Internal Revenue Bulletin 1996-13 (PDF rendition): IRS Revenue Rulings

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

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Bulletin No. 1996–13
March 25, 1996
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. 96–17, page 5.
Interest rates; underpayments and overpayments. The rate
of interest determined under section 6621 of the Code
for the calendar quarter beginning April 1, 1996, is 7
percent for overpayments, 8 percent for underpay-
ments, and 10 percent for large corporate underpay-
ments. The rate of interest paid on the portion of a
corporate overpayment exceeding $10,000 is 5.5
percent.
Rev. Rul. 96–18, page 4.
LIFO; price indexes; department stores. The January
1996 Bureau of Labor Statistics price indexes are
accepted for use by department stores employing the
retail inventory and last-in, first-out inventory methods
for valuing inventories for tax years ended on, or with
reference to, January 31, 1996.
T.D. 8656, page 9.
Final and temporary regulations under section 6662(e)
of the Code provide guidance on the imposition of the
accuracy-related penalty for net section 482 transfer
price adjustments.
EMPLOYEE PLANS
Notice 96–16, page 20.
Guidelines are set forth for determining for March 1996,
the weighted average interest rate and the resulting
permissible range of interest rates used to calculate
current liability for purposes of the full funding
limitation of section 412(c)(7) of the Code as amended
by the Omnibus Budget Reconciliation Act of 1987 and
by the Uruguay Round Agreements Act (GATT).
EXEMPT ORGANIZATIONS
Announcement 96–17, page 22.
A list is provided of organizations that no longer qualify
as organizations to which contributions are deductible
under section 170 of the Code.
EXCISE TAX
Announcement 96–15, page 22.
If the criteria described in a proposed class exemption
issued by the Department of Labor are met, the Service
will not impose the excise taxes on prohibited
transactions described in section 4975 of the Code.
ADMINISTRATIVE
Notice 96–15, page 19.
The ‘‘differential earnings rate’’ under section 809 is
tentatively determined for 1995 together with the
‘‘recomputed differential earnings rate’’ for 1994.
Notice 96–17, page 20.
T.D. 8642, 1996–7 I.R.B. 4, relating to the recognition
of gain or loss on certain distributions of contributed
property by a partnership, and to the recognition of gain
on certain distributions to a contributing partner, is
corrected.
Announcement 96–16, page 22.
This announcement clarifies the purposes and functions
of the Transfer Pricing Penalty Oversight Committee,
established to monitor and gather information on the
application of transfer pricing penalties under section
6662(e) of the Internal Revenue Code.
Finding Lists begin on page 27.
Announcement of Disbarments and Suspensions begin on page 24.

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Mission of the Service
The purpose of the Internal Revenue Service is to
collect the proper amount of tax revenue at the least
cost; serve the public by continually improving the
quality of our products and services; and perform in a
manner warranting the highest degree of public
confidence in our integrity, efficiency and fairness.
Statement of Principles
of Internal Revenue
Tax Administration
The function of the Internal Revenue Service is to
administer the Internal Revenue Code. Tax policy
for raising revenue is determined by Congress.
With this in mind, it is the duty of the Service to
carry out that policy by correctly applying the laws
enacted by Congress; to determine the reasonable
meaning of various Code provisions in light of the
Congressional purpose in enacting them; and to
perform this work in a fair and impartial manner,
with neither a government nor a taxpayer point of
view.
At the heart of administration is interpretation of the
Code. It is the responsibility of each person in the
Service, charged with the duty of interpreting the
law, to try to find the true meaning of the statutory
provision and not to adopt a strained construction in
the belief that he or she is ‘‘protecting the revenue.’’
The revenue is properly protected only when we as-
certain and apply the true meaning of the statute.
The Service also has the responsibility of applying
and administering the law in a reasonable,
practical manner. Issues should only be raised by
examining officers when they have merit, never
arbitrarily or for trading purposes. At the same
time, the examining officer should never hesitate
to raise a meritorious issue. It is also important
that care be exercised not to raise an issue or to
ask a court to adopt a position inconsistent with
an established Service position.
Administration should be both reasonable and
vigorous. It should be conducted with as little
delay as possible and with great courtesy and
considerateness. It should never try to overreach,
and should be reasonable within the bounds of law
and sound administration. It should, however, be
vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax
devices and fraud.

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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 Conventions, legisla-
tion, court decisions, and other items of general
interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscrip-
tion basis. Bulletin contents of a permanent nature 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 substantive rulings necessary to promote a uniform
application of the tax laws, including all rulings that
supersede, revoke, modify, or amend any of those
previously published in the Bulletin. All published
rulings apply retroactively unless otherwise indicated.
Procedures relating solely to matters of internal
management 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 proce-
dures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be
considered, and Service personnel and others con-
cerned 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.—1986 Code.
This part includes rulings and decisions based on
provisions of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows:
Subpart A, Tax Conventions, and Subpart B, Legislation
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 Rulings. Bank Secrecy Act Admin-
istrative Rulings are issued by the Department of the
Treasury’s Office of the Assistant Secretary
(Enforcement).
Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemak-
ing and the disbarment and suspension list included in
this part, none of these announcements are consoli-
dated in the Cumulative Bulletins.
The first Bulletin for each month includes an index for
the matters published during the preceding month.
These monthly indexes are cumulated on a quarterly
and semiannual basis, and are published in the first
Bulletin of the succeeding quarterly and semi-annual
period, respectively.
The Bulletin Index-Digest System, a research and
reference service supplementing the Bulletin, may be
obtained from the Superintendent of Documents on a
subscription basis. It consists of four Services: Service
No. 1, Income Tax; Service No. 2, Estate and Gift
Taxes; Service No. 3, Employment Taxes; Service No.
4, Excise Taxes. Each Service consists of a basic
volume and a cumulative supplement that provides (1)
finding lists of items published in the Bulletin, (2)
digests of revenue rulings, revenue procedures, and
other published items, and (3) indexes of Public Laws,
Treasury Decisions, and Tax Conventions.
The contents 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, D.C. 20402.

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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 472.—Last-in, First-out
Inventories
26 CFR 1.472–1: Last-in, first-out inventories.
LIFO; price indexes; department
stores. The January 1996 Bureau of
Labor Statistics price indexes are ac-
cepted for use by department stores
employing the retail inventory and last-
in, first-out inventory methods for valu-
ing inventories for tax years ended on,
or with reference to January 31, 1996.
Rev. Rul. 96–18
The following Department Store In-
ventory Price Indexes for January 1996
were issued by the Bureau of Labor
Statistics on February 28, 1996. The
indexes are accepted by the Internal
Revenue Service, under §1.472–1(k)
of the Income Tax Regulations and
Rev. Proc. 86–46, 1986–2 C.B. 739, for
appropriate application to inventories of
department stores employing the retail
inventory and last-in, first-out inven-
tory methods for tax years ended on, or
with reference to, January 31, 1996.
The Department Store Inventory
Price Indexes are prepared on a na-
tional basis and include (a) 23 major
groups of departments, (b) three special
combinations of the major groups—soft
goods, durable goods, and mis-
cellaneous goods, and (c) a store total,
which covers all departments, including
some not listed separately, except for
the following: candy, foods, liquor,
tobacco, and contract departments.
BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
GroupsJan 1995Jan 1996
Percent Change from
Jan 1995 to Jan 1996
1
1.Piece Goods...........................480.1519.08.1
2.Domestics and Draperies................632.3648.42.5
3.Women’s and Children’s Shoes..........627.4628.80.2
4.Men’s Shoes..........................917.6887.6–3.3
5.Infants’ Wear..........................613.6641.14.5
6.Women’s Underwear....................528.0519.1–1.7
7.Women’s Hosiery......................282.3289.42.5
8.Women’s and Girls’ Accessories.........542.2554.22.2
9.Women’s Outerwear and Girls’ Wear.....398.4400.30.5
10.Men’s Clothing........................595.7602.71.2
11.Men’s Furnishings......................553.7560.61.2
12.Boys’ Clothing and Furnishings..........480.5478.5–0.4
13.Jewelry...............................1005.9994.5–1.1
14.Notions...............................746.3802.77.6
15.Toilet Articles and Drugs...............842.6875.43.9
16.Furniture and Bedding..................646.7668.93.4
17.Floor Coverings........................571.8563.6–1.4
18.Housewares............................775.9800.53.2
19.Major Appliances......................248.5247.6–0.4
20.Radio and Television...................84.278.9–6.3
21.Recreation and Education
2
...............114.6112.6–1.7
22.Home Improvements
2
...................122.0123.10.9
23.Auto Accessories
2
......................106.4107.71.2
Groups 1–15: Soft Goods....................579.3585.21.0
Groups 16–20: Durable Goods...............464.5467.00.5
Groups 21–23: Misc. Goods
2
.................114.1113.2–0.8
Store Total
3
............................541.2544.90.7
1
Absence of a minus sign before percentage change in this column signifies price increase.
2
Indexes on a January 1986=100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, foods,
liquor, tobacco, and contract departments.

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DRAFTING INFORMATION
The principal author of this revenue
ruling is Stan Michaels of the Office of
Assistant Chief Counsel (Income Tax
and Accounting). For further informa-
tion regarding this revenue ruling,
contact Mr. Michaels on (202)
622-4970 (not a toll-free call).
Section 6621.— Determination of
Interest Rate
26 CFR 301.6621–1: Interest rate.
Interest rates; underpayments and
overpayments. The rate of interest
determined under section 6621 of the
Code for the calendar quarter beginning
April 1, 1996, is 7 percent for overpay-
ments, 8 percent for underpayments,
and 10 percent for large corporate
underpayments. The rate of interest
paid on the portion of a corporate
overpayment exceeding $10,000 is 5.5
percent.
Rev. Rul. 96–17
Section 6621 of the Internal Revenue
Code establishes different rates for
interest on tax overpayments and inter-
est on tax underpayments. Under
§ 6621(a)(1), the overpayment rate is
the sum of the federal short-term rate
plus 2 percentage points, except the
rate for the portion of a corporate
overpayment of tax exceeding $10,000
for a taxable period is the sum of the
federal short-term rate plus 0.5 of a
percentage point for interest computa-
tions made after December 31, 1994.
Under §6621(a)(2), the underpayment
rate is the sum of the federal short-term
rate plus 3 percentage points.
Section 6621(c) provides that for
purposes of interest payable under
§ 6601 on any large corporate underpay-
ment, the underpayment rate under
§ 6621(a)(2) is determined by substitut-
ing ‘‘5 percentage points’’ for ‘‘3
percentage points.’’ See §6621(c) and
§ 301.6621–3 of the Regulations on
Procedure and Administration for the
definition of a large corporate underpay-
ment and for the rules for determining
the applicable rate. Section 6621(c) and
§ 301.6621–3 are generally effective for
periods after December 31, 1990.
Section 6621(b)(1) provides that the
Secretary will determine the federal
short-term rate for the first month in
each calendar quarter.
Section 6621(b)(2)(A) provides that
the federal short-term rate determined
under §6621(b)(1) for any month ap-
plies during the first calendar quarter
beginning after such month.
Section 6621(b)(2)(B) provides that
in determining the addition to tax under
§ 6654 for failure to pay individual
estimated tax for any taxable year, the
federal short-term rate that applies
during the third month following such
taxable year also applies during the
first 15 days of the fourth month
following such taxable year.
Section 6621(b)(3) provides that the
federal short-term rate for any month is
the federal short-term rate determined
during such month by the Secretary in
accordance with §1274(d), rounded to
the nearest full percent (or, if a
multiple of
1
⁄2 of 1 percent, the rate is
increased to the next highest full
percent).
Notice 88–59, 1988–1 C.B. 546, an-
nounced that in determining the quar-
terly interest rates to be used for
overpayments and underpayments of
tax under §6621, the Internal Revenue
Service will use the federal short-term
rate based on daily compounding be-
cause that rate is most consistent with
§ 6621 which, pursuant to §6622, is
subject to daily compounding.
Rounded to the nearest full percent,
the federal short-term rate based on
daily compounding determined during
the month of January 1996 is 5 percent.
Accordingly, an overpayment rate of 7
percent and an underpayment rate of 8
percent are established for the calendar
quarter beginning April 1, 1996. The
overpayment rate for the portion of
corporate overpayments exceeding
$10,000 for the calendar quarter begin-
ning April 1, 1996, is 5.5 percent. The
underpayment rate for large corporate
underpayments for the calendar quarter
beginning April 1, 1996, is 10 percent.
These rates apply to amounts bearing
interest during that calendar quarter.
Under §6621(b)(2)(B), the 9 percent
rate that applies to individual estimated
tax underpayments for the first calendar
quarter in 1996, as provided in Rev.
Rul. 95–78, 1995–49 I.R.B. 6, also
applies to such underpayments for the
first 15 days in April 1996.
Interest factors for daily compound
interest for annual rates of 5.5 percent,
7 percent, 8 percent, and 10 percent are
published in Tables 64, 67, 69, and 73
of Rev. Proc. 95–17, 1995–1 C.B. 556,
618, 621, 623, and 627.
Annual interest rates to be com-
pounded daily pursuant to §6622 that
apply for prior periods are set forth in
the accompanying tables.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Marcia Rachy of the Office of
Assistant Chief Counsel (Income Tax
and Accounting). For further informa-
tion regarding this revenue ruling,
contact Ms. Rachy on (202) 622-4940
(not a toll-free call).

