of Rev. Proc. 2002–9 as
revised by this revenue procedure. How-
ever, the Service will process the Form
3115 in accordance with the section of
the APPENDIX of Rev. Proc. 2002–9 in
effect on the date on which the Form 3115
was filed with the national office by the
taxpayer unless on or before the due date
(including extensions) of the taxpayer’s
federal tax return for the requested year of
change (as defined in section 5.02 of Rev.
Proc. 2002–9) on that Form 3115, the tax-
payer completes a new Form 3115 to make
the change under section 2.01, 2.02, or 2B,
as applicable, of the APPENDIX of Rev.
Proc. 2002–9 as revised by this revenue
procedure and files this newly completed
Form 3115 in duplicate in accordance with
section 6.02(3)(a) of Rev. Proc. 2002–9.
Additionally, the newly completed Form
3115 must include thestatement: “Section
[insert, as appropriate: 2.01, 2.02, or 2B]
of the APPENDIX of Rev. Proc. 2002–9
as revised by Rev. Proc. 2004–11.” This
statement must be legibly printed or typed
on the appropriate line on, or at the top of
page 1 of, the Form 3115.
SECTION 7. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Sara Logan of the Office of
Associate Chief Counsel (Passthroughs
and Special Industries). For further infor-
mation regarding this revenue procedure,
contact Ms. Logan or Douglas Kim at
(202) 622–3110 (not a toll-free call).
APPENDIX
SECTION 1. Section 2.01 of the
APPENDIX of Rev. Proc 2002–9 is
deleted and replaced with the following:
“.01Impermissible to permissible
method of accounting for depreciation
or amortization.
(1)Description of change and scope.
(a)Applicability. This change applies
to a taxpayer that wants to change from
an impermissible to a permissible method
of accounting for depreciation or amortiza-
tion (depreciation) for any item of depre-
ciable or amortizable property:
(i) for which the taxpayer used the im-
permissible method of accounting in at
least the two taxable years immediately
preceding the year of change (but see
section 2.01(1)(b) of this APPENDIX for
property placed in service in the taxable
year immediately preceding the year of
change);
(ii) for which the taxpayer is making
a change in method of accounting under
§ 1.446–1T(e)(2)(ii)(d);
(iii) for which depreciation is deter-
mined under § 56(a)(1), § 56(g)(4)(A),
§ 167, § 168, § 197, § 1400I, § 1400L(b),
or § 1400L(c), or under § 168 prior to its
amendment in 1986 (former § 168); and
(iv) that is owned by the taxpayer at the
beginning of the year of change (but see
section 2.05 of this APPENDIX for prop-
erty disposed of before the year of change).
(b)Taxpayer has not adopted a method
of accounting for the item of property.
If a taxpayer does not satisfy section
2.01(1)(a)(i) of this APPENDIX for an
item of depreciable or amortizable prop-
erty because this item of property is placed
in service by the taxpayer in the taxable
year immediately preceding the year of
change (“1-year depreciable property”),
the taxpayer may change from the im-
permissible depreciation method to the
permissible depreciation method for the
1-year depreciable property by filing a
Form 3115 for this change, provided the
§ 481 adjustment reported on the Form
3115 includes the amount of any adjust-
ment that is attributable to all property
(including the 1-year depreciable prop-
erty) subject to the Form 3115. Alter-
natively, the taxpayer may change from
the impermissible depreciation method
to the permissible depreciation method
for a 1-year depreciable property by fil-
ing an amended federal tax return for the
property’s placed-in-service year prior to
the date the taxpayer files its federal tax
return for the taxable year succeeding the
placed-in-service year.
(c)Certain scope limitations inappli-
cable. The scope limitations in sections
4.02(7) and 4.02(8) of this revenue proce-
dure are not applicable to this change.
(d)Inapplicability. This change does
not apply to:
(i) any property to which § 1016(a)(3)
(regarding property held by a tax-exempt
organization) applies;
(ii) any taxpayer that is subject to
§ 263A and that is required to capital-
ize the costs with respect to which the
taxpayer wants to change its method of
accounting under section 2.01 of this AP-
PENDIX, if the taxpayer is not capitalizing
the costs as required;
(iii) any property for which a taxpayer
is making a change in depreciation under
§ 1.446–1T(e)(2)(ii)(d)(2)(vi)or(vii);
2004-3 I.R.B.313January 20, 2004

(iv) any property subject to § 167(g)
(regarding property depreciated under the
income forecast method);
(v) any § 1250 property that a taxpayer
is reclassifying to an asset class of Rev.
Proc. 87–56, 1987–2 C.B. 674, or Rev.
Proc. 83–35, 1983–1 C.B. 745, as ap-
propriate, that does not explicitly include
§ 1250 property (for example, asset class
57.0, Distributive Trades and Services);
(vi) any property for which a taxpayer is
revoking a timely valid election, or making
a late election, under § 167, § 168, § 1400I,
§ 1400L, former § 168, or § 13261(g)(2)
or (3) of the Revenue Reconciliation Act
of 1993 (1993 Act), 1993–3 C.B. 1, 128
(relating to amortizable § 197 intangibles).
A taxpayer may request consent to revoke
or make the election by submitting a re-
quest for a letter ruling under Rev. Proc.