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TABLE OF INTEREST RATES
PERIODS BEFORE JUL. 1, 1975 — PERIODS ENDING DEC. 31, 1986
OVERPAYMENTS AND UNDERPAYMENTS
DAILY RATE TABLE
PERIODRATEIN 1995–1 C.B.
Before Jul. 1, 19756%Table 2, pg. 557
Jul. 1, 1975—Jan. 31, 19769%Table 4, pg. 559
Feb. 1, 1976—Jan. 31, 19787%Table 3, pg. 558
Feb. 1, 1978—Jan. 31, 19806%Table 2, pg. 557
Feb. 1, 1980—Jan. 31, 198212%Table 5, pg. 560
Feb. 1, 1982—Dec. 31, 198220%Table 6, pg. 560
Jan. 1, 1983—Jun. 30, 198316%Table 37, pg. 591
Jul. 1, 1983—Dec. 31, 198311%Table 27, pg. 581
Jan. 1, 1984—Jun. 30, 198411%Table 75, pg. 629
Jul. 1, 1984—Dec. 31, 198411%Table 75, pg. 629
Jan. 1, 1985—Jun. 30, 198513%Table 31, pg. 585
Jul. 1, 1985—Dec. 31, 198511%Table 27, pg. 581
Jan. 1, 1986—Jun. 30, 198610%Table 25 pg. 579
Jul. 1, 1986—Dec. 31, 19869%Table 23, pg. 577

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TABLE OF INTEREST RATES
FROM JAN. 1, 1987 — PRESENT
OVERPAYMENTS
RATETABLEPG
UNDERPAYMENTS
RATETABLEPG
1995–1 C.B.1995–1 C.B.
Jan. 1, 1987—Mar. 31, 19878%215759%23577
Apr. 1, 1987—Jun. 30, 19878%215759%23577
Jul. 1, 1987—Sep. 30, 19878%215759%23577
Oct. 1, 1987—Dec. 31, 19879%2357710%25579
Jan. 1, 1988—Mar. 31, 198810%7362711%75629
Apr. 1, 1988—Jun. 30, 19889%7162510%73627
Jul. 1, 1988—Sep. 30, 19889%7162510%73627
Oct. 1, 1988—Dec. 31, 198810%7362711%75629
Jan. 1, 1989—Mar. 31, 198910%2557911%27581
Apr. 1, 1989—Jun. 30, 198911%2758112%29583
Jul. 1, 1989—Sep. 30, 198911%2758112%29583
Oct. 1, 1989—Dec. 31, 198910%2557911%27581
Jan. 1, 1990—Mar. 31, 199010%2557911%27581
Apr. 1, 1990—Jun. 30, 199010%2557911%27581
Jul. 1, 1990—Sep. 30, 199010%2557911%27581
Oct. 1, 1990—Dec. 31, 199010%2557911%27581
Jan. 1, 1991—Mar. 31, 199110%2557911%27581
Apr. 1, 1991—Jun. 30, 19919%2357710%25579
Jul. 1, 1991—Sep. 30, 19919%2357710%25579
Oct. 1, 1991—Dec. 31, 19919%2357710%25579
Jan. 1, 1992—Mar. 31, 19928%696239%71625
Apr. 1, 1992—Jun. 30, 19927%676218%69623
Jul. 1, 1992—Sep. 30, 19927%676218%69623
Oct. 1, 1992—Dec. 31, 19926%656197%67621
Jan. 1, 1993—Mar. 31, 19936%175717%19573
Apr. 1, 1993—Jun. 30, 19936%175717%19573
Jul. 1, 1993—Sep. 30, 19936%175717%19573
Oct. 1, 1993—Dec. 31, 19936%175717%19573
Jan. 1, 1994—Mar. 31, 19946%175717%19573
Apr. 1, 1994—Jun. 30, 19946%175717%19573
Jul. 1, 1994—Sep. 30, 19947%195738%21575
Oct. 1, 1994—Dec. 31, 19948%215759%23577
Jan. 1, 1995—Mar. 31, 19958%215759%23577
Apr. 1, 1995—Jun. 30, 19959%2357710%25579
Jul. 1, 1995—Sep. 30, 19958%215759%23577
Oct. 1, 1995—Dec. 31, 19958%215759%23577
Jan. 1, 1996—Mar. 31, 19968%696239%71625
Apr. 1, 1996—Jun. 30, 19967%676218%69623

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TABLE OF INTEREST RATES FOR
LARGE CORPORATE UNDERPAYMENTS
FROM JANUARY 1, 1991 — PRESENT
RATETABLEPG
1995–1 C.B.
Jan. 1, 1991—Mar. 31, 199113%31585
Apr. 1, 1991—Jun. 30, 199112%29583
Jul. 1, 1991—Sep. 30, 199112%29583
Oct. 1, 1991—Dec. 31, 199112%29583
Jan. 1, 1992—Mar. 31, 199211%75629
Apr. 1, 1992—Jun. 30, 199210%73627
Jul. 1, 1992—Sep. 30, 199210%73627
Oct. 1, 1992—Dec. 31, 19929%71625
Jan. 1, 1993—Mar. 31, 19939%23577
Apr. 1, 1993—Jun. 30, 19939%23577
Jul. 1, 1993—Sep. 30, 19939%23577
Oct. 1, 1993—Dec. 31, 19939%23577
Jan. 1, 1994—Mar. 31, 19949%23577
Apr. 1, 1994—Jun. 30, 19949%23577
Jul. 1, 1994—Sep. 30, 199410%25579
Oct. 1, 1994—Dec. 31, 199411%27581
Jan. 1, 1995—Mar. 31, 199511%27581
Apr. 1, 1995—Jun. 30, 199512%29583
Jul. 1, 1995—Sep. 30, 199511%27581
Oct. 1, 1995—Dec. 31, 199511%27581
Jan. 1, 1996—Mar. 31, 199611%75629
Apr. 1, 1996—Jun. 30, 199610%73627
TABLE OF INTEREST RATES FOR CORPORATE
OVERPAYMENTS EXCEEDING $10,000
FROM JANUARY 1, 1995 — PRESENT
RATETABLEPG
1995–1 C.B.
Jan. 1, 1995—Mar. 31, 19956.5%18572
Apr. 1, 1995—Jun. 30, 19957.5%20574
Jul. 1, 1995—Sep. 30, 19956.5%18572
Oct. 1, 1995—Dec. 31, 19956.5%18572
Jan. 1, 1996—Mar. 31, 19966.5%66620
Apr. 1, 1996—Jun. 30, 19965.5%64618

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Section 6662—Imposition of
Accuracy-Related Penalty
26 CFR 1.6662–5T: Substantial and gross
valuation misstatements under Chapter I
(Temporary).
T.D. 8656
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
AGENCY: Internal Revenue Service
(IRS), Treasury.
A C T I O N : F i n a l a n d t e m p o r a r y
regulations.
SUMMARY: These regulations provide
guidance on the imposition of the
accuracy related penalty under Internal
Revenue Code section 6662(e) for net
section 482 transfer price adjustments.
This action implements changes to the
applicable tax laws made by the Omni-
bus Budget Reconciliation Act of 1993.
DATES: These regulations are effective
February 9, 1996.
Applicability: At the election of the
taxpayer, these regulations may be
applied to all open taxable years
beginning after December 31, 1993.
FOR FURTHER INFORMATION
CONTACT: Carolyn D. Fanaroff of the
Office of Associate Chief Counsel
(International), IRS (202) 622-3880
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these final regulations have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduc-
tion Act (44 U.S.C. 3507) under
control number 1545–1426. Responses
to this collection of information are
required by section 6662(e) of the
Internal Revenue Code in order to
administer the transfer pricing penalty
under that section.
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.
The estimated average annual burden
per recordkeeper varies from 5 to 15
hours, depending on individual circum-
stances, with an estimated average of
10 hours per recordkeeper.
Comments concerning the accuracy
of this burden estimate and suggestions
for reducing this burden should be sent
to the Internal Revenue Service, Attn:
IRS Reports Clearance Officer, T:FP,
Washington, DC 20224, and to the
Office of Management and Budget,
Attn: Desk Officer for the Department
of the Treasury, Office of Information
and Regulatory Affairs, Washington,
DC 20503.
Books and records relating to this
collection of information must be re-
tained as long as their contents may
become material in the administration
of any Internal Revenue law. Gener-
ally, tax returns and tax return informa-
tion are confidential, as required by 26
U.S.C. 6103.
Background
Sections 6662(e) and (h) of the
Internal Revenue Code reflect amend-
ments made by Section 13236 of the
Omnibus Budget Reconciliation Act of
1993 (OBRA ’93, Public Law 103–66,
107 Stat. 312). On February 2, 1994,
the IRS and Treasury published tempo-
rary regulations (59 FR 4791 [TD
8519, 1994–1 298]) and a notice of
proposed rulemaking (58 FR 5263)
setting forth rules for imposing a
substantial valuation misstatement
penalty in connection with transactions
between persons described in section
482 (the transactional penalty) and net
section 482 transfer price adjustments
(the net adjustment penalty) and with-
drawing previously proposed regula-
tions issued on January 21, 1993 (58
FR 5304). On July 8, 1994, the IRS
and Treasury issued new temporary
regulations (59 FR 35030) under sec-
tion 6662(e) conforming the previously
issued regulations to the final 482
regulations published on the same day.
A cross-referenced notice of proposed
rulemaking accompanied the temporary
regulations (59 FR 35066).
The IRS and Treasury received nu-
merous comments on the proposed and
temporary regulations from taxpayers,
practitioners, tax treaty partners, indus-
try representatives, and professional
associations. In general, most commen-
ters recognized the government’s inter-
est in encouraging timely compliance
with the arm’s length standard at the
time that a tax return is filed. These
commenters primarily addressed par-
ticular aspects of the specified method
rule in §1.6662–6(d)(2)(ii) of the tem-
porary regulations that they believed
imposed an unnecessary burden.
In response to these comments, the
IRS and Treasury have attempted to
simplify the requirements set forth in
the proposed and temporary regulations
without departing from the basic objec-
tive of section 6662(e): to improve
compliance with the arm’s length
standard by encouraging taxpayers to
make reasonable efforts to determine
and document arm’s length prices for
their intercompany transactions. The
regulations are adopted as revised by
this Treasury decision, and the corre-
sponding proposed and temporary reg-
ulations are removed. Set forth below
is a discussion of the most significant
comments and the changes made in re-
sponse to them.
Discussion of Major Comments and
Changes to the Regulations
The Reasonableness Standard
Commenters expressed concern that
the standard for assertion of the trans-
actional penalty and the net adjustment
penalty (together, the penalty) under
the proposed and temporary regulations
effectively makes the penalty a ‘‘no
fault’’ penalty to be imposed in any
case in which the statutory thresholds
for imposition are met. Commenters
suggested that, in all cases, a taxpayer
could not have used the most reliable
measure of an arm’s length result if it
subsequently is determined that the
taxpayer’s analysis was incorrect. Some
of these commenters urged the IRS to
impose the penalty only where a tax-
payer deliberately attempts to shift
income.
The IRS and Treasury have deter-
mined that it is not necessary to revise
the proposed and temporary regulations
in response to these comments. The
proposed and temporary regulations do
not adopt a ‘‘no-fault’’ approach. Like
other penalty statutes, the provisions of
section 6662(e) incorporate standards
of reasonable cause and good faith. See
section 6662(e)(3)(D) and section
6664(c). Accordingly, under both the
temporary and final regulations, the
penalty is excused if the taxpayer,
based upon the data that was reason-