2003–1, 2003–1 I.R.B. 1 (or any succes-
sor).See§ 1.446–1T(e)(2)(ii)(d)(3)(iii);
(vii) any propertyfor which deprecia-
tion is determined under § 56(g)(4)(A) or
§ 167 (other than under § 168, § 1400I,
§ 1400L, or former § 168) and a tax-
payer is changing the useful life of the
property. A change in the useful life
of property is corrected by adjustments
in the applicable taxable year provided
under § 1.446–1T(e)(2)(ii)(d)(3)(i). How-
ever, this section 2.01(1)(d)(vii) of this
APPENDIX does not apply if the tax-
payer is changing to or from a useful
life, recovery period, or amortization pe-
riod that is specifically assigned by the
Internal Revenue Code (for example,
§ 167(f)(1), § 168(c)), the regulations
thereunder, or other guidance published
in the Internal Revenue Bulletin and,
therefore, this change is a change in
method of accounting (unless section
2.01(1)(d)(xv) of this APPENDIX ap-
plies). See § 1.446–1T(e)(2)(ii)(d)(3)(i);
(viii) any depreciable property
for which the use changes in the
hands of the same taxpayer.See
§ 1.446–1T(e)(2)(ii)(d)(3)(ii);
(ix)anypropertyforwhichdepre-
ciation is determined in accordance
with § 1.167(a)–11 (regarding the Class
Life Asset Depreciation Range System
(ADR));
(x) any change in method of accounting
involving a change from deducting the cost
or other basis of any property as an expense
to capitalizing and depreciating the cost or
other basis;
(xi) any change in method of account-
ing involving a change from one permissi-
ble method of accounting for the property
to another permissible method of account-
ing for the property. For example:
(A) a change from the straight-line
method of depreciation to the income
forecast method of depreciating for video-
cassettes.SeeRev. Rul. 89–62, 1989–1
C.B. 78; or
(B) a change from charging the depre-
ciation reserve with costs of removal and
crediting the depreciation reserve with sal-
vage proceeds to deducting costs of re-
moval as an expense (provided the costs
of removal are not required to be capital-
ized under any provision of the Code, such
as, § 263(a)) and including salvage pro-
ceeds in taxable income (see section 2.02
of this APPENDIX for making this change
for property for which depreciation is de-
termined under § 167);
(xii) any change in method of account-
ing involving both a change from treat-
ing the cost or other basis of the prop-
erty as nondepreciableor nonamortizable
property to treating the cost or other basis
of the property as depreciable or amortiz-
able property and the adoption of a method
of accounting for depreciation requiring
an election under § 167, § 168, § 1400I,
§ 1400L(b), former § 168, or § 13261(g)(2)
or (3) of the 1993 Act (for example, a
change in the treatment of the space con-
sumed in landfills placed in service in 1990
from nondepreciableto depreciable prop-
erty (assuming section 2.01(1)(d)(xiii) of
the APPENDIX does not apply) and the
making of an election under § 168(f)(1) to
depreciate this property under the unit of
production method of depreciation under
§167);
(xiii) any change in method of account-
ing for any item of income or deduction
other than depreciation, even if the change
results in a change in computing depreci-
ation under § 1.446–1T(e)(2)(ii)(d)(2)(i),
(ii), (iii), (iv), (v), (vi), (vii), or (viii). For
example, a change in method of account-
ing involving:
(A) a change in inventory costs (for ex-
ample, when property is reclassified from
inventory property to depreciable property,
or vice versa) (but see section 3.02 of this
APPENDIX for making a change from in-
ventory property to depreciable property
for unrecoverable line pack gas or unre-
coverable cushion gas); or
(B) a change in the character of a trans-
action from sale to lease, or vice versa (but
seesection2.03ofthisAPPENDIXfor
making this change);
(xiv) a change from determining depre-
ciation under § 168 to determining depre-
ciation under former § 168 for any property
subject to the transition rules in § 203(b)
or 204(a) of the Tax Reform Act of 1986,
1986–3 (Vol. 1) C.B. 1, 60–80; or
(xv) any change in the placed-in-service
date of a depreciable or amortizable prop-
erty. This change is corrected by adjust-
ments in the applicable taxable year pro-
vided under § 1.446–1T(e)(2)(ii)(d)(3)(v).
(2)Additional requirements.Atax-
payer also must comply with the follow-
ing:
(a)Permissible method of accounting
for depreciation. A taxpayer must change
to a permissible method of accounting for
depreciation for the item of depreciable
or amortizable property. The permissible
method of accounting is the same method
that determines the depreciation allowable
for the item of property (as provided in sec-
tion 2.01(5) of this APPENDIX).
(b)Statements required. A taxpayer
must provide the following statements, if
applicable, and attach them to the com-
pleted application:
(i) a detailed description of the former
and new methods of accounting. A general
description of these methods of account-
ing is unacceptable (for example, MACRS
to MACRS, erroneous method to proper
method, claiming less than the deprecia-
tion allowable to claiming the depreciation
allowable);
(ii) to the extent not provided elsewhere
on the application, a statement describing
the taxpayer’s business or income-produc-
ing activities. Also, if the taxpayer has
more than one business or income-produc-
ing activity, a statement describing the tax-
payer’s business or income-producing ac-
tivity in which the item of property at issue
isprimarilyusedbythetaxpayer;
(iii) to the extent not provided else-
where on the application, a statement of the
facts and law supporting the new method
of accounting, new classification of the
item of property, and new asset class in,
as appropriate, Rev. Proc. 87–56 or Rev.
Proc. 83–35. If the taxpayer is the owner
and lessor of the item of property at issue,
the statement of the facts and law support-
ing the new asset class also must describe
January 20, 20043142004-3 I.R.B.

the business or income-producing activity
in which that item of property is primarily
used by the lessee;
(iv) to the extent not provided elsewhere
on the application, a statement identifying
the year in which the item of property was
placed in service;
(v) if the item of property is depreciated
under former § 168, a statement identify-
ing the asset class in Rev. Proc. 83–35
that applies under the taxpayer’s former
and new methods ofaccounting (if none,
state and explain);
(vi) if any item of property is public
utility property within the meaning of
§ 168(i)(10) or former § 167(l)(3)(A), as
applicable, a statement providing that the
taxpayer agrees to the following additional
terms and conditions:
(A) a normalization method of ac-
counting (within the meaning of former
§ 167(l)(3)(G), former § 168(e)(3)(B), or
§ 168(i)(9), as applicable) will be used for
the public utility property subject to the
application;
(B) as of the beginning of the year of
change, the taxpayer will adjust its de-
ferred tax reserve account or similar re-
serve account in the taxpayer’s regulatory
books of account by the amount of the de-
ferral of federal income tax liability asso-
ciated with the § 481(a) adjustment appli-
cable to the public utility property subject
to the application; and
(C) within 30 calendar days of filing the
federal income tax return for the year of
change, the taxpayer will provide a copy
of the completed application to any reg-
ulatory body having jurisdiction over the
public utility property subject to the appli-
cation;
(vii) if the taxpayer is changing the
classification of an item of § 1250 prop-
erty placed in service after August 19,
1996, to a retail motor fuels outlet under
§ 168(e)(3)(E)(iii), a statement containing
the following representation: “For pur-
poses of § 168(e)(3)(E)(iii) of the Internal
Revenue Code, the taxpayer represents
that (A) 50 percent or more of the gross
revenue generated from the item of § 1250
property is from the sale of petroleum
products (not including gross revenue
from related services, such as the labor
cost of oil changes and gross revenue from
the sale of nonpetroleum products such as
tires and oil filters), (B) 50 percent or more
of the floor space in the item of property
is devoted to the sale of petroleum prod-
ucts (not including floor space devoted
to related services, such as oil changes
and floor space devoted to nonpetroleum
products such as tires and oil filters), or
(C) the time of § 1250 property is 1,400
square feet or less.”; and
(viii) if the taxpayer is changing the
classification of an item of property from
§1250propertyto§1245propertyun-
der § 168 or former § 168, a statement
of the facts and law supporting the new
§ 1245 property classification, and a state-
ment containing the following represen-
tation: “Each item of depreciable prop-
erty that is the subject of the application
filed under section 2.01 of the APPEN-
DIX of Rev. Proc. 2002–9 for the year
of change beginning[Insert the date],and
that is reclassified from[Insert, as appro-
priate: nonresidential real property, resi-
dential rental property, 19-year real prop-
erty, 18-year real property, or 15-year real
property]to an asset class of[Insert, as
appropriate, either: Rev. Proc. 87–56,
1987–2 C.B. 674, or Rev. Proc. 83–35,
1983–1 C.B. 745]that does not explicitly
include § 1250 property, is § 1245 property
for depreciation purposes.”
(3)Section 481(a) adjustment.Be-
cause the adjusted basis of the prop-
erty is changed as a result of a method
change made under section 2.01 of this
APPENDIX (seesection 2.01(4) of this
APPENDIX), items are duplicated or
omitted. Accordingly, this change is made
with a § 481(a) adjustment. This ad-
justment may result in either a negative
§ 481(a) adjustment (a decrease in taxable
income) or a positive § 481(a) adjust-
ment (an increase in taxable income) and
may be a different amount for regular tax,
alternative minimum tax, and adjusted
current earnings purposes. This § 481(a)
adjustment equals the difference between
the total amount of depreciation taken
into account in computing taxable in-
come for the property under the taxpayer’s
former method of accounting (including
the amount attributable to any property
described in section 2.01(1)(b) of this
APPENDIX that is included in the tax-
payer’s Form 3115), and the total amount
of depreciation allowable for the prop-
erty under the taxpayer’s new method of
accounting (as determined under section
2.01(5) of this APPENDIX, and including
the amount attributable to any property
described in section 2.01(1)(b) of this AP-
PENDIX that is included in the taxpayer’s
Form 3115), for open and closed years
prior to the year of change. However,
the amount of the § 481(a) adjustment
must be adjusted to account for the proper
amount of the depreciation allowable that
is required to be capitalized under any pro-
vision of the Code (for example, § 263A)
at the beginning of the year of change.
(4)Basis adjustment. As of the begin-
ning of the year of change, the basis of de-
preciable property to which section 2.01 of
this APPENDIX applies must reflect the
reductions required by § 1016(a)(2) for the
depreciation allowable for the property (as
determined under section 2.01(5) of this
APPENDIX).
(5)Meaning of depreciation allowable.
(a)In general. Section 2.01(5) of this
APPENDIX provides the amount of the
depreciation allowable determined under
§ 56(a)(1), § 56(g)(4)(A), § 167, § 168,
§ 197, § 1400I, or § 1400L(c), or former
§ 168. This amount, however, may be lim-
ited by other provisions of the Code (for
example, § 280F).
(b)Section 56(a)(1) property. The de-
preciation allowable for any taxable year
for property for which depreciation is de-
termined under § 56(a)(1) is determined by
using the depreciation method, recovery
period, and convention provided for under
§ 56(a)(1) that applies for the property’s
placed-in-service date.
(c)Section 56(g)(4)(A) property.The
depreciation allowable for any taxable
year for property for which depreciation is
determined under § 56(g)(4)(A) is deter-
mined by using the depreciation method,
recovery period or useful life, as appli-
cable, and convention provided for under
§ 56(g)(4)(A) that applies for the prop-
erty’s placed-in-service date.
(d)Section 167 property. Generally, for
any taxable year, the depreciation allow-
able for property for which depreciation is
determined under § 167, is determined ei-
ther:
(i) under the depreciation method
adopted by a taxpayer for the property;
or
(ii) if that depreciation method does not
result in a reasonable allowance for depre-
ciation or a taxpayer has not adopted a de-
preciation method for the property, under
the straight-line depreciation method.
2004-3 I.R.B.315January 20, 2004

For determining the estimated useful
life and salvage value of the property, see
§ 1.167(a)–1(b) and (c), respectively.
The depreciation allowable for any tax-
able year for propertysubjectto§167(f)
(regarding certain property excluded from
§ 197) is determined by using the depre-
ciation method and useful life prescribed
in § 167(f). If computer software is depre-
ciated under § 167(f)(1) and is qualified
property (as defined in § 168(k)(2) and
§ 1.168(k)–1T of the temporary Income
Tax Regulations), 50-percent bonus depre-
ciation property (as defined in § 168(k)(4)
and § 1.168(k)–1T), or qualified New
York Liberty Zone (Liberty Zone) prop-
erty (as defined in § 1400L(b)(2) and
§ 1.1400L(b)–1T), the depreciation al-
lowable for that computer software under
§167(f)(1)isalsodeterminedbytaking
into account the additional first year de-
preciation deduction provided by § 168(k)
or § 1400L(b), as applicable, unless the
taxpayer made a timely valid election not
to deduct any additional first year depreci-
ation for the computer software.
(e)Section 168 property. The depre-
ciation allowable for any taxable year for
property for which depreciation is deter-
mined under § 168, is determined as fol-
lows:
(i) by using either:
(A) the general depreciation system in
§168(a);or
(B) the alternative depreciation system
in § 168(g) if the property is required to
be depreciated under the alternative depre-
ciation system pursuant to § 168(g)(1) or
other provisions of the Code (for exam-
ple, property described in § 263A(e)(2)(A)
or § 280F(b)(1)). Property required to be
depreciated under the alternative depreci-
ation system pursuant to § 168(g)(1) in-
cludes property in a class (as set out in
§ 168(e)) for which the taxpayer made a
timely valid election under § 168(g)(7);
and
(ii) if the property is qualified property,
50-percent bonus depreciation property,
or Liberty Zone property, by taking into
account the additional first year depre-
ciationdeductionprovidedby§168(k)
or § 1400L(b), as applicable, unless the
taxpayer made a timely valid election
not to deduct the additional first year
depreciation (or made a deemed elec-
tion not to deduct the additional first
year depreciation; for further guidance,
see Rev. Proc. 2002–33, 2002–1 C.B.
963, or Rev. Proc. 2003–50, 2003–29
I.R.B. 119) for the class of property
(as defined in § 1.168(k)–1T(e)(2) or
§ 1.1400L(b)–1T(e)(2), as applicable) in
which that property is included.
(f)Section 197 property. The depre-
ciation allowable forany taxable year for
an amortizable § 197 intangible (including
anypropertyforwhichatimelyelection
under § 13261(g)(2) of the 1993 Act was
made) is determined in accordance with
§ 1.197–2(f).
(g)Former § 168 property. The depre-
ciation allowable forany taxable year for
property subject to former § 168 is deter-
mined by using either:
(i) the accelerated method of cost re-
covery applicable to the property (for ex-
ample, for 5-year property, the recovery
method under former § 168(b)(1)); or
(ii) the straight-line method appli-
cable to the property if the property
is required to be depreciated under the
straight-line method (for example, prop-
erty described in former § 168(f)(12) or
former § 280F(b)(2)) or if the taxpayer
elected to determine the depreciation al-
lowance under the optional straight-line
percentage (for example, the straight-line
method in former § 168(b)(3)).
(h)Qualified revitalization building.
The depreciation allowable for any tax-
able year for any qualified revitalization
building (as defined in § 1400I(b)(1)) for
which the taxpayer has made a timely valid
election under § 1400I(a) is determined as
follows:
(i) if the taxpayer elected to deduct
one-half of any qualified revitalization
expenditures (as defined in § 1400I(b)(2))
chargeable to a capital account with re-
spect to the qualified revitalization build-
ing for the taxable year in which the build-
ing is placed in service by the taxpayer, the
depreciation allowable for the property’s
placed-in-service year is equal to one-half
of the qualified revitalization expenditures
for the property and the depreciation al-
lowable for the remaining recovery period
of the property is determined using the
general depreciation system of § 168(a)
or the alternative depreciation system of
§ 168(g), as applicable; or
(ii) if the taxpayer elected to amortize
all of the qualified revitalization expendi-
tures chargeable to a capital account with
respect to the qualified revitalization build-
ing ratably over the 120-month period be-
ginning with the month in which the build-
ing is placed in service,the depreciation al-
lowable is determined in accordance with
this election.
(i)Qualified New York Liberty Zone
leasehold improvement property.Thede-
preciation allowable for any taxable year
for qualified New York Liberty Zone lease-
hold improvement property (as defined in
§ 1400L(c)(2)) is determined by using the
depreciation method and recovery period
prescribed in § 1400L(c).”