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ably available to it, reasonably con-
cluded that its analysis was the most
reliable and satisfied the documentation
requirement of the regulations. In such
a case, the taxpayer may be subject to
an adjustment if the IRS later employs
a different analysis or uses different
data leading to a different result, but an
adjustment does not necessarily trigger
the imposition of the penalty. The
regulations provide guidance on the
interpretation of the reasonableness
standard. See §1.6662–6(d).
Reported Results
In response to comments, the final
regulations clarify the method of deter-
mining reported results, and what will
be considered amended returns for
taxpayers electing Accelerated Issue
Resolution or similar procedures.
Evaluation of Methods Other Than
the Method Actually Applied
Under §1.6662–6T(d)(2)(ii) of the
temporary regulations, taxpayers may
satisfy the specified method require-
ment by selecting and applying a
specified method in a reasonable man-
ner. In order to meet this requirement,
taxpayers must make a reasonable ef-
fort to evaluate the potential ap-
plicability of the other specified
methods in a manner consistent with
the principles of the best method rule
of §1.482–1(c). Some commenters ar-
gued that this requirement would be
overly burdensome because it could
mean that the taxpayer effectively must
disprove all other methods in order to
avoid imposition of the penalty. Others
asserted that the requirement in
§1.6662–6T(d)(2)(ii) that taxpayers
make a reasonable effort to evaluate
other methods in a manner consistent
with the principles of the best method
rule was inconsistent with language
contained in §1.482–1(c)(1).
The notion of a comparison of
methods is inherent in the best method
rule of §1.482–1(c)(1). In order to be
judged the ‘‘best’’ method, the method
to some extent must be compared to
other methods. The examples set forth
under §1.482–8 illustrate an appropriate
application of a comparative analysis.
In introducing these examples, §1.482–
8 states that ‘‘a method may be applied
in a particular case only if the com-
parability, quality of data, and re-
liability of assumptions under that
method make it more reliable than any
other available measure of the arm’s
length result.’’
The comparison to be done under the
best method rule will not necessarily
entail a thorough analysis under every
potentially applicable method. The na-
ture of the available data will often
indicate either that a particular method
should be the most reliable or that
certain other specified methods would
be clearly unreliable. Indeed, in some
cases, it might be reasonable to con-
clude that a particular method is likely
to be the most reliable with virtually no
consideration of other potentially appli-
cable methods. For example, if the
comparable uncontrolled price method
can be applied based upon a closely
comparable uncontrolled transaction, it
normally would be unnecessary to give
any serious consideration to the other
methods. Whether more extensive con-
sideration could be needed in other
cases will depend on the facts and
circumstances.
Accordingly, the final regulations
retain the notion that comparisons to
other specified methods may have to be
made and the extent of such com-
parisons may vary depending upon the
data available and other factors.
Most Current Data Requirement
One of the factors taken into account
in determining whether a taxpayer
reasonably selected and applied a spec-
ified method is whether the taxpayer
made a reasonable search for data. The
proposed and temporary regulations
provided that this factor would not be
met unless the taxpayer used the most
current data that was available prior to
filing the tax return. Section 1.6662–
6T(d)(2)(iii)(B).
Commenters expressed concern that
this requirement would be unduly
burdensome because it would require a
taxpayer to continually update its trans-
fer pricing analysis until the filing of
its tax return. Commenters also argued
that this rule could lead to an increased
incidence of double taxation if particu-
lar foreign jurisdictions did not permit
alterations to transactional prices either
after the transaction or after the close
of a taxable year.
In response to these comments, the
requirement to consider the most cur-
rent available data has been modified.
Under the final regulations, taxpayers
are expected to use only data available
before the end of the taxable year and
consequently have no obligation to
continue to search for data after the
close of the taxable year to avoid the
penalty. However, when a taxpayer
obtains additional relevant data be-
tween the close of the year and the date
on which the tax return is filed (for
example, in connection with transfer
pricing analyses conducted with respect
to the subsequent taxable year), the
final regulations require the taxpayer to
include such data in its principal
documents as provided in §1.6662–6-
(d)(2)(iii)(B)(9). These documents must
be provided to the IRS upon request.
These changes are intended to relieve
much of the burden on taxpayers and at
the same time to ensure that, upon
examination, the taxpayer provides the
IRS with all relevant information in its
possession.
Reasonably Thorough Search for
Data
Commenters requested additional
guidance regarding the scope of the
term reasonably thorough search for
data under §1.6662–6(d)(2)(ii)(B). The
proposed and temporary regulations
provide that, in determining whether a
search for data was reasonably thor-
ough, the expense of acquiring addi-
tional data may be weighed against the
dollar amount of the transactions.
The IRS and Treasury have deter-
mined that more specific guidelines
that would be applicable to all situa-
tions cannot be provided because the
determination of whether a taxpayer
engaged in a reasonable search for data
depends on the facts and circumstances
of each case. Therefore, the final
regulations adhere to the general ap-
proach of the proposed and temporary
regulations.
However, the final regulations pro-
vide a more precise statement of the
rule that governs the determination of
whether the taxpayer made a reason-
able search for data. Section 1.6662–6-
(d)(2)(ii)(B) of the final regulations
provides that taxpayers may weigh the
expense a search for data against (i) the
likelihood that they will find additional
data that will improve the reliability of
the results and (ii) the amount by
which any new data would change the
taxpayer’s taxable income. Thus, a
taxpayer that has located reliable data
leading to an analysis that is unlikely
to become more reliable if additional

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data were located would not need to
continue a search. In addition, as the
amount of taxable income potentially at
stake declines (either because of low
dollar amounts of the controlled trans-
actions or because of low variability in
results that are expected under the facts
and circumstances), the need to con-
tinue to search for data also decreases.
Experience and Knowledge
Section 1.6662–6(d)(2)(ii)(A) pro-
vides that one of the factors taken into
account in determining whether a tax-
payer reasonably applied a specified
method is the experience and knowl-
edge of the taxpayer, including all
members of the taxpayer’s controlled
group. Commenters objected to this
factor because it is not limited to
consideration of the experience and
knowledge of the taxpayer. The pur-
pose of this factor is to consider the
experience and knowledge of all the
parties that are likely to be involved in
the pricing of the controlled transac-
tions. If the scope of this factor were
limited to the taxpayer participating in
the controlled transaction, the ex-
perience and knowledge of related per-
sons who may have had a role in
determining intercompany prices of the
taxpayer might not be taken into ac-
count. Accordingly, this factor has not
been changed in the final regulations.
Thresholds for Application
The net adjustment penalty under
section 6662(e)(1)(B)(ii) potentially ap-
plies if the net section 482 adjustment
exceeds the lesser of $5 million or 10
percent of the taxpayer’s gross receipts.
Some commenters objected to the
statutory $5 million threshold, pointing
out that a relatively insignificant error
could easily lead to a $5 million ad-
justment with respect to very large
intercompany transactions. As a result,
taxpayers that made reasonable efforts
to determine an arm’s length result
might nonetheless be subject to
penalty.
The $5 million threshold for imposi-
tion of the penalty is fixed by statute.
However, §1.6662–6(d)(2)(ii)(G) of the
final regulations has been added to pro-
vide that the size of an adjustment in
relation to the size of the controlled
transaction is relevant to determining
whether a taxpayer made a reasonable
effort to apply a specified or unspec-
ified method. Accordingly, the fact that
a proposed adjustment is small in rela-
tion to the dollar amount of the con-
trolled transaction to which it relates is
relevant in determining if a taxpayer
made a reasonable effort to apply a
specified or unspecified method.
Reliance on Prior Analyses
Citing the preamble to the temporary
regulations and the 1993 legislative
history, some commenters requested
that a pricing methodology that was
approved by the IRS on audit or in
connection with an Advanced Pricing
Agreement (APA) be considered to
satisfy the specified method require-
ment of the regulations. In response to
this comment, §1.6662–6(d)(2)(ii)(F) of
the final regulations has been added to
provide that whether a taxpayer relied
on a methodology developed in connec-
tion with an APA or approved by the
IRS pursuant to an audit is relevant to
determining whether the taxpayer made
a reasonable effort to apply a specified
or unspecified method, as long as the
taxpayer applied the agreed method
reasonably and consistently with its
prior application, and adjustments have
been made for any material changes in
the facts and circumstances since the
original application of that method.
Pursuant to §1.6662–6(d)(3)(ii)(B) and
(C), this factor is also relevant if the
taxpayer employed an unspecified
method.
Principal Documents
Section 1.6662–6(d)(2)(iii)(B) of the
final regulations provides a list of
principal documents that must be pro-
vided to the IRS within 30 days of a
request. The proposed and temporary
regulations set forth a contemporaneous
documentation requirement pursuant to
which all of these documents must
have been in existence at the time that
the taxpayer filed its tax return. In
response to comments, several changes
have been made to these provisions.
Under the final regulations, the con-
temporaneous documentation require-
ment does not apply to the summary of
data acquired after the close of the
taxable year or the general index of
principal and background documents.
Thus, these documents do not have to
be prepared at the time the return is
filed.
Several commenters argued that the
requirement that the principal docu-
ments generally be provided within 30
days of a request is too short, but this
requirement has not been changed in
the final regulations because the statute
mandates this 30-day disclosure period.
Moreover, except for the two principal
documents excluded from the contem-
poraneous documentation requirement,
as described above, all principal docu-
ments are required to be prepared by
the time the tax return is filed. The IRS
and Treasury believe that 30 days
should be adequate to provide docu-
ments that already exist and that were
prepared with the intention of being
provided to the IRS.
Other commenters suggested that the
list of documents in §1.6662–6(d)(2)-
(iii)(B) is too specific and that, in some
cases, it should not be necessary to
provide all of the documents listed.
Some of these commenters suggested
that the list of documents be replaced
with a more flexible approach under
which the documents required would
depend on the facts and circumstances.
The final regulations have not been
changed in response to this comment.
The list of principal documents is
intended to provide the IRS with the
documents necessary to conduct a
complete examination of a taxpayer’s
transfer pricing. It is anticipated that all
of the principal documents listed would
be needed in connection with all
transfer pricing audits. In addition, the
suggested flexible approach would de-
prive taxpayers and the IRS of much-
needed certainty. In the absence of the
specific guidance provided by the
regulations, most taxpayers would face
uncertainty as to the appropriate scope
of the documentation requirement.
Disclosure of Profit Split, Lump Sum,
and Unspecified Methods
The proposed and temporary regula-
tions require that the taxpayer disclose
on its tax return if the taxpayer used a
profit split method, an unspecified
method, or transferred an intangible in
exchange for a lump sum payment.
Commenters expressed concern about
this requirement, particularly with re-
spect to the profit split method. They
asserted that it is inappropriate to
impose a penalty on a taxpayer that
used a profit split method, solely
because it failed to comply with
disclosure requirements, if the taxpayer
otherwise fully complied with the
regulations under section 6662(e). In

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response to this comment, the final
regulations eliminate the disclosure
requirement with respect to the profit
split method, lump sum payments, and
unspecified methods. The IRS and
Treasury believe that these matters are
more appropriately addressed under
section 6038 and section 6038A of the
Internal Revenue Code governing, in
part, information returns on Forms
5471 and 5472. The IRS intends to
review these forms to determine
whether they should be revised.
Effective Date
These regulations are effective Feb-
ruary 9, 1996. However, taxpayers may
elect to apply these regulations to all
open taxable years beginning after
December 31, 1993.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It has also been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) do not
apply to the regulations and, therefore,
a Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f) of
the Internal Revenue Code, the notice
of proposed rulemaking and temporary
regulations preceding these regulations
were sent to the Small Business Ad-
ministration for comment on their
impact on small business.
Drafting Information
The principal author of these regula-
tions is Carolyn D. Fanaroff of the
Office of the Associate Chief Counsel
(International), IRS. However, other
personnel from the IRS and Treasury
Department participated in their
development.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and
602 are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority for part 1
is amended by removing the entry
‘‘Sections 1.6662–0 and 1.6662–6T’’
and adding an entry in numerical order
to read as follows:
Authority: 26 U.S.C. 7805. * * *
Section 1.6662–6 also issued under
26 U.S.C. 6662. * * *
Par. 2. Section 1.6662–0 is amended
by:
1.Revising the entry for §1.6662–
5T.
2.Adding an entry for §1.6662–6.
3.Removing the entry for §1.6662–
6T.
The revisions and additions read as
follows:
§1.6662–0 Table of contents.
******
§1.6662–5T Substantial and gross
valuation misstatements under chapter
1 (Temporary).
(a)through (e)(3) [Reserved].
(e)(4)Tests related to section 481.
(i)Substantial valuation
statement.
(ii)Gross valuation
misstatement.
(iii)Property.
(f)through (i) [Reserved].
(j)Transactions between persons de-
scribed in section 482 and net
section 482 transfer price ad-
justments.
§1.6662–6 Transactions between
persons described in section 482 and
net section 482 transfer price
adjustments.
(a)In general.
(1)Purpose and scope.
(2)Reported results.
(3)Identical terms used in
the section 482 regu-
lations.
(b)The transactional penalty.
(1)Substantial valuation
misstatement.
(2)Gross valuation mis-
statement.
(3)Reasonable cause and
good faith.
(c)Net adjustment penalty.
(1)Net section 482 ad-
justment.
(2)Substantial valuation
misstatement.
(3)Gross valuation mis-
statement.
(4)Setoff allocation rule.
(5)Gross receipts.
(6)Coordination with rea-
sonable cause excep-
tion under section
6664(c).
(7)Examples.
(d)Amounts excluded from net sec-
tion 482 adjustments.
(1)In general.
(2)Application of a spec-
ified section 482
method.
(i)In general.
(ii)Specified method re-
quirement.
(iii)Documentation requirement.
(A)In general.
(B) P r i n c i p a l d o c u -
ments.
(C)Background docu-
ments.
(3)Application of an un-
specified method.
(i)In general.
(ii)Unspecified method re-
quirement.
(A)In general.
(B)Specified method
potentially appli-
cable.
(C) N o s p e c i f i e d
method applicable.
(iii)Documentation requirement.
(A)In general.
(B) P r i n c i p a l a n d
background docu-
ments.
(4)Certain foreign to for-
eign transactions.
(5)Special rule.
(6)Examples.
(e)Special rules in the case of car-
rybacks and carryovers.
(f)Rules for coordinating between
the transactional penalty and the
net adjustment penalty.
(1)Coordination of a net
section 482 adjustment
subject to the net ad-
justment penalty and a
gross valuation mis-
statement subject to
the transactional
penalty.
(2)Coordination of net
section 482 adjustment
subject to the net ad-
justment penalty and
substantial valuation
misstatements subject
to the transactional
penalty.
(3)Examples.
(g)Effective date.