SECTION 2. Section 2.02 of the
APPENDIX of Rev. Proc. 2002–9 is
deleted and replaced with the following:
“.02Permissible to permissible method
of accounting for depreciation.
(1)Description of change. This change
applies to a taxpayer that wants to change
from a permissible method of accounting
for depreciation under § 56(g)(4)(A)(iv)
or § 167 to another permissible method
of accounting for depreciation under
§ 56(g)(4)(A)(iv) or § 167. Pursuant
to § 1.167(a)–7(a) and (c), a taxpayer may
account for depreciable property either
by treating each individual asset as an ac-
count or by combining two or more assets
in a single account and, for each account,
depreciation allowances are computed
separately.
(2)Scope.
(a)Applicability. This change applies
to any taxpayer wanting to make a change
in method of accounting for deprecia-
tion specified in section 2.02(3) of this
APPENDIX for the property in an ac-
count:
(i) for which the present and pro-
posed methods of accounting for depreci-
ation specified in section 2.02(3) of this
APPENDIX are permissible methods for
the property under § 56(g)(4)(A)(iv) or
§167;and
(ii) that is owned by the taxpayer at the
beginning of the year of change.
(b)Certain scope limitations inappli-
cable. The scope limitations in sections
4.02(7) and 4.02(8) of this revenue proce-
dure are not applicable to this change.
(c)Inapplicability. This change does
not apply to:
(i) any taxpayer that is subject to § 263A
and that is required to capitalize the costs
with respect to which the taxpayer wants
January 20, 20043162004-3 I.R.B.

to change its method of accounting under
section 2.02 of this APPENDIX, if the tax-
payer is not capitalizing the costs as re-
quired;
(ii) any property to which § 1016(a)(3)
(regarding property held by a tax-exempt
organization) applies;
(iii) any property described in § 167(f)
(regarding certain property excluded from
§197);
(iv) any property subject to § 167(g)
(regarding property depreciated under the
income forecast method);
(v) any property for which depreci-
ation is determined under § 56(a)(1),
§ 56(g)(4)(A)(i), (ii), (iii), or (v), § 168,
§ 1400I, § 1400L(b), or § 1400L(c), or
§ 168 prior to its amendment in 1986 (for-
mer § 168);
(vi) any property that the taxpayer
elected under § 168(f)(1) or former
§ 168(e)(2) to exclude from the appli-
cation of, respectively, § 168 or former
§ 168;
(vii) any property for which depre-
ciation is determined in accordance
with § 1.167(a)–11 (regarding the Class
Life Asset Depreciation Range System
(ADR));
(viii) any depreciable property
for which the taxpayer is changing
the depreciation method pursuant to
§ 1.167(e)–1T(b) of the temporary In-
come Tax Regulations (change from de-
clining-balance method to straight-line
method), § 1.167(e)–1T(c) (certain
changes for § 1245 property), or
§ 1.167(e)–1T(d) (certain changes for
§ 1250 property). These changes must be
made prospectively and are not permitted
under the cited regulations for property
for which the depreciation is determined
under § 168, § 1400I, § 1400L, or former
§ 168; or
(ix) any distributor commissions (as de-
fined by section 2 of Rev. Proc. 2000–38,
2000–2 C.B. 310) for which the tax-
payer is changing the useful life under
the distribution fee period method or the
useful life method (both described in Rev.
Proc. 2000–38). A change in this use-
ful life is corrected by adjustments in the
applicable taxable year provided under
§ 1.446–1T(e)(2)(ii)(d)(3)(i).
(3)Changes covered. Section 2.02 of
this APPENDIX only applies to the fol-
lowing changes in methods of accounting
for depreciation:
(a) a change from the straight-line
method to the sum-of-the-years-digits
method, the sinking fund method, the
unit-of-production method, or the de-
clining-balance method using any proper
percentage of the straight-line rate;
(b) a change from the declining-bal-
ance method using any percentage of the
straight-line rate to the sum-of-the-years-
digits method, the sinking fund method,
or the declining-balance method using a
different proper percentage of the straight-
line rate;
(c) a change from the sum-of-the-years-
digits method to the sinking fund method,
the declining-balance method using any
proper percentage of the straight-line rate,
or the straight-line method;
(d) a change from the unit-of-produc-
tion method to the straight-line method;
(e) a change from the sinking fund
method to the straight-line method,
the unit-of-production method, the
sum-of-the-years-digits method, or the de-
clining-balance method using any proper
percentage of the straight-line rate;
(f) a change in the interest factor used
in connection with a compound interest
method or sinking fund method;
(g) a change in averaging convention as
set forth in § 1.167(a)–10(b). However, as
specifically provided in § 1.167(a)–10(b),
in any taxable year in which an averaging
convention substantially distorts the depre-
ciation allowance for the taxable year, it
may not be used (seeRev. Rul. 73–202,
1973–1 C.B. 81);
(h) a change from charging the depre-
ciation reserve with costs of removal and
crediting the depreciation reserve with sal-
vage proceeds to deducting costs of re-
moval as an expense and including salvage
proceeds in taxable income as set forth in
§ 1.167(a)–8(e)(2).SeeRev. Rul. 74–455,
1974–2 C.B. 63. This change, however,
may be made under this revenue procedure
only if:
(i) the change is applied to all items in
the account for which the change is being
made; and
(ii) the removal costs are not required
to be capitalized under any provision of
the Code (for example, § 263(a), 263A, or
280B);
(i) a change from crediting the depreci-
ation reserve with the salvage proceeds re-
alized on normal retirement sales to com-
puting and recognizing gains and losses on
the sales (seeRev. Rul. 70–165, 1970–1
C.B. 43);
(j) a change from crediting ordinary in-
come (including the combination method
of crediting the lesser of estimated sal-
vage value or actual salvage proceeds to
the depreciation reserve, with any excess
of salvage proceeds over estimated salvage
value credited to ordinary income) with the
salvage proceeds realized on normal retire-
ment sales, to computing and recognizing
gainsandlossesonthesales(seeRev. Rul.
70–166, 1970–1 C.B. 44);
(k) a change from item accounting for
specific assets to multiple asset accounting
for the same assets, or vice versa;
(l) a change from one type of multiple
asset accounting (pooling) for specific as-
sets to a different type of multiple asset ac-
counting (pooling) for the same assets;
(m) a change from one method de-
scribed in Rev. Proc. 2000–38 for amor-
tizing distributor commissions (as defined
by section 2 of Rev. Proc. 2000–38,
2000–2 C.B. 310) to another method de-
scribed in Rev. Proc. 2000–38 for amor-
tizing distributor commissions; or
(n) a change from pooling to a single as-
set, or vice versa, for distributor commis-
sions (as defined by section 2 of Rev. Proc.
2000–38, 2000–2 C.B. 310) for which the
taxpayer is using the distribution fee period
method or the useful life method (both de-
scribed in Rev. Proc. 2000–38).