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******
Par. 3. Section 1.6662–5T is revised
to read as follows:
§1.6662–5T Substantial and gross
valuation misstatements under chapter
1 (Temporary).
(a) through (e)(3) [Reserved]. For
further information, see §1.6662–5(a)
through (e)(3).
(e)(4) Tests related to section 482—
(i) Substantial valuation misstatement.
There is a substantial valuation mis-
statement if there is a misstatement
described in §1.6662–6(b)(1) or (c)(1)
(concerning substantial valuation mis-
statements pertaining to transactions
between related persons).
(ii)Gross valuation misstatement.
There is a gross valuation misstatement
if there is a misstatement described in
§1.6662–6(b)(2) or (c)(2) (concerning
gross valuation misstatements pertain-
ing to transactions between related
persons).
(iii)Property. For purposes of this
section, the term property refers to
both tangible and intangible property.
Tangible property includes property
such as land, buildings, fixtures and
inventory. Intangible property includes
property such as goodwill, covenants
not to compete, leaseholds, patents,
contract rights, debts and choses in
action, and any other item of intangible
property described in §1.482–4(b).
(f)through (h) [Reserved] For fur-
ther information, see §1.6662–5(f)
through (h).
(i)[Reserved].
(j)Transactions between persons de-
scribed in section 482 and net section
482 transfer price adjustments. For
rules relating to the penalty imposed
with respect to a substantial or gross
valuation misstatement arising from a
section 482 allocation, see §1.6662–6.
Par. 4. Section 1.6662–6 is added to
read as follows:
§1.6662–6 Transactions between
persons described in section 482 and
net section 482 transfer price
adjustments.
(a)In general—(1) Purpose and
scope. Pursuant to section 6662(e) a
penalty is imposed on any underpay-
ment attributable to a substantial valua-
tion misstatement pertaining to either a
transaction between persons described
in section 482 (the transactional
penalty) or a net section 482 transfer
price adjustment (the net adjustment
penalty). The penalty is equal to 20
percent of the underpayment of tax
attributable to that substantial valuation
misstatement. Pursuant to section
6662(h) the penalty is increased to 40
percent of the underpayment in the
case of a gross valuation misstatement
with respect to either penalty. Para-
graph (b) of this section provides
specific rules related to the transac-
tional penalty. Paragraph (c) of this
section provides specific rules related
to the net adjustment penalty, and
paragraph (d) of this section describes
amounts that will be excluded for
purposes of calculating the net adjust-
ment penalty. Paragraph (e) of this
section sets forth special rules in the
case of carrybacks and carryovers.
Paragraph (f) of this section provides
coordination rules between penalties.
Paragraph (g) of this section provides
the effective date of this section.
(2)Reported results. Whether an
underpayment is attributable to a sub-
stantial or gross valuation misstatement
must be determined from the results of
controlled transactions that are reported
on an income tax return, regardless of
whether the amount reported differs
from the transaction price initially
reflected in the taxpayer’s books and
records. The results of controlled trans-
actions that are reported on an
amended return will be used only if the
amended return is filed before the
Internal Revenue Service has contacted
the taxpayer regarding the correspond-
ing original return. A written statement
furnished by a taxpayer subject to the
Coordinated Examination Program or a
written statement furnished by the
taxpayer when electing Accelerated
Issue Resolution or similar procedures
will be considered an amended return
for purposes of this section if it
satisfies either the requirements of a
qualified amended return for purposes
of §1.6664–2(c)(3) or such require-
ments as the Commissioner may pre-
scribe by revenue procedure. In the
case of a taxpayer that is a member of
a consolidated group, the rules of this
paragraph (a)(2) apply to the consoli-
dated income tax return of the group.
(3)Identical terms used in the sec-
tion 482 regulations. For purposes of
this section, the terms used in this
section shall have the same meaning as
identical terms used in regulations
under section 482.
(b)The transactional penalty—(1)
Substantial valuation misstatement. In
the case of any transaction between
related persons, there is a substantial
valuation misstatement if the price for
any property or services (or for the use
of property) claimed on any return is
200 percent or more (or 50 percent or
less) of the amount determined under
section 482 to be the correct price.
(2)Gross valuation misstatement. In
the case of any transaction between
related persons, there is a gross valua-
tion misstatement if the price for any
property or services (or for the use of
property) claimed on any return is 400
percent or more (or 25 percent or less)
of the amount determined under section
482 to be the correct price.
(3)Reasonable cause and good
faith. Pursuant to section 6664(c), the
transactional penalty will not be im-
posed on any portion of an underpay-
ment with respect to which the require-
ments of §1.6664–4 are met. In
applying the provisions of §1.6664–4 in
a case in which the taxpayer has relied
on professional analysis in determining
its transfer pricing, whether the profes-
sional is an employee of, or related to,
the taxpayer is not determinative in
evaluating whether the taxpayer reason-
ably relied in good faith on advice. A
taxpayer that meets the requirements of
paragraph (d) of this section with
respect to an allocation under section
482 will be treated as having estab-
lished that there was reasonable cause
and good faith with respect to that item
for purposes of §1.6664–4. If a sub-
stantial or gross valuation misstatement
under the transactional penalty also
constitutes (or is part of) a substantial
or gross valuation misstatement under
the net adjustment penalty, then the
rules of paragraph (d) of this section
(and not the rules of §1.6664–4) will
be applied to determine whether the
adjustment is excluded from calculation
of the net section 482 adjustment.
(c)Net adjustment penalty—(1) Net
section 482 adjustment. For purposes of
this section, the term net section 482
adjustment means the sum of all in-
creases in the taxable income of a
taxpayer for a taxable year resulting
from allocations under section 482
(determined without regard to any
amount carried to such taxable year
from another taxable year) less any
decreases in taxable income attributable
to collateral adjustments as described in
§1.482–1(g). For purposes of this sec-
tion, amounts that meet the require-

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ments of paragraph (d) of this section
will be excluded from the calculation
of the net section 482 adjustment.
Substantial and gross valuation mis-
statements that are subject to the
transactional penalty under paragraph
(b)(1) or (2) of this section are
included in determining the amount of
the net section 482 adjustment. See
paragraph (f) of this section for coordi-
nation rules between penalties.
(2)Substantial valuation misstate-
ment. There is a substantial valuation
misstatement if a net section 482
adjustment is greater than the lesser of
5 million dollars or ten percent of gross
receipts.
(3)Gross valuation misstatement.
There is a gross valuation misstatement
if a net section 482 adjustment is
greater than the lesser of 20 million
dollars or twenty percent of gross
receipts.
(4)Setoff allocation rule. If a tax-
payer meets the requirements of para-
graph (d) of this section with respect to
some, but not all of the allocations
made under section 482, then for pur-
poses of determining the net section
482 adjustment, setoffs, as taken into
account under §1.482–1(g)(4), must be
applied ratably against all such alloca-
tions. The following example illustrates
the principle of this paragraph (c)(4):
Example. (i) The Internal Revenue Service
makes the following section 482 adjustments for
the taxable year:
(1)Attributable to an increase in
gross income because of an
increase in royalty payments$9,000,000
(2)Attributable to an increase in
sales proceeds due to a de-
crease in the profit margin of a
related buyer6,000,000
(3) Because of a setoff under
§1.482–1(g)(4)(5,000,000)
Total section 482 adjustments10,000,000
(ii)The taxpayer meets the requirements of
paragraph (d) with respect to adjustment number
one, but not with respect to adjustment number
two. The five million dollar setoff will be
allocated ratably against the nine million dollar
a d j u s t m e n t ( $ 9 , 0 0 0 , 0 0 0 / $ 1 5 , 0 0 0 , 0 0 0 3
$5,000,000 = $3,000,000) and the six million
dollar adjustment ($6,000,000/$15,000,000 3
$5,000,000 = $2,000,000). Accordingly, in deter-
mining the net section 482 adjustment, the nine
million dollar adjustment is reduced to six
million dollars ($9,000,000 – $3,000,000) and
the six million dollar adjustment is reduced to
four million dollars ($6,000,000 –$2,000,000).
Therefore, the net section 482 adjustment equals
four million dollars.
(5)Gross receipts. For purposes of
this section, gross receipts must be
computed pursuant to the rules con-
tained in §1.448–1T(f)(2)(iv), as ad-
justed to reflect allocations under
section 482.
(6)Coordination with reasonable
cause exception under section 6664(c).
Pursuant to section 6662(e)(3)(D), a
taxpayer will be treated as having
reasonable cause under section 6664(c)
for any portion of an underpayment
attributable to a net section 482 adjust-
ment only if the taxpayer meets the
requirements of paragraph (d) of this
section with respect to that portion.
(7)Examples. The principles of this
paragraph (c) are illustrated by the
following examples:
Example 1. (i) The Internal Revenue Service
makes the following section 482 adjustments for
the taxable year:
(1)Attributable to an increase in
gross income because of an
increase in royalty payments$2,000,000
(2)Attributable to an increase in
sales proceeds due to a decrease
in the profit margin of a related
buyer2,500,000
(3)Attributable to a decrease in the
cost of goods sold because of a
decrease in the cost plus mark-
up of a related seller2,000,000
Total section 482 adjustments6,500,000
(ii)None of the adjustments are excluded
under paragraph (d) of this section. The net
section 482 adjustment ($6.5 million) is greater
than five million dollars. Therefore, there is a
substantial valuation misstatement.
Example 2. (i) The Internal Revenue Service
makes the following section 482 adjustments for
the taxable year:
(1)Attributable to an increase in
gross income because of an
increase in royalty payments$11,000,000
(2)Attributable to an increase in
sales proceeds due to a de-
crease in the profit margin of
a related buyer2,000,000
(3)Because of a setoff under
§1.482–1(g)(4)(9,000,000)
Total section 482 adjustments4,000,000
(ii)The taxpayer has gross receipts of sixty
million dollars after taking into account all
section 482 adjustments. None of the adjustments
are excluded under paragraph (d) of this section.
The net section 482 adjustment ($4 million) is
less than the lesser of five million dollars or ten
percent of gross receipts ($60 million 3 10% =
$6 million). Therefore, there is no substantial
valuation misstatement.
Example 3. (i) The Internal Revenue Service
makes the following section 482 adjustments to
the income of an affiliated group that files a
consolidated return for the taxable year:
(1)Attributable to Member A$1,500,000
(2)Attributable to Member B1,000,000
(3)Attributable to Member C2,000,000
Total section 482 adjustments 4,500,000
(ii)Members A, B, and C have gross receipts
of 20 million dollars, 12 million dollars, and 11
million dollars, respectively. Thus, the total gross
receipts are 43 million dollars. None of the
adjustments are excluded under paragraph (d) of
this section. The net section 482 adjustment
($4.5 million) is greater than the lesser of five
million dollars or ten percent of gross receipts
($43 million 3 10% = $4.3 million). Therefore,
there is a substantial valuation misstatement.
Example 4. (i) The Internal Revenue Service
makes the following section 482 adjustments to
the income of an affiliated group that files a
consolidated return for the taxable year:
(1)Attributable to Member A$1,500,000
(2)Attributable to Member B3,000,000
(3)Attributable to Member C2,500,000
Total section 482 adjustments 7,000,000
(ii)Members A, B, and C have gross receipts
of 20 million dollars, 35 million dollars, and 40
million dollars, respectively. Thus, the total gross
receipts are 95 million dollars. None of the
adjustments are excluded under paragraph (d) of
this section. The net section 482 adjustment (7
million dollars) is greater than the lesser of five
million dollars or ten percent of gross receipts
($95 million 3 10% = $9.5 million). Therefore,
there is a substantial valuation misstatement.
Example 5. (i) The Internal Revenue Service
makes the following section 482 adjustments to
the income of an affiliated group that files a
consolidated return for the taxable year:
(1)Attributable to Member A$2,000,000
(2)Attributable to Member B1,000,000
(3)Attributable to Member C1,500,000
Total section 482 adjustments 4,500,000
(ii)Members A, B, and C have gross receipts
of 10 million dollars, 35 million dollars, and 40
million dollars, respectively. Thus, the total gross
receipts are 85 million dollars. None of the
adjustments are excluded under paragraph (d) of
this section. The net section 482 adjustment
($4.5 million) is less than the lesser of five
million dollars or ten percent of gross receipts
($85 million 3 10% = $8.5 million). Therefore,
there is no substantial valuation misstatement
even though individual member A’s adjustment
($2 million) is greater than ten percent of its
individual gross receipts ($10 million 3 10% =
$1 million).
(d)Amounts excluded from net sec-
tion 482 adjustments—(1) In general.
An amount is excluded from the cal-
culation of a net section 482 adjust-
ment if the requirements of paragraph
(d)(2), (3), or (4) of this section are
met with respect to that amount.
(2)Application of a specified section
482 method—(i) In general. An amount
is excluded from the calculation of a
net section 482 adjustment if the tax-
payer establishes that both the specified
method and documentation require-
ments of this paragraph (d)(2) are met
with respect to that amount. For
purposes of this paragraph (d), a
method will be considered a specified