(4)Additional requirements.Atax-
payer also must comply with the follow-
ing:
(a)Basis for depreciation. At the be-
ginning of the year of change, the basis
for depreciation of property to which this
change applies is the adjusted basis of the
property as provided in § 1011 at the end
of the taxable year immediately preceding
the year of change (determined under the
taxpayer’s present method of accounting
for depreciation). If applicable under the
taxpayer’s proposed method of accounting
for depreciation, this adjusted basis is re-
duced by the estimated salvage value of
the property (for example, a change to the
straight-line method).
(b)Rate of depreciation.Therateof
depreciation for property changed to:
(i) the straight-line or the sum-of-the-
years-digits method of depreciation must
be based on the remaining useful life of the
property as of the beginning of the year of
change; or
2004-3 I.R.B.317January 20, 2004

(ii) the declining-balance method of de-
preciation must be based on the useful life
of the property measured from the placed-
in-service date, and not the expected re-
maining life from the date the change be-
comes effective.
(c)Regulatory requirements.For
changes in method of depreciation to
the sum-of-the-years-digits or declin-
ing-balance method, the property must
meet the requirements of § 1.167(b)–0 or
1.167(c)–1, as appropriate.
(d)Public utility property.Ifanyitem
of property is public utility property within
the meaning of former § 167(l)(3)(A), the
taxpayer must attach to the application
a statement providing that the taxpayer
agrees to the following additional terms
and conditions:
(i) a normalization method of ac-
counting within the meaning of former
§ 167(l)(3)(G) will be used for the public
utility property subject to the application;
and
(ii) within 30 calendar days of filing the
federal income tax return for the year of
change, the taxpayer will provide a copy
of the completed application to any reg-
ulatory body having jurisdiction over the
public utility property subject to the appli-
cation.
(5)Section 481(a) adjustment. Because
the adjusted basis of the property is not
changed as a result of a method change
made under section 2.02 of this APPEN-
DIX, no items are being duplicated or
omitted. Accordingly, no § 481(a) adjust-
ment is required or necessary.”
SECTION 3. Section 2B of the
APPENDIX of Rev. Proc. 2002–9 is
deleted and replaced with the following:
“SECTION 2B. COMPUTER
SOFTWARE EXPENDITURES
(§§ 162, 167, AND 197)
.01Description of change. This change
applies to a taxpayer that wants to change
its method of accounting for the costs of
computer software to a method described
in Rev. Proc. 2000–50, 2000–2 C.B. 601.
Section 5 of Rev. Proc. 2000–50 describes
the methods applicable to the costs of de-
veloping computer software. Section 6 of
Rev. Proc. 2000–50 describes the method
applicable to the costs of acquired com-
puter software. Section 7 of Rev. Proc.
2000–50 describes the method applicable
to leased or licensed computer software.
If a taxpayer treats the costs of computer
software in accordance with the applicable
method described in Rev. Proc. 2000–50,
the Service will not disturb the taxpayer’s
treatment of its costs of computer software.
.02Scope. This change applies to all
costs of computer software as defined in
section 2 of Rev. Proc. 2000–50. How-
ever, this change does not apply to any
computer software that is subject to amor-
tization as an “amortizable section 197 in-
tangible” as defined in § 197(c) and the
regulations thereunder, or to costs that a
taxpayer has treated as research and exper-
imentation expenditures under § 174.
.03Statement required. If a taxpayer
is changing to the method described in
section 5.01(2) of Rev. Proc. 2000–50,
the taxpayer must attach to the application
a statement providing the information re-
quired in section 8.02(2) of Rev. Proc.
2000–50.”
SECTION 4. Section 2.05 of the
APPENDIX of Rev. Proc. 2002–9 is
added to read as follows:
“.05Impermissible to permissible
method of accounting for depreciation
or amortization for disposed depreciable
or amortizable property.
(1)Description of change. This change
applies to a taxpayer that wants to make
the change in method of accounting for de-
preciation or amortization (depreciation)
provided under section 3 of Rev. Proc.
2004–11, 2004–3 I.R.B. 311, for an item
of depreciable or amortizable property that
has been disposed of by the taxpayer. Sec-
tion 3 of Rev. Proc. 2004–11 allows a tax-
payer to make a change in method of ac-
counting for depreciation for the disposed
property if the taxpayer used an impermis-
sible method of accounting for deprecia-
tion for the property under which the tax-
payer did not take into account any depre-
ciation allowance, or did take into account
some depreciation but less than the depre-
ciation allowable, in the year of change (as
defined in section 2.05(3) of this APPEN-
DIX) or any prior taxable year.
(2)Scope. This change applies to a tax-
payer and an item of depreciable or amorti-
zable property that are within the scope of
section 3.01 of Rev. Proc. 2004–11, pro-
vided:
(a) the taxpayer files the original Form
3115 with the taxpayer’s amended federal
tax return for the year of change (as de-
fined in section 2.05(3) of this APPEN-
DIX) prior to the expiration of the period of
limitation for assessment under § 6501(a)
for the taxable year in which the item of de-
preciable or amortizable property was dis-
posed of by the taxpayer; and
(b) the taxpayer’s amended federal tax
return for the year of change (as defined
in section 2.05(3) of this APPENDIX) in-
cludes the adjustments to taxable income
and any collateral adjustments to taxable
income or tax liability (for example, ad-
justments to the amount or character of the
gain or loss of the disposed depreciable
or amortizable property) resulting from the
change in method of accounting for depre-
ciation made by the taxpayer under section
2.05 of this APPENDIX.
(3)Year of change. The year of change
for this change is the taxable year in which
the item of depreciable or amortizable
property was disposed of by the taxpayer.
(4)Scope limitations inapplicable.The
scope limitations in section 4.02 of this
revenue procedure do not apply. If the tax-
payer is under examination, before an ap-
peals office, or before a federal court at the
time that a copy of the Form 3115 is filed
with the national office, the taxpayer must
provide a copy of the Form 3115 to the ex-
amining agent, appeals officer, or counsel
for the government, as appropriate, at the
time the copy of the Form 3115 is filed
with the national office. The Form 3115
must contain the name(s) and telephone
number(s) of the examining agent, appeals
officer, or counsel for the government, as
appropriate.
(5)Filing requirements. Notwithstand-
ing section 6.02(3)(a) of this revenue
procedure, a taxpayer making this change
must attach the original Form 3115 to the
taxpayer’s timely filed amended federal
tax return for the year of change and must
file the required copy (with signature) of
the Form 3115 with the national office no
later than when the original Form 3115 is
filed with the amended federal tax return
for the year of change.
(6)Section 481(a) adjustment period.
A taxpayer must take the § 481(a) adjust-
ment into account in the year of change.”
January 20, 20043182004-3 I.R.B.

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking by
Cross-Refere
nce to
Temporary Re
gulations
Guidance Nec
essary to
Facilitate B
usiness Electronic
Filing
REG–116664
–01
AGENCY: Int
ernal Revenue Service
(IRS), Trea
sury.
ACTION: Not
ice of proposed rulemaking
by cross-re
ference to temporary regula-
tions.
SUMMARY: I
n this issue of the Bulletin,
the IRS is i
ssuing temporary regulations
(T.D. 9100
) designed to eliminate regula-
tory imped
iments to the electronic filing
of certai
n business income tax returns and
other for
ms. Those regulations affect busi-
ness taxp
ayers who file income tax returns
electron
ically. The text of those regula-
tions als
oservesasthetextofthesepro-
posed re
gulations.
DATES: W
ritten or electronic comments
and requ
ests for a public hearing must be
receive
d by March 19, 2004.
ADDRESS
ES: Send submissions to:
CC:PA:L
PD:PR (REG–116664–01), room
5203, In
ternal Revenue Service, POB
7604, B
en Franklin Station, Washing-
ton, DC
20044. Submissions may be
hand de
livered Monday through Friday
betwee
n the hours of 8 a.m. and 4 p.m.
to: CC:
PA:LPD:PR (REG–116664–01),
Couri
er's Desk, Internal Revenue Service,
1111 C
onstitution Avenue, NW, Wash-
ingto
n, DC. Alternatively, taxpayers may
submi
t electronic comments directly to the
IRS in
ternet site atwww.irs.gov/regs.
FOR FU
RTHER INFORMATION
CONT
ACT: Concerning the regulations,
Nath
an Rosen (202) 622–4910; concern-
ing s
ubmissions of comments and/or re-
ques
ts for a hearing, Robin Jones (202)
622–
3521 (not toll-free numbers).
SUPPLEMENTAR
Y INFORMATION:
Paperwork Red
uction Act
The collectio
n of information contained
in this notice
of proposed rulemaking has
been submitte
d to the Office of Manage-
ment and Budg
et for review in accordance
with the Pape
rwork Reduction Act of 1995
(44 U.S.C. 35
07(d)). Comments on the
collection o
f information should be sent to
theOffice o
f Management and Budget,
Attn: Desk O
fficer for the Department
of the Treas
ury, Office of Information
and Regulat
ory Affairs, Washington, DC
20503, wit
h copies to theInternal Rev-
enue Servi
ce, Attn: IRS Reports Clear-
ance Offic
er, SE:W:CAR:MP:T:T:SP,
Washingto
n, DC 20224. Comments on
the collec
tion of information should be re-
ceived by
February 17, 2004. Comments
are speci
fically requested concerning:
Whether t
he proposed collection of in-
formatio
n is necessary for the proper per-
formance
of the functions of theInternal
Revenue S
ervice, including whether the
informa
tion will have practical utility;
The accur
acy of the estimated burden
associa
ted with the proposed collection of
informa
tion (see below);
How the q
uality, utility, and clarity of
the info
rmation to be collected may be en-
hanced;
How the b
urden of complying with the
propose
d collection of information may be
minimiz
ed, including through the appli-
cation o
f automated collection techniques
or othe
r forms of information technology;
and
Estima
tes of capital or start-up costs
and cos
ts of operation, maintenance, and
purcha
se of service to provide information.
The col
lection of information in this
propos
ed regulation is in §1.170A–11T.
Sectio
n 170 of the Code permits tax de-
ductio
ns, within limits, for charitable con-
tribu
tions by individuals and corporations.
Secti
on 170(a)(2) provides that under cer-
tain c
onditions, corporations may treat a
chari
table contribution as paid during the
taxab
le year even if the contribution oc-
curs
in the following taxable year. Existing
regu
lations provide that to invoke this pro-
vision, a corp
oration must submit with its
income tax ret
urn a supporting statement
and a copy of th
e board of directors’ res-
olution autho
rizing the contribution. The
proposed regu
lation eliminates the need
to submit the
resolution with the return,
but provides
that the supporting statement
must identif
y the date of the resolution.
This informa
tion regarding the timing of
board actio
nisrequiredtobereportedto
help ensure
that taxpayers properly doc-
ument their
entitlement to deductions for
charitable
contributions. The IRS cannot
ascertain
this information from the board
resolutio
n itself since, as noted above, tax-
payers wil
l no longer have to submit that
document w
ith their returns. The collec-
tion of inf
ormation is mandatory. The
likely re
spondents are for-profit corpora-
tions.
Estimate
d total annual reporting bur-
den: 250,
000 hours.
Estimate
d average annual burden hours
per respo
ndent: .25 hours.
Estimate
d number of respondents:
1,000,00
0.
Estimate
d annual frequency of re-
sponses:
annually.
An agency
may not conduct or sponsor,
and a pers
on is not required to respond to, a
collecti
on of information unless it displays
avalidc
ontrol number assigned by the Of-
fice of M
anagement and Budget.
Books or
records relating to a collection
of infor
mation must be retained as long
as their
contents may become material in
the admi
nistration of any internal revenue
law. Gen
erally, tax returns and tax return
inform
ation are confidential, as required
by 26 U.
S.C. 6103.
Backgr
ound and Explanation of
Provis
ions
Tempor
ary regulations (T.D. 9100) in
this is
sue of the Bulletin contain amend-
ments
to the Income Tax Regulations (26
CFR Pa
rt 1) and the Procedure and Admin-
istra
tion Regulations (26 CFR Part 301)
desig
ned to eliminate regulatory impedi-
ments
to the electronic filing of certain in-
come
tax returns and other forms. The text
of th
ose regulations also serves as the text
2004-3 I.R.B.319January 20, 2004

of these proposed regulations. The pream-
ble to the temporary regulations explains
the temporary regulations and these pro-
posed regulations. The regulations gen-
erally affect taxpayers who must file any
of the following forms: Form 926,Re-
turn by a U.S. Transferor of Property to
a Foreign Corporation; Form 972,Con-
sent of Shareholder To Include Specific
Amount in Gross Income; Form 973,Cor-
poration Claim for Deduction for Consent
Dividends;Form982,Reduction of Tax
Attributes Due to Discharge of Indebted-
ness (and Section 1082 Basis Adjustment);
Form 1120,U.S. Corporation Income Tax
Return; Form 1120S,U.S. Income Tax Re-
turn for an S Corporation; Form 1122,
Authorization and Consent of Subsidiary
Corporation To Be Included in a Consol-
idated Income Tax Return; Form 5471,
Information Return of U.S. Persons With
Respect To Certain Foreign Corporations;
Form 5712–A,Election and Verification of
the Cost Sharing or Profit Split Method
Under Section 936(h)(5); and Form 8832,
Entity Classification Election.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It also has
been determined thatsection 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regu-
lations. It is hereby certified that the col-
lection of information in these regulations
will not have a significant economic im-
pact on a substantial number of small en-
tities. This certification is based on the
fact that the collection of information de-
scribed above under the heading “Paper-
work Reduction Act” does not affect cor-
porations that elect to be taxed under Subti-
tle A, Chapter 1, Subchapter S of the Code.
Moreover, requiring a corporation to report
the information described above concern-
ing board of directors' approval of certain
charitable contributions imposes virtually
no incremental burden in time or expense.
Therefore, a Regulatory Flexibility Anal-
ysis under the Regulatory Flexibility Act
(5 U.S.C. Chapter 6) is not required. Pur-
suant to section 7805(f) of the Code, this
notice of proposed rulemaking will be sub-
mitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.
Comments and 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 the Treasury Depart-
ment specifically request comments on
the clarity of the proposed regulations and
how they can 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 these regula-
tions is Nathan Rosen, Office of Associate
Chief Counsel (Procedure and Administra-
tion), Administrative Provisions and Judi-
cial Practice Division.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 301
are proposed to be amended as follows:
PART 1—INCOME TAXES
Par. 1. The authority citation for part 1
continues to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 2. Section 1.170A–11 is amended
by revising paragraph (b)(2) to read as fol-
lows:
§ 1.170A–11 Limitation on, and carryover
of, contributions by corporations.