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method if it is described in the
regulations under section 482 and the
method applies to transactions of the
type under review. A qualified cost
sharing arrangement is considered a
specified method. See §1.482–7. An
unspecified method is not considered a
specified method. See §§1.482–3(e)
and 1.482–4(d).
(ii)Specified method requirement.
The specified method requirement is
met if the taxpayer selects and applies
a specified method in a reasonable
manner. The taxpayer’s selection and
application of a specified method is
reasonable only if, given the available
data and the applicable pricing
methods, the taxpayer reasonably con-
cluded that the method (and its applica-
tion of that method) provided the most
reliable measure of an arm’s length
result under the principles of the best
method rule of §1.482–1(c). A taxpayer
can reasonably conclude that a spec-
ified method provided the most reliable
measure of an arm’s length result only
if it has made a reasonable effort to
evaluate the potential applicability of
the other specified methods in a
manner consistent with the principles
of the best method rule. The extent of
this evaluation generally will depend
on the nature of the available data, and
it may vary from case to case and from
method to method. This evaluation may
not entail an exhaustive analysis or
detailed application of each method.
Rather, after a reasonably thorough
search for relevant data, the taxpayer
should consider which method would
provide the most reliable measure of an
arm’s length result given that data. The
nature of the available data may enable
the taxpayer to conclude reasonably
that a particular specified method
provides a more reliable measure of an
arm’s length result than one or more of
the other specified methods, and ac-
cordingly no further consideration of
such other specified methods is needed.
Further, it is not necessary for a tax-
payer to conclude that the selected
specified method provides a more
reliable measure of an arm’s length
result than any unspecified method. For
examples illustrating the selection of a
specified method consistent with this
paragraph (d)(2)(ii), see §1.482–8.
Whether the taxpayer’s conclusion was
reasonable must be determined from all
the facts and circumstances. The fac-
tors relevant to this determination
include the following:
(A)The experience and knowledge
of the taxpayer, including all members
of the taxpayer’s controlled group.
(B)The extent to which reliable data
was available and the data was ana-
lyzed in a reasonable manner. A tax-
payer must engage in a reasonably
thorough search for the data necessary
to determine which method should be
selected and how it should be applied.
In determining the scope of a reason-
ably thorough search for data, the
expense of additional efforts to locate
new data may be weighed against the
likelihood of finding additional data
that would improve the reliability of
the results and the amount by which
any new data would change the tax-
payer’s taxable income. Furthermore, a
taxpayer must use the most current
reliable data that is available before the
end of the taxable year in question.
Although the taxpayer is not required
to search for relevant data after the end
of the taxable year, the taxpayer must
maintain as a principal document de-
scribed in paragraph (d)(2)(iii)(B)(9) of
this section any relevant data it obtains
after the end of the taxable year but
before the return is filed, if that data
would help determine whether the tax-
payer has reported its true taxable
income.
(C)The extent to which the taxpayer
followed the relevant requirements set
forth in regulations under section 482
with respect to the application of the
method.
(D)The extent to which the taxpayer
reasonably relied on a study or other
analysis performed by a professional
qualified to conduct such a study or
analysis, including an attorney, ac-
countant, or economist. Whether the
professional is an employee of, or
related to, the taxpayer is not deter-
minative in evaluating the reliability of
that study or analysis, as long as the
study or analysis is objective, thorough,
and well reasoned. Such reliance is
reasonable only if the taxpayer dis-
closed to the professional all relevant
information regarding the controlled
transactions at issue. A study or anal-
ysis that was reasonably relied upon in
a prior year may reasonably be relied
upon in the current year if the relevant
facts and circumstances have not
changed or if the study or analysis has
been appropriately modified to reflect
any change in facts and circumstances.
(E)If the taxpayer attempted to
determine an arm’s length result by
using more than one uncontrolled com-
parable, whether the taxpayer ar-
b i t r a r i l y s e l e c t e d a r e s u l t t h a t
corresponds to an extreme point in the
range of results derived from the
uncontrolled comparables. Such a result
generally would not likely be closest to
an arm’s length result. If the uncon-
trolled comparables that the taxpayer
uses to determine an arm’s length
result are described in §1.482–1(e)(2)-
(ii)(B), one reasonable method of se-
lecting a point in the range would be
that provided in §1.482–1(e)(3).
(F)The extent to which the taxpayer
relied on a transfer pricing methodol-
ogy developed and applied pursuant to
an Advance Pricing Agreement for a
prior taxable year, or specifically ap-
proved by the Internal Revenue Service
pursuant to a transfer pricing audit of
the transactions at issue for a prior
taxable year, provided that the taxpayer
applied the approved method reason-
ably and consistently with its prior
application, and the facts and circum-
stances surrounding the use of the
method have not materially changed
since the time of the IRS’s action, or if
the facts and circumstances have
changed in a way that materially
affects the reliability of the results, the
taxpayer makes appropriate adjustments
to reflect such changes.
(G)The size of a net transfer pricing
adjustment in relation to the size of the
controlled transaction out of which the
adjustment arose.
(iii)Documentation requirement—
(A) In general. The documentation
requirement of this paragraph (d)(2)(iii)
is met if the taxpayer maintains suffi-
cient documentation to establish that
the taxpayer reasonably concluded that,
given the available data and the appli-
cable pricing methods, the method (and
its application of that method) provided
the most accurate measure of an arm’s
length result under the principles of the
best method rule in §1.482–1(c), and
provides that documentation to the
Internal Revenue Service within 30
days of a request for it in connection
with an examination of the taxable year
to which the documentation relates.
With the exception of the documenta-
tion described in paragraphs (d)(2)(iii)-
(B)(9) and (10) of this section, that
documentation must be in existence
when the return is filed. The district
director may, in his discretion, excuse a
minor or inadvertent failure to provide
required documents, but only if the
taxpayer has made a good faith effort
to comply, and the taxpayer promptly
remedies the failure when it becomes
known. The required documentation is
divided into two categories, principal

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documents and background documents
as described in paragraphs (d)(2)(iii)(B)
and (C) of this section.
(B)Principal documents. The princi-
pal documents should accurately and
completely describe the basic transfer
pricing analysis conducted by the tax-
payer. The documentation must include
the following—
(1) An overview of the taxpayer’s
business, including an analysis of the
economic and legal factors that affect
the pricing of its property or services;
(2) A description of the taxpayer’s
organizational structure (including an
organization chart) covering all related
parties engaged in transactions poten-
tially relevant under section 482, in-
cluding foreign affiliates whose
transactions directly or indirectly affect
the pricing of property or services in
the United States;
(3) Any documentation explicitly re-
quired by the regulations under section
482;
(4) A description of the method
selected and an explanation of why that
method was selected;
(5) A description of the alternative
methods that were considered and an
explanation of why they were not
selected;
(6) A description of the controlled
transactions (including the terms of
sale) and any internal data used to
analyze those transactions. For exam-
ple, if a profit split method is applied,
the documentation must include a
schedule providing the total income,
costs, and assets (with adjustments for
different accounting practices and cur-
rencies) for each controlled taxpayer
participating in the relevant business
activity and detailing the allocations of
such items to that activity;
(7) A description of the comparables
that were used, how comparability was
evaluated, and what (if any) adjust-
ments were made;
(8) An explanation of the economic
analysis and projections relied upon in
developing the method. For example, if
a profit split method is applied, the
taxpayer must provide an explanation
of the analysis undertaken to determine
how the profits would be split;
(9) A description or summary of any
relevant data that the taxpayer obtains
after the end of the tax year and before
filing a tax return, which would help
determine if a taxpayer selected and
applied a specified method in a reason-
able manner; and
(10) A general index of the principal
and background documents and a de-
scription of the recordkeeping system
used for cataloging and accessing those
documents.
(C)Background documents. The as-
sumptions, conclusions, and positions
contained in principal documents or-
dinarily will be based on, and sup-
ported by, additional background
documents. Documents that support the
principal documentation may include
the documents listed in §1.6038A–3(c)
that are not otherwise described in
paragraph (d)(2)(iii)(B) of this section.
Every document listed in those regula-
tions may not be relevant to pricing
determinations under the taxpayer’s
specific facts and circumstances and,
therefore, each of those documents
need not be maintained in all circum-
stances. Moreover, other documents not
listed in those regulations may be
necessary to establish that the tax-
payer’s method was selected and ap-
plied in the way that provided the most
accurate measure of an arm’s length
result under the principles of the best
method rule in §1.482–1(c). Back-
ground documents need not be pro-
vided to the Internal Revenue Service
in response to a request for principal
documents. If the Internal Revenue
Service subsequently requests back-
ground documents, a taxpayer must
provide that documentation to the
Internal Revenue Service within 30
days of the request. However, the
district director may, in his discretion,
extend the period for producing the
background documentation.
(3)Application of an unspecified
method—(i) In general. An adjustment
is excluded from the calculation of a
net section 482 adjustment if the tax-
payer establishes that both the unspec-
ified method and documentation
requirements of this paragraph (d)(3)
are met with respect to that amount.
(ii)Unspecified method require-
ment—(A) In general. If a method
other than a specified method was
applied, the unspecified method re-
quirement is met if the requirements of
paragraph (d)(3)(ii)(B) or (C) of this
section, as appropriate, are met.
(B)Specified method potentially ap-
plicable. If the transaction is of a type
for which methods are specified in the
regulations under section 482, then a
taxpayer will be considered to have
met the unspecified method require-
ment if the taxpayer reasonably con-
cludes, given the available data, that
none of the specified methods was
likely to provide a reliable measure of
an arm’s length result, and that it
selected and applied an unspecified
method in a way that would likely
provide a reliable measure of an arm’s
length result. A taxpayer can reason-
ably conclude that no specified method
was likely to provide a reliable meas-
ure of an arm’s length result only if it
has made a reasonable effort to evalu-
ate the potential applicability of the
specified methods in a manner consis-
tent with the principles of the best
method rule. However, it is not neces-
sary for a taxpayer to conclude that the
selected method provides a more reli-
able measure of an arm’s length result
than any other unspecified method.
Whether the taxpayer’s conclusion was
reasonable must be determined from all
the facts and circumstances. The fac-
tors relevant to this conclusion include
those set forth in paragraph (d)(2)(ii) of
this section.
(C)No specified method applicable.
If the transaction is of a type for which
no methods are specified in the regula-
tions under section 482, then a taxpayer
will be considered to have met the un-
specified method requirement if it
selected and applied an unspecified
method in a reasonable manner. For
purposes of this paragraph (d)(3)(ii)(C),
a taxpayer’s selection and application is
reasonable if the taxpayer reasonably
concludes that the method (and its
application of that method) provided
the most reliable measure of an arm’s
length result under the principles of the
best method rule in §1.482–1(c). How-
ever, it is not necessary for a taxpayer
to conclude that the selected method
provides a more reliable measure of an
arm’s length result than any other
unspecified method. Whether the tax-
payer’s conclusion was reasonable must
be determined from all the facts and
circumstances. The factors relevant to
this conclusion include those set forth
in paragraph (d)(2)(ii) of this section.
(iii)Documentation requirement—
(A) In general. The documentation
requirement of this paragraph (d)(3) is
met if the taxpayer maintains sufficient
documentation to establish that the
unspecified method requirement of
paragraph (d)(3)(ii) of this section is
met and provides that documentation to
the Internal Revenue Service within 30
days of a request for it. That documen-
tation must be in existence when the
return is filed. The district director

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may, in his discretion, excuse a minor
or inadvertent failure to provide re-
quired documents, but only if the tax-
payer has made a good faith effort to
comply, and the taxpayer promptly
remedies the failure when it becomes
known.
(B)Principal and background docu-
ments. See paragraphs (d)(2)(iii)(B) and
(C) of this section for rules regarding
these two categories of required
documentation.
(4)Certain foreign to foreign trans-
actions. For purposes of calculating a
net section 482 adjustment, any in-
crease in taxable income resulting from
an allocation under section 482 that is
attributable to any controlled transac-
tion solely between foreign corpora-
tions will be excluded unless the treat-
ment of that transaction affects the
determination of either corporation’s
income from sources within the United
States or taxable income effectively
connected with the conduct of a trade
or business within the United States.
(5)Special rule. If the regular tax
(as defined in section 55(c)) imposed
on the taxpayer is determined by
reference to an amount other than
taxable income, that amount shall be
treated as the taxable income of the
taxpayer for purposes of section
6662(e)(3). Accordingly, for taxpayers
whose regular tax is determined by
reference to an amount other than
taxable income, the increase in that
amount resulting from section 482
allocations is the taxpayer’s net section
482 adjustment.
(6)Examples. The principles of this
paragraph (d) are illustrated by the
following examples:
Example 1. (i) The Internal Revenue Service
makes the following section 482 adjustments for
the taxable year:
(1)Attributable to an increase in
gross income because of an
increase in royalty payments$9,000,000
(2)Not a 200 percent or 400 per-
cent adjustment2,000,000
(3)Attributable to a decrease in the
cost of goods sold because of a
decrease in the cost plus mark-
up of a related seller9,000,000
Total section 482 adjustments20,000,000
(ii)The taxpayer has gross receipts of 75
million dollars after all section 482 adjustments.
The taxpayer establishes that for adjustments
number one and three, it applied a transfer
pricing method specified in section 482, the
selection and application of the method was
reasonable, it documented the pricing analysis,
and turned that documentation over to the IRS
within 30 days of a request. Accordingly,
eighteen million dollars is excluded from the
calculation of the net section 482 adjustment.
Because the net section 482 adjustment is two
million dollars, there is no substantial valuation
misstatement.
Example 2. (i) The Internal Revenue Service
makes the following section 482 adjustments for
the taxable year:
(1)Attributable to an increase in
gross income because of an
increase in royalty payments$9,000,000
(2)Attributable to an adjustment
that is 200 percent or more of
the correct section 482 price2,000,000
(3)Attributable to a decrease in the
cost of goods sold because of a
decrease in the cost plus mark-
up of a related seller9,000,000
Total section 482 adjustments20,000,000
(ii)The taxpayer has gross receipts of 75
million dollars after all section 482 adjustments.
The taxpayer establishes that for adjustments
number one and three it applied a transfer
pricing method specified in section 482, the
selection and application of the method was
reasonable, it documented that analysis, and
turned the documentation over to the IRS within
30 days. Accordingly, eighteen million dollars is
excluded from the calculation of the section 482
transfer pricing adjustments for purposes of
applying the five million dollar or 10% of gross
receipts test. Because the net section 482
adjustment is only two million dollars, the
taxpayer is not subject to the net adjustment
penalty. However, the taxpayer may be subject to
the transactional penalty on the underpayment of
tax attributable to the two million dollar
adjustment.
Example 3. CFC1 and CFC2 are controlled
foreign corporations within the meaning of
section 957. Applying section 482, the IRS
disallows a deduction for 25 million dollars of
the interest that CFC1 paid to CFC2, which
results in CFC1’s U.S. shareholder having a
subpart F inclusion in excess of five million
dollars. No other adjustments under section 482
are made with respect to the controlled tax-
payers. However, the increase has no effect upon
the determination of CFC1’s or CFC2’s income
from sources within the United States or taxable
income effectively connected with the conduct of
a trade or business within the United States.
Accordingly, there is no substantial valuation
misstatement.
(e)Special rules in the case of
carrybacks and carryovers. If there is a
substantial or gross valuation misstate-
ment for a taxable year that gives rise
to a loss, deduction or credit that is
carried to another taxable year, the
transactional penalty and the net adjust-
ment penalty will be imposed on any
resulting underpayment of tax in that
other taxable year. In determining
whether there is a substantial or gross
valuation misstatement for a taxable
year, no amount carried from another
taxable year shall be included. The
following example illustrates the princi-
ple of this paragraph (e):
Example. The Internal Revenue Service makes
a section 482 adjustment of six million dollars in
taxable year 1, no portion of which is excluded
under paragraph (d) of this section. The tax-
payer’s income tax return for year 1 reported a
loss of three million dollars, which was carried
to taxpayer’s year 2 year income tax return and
used to reduce income taxes otherwise due with
respect to year 2. A determination is made that
the six million dollar allocation constitutes a
substantial valuation misstatement, and a penalty
is imposed on the underpayment of tax in year 1
attributable to the substantial valuation misstate-
ment and on the underpayment of tax in year 2
attributable to the disallowance of the net
operating loss in year 2. For purposes of
determining whether there is a substantial or
gross valuation misstatement for year 2, the three
million dollar reduction of the net operating loss
will not be added to any section 482 adjustments
made with respect to year 2.
(f)Rules for coordinating between
the transactional penalty and the net
adjustment penalty—(1) Coordination
of a net section 482 adjustment subject
to the net adjustment penalty and a
gross valuation misstatement subject to
the transactional penalty. In determin-
ing whether a net section 482 adjust-
ment exceeds five million dollars or 10
percent of gross receipts, an adjustment
attributable to a substantial or gross
valuation misstatement that is subject
to the transactional penalty will be
taken into account. If the net section
482 adjustment exceeds five million
dollars or ten percent of gross receipts,
any portion of such amount that is
attributable to a gross valuation mis-
statement will be subject to the transac-
tional penalty at the forty percent rate,
but will not also be subject to net
adjustment penalty at a twenty percent
rate. The remaining amount is subject
to the net adjustment penalty at the
twenty percent rate, even if such
amount is less than the lesser of five
million dollars or ten percent of gross
receipts.
(2)Coordination of net section 482
adjustment subject to the net adjust-
ment penalty and substantial valuation
misstatements subject to the transac-
tional penalty. If the net section 482
adjustment exceeds twenty million dol-
lars or 20 percent of gross receipts, the
entire amount of the adjustment is
subject to the net adjustment penalty at
a forty percent rate. No portion of the
adjustment is subject to the transac-
tional penalty at a twenty percent rate.
(3)Examples. The following exam-
ples illustrate the principles of this
paragraph (f):
Example 1. (i) Applying section 482, the
Internal Revenue Service makes the following
adjustments for the taxable year:

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(1)Attributable to an adjustment
that is 400 percent or more of
the correct section 482 arm’s
length result$2,000,000
(2)Not a 200 or 400 percent
adjustment2,500,000
Total4,500,000
(ii)The taxpayer has gross receipts of 75
million dollars after all section 482 adjustments.
None of the adjustments is excluded under
paragraph (d) (Amounts excluded from net
section 482 adjustments) of this section, in
determining the five million dollar or 10% of
gross receipts test under section 6662(e)-
(1)(B)(ii). The net section 482 adjustment (4.5
million dollars) is less than the lesser of five
million dollars or ten percent of gross receipts
($75 million 3 10% = $7.5 million). Thus, there
is no substantial valuation misstatement. How-
ever, the two million dollar adjustment is
attributable to a gross valuation misstatement.
Accordingly, the taxpayer may be subject to a
penalty, under section 6662(h), equal to 40
percent of the underpayment of tax attributable
to the gross valuation misstatement of two
million dollars. The 2.5 million dollar adjustment
is not subject to a penalty under section
6662(b)(3).
Example 2. The facts are the same as in
Example 1, except the taxpayer has gross receipts
of 40 million dollars. The net section 482
adjustment ($4.5 million) is greater than the
lesser of five million dollars or ten percent of
gross receipts ($40 million 3 10% = $4 million).
Thus, the five million dollar or 10% of gross
receipts test has been met. The two million dollar
adjustment is attributable to a gross valuation
misstatement. Accordingly, the taxpayer is sub-
ject to a penalty, under section 6662(h), equal to
40 percent of the underpayment of tax attributa-
ble to the gross valuation misstatement of two
million dollars. The 2.5 million dollar adjustment
is subject to a penalty under sections 6662(a) and
6662(b)(3), equal to 20 percent of the underpay-
ment of tax attributable to the substantial
valuation misstatement.
Example 3. (i) Applying section 482, the
Internal Revenue Service makes the following
transfer pricing adjustments for the taxable year:
(1)Attributable to an adjustment
that is 400 percent or more of
the correct section 482 arm’s
length result$6,000,000
(2)Not a 200 or 400 percent
adjustment15,000,000
Total21,000,000
(ii)None of the adjustments are excluded under
paragraph (d) (Amounts excluded from net section
482 adjustments) in determining the twenty
million dollar or 20% of gross receipts test under
section 6662(h). The net section 482 adjustment
(21 million dollars) is greater than twenty million
dollars and thus constitutes a gross valuation
misstatement. Accordingly, the total adjustment is
subject to the net adjustment penalty equal to 40
percent of the underpayment of tax attributable to
the 21 million dollar gross valuation misstatement.
The six million dollar adjustment will not be
separately included for purposes of any additional
penalty under section 6662.
(g)Effective date. This section is
effective February 9, 1996. However,
taxpayers may elect to apply this
section to all open taxable years
beginning after December 31, 1993.
§1.6662-6T [Removed]
Par. 5. Section 1.6662–6T is
removed.
Par. 6a. In §1.6664–0, the introduc-
tory text is amended by removing the
reference ‘‘1.6664–4’’ and adding
‘‘1.6664–4T’’ in its place.
Par. 6b. Section 1.6664–4T is revised
to read as follows:
§1.6664–4T Reasonable cause and
good faith exception to section 6662
penalties.
(a)through (e) [Reserved].
(f)Transactions between persons de-
scribed in section 482 and net section
482 transfer price adjustments. For
purposes of applying the reasonable
cause and good faith exception of
section 6664(c) to net section 482 ad-
justments, the rules of §1.6662–6(d)
apply. A taxpayer that does not satisfy
the rules of §1.6662–6(d) for a net
section 482 adjustment cannot satisfy
the reasonable cause and good faith
exception under section 6664(c). The
rules of this section apply to underpay-
ments subject to the transactional
penalty in §1.6662–6(b). If the stand-
ards of the net section 482 penalty
exclusion provisions under §1.6662–
6(d) are met with respect to such
underpayments, then the taxpayer will
be considered to have acted with
reasonable cause and good faith for
purposes of this section.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 7. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 8. In §602.101, paragraph (c) is
amended by removing the entry for
§1.6662–6T from the table and adding
an entry in numerical order to the table
to read ‘‘1.6662–6.. . . 1545–1426’’.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved January 19, 1996.
Leslie Samuels,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
February 8, 1996, 8:45 a.m., and published in
the issue of the Federal Register for February
9, 1996, 61 F.R. 4876)

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Part III.Administrative, Procedural, and Miscellaneous
Differential Earnings Rate for Mutual
Life Insurance Companies
Notice 96–15
This notice publishes a tentative
determination under §809 of the Inter-
nal Revenue Code of the ‘‘differential
earnings rate’’ for 1995 and the rate
that is used to calculate the ‘‘recom-
puted differential earnings amount’’ for
1994. (The latter rate is referred to in
this notice as the ‘‘recomputed dif-
ferential earnings rate’’ for 1994.)
These rates are used by mutual life
insurance companies to calculate their
federal income tax liability for taxable
years beginning in 1995.
BACKGROUND
Section 809(a) provides that, in the
case of any mutual life insurance
company, the amount of the deduction
allowable under §808 for policyholder
dividends is reduced (but not below
zero) by the ‘‘differential earnings
amount.’’ Any excess of the differen-
tial earnings amount over the amount
of the deduction allowable under §808
is taken into account as a reduction in
the closing balance of reserves under
subsections (a) and (b) of §807. The
‘‘differential earnings amount’’ for any
taxable year is the amount equal to the
product of (a) the life insurance com-
pany’s average equity base for the
taxable year multiplied by (b) the
‘‘differential earnings rate’’ for that
taxable year. The ‘‘differential earnings
rate’’ for the taxable year is the excess
of (a) the ‘‘imputed earnings rate’’ for
the taxable year over (b) the ‘‘average
mutual earnings rate’’ for the second
calendar year preceding the calendar
year in which the taxable year begins.
The ‘‘imputed earnings rate’’ for any
taxable year is the amount that bears
the same ratio to 16.5 percent as the
‘‘current stock earnings rate’’ for the
taxable year bears to the ‘‘base period
stock earnings rate.’’
Section 809(f) provides that, in the
case of any mutual life insurance
company, if the ‘‘recomputed differen-
tial earnings amount’’ for any taxable
year exceeds the differential earnings
amount for that taxable year, the excess
is included in life insurance gross
income for the succeeding taxable year.
If the differential earnings amount for
any taxable year exceeds the recom-
puted differential earnings amount for
that taxable year, the excess is allowed
as a life insurance deduction for the
succeeding taxable year. The ‘‘recom-
puted differential earnings amount’’ for
any taxable year is an amount calcu-
lated in the same manner as the
differential earnings amount for that
taxable year, except that the average
mutual earnings rate for the calendar
year in which the taxable year begins is
substituted for the average mutual
earnings rate for the second calendar
year preceding the calendar year in
which the taxable year begins.
The stock earnings rates and mutual
earnings rates taken into account under
§ 809 generally are determined by
dividing statement gain from operations
by the average equity base. For this
purpose, the term ‘‘statement gain from
operations’’ means ‘‘the net gain or
loss from operations required to be set
forth in the annual statement, deter-
mined without regard to Federal in-
come taxes, and .. . properly adjusted
f o r r e a l i z e d c a p i t a l g a i n s a n d
losses.. . .’’ See §809(g)(1). The term
‘‘equity base’’ is defined as an amount
determined in the manner prescribed by
regulations equal to surplus and capital
increased by the amount of nonadmit-
ted financial assets, the excess of
statutory reserves over the amount of
tax reserves, the sum of certain other
reserves, and 50 percent of any policy-
holder dividends (or other similar lia-
bility) payable in the following taxable
year. See §809(b)(2), (3), (4), (5) and
(6). Section 1.809–10 of the Income
Tax Regulations provides that the
equity base includes both the asset
valuation reserve and the interest main-
tenance reserve for taxable years end-
ing after December 31, 1991.
Section 1.809–9(a) of the regulations
provides that neither the differential
earnings rate under §809(c) nor the
recomputed differential earnings rate
that is used in computing the recom-
puted differential earnings amount un-
der §809(f)(3) may be less than zero.
As described above, the differential
earnings rate for 1995 and the recom-
puted differential earnings rate for 1994
affect the income and deductions re-
ported by mutual life insurance com-
panies on their federal income tax
returns for the 1995 taxable year.
Data necessary to determine the
tentative differential earnings rate for
1995 and the tentative recomputed
differential earnings rate for 1994 have
been compiled from returns filed by
mutual life insurance companies and
certain stock life insurance companies.
The Internal Revenue Service is cur-
rently examining these returns. This
examination will not be completed
before the March 15, 1996, due date
for filing 1995 calendar year returns.
NOTICE OF TENTATIVE RATES
This notice publishes a tentative
determination of the differential earn-
ings rate for 1995 and of the recom-
puted differential earnings rate for
1994. This notice also publishes a
tentative determination of the rates on
which the calculation of the differential
earnings rate for 1995 and the recom-
puted differential earnings rate for 1994
are based. The final determination of
these rates is expected to be published
before September 1, 1996.
The tentative determination of the
differential earnings rate for 1995 and
the tentative determination of the re-
computed differential earnings rate for
1994 that are published in this notice
should be used by mutual life insurance
companies to calculate the amount of
tax liability for taxable years beginning
in 1995 (in the case of companies that
file returns before publication of the
final determination of these rates) or to
calculate the amount of estimated un-
paid tax liability for taxable years
beginning in 1995 (in the case of
companies that are allowed an exten-
sion of time to file returns). Companies
that file returns before publication of
the final determination of these rates
should file amended returns after the
final determination of these rates is
published. If there is a failure to pay
tax for a taxable year beginning in
1995 and the failure is attributable to a
difference between (a) the tentative
determination of the differential earn-
ings rate for 1995 and recomputed
differential earnings rate for 1994 and
(b) the final determination of these
rates, then any such failure through
September 16, 1996, will be treated as
due to reasonable cause and will not
give rise to any addition to tax under
§ 6651.