*****
(b) * * *
(2) [The text of the proposed amend-
ment to §1.170A–11(b)(2) is the same as
the text of §1.170A–11T(b)(2) published
elsewhere in this issue of the Bulletin].
*****
Par. 3. Section 1.556–2 is amended by:
1. Revising paragraph (e)(2)(vii).
2. Adding paragraph (e)(3).
The revision and addition read as fol-
lows:
§1.556–2 Adjustments to taxable income.
*****
(e) * * *
(2) * * *
(vii) [The text
of the proposed amend-
ment to §1.556
–2(e)(2)(vii) is the same as
the text of §1.
556–2T(e)(2)(vii) published
elsewhere in t
his issue of the Bulletin.
*****
(3) [The text of the proposed amend-
ment to §1.556–2(e)(3) is the same as the
text of §1.556–2T(e)(3) published else-
whereinthisissueoftheBulletin].
*****
Par. 4. Section 1.565–1 is amended
by revising paragraph (b)(3) to read as fol-
lows:
§1.565–1 General rule.
*****
(b) * * *
(3) [The text of the proposed amend-
ment to §1.565–1(b)(3) is the same as the
text of §1.565–1T(b)(3) published else-
whereinthisissueoftheBulletin].
*****
Par. 5. Section 1.936–7 is amended by
revising paragraph (b), Q.&A. 1 to read as
follows:
§1.936–7 Manner of making elections
under section 936(h)(5); special election
for export sales; revocation of election
under section 936(a).
*****
(b) * * *
Q.& A. 1 [The text of the proposed
amendment to §1.936–7(b), Q.& A. 1 is
the same as the text of §1.936–7T(b), Q.&
A. 1, published elsewhere in this issue of
the Bulletin].
*****
Par. 6. Section 1.1017–1 is amended by
revising paragraph (g)(2)(iii)(B) to read as
follows:
§1.1017–1 Basis reductions following a
discharge of indebtedness.
*****
(g) * * *
(2) * * *
January 20, 20043202004-3 I.R.B.

(iii) * * *
(B) [The text of the proposed amend-
mentto§1.1017–1(g)(2)(iii)(B)
is the same as the text of
§1.1017–1T(g)(2)(iii)(B)published
elsewhere in this issue of the Bulletin].
*****
Par. 7. Section 1.1368–1 is amended
by revising paragraphs (f)(5)(iii) and
(g)(2)(iii) to read as follows:
§1.1368–1 Distributions by S
corporations.
*****
(f) * * *
(5) * * *
(iii) [The text of the proposed amend-
ment to §1.1368–1(f)(5)(iii) is the same as
the text of §1.1368–1T(f)(5)(iii) published
elsewhere in this issue of the Bulletin].
*****
(g) * * *
(2) * * *
(iii) [The text of the proposed amend-
ment to §1.1368–1(g)(2)(iii) is the same as
the text of §1.1368–1T(g)(2)(iii) published
elsewhere in this issue of the Bulletin].
*****
Par. 8. Section 1.1377–1 is amended
by revising paragraph (b)(5)(i)(C) to read
as follows:
§1.1377–1 Pro rata share.
*****
(b) * * *
(5) * * *
(i) * * *
(C) [The text of the proposed amend-
ment to §1.1377–1(b)(5)(i)(C) is the same
as the text of §1.1377–1T(b)(5)(i)(C) pub-
lished elsewhere in this issue of the Bul-
letin].
*****
Par. 9. Section 1.1502–21 is amended
by revising paragraphs (b)(3)(i) and
(b)(3)(ii)(B) to read as follows:
§1.1502–21 Net operating losses.
*****
(b) * * *
(3) * * * (i) [The text of the proposed
amendment to §1.1502–21(b)(3)(i) is the
same as the text of §1.1502–21T(b)(3)(i)
published elsewhere in this issue of the
Bulletin].
(ii) * * *
(B) [The text of the proposed amend-
mentto§1.1502–21(b)(3)(ii)(B)
is the same as the text of
§1.1502–21T(b)(3)(ii)(B)published
elsewhere in this issue of the Bulletin.
*****
Par. 10. Section 1.1502–75 is amended
by revising paragraph (h)(2) to read as fol-
lows:
§1.1502–75 Filing of consolidated
returns.
*****
(h) * * *
(2) [The text of the proposed amend-
ment to §1.1502–75(h)(2) is the same as
the text of §1.1502–75T(h)(2) published
elsewhere in the issue of the Bulletin].
*****
Par. 11. Section 1.1503–2 is
amended by revising paragraphs (g)(2)(i),
(g)(2)(iv)(B)(3)(iii) and (g)(2)(vi)(B) to
read as follows:
§1.1503–2 Dual consolidated loss.
*****
(g) * * *
(2) * * * (i) [The text of the proposed
amendment to §1.1503–2(g)(2)(i) is the
same as the text of §1.1503–2T(g)(2)(i)
published elsewhere in this issue of the
Bulletin].
*****
(iv)***
(B)***
(3)***
(iii) [The text of the proposed amend-
ment to §1.1503–2(g)(2)(iv)(B)(3)(iii)
is the same as the text of
§1.1503–2T(g)(2)(iv)(B)(3)(iii)pub-
lished elsewhere in this issue of the
Bulletin].
*****
(vi) * * *
(B) [The text of the proposed amend-
mentto§1.1503–2(g)(2)(vi)(B)
is the same as the text of
§1.1503–2T(g)(2)(vi)(B)published
elsewhere in this issue of the Bulletin].
*****
Par. 12. Section 1.6038B–1 is amended
by revising paragraphs (b)(1)(i) and
(b)(1)(ii) to read as follows:
§1.6038B–1 Reporting of certain transfers
to foreign corporations.
*****
(b) * * * (1) * * * (i) [The
text of the proposed amendments to
§1.6038B–1(b)(1)(i) is the same as the
text of §1.6038B–1T(b)(1)(i) published
elsewhere in this issue of the Bulletin].
(ii) [The text of the proposed amend-
ment to §1.6038B–1(b)(1)(ii) is the same
as the text of §1.6038B–1T(b)(1)(ii) pub-
lished elsewhere in this issue of the Bul-
letin].
*****
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 13. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 14. Section 301.7701–3 is
amended by revising paragraph (c)(1)(ii)
to read as follows:
§301.7701–3 Classification of certain
business entities.
*****
(c)***(1)***
(ii) [The text of the proposed amend-
ment to §301.7701–3 (c)(1)(ii) is the same
as the text of §301.7701–3T(c)(1)(ii) pub-
lished elsewhere in this issue of the Bul-
letin].
*****
Robert E. Wenzel,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on December 18,
2003, 8:45 a.m., and published in the issue of the Federal
Register for December 19, 2003, 68 F.R. 70747)
2004-3 I.R.B.321January 20, 2004

New Code W for the 2004
Form W–2, Box 12
Announcement 2004–2
PurposeThe purpose of this announcement is to advise employers about an additional code fo
ruse
on the 2004 Form W–2. This code will be used to identify the amount of an employer’s
contribution to an employee’s Health Savings Account (HSA).