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The tentative determination of the rates is set forth in Table 1.
Notice 96–15 Table 1
Tentative Determination of Rates To Be Used For Taxable Years Beginning in 1995
Differential earnings rate for 1995.........................................................0
Recomputed differential earnings rate for 1994..............................................5.887
Imputed earnings rate for 1994............................................................15.109
Imputed earnings rate for 1995............................................................12.589
Base period stock earnings rate............................................................18.221
Current stock earnings rate for 1995.......................................................13.902
Stock earnings rate for 1992..............................................................7.004
Stock earnings rate for 1993..............................................................23.385
Stock earnings rate for 1994..............................................................11.317
Average mutual earnings rate for 1993.....................................................18.406
Average mutual earnings rate for 1994.....................................................9.222
Weighted Average Interest Rate
Update
Notice 96–16
Notice 88–73 provides guidelines for
determining the weighted average inter-
est rate and the resulting permissible
range of interest rates used to calculate
current liability for the purpose of the
full funding limitation of §412(c)(7) of
the Internal Revenue Code as amended
by the Omnibus Budget Reconciliation
Act of 1987 and as further amended by
the Uruguay Round Agreements Act,
Pub. L. 103–465 (GATT).
The average yield on the 30-year
Treasury Constant Maturities for Febru-
ary 1996 is 6.24 percent.
The following rates were determined
for the plan years beginning in the
month shown below.
90% to 108%90% to 110%
WeightedPermissiblePermissible
MonthYearAverageRangeRange
March19966.986.28 to 7.536.28 to 7.67
Drafting Information
The principal author of this notice is
Donna Prestia of the Employee Plans
Division. For further information re-
garding this notice, call (202) 622-6076
between 2:30 and 4:00 p.m. Eastern
time (not a toll-free number). Ms.
Prestia’s number is (202) 622-7377
(also not a toll-free number).
Recognition of Gain or Loss by
Contributing Partner on Distribution
of Contributed Property or Other
Property; Correction
Notice 96–17
AGENCY: Internal Revenue Service,
Treasury.
ACTION: Correction to final regu-
lations.
SUMMARY: This document contains
corrections to final regulations (TD
8642), which were published in the
Federal Register on Tuesday, December
26, 1995, (60 FR 66727) relating to the
recognition of gain or loss on certain
distributions of contributed property by
a partnership, and to the recognition of
gain on certain distributions to a
contributing partner.
EFFECTIVE DATE: January 9, 1995.
FOR FURTHER INFORMATION
CONTACT: Stephen J. Coleman at
(202) 622-3060 (not a toll-free
number).
SUPPLEMENTARY
INFORMATION:
Background
The final regulations that are the
subject of these corrections are under
sections 704 and 737 of the Internal
Revenue Code.
Need for Correction
As published, the final regulations
contain errors which may prove to be
misleading and are in need of
clarification.
Correction of Publication
Accordingly, the publication of the
final regulations (TD 8642), which are
the subject of FR Doc. 95–30870, is
corrected as follows:

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§ 1.737–3 [Corrected]
1. On page 66737, column 2,
§ 1.737–3 (e), second paragraph from
the bottom of the column, the para-
graph designated ‘‘(e) Example 1.’’ is
correctly designated ‘‘Example 1.’’
2. On page 66737, column 3,
§ 1.737–3 (e), paragraph (i) of Example
2, line 4, the language ‘‘nondepreciable
real property to the’’ is corrected to
read ‘‘nondepreciable real property lo-
cated in the United States to the’’.
3. On page 66737, column 3,
§ 1.737–3 (e), paragraph (ii) of Exam-
ple 2, line 2, the language ‘‘Property B,
nondepreciable real property,’’ is cor-
rected to read ‘‘Property B, nondepre-
ciable real property located outside the
United States,’’.
Cynthia E. Grigsby,
Chief, Regulations Unit,
Assistant Chief Counsel (Corporate).
(Filed by the Office of the Federal Register on
February 26, 1996, 8:45 a.m., and published in
the issue of the Federal Register for February
27, 1996, 61 F.R. 7213)

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221996–28 I.R.B.
Part IV. Items of General Interest
Nonenforcement Policy—Proposed
Class Exemption
Announcement 96–15
The Department of Labor (‘‘DOL’’)
today announced a Pension Payback
Program (‘‘Program’’). As part of the
Program, DOL also today published a
notice of proposed class exemption
(Application No. D–10218) for pro-
hibited transactions that may have
arisen under section 4975 of the
Internal Revenue Code (the ‘‘Code’’)
as a result of an employer’s failure to
transfer certain employee benefit con-
tributions to its employee benefit plan
within the time frames mandated by
s e c t i o n 2 5 1 0 . 3 – 1 0 2 o f D O L ’ s
regulations.
The proposed class exemption will
exempt from the Code section 4975
excise taxes corrective payments
restored to the plan between the date of
DOL’s announcement and September 7,
1996. Accordingly, the Internal Reve-
nue Service will not seek to impose the
Code section 4975(a) and (b) sanctions
with respect to any prohibited transac-
tion that is covered by the proposed
class exemption, notwithstanding any
subsequent changes to the proposed
class exemption when it is finalized,
provided that all requirements specified
in the proposed class exemption with
respect to the prohibited transaction
have been met. For example, DOL
must receive, in accordance with condi-
tion (6) of the Program, the required
certification of compliance with all
terms and conditions of the Program
not later than September 7, 1996.
A corrective payment made to re-
store a delinquent contribution to which
the Program applies will not be consid-
ered an annual addition with respect to
the limitation year in which the correc-
tive payment is made. To the extent the
corrective payment restores a delin-
quent contribution, the payment will be
considered an annual addition for the
limitation year in which the contribu-
tion was required to have been trans-
ferred to the plan.
The principal author of this an-
nouncement is Cathy Vohs of the
Employee Plans Division. For further
information regarding this announce-
ment, please contact the Employee
Plans Division’s taxpayer assistance
telephone service between the hours of
1:30 and 4:00 p.m. Eastern time,
Monday through Thursday, on (202)
622-6074/6075 or Cathy Vohs on (202)
622-6214 (These telephone numbers
are not toll-free numbers).
Transfer Pricing Penalty Oversight
Committee
Announcement 96–16
Following issuance on February 9,
1996 of final regulations under section
6662(e) of the Internal Revenue Code
dealing with the imposition of penalties
in the case of certain reallocations of
income under section 482 of the Code
(‘‘transfer pricing penalties’’), tax-
payers have requested clarification of
the purposes and functions of the
Transfer Pricing Penalty Oversight
Committee (the ‘‘Committee’’). This
announcement clarifies the purposes
and functions of the Committee.
Background
Congress enacted the transfer pricing
penalties of section 6662(e) as part of
the Omnibus Budget Reconciliation Act
of 1990. The transfer pricing penalties
are generally applicable to taxable
years ending after November 5, 1990.
Proposed regulations interpreting sec-
tion 6662(e) were issued in January
1993, and temporary regulations were
issued in February 1994. The tempo-
rary regulations were amended in July
1994 and are effective for taxable years
ending after December 31, 1993. Reve-
nue Procedure 94–33, issued on April
18, 1994, provided that contempo-
raneous documentation would be re-
quired for taxable years beginning after
April 21, 1993 and before January 1,
1994. Final regulations issued on Feb-
ruary 9, 1996 are effective as of that
date. Taxpayers may elect to apply the
final regulations to all open taxable
years beginning after December 31,
1993.
Penalty Oversight Committee
Several months ago, the Internal
Revenue Service established the Com-
mittee to monitor and gather informa-
tion on the application of the transfer
pricing penalty. The Committee con-
sists of personnel from International,
Examination, Appeals and Chief Coun-
sel. The goal of the Committee is to
ensure uniform application of the rea-
sonableness standard and the documen-
tation requirements on a nationwide
basis. For that purpose, the Committee
will review all cases in which a district
director is considering the assertion of
the penalty. The Committee also will
collect data from district offices relat-
ing to cases in which the statutory
thresholds for imposition of the penalty
were met but the penalty was not
recommended. This monitoring func-
tion will enable the Committee to
evaluate the application of transfer
pricing penalties by the districts and to
share information within the Service
regarding the administration of section
6662(e).
The Committee will not provide an
administrative forum for taxpayers to
appeal a preliminary recommendation
by the field that the transfer pricing
penalty should be imposed. Rather, the
review function performed by the Com-
mittee is an internal procedure related
to the uniform administration of section
6662(e) by the Service. If transfer
pricing penalties are asserted, the tax-
payer may use regular administrative
and judicial procedures for appeal.
The principal authors of this an-
nouncement are Joy DeGrosky of the
International Field Assistance Speciali-
zation Program of the Office of the
Assistant Commissioner (International)
and Carolyn Fanaroff of the Office of
Associate Chief Counsel (Interna-
tional). For further information regard-
ing this announcement, contact Ms.
DeGrosky at (202) 874-1894 (not a
toll-free call) or Ms. Fanaroff at (202)
622-3880 (not a toll-free call).
Deletions from Cumulative List of
Organizations, Contributions to Which
Are Deductible Under Section 170 of
the Code
Announcement 96–17
The names of organizations that no
longer qualify as organizations de-
scribed in section 170(c)(2) of the
Internal Revenue Code of 1986 are
listed below.

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Generally, the Service will not dis-
allow deductions for contributions
made to a listed organization on or
before the date of announcement in the
Internal Revenue Bulletin that an orga-
nization no longer qualifies. However,
the Service is not precluded from
disallowing a deduction for any contri-
butions made after an organization
ceases to qualify under section
170(c)(2) if the organization has not
timely filed a suit for declaratory
judgment under section 7428 and if the
contributor (1) had knowledge of the
revocation of the ruling or determina-
tion letter, (2) was aware that such
revocation was imminent, or (3) was in
part responsible for or was aware of
the activities or omissions of the
organization that brought about this
revocation.
If on the other hand a suit for
declaratory judgment has been timely
filed, contributions from individuals
and organizations described in section
170(c)(2) that are otherwise allowable
will continue to be deductible. Protec-
tion under section 7428(c) would begin
on March 25, 1996, and would end on
the date the court first determines that
the organization is not described in
section 170(c)(2) as more particularly
set forth in section 7428(c)(1). For
individual contributors, the maximum
deduction protected is $1,000, with a
husband and wife treated as one
contributor. This benefit is not ex-
tended to any individual who was
responsible, in whole or in part, for the
acts or omissions of the organization
that were the basis for revocation.
America’s Missing Children, Inc.
Jacksonville, FL
White Harvest Mission, Inc.
Chandler, AZ

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Announcement of the Disbarment, Suspension, or Consent to Voluntary
Suspension of Attorneys, Certified Public Accountants, Enrolled Agents and
Enrolled Actuaries From Practice Before the Internal Revenue Service
Under 31 Code of Federal Regula-
tions, Part 10, an attorney, certified
public accountant, enrolled agent or en-
rolled actuary, in order to avoid the in-
stitution or conclusion of a proceeding
for his disbarment or suspension from
practice before the Internal Revenue
Service, may offer his consent to
suspension from such practice. The
Director of Practice, in his discretion,
may suspend an attorney, certified
public accountant, enrolled agent or
enrolled actuary in accordance with the
consent offered.
Attorneys, certified public account-
ants, enrolled agents and enrolled actu-
aries are prohibited in any Internal
Revenue Service matter from directly
or indirectly employing, accepting
assistance from, being employed by,
or sharing fees with, any practi-
tioner disbarred or suspended from
practice before the Internal Revenue
Service.
To enable attorneys, certified public
accountants, enrolled agents and en-
rolled actuaries to identify practitioners
under consent suspension from practice
before the Internal Revenue Service,
the Director of Practice will announce
in the Internal Revenue Bulletin the
names and addresses of practitioners
who have been suspended from such
practice, their designation as attor-
ney, certified public accountant, en-
rolled agent or enrolled actuary and
date or period of suspension. This an-
nouncement will appear 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 or for as many weeks
as is practicable for each attorney,
certified public accountant, enrolled
agent or enrolled actuary so suspended
and will be consolidated and published
in the Cumulative Bulletin.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue
Service:
NameAddressDesignationDate of Suspension
Miller, Gorden A.Mineral Wells, WVCPAFebruary 1, 1996 to April 30, 1996
Barnes, Charles E.Louisville, KYEnrolled
Agent
Indefinite from February 1, 1996
Polizzi, Angelo J.Grosse Point, MIAttorneyIndefinite from February 6, 1996
Pegler, Charles R.Islandia, NYCPAIndefinite from February 7, 1996
Foster, David M.Birmingham, MIAttorneyIndefinite from February 9, 1996
Smith, Jerry A.Evansville, INCPAFebruary 9, 1996 to November 8, 1996
Penn, Michael J.Dearborn, MICPAFebruary 9, 1996 to February 8, 1997
Mueller, E. LairdSeal Beach, CACPAFebruary 12, 1996 to June 11, 1996
Zezima, Paul P.Norwalk, CTCPAApril 1, 1996 to May 31, 1996
Van Houten, Robert R.Danbury, CTCPAMay 1, 1996 to April 30, 1997
Under Section 330, Title 31 of the
United States Code, the Secretary of
the Treasury, after due notice and
opportunity for hearing, is authorized
to suspend or disbar from practice
before the Internal Revenue Service
any person who has violated the rules
and regulations governing the recogni-
tion of attorneys, certified public ac-
countants, enrolled agents or enrolled
actuaries to practice before the Internal
Revenue Service.
Attorneys, certified public account-
ants, enrolled agents, and enrolled
actuaries are prohibited in any Internal
Revenue Service matter from directly
or indirectly employing, accepting as-
sistance from, being employed by or
sharing fees with, any practitioner
disbarred or under suspension from
practice before the Internal Revenue
Service.
To enable attorneys, certified public
accountants, enrolled agents and
enrolled actuaries to identify such
disbarred or suspended practitioners,
the Director of Practice will announce
in the Internal Revenue Bulletin the
names and addresses of practitioners
who have been suspended from such
practice, their designation as attorney,
certified public accountant, enrolled
agent or enrolled actuary, and the date
of disbarment or period of suspension.
This announcement will appear in the
weekly Bulletin for five successive
weeks or as long as it is practicable for
each attorney, certified public account-
ant, enrolled agent or enrolled actuary
so suspended or disbarred and will be
consolidated and published in the
Cumulative Bulletin.
After due notice and opportunity
for hearing before an administrative
law judge, the following individuals
have been disbarred from further prac-
tice before the Internal Revenue
Service:

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NameAddressDesignationEffective Date
Gimbel, StephenColumbia, SCCPAJanuary 20, 1996
Tropsa, Donna C.Stamford, CTAttorneyJanuary 20, 1996
Seifert, Frank J.Birmingham, ALCPAJanuary 20, 1996
Hansen, Joe B.Lubbock, TXCPAMarch 2, 1996
Announcement of the Expedited Suspension of Attorneys, Certified Public
Accountants, Enrolled Agents, and Enrolled Actuaries From Practice Before the
Internal Revenue Service
Under title 31 of the Code of Federal
Regulations, section 10.76, the Director
of Practice is authorized to immediately
suspend from practice before the Inter-
nal Revenue Service any practitioner
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 suspended or revoked for
cause; or (2) has been convicted of any
crime under title 26 of the United
States Code or, of a felony under title
18 of the United States Code involving
dishonesty or breach of trust.
Attorneys, certified public account-
ants, enrolled agents, and enrolled ac-
tuaries are prohibited in any Internal
Revenue Service matter from directly
or indirectly employing, accepting as-
sistance from, being employed by, or
sharing fees with, any practitioner
disbarred or suspended from practice
before the Internal Revenue Service.
To enable attorneys, certified public
accountants, enrolled agents, and en-
rolled actuaries to identify practitioners
under expedited suspension from prac-
tice before the Internal Revenue Serv-
ice, the Director of Practice will an-
nounce in the Internal Revenue Bulletin
the names and addresses of practition-
ers who have been suspended from such
practice, their designation as attorney,
certified public accountant, enrolled
agent, or enrolled actuary, and date or
period of suspension. This announce-
ment will appear in the weekly Bulletin
at the earliest practicable date after
such action and will continue to appear
in the weekly Bulletins for five succes-
sive weeks or for as many weeks as is
practicable for each attorney, certified
public accountant, enrolled agent, or
enrolled actuary so suspended and will
be consolidated and published in the
Cumulative Bulletin.
The following individuals have been
placed under suspension from practice
before the Internal Revenue Service by
virtue of the expedited proceeding
provisions of the applicable regulations:
NameAddressDesignationDate of Suspension
Ginsberg, Melvin R.Univ. Heights, OHAttorneyIndefinite from January 24, 1996
Lahey, Charles W.South Bend, INAttorneyIndefinite from January 24, 1996
DePiano, RobertVenice, CAAttorneyIndefinite from January 24, 1996
Kraig, Jerry B.Shaker Hgts, OHAttorneyIndefinite from January 29, 1996
Brown, David M.Los Angeles, CAAttorneyIndefinite from January 29, 1996
Hanke Jr., Dale L.Duluth, MNAttorneyIndefinite from February 1, 1996
Guillory, Patrick R.San Francisco, CAAttorneyIndefinite from February 1, 1996
Miller, Brian R.Grove, OKCPAIndefinite from February 23, 1996
McLeod, Timothy R.Saginaw, MIAttorneyIndefinite from February 26, 1996
Simone, Robert F.Philadelphia, PAAttorneyIndefinite from February 26, 1996
Bowen, David LeeFrisco City, ALCPAIndefinite from February 27, 1996
Lindley, ClarksonWayazata, MNAttorneyIndefinite from February 27, 1996

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Definition of Terms
Revenue rulings and revenue proce-
dures (hereinafter referred to as ‘‘rul-
ings’’) that have an effect on previous
rulings use the following defined terms
to describe the effect:
Amplified describes a situation where
no change is being made in a prior
published position, but the prior posi-
tion is being extended to apply to a
variation of the fact situation set forth
therein. Thus, if an earlier ruling held
that a principle applied to A, and the
new ruling holds that the same princi-
ple also applies to B, the earlier ruling
is amplified. (Compare with modified,
below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in
a prior ruling is being changed.
Distinguished describes a situation
where a ruling mentions a previously
published ruling and points out an
essential difference between them.
Modified is 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 with am-
plified and clarified, above).
Obsoleted describes a previously
published ruling that is not considered
determinative with respect to future
transactions. This term is most com-
monly used in a ruling that lists
previously published rulings that are
obsoleted because of changes in law or
regulations. A ruling may also be
obsoleted because the substance has
been included in regulations subse-
quently adopted.
Revoked describes situations where
the position in the previously published
ruling is not correct and the correct
position is being stated in the new
ruling.
Superseded describes a situation
where the new ruling does nothing
more than restate the substance and
situation of a previously published
ruling (or rulings). Thus, the term is
used to republish under the 1986 Code
and regulations the same position pub-
lished under the 1939 Code and regula-
tions. The term is also used when it is
desired to republish in a single ruling a
series of situations, names, etc., that
were previously published over a
period of time in separate rulings.
If the new ruling does more than
restate the substance of a prior ruling, a
combination of terms is used. For
example, modified and superseded de-
scribes 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 published ruling is
first modified and then, as modified, is
superseded.
Supplemented is 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 ruling has been
supplemented several times, a new
ruling may be published that includes
the list in the original ruling and the
additions, and supersedes all prior
rulings in the series.
Suspended is used in rare situations
to show that the previous published
rulings 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 Contribution 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.—Statements 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.

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Numerical Finding List
1
Bulletins 1996–1 through 1996–12
Announcements:
96–1, 1996–2 I.R.B. 57
96–2, 1996–2 I.R.B. 57
96–3, 1996–2 I.R.B. 57
96–4, 1996–3 I.R.B. 50
96–5, 1996–4 I.R.B. 99
96–6, 1996–5 I.R.B. 43
96–7, 1996–5 I.R.B. 44
96–8, 1996–7 I.R.B. 56
96–9, 1996–8 I.R.B. 30
96–10, 1996–8 I.R.B. 30
96–11, 1996–9 I.R.B. 11
96–12, 1996–11 I.R.B. 30
96–13, 1996–12 I.R.B. 33
96–14, 1996–12 I.R.B. 35
Delegations Orders:
232 (Rev. 2), 1996–7 I.R.B. 49
239 (Rev. 1), 1996–7 I.R.B. 49
Notices:
96–2, 1996–2 I.R.B. 15
96–1, 1996–3 I.R.B. 30
96–4, 1996–4 I.R.B. 69
96–5, 1996–6 I.R.B. 22
96–6, 1996–5 I.R.B. 27
96–7, 1996–6 I.R.B. 22
96–8, 1996–6 I.R.B. 23
96–9, 1996–6 I.R.B. 26
96–10, 1996–7 I.R.B. 47
96–11, 1996–8 I.R.B. 19
96–12, 1996–10 I.R.B. 29
96–13, 1996–10 I.R.B. 29
96–14, 1996–12 I.R.B. 11
Proposed Regulations:
DL–1–95, 1996–6 I.R.B. 28
EE–20–95, 1996–5 I.R.B. 15
EE–34–95, 1996–3 I.R.B. 49
EE–35–95, 1996–5 I.R.B. 19
EE–53–95, 1996–5 I.R.B. 23
EE–55–95, 1996–12 I.R.B. 12
EE–106–82, 1996–10 I.R.B. 31
EE–142–87, 1996–12 I.R.B. 13
EE–148–81, 1996–11 I.R.B. 29
IA–41–93, 1996–11 I.R.B. 29
IA–33–95, 1996–4 I.R.B. 99
INTL–3–95, 1996–6 I.R.B. 29
INTL–9–95, 1996–5 I.R.B. 25
PS–2–95, 1996–7 I.R.B. 50
Revenue Procedures:
96–1, 1996–1 I.R.B. 8
1
A cumulative list of all Revenue Rulings,
Revenue Procedures, Treasury Decisions, etc.,
published in Internal Revenue Bulletins 1995–27
through 1995–52 will be found in Internal
Revenue Bulletin 1996–1, dated January 2, 1996.
Revenue Procedures—Continued
96–2, 1996–1 I.R.B. 60
96–3, 1996–1 I.R.B. 82
96–4, 1996–1 I.R.B. 94
96–5, 1996–1 I.R.B. 129
96–6, 1996–1 I.R.B. 151
96–7, 1996–1 I.R.B. 185
96–8, 1996–1 I.R.B. 187
96–8A, 1996–9 I.R.B. 10
96–9, 1996–2 I.R.B. 15
96–10, 1996–2 I.R.B. 17
96–11, 1996–2 I.R.B. 18
96–12, 1996–3 I.R.B. 30
96–13, 1996–3 I.R.B. 31
96–14, 1996–3 I.R.B. 41
96–15, 1996–3 I.R.B. 41
96–16, 1996–3 I.R.B. 45
96–17, 1996–4 I.R.B. 69
96–18, 1996–4 I.R.B. 73
96–19, 1996–4 I.R.B. 80
96–20, 1996–4 I.R.B. 88
96–21, 1996–4 I.R.B. 96
96–22, 1996–5 I.R.B. 27
96–23, 1996–5 I.R.B. 27
96–24, 1996–5 I.R.B. 28
96–25, 1996–8 I.R.B. 19
96–26, 1996–8 I.R.B. 22
96–27, 1996–11 I.R.B. 27
Revenue Rulings:
96–1, 1996–1 I.R.B. 7
96–2, 1996–2 I.R.B. 5
96–3, 1996–2 I.R.B. 14
96–6, 1996–2 I.R.B. 8
96–4, 1996–3 I.R.B. 16
96–5, 1996–3 I.R.B. 29
96–7, 1996–3 I.R.B. 12
96–8, 1996–4 I.R.B. 62
96–9, 1996–4 I.R.B. 5
96–10, 1996–4 I.R.B. 27
96–11, 1996–4 I.R.B. 28
96–12, 1996–9 I.R.B. 4
96–13, 1996–10 I.R.B. 19
96–14, 1996–6 I.R.B. 20
96–15, 1996–11 I.R.B. 9
96–16, 1996–11 I.R.B. 4
Treasury Decisions:
8630, 1996–3 I.R.B. 19
8631, 1996–3 I.R.B. 7
8632, 1996–4 I.R.B. 6
8633, 1996–4 I.R.B. 20
8634, 1996–3 I.R.B. 17
8635, 1996–3 I.R.B. 5
8636, 1996–4 I.R.B. 64
8637, 1996–4 I.R.B. 29
8638, 1996–5 I.R.B. 5
Treasury Decisions—Continued
8639, 1996–5 I.R.B. 12
8640, 1996–2 I.R.B. 10
8641, 1996–6 I.R.B. 4
8642, 1996–7 I.R.B. 4
8643, 1996–11 I.R.B. 4
8644, 1996–7 I.R.B. 16
8645, 1996–8 I.R.B. 4
8646, 1996–8 I.R.B. 10
8647, 1996–9 I.R.B. 7
8648, 1996–10 I.R.B. 23
8649, 1996–9 I.R.B. 5
8650, 1996–10 I.R.B. 5
8651, 1996–11 I.R.B. 24
8652, 1996–11 I.R.B. 11
8653, 1996–12 I.R.B. 4
8654, 1996–11 I.R.B. 14
8655, 1996–12 I.R.B. 9

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Finding List of Current Action on
Previously Published Items
1
Bulletins 1996–1 through 1996–12
*Denotes entry since last publication
Delegation Orders:
232 (Rev. 1)
Superseded by
232 (Rev. 2), 1996–7 I.R.B. 49
239
Amended by
239 (Rev. 1), 1996–7 I.R.B. 49
Revenue Procedures:
65–17
Modified by
96–14, 1996–3 I.R.B. 41
66–49
Modified by
96–15, 1996–3 I.R.B. 41
88–32
Obsoleted by
96–15, 1996–3 I.R.B. 41
88–33
Obsoleted by
96–15, 1996–3 I.R.B. 41
89–19
Superseded by
96–17, 1996–4 I.R.B. 69
89–48
Superseded in part by
96–17, 1996–4 I.R.B. 69
91–22
Modified by
96–1, 1996–1 I.R.B. 8
91–22
Amplified by
96–13, 1996–3 I.R.B. 31
91–23
Superseded by
96–13, 1996–3 I.R.B. 31
91–24
Superseded by
96–14, 1996–3 I.R.B. 41
91–26
Superseded by
96–13, 1996–3 I.R.B. 31
92–20
Modified by
96–1, 1996–1 I.R.B. 8
1
A cumulative finding list for previously
published items mentioned in Internal Revenue
Bulletins 1995–27 through 1995–52 will be
found in Internal Revenue Bulletin 1996–1, dated
January 2, 1996.
Revenue Procedures—Continued
92–85
Modified by
96–1, 1996–1 I.R.B. 8
93–16
Superseded by
96–11, 1996–2 I.R.B. 18
93–46
Superseded in part by
96–17, 1996–4 I.R.B. 69
Superseded by
96–18, 1996–4 I.R.B. 73
94–18
Superseded in part by
96–17, 1996–4 I.R.B. 69
Superseded by
96–18, 1996–4 I.R.B. 73
94–59
Superseded in part by
96–17, 1996–4 I.R.B. 69
Superseded by
96–18, 1996–4 I.R.B. 73
95–1
Superseded by
96–1, 1996–1 I.R.B. 8
95–2
Superseded by
96–2, 1996–1 I.R.B. 60
95–3
Superseded by
96–3, 1996–1 I.R.B. 82
95–4
Superseded by
96–4, 1996–1 I.R.B. 94
95–5
Superseded by
96–5, 1996–1 I.R.B. 129
95–6
Superseded by
96–6, 1996–1 I.R.B. 151
95–7
Superseded by
96–7, 1996–1 I.R.B. 185
95–8
Superseded by
96–8, 1996–1 I.R.B. 187
95–13
Superseded by
96–20, 1996–4 I.R.B. 88
Revenue Procedures—Continued
95–20
Superseded by
96–24, 1996–5 I.R.B. 28
95–50
Superseded by
96–3, 1996–1 I.R.B. 82
96–3
Amplified by
96–12, 1996–3 I.R.B. 30
Revenue Rulings:
66–307
Obsoleted by
96–3, 1996–2 I.R.B. 14
72–437
Modified by
96–13, 1996–3 I.R.B. 31
80–80
Obsoleted by
96–3, 1996–2 I.R.B. 14
82–80
Modified by
96–14, 1996–3 I.R.B. 41
92–19
Supplemented in part
96–2, 1996–2 I.R.B. 5
92–75
Clarified by
96–13, 1996–3 I.R.B. 31
95–10
Supplemented and superseded by
96–4, 1996–3 I.R.B. 16
95–11
Supplemented and superseded by
96–5, 1996–3 I.R.B. 29