Health Savings
Accounts
(HSA)
Anewcode(Code W—Employer’s contributiontoanemployee’sHealthSavings
Account (HSA))foruseinbox12onthe2004FormW–2hasbeenaddedtothe2004
Instructions for Forms W–2 and W–3.
The Medicare Prescription Drug Improvement and Modernization Act of 2003 requires
reporting of an employer’s contributions to an employee’s HSA on Form W–2. The
amount that an employer contributes to an employee’s HSA will be shown in box 12 of
Form W–2, using Code W.
Generally, employer contributions toan employee’s MSA are not subject to in
come, social
security/Medicare, or Railroad Retirement taxes and will not affect amount
sotherwise
reported in boxes 1, 3, and 5 of Form W–2.
Announcement of Disciplinary Actions Involving
Attorneys, Certified Public Accountants, Enrolled Agents,
and Enrolled Actuaries — Suspensions, Censures,
Disbarments, and Resignations
Announcement 2004-6
Under Title 31, Code of Federal Regu-
lations, Part 10, attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries may not accept assistance from,
or assist, any person who is under disbar-
ment or suspension from practice before
the Internal Revenue Service if the assis-
tance relates to a matter constituting prac-
tice before the Internal Revenue Service
and may not knowingly aid or abet another
person to practice before the Internal Rev-
enue Service during a period of suspen-
sion, disbarment, or ineligibility of such
other person.
To enable attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries to identify persons to whom
these restrictions apply, the Director, Of-
fice of Professional Responsibility will
announce in the Internal Revenue Bulletin
their names, their city and state, their pro-
fessional designation, the effective date
of disciplinary action, and the period of
suspension. This announcement will ap-
pear in the weekly Bulletin at the earliest
practicable date after such action and will
continue to appear in the weekly Bulletins
for five successive weeks.
Disbarments From Practice Before the Internal Revenue
Service After Notice and an Opportunity for a Proceeding
Under Title 31, Code of Federal Regu-
lations, Part 10, after notice and an oppor-
tunity for a proceeding before an adminis-
trative law judge, the following individuals
have been disbarred from practice before
the Internal Revenue Service:
NameAddressDesignationEffective Date
Baxley II, MiltonGainesville, FLCPAOctober 24, 2003
January 20, 20043222004-3 I.R.B.

Consent Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, an attorney, certified pub-
lic accountant, enrolled agent, or enrolled
actuary, in order to avoid institution or con-
clusion of a proceeding for his or her dis-
barment or suspension from practice be-
fore the Internal Revenue Service, may of-
fer his or her consent to suspension from
such practice. The Director, Office of Pro-
fessional Responsibility, in his discretion,
may suspend an attorney, certified public
accountant, enrolled agent or enrolled ac-
tuary in accordance with the consent of-
fered.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue Ser-
vice:
NameAddressDesignationDate of Suspension
Nietupski, John E.Springfield,MAEnrolled AgentIndefinite
from
October 15, 2005
Roberts, Dennis C.Oklahoma City, OKAttorneyIndefinite
from
October 27, 2003
Waldo-Grant, Barbara A.Grand Rapids, MIEnrolled AgentIndefinite
from
November 1, 2003
Naylor, Dale C.El Cajon, CAEnrolled AgentIndefinite
from
November 12, 2003
Schlude, Richard M.Wilkes Barre, PAEnrolled AgentIndefinite
from
November 19, 2003
Stern, Samuel L.Robbinsdale, MNAttorneyIndefinite
from
November 19, 2003
Robles, MichaelDallas, TXCPAIndefinite
from
December 1, 2003
Young Jr., Donald A.Redondo Beach, CAEnrolled AgentDecember 1, 2003
to
August 31, 2004
Hitchcock, William C.Irvine, CAEnrolled AgentIndefinite
from
December 30, 2003
Willms, Bryant E.Lee Summit, MOEnrolled AgentJanuary 1, 2004
to
December 31, 2004
2004-3 I.R.B.323January 20, 2004

Expedited Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, the Director, Office of Pro-
fessional Responsibility, is authorized to
immediately suspend from practice before
the Internal Revenue Service any practi-
tioner who, within five years from the date
the expedited proceeding is instituted (1)
has had a license to practice as an attorney,
certified public accountant, or actuary sus-
pended or revoked for cause or (2) has been
convicted of certain crimes.
The following individuals have been
placed under suspension from practice be-
fore the Internal Revenue Service by virtue
of the expedited proceeding provisions:
NameAddressDesignationDate of Suspension
Greene, MarvinChicago, ILCPAIndefinite
from
October 21, 2003
Bolusky, Eric B.Perkins, OKAttorneyIndefinite
from
October 21, 2003
Crutchfield Jr., ErnestLatty, OHEnrolled AgentIndefinite
from
October 21, 2003
Covey, CharlesGladstone, MOCPAIndefinite
from
October 23, 2003
Prosperi, Arnold P.Jupiter Island, FLAttorneyIndefinite
from
November 24, 2003
Lucas, ChristopherOverlandPark, KSAttorneyIndefinite
from
November 24, 2003
Ramsey, Henry A.Burnet, TXCPAIndefinite
from
December 15, 2003
Resignations of Enrolled Agents
Under Title 31, Code of Federal Regu-
lations, Part 10, an enrolled agent, in or-
der to avoid the institution or conclusion
of a proceeding for his or her disbarment
or suspension from practice before the In-
ternal Revenue Service, may offer his or
her resignation as an enrolled agent. The
Director, Office of Professional Responsi-
bility, in his discretion, may accept the of-
fered resignation.
The Director, Office of Professional
Responsibility, has accepted offers of res-
ignation as an enrolled agent from the
following individuals:
NameAddressDate of Designation
Pettyplace, Edward F.Sacramento, CAJanuary 30, 2004
January 20, 20043242004-3 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified,above).
Obsoleteddescribes a previously pub-
lished ruling that isnot 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 following abbreviations in current use
and formerly used will appear in material
published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
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—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
2004-3 I.R.B.iJanuary 20, 2004

Numerical Finding List
1
Bulletins 2004–1 through 2004–3
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
2004-6, 2004-3 I.R.B.322
Notices:
2004-1, 2004-2 I.R.B.268
2004-2, 2004-2 I.R.B.269
2004-4, 2004-2 I.R.B.273
2004-6, 2004-3 I.R.B.308
2004-7, 2004-3 I.R.B.310
Proposed Regulations:
REG-116664-01, 2004-3 I.R.B.319
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
Revenue Rulings:
2004-2, 2004-2 I.R.B.265
2004-5, 2004-3 I.R.B.295
Treasury Decisions:
9099, 2004-2 I.R.B.255
9100, 2004-3 I.R.B.297
9103, 2004-3 I.R.B.306
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.
January 20, 2004ii2004-3 I.R.B.

Findings List of Current Actions on
Previously Published Items
1
Bulletins 2004–1 through 2004–3
Revenue Procedures:
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
2002-9
Modified by
Rev. Proc. 2004-11, 2004-3 I.R.B.311
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
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
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.
2004-3 I.R.B.iiiJanuary 20, 2004
*U.S. G.P.O.: 2004—304–774/60118